Insurance-Assign #2
which is the aforementioned Magdalo Street; on its right and left by driveway, thence
G.R. No. 112360 July 18, 2000
RIZAL SURETY & INSURANCE COMPANY, petitioner,
vs.
COURT OF APPEALS and TRANSWORLD KNITTING MILLS,
INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the July 15, 1993 Decision 1 and October 22, 1993
Resolution2 of the Court of Appeals3 in CA-G.R. CV NO. 28779, which modified the
Ruling4 of the Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire
Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld),
initially for One Million (₱1,000,000.00) Pesos and eventually increased to One Million
Five Hundred Thousand (₱1,500,000.00) Pesos, covering the period from August 14,
1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location thereof,
read:
"‘On stocks of finished and/or unfinished products, raw materials and supplies of
every kind and description, the properties of the Insureds and/or held by them in trust,
on commission or on joint account with others and/or for which they (sic) responsible
in case of loss whilst contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic) within own
Compound at MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA,
PHILIPPINES, BLOCK NO. 601.’
xxx xxx xxx
‘Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills, garment and lingerie factory,
transistor-stereo assembly plant, offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under galvanized iron roof
occupied as canteen and guardhouse, partly by building of two and partly one storey
constructed of concrete below, timber above undergalvanized iron roof occupied as
garage and quarters and partly by open space and/or tracking/ packing, beyond
open spaces, and at the rear by open spaces.'"5
The same pieces of property insured with the petitioner were also insured with New
India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing the middle
portion of its four-span building and partly gutting the left and right sections thereof. A
two-storey building (behind said four-span building) where fun and amusement
machines and spare parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company and
New India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance companies
an action for collection of sum of money and damages, docketed as Civil Case No.
46106 before Branch 161 of the then Court of First Instance of Rizal; praying for
judgment ordering Rizal Insurance and New India to pay the amount of ₱2,747,
867.00 plus legal interest, ₱400,000.00 as attorney's fees, exemplary damages,
expenses of litigation of ₱50,000.00 and costs of suit.6
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered
only the contents of the four-span building, which was partly burned, and not the
damage caused by the fire on the two-storey annex building.7
On January 4, 1990, the trial court rendered its decision; disposing as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay
Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00 representing
the actual value of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."8
Both the petitioner, Rizal Insurance Company, and private respondent, Transworld
Knitting Mills, Inc., went to the Court of Appeals, which came out with its decision of
July 15, 1993 under attack, the decretal portion of which reads:
"WHEREFORE, and upon all the foregoing, the decision of the court below is
MODIFIED in that defendant New India Assurance Company has and is hereby
required to pay plaintiff-appellant the amount of P1,818,604.19 while the other Rizal
Surety has to pay the plaintiff-appellant P470,328.67, based on the actual losses
sustained by plaintiff Transworld in the fire, totalling P2,790,376.00 as against the
amounts of fire insurance coverages respectively extended by New India in the
amount of P5,800,000.00 and Rizal Surety and Insurance Company in the amount of
P1,500,000.00.
No costs.
SO ORDERED."9
On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India
appealed to this Court theorizing inter alia that the private respondent could not be
compensated for the loss of the fun and amusement machines and spare parts stored
at the two-storey building because it (Transworld) had no insurable interest in said
goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118
(New India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for
Reconsideration before the Court of Appeals, and on October 22, 1993, the Court of
Appeals reconsidered its decision of July 15, 1993, as regards the imposition of
interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the
imposition of legal interest is concerned, that, on the assessment against New India
Assurance Company on the amount of P1,818,604.19 and that against Rizal Surety &
Insurance Company on the amount of P470,328.67, from May 26, 1982 when the
complaint was filed until payment is made. The rest of the said decision is retained in
all other respects.
SO ORDERED."10
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court
via the present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE
ANNEX BUILDING WHERE THE BULK OF THE BURNED PROPERTIES
WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE
INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN
NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY),
TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT
THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH
MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN
NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL
AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S
FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11,
CIVIL CODE).11
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon protected only
the contents of the main building (four-span),12 and did not include those stored in the
two-storey annex building. On the other hand, the private respondent theorized that
the so called "annex" was not an annex but was actually an integral part of the four-
span building13 and therefore, the goods and items stored therein were covered by
the same fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation of the
stipulation in subject fire insurance policy regarding its coverage, which reads:
"xxx contained and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic) within own Compound
xxx"
Therefrom, it can be gleaned unerringly that the fire insurance policy in question did
not limit its coverage to what were stored in the four-span building. As opined by the
trial court of origin, two requirements must concur in order that the said fun and
amusement machines and spare parts would be deemed protected by the fire
insurance policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied by
Transworld and second, said areas must form part of the building described in the
policy xxx"14
'Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills, garment and lingerie factory,
transistor-stereo assembly plant, offices, ware house and caretaker's quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by the Court
of Appeals are conclusive on the parties and not reviewable by this Court, and the
same carry even more weight when the Court of Appeals has affirmed the findings of
fact arrived at by the lower court.15
In the case under consideration, both the trial court and the Court of Appeals found
that the so called "annex " was not an annex building but an integral and inseparable
part of the four-span building described in the policy and consequently, the machines
and spare parts stored therein were covered by the fire insurance in dispute. The
letter-report of the Manila Adjusters and Surveyor's Company, which petitioner itself
cited and invoked, describes the "annex" building as follows:
"Two-storey building constructed of partly timber and partly concrete hollow blocks
under g.i. roof which is adjoining and intercommunicating with the repair of the first
right span of the lofty storey building and thence by property fence wall."16
Verily, the two-storey building involved, a permanent structure which adjoins and
intercommunicates with the "first right span of the lofty storey building",17 formed part
thereof, and meets the requisites for compensability under the fire insurance policy
sued upon.
So also, considering that the two-storey building aforementioned was already existing
when subject fire insurance policy contract was entered into on January 12, 1981,
having been constructed sometime in 1978,18 petitioner should have specifically
excluded the said two-storey building from the coverage of the fire insurance if
minded to exclude the same but if did not, and instead, went on to provide that such
fire insurance policy covers the products, raw materials and supplies stored within the
premises of respondent Transworld which was an integral part of the four-span
building occupied by Transworld, knowing fully well the existence of such building
adjoining and intercommunicating with the right section of the four-span building.
After a careful study, the Court does not find any basis for disturbing what the lower
courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building insured
thereby. Article 1377 of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the
petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted the
fire insurance policy contract under scrutiny. Citing the aforecited provision of law in
point, the Court in Landicho vs. Government Service Insurance System,19 ruled:
"This is particularly true as regards insurance policies, in respect of which it is settled
that the 'terms in an insurance policy, which are ambiguous, equivocal, or uncertain x
x x are to be construed strictly and most strongly against the insurer, and liberally in
favor of the insured so as to effect the dominant purpose of indemnity or payment to
the insured, especially where forfeiture is involved' (29 Am. Jur., 181), and the reason
for this is that the 'insured usually has no voice in the selection or arrangement of the
words employed and that the language of the contract is selected with great care and
deliberation by experts and legal advisers employed by, and acting exclusively in the
interest of, the insurance company.' (44 C.J.S., p. 1174)."" 20
Equally relevant is the following disquisition of the Court in Fieldmen's Insurance
Company, Inc. vs. Vda. De Songco,21 to wit:
"'This rigid application of the rule on ambiguities has become necessary in view of
current business practices.1âwphi1 The courts cannot ignore that nowadays
monopolies, cartels and concentration of capital, endowed with overwhelming
economic power, manage to impose upon parties dealing with them cunningly
prepared 'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to 'take it or leave it'
labelled since Raymond Saleilles 'contracts by adherence' (contrats [sic] d'adhesion),
in contrast to these entered into by parties bargaining on an equal footing, such
contracts (of which policies of insurance and international bills of lading are prime
example) obviously call for greater strictness and vigilance on the part of courts of
justice with a view to protecting the weaker party from abuses and imposition, and
prevent their becoming traps for the unwary (New Civil Code, Article 24; Sent. of
Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'"22
The issue of whether or not Transworld has an insurable interest in the fun and
amusement machines and spare parts, which entitles it to be indemnified for the loss
thereof, had been settled in G.R. No. L-111118, entitled New India Assurance
Company, Ltd., vs. Court of Appeals, where the appeal of New India from the
decision of the Court of Appeals under review, was denied with finality by this Court
on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises, precludes
the relitigation of a particular fact or issue in another action between the same parties
based on a different claim or cause of action. "xxx the judgment in the prior action
operates as estoppel only as to those matters in issue or points controverted, upon
the determination of which the finding or judgment was rendered. In fine, the previous
judgment is conclusive in the second case, only as those matters actually and directly
controverted and determined and not as to matters merely involved therein."23
Applying the abovecited pronouncement, the Court, in Smith Bell and Company
(Phils.), Inc. vs. Court of Appeals,24held that the issue of negligence of the shipping
line, which issue had already been passed upon in a case filed by one of the insurers,
is conclusive and can no longer be relitigated in a similar case filed by another insurer
against the same shipping line on the basis of the same factual circumstances.
Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been
negligent, or so negligent as to have proximately caused the collision between them,
was an issue that was actually, directly and expressly raised, controverted and
litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision
and held the 'Don Carlos' to have been negligent rather than the 'Yotai Maru' and, as
already noted, that Decision was affirmed by this Court in G.R. No. L-48839 in a
Resolution dated 6 December 1987. The Reyes Decision thus became final and
executory approximately two (2) years before the Sison Decision, which is assailed in
the case at bar, was promulgated. Applying the rule of conclusiveness of judgment,
the question of which vessel had been negligent in the collision between the two (2)
vessels, had long been settled by this Court and could no longer be relitigated in
C.A.-G.R. No. 61206-R. Private respondent Go Thong was certainly bound by the
ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals fell
into clear and reversible error when it disregarded the Decision of this Court affirming
the Reyes Decision."25

The controversy at bar is on all fours with the aforecited case. Considering that
private respondent's insurable interest in, and compensability for the loss of subject
fun and amusement machines and spare parts, had been adjudicated, settled and
sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in
G.R. No. L-111118, in a Resolution, dated February 2, 1994, the same can no longer
be relitigated and passed upon in the present case. Ineluctably, the petitioner, Rizal
Surety Insurance Company, is bound by the ruling of the Court of Appeals and of this
Court that the private respondent has an insurable interest in the aforesaid fun and
amusement machines and spare parts; and should be indemnified for the loss of the
same.

So also, the Court of Appeals correctly adjudged petitioner liable for the amount of
P470,328.67, it being the total loss and damage suffered by Transworld for which
petitioner Rizal Insurance is liable.26

All things studiedly considered and viewed in proper perspective, the Court is of the
irresistible conclusion, and so finds, that the Court of Appeals erred not in holding the
petitioner, Rizal Surety Insurance Company, liable for the destruction and loss of the
insured buildings and articles of the private respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October
22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto.
No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 169737 February 12, 2008
BLUE CROSS HEALTH CARE, INC., petitioner,
vs.
NEOMI* and DANILO OLIVARES, respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari 1 of a decision2 and resolution3 of the Court of
Appeals (CA) dated July 29, 2005 and September 21, 2005, respectively, in CA-G.R.
SP No. 84163 which affirmed the decision of the Regional Trial Court (RTC), Makati
City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153,4 which in turn
reversed the decision of the Metropolitan Trial Court (MeTC), Makati City, Branch 66
dated August 5, 2003 in Civil Case No. 80867.5
Respondent Neomi T. Olivares applied for a health care program with petitioner Blue
Cross Health Care, Inc., a health maintenance firm. For the period October 16, 2002
to October 15, 2003,6 she paid the amount of P11,117. For the same period, she also
availed of the additional service of limitless consultations for an additional amount
of P1,000. She paid these amounts in full on October 17, 2002. The application was
approved on October 22, 2002. In the health care agreement, ailments due to "pre-
existing conditions" were excluded from the coverage. 7
On November 30, 2002, or barely 38 days from the effectivity of her health insurance,
respondent Neomi suffered a stroke and was admitted at the Medical City which was
one of the hospitals accredited by petitioner. During her confinement, she underwent
several laboratory tests. On December 2, 2002, her attending physician, Dr.
Edmundo Saniel,8 informed her that she could be discharged from the hospital. She
incurred hospital expenses amounting to P34,217.20. Consequently, she requested
from the representative of petitioner at Medical City a letter of authorization in order to
settle her medical bills. But petitioner refused to issue the letter and suspended
payment pending the submission of a certification from her attending physician that
the stroke she suffered was not caused by a pre-existing condition.9
She was discharged from the hospital on December 3, 2002. On December 5, 2002,
she demanded that petitioner pay her medical bill. When petitioner still refused, she
and her husband, respondent Danilo Olivares, were constrained to settle the
bill.10 They thereafter filed a complaint for collection of sum of money against
petitioner in the MeTC on January 8, 2003.11 In its answer dated January 24, 2003,
petitioner maintained that it had not yet denied respondents' claim as it was still
awaiting Dr. Saniel's report.
In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13, 2003. [Respondent]
Neomi T. Olivares called by phone on January 29, 2003. She stated that she
is invoking patient-physician confidentiality. That she no longer has any
relationship with [petitioner]. And that I should not release any medical
information concerning her neurologic status to anyone without her approval.
Hence, the same day I instructed my secretary to inform your office thru Ms.
Bernie regarding [respondent's] wishes.
xxx xxx xxx12
In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of
cause of action. It held:
xxx the best person to determine whether or not the stroke she suffered was
not caused by "pre-existing conditions" is her attending physician Dr. Saniel
who treated her and conducted the test during her confinement. xxx But
since the evidence on record reveals that it was no less than [respondent
Neomi] herself who prevented her attending physician from issuing the
required certification, petitioner cannot be faulted from suspending payment
of her claim, for until and unless it can be shown from the findings made by
her attending physician that the stroke she suffered was not due to pre-
existing conditions could she demand entitlement to the benefits of her
policy.13
On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the
MeTC and ordered petitioner to pay respondents the following amounts:
(1) P34,217.20 representing the medical bill in Medical City and P1,000 as
reimbursement for consultation fees, with legal interest from the filing of the complaint
until fully paid; (2) P20,000 as moral damages; (3) P20,000 as exemplary damages;
(4) P20,000 as attorney's fees and (5) costs of suit.14 The RTC held that it was the
burden of petitioner to prove that the stroke of respondent Neomi was excluded from
the coverage of the health care program for being caused by a pre-existing condition.
It was not able to discharge that burden.15
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in
the CA. In a decision promulgated on July 29, 2005, the CA affirmed the decision of
the RTC. It denied reconsideration in a resolution promulgated on September 21,
2005. Hence this petition which raises the following issues: (1) whether petitioner was
able to prove that respondent Neomi's stroke was caused by a pre-existing condition
and therefore was excluded from the coverage of the health care agreement and (2)
whether it was liable for moral and exemplary damages and attorney's fees.
The health care agreement defined a "pre-existing condition" as:
x x x a disability which existed before the commencement date of
membership whose natural history can be clinically determined, whether or
not the Member was aware of such illness or condition. Such conditions also
include disabilities existing prior to reinstatement date in the case of lapse of
an Agreement. Notwithstanding, the following disabilities but not to the
exclusion of others are considered pre-existing conditions including their
complications when occurring during the first year of a Member’s coverage:
I. Tumor of Internal Organs
II. Hemorrhoids/Anal Fistula
After the Member has been continuously covered for 12 months, this pre-
existing provision shall no longer be applicable except for illnesses
specifically excluded by an endorsement and made part of this Agreement. 16
Under this provision, disabilities which existed before the commencement of the
agreement are excluded from its coverage if they become manifest within one year
from its effectivity. Stated otherwise, petitioner is not liable for pre-existing conditions
if they occur within one year from the time the agreement takes effect.

III. Diseased tonsils and sinus conditions requiring surgery Petitioner argues that respondents prevented Dr. Saniel from submitting his report
regarding the medical condition of Neomi. Hence, it contends that the presumption
that evidence willfully suppressed would be adverse if produced should apply in its
IV. Cataract/Glaucoma favor.17

V. Pathological Abnormalities of nasal septum or turbinates Respondents counter that the burden was on petitioner to prove that Neomi's stroke
was excluded from the coverage of their agreement because it was due to a pre-
VI. Goiter and other thyroid disorders existing condition. It failed to prove this.18

VII. Hernia/Benign prostatic hypertrophy We agree with respondents.

VIII. Endometriosis In Philamcare Health Systems, Inc. v. CA,19 we ruled that a health care agreement is
in the nature of a non-life insurance.20 It is an established rule in insurance contracts
IX. Asthma/Chronic Obstructive Lung disease that when their terms contain limitations on liability, they should be construed strictly
against the insurer. These are contracts of adhesion the terms of which must be
interpreted and enforced stringently against the insurer which prepared the contract.
X. Epilepsy This doctrine is equally applicable to health care agreements.21

XI. Scholiosis/Herniated disc and other Spinal column abnormalities Petitioner never presented any evidence to prove that respondent Neomi's stroke was
due to a pre-existing condition. It merely speculated that Dr. Saniel's report would be
XII. Tuberculosis adverse to Neomi, based on her invocation of the doctor-patient privilege. This was a
disputable presumption at best.
XIII. Cholecysitis
Section 3 (e), Rule 131 of the Rules of Court states:
XIV. Gastric or Duodenal ulcer
Sec. 3. Disputable presumptions. ― The following presumptions are
satisfactory if uncontradicted, but may be contradicted and overcome by
XV. Hallux valgus
other evidence:

XVI. Hypertension and other Cardiovascular diseases

xxx xxx xxx

XVII. Calculi
(e) That evidence willfully suppressed would be adverse if produced.

XVIII. Tumors of skin, muscular tissue, bone or any form of blood

Suffice it to say that this presumption does not apply if (a) the evidence is at the
dyscracias
disposal of both parties; (b) the suppression was not willful; (c) it is merely
corroborative or cumulative and (d) the suppression is an exercise of a
XIX. Diabetes Mellitus privilege.22 Here, respondents' refusal to present or allow the presentation of Dr.
Saniel's report was justified. It was privileged communication between physician and
XX. Collagen/Auto-Immune disease patient.
Furthermore, as already stated, limitations of liability on the part of the insurer or
health care provider must be construed in such a way as to preclude it from evading
its obligations. Accordingly, they should be scrutinized by the courts with "extreme
jealousy"23 and "care" and with a "jaundiced eye."24 Since petitioner had the burden WE CONCUR:
of proving exception to liability, it should have made its own assessment of whether
respondent Neomi had a pre-existing condition when it failed to obtain the attending
physician's report. It could not just passively wait for Dr. Saniel's report to bail it out. REYNATO S. PUNO
The mere reliance on a disputable presumption does not meet the strict standard Chief Justice
required under our jurisprudence. Chairperson

Next, petitioner argues that it should not be held liable for moral and exemplary ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA
damages, and attorney's fees since it did not act in bad faith in denying respondent Associate Justice Associate Justice
Neomi's claim. It insists that it waited in good faith for Dr. Saniel's report and that,
based on general medical findings, it had reasonable ground to believe that her TERESITA J. LEONARDO-DE CASTRO
stroke was due to a pre-existing condition, considering it occurred only 38 days after Associate Justice
the coverage took effect.25

We disagree.
CERTIFICATION
The RTC and CA found that there was a factual basis for the damages adjudged
against petitioner. They found that it was guilty of bad faith in denying a claim based
merely on its own perception that there was a pre-existing condition: Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.
[Respondents] have sufficiently shown that [they] were forced to engage in a
dispute with [petitioner] over a legitimate claim while [respondent Neomi
was] still experiencing the effects of a stroke and forced to pay for her REYNATO S. PUNO
medical bills during and after her hospitalization despite being covered by Chief Justice
[petitioner’s] health care program, thereby suffering in the process extreme
mental anguish, shock, serious anxiety and great stress. [They] have shown
that because of the refusal of [petitioner] to issue a letter of authorization and
to pay [respondent Neomi's] hospital bills, [they had] to engage the services
of counsel for a fee of P20,000.00. Finally, the refusal of petitioner to pay
Footnotes
respondent Neomi's bills smacks of bad faith, as its refusal [was] merely
based on its own perception that a stroke is a pre-existing condition.
(emphasis supplied) * The petition spelled the name of respondent as Noemi Olivares but in the
decision of the Court of Appeals, Neomi was used since she signed as such
in the verification and certificate of non-forum shopping attached to her
This is a factual matter binding and conclusive on this Court. 26 We see no reason to
complaint.
disturb these findings.
1 Under Rule 45 of the Rules of Court.
WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and
September 21, 2005 resolution of the Court of Appeals in CA-G.R. SP No. 84163
2
are AFFIRMED. Penned by Associate Justice Japar B. Dimaampao and concurred in by
Associate Justices Martin S. Villarama, Jr. and Edgardo F. Sundiam of the
Former Fifteenth Division of the Court of Appeals; rollo, pp. 17-25.
Treble costs against petitioner.

SO ORDERED.

RENATO C. CORONA
Associate Justice
 Republic of the Philippines 3. The said armored car was driven by Benjamin
SUPREME COURT Magalong Y de Vera, escorted by Security Guard
Manila Saturnino Atiga Y Rosete. Driver Magalong was
assigned by PRC Management Systems with the
FIRST DIVISION plaintiff by virtue of an Agreement executed on
August 7, 1983, a duplicate original copy of which
is hereto attached as Exhibit "B";
G.R. No. 115278 May 23, 1995
4. The Security Guard Atiga was assigned by
FORTUNE INSURANCE AND SURETY CO., INC., petitioner, Unicorn Security Services, Inc. with the plaintiff
vs. by virtue of a contract of Security Service
COURT OF APPEALS and PRODUCERS BANK OF THE executed on October 25, 1982, a duplicate
PHILIPPINES, respondents. original copy of which is hereto attached as
Exhibit "C";
DAVIDE, JR., J.:
5. After an investigation conducted by the Pasay
The fundamental legal issue raised in this petition for review on certiorari is whether police authorities, the driver Magalong and guard
the petitioner is liable under the Money, Security, and Payroll Robbery policy it issued Atiga were charged, together with Edelmer
to the private respondent or whether recovery thereunder is precluded under the Bantigue Y Eulalio, Reynaldo Aquino and John
general exceptions clause thereof. Both the trial court and the Court of Appeals held Doe, with violation of P.D. 532 (Anti-Highway
that there should be recovery. The petitioner contends otherwise. Robbery Law) before the Fiscal of Pasay City. A
copy of the complaint is hereto attached as
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Exhibit "D";
Manila, by private respondent Producers Bank of the Philippines (hereinafter
Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter 6. The Fiscal of Pasay City then filed an
Fortune) of a complaint for recovery of the sum of P725,000.00 under the policy information charging the aforesaid persons with
issued by Fortune. The sum was allegedly lost during a robbery of Producer's the said crime before Branch 112 of the Regional
armored vehicle while it was in transit to transfer the money from its Pasay City Trial Court of Pasay City. A copy of the said
Branch to its head office in Makati. The case was docketed as Civil Case No. 1817 information is hereto attached as Exhibit "E." The
and assigned to Branch 146 thereof. case is still being tried as of this date;

After joinder of issues, the parties asked the trial court to render judgment based on
the following stipulation of facts:
1. The plaintiff was insured by the defendants
and an insurance policy was issued, the duplicate
original of which is hereto attached as Exhibit "A";
2. An armored car of the plaintiff, while in the
process of transferring cash in the sum of
P725,000.00 under the custody of its teller,
Maribeth Alampay, from its Pasay Branch to its
Head Office at 8737 Paseo de Roxas, Makati,
Metro Manila on June 29, 1987, was robbed of
the said cash. The robbery took place while the
armored car was traveling along Taft Avenue in
Pasay City;
7. Demands were made by the plaintiff upon the
defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as the
loss is excluded from the coverage of the
insurance policy, attached hereto as Exhibit "A,"
specifically under page 1 thereof, "General
Exceptions" Section (b), which is marked as
Exhibit "A-1," and which reads as follows:
GENERAL EXCEPTIONS
The company shall not be liable under this policy
in report of
xxx xxx xxx
(b) any loss caused by any
dishonest, fraudulent or
 criminal act of the insured or
any officer, employee, partner,
director, trustee or authorized
representative of the Insured
whether acting alone or in
conjunction with others. . . .
8. The plaintiff opposes the contention of the
defendant and contends that Atiga and Magalong
are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the
robbery.1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The
dispositive portion thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff
and against defendant, and
(a) orders defendant to pay
plaintiff the net amount of
P540,000.00 as liability under
Policy No. 0207 (as mitigated
by the P40,000.00 special
clause deduction and by the
recovered sum of
P145,000.00), with interest
thereon at the legal rate, until
fully paid;
(b) orders defendant to pay
plaintiff the sum of P30,000.00
as and for attorney's fees; and
(c) orders defendant to pay
costs of suit.
All other claims and counterclaims are accordingly dismissed
forthwith.
SO ORDERED. 2
The trial court ruled that Magalong and Atiga were not employees or representatives
of Producers. It Said:
The Court is satisfied that plaintiff may not be said to have selected
and engaged Magalong and Atiga, their services as armored car
driver and as security guard having been merely offered by PRC
Management and by Unicorn Security and which latter firms
assigned them to plaintiff. The wages and salaries of both
Magalong and Atiga are presumably paid by their respective firms,
which alone wields the power to dismiss them. Magalong and Atiga
are assigned to plaintiff in fulfillment of agreements to provide
driving services and property protection as such — in a context
which does not impress the Court as translating into plaintiff's
power to control the conduct of any assigned driver or security
guard, beyond perhaps entitling plaintiff to request are replacement
for such driver guard. The finding is accordingly compelled that
neither Magalong nor Atiga were plaintiff's "employees" in
avoidance of defendant's liability under the policy, particularly the
general exceptions therein embodied.
Neither is the Court prepared to accept the proposition that driver
Magalong and guard Atiga were the "authorized representatives" of
plaintiff. They were merely an assigned armored car driver and
security guard, respectively, for the June 29, 1987 money transfer
from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly
— it was teller Maribeth Alampay who had "custody" of the
P725,000.00 cash being transferred along a specified money route,
and hence plaintiff's then designated "messenger" adverted to in
the policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case as
CA-G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in
toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and
Atiga were neither employees nor authorized representatives of Producers and
ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in favor
of the insured and strictly against the insurance company (New Life
Enterprises vs. Court of Appeals, 207 SCRA 669; Sun Insurance
Office, Ltd. vs. Court of Appeals, 211 SCRA 554). Contracts of
insurance, like other contracts, are to be construed according to the
sense and meaning of the terms which the parties themselves have
used. If such terms are clear and unambiguous, they must be taken
and understood in their plain, ordinary and popular sense (New Life
Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs.
Court of Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted
stipulation is plain, ordinary and simple. No other interpretation is
necessary. The word "employee" must be taken to mean in the
ordinary sense.
The Labor Code is a special law specifically dealing with/and
specifically designed to protect labor and therefore its definition as
 to employer-employee relationships insofar as the
application/enforcement of said Code is concerned must
necessarily be inapplicable to an insurance contract which
defendant-appellant itself had formulated. Had it intended to apply
the Labor Code in defining what the word "employee" refers to, it
must/should have so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees
of plaintiff-appellee bank because it has no power to hire or to
dismiss said driver and security guard under the contracts (Exhs. 8
and C) except only to ask for their replacements from the
contractors.5
On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the
trial court and the Court of Appeals erred in holding it liable under the insurance policy
because the loss falls within the general exceptions clause considering that driver
Magalong and security guard Atiga were Producers' authorized representatives or
employees in the transfer of the money and payroll from its branch office in Pasay
City to its head office in Makati.
According to Fortune, when Producers commissioned a guard and a driver to transfer
its funds from one branch to another, they effectively and necessarily became its
authorized representatives in the care and custody of the money. Assuming that they
could not be considered authorized representatives, they were, nevertheless,
employees of Producers. It asserts that the existence of an employer-employee
relationship "is determined by law and being such, it cannot be the subject of
agreement." Thus, if there was in reality an employer-employee relationship between
Producers, on the one hand, and Magalong and Atiga, on the other, the provisions in
the contracts of Producers with PRC Management System for Magalong and with
Unicorn Security Services for Atiga which state that Producers is not their employer
and that it is absolved from any liability as an employer, would not obliterate the
relationship.
Fortune points out that an employer-employee relationship depends upon four
standards: (1) the manner of selection and engagement of the putative employee; (2)
the mode of payment of wages; (3) the presence or absence of a power to dismiss;
and (4) the presence and absence of a power to control the putative employee's
conduct. Of the four, the right-of-control test has been held to be the decisive
factor. 6 It asserts that the power of control over Magalong and Atiga was vested in
and exercised by Producers. Fortune further insists that PRC Management System
and Unicorn Security Services are but "labor-only" contractors under Article 106 of
the Labor Code which provides:
Art. 106. Contractor or subcontractor. — There is "labor-only"
contracting where the person supplying workers to an employer
does not have substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, and the
workers recruited and placed by such persons are performing
activities which are directly related to the principal business of such
employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the
latter were directly employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers,
following the ruling in International Timber Corp. vs. NLRC 7 that a finding that a
contractor is a "labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the project and the employees
of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its
employees since it had nothing to do with their selection and engagement, the
payment of their wages, their dismissal, and the control of their conduct. Producers
argued that the rule in International Timber Corp. is not applicable to all cases but
only when it becomes necessary to prevent any violation or circumvention of the
Labor Code, a social legislation whose provisions may set aside contracts entered
into by parties in order to give protection to the working man.
Producers further asseverates that what should be applied is the rule in American
President Lines vs. Clave, 8 to wit:
In determining the existence of employer-employee relationship,
the following elements are generally considered, namely: (1) the
selection and engagement of the employee; (2) the payment of
wages; (3) the power of dismissal; and (4) the power to control the
employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which
assigned Magalong as the driver of Producers' armored car and was responsible for
his faithful discharge of his duties and responsibilities, and since Producers paid the
monthly compensation of P1,400.00 per driver to PRC Management Systems and not
to Magalong, it is clear that Magalong was not Producers' employee. As to Atiga,
Producers relies on the provision of its contract with Unicorn Security Services which
provides that the guards of the latter "are in no sense employees of the CLIENT."
There is merit in this petition.
It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Section 174 of the
Insurance Code provides:
Sec. 174. Casualty insurance is insurance covering loss or liability
arising from accident or mishap, excluding certain types of loss
which by law or custom are considered as falling exclusively within
the scope of insurance such as fire or marine. It includes, but is not
limited to, employer's liability insurance, public liability insurance,
motor vehicle liability insurance, plate glass insurance, burglary and
theft insurance, personal accident and health insurance as written
 by non-life insurance companies, and other substantially similar
kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance
Code contains no other provisions applicable to casualty insurance or to robbery
insurance in particular. These contracts are, therefore, governed by the general
provisions applicable to all types of insurance. Outside of these, the rights and
obligations of the parties must be determined by the terms of their contract, taking
into consideration its purpose and always in accordance with the general principles of
insurance law. 9
It has been aptly observed that in burglary, robbery, and theft insurance, "the
opportunity to defraud the insurer — the moral hazard — is so great that insurers
have found it necessary to fill up their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the insurer assume the risk of all losses
due to the hazards insured against." 10 Persons frequently excluded under such
provisions are those in the insured's service and employment. 11 The purpose of the
exception is to guard against liability should the theft be committed by one having
unrestricted access to the property. 12 In such cases, the terms specifying the
excluded classes are to be given their meaning as understood in common
speech. 13 The terms "service" and "employment" are generally associated with the
idea of selection, control, and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein should
be resolved against the insurer, 15 or it should be construed liberally in favor of the
insured and strictly against the insurer. 16 Limitations of liability should be regarded
with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It
goes without saying then that if the terms of the contract are clear and unambiguous,
there is no room for construction and such terms cannot be enlarged or diminished by
judicial construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions
specified therein. 19 It is settled that the terms of the policy constitute the measure of
the insurer's liability. 20 In the absence of statutory prohibition to the contrary,
insurance companies have the same rights as individuals to limit their liability and to
impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.
With the foregoing principles in mind, it may now be asked whether Magalong and
Atiga qualify as employees or authorized representatives of Producers under
paragraph (b) of the general exceptions clause of the policy which, for easy
reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent
or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representative of the Insured whether
acting alone or in conjunction with others. . . .
(emphases supplied)
There is marked disagreement between the parties on the correct meaning of the
terms "employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and
exempt from protection and coverage losses arising from dishonest, fraudulent, or
criminal acts of persons granted or having unrestricted access to Producers' money
or payroll. When it used then the term "employee," it must have had in mind any
person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of
the employer-employee relationship, 21 or as statutorily declared even in a limited
sense as in the case of Article 106 of the Labor Code which considers the employees
under a "labor-only" contract as employees of the party employing them and not of
the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and
Unicorn Security Services are "labor-only" contracts.
Producers, however, insists that by the express terms thereof, it is not the
employer of Magalong. Notwithstanding such express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and
the security guards each shall supply to Producers are not the latter's
employees, it may, in fact, be that it is because the contracts are, indeed,
"labor-only" contracts. Whether they are is, in the light of the criteria provided
for in Article 106 of the Labor Code, a question of fact. Since the parties
opted to submit the case for judgment on the basis of their stipulation of
facts which are strictly limited to the insurance policy, the contracts with PRC
Management Systems and Unicorn Security Services, the complaint for
violation of P.D. No. 532, and the information therefor filed by the City Fiscal
of Pasay City, there is a paucity of evidence as to whether the contracts
between Producers and PRC Management Systems and Unicorn Security
Services are "labor-only" contracts.
But even granting for the sake of argument that these contracts were not "labor-only"
contracts, and PRC Management Systems and Unicorn Security Services were truly
independent contractors, we are satisfied that Magalong and Atiga were, in respect of
the transfer of Producer's money from its Pasay City branch to its head office in
Makati, its "authorized representatives" who served as such with its teller Maribeth
Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to
safely transfer the money to its head office, with Alampay to be responsible for its
custody in transit; Magalong to drive the armored vehicle which would carry the
money; and Atiga to provide the needed security for the money, the vehicle, and his
two other companions. In short, for these particular tasks, the three acted as agents
of Producers. A "representative" is defined as one who represents or stands in the
place of another; one who represents others or another in a special capacity, as an
agent, and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions
clause of the insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of
the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET
ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 156167 May 16, 2005
Item - P7,691,000.00 - on the Clubhouse only
GULF RESORTS, INC., petitioner,
vs. @ .392%;
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent. - 1,500,000.00 - on the furniture, etc. contained in the building above-
mentioned@ .490%;
DECISION - 393,000.00 - on the two swimming pools, only (against the peril of
earthquake shock only) @ 0.100%
PUNO, J.:
- 116,600.00 other buildings include as follows:
a) Tilter House - P19,800.00 - 0.551%
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE b) Power House - P41,000.00 - 0.551%
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court c) House Shed - P55,000.00 - 0.540%
decision1 which dismissed its two appeals and affirmed the judgment of the trial
court. P100,000.00 - for furniture, fixtures, lines air-con and operating equipment

For review are the warring interpretations of petitioner and respondent on the scope
of the insurance company’s liability for earthquake damage to petitioner’s properties.
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are
as follows:
that plaintiff agreed to insure with defendant the properties covered by
AHAC (AIU) Policy No. 206-4568061-9 (Exh. "H") provided that the policy
wording and rates in said policy be copied in the policy to be issued by
defendant; that defendant issued Policy No. 31944 to plaintiff covering the
period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total
premium of P45,159.92 (Exh. "I"); that in the computation of the premium,
defendant’s Policy No. 31944 (Exh. "I"), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and Rate-Various
had its properties in said resort insured originally with the American Home Premium – P37,420.60 F/L
Assurance Company (AHAC-AIU). In the first four insurance policies issued
by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", – 2,061.52 – Typhoon
"D", "E" and "F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss – 1,030.76 – EC
from earthquake shock was extended only to plaintiff’s two swimming pools,
thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and – 393.00 – ES
two (2) swimming pools only (Exhs. "C-1"; ‘D-1", "E" and "F-1"). "Item 5" in Doc. Stamps 3,068.10
those policies referred to the two (2) swimming pools only (Exhs. "1-B", "2-
F.S.T. 776.89
B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in plaintiff’s favor
Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, Prem. Tax 409.05
1989 (Exhs. "G" also "G-1") and in said policy the earthquake endorsement TOTAL 45,159.92;
clause as indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was
deleted and the entry under Endorsements/Warranties at the time of issue
read that plaintiff renewed its policy with AHAC (AIU) for the period of March that the above break-down of premiums shows that plaintiff paid
14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. "H") only P393.00 as premium against earthquake shock (ES); that in all the six
which carried the entry under "Endorsement/Warranties at Time of Issue", insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the premium
which read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the against the peril of earthquake shock is the same, that is P393.00 (Exhs. "C"
amount of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6-B") as and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-
premium thereof, computed as follows: 1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and in
Policy No. 31944 issued by defendant, the shock endorsement provide(sic):
 In consideration of the payment by the insured to the company of
the sum included additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this policy
due to the contrary, that this insurance covers loss or damage to
shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. "1-D", "2-D", "3-A",
"4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was
deleted; that on July 16, 1990 an earthquake struck Central Luzon and
Northern Luzon and plaintiff’s properties covered by Policy No. 31944 issued
by defendant, including the two swimming pools in its Agoo Playa Resort
were damaged.2
After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned the investigation of the claim
to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and
Surveyors, Inc., through its Vice-President A.R. de Leon,4 rendered a preliminary
report5 finding extensive damage caused by the earthquake to the clubhouse and to
the two swimming pools. Mr. de Leon stated that "except for the swimming pools, all
affected items have no coverage for earthquake shocks."6 On August 11, 1990,
petitioner filed its formal demand7 for settlement of the damage to all its properties in
the Agoo Playa Resort. On August 23, 1990, respondent denied petitioner’s claim on
the ground that its insurance policy only afforded earthquake shock coverage to the
two swimming pools of the resort.8 Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a complaint10 with the regional
trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured
properties, with interest thereon, as computed under par. 29 of the policy
(Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses
sustained by plaintiff on account of defendant’s refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorney’s fees and expenses of
litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium
of P393.00 against the peril of earthquake shock, the same premium it paid
against earthquake shock only on the two swimming pools in all the policies
issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the
Court must consequently agree with the position of defendant that the
endorsement rider (Exhibit "7-C") means that only the two swimming pools
were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of
adhesion hence, where the language used in an insurance contract or
application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the language used in the
policy in litigation is clear and unambiguous hence there is no need for
interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming
pools had earthquake shock coverage and were heavily damaged by the
earthquake which struck on July 16, 1990. Defendant having admitted that
the damage to the swimming pools was appraised by defendant’s adjuster
at P386,000.00, defendant must, by virtue of the contract of insurance, pay
plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its
willingness and readiness to settle said liability, there is no basis for the
grant of the other damages prayed for by plaintiff. As to the counterclaims of
defendant, the Court does not agree that the action filed by plaintiff is
baseless and highly speculative since such action is a lawful exercise of the
plaintiff’s right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is likewise
denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs
the sum of THREE HUNDRED EIGHTY SIX THOUSAND PESOS
(P386,000.00) representing damage to the two (2) swimming pools, with
interest at 6% per annum from the date of the filing of the Complaint until
defendant’s obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an appeal
with the Court of Appeals based on the following assigned errors: 14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT
CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING
POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS
PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE
 OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES
SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-
APPELLANT’S RIGHT TO RECOVER UNDER DEFENDANT-APPELLEE’S
POLICY (NO. 31944; EXH "I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY
16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-
APPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH
INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON
PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower court’s failure
to award it attorney’s fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties,
We are not convinced that the last two (2) insurance contracts (Exhs. "G"
and "H"), which the plaintiff-appellant had with AHAC (AIU) and upon which
the subject insurance contract with Philippine Charter Insurance Corporation
is said to have been based and copied (Exh. "I"), covered an extended
earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-
appellant’s prayer for the imposition of interest – 24% on the insurance claim
and 6% on loss of income allegedly amounting to P4,280,000.00. Since the
defendant-appellant has expressed its willingness to pay the damage
caused on the two (2) swimming pools, as the Court a quo and this Court
correctly found it to be liable only, it then cannot be said that it was in default
and therefore liable for interest.
Coming to the defendant-appellant’s prayer for an attorney’s fees, long-
standing is the rule that the award thereof is subject to the sound discretion
of the court. Thus, if such discretion is well-exercised, it will not be disturbed
on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002).
Moreover, being the award thereof an exception rather than a rule, it is
necessary for the court to make findings of facts and law that would bring the
case within the exception and justify the grant of such award (Country
Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the
plaintiff-appellant’s action is not baseless and highly speculative, We find
that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby
DISMISSED and judgment of the Trial Court hereby AFFIRMED in toto. No
costs.15
Petitioner filed the present petition raising the following issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT
UNDER RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE
TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED
PETITIONER’S PRAYER FOR DAMAGES WITH INTEREST THEREON AT
THE RATE CLAIMED, ATTORNEY’S FEES AND EXPENSES OF
LITIGATION.
Petitioner contends:
First, that the policy’s earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words "any property
insured by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states that
it is "[s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake
Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over
the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in
favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondent’s liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium
was not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
Tenth, the parties’ contemporaneous and subsequent acts show that they intended to
extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company
(AHAC-AIU), which covered all the resort’s properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock. Respondent’s insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under the
doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule
45 of the Revised Rules of Court as its remedy, and there is no need for calibration of
the evidence in order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments: 18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioner’s insured properties other
than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only the
two swimming pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier policies, and there
was no increase in the premium paid. AHAC-AIU, in a letter19 by its representative
Manuel C. Quijano, categorically stated that its previous policy, from which
respondent’s policy was copied, covered only earthquake shock for the two swimming
pools.
Second, petitioner’s payment of additional premium in the amount of P393.00 shows
that the policy only covered earthquake shock damage on the two swimming pools.
The amount was the same amount paid by petitioner for earthquake shock coverage
on the two swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioner’s properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their rider’s
title, in the last two policies, this qualification in the title was deleted. AHAC-AIU,
through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden the scope of the
endorsement whose descriptive title was merely enumerated. Any ambiguity in the
policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as
covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988,
the phrase "Item 5 – P393,000.00 – on the two swimming pools only (against the peril
of earthquake shock only)" meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as "Item
3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must
be paid for all the properties covered. In all of its seven insurance policies, petitioner
only paid P393.00 as premium for coverage of the swimming pools against
earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier "ANY" instead of "ALL" to
describe the property covered was done deliberately to enable the parties to specify
the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioner’s own evidence shows
that it only required respondent to follow the exact provisions of its previous policy
from AHAC-AIU. Respondent complied with this requirement. Respondent’s only
deviation from the agreement was when it modified the provisions regarding the
replacement cost endorsement. With regard to the issue under litigation, the riders of
the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would
estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjuster’s letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIU’s inadvertent deletion of the phrase "Item
5 Only" after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties’ clear intention to limit earthquake
shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It
did not object to any deficiency nor did it institute any action to reform the policy. The
policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorney’s fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on
the two swimming pools, it cannot be considered to be in default, and therefore, it is In consideration of the payment by the Insured to the Company of the sum
not liable for interest. of P. . . . . . . . . . . . . . . . . additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this Policy to the
We hold that the petition is devoid of merit. contrary, that this insurance covers loss or damage (including loss or
damage by fire) to any of the property insured by this Policy occasioned by
or through or in consequence of Earthquake.
In Insurance Policy No. 31944, four key items are important in the resolution of the
case at bar.
Provided always that all the conditions of this Policy shall apply (except in so
far as they may be hereby expressly varied) and that any reference therein
First, in the designation of location of risk, only the two swimming pools were to loss or damage by fire should be deemed to apply also to loss or damage
specified as included, viz: occasioned by or through or in consequence of Earthquake. 24

ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril Petitioner contends that pursuant to this rider, no qualifications were placed on the
of earthquake shock only)20 scope of the earthquake shock coverage. Thus, the policy extended earthquake
shock coverage to all of the insured properties.
Second, under the breakdown for premium payments,21 it was stated that:
It is basic that all the provisions of the insurance policy should be examined and
PREMIUM RECAPITULATION interpreted in consonance with each other.25 All its parts are reflective of the true
intent of the parties. The policy cannot be construed piecemeal. Certain stipulations
ITEM NOS. AMOUNT RATES PREMIUM cannot be segregated and then made to control; neither do particular words or
xxx phrases necessarily determine its character. Petitioner cannot focus on the
earthquake shock endorsement to the exclusion of the other provisions. All the
3 393,000.00 0.100%-E/S 393.0022] provisions and riders, taken and interpreted together, indubitably show the intention of
the parties to extend earthquake shock coverage to the two swimming pools only.
Third, Policy Condition No. 6 stated:
A careful examination of the premium recapitulation will show that it is the clear intent
6. This insurance does not cover any loss or damage occasioned by or of the parties to extend earthquake shock coverage only to the two swimming pools.
through or in consequence, directly or indirectly of any of the following Section 2(1) of the Insurance Code defines a contract of insurance as an agreement
occurrences, namely:-- whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. Thus, an insurance
23 contract exists where the following elements concur:
(a) Earthquake, volcanic eruption or other convulsion of nature.

1. The insured has an insurable interest;

Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To
Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
ANNUAL PAYMENT AGREEMENT
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED
AGGREGATE SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN
CONSIDERATION OF A DISCOUNT OF 5% OR 7 ½ % OF THE NET
PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
2. The insured is subject to a risk of loss by the happening of the designated
peril;
ON
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a
premium.26 (Emphasis ours)

Earthquake Endorsement An insurance premium is the consideration paid an insurer for undertaking to
indemnify the insured against a specified peril. 27 In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches.28 In
the subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioner’s previous insurance policies from AHAC-AIU.
As borne out by petitioner’s witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25,
1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4, 1985 the
coverage on earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding
to the two swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25,
1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they
are of course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend
what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to
March 14, 1989, did you give written instruction to Forte Insurance Agency
advising it that the earthquake shock coverage must extend to all properties
of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an
oral instruction to that effect of extending the coverage on (sic) the other
properties of the company.
Q. And that instruction, according to you, was very important because in
April 1987 there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in
the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be
covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home
Assurance Company marked Exhibit "G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake
shock endorsement has no more limitation referring to the two swimming
pools only, I was contented already that the previous limitation pertaining to
the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement
on Long Term Policies"29 to the insurance policy as proof of the intent of the parties
to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or
endorsements to which the policy is subject, as required under Section 50, paragraph
2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter
for AHAC-AIU:
WITNESS:
Because it says here in the policies, in the enumeration
"Earthquake Shock Endorsement, in the Clauses and Warranties:
Item 5 only (Earthquake Shock Endorsement)," sir.
ATTY. MEJIA:

DIRECT EXAMINATION OF JUAN BARANDA III30 Witness referring to Exhibit C-1, your Honor.
TSN, August 11, 1992
pp. 9-12
WITNESS:
Atty. Mejia:
We do not normally cover earthquake shock endorsement on stand
alone basis. For swimming pools we do cover earthquake shock.
We respectfully manifest that the same exhibits C to H inclusive For building we covered it for full earthquake coverage which
have been previously marked by counsel for defendant as Exhibit[s] includes earthquake shock…
1-6 inclusive. Did you have occasion to review of (sic) these six (6)
policies issued by your company [in favor] of Agoo Playa Resort?
COURT:
WITNESS:
As far as earthquake shock endorsement you do not have a
specific coverage for other things other than swimming pool? You
Yes[,] I remember having gone over these policies at one point of are covering building? They are covered by a general insurance?
time, sir.
WITNESS:
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C
to H respectively carries an earthquake shock endorsement[?] My question
to you is, on the basis on (sic) the wordings indicated in Exhibits C to H Earthquake shock coverage could not stand alone. If we are
respectively what was the extent of the coverage [against] the peril of covering building or another we can issue earthquake shock solely
earthquake shock as provided for in each of the six (6) policies? but that the moment I see this, the thing that comes to my mind is
either insuring a swimming pool, foundations, they are normally
affected by earthquake but not by fire, sir.
xxx
DIRECT EXAMINATION OF JUAN BARANDA III
WITNESS: TSN, August 11, 1992
pp. 23-25
The extent of the coverage is only up to the two (2) swimming
pools, sir. Q. Plaintiff’s witness, Mr. Mantohac testified and he alleged that only
Exhibits C, D, E and F inclusive [remained] its coverage against earthquake
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and shock to two (2) swimming pools only but that Exhibits G and H respectively
H? entend the coverage against earthquake shock to all the properties indicated
in the respective schedules attached to said policies, what can you say
A. Yes, sir. about that testimony of plaintiff’s witness?

ATTY. MEJIA: WITNESS:

What is your basis for stating that the coverage against earthquake As I have mentioned earlier, earthquake shock cannot stand alone
shock as provided for in each of the six (6) policies extend to the without the other half of it. I assure you that this one covers the two
two (2) swimming pools only? swimming pools with respect to earthquake shock endorsement.
 Based on it, if we are going to look at the premium there has been
no change with respect to the rates. Everytime (sic) there is a
renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We
are not only going to consider the two (2) swimming pools of the
other as stated in the policy. As I see, there is no increase in the
amount of the premium. I must say that the coverage was not
broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
ATTY. ANDRES:
As an insurance executive will you not attach any significance to
the deletion of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is
inadvertent. Being a company underwriter, we do not cover. . it was
inadvertent because of the previous policies that we have issued
with no specific attachments, premium rates and so on. It was
inadvertent, sir.

WITNESS:
They are the same in the sence (sic), in the amount of the
coverage. If you are going to do some computation based on the
rates you will arrive at the same premiums, your Honor.
The Court also rejects petitioner’s contention that respondent’s contemporaneous and
subsequent acts to the issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioner’s own witness testified to this agreement, viz:

CROSS-EXAMINATION OF JUAN BARANDA III CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, September 7, 1992 TSN, January 14, 1992
pp. 4-6 pp. 4-5

ATTY. ANDRES: Q. Just to be clear about this particular answer of yours Mr. Witness, what
exactly did you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of
Would you as a matter of practice [insure] swimming pools for fire procuring the policy from Philippine Charter Insurance Corporation?
insurance?
A. I told him that the insurance that they will have to get will have the same
WITNESS: provisions as this American Home Insurance Policy No. 206-4568061-9.

No, we don’t, sir. Q. You are referring to Exhibit "H" of course?

Q. That is why the phrase "earthquake shock to the two (2) swimming pools A. Yes, sir, to Exhibit "H".
only" was placed, is it not?
Q. So, all the provisions here will be the same except that of the premium
A. Yes, sir. rates?

ATTY. ANDRES: A. Yes, sir. He assured me that with regards to the insurance premium rates
that they will be charging will be limited to this one. I (sic) can even be
lesser.
Will you not also agree with me that these exhibits, Exhibits G and
H which you have pointed to during your direct-examination, the
phrase "Item no. 5 only" meaning to (sic) the two (2) swimming CROSS EXAMINATION OF LEOPOLDO MANTOHAC
pools was deleted from the policies issued by AIU, is it not? TSN, January 14, 1992
pp. 12-14
xxx
Atty. Mejia:
 Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of
the provisions and scope of coverage of Exhibits "I" and "H" sometime in the
third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the
policy wordings as well as scope of coverage of Exhibits "I" and "H"
respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the insurance
policy I sent them but it was only when this case erupted that we discovered
some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice
any discrepancy at any time between those indicated in Exhibit "I" and those
indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only against
the peril of earthquake shock which I understood before that this provision
will have to be placed here because this particular provision under the peril
of earthquake shock only is requested because this is an insurance policy
and therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondent’s representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondent’s independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative
of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to
believe that the endorsement for earthquake shock covered properties other than the
two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and
Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item
3 specifically that the coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had
found out in the policy and he confirmed to me indeed only Item 3 which
were the two swimming pools have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating
that except for the swimming pools all affected items have no coverage for
earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of
the policy I found out that under Item 3 it was specific on the wordings that
on the two swimming pools only, then enclosed in parenthesis (against the
peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming
pools have a computation for premium payment for earthquake shock and all
the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which usually prepares it. 31 A contract of adhesion is one wherein a
party, usually a corporation, prepares the stipulations in the contract, while the other
party merely affixes his signature or his "adhesion" thereto. Through the years, the
courts have held that in these type of contracts, the parties do not bargain on equal
footing, the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.32 Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured. 33
The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided.34 Thus, we
have called on lower courts to remain careful in scrutinizing the factual circumstances
behind each case to determine the efficacy of the claims of contending parties.
In Development Bank of the Philippines v. National Merchandising Corporation,
et al.,35 the parties, who were acute businessmen of experience, were presumed to
have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the inception
of the policy, petitioner had required the respondent to copy verbatimthe provisions
and terms of its latest insurance policy from AHAC-AIU. The testimony of Mr.
Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner,
is reflective of petitioner’s knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21
 Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want
for those facilities in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the same or
exact provisions of the previous insurance policy we had with American
Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which
you wanted in the American Home Insurance policy are to be incorporated in
the PCIC policy?

A. Yes, sir.

Q. What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance

Corporation I specifically told him that the policy and wordings shall be
copied from the AIU Policy No. 206-4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy
No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was
variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-AIU’s policy.
Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this
case as the parties’ intent to limit the coverage of the policy to the two swimming
pools only is not ambiguous.37

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.

SO ORDERED.
G.R. No. 166245 April 9, 2008
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse
and set aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-
G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company
(Philamlife) entered into an agreement denominated as Creditor Group Life Policy No.
P-19202 with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under
the policy, the clients of Eternal who purchased burial lots from it on installment basis
would be insured by Philamlife. The amount of insurance coverage depended upon
the existing balance of the purchased burial lots. The policy was to be effective for a
period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65
years of age, is indebted to the Assured for the unpaid balance of his loan
with the Assured, and is accepted for Life Insurance coverage by the
Company on its effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to
P50,000.00. However, a declaration of good health shall be required for all
Lot Purchasers as part of the application. The Company reserves the right to
require further evidence of insurability satisfactory to the Company in respect
of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the
amount of the unpaid balance of his loan (including arrears up to but not
exceeding 2 months) as reported by the Assured to the Company or the sum
of P100,000.00, whichever is smaller. Such benefit shall be paid to the
Assured if the Lot Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if
the application of the Lot Purchaser is not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot
purchasers, together with a copy of the application of each purchaser, and the
amounts of the respective unpaid balances of all insured lot purchasers. In relation to
the instant petition, Eternal complied by submitting a letter dated December 29,
1982,4 containing a list of insurable balances of its lot buyers for October 1982. One
of those included in the list as "new business" was a certain John Chuang. His
balance of payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an
insurance claim for Chuang’s death. Attached to the claim were the following
documents: (1) Chuang’s Certificate of Death; (2) Identification Certificate stating that
Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of
Attending Physician; and (5) Assured’s Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984, 6 requiring Eternal to
submit the following documents relative to its insurance claim for Chuang’s death: (1)
Certificate of Claimant (with form attached); (2) Assured’s Certificate (with form
attached); (3) Application for Insurance accomplished and signed by the insured,
Chuang, while still living; and (4) Statement of Account showing the unpaid balance of
Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14,
1984,7 which was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the
latter’s insurance claim. This prompted Eternal to demand from Philamlife the
payment of the claim for PhP 100,000 on April 25, 1986.8
In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a
letter dated May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and
9529 with Eternal Gardens Memorial Park in October 1982 for the total
 maximum insurable amount of P100,000.00 each. No application for Group
Insurance was submitted in our office prior to his death on August 2, 1984.
In accordance with our Creditor’s Group Life Policy No. P-1920, under
Evidence of Insurability provision, "a declaration of good health shall be
required for all Lot Purchasers as party of the application." We cite further
the provision on Effective Date of Coverage under the policy which states
that "there shall be no insurance if the application is not approved by the
Company." Since no application had been submitted by the
Insured/Assured, prior to his death, for our approval but was submitted
instead on November 15, 1984, after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to point out that Eternal Gardens
being the Assured was a party to the Contract and was therefore aware of
these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our
approval per se of the insurance coverage but are held by us in trust for the
payor until the prerequisites for insurance coverage shall have been met.
We will however, return all the premiums which have been paid in behalf of
John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC)
for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial
court decided in favor of Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the
Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until
fully paid; and, to pay the sum of P10,000.00 as attorney’s fees.
SO ORDERED.
The RTC found that Eternal submitted Chuang’s application for insurance which he
accomplished before his death, as testified to by Eternal’s witness and evidenced by
the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life
Insurance Application Forms & Cert."10 It further ruled that due to Philamlife’s inaction
from the submission of the requirements of the group insurance on December 29,
1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s acceptance of the
premiums during the same period, Philamlife was deemed to have approved
Chuang’s application. The RTC said that since the contract is a group life insurance,
once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil
Case No. 57810 is REVERSED and SET ASIDE, and the complaint
is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuang’s application was not
enclosed in Eternal’s letter dated December 29, 1982. It further ruled that the non-
accomplishment of the submitted application form violated Section 26 of the
Insurance Code. Thus, the CA concluded, there being no application form, Chuang
was not covered by Philamlife’s insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not
therefore determined by this Honorable Court, or has decided it in a way not
in accord with law or with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to
respondent PhilamLife before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial
Court dated May 29, 1996.
The Court’s Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual
issues raised before the CA and first level courts, considering their findings of facts
are conclusive and binding on this Court. However, such rule is subject to exceptions,
as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its findings the [CA] went beyond
the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings [of the CA] are
contrary to the trial court; (8) when the findings are conclusions without
citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioner’s main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.12(Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this
Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before his
death. In Eternal’s letter dated December 29, 1982, a list of insurable interests of
buyers for October 1982 was attached, including Chuang in the list of new
businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in
the letter that was apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance application which was signed
by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife
received a copy of Chuang’s insurance application.
The evidence on record supports Eternal’s position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife
stamped as received, states that the insurance forms for the attached list of burial lot
buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is an
admission by Philamlife against its own interest. 13 The burden of evidence has shifted
to Philamlife, which must prove that the letter did not contain Chuang’s insurance
application. However, Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuang’s insurance application.
To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal
letter is stamped as received, the contents of the letter are correct and accounted for.
Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due
to inconsistencies is groundless. The trial court is in the best position to determine the
reliability and credibility of the witnesses, because it has the opportunity to observe
firsthand the witnesses’ demeanor, conduct, and attitude. Findings of the trial court on
such matters are binding and conclusive on the appellate court, unless some facts or
circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however,
reveals no overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original
insurance application of Chuang was, as shown by the testimony of Edilberto
Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of
new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies
of this form and the original of this is submitted to Philamlife together with
the monthly remittances and the second copy is remained or retained with
the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is
merely asking for the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I
submitted with that payment together with the new clients all the originals I
see to it before I sign the transmittal letter the originals are attached
therein.16
In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as an
attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on
whether one or two insurance application forms were accomplished and the testimony
of Mendoza on who actually filled out the application form, these are minor
inconsistencies that do not affect the credibility of the witnesses. Thus, we ruled in
People v. Paredes that minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate
any suspicion that the testimonies have been rehearsed. 17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of
the prosecution’s evidence as a whole or reflect on the witnesses’ honesty.
The test is whether the testimonies agree on essential facts and whether the
respective versions corroborate and substantially coincide with each other
so as to make a consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by
Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternal’s witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss
without approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if
the application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two
sentences. The first sentence appears to state that the insurance coverage of the
clients of Eternal already became effective upon contracting a loan with Eternal while
the second sentence appears to require Philamlife to approve the insurance contract
before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which
must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latter’s interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with
the general rule of resolving any ambiguity therein in favor of the insured,
where the contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other words, it should
be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with
its obligations.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts
should construe them in such a way as to preclude the insurer from non-
compliance with his obligation. Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which
prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance
contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920
dated December 10, 1980, must be construed in favor of the insured and in favor of
the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean
that upon a party’s purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser is created and the same is effective,
valid, and binding until terminated by Philamlife by disapproving the insurance
application. The second sentence of Creditor Group Life Policy No. P-1920 on the
Effective Date of Benefit is in the nature of a resolutory condition which would lead to
the cessation of the insurance contract. Moreover, the mere inaction of the insurer on
the insurance application must not work to prejudice the insured; it cannot be
interpreted as a termination of the insurance contract. The termination of the
insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on
equal footing is inaccurate at best. Insurance contracts are wholly prepared by the
insurer with vast amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to
be delineated. Hence, in order to protect the interest of insurance applicants,
insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor the
application as a valid, binding, and effective insurance contract. 21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-
G.R. CV No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of
the Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of
the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of
PhP 100,000 from the time of extra-judicial demand by Eternal until
Philamlife’s receipt of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per
annum of PhP 100,000 from June 17, 1996 until full payment of this award;
and
(4) To pay Eternal attorney’s fees in the amount of PhP 10,000.
No costs.
SO ORDERED.
G.R. No. 175666 July 29, 2013
MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.
vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit
business from or provide insurance coverage only to legitimate and bona fide clients,
by requiring them to thoroughly investigate those they insure within two years from
effectivity of the policy and while the insured is still alive. If they do not, they will be
obligated to honor claims on the policies they issue, regardless of fraud, concealment
or misrepresentation. The law assumes that they will do just that and not sit on their
laurels, indiscriminately soliciting and accepting insurance business from any Tom,
Dick and Harry.
Assailed in this Petition for Review on Certiorari 1 are the September 28, 2005
Decision2 of the Court of Appeals' (CA) in CA-G.R. CV No. 62286 and its November
9, 2006 Resolution3 denying the petitioner’s Motion for Reconsideration.4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila
Bankers Life Insurance Corporation (Bankers Life), designating respondent Cresencia
P. Aban (Aban), her niece,5 as her beneficiary.
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of
₱100,000.00, in Sotero’s favor on August 30, 1993, after the requisite medical
examination and payment of the insurance premium.6
On April 10, 1996,7 when the insurance policy had been in force for more than two
years and seven months, Sotero died. Respondent filed a claim for the insurance
proceeds on July 9, 1996. Petitioner conducted an investigation into the claim, 8 and
came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was
illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to pay the insurance premiums
on Insurance Policy No. 747411;
4. Sotero did not sign the July 3, 1993 application for insurance;9 and
5. Respondent was the one who filed the insurance application, and x x x
designated herself as the beneficiary.10
For the above reasons, petitioner denied respondent’s claim on April 16, 1997 and
refunded the premiums paid on the policy.11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the
policy, which was docketed as Civil Case No. 97-867 and assigned to Branch 134 of
the Makati Regional Trial Court. The main thesis of the Complaint was that the policy
was obtained by fraud, concealment and/or misrepresentation under the Insurance
Code,12 which thus renders it voidable under Article 139013 of the Civil Code.
Respondent filed a Motion to Dismiss14 claiming that petitioner’s cause of action was
barred by prescription pursuant to Section 48 of the Insurance Code, which provides
as follows:
Whenever a right to rescind a contract of insurance is given to the insurer by any
provision of this chapter, such right must be exercised previous to the
commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of two years from the date
of its issue or of its last reinstatement, the insurer cannot prove that the policy is void
ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioner’s investigator testified in
court, stating among others that the insurance underwriter who solicited the insurance
is a cousin of respondent’s husband, Dindo Aban, 15 and that it was the respondent
who paid the annual premiums on the policy.16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an Order17 granting respondent’s Motion
to Dismiss, thus:
WHEREFORE, defendant CRESENCIA P. ABAN’s Motion to Dismiss is hereby
granted. Civil Case No. 97-867 is hereby dismissed.
SO ORDERED.18
In dismissing the case, the trial court found that Sotero, and not respondent, was the
one who procured the insurance; thus, Sotero could legally take out insurance on her
own life and validly designate – as she did – respondent as the beneficiary. It held
further that under Section 48, petitioner had only two years from the effectivity of the
policy to question the same; since the policy had been in force for more than two
years, petitioner is now barred from contesting the same or seeking a rescission or
annulment thereof.
Petitioner moved for reconsideration, but in another Order 19 dated October 20, 1998,
the trial court stood its ground.
Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286.
Petitioner questioned the dismissal of Civil Case No. 97-867, arguing that the trial
court erred in applying Section 48 and declaring that prescription has set in. It
contended that since it was respondent – and not Sotero – who obtained the
insurance, the policy issued was rendered void ab initio for want of insurable interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed Decision, which contained the
following decretal portion:
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for
lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying Section 48 to petitioner’s case, the CA
held that petitioner may no longer prove that the subject policy was void ab initio or
rescindible by reason of fraudulent concealment or misrepresentation after the lapse
of more than two years from its issuance. It ratiocinated that petitioner was equipped
with ample means to determine, within the first two years of the policy, whether fraud,
concealment or misrepresentation was present when the insurance coverage was
obtained. If it failed to do so within the statutory two-year period, then the insured
must be protected and allowed to claim upon the policy.
Petitioner moved for reconsideration,21 but the CA denied the same in its November
9, 2006 Resolution.22 Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I CA’s findings of fact leading to such conclusion should be respected.
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF
THE TRIAL COURT DISMISSING THE COMPLAINT ON THE GROUND OF
PRESCRIPTION IN CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE
JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE
APPLICATION OF THE INCONTESTABILITY PROVISION IN THE INSURANCE
CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S
MOTION FOR RECONSIDERATION.23
Petitioner’s Arguments
In praying that the CA Decision be reversed and that the case be remanded to the
trial court for the conduct of further proceedings, petitioner argues in its Petition and
Reply24 that Section 48 cannot apply to a case where the beneficiary under the
insurance contract posed as the insured and obtained the policy under fraudulent
circumstances. It adds that respondent, who was merely Sotero’s niece, had no
insurable interest in the life of her aunt.
Relying on the results of the investigation that it conducted after the claim for the
insurance proceeds was filed, petitioner insists that respondent’s claim was spurious,
as it appeared that Sotero did not actually apply for insurance coverage, was
unlettered, sickly, and had no visible source of income to pay for the insurance
premiums; and that respondent was an impostor, posing as Sotero and fraudulently
obtaining insurance in the latter’s name without her knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not
have given rise to rights and obligations; as such, the action for the declaration of its
nullity or inexistence does not prescribe.25
Respondent’s Arguments
Respondent, on the other hand, essentially argues in her Comment 26 that the CA is
correct in applying Section 48. She adds that petitioner’s new allegation in its Petition
that the policy is void ab initio merits no attention, having failed to raise the same
below, as it had claimed originally that the policy was merely voidable.
On the issue of insurable interest, respondent echoes the CA’s pronouncement that
since it was Sotero who obtained the insurance, insurable interest was present.
Under Section 10 of the Insurance Code, Sotero had insurable interest in her own life,
and could validly designate anyone as her beneficiary. Respondent submits that the
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and appellate courts’ finding that it was Sotero
who obtained the insurance for herself, designating respondent as her beneficiary.
Both courts are in accord in this respect, and the Court is loath to disturb this. While
petitioner insists that its independent investigation on the claim reveals that it was
respondent, posing as Sotero, who obtained the insurance, this claim is no longer
feasible in the wake of the courts’ finding that it was Sotero who obtained the
insurance for herself. This finding of fact binds the Court.
With the above crucial finding of fact – that it was Sotero who obtained the insurance
for herself – petitioner’s case is severely weakened, if not totally disproved.
Allegations of fraud, which are predicated on respondent’s alleged posing as Sotero
and forgery of her signature in the insurance application, are at once belied by the
trial and appellate courts’ finding that Sotero herself took out the insurance for herself.
"Fraudulent intent on the part of the insured must be established to entitle the insurer
to rescind the contract."27 In the absence of proof of such fraudulent intent, no right to
rescind arises.
Moreover, the results and conclusions arrived at during the investigation conducted
unilaterally by petitioner after the claim was filed may simply be dismissed as self-
serving and may not form the basis of a cause of action given the existence and
application of Section 48, as will be discussed at length below.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and
the insured. Under the provision, an insurer is given two years – from the effectivity of
a life insurance contract and while the insured is alive – to discover or prove that the
policy is void ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy,
even though the policy was obtained by fraud, concealment, or misrepresentation.
This is not to say that insurance fraud must be rewarded, but that insurers who
recklessly and indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life
insurance. It gives insurers enough time to inquire whether the policy was obtained by
fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming
individuals that their attempts at insurance fraud would be timely uncovered – thus
deterring them from venturing into such nefarious enterprise. At the same time,
legitimate policy holders are absolutely protected from unwarranted denial of their
claims or delay in the collection of insurance proceeds occasioned by allegations of
fraud, concealment, or misrepresentation by insurers, claims which may no longer be
set up after the two-year period expires as ordained under the law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and
the insured are given the assurance that any dishonest scheme to obtain life
insurance would be exposed, and attempts at unduly denying a claim would be struck
down. Life insurance policies that pass the statutory two-year period are essentially
treated as legitimate and beyond question, and the individuals who wield them are
made secure by the thought that they will be paid promptly upon claim. In this
manner, Section 48 contributes to the stability of the insurance industry.
Section 48 prevents a situation where the insurer knowingly continues to accept
annual premium payments on life insurance, only to later on deny a claim on the
policy on specious claims of fraudulent concealment and misrepresentation, such as
what obtains in the instant case. Thus, instead of conducting at the first instance an
investigation into the circumstances surrounding the issuance of Insurance Policy No.
747411 which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and
opted instead to continue collecting the premiums on the policy. For nearly three
years, petitioner collected the premiums and devoted the same to its own profit. It
cannot now deny the claim when it is called to account. Section 48 must be applied to
it with full force and effect.
The Court therefore agrees fully with the appellate court’s pronouncement that –
the "incontestability clause" is a provision in law that after a policy of life insurance
made payable on the death of the insured shall have been in force during the lifetime
of the insured for a period of two (2) years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible
by reason of fraudulent concealment or misrepresentation of the insured or his agent.
The purpose of the law is to give protection to the insured or his beneficiary by limiting
the rescinding of the contract of insurance on the ground of fraudulent concealment or
misrepresentation to a period of only two (2) years from the issuance of the policy or
its last reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent
concealment or misrepresentation within a period of two (2) years. It is not fair for the
insurer to collect the premiums as long as the insured is still alive, only to raise the
issue of fraudulent concealment or misrepresentation when the insured dies in order
to defeat the right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the
beneficiary is given the stability to recover under the policy when the insured dies.
The provision also makes clear when the two-year period should commence in case
the policy should lapse and is reinstated, that is, from the date of the last
reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how
patent or well-founded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by
insurance companies to avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses
of false representations or concealment of material facts insofar as health and
previous diseases are concerned if the insurance has been in force for at least two
years during the insured’s lifetime. The phrase "during the lifetime" found in Section
48 simply means that the policy is no longer considered in force after the insured has
died. The key phrase in the second paragraph of Section 48 is "for a period of two
years."
As borne by the records, the policy was issued on August 30, 1993, the insured died SO ORDERED.
on April 10, 1996, and the claim was denied on April 16, 1997. The insurance policy
was thus in force for a period of 3 years, 7 months, and 24 days. Considering that the MARIANO C. DEL CASTILLO
insured died after the two-year period, the plaintiff-appellant is, therefore, barred from
proving that the policy is void ab initio by reason of the insured’s fraudulent
concealment or misrepresentation or want of insurable interest on the part of the
beneficiary, herein defendant-appellee.

Well-settled is the rule that it is the plaintiff-appellant’s burden to show that the factual
findings of the trial court are not based on substantial evidence or that its conclusions
are contrary to applicable law and jurisprudence. The plaintiff-appellant failed to
discharge that burden.28

Petitioner claims that its insurance agent, who solicited the Sotero account, happens
to be the cousin of respondent’s husband, and thus insinuates that both connived to
commit insurance fraud. If this were truly the case, then petitioner would have
discovered the scheme earlier if it had in earnest conducted an investigation into the
circumstances surrounding the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim was filed thereon more than two
years later, naturally it was unable to detect the scheme. For its negligence and
inaction, the Court cannot sympathize with its plight. Instead, its case precisely
provides the strong argument for requiring insurers to diligently conduct investigations
on each policy they issue within the two-year period mandated under Section 48, and
not after claims for insurance proceeds are filed with them.

Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease doing
business. If they could not properly screen their agents or salesmen before taking
them in to market their products, or if they do not thoroughly investigate the insurance
contracts they enter into with their clients, then they have only themselves to blame.
Otherwise said, insurers cannot be allowed to collect premiums on insurance policies,
use these amounts collected and invest the same through the years, generating
profits and returns therefrom for their own benefit, and thereafter conveniently deny
insurance claims by questioning the authority or integrity of their own agents or the
insurance policies they issued to their premium-paying clients. This is exactly one of
the schemes which Section 48 aims to prevent.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases in
court, hoping that the inevitable may be put off for years – or even decades – by the
pendency of these unnecessary court cases. In the meantime, they benefit from
collecting the interest and/or returns on both the premiums previously paid by the
insured and the insurance proceeds which should otherwise go to their beneficiaries.
The business of insurance is a highly regulated commercial activity in the
country,29 and is imbued with public interest.30 "An insurance contract is a contract of
adhesion which must be construed liberally in favor of the insured and strictly against
the insurer in order to safeguard the former’s interest."31

WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision
and the November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No.
62286 are AFFIRMED.
G.R. No. 75605 January 22, 1993
RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE
PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
B.L. Padilla for petitioner.
Sabino Padilla, Jr. for Fidelity & Surety, Co.
MELO, J.:
The two consolidated cases involved herein stemmed from the issuance by
Fidelity and Surety Insurance Company of the Philippines (Fidelity for short) of
its Fire Insurance Policy No. F-18876 effective between June 23, 1980 and June
23, 1981 covering Rafael (Rex) Verendia's residential building located at Tulip
Drive, Beverly Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as
beneficiary was the Monte de Piedad & Savings Bank. Verendia also insured
the same building with two other companies, namely, The Country Bankers
Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12,
1981, and The Development Insurance for P400,000.00 under Policy No. F-48867
expiring on June 30, 198l.
While the three fire insurance policies were in force, the insured property was
completely destroyed by fire on the early morning of December 28, 1980.
Fidelity was accordingly informed of the loss and despite demands, refused
payment under its policy, thus prompting Verendia to file a complaint with the
then Court of First Instance of Quezon City, praying for payment of
P385,000.00, legal interest thereon, plus attorney's fees and litigation expenses.
The complaint was later amended to include Monte de Piedad as an "unwilling
defendant" (P. 16, Record).
Answering the complaint, Fidelity, among other things, averred that the policy
was avoided by reason of over-insurance; that Verendia maliciously
represented that the building at the time of the fire was leased under a contract
executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a
Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz,
ruling in favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial
court ruled that Paragraph 3 of the policy was also violated by Verendia in that
the insured failed to inform Fidelity of his other insurance coverages with
Country Bankers Insurance and Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision
promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa,
Bartolome, and Ejercito (P), JJ.), the appellate court reversed for the following
reasons: (a) there was no misrepresentation concerning the lease for the
contract was signed by Marcelo Garcia in the name of Roberto Garcia; and (b)
Paragraph 3 of the policy contract requiring Verendia to give notice to Fidelity
of other contracts of insurance was waived by Fidelity as shown by its conduct
in attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but
instead of directly filing a motion for reconsideration within 15 days therefrom,
Fidelity filed on April 21, 1986, a motion for extension of 3 days within which to
file a motion for reconsideration. The motion for extension was not filed on
April 19, 1986 which was the 15th day after receipt of the decision because said
15th day was a Saturday and of course, the following day was a Sunday (p.
14., Rollo of G.R. No. 75605). The motion for extension was granted by the
appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity had in the meantime
filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for
reconsideration on the ground that the motion for extension was filed out of
time because the 15th day from receipt of the decision which fell on a Saturday
was ignored by Fidelity, for indeed, so Verendia contended, the Intermediate
Appellate Court has personnel receiving pleadings even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a
motion for reconsideration was similarly brushed aside on July 22, 1986 (p.
30, ibid .), the petition herein docketed as G.R. No. 75605 was initiated.
Subsequently, or more specifically on October 21, 1986, the appellate court
denied Fidelity's motion for reconsideration and account thereof. Fidelity filed
on March 31, 1986, the petition for review on certiorari now docketed as G.R.
No. 76399. The two petitions, inter-related as they are, were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the
petition for review on certiorari, we must first determine whether the decision of
the appellate court may still be reviewed, or whether the same is beyond further
judicial scrutiny. Stated otherwise, before anything else, inquiry must be made
into the issue of whether Fidelity could have legally asked for an extension of
the 15-day reglementary period for appealing or for moving for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the
doctrine that the pendency of a motion for extension of time to perfect an
appeal does not suspend the running of the period sought to be extended
(Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same effect were the
rulings in Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4
SCRA 138 [1962]), and Joe vs. King (20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not
expressly prohibit the filing of a motion for extension of time to file a motion for
reconsideration in regard to a final order or judgment, magistrates, including
those in the Court of Appeals, held sharply divided opinions on whether the
period for appealing which also includes the period for moving to reconsider
may be extended. The matter was not definitely settled until this Court issued
its Resolution in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]),
declaring that beginning one month from the promulgation of the resolution on
May 30, 1986 —
. . . the rule shall be strictly enforced that no motion for
extension of time to file a motion for new trial or
reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June
30, 1986, although, of course, Verendia's motion to expunge the motion for
reconsideration was not finally disposed until July 22, 1986, or after the dictum
in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for
extension came before its formal proscription under Habaluyas, for which
reason we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or
not the contract of lease submitted by Verendia to support his claim on the fire
insurance policy constitutes a false declaration which would forfeit his benefits
under Section 13 of the policy and (b) whether or not, in submitting the
subrogation receipt in evidence, Fidelity had in effect agreed to settle
Verendia's claim in the amount stated in said receipt.1
Verging on the factual, the issue of the veracity or falsity of the lease contract could
have been better resolved by the appellate court for, in a petition for review
on certiorari under Rule 45, the jurisdiction of this Court is limited to the review of
errors of law. The appellate court's findings of fact are, therefore, conclusive upon this
Court except in the following cases: (1) when the conclusion is a finding grounded
entirely on speculation, surmises, or conjectures; (2) when the inference made is
manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the judgment is premised on a
misapprehension of facts; (5) when the findings of fact are conflicting; and (6) when
the Court of Appeals in making its findings went beyond the issues of the case and
the same are contrary to the admissions of both appellant and appellee (Ronquillo v.
Court of Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the trial
court and the appellate court on important issues in these consolidated cases and it
appearing that the appellate court judgment is based on a misapprehension of facts,
this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance
benefits, was entered into between him and one Robert Garcia, married to Helen
Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the
insurance policy. When the rented residential building was razed to the ground on
December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within
the premises. However, according to the investigation report prepared by Pat.
Eleuterio M. Buenviaje of the Antipolo police, the building appeared to have "no
occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic) portion of
said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that
Marcelo Garcia, whom he considered as the real lessee, was occupying the building
when it was burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an
adjuster was able to locate him. Robert Garcia then executed an affidavit before the
National Intelligence and Security Authority (NISA) to the effect that he was not the
lessee of Verendia's house and that his signature on the contract of lease was a
complete forgery. Thus, on the strength of these facts, the adjuster submitted a report
dated December 4, 1981 recommending the denial of Verendia's claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed
the lease contract. According to Verendia, it was signed by Marcelo Garcia, cousin of
Robert, who had been paying the rentals all the while. Verendia, however, failed to
explain why Marcelo had to sign his cousin's name when he in fact was paying for the
rent and why he (Verendia) himself, the lessor, allowed such a ruse. Fidelity's
conclusions on these proven facts appear, therefore, to have sufficient bases;
Verendia concocted the lease contract to deflect responsibility for the fire towards an
alleged "lessee", inflated the value of the property by the alleged monthly rental of
P6,500 when in fact, the Provincial Assessor of Rizal had assessed the property's fair
market value to be only P40,300.00, insured the same property with two other
insurance companies for a total coverage of around P900,000, and created a dead-
end for the adjuster by the disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the parties
(Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and
conditions constitute the measure of the insurer's liability and compliance therewith is
a condition precedent to the insured's right to recovery from the insurer (Oriental
Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla
Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As it is also
a contract of adhesion, an insurance contract should be liberally construed in favor of
the insured and strictly against the insurer company which usually prepares it
(Western Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia
used a false lease contract to support his claim under Fire Insurance Policy No. F-
18876, the terms of the policy should be strictly construed against the insured.
Verendia failed to live by the terms of the policy, specifically Section 13 thereof which
is expressed in terms that are clear and unambiguous, that all benefits under the
policy shall be forfeited "If the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or devises
are used by the Insured or anyone acting in his behalf to obtain any benefit under the
policy". Verendia, having presented a false declaration to support his claim for
benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by
virtue of Section 13 of the policy in the absence of proof that Fidelity waived such
provision (Pacific Banking Corporation vs. Court of Appeals, supra). Worse yet, by
presenting a false lease contract, Verendia, reprehensibly disregarded the principle
that insurance contracts are uberrimae fidae and demand the most abundant good
faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).

There is also no reason to conclude that by submitting the subrogation receipt as

evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia's
claims in consideration of the amount of P142,685.77. While the said receipt appears
to have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It
is even incomplete as the blank spaces for a witness and his address are not filled
up. More significantly, the same receipt states that Verendia had received the
aforesaid amount. However, that Verendia had not received the amount stated
therein, is proven by the fact that Verendia himself filed the complaint for the full
amount of P385,000.00 stated in the policy. It might be that there had been efforts to
settle Verendia's claims, but surely, the subrogation receipt by itself does not prove
that a settlement had been arrived at and enforced. Thus, to interpret Fidelity's
presentation of the subrogation receipt in evidence as indicative of its accession to its
"terms" is not only wanting in rational basis but would be substituting the will of the
Court for that of the parties.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R.
No. 76399 is GRANTED and the decision of the then Intermediate Appellate Court
under review is REVERSED and SET ASIDE and that of the trial court is hereby
REINSTATED and UPHELD.

SO ORDERED.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

# Footnotes

1 Fidelity appears to have agreed with the appellate court that it

had waived Verendia's failure to abide by policy condition No. 3 on
disclosure of other insurance policies by its failure to assign it as an
error in the petition in G.R. No. 76399. It must have likewise
realized the futility of assigning it as an error because on the first
page of the policy the following is typewritten: "Other insurances
allowed, the amounts to be declared in the event of loss or when
required."
G.R. No. 156167 May 16, 2005
Item - P7,691,000.00 - on the Clubhouse only

GULF RESORTS, INC., petitioner,

@ .392%;
vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent. - 1,500,000.00 - on the furniture, etc. contained in the building above-
mentioned@ .490%;
DECISION - 393,000.00 - on the two swimming pools, only (against the peril of
earthquake shock only) @ 0.100%
PUNO, J.: - 116,600.00 other buildings include as follows:
a) Tilter House - P19,800.00 - 0.551%
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE b) Power House - P41,000.00 - 0.551%
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court c) House Shed - P55,000.00 - 0.540%
decision1 which dismissed its two appeals and affirmed the judgment of the trial
P100,000.00 - for furniture, fixtures, lines air-con and operating equipment
court.

For review are the warring interpretations of petitioner and respondent on the scope
of the insurance company’s liability for earthquake damage to petitioner’s properties.
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are
as follows:
that plaintiff agreed to insure with defendant the properties covered by
AHAC (AIU) Policy No. 206-4568061-9 (Exh. "H") provided that the policy
wording and rates in said policy be copied in the policy to be issued by
defendant; that defendant issued Policy No. 31944 to plaintiff covering the
period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total
premium of P45,159.92 (Exh. "I"); that in the computation of the premium,
defendant’s Policy No. 31944 (Exh. "I"), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and Rate-Various
had its properties in said resort insured originally with the American Home Premium – P37,420.60 F/L
Assurance Company (AHAC-AIU). In the first four insurance policies issued
– 2,061.52 – Typhoon
by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C",
"D", "E" and "F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss – 1,030.76 – EC
from earthquake shock was extended only to plaintiff’s two swimming pools, – 393.00 – ES
thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and
two (2) swimming pools only (Exhs. "C-1"; ‘D-1", "E" and "F-1"). "Item 5" in Doc. Stamps 3,068.10
those policies referred to the two (2) swimming pools only (Exhs. "1-B", "2- F.S.T. 776.89
B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in plaintiff’s favor
Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, Prem. Tax 409.05
1989 (Exhs. "G" also "G-1") and in said policy the earthquake endorsement TOTAL 45,159.92;
clause as indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was
deleted and the entry under Endorsements/Warranties at the time of issue
read that plaintiff renewed its policy with AHAC (AIU) for the period of March that the above break-down of premiums shows that plaintiff paid
14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. "H") only P393.00 as premium against earthquake shock (ES); that in all the six
which carried the entry under "Endorsement/Warranties at Time of Issue", insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the premium
which read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the against the peril of earthquake shock is the same, that is P393.00 (Exhs. "C"
amount of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6-B") as and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-
premium thereof, computed as follows: 1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and in
Policy No. 31944 issued by defendant, the shock endorsement provide(sic):
 In consideration of the payment by the insured to the company of
the sum included additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this policy
due to the contrary, that this insurance covers loss or damage to
shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. "1-D", "2-D", "3-A",
"4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was
deleted; that on July 16, 1990 an earthquake struck Central Luzon and
Northern Luzon and plaintiff’s properties covered by Policy No. 31944 issued
by defendant, including the two swimming pools in its Agoo Playa Resort
were damaged.2
After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned the investigation of the claim
to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and
Surveyors, Inc., through its Vice-President A.R. de Leon,4 rendered a preliminary
report5 finding extensive damage caused by the earthquake to the clubhouse and to
the two swimming pools. Mr. de Leon stated that "except for the swimming pools, all
affected items have no coverage for earthquake shocks." 6 On August 11, 1990,
petitioner filed its formal demand7 for settlement of the damage to all its properties in
the Agoo Playa Resort. On August 23, 1990, respondent denied petitioner’s claim on
the ground that its insurance policy only afforded earthquake shock coverage to the
two swimming pools of the resort.8 Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a complaint10 with the regional
trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured
properties, with interest thereon, as computed under par. 29 of the policy
(Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses
sustained by plaintiff on account of defendant’s refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorney’s fees and expenses of
litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium
of P393.00 against the peril of earthquake shock, the same premium it paid
against earthquake shock only on the two swimming pools in all the policies
issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the
Court must consequently agree with the position of defendant that the
endorsement rider (Exhibit "7-C") means that only the two swimming pools
were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of
adhesion hence, where the language used in an insurance contract or
application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the language used in the
policy in litigation is clear and unambiguous hence there is no need for
interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming
pools had earthquake shock coverage and were heavily damaged by the
earthquake which struck on July 16, 1990. Defendant having admitted that
the damage to the swimming pools was appraised by defendant’s adjuster
at P386,000.00, defendant must, by virtue of the contract of insurance, pay
plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its
willingness and readiness to settle said liability, there is no basis for the
grant of the other damages prayed for by plaintiff. As to the counterclaims of
defendant, the Court does not agree that the action filed by plaintiff is
baseless and highly speculative since such action is a lawful exercise of the
plaintiff’s right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is likewise
denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs
the sum of THREE HUNDRED EIGHTY SIX THOUSAND PESOS
(P386,000.00) representing damage to the two (2) swimming pools, with
interest at 6% per annum from the date of the filing of the Complaint until
defendant’s obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an appeal
with the Court of Appeals based on the following assigned errors: 14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT
CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING
POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS
PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE
 OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES
SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-
APPELLANT’S RIGHT TO RECOVER UNDER DEFENDANT-APPELLEE’S
POLICY (NO. 31944; EXH "I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY
16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-
APPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH
INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON
PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower court’s failure
to award it attorney’s fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties,
We are not convinced that the last two (2) insurance contracts (Exhs. "G"
and "H"), which the plaintiff-appellant had with AHAC (AIU) and upon which
the subject insurance contract with Philippine Charter Insurance Corporation
is said to have been based and copied (Exh. "I"), covered an extended
earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-
appellant’s prayer for the imposition of interest – 24% on the insurance claim
and 6% on loss of income allegedly amounting to P4,280,000.00. Since the
defendant-appellant has expressed its willingness to pay the damage
caused on the two (2) swimming pools, as the Court a quo and this Court
correctly found it to be liable only, it then cannot be said that it was in default
and therefore liable for interest.
Coming to the defendant-appellant’s prayer for an attorney’s fees, long-
standing is the rule that the award thereof is subject to the sound discretion
of the court. Thus, if such discretion is well-exercised, it will not be disturbed
on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002).
Moreover, being the award thereof an exception rather than a rule, it is
necessary for the court to make findings of facts and law that would bring the
case within the exception and justify the grant of such award (Country
Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the
plaintiff-appellant’s action is not baseless and highly speculative, We find
that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby
DISMISSED and judgment of the Trial Court hereby AFFIRMED in toto. No
costs.15
Petitioner filed the present petition raising the following issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT
UNDER RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE
TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED
PETITIONER’S PRAYER FOR DAMAGES WITH INTEREST THEREON AT
THE RATE CLAIMED, ATTORNEY’S FEES AND EXPENSES OF
LITIGATION.
Petitioner contends:
First, that the policy’s earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words "any property
insured by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states that
it is "[s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake
Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over
the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in
favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondent’s liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium
was not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
Tenth, the parties’ contemporaneous and subsequent acts show that they intended to
extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company
(AHAC-AIU), which covered all the resort’s properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock. Respondent’s insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under the
doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule
45 of the Revised Rules of Court as its remedy, and there is no need for calibration of
the evidence in order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments: 18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioner’s insured properties other
than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only the
two swimming pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier policies, and there
was no increase in the premium paid. AHAC-AIU, in a letter19 by its representative
Manuel C. Quijano, categorically stated that its previous policy, from which
respondent’s policy was copied, covered only earthquake shock for the two swimming
pools.
Second, petitioner’s payment of additional premium in the amount of P393.00 shows
that the policy only covered earthquake shock damage on the two swimming pools.
The amount was the same amount paid by petitioner for earthquake shock coverage
on the two swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioner’s properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their rider’s
title, in the last two policies, this qualification in the title was deleted. AHAC-AIU,
through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden the scope of the
endorsement whose descriptive title was merely enumerated. Any ambiguity in the
policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as
covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988,
the phrase "Item 5 – P393,000.00 – on the two swimming pools only (against the peril
of earthquake shock only)" meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as "Item
3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must
be paid for all the properties covered. In all of its seven insurance policies, petitioner
only paid P393.00 as premium for coverage of the swimming pools against
earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier "ANY" instead of "ALL" to
describe the property covered was done deliberately to enable the parties to specify
the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioner’s own evidence shows
that it only required respondent to follow the exact provisions of its previous policy
from AHAC-AIU. Respondent complied with this requirement. Respondent’s only
deviation from the agreement was when it modified the provisions regarding the
replacement cost endorsement. With regard to the issue under litigation, the riders of
the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would
estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjuster’s letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIU’s inadvertent deletion of the phrase "Item
5 Only" after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties’ clear intention to limit earthquake
shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It
did not object to any deficiency nor did it institute any action to reform the policy. The
policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorney’s fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on
the two swimming pools, it cannot be considered to be in default, and therefore, it is In consideration of the payment by the Insured to the Company of the sum
not liable for interest. of P. . . . . . . . . . . . . . . . . additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this Policy to the
We hold that the petition is devoid of merit. contrary, that this insurance covers loss or damage (including loss or
damage by fire) to any of the property insured by this Policy occasioned by
or through or in consequence of Earthquake.
In Insurance Policy No. 31944, four key items are important in the resolution of the
case at bar.
Provided always that all the conditions of this Policy shall apply (except in so
far as they may be hereby expressly varied) and that any reference therein
First, in the designation of location of risk, only the two swimming pools were to loss or damage by fire should be deemed to apply also to loss or damage
specified as included, viz: occasioned by or through or in consequence of Earthquake. 24

ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril Petitioner contends that pursuant to this rider, no qualifications were placed on the
of earthquake shock only)20 scope of the earthquake shock coverage. Thus, the policy extended earthquake
shock coverage to all of the insured properties.
Second, under the breakdown for premium payments,21 it was stated that:
It is basic that all the provisions of the insurance policy should be examined and
PREMIUM RECAPITULATION interpreted in consonance with each other.25 All its parts are reflective of the true
intent of the parties. The policy cannot be construed piecemeal. Certain stipulations
ITEM NOS. AMOUNT RATES PREMIUM cannot be segregated and then made to control; neither do particular words or
xxx phrases necessarily determine its character. Petitioner cannot focus on the
earthquake shock endorsement to the exclusion of the other provisions. All the
3 393,000.00 0.100%-E/S 393.0022] provisions and riders, taken and interpreted together, indubitably show the intention of
the parties to extend earthquake shock coverage to the two swimming pools only.
Third, Policy Condition No. 6 stated:
A careful examination of the premium recapitulation will show that it is the clear intent
6. This insurance does not cover any loss or damage occasioned by or of the parties to extend earthquake shock coverage only to the two swimming pools.
through or in consequence, directly or indirectly of any of the following Section 2(1) of the Insurance Code defines a contract of insurance as an agreement
occurrences, namely:-- whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. Thus, an insurance
23 contract exists where the following elements concur:
(a) Earthquake, volcanic eruption or other convulsion of nature.

1. The insured has an insurable interest;

Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To
Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
ANNUAL PAYMENT AGREEMENT
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED
AGGREGATE SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN
CONSIDERATION OF A DISCOUNT OF 5% OR 7 ½ % OF THE NET
PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
2. The insured is subject to a risk of loss by the happening of the designated
peril;
ON
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a
premium.26 (Emphasis ours)

Earthquake Endorsement An insurance premium is the consideration paid an insurer for undertaking to
indemnify the insured against a specified peril. 27 In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches.28 In
the subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioner’s previous insurance policies from AHAC-AIU.
As borne out by petitioner’s witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25,
1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4, 1985 the
coverage on earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding
to the two swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25,
1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they
are of course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend
what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to
March 14, 1989, did you give written instruction to Forte Insurance Agency
advising it that the earthquake shock coverage must extend to all properties
of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an
oral instruction to that effect of extending the coverage on (sic) the other
properties of the company.
Q. And that instruction, according to you, was very important because in
April 1987 there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in
the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be
covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home
Assurance Company marked Exhibit "G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake
shock endorsement has no more limitation referring to the two swimming
pools only, I was contented already that the previous limitation pertaining to
the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement
on Long Term Policies"29 to the insurance policy as proof of the intent of the parties
to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or
endorsements to which the policy is subject, as required under Section 50, paragraph
2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter
for AHAC-AIU:
WITNESS:
Because it says here in the policies, in the enumeration
"Earthquake Shock Endorsement, in the Clauses and Warranties:
Item 5 only (Earthquake Shock Endorsement)," sir.
ATTY. MEJIA:

DIRECT EXAMINATION OF JUAN BARANDA III30 Witness referring to Exhibit C-1, your Honor.
TSN, August 11, 1992
pp. 9-12
WITNESS:
Atty. Mejia:
We do not normally cover earthquake shock endorsement on stand
alone basis. For swimming pools we do cover earthquake shock.
We respectfully manifest that the same exhibits C to H inclusive For building we covered it for full earthquake coverage which
have been previously marked by counsel for defendant as Exhibit[s] includes earthquake shock…
1-6 inclusive. Did you have occasion to review of (sic) these six (6)
policies issued by your company [in favor] of Agoo Playa Resort?
COURT:
WITNESS:
As far as earthquake shock endorsement you do not have a
specific coverage for other things other than swimming pool? You
Yes[,] I remember having gone over these policies at one point of are covering building? They are covered by a general insurance?
time, sir.
WITNESS:
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C
to H respectively carries an earthquake shock endorsement[?] My question
to you is, on the basis on (sic) the wordings indicated in Exhibits C to H Earthquake shock coverage could not stand alone. If we are
respectively what was the extent of the coverage [against] the peril of covering building or another we can issue earthquake shock solely
earthquake shock as provided for in each of the six (6) policies? but that the moment I see this, the thing that comes to my mind is
either insuring a swimming pool, foundations, they are normally
affected by earthquake but not by fire, sir.
xxx
DIRECT EXAMINATION OF JUAN BARANDA III
WITNESS: TSN, August 11, 1992
pp. 23-25
The extent of the coverage is only up to the two (2) swimming
pools, sir. Q. Plaintiff’s witness, Mr. Mantohac testified and he alleged that only
Exhibits C, D, E and F inclusive [remained] its coverage against earthquake
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and shock to two (2) swimming pools only but that Exhibits G and H respectively
H? entend the coverage against earthquake shock to all the properties indicated
in the respective schedules attached to said policies, what can you say
A. Yes, sir. about that testimony of plaintiff’s witness?

ATTY. MEJIA: WITNESS:

What is your basis for stating that the coverage against earthquake As I have mentioned earlier, earthquake shock cannot stand alone
shock as provided for in each of the six (6) policies extend to the without the other half of it. I assure you that this one covers the two
two (2) swimming pools only? swimming pools with respect to earthquake shock endorsement.
 Based on it, if we are going to look at the premium there has been
no change with respect to the rates. Everytime (sic) there is a
renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We
are not only going to consider the two (2) swimming pools of the
other as stated in the policy. As I see, there is no increase in the
amount of the premium. I must say that the coverage was not
broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
ATTY. ANDRES:
As an insurance executive will you not attach any significance to
the deletion of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is
inadvertent. Being a company underwriter, we do not cover. . it was
inadvertent because of the previous policies that we have issued
with no specific attachments, premium rates and so on. It was
inadvertent, sir.

WITNESS:
They are the same in the sence (sic), in the amount of the
coverage. If you are going to do some computation based on the
rates you will arrive at the same premiums, your Honor.
The Court also rejects petitioner’s contention that respondent’s contemporaneous and
subsequent acts to the issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioner’s own witness testified to this agreement, viz:

CROSS-EXAMINATION OF JUAN BARANDA III CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, September 7, 1992 TSN, January 14, 1992
pp. 4-6 pp. 4-5

ATTY. ANDRES: Q. Just to be clear about this particular answer of yours Mr. Witness, what
exactly did you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of
Would you as a matter of practice [insure] swimming pools for fire procuring the policy from Philippine Charter Insurance Corporation?
insurance?
A. I told him that the insurance that they will have to get will have the same
WITNESS: provisions as this American Home Insurance Policy No. 206-4568061-9.

No, we don’t, sir. Q. You are referring to Exhibit "H" of course?

Q. That is why the phrase "earthquake shock to the two (2) swimming pools A. Yes, sir, to Exhibit "H".
only" was placed, is it not?
Q. So, all the provisions here will be the same except that of the premium
A. Yes, sir. rates?

ATTY. ANDRES: A. Yes, sir. He assured me that with regards to the insurance premium rates
that they will be charging will be limited to this one. I (sic) can even be
lesser.
Will you not also agree with me that these exhibits, Exhibits G and
H which you have pointed to during your direct-examination, the
phrase "Item no. 5 only" meaning to (sic) the two (2) swimming CROSS EXAMINATION OF LEOPOLDO MANTOHAC
pools was deleted from the policies issued by AIU, is it not? TSN, January 14, 1992
pp. 12-14
xxx
Atty. Mejia:
 Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of
the provisions and scope of coverage of Exhibits "I" and "H" sometime in the
third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the
policy wordings as well as scope of coverage of Exhibits "I" and "H"
respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the insurance
policy I sent them but it was only when this case erupted that we discovered
some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice
any discrepancy at any time between those indicated in Exhibit "I" and those
indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only against
the peril of earthquake shock which I understood before that this provision
will have to be placed here because this particular provision under the peril
of earthquake shock only is requested because this is an insurance policy
and therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondent’s representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondent’s independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative
of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to
believe that the endorsement for earthquake shock covered properties other than the
two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and
Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item
3 specifically that the coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had
found out in the policy and he confirmed to me indeed only Item 3 which
were the two swimming pools have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating
that except for the swimming pools all affected items have no coverage for
earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of
the policy I found out that under Item 3 it was specific on the wordings that
on the two swimming pools only, then enclosed in parenthesis (against the
peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming
pools have a computation for premium payment for earthquake shock and all
the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which usually prepares it.31 A contract of adhesion is one wherein a
party, usually a corporation, prepares the stipulations in the contract, while the other
party merely affixes his signature or his "adhesion" thereto. Through the years, the
courts have held that in these type of contracts, the parties do not bargain on equal
footing, the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.32 Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided.34 Thus, we
have called on lower courts to remain careful in scrutinizing the factual circumstances
behind each case to determine the efficacy of the claims of contending parties.
In Development Bank of the Philippines v. National Merchandising Corporation,
et al.,35 the parties, who were acute businessmen of experience, were presumed to
have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the inception
of the policy, petitioner had required the respondent to copy verbatimthe provisions
and terms of its latest insurance policy from AHAC-AIU. The testimony of Mr.
Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner,
is reflective of petitioner’s knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21
 Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want
for those facilities in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the same or
exact provisions of the previous insurance policy we had with American
Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which
you wanted in the American Home Insurance policy are to be incorporated in
the PCIC policy?

A. Yes, sir.

Q. What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance

Corporation I specifically told him that the policy and wordings shall be
copied from the AIU Policy No. 206-4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy
No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was
variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-AIU’s policy.
Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this
case as the parties’ intent to limit the coverage of the policy to the two swimming
pools only is not ambiguous.37

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.

SO ORDERED.
G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health
care coverage with petitioner Philamcare Health Systems, Inc. In the standard
application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for
high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or
peptic ulcer? (If Yes, give details).1
The application was approved for a period of one year from March 1, 1988 to March
1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the
agreement, respondent’s husband was entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein. He was also entitled to avail of "out-
patient benefits" such as annual physical examinations, preventive health care and
other out-patient services.
Upon the termination of the agreement, the same was extended for another year from
March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The
amount of coverage was increased to a maximum sum of P75,000.00 per disability.2
During the period of his coverage, Ernani suffered a heart attack and was confined at
the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her
husband was in the hospital, respondent tried to claim the benefits under the health
care agreement. However, petitioner denied her claim saying that the Health Care
Agreement was void. According to petitioner, there was a concealment regarding
Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of
Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to
his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent
was constrained to bring him back to the Chinese General Hospital where he died on
the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorney’s fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor
of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of
the late Ernani Trinos in the amount of P76,000.00 plus interest, until the
amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00
to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary
damages to plaintiff;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente. 4 Petitioner’s motion for
reconsideration was denied.5 Hence, petitioner brought the instant petition for review,
raising the primary argument that a health care agreement is not an insurance
contract; hence the "incontestability clause" under the Insurance Code 6 does not
apply.1âwphi1.nêt
Petitioner argues that the agreement grants "living benefits," such as medical check-
ups and hospitalization which a member may immediately enjoy so long as he is alive
upon effectivity of the agreement until its expiration one-year thereafter. Petitioner
also points out that only medical and hospitalization benefits are given under the
agreement without any indemnification, unlike in an insurance contract where the
insured is indemnified for his loss. Moreover, since Health Care Agreements are only
for a period of one year, as compared to insurance contracts which last
longer,7 petitioner argues that the incontestability clause does not apply, as the same
requires an effectivity period of at least two years. Petitioner further argues that it is
not an insurance company, which is governed by the Insurance Commission, but a
Health Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
peril;
3. The insurer assumes the risk;
 4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a premium. 8
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the life
and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondent’s husband in obtaining the
health care agreement was his own health. The health care agreement was in the
nature of non-life insurance, which is primarily a contract of indemnity. 9 Once the
member incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingent, the health care provider must pay for the same to the
extent agreed upon under the contract.
Petitioner argues that respondent’s husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners required
respondent’s husband to sign an express authorization for any person, organization
or entity that has any record or knowledge of his health to furnish any and all
information relative to any hospitalization, consultation, treatment or any other
medical advice or examination.10 Specifically, the Health Care Agreement signed by
respondent’s husband states:
We hereby declare and agree that all statement and answers contained
herein and in any addendum annexed to this application are full, complete
and true and bind all parties in interest under the Agreement herein applied
for, that there shall be no contract of health care coverage unless and until
an Agreement is issued on this application and the full Membership Fee
according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired
by any Representative of PhilamCare shall be binding upon PhilamCare
unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon
any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office
Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicant’s medical history, thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the
PhilamCare Health Systems, Inc. any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or
examination. This authorization is in connection with the application for
health care coverage only. A photographic copy of this authorization shall be
as valid as the original.12 (Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which
reads:
Failure to disclose or misrepresentation of any material information by the
member in the application or medical examination, whether intentional or
unintentional, shall automatically invalidate the Agreement from the very
beginning and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the
applicant by Philamcare or the assessment of a higher Membership Fee for
the benefit or benefits applied for.13
The answer assailed by petitioner was in response to the question relating to the
medical history of the applicant. This largely depends on opinion rather than fact,
especially coming from respondent’s husband who was not a medical doctor. Where
matters of opinion or judgment are called for, answers made in good faith and without
intent to deceive will not avoid a policy even though they are untrue.14 Thus,
(A)lthough false, a representation of the expectation, intention, belief,
opinion, or judgment of the insured will not avoid the policy if there is no
actual fraud in inducing the acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the rule although the statement is
material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement,
but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally
states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the
facts within his knowledge, since in such case the intent to deceive the
insurer is obvious and amounts to actual fraud.15(Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.16 Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate, petitioner is liable for
claims made under the contract. Having assumed a responsibility under the
agreement, petitioner is bound to answer the same to the extent agreed upon. In the
end, the liability of the health care provider attaches once the member is hospitalized
for the disease or injury covered by the agreement or whenever he avails of the
covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to
rescind a contract of insurance." The right to rescind should be exercised previous to
the commencement of an action on the contract.17In this case, no rescission was
made. Besides, the cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer
lie.23
Finally, petitioner alleges that respondent was not the legal wife of the deceased
member considering that at the time of their marriage, the deceased was previously
married to another woman who was still alive. The health care agreement is in the
nature of a contract of indemnity. Hence, payment should be made to the party who
incurred the expenses. It is not controverted that respondent paid all the hospital and
medical expenses. She is therefore entitled to reimbursement. The records
adequately prove the expenses incurred by respondent for the deceased’s
hospitalization, medication and the professional fees of the attending physicians.24
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.

2. Notice must be based on the occurrence after effective date of the policy of one or
more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code
and upon request of insured, to furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of
insurance contract contain limitations on liability, courts should construe them in such
a way as to preclude the insurer from non-compliance with his obligation.19 Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly
against the party which prepared the contract – the insurer.20 By reason of the
exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 21 This is equally
applicable to Health Care Agreements. The phraseology used in medical or hospital
service contracts, such as the one at bar, must be liberally construed in favor of the
subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of
doubtful import should be strictly construed against the provider. 22

Anent the incontestability of the membership of respondent’s husband, we quote with

approval the following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare

Health Systems Inc. had twelve months from the date of issuance of the
Agreement within which to contest the membership of the patient if he had
previous ailment of asthma, and six months from the issuance of the
G.R. No. 150094 August 18, 2004
FEDERAL EXPRESS CORPORATION, petitioner,
vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE
COMPANY, INC., respondents.
DECISION
PANGANIBAN, J.:
Basic is the requirement that before suing to recover loss of or damage to transported
goods, the plaintiff must give the carrier notice of the loss or damage, within the
period prescribed by the Warsaw Convention and/or the airway bill.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging
the June 4, 2001 Decision2 and the September 21, 2001 Resolution3 of the Court of
Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as follows:
"WHEREFORE, premises considered, the present appeal is hereby
DISMISSED for lack of merit. The appealed Decision of Branch 149 of the
Regional Trial Court of Makati City in Civil Case No. 95-
1219, entitled 'American Home Assurance Co. and PHILAM Insurance Co.,
Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC.
(formerly U-WAREHOUSE, INC.),' is hereby AFFIRMED and REITERATED.
"Costs against the [petitioner and Cargohaus, Inc.]." 4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of
Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an
agent of [Petitioner] Federal Express Corporation, a shipment of 109 cartons
of veterinary biologicals for delivery to consignee SMITHKLINE and French
Overseas Company in Makati City, Metro Manila. The shipment was covered
by Burlington Airway Bill No. 11263825 with the words, 'REFRIGERATE
WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp marked on its face.
That same day, Burlington insured the cargoes in the amount of $39,339.00
with American Home Assurance Company (AHAC). The following day,
Burlington turned over the custody of said cargoes to Federal Express which
transported the same to Manila. The first shipment, consisting of 92 cartons
arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT and was
immediately stored at [Cargohaus Inc.'s] warehouse. While the second,
consisting of 17 cartons, came in two (2) days later, or on January 31, 1994,
in Flight No. 0071-30NRT which was likewise immediately stored at
Cargohaus' warehouse. Prior to the arrival of the cargoes, Federal Express
informed GETC Cargo International Corporation, the customs broker hired
by the consignee to facilitate the release of its cargoes from the Bureau of
Customs, of the impending arrival of its client's cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days
after the cargoes arrived in Manila, a non-licensed custom's broker who was
assigned by GETC to facilitate the release of the subject cargoes, found out,
while he was about to cause the release of the said cargoes, that the same
[were] stored only in a room with two (2) air conditioners running, to cool the
place instead of a refrigerator. When he asked an employee of Cargohaus
why the cargoes were stored in the 'cool room' only, the latter told him that
the cartons where the vaccines were contained specifically indicated therein
that it should not be subjected to hot or cold temperature. Thereafter,
DIONEDA, upon instructions from GETC, did not proceed with the
withdrawal of the vaccines and instead, samples of the same were taken
and brought to the Bureau of Animal Industry of the Department of
Agriculture in the Philippines by SMITHKLINE for examination wherein it was
discovered that the 'ELISA reading of vaccinates sera are below the positive
reference serum.'
"As a consequence of the foregoing result of the veterinary biologics test,
SMITHKLINE abandoned the shipment and, declaring 'total loss' for the
unusable shipment, filed a claim with AHAC through its representative in the
Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND
THREE HUNDRED THIRTY NINE DOLLARS ($39,339.00). Thereafter,
[respondents] filed an action for damages against the [petitioner] imputing
negligence on either or both of them in the handling of the cargo.
"Trial ensued and ultimately concluded on March 18, 1997 with the
[petitioner] being held solidarily liable for the loss as follows:
'WHEREFORE, judgment is hereby rendered in favor of
[respondents] and [petitioner and its Co-Defendant Cargohaus] are
directed to pay [respondents], jointly and severally, the following:
1. Actual damages in the amount of the peso equivalent of
US$39,339.00 with interest from the time of the filing of
the complaint to the time the same is fully paid.
 2. Attorney's fees in the amount of P50,000.00 and
3. Costs of suit.
'SO ORDERED.'
"Aggrieved, [petitioner] appealed to [the CA]." 5
Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal and
Plant Health Inspection Service) was found by the CA to be inadmissible in evidence.
Despite this ruling, the appellate court held that the shipping Receipts were a prima
facie proof that the goods had indeed been delivered to the carrier in good condition.
We quote from the ruling as follows:
"Where the plaintiff introduces evidence which shows prima facie that the
goods were delivered to the carrier in good condition [i.e., the shipping
receipts], and that the carrier delivered the goods in a damaged condition, a
presumption is raised that the damage occurred through the fault or
negligence of the carrier, and this casts upon the carrier the burden of
showing that the goods were not in good condition when delivered to the
carrier, or that the damage was occasioned by some cause excepting the
carrier from absolute liability. This the [petitioner] failed to discharge. x x x." 6
Found devoid of merit was petitioner's claim that respondents had no personality to
sue. This argument was supposedly not raised in the Answer or during trial.
Hence, this Petition.7
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.
Are the decision and resolution of the Honorable Court of Appeals proper
subject for review by the Honorable Court under Rule 45 of the 1997 Rules
of Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals – petitioner's claim that
respondents have no personality to sue because the payment was made by
the respondents to Smithkline when the insured under the policy is
Burlington Air Express is devoid of merit – correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were
received in good condition, correct or not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding
respondents' own admission that petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw
Convention?"8
Simply stated, the issues are as follows: (1) Is the Petition proper for review by the
Supreme Court? (2) Is Federal Express liable for damage to or loss of the insured
goods?
This Court's Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from undisputed
facts is a question of law cognizable by the Supreme Court. 9
In the present case, the facts are undisputed. As will be shown shortly, petitioner is
questioning the conclusions drawn from such facts. Hence, this case is a proper
subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no cause of
action against it -- because the payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance10 ("Certificate") that both
opposing parties cite in support of their respective positions. They differ only in their
interpretation of what their rights are under its terms. The determination of those
rights involves a question of law, not a question of fact. "As distinguished from a
question of law which exists 'when the doubt or difference arises as to what the law is
on a certain state of facts' -- 'there is a question of fact when the doubt or difference
arises as to the truth or the falsehood of alleged facts'; or when the 'query necessarily
invites calibration of the whole evidence considering mainly the credibility of
witnesses, existence and relevancy of specific surrounding circumstance, their
relation to each other and to the whole and the probabilities of the situation.'" 11
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is "payable to
order x x x upon surrender of this Certificate." Such wording conveys the right of
collecting on any such damage or loss, as fully as if the property were covered by a
special policy in the name of the holder itself. At the back of the Certificate appears
the signature of the representative of Burlington. This document has thus been duly
indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of
collecting or of being indemnified for loss of or damage to the insured shipment, as
fully as if the property were covered by a special policy in the name of the holder.
Hence, being the holder of the Certificate and having an insurable interest in the
goods, Smithkline was the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a
subrogation Receipt12 in favor of respondents. The latter were thus authorized "to file
claims and begin suit against any such carrier, vessel, person, corporation or
government." Undeniably, the consignee had a legal right to receive the goods in the
same condition it was delivered for transport to petitioner. If that right was violated,
the consignee would have a cause of action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the
insured goods, the insurer's entitlement to subrogation pro tanto -- being of the
highest equity -- equips it with a cause of action in case of a contractual breach or
negligence.13 "Further, the insurer's subrogatory right to sue for recovery under the bill
of lading in case of loss of or damage to the cargo is jurisprudentially upheld." 14
In the exercise of its subrogatory right, an insurer may proceed against an erring
carrier. To all intents and purposes, it stands in the place and in substitution of the
consignee. A fortiori, both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading.15
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly
pointed out that respondents' claim and right of action are already barred. The latter,
and even the consignee, never filed with the carrier any written notice or complaint
regarding its claim for damage of or loss to the subject cargo within the period
required by the Warsaw Convention and/or in the airway bill. Indeed, this fact has
never been denied by respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of
the shipment unless a written notice, sufficiently describing the goods
concerned, the approximate date of the damage or loss, and the details of
the claim, is presented by shipper or consignee to an office of Burlington
within (14) days from the date the goods are placed at the disposal of the
person entitled to delivery, or in the case of total loss (including non-delivery)
unless presented within (120) days from the date of issue of the [Airway
Bill]."16
Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the
carrier in writing in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the
damage and at the latest within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date
of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at
his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120)
days from the date of the issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier
whose air waybill was used, or to the first carrier or to the last carrier or to
the carrier who performed the transportation during which the loss, damage
or delay took place."17
Article 26 of the Warsaw Convention, on the other hand, provides:
"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or
goods without complaint shall be prima facie evidence that the same have
been delivered in good condition and in accordance with the document of
transportation.
(2) In case of damage, the person entitled to delivery must complain to the
carrier forthwith after the discovery of the damage, and, at the latest, within 3
days from the date of receipt in the case of baggage and 7 days from the
date of receipt in the case of goods. In case of delay the complaint must be
 made at the latest within 14 days from the date on which the baggage or WHEREFORE, the Petition is GRANTED, and the assailed
goods have been placed at his disposal. Decision REVERSED insofar as it pertains to Petitioner Federal Express Corporation.
No pronouncement as to costs.
(3) Every complaint must be made in writing upon the document of
transportation or by separate notice in writing dispatched within the times SO ORDERED.
aforesaid.

(4) Failing complaint within the times aforesaid, no action shall lie against the
carrier, save in the case of fraud on his part."18

Condition Precedent

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor
actually constitutes a condition precedent to the accrual of a right of action against a
carrier for loss of or damage to the goods.19 The shipper or consignee must allege
and prove the fulfillment of the condition. If it fails to do so, no right of action against
the carrier can accrue in favor of the former. The aforementioned requirement is a
reasonable condition precedent; it does not constitute a limitation of action. 20

The requirement of giving notice of loss of or injury to the goods is not an empty
formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier
that the cargo has been damaged, and that it is being charged with liability therefor;
and (2) to give it an opportunity to examine the nature and extent of the injury. "This
protects the carrier by affording it an opportunity to make an investigation of a claim
while the matter is fresh and easily investigated so as to safeguard itself from false
and fraudulent claims."21

When an airway bill -- or any contract of carriage for that matter -- has a stipulation
that requires a notice of claim for loss of or damage to goods shipped and the
stipulation is not complied with, its enforcement can be prevented and the liability
cannot be imposed on the carrier. To stress, notice is a condition precedent, and the
carrier is not liable if notice is not given in accordance with the stipulation. 22 Failure to
comply with such a stipulation bars recovery for the loss or damage suffered.23

Being a condition precedent, the notice must precede a suit for enforcement. 24 In the
present case, there is neither an allegation nor a showing of respondents' compliance
with this requirement within the prescribed period. While respondents may have had a
cause of action then, they cannot now enforce it for their failure to comply with the
aforesaid condition precedent.

In view of the foregoing, we find no more necessity to pass upon the other issues
raised by petitioner.

We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-
defendant in respondents' Complaint below -- has been adjudged by the trial court as
liable for, inter alia, "actual damages in the amount of the peso equivalent of US
$39,339."25 This judgment was affirmed by the Court of Appeals and is already final
and executory.26
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.
PADILLA, J:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642,
dated 21 March 1979, ordering petitioner Manila Mahogany Manufacturing
Corporation to pay private respondent Zenith Insurance Corporation the sum of Five
Thousand Pesos (P5,000.00) with 6% annual interest from 18 January 1973,
attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and the
resolution of the same Court, dated 8 February 1980, denying petitioner's motion for
reconsideration of it's decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door
sedan with respondent insurance company. On 4 May 1970 the insured vehicle was
bumped and damaged by a truck owned by San Miguel Corporation. For the damage
caused, respondent company paid petitioner five thousand pesos (P5,000.00) in
amicable settlement. Petitioner's general manager executed a Release of Claim,
subrogating respondent company to all its right to action against San Miguel
Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to
demand reimbursement from San Miguel Corporation of the amount it had paid
petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that San Miguel
Corporation had already paid petitioner P4,500.00 for the damages to petitioner's
motor vehicle, as evidenced by a cash voucher and a Release of Claim executed by
the General Manager of petitioner discharging San Miguel Corporation from "all
actions, claims, demands the rights of action that now exist or hereafter [sic] develop
arising out of or as a consequence of the accident."
Respondent insurance company thus demanded from petitioner reimbursement of the
sum of P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence,
respondent company filed suit in the City Court of Manila for the recovery of
P4,500.00. The City Court ordered petitioner to pay respondent P4,500.00. On appeal
the Court of First Instance of Manila affirmed the City Court's decision in toto, which
CFI decision was affirmed by the Court of Appeals, with the modification that
petitioner was to pay respondent the total amount of P5,000.00 that it had earlier
received from the respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00
to respondent company as the subrogation in the Release of Claim it executed in
favor of respondent was conditioned on recovery of the total amount of damages
petitioner had sustained. Since total damages were valued by petitioner at P9,486.43
and only P5,000.00 was received by petitioner from respondent, petitioner argues that
it was entitled to go after San Miguel Corporation to claim the additional P4,500.00
eventually paid to it by the latter, without having to turn over said amount to
respondent. Respondent of course disputes this allegation and states that there was
no qualification to its right of subrogation under the Release of Claim executed by
petitioner, the contents of said deed having expressed all the intents and purposes of
the parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel
Corporation, petitioner cites Art. 2207 of the Civil Code, which states:
If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising
out of the wrong or breach of contract complained of the insurance
company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the
injury or loss the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may exercise
his right for the remainder, and he shall be preferred to the person
who has been subrogated in his place in virtue of the partial
payment of the same credit.
We find petitioners arguments to be untenable and without merit. In the absence of
any other evidence to support its allegation that a gentlemen's agreement existed
between it and respondent, not embodied in the Release of Claim, such ease of
Claim must be taken as the best evidence of the intent and purpose of the parties.
Thus, the Court of Appeals rightly stated:
Petitioner argues that the release claim it executed subrogating
Private respondent to any right of action it had against San Miguel
Corporation did not preclude Manila Mahogany from filing a
deficiency claim against the wrongdoer. Citing Article 2207, New
Civil Code, to the effect that if the amount paid by an insurance
company does not fully cover the loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss,
petitioner claims a preferred right to retain the amount coming from
San Miguel Corporation, despite the subrogation in favor of Private
respondent.
Although petitioners right to file a deficiency claim against San
Miguel Corporation is with legal basis, without prejudice to the
insurer's right of subrogation, nevertheless when Manila Mahogany
executed another release claim (Exhibit K) discharging San Miguel
Corporation from "all actions, claims, demands and rights of action
that now exist or hereafter arising out of or as a consequence of the
 accident" after the insurer had paid the proceeds of the policy- the
compromise agreement of P5,000.00 being based on the insurance
policy-the insurer is entitled to recover from the insured the amount
of insurance money paid (Metropolitan Casualty Insurance
Company of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132
cited in Insurance Code and Insolvency Law with comments and
annotations, H.B. Perez 1976, p. 151). Since petitioner by its own
acts released San Miguel Corporation, thereby defeating private
respondents, the right of subrogation, the right of action of
petitioner against the insurer was also nullified. (Sy Keng & Co. vs.
Queensland Insurance Co., Ltd., 54 O.G. 391) Otherwise stated:
private respondent may recover the sum of P5,000.00 it had earlier
paid to petitioner. 1
As held in Phil. Air Lines v. Heald Lumber Co., 2
If a property is insured and the owner receives the indemnity from
the insurer, it is provided in [Article 2207 of the New Civil Code] that
the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer does
not fully cover the loss, then the aggrieved party is the one entitled
to recover the deficiency. ... Under this legal provision, the real
party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured 3 (Emphasis supplied)
The decision of the respondent court ordering petitioner to pay respondent company,
not the P4,500.00 as originally asked for, but P5,000.00, the amount respondent
company paid petitioner as insurance, is also in accord with law and jurisprudence. In
disposing of this issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 paid by San
Miguel Corporation under its clear right to file a deficiency claim for
damages incurred, against the wrongdoer, should the insurance
company not fully pay for the injury caused (Article 2207, New Civil
Code). However, when petitioner released San Miguel Corporation
from any liability, petitioner's right to retain the sum of P5,000.00 no
longer existed, thereby entitling private respondent to recover the
same. (Emphasis supplied)
As has been observed:
... The right of subrogation can only exist after the insurer has paid
the otherwise the insured will be deprived of his right to full
indemnity. If the insurance proceeds are not sufficient to cover the
damages suffered by the insured, then he may sue the party
responsible for the damage for the the [sic] remainder. To the
extent of the amount he has already received from the insurer
enjoy's [sic] the right of subrogation.
Since the insurer can be subrogated to only such rights as the
insured may have, should the insured, after receiving payment from
the insurer, release the wrongdoer who caused the loss, the insurer
loses his rights against the latter. But in such a case, the insurer will
be entitled to recover from the insured whatever it has paid to the
latter, unless the release was made with the consent of the
insurer. 4(Emphasis supplied.)
And even if the specific amount asked for in the complaint is P4,500.00 only and not
P5,000.00, still, the respondent Court acted well within its discretion in awarding
P5,000.00, the total amount paid by the insurer. The Court of Appeals rightly
reasoned as follows:
It is to be noted that private respondent, in its companies, prays for
the recovery, not of P5,000.00 it had paid under the insurance
policy but P4,500.00 San Miguel Corporation had paid to petitioner.
On this score, We believe the City Court and Court of First Instance
erred in not awarding the proper relief. Although private respondent
prays for the reimbursement of P4,500.00 paid by San Miguel
Corporation, instead of P5,000.00 paid under the insurance policy,
the trial court should have awarded the latter, although not prayed
for, under the general prayer in the complaint "for such further or
other relief as may be deemed just or equitable, (Rule 6, Sec. 3,
Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495
; Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil
120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed
from is hereby AFFIRMED with costs against petitioner.
SO ORDERED.
G.R. Nos. 180880-81 September 25, 2009 1. The Owner shall inform its insurer of Clause 207 and 22
(a)8 (refer at the back hereof) and shall include Keppel Cebu
KEPPEL CEBU SHIPYARD, INC., Petitioner, Shipyard as a co-assured in its insurance policy.
vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent. 2. The Owner shall waive its right to claim for any loss of profit or
loss of use or damages consequential on such loss of use resulting
x - - - - - - - - - - - - - - - - - - - - - - -x from the delay in the redelivery of the above vessel.

G.R. Nos. 180896-97 3. Owner’s sub-contractors or workers are not permitted to work in
the yard without the written approval of the Vice President –
Operations.
PIONEER INSURANCE AND SURETY CORPORATION, Petitioner,
vs.
KEPPEL CEBU SHIPYARD, INC., Respondent. 4. In consideration of Keppel Cebu Shipyard allowing Owner to
carry out own repairs onboard the vessel, the Owner shall
indemnify and hold Keppel Cebu Shipyard harmless from any or all
DECISION claims, damages, or liabilities arising from death or bodily injuries to
Owner’s workers, or damages to the vessel or other property
NACHURA, J.: however caused.

Before us are the consolidated petitions filed by the parties—Pioneer Insurance and
Surety Corporation1 (Pioneer) and Keppel Cebu Shipyard, Inc.2 (KCSI)—to review on
certiorari the Decision3 dated December 17, 2004 and the Amended Decision4 dated
December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and
73934.
On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A)
executed a Shiprepair Agreement5 wherein KCSI would renovate and reconstruct
WG&A’s M/V "Superferry 3" using its dry docking facilities pursuant to its restrictive
safety and security rules and regulations. Prior to the execution of the Shiprepair
Agreement, "Superferry 3" was already insured by WG&A with Pioneer for
US$8,472,581.78. The Shiprepair Agreement reads—
SHIPREPAIR AGREEMENT6
Company: WG & A JEBSENS SHIPMANAGEMENT INC.
Address: Harbour Center II, Railroad & Chicago Sts.
Port Area, City of Manila
We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V "SUPERFERRY 3" and
KEPPEL CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking
and Repair of the above-named vessel ordered by the Owner’s Authorized
Representative shall be carried out under the Keppel Cebu Shipyard Standard
Conditions of Contract for Shiprepair, guidelines and regulations on safety and
security issued by Keppel Cebu Shipyard. In addition, the following are mutually
agreed upon by the parties:
5. On arrival, the Owner Representative, Captain, Chief Officer and
Chief Engineer will be invited to attend a conference with our
Production, Safety and Security personnel whereby they will be
briefed on, and given copies of Shipyard safety regulations.
6. An adequate number of officers and crew must remain on board
at all times to ensure the safety of the vessel and compliance of
safety regulations by crew and owner employed workmen.
7. The ship’s officers/crew or owner appointed security personnel
shall maintain watch against pilferage and acts of sabotage.
8. The yard must be informed and instructed to provide the
necessary security arrangement coverage should there be
inadequate or no crew on board to provide the expressed safety
and security enforcement.
9. The Owner shall be liable to Keppel Cebu Shipyard for any death
and/or bodily injuries for the [K]eppel Cebu Shipyard’s employees
and/or contract workers; theft and/or damages to Keppel Cebu
Shipyard’s properties and other liabilities which are caused by the
workers of the Owner.
10. The invoice shall be based on quotation reference 99-KCSI-
211 dated December 20, 1999tariff dated March 15, 1998.
11. Payment term shall be as follows:
 12. The Owner and Keppel Cebu Shipyard shall endeavor to settle
amicably any dispute that may arise under this Agreement. Should
all efforts for an amicable settlement fail, the disputes shall be
submitted for arbitration in Metro Manila in accordance with
provisions of Executive Order No. 1008 under the auspices of the
Philippine Arbitration Commission.
and in consideration of which the undersigned hereby assigns and transfers to the
said company each and all claims and demands against any person, persons,
corporation or property arising from or connected with such loss or damage and the
said company is subrogated in the place of and to the claims and demands of the
undersigned against said person, persons, corporation or property in the premises to
the extent of the amount above-mentioned.

(Signed) WILLIAM, GOTHONG & ABOITIZ, INC.

(Signed) &/OR ABOITIZ SHIPPING CORP.
BARRY CHIA SOO HOCK
By:
(Printed Name/Signature Above Name)
(Printed Name/Signature Above Name)
(Signed)
Authorized Representative
______________________________________
Vice President – Operations
for and in behalf of:
Keppel Cebu Shipyard, Inc.
WG & A Jebsens Shipmgmt.
Witnesses:
JAN. 26, 2000.
(Signed)
Date
Date ______________________________________
(Signed)
______________________________________
On February 8, 2000, in the course of its repair, M/V "Superferry 3" was gutted by fire.
Claiming that the extent of the damage was pervasive, WG&A declared the vessel’s
damage as a "total constructive loss" and, hence, filed an insurance claim with Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter
Pioneer. denied any responsibility for the loss of the subject vessel. As KCSI continuously
refused to pay despite repeated demands, Pioneer, on August 7, 2000, filed a
Request for Arbitration before the Construction Industry Arbitration Commission
On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:
US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt 9 in favor
of Pioneer, to wit:
1. To pay to the claimant Pioneer Insurance and Surety Corporation the sum
of U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plus
LOSS AND SUBROGATION RECEIPT interest thereon computed from the date of the "Loss and Subrogation
Receipt" on 16 June 2000 or from the date of filing of [the] "Request for
16 June 2000 Arbitration," as may be found proper;

Our Claim Ref: MH-NIL-H0-99-00018 2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and
US$8,472,581.78 WG&A Jebsens Shipmanagement, Inc. the sum of ₱500,000,000.00 plus
------------------------------------------------ interest thereon from the date of filing [of the] "Request for Arbitration" or
date of the arbitral award, as may be found proper;
RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of
U.S. DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND 3. To pay to the claimants herein the sum of ₱3,000,000.00 for and as
FIVE HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS attorney’s fees; plus other damages as may be established during the
THREE HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full proceedings, including arbitration fees and other litigation expenses, and the
satisfaction, compromise and discharge of all claims for loss and expenses sustained costs of suit.
to the vessel "SUPERFERRY 3" insured under Policy Nos. MH-H0-99-0000168-00-D
(H&M) and MH-H0-99-0000169 (I.V.) by reason as follows: It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the
"Shiprepair Agreement" (Annex "A") as well as the hardly legible Clauses 20 and 22
Fire on board at Keppel Cebu Shipyard (a) and other similar clauses printed in very fine print on the unsigned dorsal page
on 08 February 2000 thereof, be all declared illegal and void ab initio and without any legal effect
whatsoever.10
KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of
Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC granted the
withdrawal on October 22, 2001, thereby dismissing the claim of WG&A against
KCSI. Hence, the arbitration proceeded with Pioneer as the remaining claimant.
In the course of the proceedings, Pioneer and KCSI stipulated, among others, that:
(1) on January 26, 2000, M/V "Superferry 3" arrived at KCSI in Lapu-Lapu City, Cebu,
for dry docking and repairs; (2) on the same date, WG&A signed a ship repair
agreement with KCSI; and (3) a fire broke out on board M/V "Superferry 3" on
February 8, 2000, while still dry docked in KCSI’s shipyard.11
As regards the disputed facts, below are the respective positions of the parties, viz.:
Pioneer’s Theory of the Case:
First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer
has been subrogated to the claim of its assured. The Claimant claims that it has the
preponderance of evidence over that of the Respondent. Claimant cited documentary
references on the Statutory Source of the Principle of Subrogation. Claimant then
proceeded to explain that the Right of Subrogation:
Is by Operation of Law
exists in Property Insurance
is not Dependent Upon Privity of Contract.
Claimant then argued that Payment Operates as Equitable Assignment of Rights to
Insurer and that the Right of Subrogation Entitles Insurer to Recover from the Liable
Party.
Second, Respondent Keppel had custody of and control over the M/V "Superferry 3"
while said vessel was in Respondent Keppel’s premises. In its Draft Decision,
Claimant stated:
A. The evidence presented during the hearings indubitably proves that
respondent not only took custody but assumed responsibility and control
over M/V Superferry 3 in carrying out the dry-docking and repair of the
vessel.
B. The presence on board the M/V Superferry 3 of its officers and crew does
not relieve the respondent of its responsibility for said vessel.
C. Respondent Keppel assumed responsibility over M/V Superferry 3 when it
brought the vessel inside its graving dock and applied its own safety rules to
the dry-docking and repairs of the vessel.
D. The practice of allowing a shipowner and its sub-contractors to perform
maintenance works while the vessel was within respondent’s premises does
not detract from the fact that control and custody over M/V Superferry 3 was
transferred to the yard.
From the preceding statements, Claimant claims that Keppel is clearly liable for the
loss of M/V Superferry 3.
Third, the Vessel’s Safety Manual cannot be relied upon as proof of the Master’s
continuing control over the vessel.
Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur.
According to Claimant, the Yard is liable under the ruling laid down by the Supreme
Court in the "Manila City" case. Claimant asserts that said ruling is applicable hereto
as The Law of the Case.
Fifth, the liability of Respondent does not arise merely from the application of the
Doctrine of Res Ipsa Loquitur, but from its negligence in this case.
Sixth, the Respondent Yard was the employer responsible for the negligent acts of
the welder. According to Claimant;
In contemplation of law, Sevillejo was not a loaned servant/employee. The yard,
being his employer, is solely and exclusively liable for his negligent acts. Claimant
proceeded to enumerate its reasons:
A. The "Control Test" – The yard exercised control over Sevillejo. The power
of control is not diminished by the failure to exercise control.
B. There was no independent work contract between Joniga and Sevillejo –
Joniga was not the employer of Sevillejo, as Sevillejo remained an employee
of the yard at the time the loss occurred.
C. The mere fact that Dr. Joniga requested Sevillejo to perform some of the
Owner’s hot works under the 26 January 2000 work order did not make Dr.
Joniga the employer of Sevillejo.
Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck
A. Claimant argued that:
A. The yard, not Dr. Joniga, gave the welders their marching orders, and
B. Dr. Joniga’s authority to request the execution of owner’s hot works in the
passenger areas was expressly recognized by the Yard Project
Superintendent Orcullo.
Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was
not required by the yard, and the owner’s hotworks were conducted by welders who
remained employees of the yard. Claimant contends that the need, if any, for an
owner’s application for a hot work permit was canceled out by the yard’s actual
knowledge of Sevillejo’s whereabouts and the fact that he was in deck A doing
owner’s hotworks.
Eight[h], in supplying welders and equipment as per The Work Order Dated 26
January 2000, the Yard did so at its own risk, and acted as a Less Than Prudent Ship
Repairer.1avvphi1
The Claimant then disputed the statements of Manuel Amagsila by claiming that
Amagsila was a disgruntled employee. Nevertheless, Claimant claims that Amagsila
affirmed that the five yard welders never became employees of the owner so as to
obligate the latter to be responsible for their conduct and performance.
Claimant enumerated further badges of yard negligence.
According to Claimant:
A. Yard’s water supply was inadequate.
B. Yard Fire Fighting Efforts and Equipment Were Inadequate.
C. Yard Safety Practices and Procedures Were Unsafe or Inadequate.
D. Yard Safety Assistants and Firewatch-Men were Overworked.
Finally, Claimant disputed the theories propounded by the Respondent (The Yard).
Claimant presented its case against:
(i) Non-removal of the life jackets theory.
(ii) Hole-in-the[-]floor theory.
(iii) Need for a plan theory.
(iv) The unauthorized hot works theory.
(v) The Marina report theory.
The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of
the welder involved in the cause of the fire, Mr. Severino Sevillejo. Claimant claims
that this is suppression of evidence by Respondent.
KCSI’s Theory of the Case
1. The Claimant has no standing to file the Request for Arbitration and the
Tribunal has no jurisdiction over the case:
(a) There is no valid arbitration agreement between the Yard and
the Vessel Owner. On January 26, 2000, when the ship repair
agreement (which includes the arbitration agreement) was signed
by WG&A Jebsens on behalf of the Vessel, the same was still
owned by Aboitiz Shipping. Consequently, when another firm,
WG&A, authorized WG&A Jebsens to manage the MV Superferry
3, it had no authority to do so. There is, as a result, no binding
arbitration agreement between the Vessel Owner and the Yard to
which the Claimant can claim to be subrogated and which can
support CIAC jurisdiction.
(b) The Claimant is not a real party in interest and has no standing
because it has not been subrogated to the Vessel Owner. For the
reason stated above, the insurance policies on which the Claimant
bases its right of subrogation were not validly obtained. In any
event, the Claimant has not been subrogated to any rights which
the Vessel may have against the Yard because:
i. The Claimant has not proved payment of the proceeds
of the policies to any specific party. As a consequence, it
has also not proved payment to the Vessel Owner.
ii. The Claimant had no legally demandable obligation to
pay under the policies and did so only voluntarily. Under
the policies, the Claimant and the Vessel agreed that there
is no Constructive Total Loss "unless the expense of
recovering and repairing the vessel would exceed the
Agreed Value" of ₱360 million assigned by the parties to
the Vessel, a threshold which the actual repair cost for the
Vessel did not reach. Since the Claimant opted to pay
contrary to the provisions of the policies, its payment was
voluntary, and there was no resulting subrogation to the
Vessel.
iii. There was also no subrogation under Article 1236 of
the Civil Code. First, if the Claimant asserts a right of
payment only by virtue of Article 1236, then there is no
legal subrogation under Article 2207 and it
does not succeed to the Vessel’s rights under the Ship
[R]epair Agreement and the arbitration agreement. It does
not have a right to demand arbitration and will have only a
purely civil law claim for reimbursement to the extent that
its payment benefited the Yard which should be filed in
court. Second, since the Yard is not liable for the fire and
the resulting damage to the Vessel, then it derived no
benefit from the Claimant’s payment to the Vessel Owner.
Third, in any event, the Claimant has not proved payment
of the proceeds to the Vessel Owner.
2. The Ship [R]epair Agreement was not imposed upon the Vessel. The
Vessel knowingly and voluntarily accepted that agreement. Moreover, there
are no signing or other formal defects that can invalidate the agreement.
3. The proximate cause of the fire and damage to the Vessel was not any
negligence committed by Angelino Sevillejo in cutting the bulkhead door or
any other shortcoming by the Yard. On the contrary, the proximate cause of
the fire was Dr. Joniga’s and the Vessel’s deliberate decision to have
Angelino Sevillejo undertake cutting work in inherently dangerous conditions
created by them.
(a) The Claimant’s material witnesses lied on the record and the
Claimant presented no credible proof of any negligence by
Angelino Sevillejo.
(b) Uncontroverted evidence proved that Dr. Joniga neglected or
decided not to obtain a hot work permit for the bulkhead cutting and
also neglected or refused to have the ceiling and the flammable
lifejackets removed from underneath the area where he instructed
Angelino Sevillejo to cut the bulkhead door. These decisions or
oversights guaranteed that the cutting would be done in extremely
hazardous conditions and were the proximate cause of the fire and
the resulting damage to the Vessel.
(c) The Yard’s expert witness, Dr. Eric Mullen gave the only
credible account of the cause and the mechanics of ignition of the
fire. He established that: i) the fire started when the cutting of the
bulkhead door resulted in sparks or hot molten slag which fell
through pre-existing holes on the deck floor and came into contact
with and ignited the flammable lifejackets stored in the ceiling void
directly below; and ii) the bottom level of the bulkhead door was
immaterial, because the sparks and slag could have come from the
cutting of any of the sides of the door. Consequently, the cutting
itself of the bulkhead door under the hazardous conditions created
by Dr. Joniga, rather than the positioning of the door’s bottom edge,
was the proximate cause of the fire.
(d) The Manila City case is irrelevant to this dispute and in any
case, does not establish governing precedent to the effect that
when a ship is damaged in dry dock, the shipyard is presumed at
fault. Apart from the differences in the factual setting of the two
cases, the Manila City pronouncements regarding the res ipsa
loquitur doctrine are obiter dicta without value as binding precedent.
Furthermore, even if the principle were applied to create a
presumption of negligence by the Yard, however, that presumption
is conclusively rebutted by the evidence on record.
(e) The Vessel’s deliberate acts and its negligence created the
inherently hazardous conditions in which the cutting work that could
otherwise be done safely ended up causing a fire and the damage
to the Vessel. The fire was a direct and logical consequence of the
Vessel’s decisions to: (1) take Angelino Sevillejo away from his
welding work at the Promenade Deck restaurant and instead to
require him to do unauthorized cutting work in Deck A; and (2) to
have him do that without satisfying the requirements for and
obtaining a hot work permit in violation of the Yard’s Safety Rules
and without removing the flammable ceiling and life jackets below,
contrary to the requirements not only of the Yard’s Safety Rules but
also of the demands of standard safe practice and the Vessel’s own
explicit safety and hot work policies.
(f) The vessel has not presented any proof to show that the Yard
was remiss in its fire fighting preparations or in the actual conduct
of fighting the 8 February 2000 fire. The Yard had the necessary
equipment and trained personnel and employed all those resources
immediately and fully to putting out the 8 February 2000 fire.
4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the
deck floor, and that this circumstance rather than the extremely hazardous
conditions created by Dr. Joniga and the Vessel for that activity caused the
fire, the Yard may still not be held liable for the resulting damage.
(a) The Yard’s only contractual obligation to the Vessel in respect of
the 26 January 2000 Work Order was to supply welders for the
Promenade Deck restaurant who would then perform welding work
"per owner[‘s] instruction." Consequently, once it had provided
those welders, including Angelino Sevillejo, its obligation to the
Vessel was fully discharged and no claim for contractual breach, or
for damages on account thereof, may be raised against the Yard.
(b) The Yard is also not liable to the Vessel/Claimant on the basis
of quasi-delict.
i. The Vessel exercised supervision and control over
Angelino Sevillejo when he was doing work at the
Promenade Deck restaurant and especially when he was
instructed by Dr. Joniga to cut the bulkhead door.
Consequently, the Vessel was the party with actual control
over his tasks and is deemed his true and effective
employer for purposes of establishing Article 2180
employer liability.
ii. Even assuming that the Yard was Angelino Sevillejo’s
employer, the Yard may nevertheless not be held liable
under Article 2180 because Angelino Sevillejo was acting
beyond the scope of his tasks assigned by the Yard
(which was only to do welding for the Promenade Deck
restaurant) when he cut the bulkhead door pursuant to
instructions given by the Vessel.
 iii. The Yard is nonetheless not liable under Article 2180
because it exercised due diligence in the selection and
supervision of Angelino Sevillejo.
5. Assuming that the Yard is liable, it cannot be compelled to pay the full
amount of ₱360 million paid by the Claimant.
(a) Under the law, the Yard may not be held liable to the Claimant,
as subrogee, for an amount greater than that which the Vessel
could have recovered, even if the Claimant may have paid a higher
amount under its policies. In turn, the right of the Vessel to recover
is limited to actual damage to the MV Superferry 3, at the time of
the fire.
(b) Under the Ship [R]epair Agreement, the liability of the Yard is
limited to ₱50 million – a stipulation which, under the law and
decisions of the Supreme Court, is valid, binding and enforceable.
(c) The Vessel breached its obligation under Clause 22 (a) of the
Yard’s Standard Terms to name the Yard as co-assured under the
policies – a breach which makes the Vessel liable for damages.
This liability should in turn be set-off against the Claimant’s claim
for damages.
The Respondent listed what it believes the Claimant wanted to impress upon the
Tribunal. Respondent enumerated and disputed these as follows:
1. Claimant’s counsel contends that the cutting of the bulkhead door was
covered by the 26 January 2000 Work Order.
2. Claimant’s counsel contends that Dr. Joniga told Gerry Orcullo about his
intention to have Angelino Sevillejo do cutting work at the Deck A bulkhead
on the morning of 8 February 2000.
3. Claimant’s counsel contends that under Article 1727 of the Civil Code,
"The contractor is responsible for the work done by persons employed by
him."
4. Claimant’s counsel contends that "[t]he second reason why there was no
job spec or job order for this cutting work, [is] the cutting work was known to
the yard and coordinated with Mr. Gerry Orcullo, the yard project
superintendent."
5. Claimant’s counsel also contends, to make the Vessel’s unauthorized hot
works activities seem less likely, that they could easily be detected because
Mr. Avelino Aves, the Yard Safety Superintendent, admitted that "No hot
works could really be hidden from the Yard, your Honors, because the
welding cables and the gas hoses emanating from the dock will give these
hotworks away apart from the assertion and the fact that there were also
safety assistants supposedly going around the vessel."
Respondent disputed the above by presenting its own argument in its Final
Memorandum.12
On October 28, 2002, the CIAC rendered its Decision 13 declaring both WG&A and
KCSI guilty of negligence, with the following findings and conclusions—
The Tribunal agrees that the contractual obligation of the Yard is to provide the
welders and equipment to the promenade deck. [The] Tribunal agrees that the cutting
of the bulkhead door was not a contractual obligation of the Yard. However, by
requiring, according to its own regulations, that only Yard welders are to undertake
hotworks, it follows that there are certain qualifications of Yard welders that would be
requisite of yard welders against those of the vessel welders. To the Tribunal, this
means that yard welders are aware of the Yard safety rules and regulations on
hotworks such as applying for a hotwork permit, discussing the work in a production
meeting, and complying with the conditions of the hotwork permit prior to
implementation. By the requirement that all hotworks are to be done by the Yard, the
Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however
mitigated in that he was not even a foreman, and that the instructions to him was (sic)
by an authorized person. The Tribunal notes that the hotworks permit require[s] a
request by at least a foreman. The fact that no foreman was included in the five
welders issued to the Vessel was never raised in this dispute. As discussed earlier by
the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work
order, the Vessel is considered equally negligent. This Tribunal finds the concurrent
negligence of the Yard through Sevillejo and the Vessel through Dr. Joniga as both
contributory to the cause of the fire that damaged the vessel. 14
Holding that the liability for damages was limited to ₱50,000,000.00, the CIAC
ordered KCSI to pay Pioneer the amount of ₱25,000,000.00, with interest at 6% per
annum from the time of the filing of the case up to the time the decision is
promulgated, and 12% interest per annum added to the award, or any balance
thereof, after it becomes final and executory. The CIAC further ordered that the
arbitration costs be imposed on both parties on a pro rata basis.15
Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018.
KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP No.
73934. The cases were consolidated.
On December 17, 2004, the Former Fifteenth Division of the CA rendered its
Decision, disposing as follows:
WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018)
is DISMISSED while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED,
dismissing petitioner’s claims in its entirety. No costs.
The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata.
SO ORDERED.16 A. STARE DECISIS RENDERS INAPPLICABLE ANY
INVOCATION OF LIMITED LIABILITY BY THE YARD.
Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision,
insisting that it suffered from serious errors in the appreciation of the evidence and B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC
from gross misapplication of the law and jurisprudence on negligence. KCSI, for its POLICY.
part, filed a motion for partial reconsideration of the same Decision.
C. THE VESSEL OWNER DID NOT AGREE THAT THE YARD’S
On December 20, 2007, an Amended Decision was promulgated by the Special LIABILITY FOR LOSS OR DAMAGE TO THE VESSEL ARISING
Division of Five – Former Fifteenth Division of the CA – in light of the dissent of FROM YARD’S NEGLIGENCE IS LIMITED TO THE SUM OF
Associate Justice Lucas P. Bersamin,17 joined by Associate Justice Japar B. ₱50,000,000.00 ONLY.
Dimaampao. The fallo of the Amended Decision reads—
D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT LIABILITY,
WHEREFORE, premises considered, the Court hereby decrees that: IN THAT:

1. Pioneer’s Motion for Reconsideration is PARTIALLY GRANTED, ordering (i) THE YARD HAD CUSTODY AND CONTROL OVER
The Yard to pay Pioneer ₱25 Million, without legal interest, within 15 days THE VESSEL (M/V "SUPERFERRY 3") ON 08
from the finality of this Amended Decision, subject to the following FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;
modifications:
(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN
1.1 – Pioneer’s Petition (CA-G.R. SP No. 74018) is PARTIALLY THE COURSE OF THE REPAIRS EXCLUSIVELY
GRANTED as the Yard is hereby ordered to pay Pioneer ₱25 PERFORMED BY YARD WORKERS.
Million without legal interest;
III
2. The Yard is hereby declared as equally negligent, thus, the total
GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced to THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS
PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer ₱25 Million, CONCURRENTLY NEGLIGENT, CONSIDERING THAT:
without legal interest, within 15 days from the finality of this Amended
Decision; and
A. DR. JONIGA, THE VESSEL’S PASSAGE TEAM LEADER, DID
NOT SUPERVISE OR CONTROL THE REPAIRS.
3. The rest of the disposition in the original Decision remains the same.
B. IT WAS THE YARD THROUGH ITS PROJECT
SO ORDERED.18 SUPERINTENDENT GERMINIANO ORCULLO THAT
SUPERVISED AND CONTROLLED THE REPAIR WORKS.
Hence, these petitions. Pioneer bases its petition on the following grounds:
C. SINCE ONLY YARD WELDERS COULD PERFORM HOT
I WORKS IT FOLLOWS THAT THEY ALONE COULD BE GUILTY
OF NEGLIGENCE IN DOING THE SAME.
THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON
NON-FACTS LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS D. THE YARD AUTHORIZED THE HOT WORK OF YARD
REMAIN TO INVALIDATE THE AMENDED DECISION. THIS ALSO VIOLATES WELDER ANGELINO SEVILLEJO.
SECTION 14, ARTICLE VIII OF THE CONSTITUTION.
E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE
II PROXIMATE CAUSE OF THE LOSS.

THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT
YARD TO THE SUM OF ₱50,000,000.00, IN THAT: OR CONTRIBUTORY TO THE LOSS.
IV
THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A
CONSTRUCTIVE TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING
THAT THE YARD WAS LIABLE FOR THE VALUE OF THE FULL CONSTRUCTIVE
TOTAL LOSS.
V LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF
THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLE FOR
INTEREST.
VI
THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE
FOR ARBITRATION COSTS.19
On the other hand, KCSI cites the following grounds for the allowance of its petition,
to wit:
1. ABSENCE OF YARD RESPONSIBILITY
IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT,
WITHOUT EXPLANATION, THE CIAC’S RULING THAT THE YARD WAS EQUALLY
NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS PERMIT
FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO, AFTER THE
COURT OF APPEALS ITSELF HAD SHOWN THAT RULING TO BE COMPLETELY
WRONG AND BASELESS.
2. NO CONSTRUCTIVE TOTAL LOSS
IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE,
WITHOUT EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL
LOSS AFTER HAVING ITSELF EXPLAINED WHY THE VESSEL COULD NOT BE A
CONSTRUCTIVE TOTAL LOSS.
3. FAILURE OR REFUSAL TO ADDRESS
KEPPEL’S MOTION FOR RECONSIDERATION
FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO
HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT
EXPLANATION, KEPPEL’S PARTIAL MOTION FOR RECONSIDERATION OF THE
ORIGINAL DECISION WHICH SHOWED: 1) WHY PIONEER WAS NOT
SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO
STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE REQUIRED TO
REIMBURSE PIONEER’S PAYMENTS TO THE VESSEL OWNER IN VIEW OF THE
CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY
PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION.
4. FAILURE TO CREDIT FOR SALVAGE RECOVERY
EVEN IF THE COURT OF APPEAL’S RULINGS ON ALL OF THE FOREGOING
ISSUES WERE CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY
THE DAMAGES AWARDED (₱25 MILLION), THE COURT OF APPEALS STILL
ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE VESSEL
RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO REDUCE ANY
LIABILITY ON THE PART OF THE YARD TO ₱9.874 MILLION.20
To our minds, these errors assigned by both Pioneer and KCSI may be summed up in
the following core issues:
A. To whom may negligence over the fire that broke out on board M/V
"Superferry 3" be imputed?
B. Is subrogation proper? If proper, to what extent can subrogation be
made?
C. Should interest be imposed on the award of damages? If so, how much?
D. Who should bear the cost of the arbitration?
To resolve these issues, it is imperative that we digress from the general rule that in
petitions for review under Rule 45 of the Rules of Court, only questions of law shall be
entertained. Considering the disparate findings of fact of the CIAC and the CA which
led them to different conclusions, we are constrained to revisit the factual
circumstances surrounding this controversy.21
The Court’s Ruling
A. The issue of negligence
Undeniably, the immediate cause of the fire was the hot work done by Angelino
Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck A.
As established before the CIAC –
The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini
Ling,22 p. 20). Angelino Sevillejo tried to put out the fire by pouring the contents of a
five-liter drinking water container on it and as he did so, smoke came up from under
Deck A. He got another container of water which he also poured whence the smoke
was coming. In the meantime, other workers in the immediate vicinity tried to fight the
fire by using fire extinguishers and buckets of water. But because the fire was inside
the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly
because it was not possible to direct water jets or the fire extinguishers into the space
at the source. Fighting the fire was extremely difficult because the life jackets and the
construction materials of the Deck B ceiling were combustible and permitted the fire
to spread within the ceiling void. From there, the fire dropped into the Deck B
accommodation areas at various locations, where there were combustible materials.
Respondent points to cans of paint and thinner, in addition to the plywood partitions
and foam mattresses on deck B (Exh. 1-Mullen,23 pp. 7-8, 18; Exh. 2-Mullen, pp. 11-
12).24
Pioneer contends that KCSI should be held liable because Sevillejo was its employee
who, at the time the fire broke out, was doing his assigned task, and that KCSI was
solely responsible for all the hot works done on board the vessel. KCSI claims
otherwise, stating that the hot work done was beyond the scope of Sevillejo’s
assigned tasks, the same not having been authorized under the Work Order25dated
January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A
was itself negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga),
for failing to remove the life jackets from the ceiling void, causing the immediate
spread of the fire to the other areas of the ship.
We rule in favor of Pioneer.
First. The Shiprepair Agreement is clear that WG&A, as owner of M/V "Superferry 3,"
entered into a contract for the dry docking and repair of the vessel under KCSI’s
Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on
safety and security. Thus, the CA erred when it said that WG&A would renovate and
reconstruct its own vessel merely using the dry docking facilities of KCSI.
Second. Pursuant to KCSI’s rules and regulations on safety and security, only
employees of KCSI may undertake hot works on the vessel while it was in the graving
dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the Shiprepair
Agreement requiring the prior written approval of KCSI’s Vice President for
Operations before WG&A could effect any work performed by its own workers or sub-
contractors. In the exercise of this authority, KCSI’s Vice-President for Operations, in
the letter dated January 2, 1997, banned any hot works from being done except by
KCSI’s workers, viz.:
The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel
oil tanks to be carried out only by shipyard workers x x x. 26
WG&A recognized and complied with this restrictive directive such that, during the
arrival conference on January 26, 2000, Dr. Joniga, the vessel’s passage team leader
in charge of its hotel department, specifically requested KCSI to finish the hot works
started by the vessel’s contractors on the passenger accommodation decks. 27 This
was corroborated by the statements of the vessel’s hotel manager Marcelo
Rabe28 and the vessel’s quality control officer Joselito Esteban. 29 KCSI knew of the
unfinished hot works in the passenger accommodation areas. Its safety supervisor
Esteban Cabalhug confirmed that KCSI was aware "that the owners of this vessel
(M/V ‘Superferry 3’) had undertaken their own (hot) works prior to arrival alongside
(sic) on 26th January," and that no hot work permits could thereafter be issued to
WG&A’s own workers because "this was not allowed for the Superferry 3." 30 This
shows that Dr. Joniga had authority only to request the performance of hot works by
KCSI’s welders as needed in the repair of the vessel while on dry dock.
Third. KCSI welders covered by the Work Order performed hot works on various
areas of the M/V "Superferry 3," aside from its promenade deck. This was a
recognition of Dr. Joniga’s authority to request the conduct of hot works even on the
passenger accommodation decks, subject to the provision of the January 26, 2000
Work Order that KCSI would supply welders for the promenade deck of the ship.
At the CIAC proceedings, it was adequately shown that between February 4 and 6,
2000, the welders of KCSI: (a) did the welding works on the ceiling hangers in the
lobby of Deck A; (b) did the welding and cutting works on the deck beam to access
aircon ducts; and (c) did the cutting and welding works on the protection bars at the
tourist dining salon of Deck B,31 at a rate of ₱150.00/welder/hour.32 In fact, Orcullo,
Project Superintendent of KCSI, admitted that "as early as February 3, 2000 (five
days before the fire) [the Yard] had acknowledged Dr. Joniga’s authority to order such
works or additional jobs."33
It is evident, therefore, that although the January 26, 2000 Work Order was a special
order for the supply of KCSI welders to the promenade deck, it was not restricted to
the promenade deck only. The Work Order was only a special arrangement between
KCSI and WG&A that meant additional cost to the latter.
Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to
the latter’s direct control and supervision.
Indeed, KCSI was the employer of Sevillejo—paying his salaries; retaining the power
and the right to discharge or substitute him with another welder; providing him and the
other welders with its equipment; giving him and the other welders marching orders to
work on the vessel; and monitoring and keeping track of his and the other welders’
activities on board, in view of the delicate nature of their work. 34 Thus, as such
employee, aware of KCSI’s Safety Regulations on Vessels Afloat/Dry, which
specifically provides that "(n)o hotwork (welding/cutting works) shall be done on board
[the] vessel without [a] Safety Permit from KCSI Safety Section," 35 it was incumbent
upon Sevillejo to obtain the required hot work safety permit before starting the work
he did, including that done on Deck A where the fire started.
Fifth. There was a lapse in KCSI’s supervision of Sevillejo’s work at the time the fire
broke out.
It was established that no hot works could be hidden from or remain undetected by
KCSI because the welding cables and the gas hoses emanating from the dock would
give the hot works away. Moreover, KCSI had roving fire watchmen and safety
assistants who were moving around the vessel.36 This was confirmed by Restituto
Rebaca (Rebaca), KCSI’s Safety Supervisor, who actually spotted Sevillejo on Deck
A, two hours before the fire, doing his cutting work without a hot work permit, a fire
watchman, or a fire extinguisher. KCSI contends that it did its duty when it prohibited
Sevillejo from continuing the hot work. However, it is noteworthy that, after
purportedly scolding Sevillejo for working without a permit and telling him to stop until
the permit was acquired and the other safety measures were observed, Rebaca left
without pulling Sevillejo out of the work area or making sure that the latter did as he
was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the
bulkhead door at Deck A after Rebaca left, even disregarding the 4-inch marking set,
thus cutting the door level with the deck, until the fire broke out.
This conclusion on the failure of supervision by KCSI was absolutely supported by Dr.
Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore,
KCSI’s own fire expert, who observed that—
4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc
welder, not a cutter. The dangers of ignition occurring as a result of the two processes
are similar in that both electric arc welding and hot cutting produce heat at the work
area and sparks and incendive material that can travel some distance from the work
area. Hence, the safety precautions that are expected to be applied by the supervisor
are the same for both types of work. However, the quantity and incendivity of the
spray from the hot cutting are much greater than those of sparks from electric arc
welding, and it may well be that Angelino Sevillejo would not have a full appreciation
of the dangers involved. This made it all the more important that the supervisor, who
should have had such an appreciation, ensured that the appropriate safety
precautions were carried out.37
In this light, therefore, Sevillejo, being one of the specially trained welders specifically
authorized by KCSI to do the hot works on M/V "Superferry 3" to the exclusion of
other workers, failed to comply with the strict safety standards of KCSI, not only
because he worked without the required permit, fire watch, fire buckets, and
extinguishers, but also because he failed to undertake other precautionary measures
for preventing the fire. For instance, he could have, at the very least, ensured that
whatever combustible material may have been in the vicinity would be protected from
the sparks caused by the welding torch. He could have easily removed the life jackets
from the ceiling void, as well as the foam mattresses, and covered any holes where
the sparks may enter.
Conjunctively, since Rebaca was already aware of the hazard, he should have taken
all possible precautionary measures, including those above mentioned, before
allowing Sevillejo to continue with his hot work on Deck A. In addition to scolding
Sevillejo, Rebaca merely checked that no fire had started yet. Nothing more. Also,
inasmuch as KCSI had the power to substitute Sevillejo with another electric arc
welder, Rebaca should have replaced him.
There is negligence when an act is done without exercising the competence that a
reasonable person in the position of the actor would recognize as necessary to
prevent an unreasonable risk of harm to another. Those who undertake any work
calling for special skills are required to exercise reasonable care in what they
do.38 Verily, there is an obligation all persons have – to take due care which, under
ordinary circumstances of the case, a reasonable and prudent man would take. The
omission of that care constitutes negligence. Generally, the degree of care required is
graduated according to the danger a person or property may be subjected to, arising
from the activity that the actor pursues or the instrumentality that he uses. The greater
the danger, the greater the degree of care required. Extraordinary risk demands
extraordinary care. Similarly, the more imminent the danger, the higher degree of
care warranted.39 In this aspect,
KCSI failed to exercise the necessary degree of caution and foresight called for by
the circumstances.
We cannot subscribe to KCSI’s position that WG&A, through Dr. Joniga, was
negligent.
On the one hand, as discussed above, Dr. Joniga had authority to request the
performance of hot works in the other areas of the vessel. These hot works were
deemed included in the January 26, 2000 Work Order and the Shiprepair Agreement.
In the exercise of this authority, Dr. Joniga asked Sevillejo to do the cutting of the
bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was
doing, but failed to supervise him with the degree of care warranted by the attendant
circumstances.
Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void
for two reasons – (1) the life jackets were not even contributory to the occurrence of
the fire; and (2) it was not incumbent upon him to remove the same. It was shown
during the hearings before the CIAC that the removal of the life jackets would not
have made much of a difference. The fire would still have occurred due to the
presence of other combustible materials in the area. This was the uniform conclusion
of both WG&A’s40 and KCSI’s41 fire experts. It was also proven during the CIAC
proceedings that KCSI did not see the life jackets as being in the way of the hot
works, thus, making their removal from storage unnecessary.42
These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo
was negligent in the performance of his assigned task. His negligence was the
proximate cause of the fire on board M/V "Superferry 3." As he was then definitely
engaged in the performance of his assigned tasks as an employee of KCSI, his
negligence gave rise to the vicarious liability of his employer 43 under Article 2180 of
the Civil Code, which provides—
Art. 2180. The obligation imposed by article 2176 is demandable not only for one’s
own act or omission, but also for those of persons for whom one is responsible.
xxxx
Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks, even though the former are
not engaged in any business or industry.
xxxx
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.
KCSI failed to prove that it exercised the necessary diligence incumbent upon it to
rebut the legal presumption of its negligence in supervising Sevillejo. 44 Consequently,
it is responsible for the damages caused by the negligent act of its employee, and its
liability is primary and solidary. All that is needed is proof that the employee has, by
his negligence, caused damage to another in order to make the employer responsible
for the tortuous act of the former.45 From the foregoing disquisition, there is ample
proof of the employee’s negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that it had to pay
WG&A the full amount of the insurance coverage and, by operation of law, it was
entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It
further argues that the limitation of liability clause found in the Shiprepair Agreement
is null and void for being iniquitous and against public policy.
KCSI counters that a total constructive loss was not adequately proven by Pioneer,
and that there is no proof of payment of the insurance proceeds. KCSI insists on the
validity of the limited-liability clause up to ₱50,000,000.00, because WG&A acceded
to the provision when it executed the Shiprepair Agreement. KCSI also claims that the
salvage value of the vessel should be deducted from whatever amount it will be made
to pay to Pioneer.
We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of
M/V "Superferry 3."
In marine insurance, a constructive total loss occurs under any of the conditions set
forth in Section 139 of the Insurance Code, which provides—
Sec. 139. A person insured by a contract of marine insurance may abandon the thing
insured, or any particular portion hereof separately valued by the policy, or otherwise
separately insured, and recover for a total loss thereof, when the cause of the loss is
a peril insured against:
(a) If more than three-fourths thereof in value is actually lost, or
would have to be expended to recover it from the peril;
(b) If it is injured to such an extent as to reduce its value more than
three-fourths; x x x.
It appears, however, that in the execution of the insurance policies over M/V
"Superferry 3," WG&A and Pioneer incorporated by reference the American Institute
Hull Clauses 2/6/77, the Total Loss Provision of which reads—
Total Loss
In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall
be taken as the repaired value and nothing in respect of the damaged or break-up
value of the Vessel or wreck shall be taken into account.
There shall be no recovery for a constructive Total Loss hereunder unless the
expense of recovering and repairing the Vessel would exceed the Agreed Value in
policies on Hull and Machinery. In making this determination, only expenses incurred
or to be incurred by reason of a single accident or a sequence of damages arising
from the same accident shall be taken into account, but expenses incurred prior to
tender of abandonment shall not be considered if such are to be claimed separately
under the Sue and Labor clause. x x x.
In the course of the arbitration proceedings, Pioneer adduced in evidence the
estimates made by three (3) disinterested and qualified shipyards for the cost of the
repair of the vessel, specifically: (a) ₱296,256,717.00, based on the Philippine
currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi
Heavy Industries (Cebu) Inc.; (b) ₱309,780,384.15, based on the Philippine currency
equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and (c)
₱301,839,974.00, based on the Philippine currency equivalent of the quotation of
Singapore Technologies Marine Ltd. All the estimates showed that the repair expense
would exceed ₱270,000,000.00, the amount equivalent to ¾ of the vessel’s insured
value of ₱360,000,000.00. Thus, WG&A opted to abandon M/V "Superferry 3" and
claimed from Pioneer the full amount of the policies. Pioneer paid WG&A’s claim, and
now demands from KCSI the full amount of ₱360,000,000.00, by virtue of
subrogation.1avvphi1
KCSI denies the liability because, aside from its claim that it cannot be held culpable
for negligence resulting in the destructive fire, there was no constructive total loss, as
the amount of damage was only US$3,800,000.00 or ₱170,611,260.00, the amount of
repair expense quoted by Simpson, Spence & Young.
In the face of this apparent conflict, we hold that Section 139 of the Insurance Code
should govern, because (1) Philippine law is deemed incorporated in every locally
executed contract; and (2) the marine insurance policies in question expressly
provided the following:
IMPORTANT
This insurance is subject to English jurisdiction, except in the event that loss or losses
are payable in the Philippines, in which case if the said laws and customs of England
shall be in conflict with the laws of the Republic of the Philippines, then the laws of the
Republic of the Philippines shall govern.(Underscoring supplied.)
The CA held that Section 139 of the Insurance Code is merely permissive on account
of the word "may" in the provision. This is incorrect. Properly considered, the word
"may" in the provision is intended to grant the insured (WG&A) the option or
discretion to choose the abandonment of the thing insured (M/V "Superferry 3"), or
any particular portion thereof separately valued by the policy, or otherwise separately
insured, and recover for a total loss when the cause of the loss is a peril insured
against. This option or discretion is expressed as a right in Section 131 of the same
Code, to wit:
Sec. 131. A constructive total loss is one which gives to a person insured a right to
abandon under Section one hundred thirty-nine.
It cannot be denied that M/V "Superferry 3" suffered widespread damage from the fire
that occurred on February 8, 2000, a covered peril under the marine insurance
policies obtained by WG&A from Pioneer. The estimates given by the three
disinterested and qualified shipyards show that the damage to the ship would exceed
₱270,000,000.00, or ¾ of the total value of the policies – ₱360,000,000.00. These
estimates constituted credible and acceptable proof of the extent of the damage
sustained by the vessel. It is significant that these estimates were confirmed by the
Adjustment Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.),
Inc., the average adjuster that Pioneer had enlisted to verify and confirm the extent of
the damage. The Adjustment Report verified and confirmed that the damage to the
vessel amounted to a constructive total loss and that the claim for ₱360,000,000.00
under the policies was compensable.46 It is also noteworthy that KCSI did not cross-
examine Henson Lim, Director of Richards Hogg, whose affidavit-direct testimony
submitted to the CIAC confirmed that the vessel was a constructive total loss.
Considering the extent of the damage, WG&A opted to abandon the ship and claimed
the value of its policies. Pioneer, finding the claim compensable, paid the claim, with
WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of
the insurance proceeds from Pioneer. On this note, we find as unacceptable the claim
of KCSI that there was no ample proof of payment simply because the person who
signed the Receipt appeared to be an employee of Aboitiz Shipping
Corporation.47 The Loss and Subrogation Receipt issued by WG&A to Pioneer is the
best evidence of payment of the insurance proceeds to the former, and no
controverting evidence was presented by KCSI to rebut the presumed authority of the
signatory to receive such payment.
On the matter of subrogation, Article 2207 of the Civil Code provides—
Art. 2207. If the plaintiff’s property has been insured and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury.
Subrogation is the substitution of one person by another with reference to a lawful
claim or right, so that he who is substituted succeeds to the rights of the other in
relation to a debt or claim, including its remedies or securities. The principle covers a
situation wherein an insurer has paid a loss under an insurance policy is entitled to all
the rights and remedies belonging to the insured against a third party with respect to
any loss covered by the policy. It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all means that the
creditor could employ to enforce payment.48
We have held that payment by the insurer to the insured operates as an equitable
assignment to the insurer of all the remedies that the insured may have against the
third party whose negligence or wrongful act caused the loss. The right of subrogation
is not dependent upon, nor does it grow out of, any privity of contract. It accrues
simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and to accomplish
justice; and is the mode that equity adopts to compel the ultimate payment of a debt
by one who, in justice, equity, and good conscience, ought to pay.49
We cannot accept KCSI’s insistence on upholding the validity Clause 20, which
provides that the limit of its liability is only up to ₱50,000,000.00; nor of Clause 22(a),
that KCSI stands as a co-assured in the insurance policies, as found in the Shiprepair
Agreement.
Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal
foundation. They are unfair and inequitable under the premises. It was established
during arbitration that WG&A did not voluntarily and expressly agree to these
provisions. Engr. Elvin F. Bello, WG&A’s fleet manager, testified that he did not sign
the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were
found, because he did not want WG&A to be bound by them. However, considering
that it was only KCSI that had shipyard facilities large enough to accommodate the
dry docking and repair of big vessels owned by WG&A, such as M/V "Superferry 3,"
in Cebu, he had to sign the front portion of the Shiprepair Agreement; otherwise, the
vessel would not be accepted for dry docking.50
Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on
a "take-it-or-leave-it" basis. A contract of adhesion is so-called because its terms are
prepared by only one party, while the other party merely affixes his signature
signifying his adhesion thereto. Although not invalid, per se, a contract of adhesion is
void when the weaker party is imposed upon in dealing with the dominant bargaining
party, and its option is reduced to the alternative of "taking it or leaving it," completely
depriving such party of the opportunity to bargain on equal footing. 51
Clause 20 is also a void and ineffectual waiver of the right of WG&A to be
compensated for the full insured value of the vessel or, at the very least, for its actual
market value. There was clearly no intention on the part of WG&A to relinquish such
right. It is an elementary rule that a waiver must be positively proved, since a waiver
by implication is not normally countenanced. The norm is that a waiver must not only
be voluntary, but must have been made knowingly, intelligently, and with sufficient
awareness of the relevant circumstances and likely consequences. There must be
persuasive evidence to show an actual intention to relinquish the right. 52 This has not
been demonstrated in this case.
Likewise, Clause 20 is a stipulation that may be considered contrary to public policy.
To allow KCSI to limit its liability to only ₱50,000,000.00, notwithstanding the fact that
there was a constructive total loss in the amount of ₱360,000,000.00, would sanction
the exercise of a degree of diligence short of what is ordinarily required. It would not
be difficult for a negligent party to escape liability by the simple expedient of paying
an amount very much lower than the actual damage or loss sustained by the other. 53
Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to the Request for Arbitration was filed until this Decision becomes final and executory,
make each other a co-assured under an insurance policy is to be gleaned principally plus twelve percent (12%) interest per annum on the said amount or any balance
from the insurance contract or policy itself and not from any other contract or thereof from the finality of the Decision until the same will have been fully paid. The
agreement, because the insurance policy denominates the assured and the arbitration costs shall be borne by both parties on a pro rata basis. Costs against
beneficiaries of the insurance contract. Undeniably, the hull and machinery insurance KCSI.
procured by WG&A from Pioneer named only the former as the assured. There was
no manifest intention on the part of WG&A to constitute KCSI as a co-assured under SO ORDERED.
the policies. To have deemed KCSI as a co-assured under the policies would have
had the effect of nullifying any claim of WG&A from Pioneer for any loss or damage
caused by the negligence of KCSI. No ship owner would agree to make a ship ANTONIO EDUARDO B. NACHURA
repairer a co-assured under such insurance policy. Otherwise, any claim for loss or Associate Justice
damage under the policy would be rendered nugatory. WG&A could not have
intended such a result.54 WE CONCUR:

Nevertheless, we concur with the position of KCSI that the salvage value of the CONSUELO YNARES-SANTIAGO*
damaged M/V "Superferry 3" should be taken into account in the grant of any award. Acting Chief Justice
It was proven before the CIAC that the machinery and the hull of the vessel were Chairperson
separately sold for ₱25,290,000.00 (or US$468,333.33) and US$363,289.50,
respectively. WG&A’s claim for the upkeep of the wreck until the same were sold
amounts to ₱8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of MINITA V. CHICO-NAZARIO PRESBITERO J. VELASCO, JR.
the sale of the machinery and the hull, for a net recovery of US$673,812.87, or Associate Justice Associate Justice
equivalent to ₱30,252,648.09, at ₱44.8977/$1, the prevailing exchange rate when the
Request for Arbitration was filed. Not considering this salvage value in the award DIOSDADO M. PERALTA
would amount to unjust enrichment on the part of Pioneer. Associate Justice

C. On the imposition of interest CERTIFICATION

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals, 55 the award
in favor of Pioneer in the amount of ₱350,146,786.89 should earn interest at 6% per
annum from the filing of the case until the award becomes final and executory.
Thereafter, the rate of interest shall be 12% per annum from the date the award
becomes final and executory until its full satisfaction.
D. On the payment for the cost of arbitration
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.
CONSUELO YNARES-SANTIAGO
Acting Chief Justice

It is only fitting that both parties should share in the burden of the cost of arbitration,
on a pro rata basis. We find that Pioneer had a valid reason to institute a suit against
KCSI, as it believed that it was entitled to claim reimbursement of the amount it paid
Footnotes
to WG&A. However, we disagree with Pioneer that only KCSI should shoulder the
arbitration costs. KCSI cannot be faulted for defending itself for perceived wrongful
acts and conditions. Otherwise, we would be putting a price on the right to litigate on * Acting Chief Justice.
the part of Pioneer.
1 Rollo (G.R. Nos. 180896-97), pp. 33-109.
WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No.
180896-97 and the Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are 2 Rollo (G.R. Nos. 180880-81), pp. 338-378.
PARTIALLY GRANTED and the Amended Decision dated December 20, 2007 of the
Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the 3
amount of ₱360,000,000.00 less ₱30,252,648.09, equivalent to the salvage value Rollo (G.R. Nos. 180896-97), pp. 116-144.
recovered by Pioneer from M/V "Superferry 3," or the net total amount of
₱329,747,351.91, with six percent (6%) interest per annum reckoned from the time 4 Id. at 146-165.
5 22
Id. at 483-484. The fire expert presented by Pioneer.

6 23
The Shiprepair Agreement was duly acknowledged by the parties before a Dr. Eric Mullen, the fire expert presented by KCSI.
notary public.
24 Rollo (G.R. Nos. 180896-97), p. 262.
720. The Contractor shall not be under any liability to the Customer either in
contract or otherwise except for negligence and such liability shall itself be 25 The Work Order dated January 26, 2000 provided to –
subject to the following overriding limitations and exceptions, namely
1. Supply of 5 welders & equipment as per Owner’s instructions to
(a) The total liability of the Contractor to the Customer (including promenade deck.
the liability to replace under Clause 17) or of any Sub-contractor
shall be limited in respect of any and/or defect(s) or event(s) to the
sum of Pesos Philippine Currency Fifty Million only x x x. 2. JO# 89/99 – Pull-out & clean w/ chemical of Aux. engine blower
& change both ball bearing 15 kw, 27 amp, 440 Wtts as required.
8 22(a) The Customer shall keep the vessel adequately insured for the
vessel’s hull and machinery, her crew and the equipment on board and on 3. Renew sleeve on endcover of motor as required.
other goods owned or held by the Customer against any and all risks and
liabilities and ensure that such insurance policies shall include the 4. Renew deteriorated side frames & fwd pls as required.
Contractor as a co-assured.
5. Renew deteriorated air vent and sides pls as required.
9 Rollo (G.R. Nos. 180896-97), p. 526.
26 CIAC Decision, p. 28.
10 Id. at 167.
27 Dr. Joniga gave this narration under oath:
11 Id. at 236.
5. That at the arrival conference on January 26, 2000, x x x we
12 Id. at 236-242. discussed the projected dry docking works and the shipyard safety
regulations particularly the restriction that only shipyard workers
13 Id. at 229-320. and welders can perform hot works on board the vessel.

14 Id. at 286. During the said conference, I brought up the need of the hotel
department specifically for the yard to provide welders to the
15
passenger accommodations on Deck A, Deck B and Deck C,
Id. at 319. according to owner’s instructions, meaning, the ship owner through
me as the one in charge of the hotel department could request
16 Id. at 143-144. maintenance works in the passenger decks which may be
determined and the need for which may arise only in the course of
17 Now a member of this Court. the dry docking and which will require hot works by the yard’s
welders subject to shipyard safety and billing regulations.
18 Id. at 163-164.
My aforementioned input was duly taken note of, and on that same
19
date, a Work Order dated January 26, 2000 signed by the Ship
Rollo (G.R. No. 180896-97), pp. 46-48. Superintendent Manuel Amagsila and KCSI Project Superintendent
Gerry Orcullo x x x. (Exhibit "C-Joniga," p. 2)
20 Rollo (G.R. Nos. 180880-81), pp. 356-357.
284. That upon request of Dr. Joniga during said arrival conference, a Work
21 Order dated January 26, 2000 was signed whereby the ship owner could
Prudential Shipping and Management Corporation v. Sta. Rita, G.R. No.
166580, February 8, 2007, 515 SCRA 157. request for some hot work in the passenger decks "as per Owner’s
instructions" with the ship’s hotel department indicating certain maintenance
or renovation in the course of the dry docking but it will be the yard which will
execute the hot works needed. (Exhibit "C-Rabe," p. 2.)
294. x x x I confirm that said Work Order [of 26 January 2000] required the
Yard, and the Yard agreed, to supply "5 welders and equipment as per
owner’s instructions to promenade deck," because Dr. Joniga wanted that
the unfinished hot works in the promenade deck and passenger areas that
were started in Manila should be finished, otherwise the dry docking would
be useless.
The place mentioned was "to promenade deck" because the bulk of
the work was in the promenade deck, but included the unfinished
hot works in the tourist and other passenger areas, which the Yard
knew because they inspected and went around the vessel when we
arrived on January 26, 2000.
The unfinished hot works in the passenger areas were also known
to shipyard project superintendent Gerry Orcullo. Without the
Yard’s express knowledge or permission, no yard welder will just go
to some part of the vessel and do some kind of hot work. As I said
only Yard workers performed hot works on board the vessel.
(Exhibit "A-Esteban," p. 2.)
30 Cabalhug’s affidavit-direct testimony dated May 24, 2001.
31Exhibit "C-Joniga," par. 6; Exhibit "C-Rabe," par. 4; Exhibit "A-Esteban,"
par. 7.
32Per the affidavit of The Yard’s Commercial Manager Khew Kah Khin who
said, "Later I saw a copy of the work order for the supply of welders to the
owners to carry out the same work and was asked for a quotation for this. I
quoted verbally PhP150 per man per hour. This was an unusual
arrangement and I cannot recall any other occasion on which the Yard
welders were supplied in similar circumstances."
33
TSN, Gerry Orcullo, May 22, 2002, pp. 167-170.
34
CIAC Decision, p. 58.
35 Id. at 52.
36 TSN, Avelino Aves (on cross-examination).
37Exhibit 2-Mullen (Supplementary Report on the fire on board Superferry
3).
38 Far Eastern Shipping Company v. CA, 357 Phil. 703 (1998).
40 Ms. Aini Ling, WG&A’s fire expert, specifically testified:
"Sir, if there is no life jacket, of course, there is no ignition of life
jackets. x x x
That doesn’t mean that they (sic) might not be a fire, your Honor,
because there are other combustible materials in the ceiling void."
(TSN, May 21, 2002, pp. 319-320, as quoted in the CIAC Decision,
p. 38).
41 The pertinent testimony of Dr. Eric Mullen, The Yard’s fire expert, is as
follows:
ATTY. LOMBOS:
Now, you also heard Ms. Ling say that even if she concedes that
the removal of the life jackets from under the ceiling void would
have made the most likely source of the fire, ah, would have
eliminated the most likely source of the fire, her opinion was still
that there was a possibility of fire from say, wires or the ceiling
material which was plywood she says on top of the Formica. Do
you have any views regarding that?
DR. MULLEN:
In so far as my mechanism, which I firmly believe to be the case
that the material fell through the holes, it would have made that
much difference. Because you have the life jackets would ignite
easily, the ceiling itself would ignite easily because the material that
is falling down is very incendive (sic) and in some cases has flames
on them. So, it wouldn’t have made that much difference had the
life jackets been removed, there was still possibility for fire. (TSN,
May 23, 2002, pp. 132-133, as quoted in the CIAC Decision, p. 38-
39).
42
This fact was admitted during cross-examination by Geoff Phoon, The
Yard’s president, who testified in this wise:
ATTY. LIM:
Q Did you require the vessel to take out the life jackets and put
them somewhere else or some place else on board or on shore?
MR. PHOON:
A We don’t touch the ship property.

Q You, in fact, did not require that?

A It belongs to the ship, You asked me do I require, I said it belongs

to the ship.

Q Up to now you do not require despite –

A We don’t touch any item unless it is in the way of the work. (TSN,
May 22, 2002, pp. 54-55).
G.R. No. 194320 February 1, 2012 refused to settle their liability, Malayan Insurance was constrained to file a complaint
for damages for gross negligence against respondents.7
MALAYAN INSURANCE CO., INC., Petitioner,
vs. In their Answer, respondents asserted that they cannot be held liable for the vehicular
RODELIO ALBERTO and ENRICO ALBERTO REYES, Respondents. accident, since its proximate cause was the reckless driving of the Nissan Bus driver.
They alleged that the speeding bus, coming from the service road of EDSA,
DECISION maneuvered its way towards the middle lane without due regard to Reyes’ right of
way. When the Nissan Bus abruptly stopped, Reyes stepped hard on the brakes but
the braking action could not cope with the inertia and failed to gain sufficient traction.
VELASCO, JR., J.: As a consequence, the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant,
which, in turn, hit the rear end of the vehicle in front of it. The Nissan Bus, on the
The Case other hand, sideswiped the Fuzo Cargo Truck, causing damage to the latter in the
amount of PhP 20,000. Respondents also controverted the results of the Police
Before Us is a Petition for Review on Certiorari under Rule 45, seeking to reverse and Report, asserting that it was based solely on the biased narration of the Nissan Bus
set aside the July 28, 2010 Decision1 of the Court of Appeals (CA) and its October 29, driver.8
2010 Resolution2 denying the motion for reconsideration filed by petitioner Malayan
Insurance Co., Inc. (Malayan Insurance). The July 28, 2010 CA Decision reversed After the termination of the pre-trial proceedings, trial ensued. Malayan Insurance
and set aside the Decision3 dated February 2, 2009 of the Regional Trial Court, presented the testimony of its lone witness, a motor car claim adjuster, who attested
Branch 51 in Manila. that he processed the insurance claim of the assured and verified the documents
submitted to him. Respondents, on the other hand, failed to present any evidence.
The Facts
In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885,
At around 5 o’clock in the morning of December 17, 1995, an accident occurred at the ruled in favor of Malayan Insurance and declared respondents liable for damages.
corner of EDSA and Ayala Avenue, Makati City, involving four (4) vehicles, to wit: (1) The dispositive portion reads:
a Nissan Bus operated by Aladdin Transit with plate number NYS 381; (2) an Isuzu
Tanker with plate number PLR 684; (3) a Fuzo Cargo Truck with plate number PDL WHEREFORE, judgment is hereby rendered in favor of the plaintiff against
297; and (4) a Mitsubishi Galant with plate number TLM 732. 4 defendants jointly and severally to pay plaintiff the following:

Based on the Police Report issued by the on-the-spot investigator, Senior Police 1. The amount of P700,000.00 with legal interest from the time of the filing of
Officer 1 Alfredo M. Dungga (SPO1 Dungga), the Isuzu Tanker was in front of the the complaint;
Mitsubishi Galant with the Nissan Bus on their right side shortly before the vehicular
incident. All three (3) vehicles were at a halt along EDSA facing the south direction 2. Attorney’s fees of P10,000.00 and;
when the Fuzo Cargo Truck simultaneously bumped the rear portion of the Mitsubishi
Galant and the rear left portion of the Nissan Bus. Due to the strong impact, these two
vehicles were shoved forward and the front left portion of the Mitsubishi Galant 3. Cost of suit.
rammed into the rear right portion of the Isuzu Tanker. 5
SO ORDERED.9
Previously, particularly on December 15, 1994, Malayan Insurance issued Car
Insurance Policy No. PV-025-00220 in favor of First Malayan Leasing and Finance Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV No.
Corporation (the assured), insuring the aforementioned Mitsubishi Galant against 93112. In its Decision dated July 28, 2010, the CA reversed and set aside the
third party liability, own damage and theft, among others. Having insured the vehicle Decision of the trial court and ruled in favor of respondents, disposing:
against such risks, Malayan Insurance claimed in its Complaint dated October 18,
1999 that it paid the damages sustained by the assured amounting to PhP 700,000. 6 WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and
the assailed Decision dated 2 February 2009 REVERSED and SET ASIDE. The
Maintaining that it has been subrogated to the rights and interests of the assured by Complaint dated 18 October 1999 is hereby DISMISSED for lack of merit. No costs.
operation of law upon its payment to the latter, Malayan Insurance sent several
demand letters to respondents Rodelio Alberto (Alberto) and Enrico Alberto Reyes SO ORDERED.10
(Reyes), the registered owner and the driver, respectively, of the Fuzo Cargo Truck,
requiring them to pay the amount it had paid to the assured. When respondents
The CA held that the evidence on record has failed to establish not only negligence
on the part of respondents, but also compliance with the other requisites and the
consequent right of Malayan Insurance to subrogation. 11 It noted that the police
report, which has been made part of the records of the trial court, was not properly
identified by the police officer who conducted the on-the-spot investigation of the
subject collision. It, thus, held that an appellate court, as a reviewing body, cannot
rightly appreciate firsthand the genuineness of an unverified and unidentified
document, much less accord it evidentiary value.12
Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a
police report is a prima facie evidence of the facts stated in it. And inasmuch as they
never questioned the presentation of the report in evidence, respondents are deemed
to have waived their right to question its authenticity and due execution. 13
In its Resolution dated October 29, 2010, the CA denied the motion for
reconsideration. Hence, Malayan Insurance filed the instant petition.
The Issues
In its Memorandum14 dated June 27, 2011, Malayan Insurance raises the following
issues for Our consideration:
I investigator who prepared the police report, said report is still admissible in evidence,
WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE
POLICE REPORT SINCE THE POLICE INVESTIGATOR WHO PREPARED
THE SAME DID NOT ACTUALLY TESTIFY IN COURT THEREON.
II
WHETHER THE SUBROGATION OF MALAYAN INSURANCE
IMPAIRED AND/OR DEFICIENT.
On the other hand, respondents submit the following issues in
Memorandum15 dated July 7, 2011:
I or statements; the general rule that excludes hearsay as evidence applies to written,
WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT FOR
FAILURE OF MALAYAN INSURANCE TO OVERCOME THE BURDEN OF
PROOF REQUIRED TO ESTABLISH THE NEGLIGENCE OF
RESPONDENTS.
II
WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN
INSURANCE ARE SUFFICIENT TO CLAIM FOR THE AMOUNT OF
DAMAGES.
III
WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS
PASSED COMPLIANCE AND REQUISITES AS PROVIDED UNDER
PERTINENT LAWS.
Essentially, the issues boil down to the following: (1) the admissibility of the police
report; (2) the sufficiency of the evidence to support a claim for gross negligence; and
(3) the validity of subrogation in the instant case.
Our Ruling
The petition has merit.
Admissibility of the Police Report
Malayan Insurance contends that, even without the presentation of the police
especially since respondents failed to make a timely objection to its presentation in
evidence.16 Respondents counter that since the police report was never confirmed by
the investigating police officer, it cannot be considered as part of the evidence on
record.17
Indeed, under the rules of evidence, a witness can testify only to those facts which
the witness knows of his or her personal knowledge, that is, which are derived from
the witness’ own perception.18 Concomitantly, a witness may not testify on matters
IS which he or she merely learned from others either because said witness was told or
read or heard those matters.19 Such testimony is considered hearsay and may not be
received as proof of the truth of what the witness has learned. This is known as the
its hearsay rule.20
As discussed in D.M. Consunji, Inc. v. CA,21 "Hearsay is not limited to oral testimony
as well as oral statements."
There are several exceptions to the hearsay rule under the Rules of Court, among
which are entries in official records.22 Section 44, Rule 130 provides:
Entries in official records made in the performance of his duty by a public officer of the
Philippines, or by a person in the performance of a duty specially enjoined by law are
prima facie evidence of the facts therein stated.
In Alvarez v. PICOP Resources,23 this Court reiterated the requisites for the
admissibility in evidence, as an exception to the hearsay rule of entries in official
records, thus: (a) that the entry was made by a public officer or by another person
specially enjoined by law to do so; (b) that it was made by the public officer in the
performance of his or her duties, or by such other person in the performance of a duty
specially enjoined by law; and (c) that the public officer or other person had sufficient
knowledge of the facts by him or her stated, which must have been acquired by the
public officer or other person personally or through official information.
Notably, the presentation of the police report itself is admissible as an exception to
the hearsay rule even if the police investigator who prepared it was not presented in
court, as long as the above requisites could be adequately proved. 24
Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator, prepared
the report, and he did so in the performance of his duty. However, what is not clear is
whether SPO1 Dungga had sufficient personal knowledge of the facts contained in
his report. Thus, the third requisite is lacking.
Respondents failed to make a timely objection to the police report’s presentation in
evidence; thus, they are deemed to have waived their right to do so.25 As a result, the
police report is still admissible in evidence.
Sufficiency of Evidence
Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck,
bumped the rear of the Mitsubishi Galant, he is presumed to be negligent unless
proved otherwise. It further contends that respondents failed to present any evidence
to overturn the presumption of negligence.26 Contrarily, respondents claim that since
Malayan Insurance did not present any witness who shall affirm any negligent act of
Reyes in driving the Fuzo Cargo truck before and after the incident, there is no
evidence which would show negligence on the part of respondents. 27
We agree with Malayan Insurance. Even if We consider the inadmissibility of the
police report in evidence, still, respondents cannot evade liability by virtue of the res
ipsa loquitur doctrine. The D.M. Consunji, Inc. case is quite elucidating:
Petitioner’s contention, however, loses relevance in the face of the application of res
ipsa loquitur by the CA. The effect of the doctrine is to warrant a presumption or
inference that the mere fall of the elevator was a result of the person having charge of
the instrumentality was negligent. As a rule of evidence, the doctrine of res ipsa
loquitur is peculiar to the law of negligence which recognizes that prima facie
negligence may be established without direct proof and furnishes a substitute for
specific proof of negligence.
The concept of res ipsa loquitur has been explained in this wise:
While negligence is not ordinarily inferred or presumed, and while the mere
happening of an accident or injury will not generally give rise to an inference or
presumption that it was due to negligence on defendant’s part, under the doctrine of
res ipsa loquitur, which means, literally, the thing or transaction speaks for itself, or in
one jurisdiction, that the thing or instrumentality speaks for itself, the facts or
circumstances accompanying an injury may be such as to raise a presumption, or at
least permit an inference of negligence on the part of the defendant, or some other
person who is charged with negligence.
x x x where it is shown that the thing or instrumentality which caused the injury
complained of was under the control or management of the defendant, and that the
occurrence resulting in the injury was such as in the ordinary course of things would
not happen if those who had its control or management used proper care, there is
sufficient evidence, or, as sometimes stated, reasonable evidence, in the absence of
explanation by the defendant, that the injury arose from or was caused by the
defendant’s want of care.
One of the theoretical bases for the doctrine is its necessity, i.e., that necessary
evidence is absent or not available.
The res ipsa loquitur doctrine is based in part upon the theory that the defendant in
charge of the instrumentality which causes the injury either knows the cause of the
accident or has the best opportunity of ascertaining it and that the plaintiff has no
such knowledge, and therefore is compelled to allege negligence in general terms
and to rely upon the proof of the happening of the accident in order to establish
negligence. The inference which the doctrine permits is grounded upon the fact that
the chief evidence of the true cause, whether culpable or innocent, is practically
accessible to the defendant but inaccessible to the injured person.
It has been said that the doctrine of res ipsa loquitur furnishes a bridge by which a
plaintiff, without knowledge of the cause, reaches over to defendant who knows or
should know the cause, for any explanation of care exercised by the defendant in
respect of the matter of which the plaintiff complains. The res ipsa loquitur doctrine,
another court has said, is a rule of necessity, in that it proceeds on the theory that
under the peculiar circumstances in which the doctrine is applicable, it is within the
power of the defendant to show that there was no negligence on his part, and direct
proof of defendant’s negligence is beyond plaintiff’s power. Accordingly, some courts
add to the three prerequisites for the application of the res ipsa loquitur doctrine the
further requirement that for the res ipsa loquitur doctrine to apply, it must appear that
the injured party had no knowledge or means of knowledge as to the cause of the
accident, or that the party to be charged with negligence has superior knowledge or
opportunity for explanation of the accident.
The CA held that all the requisites of res ipsa loquitur are present in the case at bar:
There is no dispute that appellee’s husband fell down from the 14th floor of a building
to the basement while he was working with appellant’s construction project, resulting
to his death. The construction site is within the exclusive control and management of
appellant. It has a safety engineer, a project superintendent, a carpenter leadman and
others who are in complete control of the situation therein. The circumstances of any
accident that would occur therein are peculiarly within the knowledge of the appellant
or its employees. On the other hand, the appellee is not in a position to know what
caused the accident. Res ipsa loquitur is a rule of necessity and it applies where
evidence is absent or not readily available, provided the following requisites are
present: (1) the accident was of a kind which does not ordinarily occur unless
someone is negligent; (2) the instrumentality or agency which caused the injury was
under the exclusive control of the person charged with negligence; and (3) the injury
suffered must not have been due to any voluntary action or contribution on the part of
the person injured. x x x.
No worker is going to fall from the 14th floor of a building to the basement while
performing work in a construction site unless someone is negligent[;] thus, the first
requisite for the application of the rule of res ipsa loquitur is present. As explained
earlier, the construction site with all its paraphernalia and human resources that likely
caused the injury is under the exclusive control and management of appellant[;]
thus[,] the second requisite is also present. No contributory negligence was attributed
to the appellee’s deceased husband[;] thus[,] the last requisite is also present. All the
requisites for the application of the rule of res ipsa loquitur are present, thus a
reasonable presumption or inference of appellant’s negligence arises. x x x.
Petitioner does not dispute the existence of the requisites for the application of res
ipsa loquitur, but argues that the presumption or inference that it was negligent did
not arise since it "proved that it exercised due care to avoid the accident which befell
respondent’s husband."
Petitioner apparently misapprehends the procedural effect of the doctrine. As stated
earlier, the defendant’s negligence is presumed or inferred when the plaintiff
establishes the requisites for the application of res ipsa loquitur. Once the plaintiff
makes out a prima facie case of all the elements, the burden then shifts to defendant
to explain. The presumption or inference may be rebutted or overcome by other
evidence and, under appropriate circumstances a disputable presumption, such as
that of due care or innocence, may outweigh the inference. It is not for the defendant
to explain or prove its defense to prevent the presumption or inference from arising.
Evidence by the defendant of say, due care, comes into play only after the
circumstances for the application of the doctrine has been established. 28
In the case at bar, aside from the statement in the police report, none of the parties
disputes the fact that the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant,
which, in turn, hit the rear end of the vehicle in front of it. Respondents, however,
point to the reckless driving of the Nissan Bus driver as the proximate cause of the
collision, which allegation is totally unsupported by any evidence on record. And
assuming that this allegation is, indeed, true, it is astonishing that respondents never
even bothered to file a cross-claim against the owner or driver of the Nissan Bus.
What is at once evident from the instant case, however, is the presence of all the
requisites for the application of the rule of res ipsa loquitur. To reiterate, res ipsa
loquitur is a rule of necessity which applies where evidence is absent or not readily
available. As explained in D.M. Consunji, Inc., it is partly based upon the theory that
the defendant in charge of the instrumentality which causes the injury either knows
the cause of the accident or has the best opportunity of ascertaining it and that the
plaintiff has no such knowledge, and, therefore, is compelled to allege negligence in
general terms and to rely upon the proof of the happening of the accident in order to
establish negligence.
As mentioned above, the requisites for the application of the res ipsa loquitur rule are
the following: (1) the accident was of a kind which does not ordinarily occur unless
someone is negligent; (2) the instrumentality or agency which caused the injury was
under the exclusive control of the person charged with negligence; and (3) the injury
suffered must not have been due to any voluntary action or contribution on the part of
the person injured.29
In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the
Mitsubishi Galant unless someone is negligent. Also, the Fuzo Cargo Truck was
under the exclusive control of its driver, Reyes. Even if respondents avert liability by
putting the blame on the Nissan Bus driver, still, this allegation was self-serving and
totally unfounded. Finally, no contributory negligence was attributed to the driver of
the Mitsubishi Galant. Consequently, all the requisites for the application of the
doctrine of res ipsa loquitur are present, thereby creating a reasonable presumption
of negligence on the part of respondents.
It is worth mentioning that just like any other disputable presumptions or inferences,
the presumption of negligence may be rebutted or overcome by other evidence to the
contrary. It is unfortunate, however, that respondents failed to present any evidence
before the trial court. Thus, the presumption of negligence remains. Consequently,
the CA erred in dismissing the complaint for Malayan Insurance’s adverted failure to
prove negligence on the part of respondents.
Validity of Subrogation
Malayan Insurance contends that there was a valid subrogation in the instant case, as
evidenced by the claim check voucher30 and the Release of Claim and Subrogation
Receipt31 presented by it before the trial court. Respondents, however, claim that the
documents presented by Malayan Insurance do not indicate certain important details
that would show proper subrogation.
As noted by Malayan Insurance, respondents had all the opportunity, but failed to
object to the presentation of its evidence. Thus, and as We have mentioned earlier,
respondents are deemed to have waived their right to make an objection. As this
Court held in Asian Construction and Development Corporation v. COMFAC
Corporation:
The rule is that failure to object to the offered evidence renders it admissible,
and the court cannot, on its own, disregard such evidence. We note that
ASIAKONSTRUCT’s counsel of record before the trial court, Atty. Bernard Dy, who
actively participated in the initial stages of the case stopped attending the hearings
when COMFAC was about to end its presentation. Thus, ASIAKONSTRUCT could
not object to COMFAC’s offer of evidence nor present evidence in its defense;
ASIAKONSTRUCT was deemed by the trial court to have waived its chance to do so.
Note also that when a party desires the court to reject the evidence offered, it
must so state in the form of a timely objection and it cannot raise the objection
to the evidence for the first time on appeal. Because of a party’s failure to
timely object, the evidence becomes part of the evidence in the case.
Thereafter, all the parties are considered bound by any outcome arising from JOSE CATRAL MENDOZA BIENVENIDO L. REYES*
the offer of evidence properly presented.32(Emphasis supplied.) Associate Justice Associate Justice

Bearing in mind that the claim check voucher and the Release of Claim and ESTELA M. PERLAS-BERNABE
Subrogation Receipt presented by Malayan Insurance are already part of the Associate Justice
evidence on record, and since it is not disputed that the insurance company, indeed,
paid PhP 700,000 to the assured, then there is a valid subrogation in the case at bar.
As explained in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety ATTESTATION
Corporation:
I attest that the conclusions in the above Decision had been reached in consultation
Subrogation is the substitution of one person by another with reference to a lawful before the case was assigned to the writer of the opinion of the Court’s Division.
claim or right, so that he who is substituted succeeds to the rights of the other in
relation to a debt or claim, including its remedies or securities. The principle covers a PRESBITERO J. VELASCO, JR.
situation wherein an insurer has paid a loss under an insurance policy is entitled to all Associate Justice
the rights and remedies belonging to the insured against a third party with respect to Chairperson
any loss covered by the policy. It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all means that the
CERTIFICATION
creditor could employ to enforce payment.1âwphi1

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s
We have held that payment by the insurer to the insured operates as an equitable
Attestation, I certify that the conclusions in the above Decision had been reached in
assignment to the insurer of all the remedies that the insured may have against the
consultation before the case was assigned to the writer of the opinion of the Court’s
third party whose negligence or wrongful act caused the loss. The right of subrogation
Division.
is not dependent upon, nor does it grow out of, any privity of contract. It accrues
simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and to accomplish RENATO C. CORONA
justice; and is the mode that equity adopts to compel the ultimate payment of a debt Chief Justice
by one who, in justice, equity, and good conscience, ought to pay. 33

Considering the above ruling, it is only but proper that Malayan Insurance be
subrogated to the rights of the assured.

WHEREFORE, the petition is hereby GRANTED. The CA’s July 28, 2010 Decision
and October 29, 2010 Resolution in CA-G.R. CV No. 93112 are hereby REVERSED
and SET ASIDE. The Decision dated February 2, 2009 issued by the trial court in
Civil Case No. 99-95885 is hereby REINSTATED.

No pronouncement as to cost.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

DIOSDADO M. PERALTA
Associate Justice
G.R. No. 185964 June 16, 2014
ASIAN TERMINALS, INC., Petitioner,
vs.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
seeking to annul and set aside the Decision2 dated October 10, 2008 of the Court of
Appeals (CA) in CA-G.R. SP No. 99021 which adjudged petitioner Asian Terminals,
Inc. (ATI) liable to pay the money claims of respondent First Lepanto-Taisho
Insurance Corporation (FIRST LEPANTO).
The Undisputed Facts
On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in 100 plain
jumbo bags complete and in good condition were loaded and received on board M/V
"Da Feng" owned by China Ocean Shipping Co. (COSCO) in favor of consignee,
Grand Asian Sales, Inc. (GASI). Based on a Certificate of Insurance4 dated August
24, 1995, it appears that the shipment was insured against all risks by GASI with
FIRST LEPANTO for ₱7,959,550.50 under Marine Open Policy No. 0123.
The shipment arrived in Manila on July 18, 1996 and was discharged into the
possession and custody of ATI, a domestic corporation engaged in arrastre business.
The shipment remained for quite some time at ATI’s storage area until it was
withdrawn by broker, Proven Customs Brokerage Corporation (PROVEN), on August
8 and 9, 1996 for delivery to the consignee. Upon receipt of the shipment, 5 GASI
subjected the same to inspection and found that the delivered goods incurred
shortages of 8,600 kilograms and spillage of 3,315 kg for a total of11,915 kg of
loss/damage valued at ₱166,772.41.
GASI sought recompense from COSCO, thru its Philippine agent Smith Bell Shipping
Lines, Inc. (SMITH BELL),6ATI7 and PROVEN8 but was denied. Hence, it pursued
indemnification from the shipment’s insurer.9
After the requisite investigation and adjustment, FIRST LEPANTO paid GASI the
amount of ₱165,772.40 as insurance indemnity.10
Thereafter, GASI executed a Release of Claim 11 discharging FIRST LEPANTO from
any and all liabilities pertaining to the lost/damaged shipment and subrogating it to all
the rights of recovery and claims the former may have against any person or
corporation in relation to the lost/damaged shipment.
As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping agency in
the Philippines, SMITH BELL, PROVEN and ATI, reimbursement of the amount it
paid to GASI. When FIRST LEPANTO’s demands were not heeded, it filed on May
29, 1997 a Complaint12 for sum of money before the Metropolitan Trial Court (MeTC)
of Manila, Branch 3. FIRST LEPANTO sought that it be reimbursed the amount of
166,772.41, twenty-five percent (25%) thereof as attorney’s fees, and costs of suit.
ATI denied liability for the lost/damaged shipment and claimed that it exercised due
diligence and care in handling the same. 13 ATI averred that upon arrival of the
shipment, SMITH BELL requested for its inspection 14 and it was discovered that one
jumbo bag thereof sustained loss/damage while in the custody of COSCO as
evidenced by Turn Over Survey of Bad Order Cargo No. 47890 dated August 6,
199615 jointly executed by the respective representatives of ATI and COSCO. During
the withdrawal of the shipment by PROVEN from ATI’s warehouse, the entire
shipment was re-examined and it was found to be exactly in the same condition as
when it was turned over to ATI such that one jumbo bag was damaged. To bolster
this claim, ATI submitted Request for Bad Order Survey No. 40622 dated August 9,
199616 jointly executed by the respective representatives of ATI and PROVEN. ATI
also submitted various Cargo Gate Passes17 showing that PROVEN was able to
completely withdraw all the shipment from ATI’s warehouse in good order condition
except for that one damaged jumbo bag.
In the alternative, ATI asserted that even if it is found liable for the lost/damaged
portion of the shipment, its contract for cargo handling services limits its liability to not
more than ₱5,000.00 per package. ATI interposed a counterclaim of ₱20,000.00
against FIRST LEPANTO as and for attorney’s fees. It also filed a cross-claim against
its co-defendants COSCO and SMITH BELL in the event that it is made liable to
FIRST LEPANTO.18
PROVEN denied any liability for the lost/damaged shipment and averred that the
complaint alleged no specific acts or omissions that makes it liable for damages.
PROVEN claimed that the damages in the shipment were sustained before they were
withdrawn from ATI’s custody under which the shipment was left in an open area
exposed to the elements, thieves and vandals. PROVEN contended that it exercised
due diligence and prudence in handling the shipment. PROVEN also filed a
counterclaim for attorney’s fees and damages.19
Despite receipt of summons on December 4, 1996,20 COSCO and SMITH BELL failed
to file an answer to the complaint. FIRST LEPANTO thus moved that they be
declared in default21 but the motion was denied by the MeTC on the ground that
under Rule 9, Section 3 of the Rules of Civil Procedure, "when a pleading asserting a
claim states a common cause of action against several defending parties, some of
whom answer and the other fail to do so, the Court shall try the case against all upon
the answers thus filed, and render judgment upon the evidence presented." 22
Ruling of the MeTC
In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and PROVEN from any
liability and instead found COSCO to be the party at fault and hence liable for the
loss/damage sustained by the subject shipment. However, the MeTC ruled it has no
jurisdiction over COSCO because it is a foreign corporation. Also, it cannot enforce
judgment upon SMITH BELL because no evidence was presented establishing that it
is indeed the Philippine agent of COSCO. There is also no evidence attributing any
fault to SMITH BELL. Consequently, the complaint was dismissed in this wise:
WHEREFORE, in light of the foregoing, judgment is hereby rendered DISMISSING
the instant case for failure of [FIRST LEPANTO] to sufficiently establish its cause o
faction against [ATI, COSCO, SMITH BELL, and PROVEN].
The counterclaims of [ATI and PROVEN] are likewise dismissed for lack of legal
basis.
No pronouncement as to cost.
SO ORDERED.24
Ruling of the Regional Trial Court
On appeal, the Regional Trial Court (RTC) reversed the MeTC’s findings. In its
Decision25 dated January 26, 2007, the RTC of Manila, Branch 21, in Civil Case No.
06-116237, rejected the contentions of ATI upon its observation that the same is
belied by its very own documentary evidence. The RTC remarked that, if, as alleged
by ATI, one jumbo bag was already in bad order condition upon its receipt of the
shipment from COSCO on July 18, 1996, then how come that the Request for Bad
Order Survey and the Turn Over Survey of Bad Order Cargo were prepared only
weeks thereafter or on August 9, 1996 and August 6, 1996, respectively. ATI was
adjudged unable to prove that it exercised due diligence while in custody of the
shipment and hence, negligent and should be held liable for the damages caused to
GASI which, in turn, is subrogated by FIRST LEPANTO.
The RTC rejected ATI’s contention that its liability is limited only to ₱5,000.00 per
package because its Management Contract with the Philippine Ports Authority (PPA)
purportedly containing the same was not presented as evidence. More importantly,
FIRST LEPANTO or GASI cannot be deemed bound thereby because they were not
parties thereto. Lastly, the RTC did not give merit to ATI’s defense that any claim
against it has already prescribed because GASI failed to file any claim within the 15-
day period stated in the gate pass issued by ATI to GASI’s broker, PROVEN.
Accordingly, the RTC disposed thus:
WHEREFORE, in light of the foregoing, the judgment on appeal is hereby
REVERSED.
[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of [P]165,772.40
with legal interest until fully paid, to pay [FIRST LEPANTO] 10% of the amount due
the latter as and for attorney’s fees plus the costs of suit.
The complaint against [COSCO/SMITH BELL and PROVEN] are DISMISSED for lack
of evidence against them. The counterclaim and cross[-]claim of [ATI] are likewise
DISMISSED for lack of merit.
SO ORDERED.26
Ruling of the CA
ATI sought recourse with the CA challenging the RTC’s finding that FIRST LEPANTO
was validly subrogated to the rights of GASI with respect to the lost/damaged
shipment. ATI argued that there was no valid subrogation because FIRSTLEPANTO
failed to present a valid, existing and enforceable Marine Open Policy or insurance
contract. ATI reasoned that the Certificate of Insurance or Marine Cover Note
submitted by FIRST LEPANTO as evidence is not the same as an actual insurance
contract.
In its Decision27 dated October 10, 2008, the CA dismissed the appeal and held that
the Release of Claim and the Certificate of Insurance presented by FIRST LEPANTO
sufficiently established its relationship with the consignee and that upon proof of
payment of the latter’s claim for damages, FIRST LEPANTO was subrogated to its
rights against those liable for the lost/damaged shipment.
The CA also affirmed the ruling of the RTC that the subject shipment was damaged
while in the custody of ATI. Thus, the CA disposed as follows:
WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED and
the instant petition is DENIED for lack of merit.
SO ORDERED.28
ATI moved for reconsideration but the motion was denied in the CA
Resolution29 dated January 12, 2009. Hence, this petition arguing that:
(a) The presentation of the insurance policy is indispensable in proving the right of
FIRST LEPANTO to be subrogated to the right of the consignee pursuant to the ruling
in Wallem Philippines Shipping, Inc. v. Prudential Guarantee and Assurance Inc.; 30
(b) ATI cannot be barred from invoking the defense of prescription as provided for in
the gate passes in consonance with the ruling in International Container Terminal
Services, Inc. v. Prudential Guarantee and Assurance Co, Inc.31
Ruling of the Court
The Court denies the petition.
ATI failed to prove that it exercised
due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.
It must be emphasized that factual questions pertaining to ATI’s liability for the
loss/damage sustained by GASI has already been settled in the uniform factual
findings of the RTC and the CA that: ATI failed to prove by preponderance of
evidence that it exercised due diligence in handling the shipment.
Such findings are binding and conclusive upon this Court since a review thereof is
proscribed by the nature of the present petition. Only questions of law are allowed in
petitions for review on certiorari under Rule 45 of the Rules of Court. It is not the
Court’s duty to review, examine, and evaluate or weigh all over again the probative
value of the evidence presented, especially where the findings of the RTC are
affirmed by the CA, as in this case.32
There are only specific instances when the Court deviates from the rule and conducts
a review of the courts a quo’s factual findings, such as when: (1) the inference made
is manifestly mistaken, absurd or impossible; (2) there is grave abuse of discretion;(3)
the findings are grounded entirely on speculations, surmises or conjectures; (4) the
judgment of the CA is based on misapprehension of facts; (5) the CA, in making its
findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (6) the findings of fact are conclusions
without citation of specific evidence on which they are based; (7) the CA manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion; and (8) the findings of fact of the CA
are premised on the absence of evidence and are contradicted by the evidence on
record.33
None of these instances, however, are present in this case. Moreover, it is
unmistakable that ATI has already conceded to the factual findings of RTC and CA
adjudging it liable for the shipment’s loss/damage considering the absence of
arguments pertaining to such issue in the petition at bar.
These notwithstanding, the Court scrutinized the records of the case and found that
indeed, ATI is liable as the arrastre operator for the lost/damaged portion of the
shipment.
The relationship between the consignee and the arrastre operator is akin to that
existing between the consignee and/or the owner of the shipped goods and the
common carrier, or that between a depositor and a warehouseman. Hence, in the
performance of its obligations, an arrastre operator should observe the same degree
of diligence as that required of a common carrier and a warehouseman. Being the
custodian of the goods discharged from a vessel, an arrastre operator’s duty is to
take good care of the goods and to turn them over to the party entitled to their
possession.34
In a claim for loss filed by the consignee (or the insurer), the burden of proof to show
compliance with the obligation to deliver the goods to the appropriate party devolves
upon the arrastre operator. Since the safekeeping of the goods is its responsibility, it
must prove that the losses were not due to its negligence or to that of its employees.
To avoid liability, the arrastre operator must prove that it exercised diligence and due
care in handling the shipment.35
ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to
COSCO on the basis of the Request for Bad Order Survey dated August 9, 1996
purportedly showing that when ATI received the shipment, one jumbo bag thereof
was already in damaged condition.
The RTC and CA were both correct in concluding that ATI’s contention was
improbable and illogical. As judiciously discerned by the courts a quo, the date of the
document was too distant from the date when the shipment was actually received by
ATI from COSCO on July 18, 1996. In fact, what the document established is that
when the loss/damage was discovered, the shipment has been in ATI’s custody for at
least two weeks. This circumstance, coupled with the undisputed declaration of
PROVEN’s witnesses that while the shipment was in ATI’s custody, it was left in an
open area exposed to the elements, thieves and vandals, 36 all generate the
conclusion that ATI failed to exercise due care and diligence while the subject
shipment was under its custody, control and possession as arrastre operator.
To prove the exercise of diligence in handling the subject cargoes, an arrastre
operator must do more than merely show the possibility that some other party could
be responsible for the loss or the damage.37 It must prove that it used all reasonable
means to handle and store the shipment with due care and diligence including
safeguarding it from weather elements, thieves or vandals.
Non-presentation of the insurance
contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.
It is conspicuous from the records that ATI put in issue the submission of the
insurance contract for the first time before the CA. Despite opportunity to study FIRST
LEPANTO’s complaint before the MeTC, ATI failed to allege in its answer the
necessity of the insurance contract. Neither was the same considered during pre-trial
as one of the decisive matters in the case. Further, ATI never challenged the
relevancy or materiality of the Certificate of Insurance presented by FIRST LEPANTO
as evidence during trial as proof of its right to be subrogated in the consignee’s stead.
Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO will
have to prove its subrogation rights by presenting a copy of the insurance contract,
ATI is barred from pleading the absence of such contract in its appeal. It is imperative
for the parties to disclose during pre-trial all issues they intend to raise during the trial
because, they are bound by the delimitation of such issues. The determination of
issues during the pre-trial conference bars the consideration of other questions,
whether during trial or on appeal.38
A faithful adherence to the rule by litigants is ensured by the equally settled principle
that a party cannot change his theory on appeal as such act violates the basic
rudiments of fair play and due process. As stressed in Jose v. Alfuerto: 39
[A] party cannot change his theory ofthe case or his cause of action on appeal. Points
of law, theories, issues and arguments not brought to the attention of the lower court
will not be considered by the reviewing court. The defenses not pleaded in the answer
cannot, on appeal, change fundamentally the nature of the issue in the case. To do
so would be unfair to the adverse party, who had no opportunity to present evidence
in connection with the new theory; this would offend the basic rules of due process
and fair play.40 (Citation omitted)
While the Court may adopt a liberal stance and relax the rule, no reasonable
explanation, however, was introduced to justify ATI’s failure to timely question the
basis of FIRST LEPANTO’s rights as a subrogee.
The fact that the CA took cognizance of and resolved the said issue did not cure or
ratify ATI’s faux pas. "[A] judgment that goes beyond the issues and purports to
adjudicate something on which the court did not hear the parties, is not only irregular
but also extrajudicial and invalid." 41 Thus, for resolving an issue not framed during the
pre-trial and on which the parties were not heard during the trial, that portion of the
CA’s judgment discussing the necessity of presenting an insurance contract was
erroneous.
At any rate, the non-presentation of the insurance contract is not fatal to FIRST
LEPANTO’s right to collect reimbursement as the subrogee of GASI.
"Subrogation is the substitution of one person in the place of another with reference to
a lawful claim or right, so that he who is substituted succeeds to the rights of the other
in relation to a debt or claim, including its remedies or securities." 42 The right of
subrogation springs from Article 2207 of the Civil Code which states:
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrong-doer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury.
As a general rule, the marine insurance policy needs to be presented in evidence
before the insurer may recover the insured value of the lost/damaged cargo in the
exercise of its subrogatory right. In Malayan Insurance Co., Inc. v.Regis Brokerage
Corp.,43 the Court stated that the presentation of the contract constitutive of the
insurance relationship between the consignee and insurer is critical because it is the
legal basis of the latter’s right to subrogation.44
In Home Insurance Corporation v. CA,45 the Court also held that the insurance
contract was necessary to prove that it covered the hauling portion of the shipment
and was not limited to the transport of the cargo while at sea. The shipment in that
case passed through six stages with different parties involved in each stage until it
reached the consignee. The insurance contract, which was not presented in
evidence, was necessary to determine the scope of the insurer’s liability, if any, since
no evidence was adduced indicating at what stage in the handling process the
damage to the cargo was sustained.46
An analogous disposition was arrived at in the Wallem 47 case cited by ATI wherein
the Court held that the insurance contract must be presented in evidence in order to
determine the extent of its coverage. It was further ruled therein that the liability of the
carrier from whom reimbursement was demanded was not established with certainty
because the alleged shortage incurred by the cargoes was not definitively
determined.48
Nevertheless, the rule is not inflexible. In certain instances, the Court has admitted
exceptions by declaring that a marine insurance policy is dispensable evidence in
reimbursement claims instituted by the insurer.
In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of subrogation
accrues simply upon payment by the insurance company of the insurance claim.
Hence, presentation in evidence of the marine insurance policy is not indispensable
before the insurer may recover from the common carrier the insured value of the lost
cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, was
held sufficient to establish not only the relationship between the insurer and
consignee, but also the amount paid to settle the insurance claim. The presentation of
the insurance contract was deemed not fatal to the insurer’s cause of action because
the loss of the cargo undoubtedly occurred while on board the petitioner’s vessel.50
The same rationale was the basis of the judgment in International Container Terminal
Services, Inc. v. FGU Insurance Corporation,51 wherein the arrastre operator was
found liable for the lost shipment despite the failure of the insurance company to offer
in evidence the insurance contract or policy. As in Delsan, it was certain that the loss
of the cargo occurred while in the petitioner’s custody. 52
Based on the attendant facts of the instant case, the application of the exception is
warranted.1âwphi1 As discussed above, it is already settled that the loss/damage to
the GASI’s shipment occurred while they were in ATI’s custody, possession and
control as arrastre operator. Verily, the Certificate of Insurance 53 and the Release of
Claim54presented as evidence sufficiently established FIRST LEPANTO’s right to
collect reimbursement as the subrogee of the consignee, GASI.
With ATI’s liability having been positively established, to strictly require the
presentation of the insurance contract will run counter to the principle of equity upon
which the doctrine of subrogation is premised. Subrogation is designed to promote
and to accomplish justice and is the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice, equity and good conscience ought to pay. 55
The payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies which the insured may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not dependent
upon, nor does it grow out of any privity of contract or upon payment by the insurance
company of the insurance claim. It accrues simply upon payment by the insurance
company of the insurance claim.56
ATI cannot invoke prescription
ATI argued that the consignee, thru its insurer, FIRST LEPANTO is barred from
seeking payment for the lost/damaged shipment because the claim letter of GASI to
ATI was served only on September 27, 1996 or more than one month from the date
the shipment was delivered to the consignee’s warehouse on August 9, 1996. The
claim of GASI was thus filed beyond the 15-day period stated in ATI’s Management
Contract with PPA which in turn was reproduced in the gate passes issued to the
consignee’s broker, PROVEN, as follows:
Issuance of this Gate Pass Constitutes delivery to and receipt by consignee of the
goods as described above in good order and condition unless an accompanying x x x
certificates duly issued and noted on the face of this Gate Pass appeals. [sic]
This Gate pass is subject to all terms and conditions defined in the Management
Contract between the Philippine Port[s] Authority and Asian Terminals, Inc. and
amendment thereto and alterations thereof particularly but not limited to the [A]rticle
VI thereof, limiting the contractor’s liability to [P]5,000.00 per package unless the
importation is otherwise specified or manifested or communicated in writing together
with the invoice value and supported by a certified packing list to the contractor by the
interested party or parties before the discharge of the goods and corresponding
arrastre charges have been paid providing exception or restrictions from liability
releasing the contractor from liability among others unless a formal claim with the
required annexes shall have been filed with the contractor within fifteen (15) days
from date of issuance by the contractors or certificate of loss, damages, injury, or
Certificate of non-delivery.57
The contention is bereft of merit. As clarified in Insurance Company of North America
v. Asian Terminals, Inc.,58substantial compliance with the 15-day time limitation is
allowed provided that the consignee has made a provisional claim thru a request for
bad order survey or examination report, viz:
Although the formal claim was filed beyond the 15-day period from the issuance of
the examination report on the request for bad order survey, the purpose of the time
limitations for the filing of claims had already been fully satisfied by the request of the
consignee’s broker for a bad order survey and by the examination report of the
arrastre operator on the result thereof, as the arrastre operator had become aware of
and had verified the facts giving rise to its liability. Hence, the arrastre operator
suffered no prejudice by the lack of strict compliance with the 15-day limitation to file
the formal complaint.59 (Citations omitted)
ATI cannot rely on the ruling in Prudentiat61 because the consignee therein made no
provisional claim thru request for bad order survey and instead filed a claim for the
first time after four months from receipt of the shipment.
Attorney's fees and interests
All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65, 772.40
representing the insurance indemnity paid by the latter to GASI. Pursuant to Nacar v.
Gallery Frames,62 the said amount shall earn a legal interest at the rate of six percent
(6%) per annum from the date of finality of this judgment until its full satisfaction.
As correctly imposed by the RTC and the CA, ten percent (10%) of the judgment
award is reasonable as and for attorney's fees considering the length of time that has
passed in prosecuting the claim.63
WHEREFORE, premises considered, the petition is hereby DENIED. The Decision
dated October 10, 2008 of the Court of Appeals in CA-G.R. SP No. 99021 is hereby
AFFIRMED insofar as it adjudged liable and ordered Asian Terminals, Inc., to pay
First Lepanto-Taisho Insurance Corp., the amount of ₱165,772.40, ten percent (10%)
thereof as and for attorney's fees, plus costs of suit. The said amount shall earn legal
interest at the rate of six percent ( 6%) per annum from the date of finality of this
judgment until its full satisfaction.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice
Chairperson

In the present case, ATI was notified of the loss/damage to the subject shipment as
early as August 9, 1996 thru a Request for Bad Order Survey60 jointly prepared by the
consignee’s broker, PROVEN, and the representatives of ATI. For having submitted a
provisional claim, GASI is thus deemed to have substantially complied with the notice
requirement to the arrastre operator notwithstanding that a formal claim was sent to
the latter only on September 27, 1996. ATI was not deprived the best opportunity to
probe immediately the veracity of such claims. Verily then, GASI, thru its subrogee
FIRST LEPANTO, is not barred by filing the herein action in court.