G.R. No. 154514.

July 28, 2005

WHITE GOLD MARINE SERVICES, INC., Petitioners,

vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.

DECISION

QUISUMBING, J.:

This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-
G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in
I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance
Code and the respondents do not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage
for its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited
(Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently,
White Gold was issued a Certificate of Entry and Acceptance.3 Pioneer also issued receipts
evidencing payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to
recover the latter’s unpaid balance. White Gold on the other hand, filed a complaint before the
Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the
Insurance Code, while Pioneer violated Sections 299,6 3007 and 3018 in relation to Sections 302
and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for
Steamship Mutual to secure a license because it was not engaged in the insurance business. It
explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise,
Pioneer need not obtain another license as insurance agent and/or a broker for Steamship
Mutual because Steamship Mutual was not engaged in the insurance business. Moreover,
Pioneer was already licensed, hence, a separate license solely as agent/broker of Steamship
Mutual was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
appellate court distinguished between P & I Clubs vis-à-vis conventional insurance. The
appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate
court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING
BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS
THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE
TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE
THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A
LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN
NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not
have a license to do business in the Philippines although Pioneer is its resident agent. This
relationship is reflected in the certifications issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To
buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v.
Court of Appeals10 as "an association composed of shipowners in general who band together for
the specific purpose of providing insurance cover on a mutual basis against liabilities incidental
to shipowning that the members incur in favor of third parties." It stresses that as a P & I Club,
Steamship Mutual’s primary purpose is to solicit and provide protection and indemnity
coverage and for this purpose, it has engaged the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have
come together to provide mutual protection against liabilities incidental to
shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business"
or "transacting an insurance business". These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions, or that no separate or direct consideration is
received therefor, shall not preclude the existence of an insurance business.12

The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light
of the occurrence, contingency, or circumstances under which the performance becomes
requisite. It is not by what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a

consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.14

In particular, a marine insurance undertakes to indemnify the assured against marine losses,
such as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code
enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are
both the insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and where
the profits are divided among themselves, in proportion to their interest.17 Additionally, mutual
insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.18
A P & I Club is "a form of insurance against third party liability, where the third party is anyone
other than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I
Club is a mutual insurance association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the
requisite certificate of authority mandated by Section 18720 of the Insurance Code. It maintains
a resident agent in the Philippines to solicit insurance and to collect payments in its behalf. We
note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-
payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its
agent Pioneer, must secure a license from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary. Thus,
no insurer or insurance company is allowed to engage in the insurance business without a
license or a certificate of authority from the Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of

registration22 issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of authority23 issued by the same agency.
However, a Certification from the Commission states that Pioneer does not have a separate
license to be an agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a separate license to act
as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation or

procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the
Philippines or any agent thereof, without first procuring a license so to act from the
Commissioner, which must be renewed annually on the first day of January, or within six
months thereafter. . .

Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its
directors and officers. Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court
of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby
REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and
Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper
authorizations to do business as insurer and insurance agent, respectively. The petitioner’s
prayer for the revocation of Pioneer’s Certificate of Authority and removal of its directors and
officers, is DENIED. Costs against respondents.

SO ORDERED.

G.R. No. 181132               June 5, 2009

HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN

MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents.

DECISION

NACHURA, J.:

This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set
aside the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No.
85948, dismissing petitioners’ appeal for lack of jurisdiction.

The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch
29, for revocation and/or reduction of insurance proceeds for being void and/or inofficious,
with prayer for a temporary restraining order (TRO) and a writ of preliminary injunction.

The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loreto’s illegitimate family; (2) Eva de Guzman
Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is
disqualified to receive any proceeds from his insurance policies from Insular Life Assurance
Company, Ltd. (Insular)4 and Great Pacific Life Assurance Corporation (Grepalife);5 (3) the
illegitimate children of Loreto—Odessa, Karl Brian, and Trisha Angelie—were entitled only to
one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa and
those to be released to Karl Brian and Trisha Angelie were inofficious and should be reduced;
and (4) petitioners could not be deprived of their legitimes, which should be satisfied first.

In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among
others, that part of the insurance proceeds had already been released in favor of Odessa, while
the rest of the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both
minors, upon the appointment of their legal guardian. Petitioners also prayed for the total
amount of ₱320,000.00 as actual litigation expenses and attorney’s fees.
In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa,
Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the
insurance proceeds of the insurance policies; that when it ascertained that Eva was not the
legal wife of Loreto, it disqualified her as a beneficiary and divided the proceeds among Odessa,
Karl Brian, and Trisha Angelie, as the remaining designated beneficiaries; and that it released
Odessa’s share as she was of age, but withheld the release of the shares of minors Karl Brian
and Trisha Angelie pending submission of letters of guardianship. Insular alleged that the
complaint or petition failed to state a cause of action insofar as it sought to declare as void the
designation of Eva as beneficiary, because Loreto revoked her designation as such in Policy No.
A001544070 and it disqualified her in Policy No. A001693029; and insofar as it sought to
declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie, considering that no
settlement of Loreto’s estate had been filed nor had the respective shares of the heirs been
determined. Insular further claimed that it was bound to honor the insurance policies
designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the
Insurance Code.

In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and
Trisha Angelie were denied because Loreto was ineligible for insurance due to a
misrepresentation in his application form that he was born on December 10, 1936 and, thus,
not more than 65 years old when he signed it in September 2001; that the case was premature,
there being no claim filed by the legitimate family of Loreto; and that the law on succession
does not apply where the designation of insurance beneficiaries is clear.

As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to
petitioners, summons by publication was resorted to. Still, the illegitimate family of Loreto
failed to file their answer. Hence, the trial court, upon motion of petitioners, declared them in
default in its Order dated May 7, 2004.

During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in
their respective answers be resolved first. The trial court ordered petitioners to comment
within 15 days.

In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely
legal – whether the complaint itself was proper or not – and that the designation of a
beneficiary is an act of liberality or a donation and, therefore, subject to the provisions of
Articles 7528 and 7729 of the Civil Code.

In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to
the designated beneficiaries in the policies, not to the estate or to the heirs of the insured.
Grepalife also reiterated that it had disqualified Eva as a beneficiary when it ascertained that
Loreto was legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which
reads –

WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and
Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The
action shall proceed with respect to the other defendants Eva Verna de Guzman, Insular Life
and Grepalife.

SO ORDERED.10

In so ruling, the trial court ratiocinated thus –

Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic)
special laws. Matters not expressly provided for in such special laws shall be regulated by this
Code. The principal law on insurance is the Insurance Code, as amended. Only in case of
deficiency in the Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life
Assurance Co., 41 Phil. 269.)

The Insurance Code, as amended, contains a provision regarding to whom the insurance
proceeds shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall
be applied exclusively to the proper interest of the person in whose name or for whose benefit
it is made, unless otherwise specified in the policy. Since the defendants are the ones named as
the primary beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C. Maramag
and there is no showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the beneficiary has a
vested right to the indemnity, unless the insured reserves the right to change the beneficiary.
(Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).

Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary
succession in order to defeat the right of herein defendants to collect the insurance indemnity.
The beneficiary in a contract of insurance is not the donee spoken in the law of donation. The
rules on testamentary succession cannot apply here, for the insurance indemnity does not
partake of a donation. As such, the insurance indemnity cannot be considered as an advance of
the inheritance which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of
Southern Luzon Employees’ Association v. Juanita Golpeo, et al., the Honorable Supreme Court
made the following pronouncements[:]

"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs
exclusively to the defendant as his individual and separate property, we agree that the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of
the person whose life was insured, and that such proceeds are the separate and individual
property of the beneficiary and not of the heirs of the person whose life was insured, is the
doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of
Section 428 of the Code of Commerce x x x."
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no
sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for
the reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in
the insurances (sic) of the late Loreto C. Maramag.

However, herein plaintiffs are not totally bereft of any cause of action. One of the named
beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine Eva
Verna De Guzman. Any person who is forbidden from receiving any donation under Article 739
cannot be named beneficiary of a life insurance policy of the person who cannot make any
donation to him, according to said article (Art. 2012, Civil Code). If a concubine is made the
beneficiary, it is believed that the insurance contract will still remain valid, but the indemnity
must go to the legal heirs and not to the concubine, for evidently, what is prohibited under Art.
2012 is the naming of the improper beneficiary. In such case, the action for the declaration of
nullity may be brought by the spouse of the donor or donee, and the guilt of the donor and
donee may be proved by preponderance of evidence in the same action (Comment of Edgardo
L. Paras, Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna
de Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late
Loreto C. Maramag is void under Art. 739 of the Civil Code, the insurance indemnity that should
be paid to her must go to the legal heirs of the deceased which this court may properly take
cognizance as the action for the declaration for the nullity of a void donation falls within the
general jurisdiction of this Court.11

Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main,
that the petition failed to state a cause of action. Insular further averred that the proceeds
were divided among the three children as the remaining named beneficiaries. Grepalife, for its
part, also alleged that the premiums paid had already been refunded.

Petitioners, in their comment, reiterated their earlier arguments and posited that whether the
complaint may be dismissed for failure to state a cause of action must be determined solely on
the basis of the allegations in the complaint, such that the defenses of Insular and Grepalife
would be better threshed out during trial.1avvphi1

On June 16, 2005, the trial court issued a Resolution, disposing, as follows:

WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by
defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case
against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the
case against them is hereby ordered DISMISSED.

SO ORDERED.14

In granting the motions for reconsideration of Insular and Grepalife, the trial court considered
the allegations of Insular that Loreto revoked the designation of Eva in one policy and that
Insular disqualified her as a beneficiary in the other policy such that the entire proceeds would
be paid to the illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance
Code. It ruled that it is only in cases where there are no beneficiaries designated, or when the
only designated beneficiary is disqualified, that the proceeds should be paid to the estate of the
insured. As to the claim that the proceeds to be paid to Loreto’s illegitimate children should be
reduced based on the rules on legitime, the trial court held that the distribution of the
insurance proceeds is governed primarily by the Insurance Code, and the provisions of the Civil
Code are irrelevant and inapplicable. With respect to the Grepalife policy, the trial court noted
that Eva was never designated as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie;
thus, it upheld the dismissal of the case as to the illegitimate children. It further held that the
matter of Loreto’s misrepresentation was premature; the appropriate action may be filed only
upon denial of the claim of the named beneficiaries for the insurance proceeds by Grepalife.

Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for
lack of jurisdiction, holding that the decision of the trial court dismissing the complaint for
failure to state a cause of action involved a pure question of law. The appellate court also noted
that petitioners did not file within the reglementary period a motion for reconsideration of the
trial court’s Resolution, dated September 21, 2004, dismissing the complaint as against Odessa,
Karl Brian, and Trisha Angelie; thus, the said Resolution had already attained finality.

Hence, this petition raising the following issues:

a. In determining the merits of a motion to dismiss for failure to state a cause of action,
may the Court consider matters which were not alleged in the Complaint, particularly
the defenses put up by the defendants in their Answer?

b. In granting a motion for reconsideration of a motion to dismiss for failure to state a

cause of action, did not the Regional Trial Court engage in the examination and
determination of what were the facts and their probative value, or the truth thereof,
when it premised the dismissal on allegations of the defendants in their answer – which
had not been proven?

c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
insurance for the concubine?15

In essence, petitioners posit that their petition before the trial court should not have been
dismissed for failure to state a cause of action because the finding that Eva was either
disqualified as a beneficiary by the insurance companies or that her designation was revoked by
Loreto, hypothetically admitted as true, was raised only in the answers and motions for
reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to
prosper on that ground, only the allegations in the complaint should be considered. They
further contend that, even assuming Insular disqualified Eva as a beneficiary, her share should
not have been distributed to her children with Loreto but, instead, awarded to them, being the
legitimate heirs of the insured deceased, in accordance with law and jurisprudence.
The petition should be denied.

The grant of the motion to dismiss was based on the trial court’s finding that the petition failed
to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which
reads –

SECTION 1. Grounds. – Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:

xxxx

(g) That the pleading asserting the claim states no cause of action.

A cause of action is the act or omission by which a party violates a right of another.16 A
complaint states a cause of action when it contains the three (3) elements of a cause of action
—(1) the legal right of the plaintiff; (2) the correlative obligation of the defendant; and (3) the
act or omission of the defendant in violation of the legal right. If any of these elements is
absent, the complaint becomes vulnerable to a motion to dismiss on the ground of failure to
state a cause of action.17

When a motion to dismiss is premised on this ground, the ruling thereon should be based only
on the facts alleged in the complaint. The court must resolve the issue on the strength of such
allegations, assuming them to be true. The test of sufficiency of a cause of action rests on
whether, hypothetically admitting the facts alleged in the complaint to be true, the court can
render a valid judgment upon the same, in accordance with the prayer in the complaint. This is
the general rule.

However, this rule is subject to well-recognized exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:

1. the falsity of the allegations is subject to judicial notice;

2. such allegations are legally impossible;

3. the allegations refer to facts which are inadmissible in evidence;

4. by the record or document in the pleading, the allegations appear unfounded; or

5. there is evidence which has been presented to the court by stipulation of the parties
or in the course of the hearings related to the case.18

In this case, it is clear from the petition filed before the trial court that, although petitioners are
the legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies
issued by Insular and Grepalife. The basis of petitioners’ claim is that Eva, being a concubine of
Loreto and a suspect in his murder, is disqualified from being designated as beneficiary of the
insurance policies, and that Eva’s children with Loreto, being illegitimate children, are entitled
to a lesser share of the proceeds of the policies. They also argued that pursuant to Section 12 of
the Insurance Code,19 Eva’s share in the proceeds should be forfeited in their favor, the former
having brought about the death of Loreto. Thus, they prayed that the share of Eva and portions
of the shares of Loreto’s illegitimate children should be awarded to them, being the legitimate
heirs of Loreto entitled to their respective legitimes.

It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that insurance
contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the
Insurance Code states—

SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless otherwise specified in the policy.

Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds
are either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon
the maturation of the policy.20 The exception to this rule is a situation where the insurance
contract was intended to benefit third persons who are not parties to the same in the form of
favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from
the insurer.21

Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are
not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no
legal obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a
beneficiary in one policy and her disqualification as such in another are of no moment
considering that the designation of the illegitimate children as beneficiaries in Loreto’s
insurance policies remains valid. Because no legal proscription exists in naming as beneficiaries
the children of illicit relationships by the insured,22 the shares of Eva in the insurance proceeds,
whether forfeited by the court in view of the prohibition on donations under Article 739 of the
Civil Code or by the insurers themselves for reasons based on the insurance contracts, must be
awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of
petitioners. It is only in cases where the insured has not designated any beneficiary,23 or when
the designated beneficiary is disqualified by law to receive the proceeds,24 that the insurance
policy proceeds shall redound to the benefit of the estate of the insured.

In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the
same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the
appellate court had no jurisdiction to take cognizance of the appeal; the issue of failure to state
a cause of action is a question of law and not of fact, there being no findings of fact in the first
place.25

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

G.R. No. 167622             November 7, 2008

GREGORIO V. TONGKO, petitioner
vs.
THE MANUFACTURERS LIFE INSURANCE CO. (PHILS.), INC. and RENATO A. VERGEL DE
DIOS, respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the March 29, 2005
Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 88253, entitled The Manufacturers Life
Insurance Co. (Phils.), Inc. v. National Labor Relations Commission and Gregorio V. Tongko. The
assailed decision set aside the Decision dated September 27, 2004 and Resolution dated
December 16, 2004 rendered by the National Labor Relations Commission (NLRC) in NLRC NCR
CA No. 040220-04.

The Facts

Manufacturers Life Insurance Co. (Phils.), Inc. (Manulife) is a domestic corporation engaged in
life insurance business. Renato A. Vergel De Dios was, during the period material, its President
and Chief Executive Officer. Gregorio V. Tongko started his professional relationship with
Manulife on July 1, 1977 by virtue of a Career Agent's Agreement2 (Agreement) he executed
with Manulife.

In the Agreement, it is provided that:

It is understood and agreed that the Agent is an independent contractor and nothing
contained herein shall be construed or interpreted as creating an employer-employee
relationship between the Company and the Agent.

xxxx

a) The Agent shall canvass for applications for Life Insurance, Annuities, Group policies
and other products offered by the Company, and collect, in exchange for provisional
receipts issued by the Agent, money due or to become due to the Company in respect of
applications or policies obtained by or through the Agent or from policyholders allotted
 by the Company to the Agent for servicing, subject to subsequent confirmation of
receipt of payment by the Company as evidenced by an Official Receipt issued by the
Company directly to the policyholder.

xxxx

The Company may terminate this Agreement for any breach or violation of any of the
provisions hereof by the Agent by giving written notice to the Agent within fifteen (15)
days from the time of the discovery of the breach. No waiver, extinguishment,
abandonment, withdrawal or cancellation of the right to terminate this Agreement by
the Company shall be construed for any previous failure to exercise its right under any
provision of this Agreement.

Either of the parties hereto may likewise terminate his Agreement at any time without
cause, by giving to the other party fifteen (15) days notice in writing. x x x

In 1983, Tongko was named as a Unit Manager in Manulife's Sales Agency Organization. In
1990, he became a Branch Manager. As the CA found, Tongko's gross earnings from his work at
Manulife, consisting of commissions, persistency income, and management overrides, may be
summarized as follows:

January to December 10, 2002 - P 865,096.07

2001 - 6,214,737.11

2000 - 8,003,180.38

1999 - 6,797,814.05

1998 - 4,805,166.34

1997 - 2,822,620.003

The problem started sometime in 2001, when Manulife instituted manpower development
programs in the regional sales management level. Relative thereto, De Dios addressed a letter
dated November 6, 20014 to Tongko regarding an October 18, 2001 Metro North Sales
Managers Meeting. In the letter, De Dios stated:

The first step to transforming Manulife into a big league player has been very clear - to
increase the number of agents to at least 1,000 strong for a start. This may seem
diametrically opposed to the way Manulife was run when you first joined the
organization. Since then, however, substantial changes have taken place in the
organization, as these have been influenced by developments both from within and
without the company.
xxxx

The issues around agent recruiting are central to the intended objectives hence the
need for a Senior Managers' meeting earlier last month when Kevin O'Connor, SVP -
Agency, took to the floor to determine from our senior agency leaders what more could
be done to bolster manpower development. At earlier meetings, Kevin had presented
information where evidently, your Region was the lowest performer (on a per Manager
basis) in terms of recruiting in 2000 and, as of today, continues to remain one of the
laggards in this area.

While discussions, in general, were positive other than for certain comments from your
end which were perceived to be uncalled for, it became clear that a one-on-one meeting
with you was necessary to ensure that you and management, were on the same plane.
As gleaned from some of your previous comments in prior meetings (both in group and
one-on-one), it was not clear that we were proceeding in the same direction.

Kevin held subsequent series of meetings with you as a result, one of which I joined
briefly. In those subsequent meetings you reiterated certain views, the validity of which
we challenged and subsequently found as having no basis.

With such views coming from you, I was a bit concerned that the rest of the Metro
North Managers may be a bit confused as to the directions the company was taking. For
this reason, I sought a meeting with everyone in your management team, including you,
to clear the air, so to speak.

This note is intended to confirm the items that were discussed at the said Metro North
Region's Sales Managers meeting held at the 7/F Conference room last 18 October.

xxxx

Issue # 2: "Some Managers are unhappy with their earnings and would want to revert to
the position of agents."

This is an often repeated issue you have raised with me and with Kevin. For this reason, I
placed the issue on the table before the rest of your Region's Sales Managers to verify
its validity. As you must have noted, no Sales Manager came forward on their own to
confirm your statement and it took you to name Malou Samson as a source of the same,
an allegation that Malou herself denied at our meeting and in your very presence.

This only confirms, Greg, that those prior comments have no solid basis at all. I now
believe what I had thought all along, that these allegations were simply meant to
muddle the issues surrounding the inability of your Region to meet its agency
development objectives!
Issue # 3: "Sales Managers are doing what the company asks them to do but, in the
process, they earn less."

xxxx

All the above notwithstanding, we had your own records checked and we found that
you made a lot more money in the Year 2000 versus 1999. In addition, you also
volunteered the information to Kevin when you said that you probably will make more
money in the Year 2001 compared to Year 2000. Obviously, your above statement about
making "less money" did not refer to you but the way you argued this point had us
almost believing that you were spouting the gospel of truth when you were not. x x x

xxxx

All of a sudden, Greg, I have become much more worried about your ability to lead this
group towards the new direction that we have been discussing these past few weeks,
i.e., Manulife's goal to become a major agency-led distribution company in the
Philippines. While as you claim, you have not stopped anyone from recruiting, I have
never heard you proactively push for greater agency recruiting. You have not been
proactive all these years when it comes to agency growth.

xxxx

I cannot afford to see a major region fail to deliver on its developmental goals next year
and so, we are making the following changes in the interim:

1. You will hire at your expense a competent assistant who can unload you of
much of the routine tasks which can be easily delegated. This assistant should be
so chosen as to complement your skills and help you in the areas where you feel
"may not be your cup of tea".

You have stated, if not implied, that your work as Regional Manager may be too
taxing for you and for your health. The above could solve this problem.

xxxx

2. Effective immediately, Kevin and the rest of the Agency Operations will deal
with the North Star Branch (NSB) in autonomous fashion. x x x

I have decided to make this change so as to reduce your span of control and
allow you to concentrate more fully on overseeing the remaining groups under
Metro North, your Central Unit and the rest of the Sales Managers in Metro
North. I will hold you solely responsible for meeting the objectives of these
remaining groups.
 xxxx

The above changes can end at this point and they need not go any further. This,
however, is entirely dependent upon you. But you have to understand that meeting
corporate objectives by everyone is primary and will not be compromised. We are
meeting tough challenges next year and I would want everybody on board. Any
resistance or holding back by anyone will be dealt with accordingly.

Subsequently, De Dios wrote Tongko another letter dated December 18, 2001,5 terminating
Tongko's services, thus:

It would appear, however, that despite the series of meetings and communications,
both one-on-one meetings between yourself and SVP Kevin O'Connor, some of them
with me, as well as group meetings with your Sales Managers, all these efforts have
failed in helping you align your directions with Management's avowed agency growth
policy.

xxxx

On account thereof, Management is exercising its prerogative under Section 14 of your

Agents Contract as we are now issuing this notice of termination of your Agency
Agreement with us effective fifteen days from the date of this letter.

Therefrom, Tongko filed a Complaint dated November 25, 2002 with the NLRC against Manulife
for illegal dismissal. The case, docketed as NLRC NCR Case No. 11-10330-02, was raffled to
Labor Arbiter Marita V. Padolina.

In the Complaint, Tongko, in a bid to establish an employer-employee relationship, alleged that

De Dios gave him specific directives on how to manage his area of responsibility in the latter's
letter dated November 6, 2001. He further claimed that Manulife exercised control over him as
follows:

Such control was certainly exercised by respondents over the herein complainant. It was
Manulife who hired, promoted and gave various assignments to him. It was the
company who set objectives as regards productions, recruitment, training programs and
all activities pertaining to its business. Manulife prescribed a Code of Conduct which
would govern in minute detail all aspects of the work to be undertaken by employees,
including the sales process, the underwriting process, signatures, handling of money,
policyholder service, confidentiality, legal and regulatory requirements and grounds for
termination of employment. The letter of Mr. De Dios dated 06 November 2001 left no
doubt as to who was in control. The subsequent termination letter dated 18 December
2001 again established in no uncertain terms the authority of the herein respondents to
control the employees of Manulife. Plainly, the respondents wielded control not only as
to the ends to be achieved but the ways and means of attaining such ends.6
Tongko bolstered his argument by citing Insular Life Assurance Co., Ltd. v. NLRC
(4th Division)7 and Great Pacific Life Assurance Corporation v. NLRC,8 which Tongko claimed to
be similar to the instant case.

Tongko further claimed that his dismissal was without basis and that he was not afforded due
process. He also cited the Manulife Code of Conduct by which his actions were controlled by
the company.

Manulife then filed a Position Paper with Motion to Dismiss dated February 27, 2003,9 in which
it alleged that Tongko is not its employee, and that it did not exercise "control" over him. Thus,
Manulife claimed that the NLRC has no jurisdiction over the case.

In a Decision dated April 15, 2004, Labor Arbiter Marita V. Padolina dismissed the complaint for
lack of an employer-employee relationship. Padolina found that applying the four-fold test in
determining the existence of an employer-employee relationship, none was found in the
instant case. The dispositive portion thereof states:

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the

instant complaint for lack of jurisdiction, there being no employer-employee
relationship between the parties.

SO ORDERED.

Tongko appealed the arbiter's Decision to the NLRC which reversed the same and rendered a
Decision dated September 27, 2004 finding Tongko to have been illegally dismissed.

The NLRC's First Division, while finding an employer-employee relationship between Manulife
and Tongko applying the four-fold test, held Manulife liable for illegal dismissal. It further
stated that Manulife exercised control over Tongko as evidenced by the letter dated November
6, 2001 of De Dios and wrote:

The above-mentioned letter shows the extent to which respondents controlled

complainant's manner and means of doing his work and achieving the goals set by
respondents. The letter shows how respondents concerned themselves with the manner
complainant managed the Metro North Region as Regional Sales Manager, to the point
that respondents even had a say on how complainant interacted with other individuals
in the Metro North Region. The letter is in fact replete with comments and criticisms on
how complainant carried out his functions as Regional Sales Manager.

More importantly, the letter contains an abundance of directives or orders that are
intended to directly affect complainant's authority and manner of carrying out his
functions as Regional Sales Manager.10 x x x

Additionally, the First Division also ruled that:

 Further evidence of [respondents'] control over complainant can be found in the
records of the case. [These] are the different codes of conduct such as the Agent Code
of Conduct, the Manulife Financial Code of Conduct, and the Manulife Financial Code of
Conduct Agreement, which serve as the foundations of the power of control wielded by
respondents over complainant that is further manifested in the different administrative
and other tasks that he is required to perform. These codes of conduct corroborate and
reinforce the display of respondents' power of control in their 06 November 2001 Letter
to complainant.11

The fallo of the September 27, 2004 Decision reads:

WHEREFORE, premises considered, the appealed Decision is hereby reversed and set
aside. We find complainant to be a regular employee of respondent Manulife and that
he was illegally dismissed from employment by respondents.

In lieu of reinstatement, respondent Manulife is hereby ordered to pay complainant

separation pay as above set forth. Respondent Manulife is further ordered to pay
complainant backwages from the time he was dismissed on 02 January 2002 up to the
finality of this decision also as indicated above.

xxxx

All other claims are hereby dismissed for utter lack of merit.

From this Decision, Manulife filed a motion for reconsideration which was denied by the NLRC
First Division in a Resolution dated December 16, 2004.12

Thus, Manulife filed an appeal with the CA docketed as CA-G.R. SP No. 88253. Thereafter, the
CA issued the assailed Decision dated March 29, 2005, finding the absence of an employer-
employee relationship between the parties and deeming the NLRC with no jurisdiction over the
case. The CA arrived at this conclusion while again applying the four-fold test. The CA found
that Manulife did not exercise control over Tongko that would render the latter an employee of
Manulife. The dispositive portion reads:

WHEREFORE, premises considered, the present petition is hereby GRANTED and the writ
prayed for accordingly GRANTED. The assailed Decision dated September 27, 2004 and
Resolution dated December 16, 2004 of the National Labor Relations Commission in
NLRC NCR Case No. 00-11-10330-2002 (NLRC NCR CA No. 040220-04) are hereby
ANNULLED and SET ASIDE. The Decision dated April 15, 2004 of Labor Arbiter Marita V.
Padolina is hereby REINSTATED.

Hence, Tongko filed this petition and presented the following issues:

A
 The Court of Appeals committed grave abuse of discretion in granting respondents'
petition for certiorari.

The Court of Appeals committed grave abuse of discretion in annulling and setting aside
the Decision dated September 27, 2004 and Resolution dated December 16, 2004 in
finding that there is no employer-employee relationship between petitioner and
respondent.

The Court of Appeals committed grave abuse of discretion in annulling and setting aside
the Decision dated September 27, 2004 and Resolution dated December 16, 2004 which
found petitioner to have been illegally dismissed and ordered his reinstatement with
payment of backwages.13

Restated, the issues are: (1) Was there an employer-employee relationship between Manulife
and Tongko? and (2) If yes, was Manulife guilty of illegal dismissal?

The Court's Ruling

This petition is meritorious.

Tongko Was An Employee of Manulife

The basic issue of whether or not the NLRC has jurisdiction over the case resolves itself into the
question of whether an employer-employee relationship existed between Manulife and
Tongko. If no employer-employee relationship existed between the two parties, then
jurisdiction over the case properly lies with the Regional Trial Court.

In the determination of whether an employer-employee relationship exists between two

parties, this Court applies the four-fold test to determine the existence of the elements of such
relationship. In Pacific Consultants International Asia, Inc. v. Schonfeld, the Court set out the
elements of an employer-employee relationship, thus:

Jurisprudence is firmly settled that whenever the existence of an employment

relationship is in dispute, four elements constitute the reliable yardstick: (a) the
selection and engagement of the employee; (b) the payment of wages; (c) the power of
dismissal; and (d) the employer's power to control the employee's conduct. It is the so-
called "control test" which constitutes the most important index of the existence of the
employer-employee relationship that is, whether the employer controls or has reserved
the right to control the employee not only as to the result of the work to be done but
also as to the means and methods by which the same is to be accomplished. Stated
 otherwise, an employer-employee relationship exists where the person for whom the
services are performed reserves the right to control not only the end to be achieved but
also the means to be used in reaching such end.14

The NLRC, for its part, applied the four-fold test and found the existence of all the elements and
declared Tongko an employee of Manulife. The CA, on the other hand, found that the element
of control as an indicator of the existence of an employer-employee relationship was lacking in
this case. The NLRC and the CA based their rulings on the same findings of fact but differed in
their interpretations.

The NLRC arrived at its conclusion, first, on the basis of the letter dated November 6, 2001
addressed by De Dios to Tongko. According to the NLRC, the letter contained "an abundance of
directives or orders that are intended to directly affect complainant's authority and manner of
carrying out his functions as Regional Sales Manager." It enumerated these "directives" or
"orders" as follows:

1. You will hire at your expense a competent assistant who can unload you of much of
the routine tasks which can be easily delegated. x x x

xxxx

This assistant should be hired immediately.

2. Effective immediately, Kevin and the rest of the Agency Operations will deal with the
North Star Branch (NSB) in autonomous fashion x x x.

xxxx

I have decided to make this change so as to reduce your span of control and allow you
to concentrate more fully on overseeing the remaining groups under Metro North, your
Central Unit and the rest of the Sales Managers in Metro North. x x x

3. Any resistance or holding back by anyone will be dealt with accordingly.

4. I have been straightforward in this my letter and I know that we can continue to work
together… but it will have to be on my terms. Anything else is unacceptable!

The NLRC further ruled that the different codes of conduct that were applicable to Tongko
served as the foundations of the power of control wielded by Manulife over Tongko that is
further manifested in the different administrative and other tasks that he was required to
perform.

The NLRC also found that Tongko was required to render exclusive service to Manulife, further
bolstering the existence of an employer-employee relationship.
Finally, the NLRC ruled that Tongko was integrated into a management structure over which
Manulife exercised control, including the actions of its officers. The NLRC held that such
integration added to the fact that Tongko did not have his own agency belied Manulife's claim
that Tongko was an independent contractor.

The CA, however, considered the finding of the existence of an employer-employee relationship
by the NLRC as far too sweeping having as its only basis the letter dated November 6, 2001 of
De Dios. The CA did not concur with the NLRC's ruling that the elements of control as pointed
out by the NLRC are "sufficient indicia of control that negates independent contractorship and
conclusively establish an employer-employee relationship between"15 Tongko and Manulife.
The CA ruled that there is no employer-employee relationship between Tongko and Manulife.

An impasse appears to have been reached between the CA and the NLRC on the sole issue of
control over an employee's conduct. It bears clarifying that such control not only applies to the
work or goal to be done but also to the means and methods to accomplish it.16 In Sonza v. ABS-
CBN Broadcasting Corporation, we explained that not all forms of control would establish an
employer-employee relationship, to wit:

Further, not every form of control that a party reserves to himself over the conduct of
the other party in relation to the services being rendered may be accorded the effect of
establishing an employer-employee relationship. The facts of this case fall squarely with
the case of Insular Life Assurance Co., Ltd. vs. NLRC. In said case, we held that:

Logically, the line should be drawn between rules that merely serve as
guidelines towards the achievement of the mutually desired result without
dictating the means or methods to be employed in attaining it, and those that
control or fix the methodology and bind or restrict the party hired to the use of
such means. The first, which aim only to promote the result, create no
employer-employee relationship unlike the second, which address both the
result and the means used to achieve it.17 (Emphasis supplied.)

We ruled in Insular Life Assurance Co., Ltd. v. NLRC (Insular) that:

It is, therefore, usual and expected for an insurance company to promulgate a set of
rules to guide its commission agents in selling its policies that they may not run afoul of
the law and what it requires or prohibits. Of such a character are the rules which
prescribe the qualifications of persons who may be insured, subject insurance
applications to processing and approval by the Company, and also reserve to the
Company the determination of the premiums to be paid and the schedules of payment.
None of these really invades the agent's contractual prerogative to adopt his own selling
methods or to sell insurance at his own time and convenience, hence cannot justifiably
be said to establish an employer-employee relationship between him and the
company.18
Hence, we ruled in Insular that no employer-employee relationship existed therein. However,
such ruling was tempered with the qualification that had there been evidence that the
company promulgated rules or regulations that effectively controlled or restricted an insurance
agent's choice of methods or the methods themselves in selling insurance, an employer-
employee relationship would have existed. In other words, the Court in Insular in no way
definitively held that insurance agents are not employees of insurance companies, but rather
made the same a case-to-case basis. We held:

The respondents limit themselves to pointing out that Basiao's contract with the
Company bound him to observe and conform to such rules and regulations as the latter
might from time to time prescribe. No showing has been made that any such rules or
regulations were in fact promulgated, much less that any rules existed or were issued
which effectively controlled or restricted his choice of methods or the methods
themselves of selling insurance. Absent such showing, the Court will not speculate
that any exceptions or qualifications were imposed on the express provision of the
contract leaving Basiao "... free to exercise his own judgment as to the time, place and
means of soliciting insurance."19 (Emphasis supplied.)

There is no conflict between our rulings in Insular and in Great Pacific Life Assurance
Corporation. We said in the latter case:

[I]t cannot be gain said that Grepalife had control over private respondents'
performance as well as the result of their efforts. A cursory reading of their respective
functions as enumerated in their contracts reveals that the company practically
dictates the manner by which their jobs are to be carried out. For instance, the District
Manager must properly account, record and document the company's funds spot-check
and audit the work of the zone supervisors, conserve the company's business in the
district through ‘reinstatements', follow up the submission of weekly remittance reports
of the debit agents and zone supervisors, preserve company property in good condition,
train understudies for the position of district manager, and maintain his quota of sales
(the failure of which is a ground for termination). On the other hand, a zone supervisor
must direct and supervise the sales activities of the debit agents under him, conserve
company property through "reinstatements", undertake and discharge the functions of
absentee debit agents, spot-check the records of debit agents, and insure proper
documentation of sales and collections by the debit agents.20 (Emphasis supplied.)

Based on the foregoing cases, if the specific rules and regulations that are enforced against
insurance agents or managers are such that would directly affect the means and methods by
which such agents or managers would achieve the objectives set by the insurance company,
they are employees of the insurance company.

In the instant case, Manulife had the power of control over Tongko that would make him its
employee. Several factors contribute to this conclusion.
In the Agreement dated July 1, 1977 executed between Tongko and Manulife, it is provided
that:

The Agent hereby agrees to comply with all regulations and requirements of the
Company as herein provided as well as maintain a standard of knowledge and
competency in the sale of the Company's products which satisfies those set by the
Company and sufficiently meets the volume of new business required of Production
Club membership.21

Under this provision, an agent of Manulife must comply with three (3) requirements: (1)
compliance with the regulations and requirements of the company; (2) maintenance of a level
of knowledge of the company's products that is satisfactory to the company; and (3)
compliance with a quota of new businesses.

Among the company regulations of Manulife are the different codes of conduct such as the
Agent Code of Conduct, Manulife Financial Code of Conduct, and Manulife Financial Code of
Conduct Agreement, which demonstrate the power of control exercised by the company over
Tongko. The fact that Tongko was obliged to obey and comply with the codes of conduct was
not disowned by respondents.

Thus, with the company regulations and requirements alone, the fact that Tongko was an
employee of Manulife may already be established. Certainly, these requirements controlled the
means and methods by which Tongko was to achieve the company's goals.

More importantly, Manulife's evidence establishes the fact that Tongko was tasked to perform
administrative duties that establishes his employment with Manulife.

In its Comment (Re: Petition for Review dated 15 April 2005) dated August 5, 2005, Manulife
attached affidavits of its agents purportedly to support its claim that Tongko, as a Regional Sales
Manager, did not perform any administrative functions. An examination of these affidavits
would, however, prove the opposite.

In an Affidavit dated April 28, 2003,22 John D. Chua, a Regional Sales Manager of Manulife,
stated:

4. On September 1, 1996, my services were engaged by Manulife as an Agency Regional

Sales Manager ("RSM") for Metro South Region pursuant to an Agency Contract. As such
RSM, I have the following functions:

1. Refer and recommend prospective agents to Manulife

2. Coach agents to become productive

 3. Regularly meet with, and coordinate activities of agents affiliated to my
region.

While Amada Toledo, a Branch Manager of Manulife, stated in her Affidavit dated April 29,
200323 that:

3. In January 1997, I was assigned as a Branch Manager ("BM") of Manulife for the
Metro North Sector;

4. As such BM, I render the following services:

a. Refer and recommend prospective agents to Manulife;

b. Train and coordinate activities of other commission agents;

c. Coordinate activities of Agency Managers who, in turn, train and coordinate

activites of other commission agents;

d. Achieve agreed production objectives in terms of Net Annualized Commissions

and Case Count and recruitment goals; and

e. Sell the various products of Manulife to my personal clients.

While Ma. Lourdes Samson, a Unit Manager of Manulife, stated in her Affidavit dated April 28,
200324 that:

3. In 1977, I was assigned as a Unit Manager ("UM") of North Peaks Unit, North Star
Branch, Metro North Region;

4. As such UM, I render the following services:

a. To render or recommend prospective agents to be licensed, trained and

contracted to sell Manulife products and who will be part of my Unit;

b. To coordinate activities of the agents under my Unit in their daily, weekly and
monthly selling activities, making sure that their respective sales targets are met;

c. To conduct periodic training sessions for my agents to further enhance their

sales skills.

d. To assist my agents with their sales activities by way of joint fieldwork,

consultations and one-on- one evaluation and analysis of particular accounts.
 e. To provide opportunities to motivate my agents to succeed like conducting
promos to increase sales activities and encouraging them to be involved in
company and industry activities.

f. To provide opportunities for professional growth to my agents by encouraging

them to be a member of the LUCAP (Life Underwriters Association of the
Philippines).

A comparison of the above functions and those contained in the Agreement with those cited
in Great Pacific Life Assurance Corporation25 reveals a striking similarity that would more than
support a similar finding as in that case. Thus, there was an employer-employee relationship
between the parties.

Additionally, it must be pointed out that the fact that Tongko was tasked with recruiting a
certain number of agents, in addition to his other administrative functions, leads to no other
conclusion that he was an employee of Manulife.

In his letter dated November 6, 2001, De Dios harped on the direction of Manulife of becoming
a major agency-led distribution company whereby greater agency recruitment is required of
the managers, including Tongko. De Dios made it clear that agent recruitment has become the
primary means by which Manulife intends to sell more policies. More importantly, it is Tongko's
alleged failure to follow this principle of recruitment that led to the termination of his
employment with Manulife. With this, it is inescapable that Tongko was an employee of
Manulife.

Tongko Was Illegally Dismissed

In its Petition for Certiorari dated January 7, 200526 filed before the CA, Manulife argued that
even if Tongko is considered as its employee, his employment was validly terminated on the
ground of gross and habitual neglect of duties, inefficiency, as well as willful disobedience of
the lawful orders of Manulife. Manulife stated:

In the instant case, private respondent, despite the written reminder from Mr. De Dios
refused to shape up and altogether disregarded the latter's advice resulting in his
laggard performance clearly indicative of his willful disobedience of the lawful orders of
his superior. x x x

xxxx

As private respondent has patently failed to perform a very fundamental duty, and that
is to yield obedience to all reasonable rules, orders and instructions of the Company, as
well as gross failure to reach at least minimum quota, the termination of his
engagement from Manulife is highly warranted and therefore, there is no illegal
dismissal to speak of.
It is readily evident from the above-quoted portions of Manulife's petition that it failed to cite a
single iota of evidence to support its claims. Manulife did not even point out which order or rule
that Tongko disobeyed. More importantly, Manulife did not point out the specific acts that
Tongko was guilty of that would constitute gross and habitual neglect of duty or disobedience.
Manulife merely cited Tongko's alleged "laggard performance," without substantiating such
claim, and equated the same to disobedience and neglect of duty.

We cannot, therefore, accept Manulife's position.

In Quebec, Sr. v. National Labor Relations Commission, we ruled that:

When there is no showing of a clear, valid and legal cause for the termination of
employment, the law considers the matter a case of illegal dismissal and the burden is
on the employer to prove that the termination was for a valid or authorized cause. This
burden of proof appropriately lies on the shoulders of the employer and not on the
employee because a worker's job has some of the characteristics of property rights and
is therefore within the constitutional mantle of protection. No person shall be deprived
of life, liberty or property without due process of law, nor shall any person be denied
the equal protection of the laws.

Apropos thereto, Art. 277, par. (b), of the Labor Code mandates in explicit terms that
the burden of proving the validity of the termination of employment rests on the
employer. Failure to discharge this evidential burden would necessarily mean that the
dismissal was not justified, and, therefore, illegal.27

We again ruled in Times Transportation Co., Inc. v. National Labor Relations Commission that:

The law mandates that the burden of proving the validity of the termination of
employment rests with the employer. Failure to discharge this evidentiary burden would
necessarily mean that the dismissal was not justified, and, therefore, illegal.
Unsubstantiated suspicions, accusations and conclusions of employers do not provide
for legal justification for dismissing employees. In case of doubt, such cases should be
resolved in favor of labor, pursuant to the social justice policy of our labor laws and
Constitution.28

This burden of proof was clarified in Community Rural Bank of San Isidro (N.E.), Inc. v. Paez to
mean substantial evidence, to wit:

The Labor Code provides that an employer may terminate the services of an employee
for just cause and this must be supported by substantial evidence. The settled rule in
administrative and quasi-judicial proceedings is that proof beyond reasonable doubt is
not required in determining the legality of an employer's dismissal of an employee, and
not even a preponderance of evidence is necessary as substantial evidence is considered
sufficient. Substantial evidence is more than a mere scintilla of evidence or relevant
 evidence as a reasonable mind might accept as adequate to support a conclusion, even
if other minds, equally reasonable, might conceivably opine otherwise.29

Here, Manulife failed to overcome such burden of proof. It must be reiterated that Manulife
even failed to identify the specific acts by which Tongko's employment was terminated much
less support the same with substantial evidence. To repeat, mere conjectures cannot work to
deprive employees of their means of livelihood. Thus, it must be concluded that Tongko was
illegally dismissed.

Moreover, as to Manulife's failure to comply with the twin notice rule, it reasons that Tongko
not being its employee is not entitled to such notices. Since we have ruled that Tongko is its
employee, however, Manulife clearly failed to afford Tongko said notices. Thus, on this ground
too, Manulife is guilty of illegal dismissal. In Quebec, Sr., we also stated:

Furthermore, not only does our legal system dictate that the reasons for dismissing a
worker must be pertinently substantiated, it also mandates that the manner of dismissal
must be properly done, otherwise, the termination itself is gravely defective and may be
declared unlawful.30

For breach of the due process requirements, Manulife is liable to Tongko in the amount of PhP
30,000 as indemnity in the form of nominal damages.31

Finally, Manulife raises the issue of the correctness of the computation of the award to Tongko
made by the NLRC by claiming that Songco v. National Labor Relations Commission32 is
inapplicable to the instant case, considering that Songco was dismissed on the ground of
retrenchment.

An examination of Songco reveals that it may be applied to the present case. In that case, Jose
Songco was a salesman of F.E. Zuellig (M), Inc. which terminated the services of Songco on the
ground of retrenchment due to financial losses. The issue raised to the Court, however, was
whether commissions are considered as part of wages in order to determine separation pay.
Thus, the fact that Songco was dismissed due to retrenchment does not hamper the application
thereof to the instant case. What is pivotal is that we ruled in Songco that commissions are part
of wages for the determination of separation pay.

Article 279 of the Labor Code on security of tenure pertinently provides that:

In cases of regular employment the employer shall not terminate the services of an
employee except for a just cause or when authorized by this Title. An employee who is
unjustly dismissed from work shall be entitled to reinstatement without loss of seniority
rights and other privileges and to his full backwages, inclusive of allowances, and to his
other benefits or their monetary equivalent computed from the time his compensation
was withheld from him up to the time of his actual reinstatement.
In Triad Security & Allied Services, Inc. v. Ortega, Jr. (Triad), we thus stated that an illegally
dismissed employee shall be entitled to backwages and separation pay, if reinstatement is no
longer viable:

As the law now stands, an illegally dismissed employee is entitled to two reliefs, namely:
backwages and reinstatement. These are separate and distinct from each other.
However, separation pay is granted where reinstatement is no longer feasible because
of strained relations between the employee and the employer. In effect, an illegally
dismissed employee is entitled to either reinstatement, if viable, or separation pay if
reinstatement is no longer viable and backwages.33

Taking into consideration the cases of Songco and Triad, we find correct the computation of the
NLRC that the monthly gross wage of Tongko in 2001 was PhP 518,144.76. For having been
illegally dismissed, Tongko is entitled to reinstatement with full backwages under Art. 279 of
the Labor Code. Due to the strained relationship between Manulife and Tongko, reinstatement,
however, is no longer advisable. Thus, Tongko will be entitled to backwages from January 2,
2002 (date of dismissal) up to the finality of this decision. Moreover, Manulife will pay Tongko
separation pay of one (1) month salary for every year of service that is from 1977 to 2001
amounting to PhP 12,435,474.24, considering that reinstatement is not feasible. Tongko shall
also be entitled to an award of attorney's fees in the amount of ten percent (10%) of the
aggregate amount of the above awards.

WHEREFORE, the petition is hereby GRANTED. The assailed March 29, 2005 Decision of the CA
in CA-G.R. SP No. 88253 is REVERSED and SET ASIDE. The Decision dated September 27, 2004 of
the NLRC is REINSTATED with the following modifications:

Manulife shall pay Tongko the following:

(1) Full backwages, inclusive of allowances and other benefits or their monetary
equivalent from January 2, 2002 up to the finality of this Decision;

(2) Separation pay of one (1) month salary for every year of service from 1977 up to
2001 amounting to PhP 12,435,474.24;

(3) Nominal damages of PhP 30,000 as indemnity for violation of the due process
requirements; and

(4) Attorney's fees equivalent to ten percent (10%) of the aforementioned backwages
and separation pay.

Costs against respondent Manulife.

SO ORDERED.
G.R. No. 147839             June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of
the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August
31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and
upheld the causes of action for damages of Insurance Company of North America (respondent)
against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which
denied petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss
& Co.. IMC and LSPI separately obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts in connection with
ready-made clothing materials which have been sold or delivered to various customers and
dealers of the Insured anywhere in the Philippines."2 The policies defined book debts as the
"unpaid account still appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of
the merchandise sold and delivered by the Insured which are outstanding at the date of
loss for a period in excess of six (6) months from the date of the covering invoice or
actual delivery of the merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after
the close of every calendar month all amount shown in their books of accounts as
unpaid and thus become receivable item from their customers and dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by
fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing
materials sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges
that IMC and LSPI filed with respondent their claims under their respective fire insurance
policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with IMC
was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC
and LSPI and, by virtue thereof, respondent was subrogated to their rights against petitioner;
that respondent made several demands for payment upon petitioner but these went
unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be
held liable because the property covered by the insurance policies were destroyed due to
fortuities event or force majeure; that respondent's right of subrogation has no basis inasmuch
as there was no breach of contract committed by it since the loss was due to fire which it could
not prevent or foresee; that IMC and LSPI never communicated to it that they insured their
properties; that it never consented to paying the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on
the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held
that the fire was purely accidental; that the cause of the fire was not attributable to the
negligence of the petitioner; that it has not been established that petitioner is the debtor of
IMC and LSPI; that since the sales invoices state that "it is further agreed that merely for
purpose of securing the payment of purchase price, the above-described merchandise remains
the property of the vendor until the purchase price is fully paid", IMC and LSPI retained
ownership of the delivered goods and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision
setting aside the decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a
new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant

to the insured Inter Capitol Marketing Corporation, plus legal interest from the time of
demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to

the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully
paid.
With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner
since the proviso contained in the sales invoices is an exception under Article 1504 (1) of the
Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk is borne by
the owner of the thing at the time the loss under the principle of res perit domino; that
petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but the payment of
its unpaid account and as such the obligation to pay is not extinguished, even if the fire is
considered a fortuitous event; that by subrogation, the insurer has the right to go against
petitioner; that, being a fire insurance with book debt endorsements, what was insured was the
vendor's interest as a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution
dated April 11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of
Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS
ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE
INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot be
deemed to be over credit since an insurance "on credit" belies not only the nature of fire
insurance but the express terms of the policies; that it was not credit that was insured since
respondent paid on the occasion of the loss of the insured goods to fire and not because of the
non-payment by petitioner of any obligation; that, even if the insurance is deemed as one over
credit, there was no loss as the accounts were not yet due since no prior demands were made
by IMC and LSPI against petitioner for payment of the debt and such demands came from
respondent only after it had already paid IMC and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC
and LSPI assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk had
transferred to petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured nor was its consent or
approval ever secured; that this lack of privity forecloses any real interest on the part of
respondent in the obligation to pay, limiting its interest to keeping the insured goods safe from
fire.

For its part, respondent counters that while ownership over the ready- made clothing materials
was transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said
goods as creditors who stand to suffer direct pecuniary loss from its destruction by fire; that
petitioner is liable for loss of the ready-made clothing materials since it failed to overcome the
presumption of liability under Article 126516 of the Civil Code; that the fire was caused through
petitioner's negligence in failing to provide stringent measures of caution, care and
maintenance on its property because electric wires do not usually short circuit unless there are
defects in their installation or when there is lack of proper maintenance and supervision of the
property; that petitioner is guilty of gross and evident bad faith in refusing to pay respondent's
valid claim and should be liable to respondent for contracted lawyer's fees, litigation expenses
and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it
from the CA is limited to reviewing questions of law which involves no examination of the
probative value of the evidence presented by the litigants or any of them.18 The Supreme Court
is not a trier of facts; it is not its function to analyze or weigh evidence all over
again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the
Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (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 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 CA manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different conclusion.21 Exceptions (4), (5), (7), and
(11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing
materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no
room for construction.22 In this case, the questioned insurance policies provide coverage for
"book debts in connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the Philippines."23 ; and
defined book debts as the "unpaid account still appearing in the Book of Account of the Insured
45 days after the time of the loss covered under this Policy."24 Nowhere is it provided in the
questioned insurance policies that the subject of the insurance is the goods sold and delivered
to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood
literally just as they appear on the face of the contract.25 Thus, what were insured against were
the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the loss
through fire, and not the loss or destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of
securing the payment of the purchase price the above described merchandise remains the
property of the vendor until the purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the ownership therein is transferred to the buyer
the goods are at the buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods are
at the buyer's risk from the time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk
of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods
delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest
until full payment of the value of the delivered goods. Unlike the civil law concept of res perit
domino, where ownership is the basis for consideration of who bears the risk of loss, in
property insurance, one's interest is not determined by concept of title, but whether insured
has substantial economic interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such nature
that a contemplated peril might directly damnify the insured." Parenthetically, under Section 14
of the same Code, an insurable interest in property may consist in: (a) an existing interest; (b)
an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an existing
interest in that out of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or
a lien upon, or possession of, the subject matter of the insurance, and neither the title nor a
beneficial interest is requisite to the existence of such an interest, it is sufficient that the
insured is so situated with reference to the property that he would be liable to loss should it be
injured or destroyed by the peril against which it is insured.29 Anyone has an insurable interest
in property who derives a benefit from its existence or would suffer loss from its
destruction.30 Indeed, a vendor or seller retains an insurable interest in the property sold so
long as he has any interest therein, in other words, so long as he would suffer by its destruction,
as where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain to
the unpaid accounts appearing in their Books of Account 45 days after the time of the loss
covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article
117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article
1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but
for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the CA,
where the obligation consists in the payment of money, the failure of the debtor to make the
payment even by reason of a fortuitous event shall not relieve him of his liability.33 The
rationale for this is that the rule that an obligor should be held exempt from liability when the
loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery
of a determinate thing and there is no stipulation holding him liable even in case of fortuitous
event. It does not apply when the obligation is pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation is
generic in the sense that the object thereof is designated merely by its class or genus without
any particular designation or physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor's fault and before he has
incurred in delay will not have the effect of extinguishing the obligation.35 This rule is based on
the principle that the genus of a thing can never perish. Genus nunquan perit.36 An obligation to
pay money is generic; therefore, it is not excused by fortuitous loss of any specific property of
the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has been established that petitioner has
outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
22"38 show that petitioner has an outstanding account with IMC in the amount
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is
the subrogation receipt executed by IMC in favor of respondent upon receipt of the insurance
proceeds. All these documents have been properly identified, presented and marked as exhibits
in court. The subrogation receipt, by itself, is sufficient to establish not only the relationship of
respondent as insurer and IMC as the insured, but also the amount paid to settle the insurance
claim. The right of subrogation accrues simply upon payment by the insurance company of the
insurance claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207
of the Civil Code which 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. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from
petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's
unpaid account with LSPI. It only confirms the loss of Levi's products in the amount
of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation
receipt was offered in evidence. Thus, there is no evidence that respondent has been
subrogated to any right which LSPI may have against petitioner. Failure to substantiate the
claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.

No pronouncement as to costs.
SO ORDERED.

G.R. No. 124520 August 18, 1997

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.

PADILLA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a
decision of respondent Court of Appeals.

The undisputed facts of the case are as follows:

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with
private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October
1988.

2. One of the stipulations of the one (1) year lease contract states:

18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods
and effects placed at any stall or store or space in the leased premises without first
obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the
insurance thereof without the consent of the LESSOR then the policy is deemed
assigned and transferred to the LESSOR for its own benefit; . . .1

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against
loss by fire the merchandise inside the leased premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written
consent of private respondent CKS.

4. On the day that the lease contract was to expire, fire broke out inside the leased premises.

5. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the
insurance contract (between the Cha spouses and United) be paid directly to CKS, based on its
lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and
United.

7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering
therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to
pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit.

8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision ** dated

11 January 1996, affirming the trial court decision, deleting however the awards for exemplary
damages and attorney's fees. A motion for reconsideration by United was denied on 29 March
1996.

In the present petition, the following errors are assigned by petitioners to the Court of Appeals:

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE

STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY

II

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT OF

LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE
QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE INSURANCE
TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER

III

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN

INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW

IV

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN

INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE
RESPONDENT CORPORATION.2

The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the
lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that
any fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the
leased premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained
without the prior written consent of the latter.

It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot
be contrary to law, morals, good customs, public order or public policy.3

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable except for
the benefit of some person having an insurable interest in the property insured.

A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of indemnity. Insurable interest in the property
insured must exist at the time the insurance takes effect and at the time the loss occurs.4 The
basis of such requirement of insurable interest in property insured is based on sound public
policy: to prevent a person from taking out an insurance policy on property upon which he has
no insurable interest and collecting the proceeds of said policy in case of loss of the property. In
such a case, the contract of insurance is a mere wager which is void under Section 25 of the
Insurance Code, which provides:

Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the
person insured has or has not any interest in the property insured, or that the policy
shall be received as proof of such interest, and every policy executed by way of gaming
or wagering, is void.

In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance
Code which provide:

Sec. 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof.

Therefore, respondent CKS cannot, under the Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise.
This insurable interest over said merchandise remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under the provision of the lease contract previously
quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners).
The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a
person (CKS) who has no insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses
obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a
new decision is hereby entered, awarding the proceeds of the fire insurance policy to
petitioners Nilo Cha and Stella Uy-Cha.

SO ORDERED.

G.R. No. 82036 May 22, 1997

TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and VICENTE MENDOZA, respondents.

HERMOSISIMA, JR., J.:

The petition herein seeks the review and reversal of the decision 1 of respondent Court of
Appeals 2 affirming in toto the judgment 3 of the Regional Trial Court 4 in an action for
damages 5 filed by private respondent Vicente Mendoza, Jr. as heir of his mother who was killed
in a vehicular accident.

Before the trial court, the complainant lumped the erring taxicab driver, the owner of the
taxicab, and the alleged insurer of the vehicle which featured in the vehicular accident into one
complaint. The erring taxicab was allegedly covered by a third-party liability insurance policy
issued by petitioner Travellers Insurance & Surety Corporation.

The evidence presented before the trial court established the following facts:

At about 5:30 o'clock in the morning of July 20, 1980, a 78-year old woman by
the name of Feliza Vineza de Mendoza was on her way to hear mass at the
Tayuman Cathedral. While walking along Tayuman corner Gregorio Perfecto
Streets, she was bumped by a taxi that was running fast. Several persons
witnessed the accident, among whom were Rolando Marvilla, Ernesto Lopez and
Eulogio Tabalno. After the bumping, the old woman was seen sprawled on the
pavement. Right away, the good Samaritan that he was, Mavilla ran towards the
old woman and held her on his lap to inquire from her what had happened, but
obviously she was already in shock and could not talk. At this moment, a private
jeep stopped. With the driver of that vehicle, the two helped board the old
woman on the jeep and brought her to the Mary Johnston Hospital in Tondo.

. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street

from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It
was on his return trip from Rizal Avenue when Lopez saw the plaintiff and his
brother who were crying near the scene of the accident. Upon learning that the
two were the sons of the old woman, Lopez told them what had happened. The
Mendoza brothers were then able to trace their mother at the Mary Johnston
Hospital where they were advised by the attending physician that they should
bring the patient to the National Orthopedic Hospital because of her fractured
bones. Instead, the victim was brought to the U.S.T. Hospital where she expired
at 9:00 o'clock that same morning. Death was caused by "traumatic shock" as a
result of the severe injuries she sustained . . .

. . . The evidence shows that at the moment the victim was bumped by the
vehicle, the latter was running fast, so much so that because of the strong
impact the old woman was thrown away and she fell on the pavement. . . . In
truth, in that related criminal case against defendant Dumlao . . . the trial court
found as a fact that therein accused "was driving the subject taxicab in a
careless, reckless and imprudent manner and at a speed greater than what was
reasonable and proper without taking the necessary precaution to avoid
accident to persons . . . considering the condition of the traffic at the place at the
time aforementioned" . . . Moreover, the driver fled from the scene of the
accident and without rendering assistance to the victim. . . .

. . . Three (3) witnesses who were at the scene at the time identified the taxi
involved, though not necessarily the driver thereof. Marvilla saw a lone taxi
speeding away just after the bumping which, when it passed by him, said witness
noticed to be a Lady Love Taxi with Plate No. 438, painted maroon, with baggage
bar attached on the baggage compartment and with an antenae [sic] attached at
the right rear side. The same descriptions were revealed by Ernesto Lopez, who
further described the taxi to have . . . reflectorized decorations on the edges of
the glass at the back . . . A third witness in the person of Eulogio Tabalno . . .
made similar descriptions although, because of the fast speed of the taxi, he was
only able to detect the last digit of the plate number which is "8". . . . [T]he police
proceeded to the garage of Lady Love Taxi and then and there they took
possession of such a taxi and later impounded it in the impounding area of the
agency concerned. . . . [T]he eyewitnesses . . . were unanimous in pointing to
that Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.

. . . During the investigation, defendant Armando Abellon, the registered owner

of Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact
"that the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao. . ." . . . It
was on the basis of this affidavit of the registered owner that caused the police
to apprehend Rodrigo Dumlao, and consequently to have him prosecuted and
eventually convicted of the offense . . . . . . . [S]aid Dumlao absconded in that
criminal case, specially at the time of the promulgation of the judgment therein
so much so that he is now a fugitive from justice.6
Private respondent filed a complaint for damages against Armando Abellon as the owner of the
Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love taxicab that bumped private
respondent's mother. Subsequently, private respondent amended his complaint to include
petitioner as the compulsory insurer of the said taxicab under Certificate of Cover No. 1447785-
3.

After trial, the trial court rendered judgment in favor of private respondent, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more

particularly the "Heirs of the late Feliza Vineza de Mendoza," and against
defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and
Surety Corporation, by ordering the latter to pay, jointly and severally, the
former the following amounts:

(a) The sum of P2,924.70, as actual and compensatory damages,

with interest thereon at the rate of 12% per annum from October
17, 1980, when the complaint was filed, until the said amount is
fully paid;

(b) P30,000.00 as death indemnity;

(c) P25,000.00 as moral damages;

(d) P10,000.00 as by way of corrective or exemplary

damages; and

(e) Another P10,000.00 by way of attorney's fees and other

litigation expenses.

Defendants are further ordered to pay, jointly and severally, the costs of this
suit.

SO ORDERED. 7

Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The
decision of the trial court was affirmed by respondent appellate court. Petitioner's Motion for
Reconsideration 8 of September 22, 1987 was denied in a Resolution 9 dated February 9, 1988.

Hence this petition.

Petitioner mainly contends that it did not issue an insurance policy as compulsory insurer of the
Lady Love Taxi and that, assuming arguendo that it had indeed covered said taxicab for third-
party liability insurance, private respondent failed to file a written notice of claim with
petitioner as required by Section 384 of P.D. No. 612, otherwise known as the Insurance Code.

We find the petition to be meritorious.

When private respondent filed his amended complaint to implead petitioner as party defendant
and therein alleged that petitioner was the third-party liability insurer of the Lady Love taxicab
that fatally hit private respondent's mother, private respondent did not attach a copy of the
insurance contract to the amended complaint. Private respondent does not deny this omission.

It is significant to point out at this juncture that the right of a third person to sue the insurer
depends on whether the contract of insurance is intended to benefit third persons also or only
the insured.

[A] policy . . . whereby the insurer agreed to indemnify the insured "against all
sums . . . which the Insured shall become legally liable to pay in respect of: a.
death of or bodily injury to any person . . . is one for indemnity against liability;
from the fact then that the insured is liable to the third person, such third person
is entitled to sue the insurer.

The right of the person injured to sue the insurer of the party at fault (insured),
depends on whether the contract of insurance is intended to benefit third
persons also or on the insured And the test applied has been this: Where the
contract provides for indemnity against liability to third persons, then third
persons to whom the insured is liable can sue the insurer. Where the contract is
for indemnity against actual loss or payment, then third persons cannot proceed
against the insurer, the contract being solely to reimburse the insured for liability
actually discharged by him thru payment to third persons, said third persons'
recourse being thus limited to the insured alone. 10

Since private respondent failed to attach a copy of the insurance contract to his complaint, the
trial court could not have been able to apprise itself of the real nature and pecuniary limits of
petitioner's liability. More importantly, the trial court could not have possibly ascertained the
right of private respondent as third person to sue petitioner as insurer of the Lady Love taxicab
because the trial court never saw nor read the insurance contract and learned of its terms and
conditions.

Petitioner, understandably, did not volunteer to present any insurance contract covering the
Lady Love taxicab that fatally hit private respondent's mother, considering that petitioner
precisely presented the defense of lack of insurance coverage before the trial court. Neither did
the trial court issue a subpoena duces tecum to have the insurance contract produced before it
under pain of contempt.
We thus find hardly a basis in the records for the trial court to have validly found petitioner
liable jointly and severally with the owner and the driver of the Lady Love taxicab, for damages
accruing to private respondent.

Apparently, the trial court did not distinguish between the private respondent's cause of action
against the owner and the driver of the Lady Love taxicab and his cause of action against
petitioner. The former is based on torts and quasi-delicts while the latter is based on contract.
Confusing these two sources of obligations as they arise from the same act of the taxicab fatally
hitting private respondent's mother, and in the face of overwhelming evidence of the reckless
imprudence of the driver of the Lady Love taxicab, the trial court brushed aside its ignorance of
the terms and conditions of the insurance contract and forthwith found all three — the driver
of the taxicab, the owner of the taxicab, and the alleged insurer of the taxicab — jointly and
severally liable for actual, moral and exemplary damages as well as attorney's fees and litigation
expenses. This is clearly a misapplication of the law by the trial court, and respondent appellate
court grievously erred in not having reversed the trial court on this ground.

While it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer,
however, the direct liability of the insurer under indemnity contracts against
third-party liability does not mean that the insurer can be held solidarily liable
with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort. 11

Applying this principle underlying solidary obligation and insurance contracts, we ruled
in one case that:

In solidary obligation, the creditor may enforce the entire obligation against one
of the solidary debtors. On the other hand, insurance is defined as "a contract
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event."

In the case at bar, the trial court held petitioner together with respondents Sio
Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a
total amount of P29,103.00, with the qualification that petitioner's liability is
only up to P20,000.00. In the context of a solidary obligation, petitioner may be
compelled by respondent Vallejos to pay the entire obligation of P29,103.00,
notwithstanding the qualification made by the trial court. But, how can
petitioner be obliged to pay the entire obligation when the amount stated in its
insurance policy with respondent Sio Choy for indemnity against third-party
liability is only P20,000.00? Moreover, the qualification made in the decision of
the trial court to the effect that petitioner is sentenced to pay up to P20,000.00
only when the obligation to pay P29,103.00 is made solidary is an evident breach
of the concept of a solidary obligation. 12
The above principles take on more significance in the light of the counter-allegation of
petitioner that, assuming arguendo that it is the insurer of the Lady Love taxicab in question, its
liability is limited to only P50,000.00, this being its standard amount of coverage in vehicle
insurance policies. It bears repeating that no copy of the insurance contract was ever proffered
before the trial court by the private respondent, notwithstanding knowledge of the fact that
the latter's complaint against petitioner is one under a written contract. Thus, the trial court
proceeded to hold petitioner liable for an award of damages exceeding its limited liability of
P50,000.00. This only shows beyond doubt that the trial court was under the erroneous
presumption that petitioner could be found liable absent proof of the contract and based
merely on the proof of reckless imprudence on the part of the driver of the Lady Love taxicab
that fatally hit private respondent's mother.

II

Petitioner did not tire in arguing before the trial court and the respondent appellate court that,
assuming arguendo that it had issued the insurance contract over the Lady Love taxicab, private
respondent's cause of action against petitioner did not successfully accrue because he failed to
file with petitioner a written notice of claim within six (6) months from the date of the accident
as required by Section 384 of the Insurance Code.

At the time of the vehicular incident which resulted in the death of private respondent's
mother, during which time the Insurance Code had not yet been amended by Batas Pambansa
(B.P.) Blg. 874, Section 384 provided as follows:

Any person having any claim upon the policy issued pursuant to this chapter
shall, without any unnecessary delay, present to the insurance company
concerned a written notice of claim setting forth the amount of his loss, and/or
the nature, extent and duration of the injuries sustained as certified by a duly
licensed physician. Notice of claim must be filed within six months from date of
the accident, otherwise, the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be brought in proper cases, with
the Commission or the Courts within one year from date of accident, otherwise
the claimant's right of action shall prescribe [emphasis supplied].

In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman, 13 we ruled
that the one year prescription period to bring suit in court against the insurer should be
counted from the time that the insurer rejects the written claim filed therewith by the insured,
the beneficiary or the third person interested under the insurance policy. We explained:

It is very obvious that petitioner company is trying to use Section 384 of the
Insurance Code as a cloak to hide itself from its liabilities. The facts of these
cases evidently reflect the deliberate efforts of petitioner company to prevent
the filing of a formal action against it. Bearing in mind that if it succeeds in doing
so until one year lapses from the date of the accident it could set up the defense
 of prescription, petitioner company made private respondents believe that their
claims would be settled in order that the latter will not find it necessary to
immediately bring suit. In violation of its duties to adopt and implement
reasonable standards for the prompt investigation of claims and to effectuate
prompt, fair and equitable settlement of claims, and with manifest bad faith,
petitioner company devised means and ways of stalling the settlement
proceeding . . . [N]o steps were taken to process the claim and no rejection of
said claim was ever made even if private respondent had already complied with
all the requirements. . . .

This Court has made the observation that some insurance companies have been
inventing excuses to avoid their just obligations and it is only the State that can
give the protection which the insuring public needs from possible abuses of the
insurers. 14

It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to
categorically provide that "action or suit for recovery of damage due to loss or injury must be
brought in proper cases, with the Commissioner or the Courts within one year from denial of
the claim, otherwise the claimant's right of action shall prescribe" [emphasis ours]. 15

We have certainly ruled with consistency that the prescriptive period to bring suit in court
under an insurance policy, begins to run from the date of the insurer's rejection of the claim
filed by the insured, the beneficiary or any person claiming under an insurance contract. This
ruling is premised upon the compliance by the persons suing under an insurance contract, with
the indispensable requirement of having filed the written claim mandated by Section 384 of the
insurance Code before and after its amendment. Absent such written claim filed by the person
suing under an insurance contract, no cause of action accrues under such insurance contract,
considering that it is the rejection of that claim that triggers the running of the one-year
prescriptive period to bring suit in court, and there can be no opportunity for the insurer to
even reject a claim if none has been filed in the first place, as in the instant case.

The one-year period should instead be counted from the date of rejection by the
insurer as this is the time when the cause of action accrues. . . .

In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:

The plaintiff's cause of action did not accrue until his claim was finally rejected by
the insurance company. This is because, before such final rejection, there was no
real necessity for bringing suit.

The philosophy of the above pronouncement was pointed out in the case
of ACCFA vs. Alpha Insurance and Surety Co., viz:
 Since a cause of action requires, as essential elements, not only a legal right of
the plaintiff and a correlative obligation of the defendant but also an act or
omission of the defendant in violation of said legal right, the cause of action does
not accrue until the party obligated refuses, expressly or impliedly, to comply
with its duty. 16

When petitioner asseverates, thus, that no written claim was filed by private respondent and
rejected by petitioner, and private respondent does not dispute such asseveration through a
denial in his pleadings, we are constrained to rule that respondent appellate court committed
reversible error in finding petitioner liable under an insurance contract the existence of which
had not at all been proven in court. Even if there were such a contract, private respondent's
cause of action can not prevail because he failed to file the written claim mandated by Section
384 of the Insurance Code. He is deemed, under this legal provision, to have waived his rights
as against petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case No. 135486 are
REVERSED and SET ASIDE insofar as Travelers Insurance & Surety Corporation was found jointly
and severally liable to pay actual, moral and exemplary damages, death indemnity, attorney's
fees and litigation expenses in Civil Case No. 135486. The complaint against Travellers Insurance
& Surety Corporation in said case is hereby ordered dismissed.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,

vs.
HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner
Company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated
April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar
relief, through these petitions for certiorari by way of appeal, from the amended decision of
respondent Court of Appeals which affirmed in toto the decision of the Court of First Instance
of Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company
and Mondragon) jointly and severally to pay plaintiff (herein private respondent Ngo Hing) the
amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P1,077.75, without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the
Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life) for a twenty-year
endownment policy in the amount of P50,000.00 on the life of his one-year old daughter Helen
Go. Said respondent supplied the essential data which petitioner Lapulapu D. Mondragon,
Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form in his own
handwriting (Exhibit I-M). Mondragon finally type-wrote the data on the application form which
was signed by private respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as his
commission for being a duly authorized agebt of Pacific Life. Upon the payment of the
insurance premuim, the binding deposit receipt (Exhibit E) was issued to private respondent
Ngo Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the
application form his strong recommendation for the approval of the insurance application. Then
on April 30, 1957, Mondragon received a letter from Pacific Life disapproving the insurance
application (Exhibit 3-M). The letter stated that the said life insurance application for 20-year
endowment plan is not available for minors below seven years old, but Pacific Life can consider
the same under the Juvenile Triple Action Plan, and advised that if the offer is acceptable, the
Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by
petitioner Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon
wrote back Pacific Life again strongly recommending the approval of the 20-year endowment
insurance plan to children, pointing out that since 1954 the customers, especially the Chinese,
were asking for such coverage (Exhibit 4-M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza with
complication of bronchopneumonia. Thereupon, private respondent sought the payment of the
proceeds of the insurance, but having failed in his effort, he filed the action for the recovery of
the same before the Court of First Instance of Cebu, which rendered the adverse decision as
earlier refered to against both petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E)
constituted a temporary contract of the life insurance in question; and (2) whether private
respondent Ngo Hing concealed the state of health and physical condition of Helen Go, which
rendered void the aforesaid Exhibit E.

1. At the back of Exhibit E are condition precedents required before a deposit is considered a
BINDING RECEIPT. These conditions state that:

A. If the Company or its agent, shan have received the premium deposit ... and
the insurance application, ON or PRIOR to the date of medical
examination ... said insurance shan be in force and in effect from the date of such
medical examination, for such period as is covered by the deposit ..., PROVIDED
the company shall be satisfied that on said date the applicant was insurable on
standard rates under its rule for the amount of insurance and the kind of policy
requested in the application.

D. If the Company does not accept the application on standard rate for the
amount of insurance and/or the kind of policy requested in the
application but issue, or offers to issue a policy for a different plan and/or
amount ..., the insurance shall not be in force and in effect until the applicant
shall have accepted the policy as issued or offered by the Company and shall have
paid the full premium thereof. If the applicant does not accept the policy, the
deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and the
Company declines to approve the application the insurance applied for shall not
have been in force at any time and the sum paid be returned to the applicant
upon the surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is
intended to be merely a provisional or temporary insurance contract and only upon compliance
of the following conditions: (1) that the company shall be satisfied that the applicant was
insurable on standard rates; (2) that if the company does not accept the application and offers
to issue a policy for a different plan, the insurance contract shall not be binding until the
applicant accepts the policy offered; otherwise, the deposit shall be reftmded; and (3) that if
the applicant is not ble according to the standard rates, and the company disapproves the
application, the insurance applied for shall not be in force at any time, and the premium paid
shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is
merely an acknowledgment, on behalf of the company, that the latter's branch office had
received from the applicant the insurance premium and had accepted the application subject
for processing by the insurance company; and that the latter will either approve or reject the
same on the basis of whether or not the applicant is "insurable on standard rates." Since
petitioner Pacific Life disapproved the insurance application of respondent Ngo Hing, the
binding deposit receipt in question had never become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and
does not insure outright. As held by this Court, where an agreement is made between the
applicant and the agent, no liability shall attach until the principal approves the risk and a
receipt is given by the agent. The acceptance is merely conditional and is subordinated to the
act of the company in approving or rejecting the application. Thus, in life insurance, a "binding
slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life Assurance Company of
Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-
M), Pacific Life disapproved the insurance application in question on the ground that it is not
offering the twenty-year endowment insurance policy to children less than seven years of age.
What it offered instead is another plan known as the Juvenile Triple Action, which private
respondent failed to accept. In the absence of a meeting of the minds between petitioner
Pacific Life and private respondent Ngo Hing over the 20-year endowment life insurance in the
amount of P50,000.00 in favor of the latter's one-year old daughter, and with the non-
compliance of the abovequoted conditions stated in the disputed binding deposit receipt, there
could have been no insurance contract duly perfected between thenl Accordingly, the deposit
paid by private respondent shall have to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance,
like other contracts, must be assented to by both parties either in person or by their agents ...
The contract, to be binding from the date of the application, must have been a completed
contract, one that leaves nothing to be dione, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be no contract of insurance unless
the minds of the parties have met in agreement."

We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would not have
any adverse effect on the allegedly perfected temporary contract (Respondent's Brief, pp. 13-
14). In this first place, there was no contract perfected between the parties who had no
meeting of their minds. Private respondet, being an authorized insurance agent of Pacific Life at
Cebu branch office, is indubitably aware that said company does not offer the life insurance
applied for. When he filed the insurance application in dispute, private respondent was,
therefore, only taking the chance that Pacific Life will approve the recommendation of
Mondragon for the acceptance and approval of the application in question along with his
proposal that the insurance company starts to offer the 20-year endowment insurance plan for
children less than seven years. Nonetheless, the record discloses that Pacific Life had rejected
the proposal and recommendation. Secondly, having an insurable interest on the life of his one-
year old daughter, aside from being an insurance agent and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must have known and followed the progress on the
processing of such application and could not pretend ignorance of the Company's rejection of
the 20-year endowment life insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of then
Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from his
dissenting opinion to the amended decision of the respondent court which completely reversed
the original decision, the following:

Of course, there is the insinuation that neither the memorandum of rejection

(Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the desire
for applicant's father to have the application considered as one for a 20-year
endowment plan was ever duly communicated to Ngo; Hing, father of the minor
applicant. I am not quite conninced that this was so. Ngo Hing, as father of the
applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-
1). The unchallenged statement of appellant Mondragon in his letter of May 6,
1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our associate"
and that it was the latter who "insisted that the plan be placed on the 20-year
endowment plan." Under these circumstances, it is inconceivable that the
progress in the processing of the application was not brought home to his
knowledge. He must have been duly apprised of the rejection of the application
for a 20-year endowment plan otherwise Mondragon would not have asserted
that it was Ngo Hing himself who insisted on the application as originally filed,
thereby implictly declining the offer to consider the application under the
Juvenile Triple Action Plan. Besides, the associate of Mondragon that he was,
Ngo Hing should only be presumed to know what kind of policies are available in
the company for minors below 7 years old. What he and Mondragon were
apparently trying to do in the premises was merely to prod the company into
going into the business of issuing endowment policies for minors just as other
insurance companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have been bound at
all under the binding slip for a plan of insurance that it could not have, by then
issued at all. (Amended Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief that
private respondent had deliberately concealed the state of health and piysical condition of his
daughter Helen Go. Wher private regpondeit supplied the required essential data for the
insurance application form, he was fully aware that his one-year old daughter is typically a
mongoloid child. Such a congenital physical defect could never be ensconced nor disguished.
Nonetheless, private respondent, in apparent bad faith, withheld the fact materal to the risk to
be assumed by the insurance compary. As an insurance agent of Pacific Life, he ought to know,
as he surely must have known. his duty and responsibility to such a material fact. Had he
diamond said significant fact in the insurance application fom Pacific Life would have verified
the same and would have had no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good faith,
absolute and perfect candor or openness and honesty; the absence of any concealment or
demotion, however slight [Black's Law Dictionary, 2nd Edition], not for the alone but equally so
for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a
neglect to communicate that which a partY knows aDd Ought to communicate (Section 25, Act
No. 2427). Whether intentional or unintentional the concealment entitles the insurer to rescind
the contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil
930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private
respondent appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the parties
with the noncompliance of the conditions provided in the binding receipt, and concealment, as
legally defined, having been comraitted by herein private respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby
entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance
Company from their civil liabilities as found by respondent Court and ordering the aforesaid
insurance company to reimburse the amount of P1,077.75, without interest, to private
respondent, Ngo Hing. Costs against private respondent.

SO ORDERED.

G.R. No. 128833 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners,

vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.

G.R. No. 128834 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, petitioners,

vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES
GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.

G.R. No. 128866 April 20, 1998

MALAYAN INSURANCE INC., petitioners,

vs.
GOYU & SONS, INC. respondent.

MELO, J.:
The issue relevant to the herein three consolidated petitions revolve around the fire loss claims
of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc.
(MICO) in connection with the mortgage contracts entered into by and between Rizal
Commercial Banking Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commending July 27, 1992. RCBC was ordered to
pay actual and compensatory damages in the amount of P5,000,000.00. MICO and RCBC were
held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for
attorney's fees. GOYU's obligation to RCBC was fixed at P68,785,069.04 as of April 1992,
without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in
view of the common facts and issues involved, their individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After
due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli
D. Lao, recommended GOYU's application for approval by RCBC's executive committee. A credit
facility in the amount of P30 million was initially granted. Upon GOYU's application and Uy's and
Lao's recommendation, RCBC's executive committee increased GOYU's credit facility to P50
million, then to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two
chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed
itself to insure the mortgaged property with an insurance company approved by RCBC, and
subsequently, to endorse and deliver the insurance polices to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992,
Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan
insurance policies, issued nine endorsements in favor of RCBC seemingly upon instructions of
GOYU (Exhibits "1-Malayan" to "9-Malayan").

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire.
Consequently, GOYU submitted its claim for indemnity on account of the loss insured against.
MICO denied the claim on the ground that the insurance policies were either attached pursuant
to writs of attachments/garnishments issued by various courts or that the insurance proceeds
were also claimed by other creditors of GOYU alleging better rights to the proceeds than the
insured. GOYU filed a complaint for specific performance and damages which was docketed at
the Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case
No. 93-65442, now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the
insurance policies, but said claims were also denied for the same reasons that MICO denied
GOYU's claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court
of Manila (Branch 3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo
Sebastian, and Philippine Trust Company obtained their respective writs of attachments from
various courts, covering an aggregate amount of P14,938,080.23, and ordered that the
proceeds of the ten insurance policies be deposited with the said court minus the
aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount
of P50,505,594.60 with Branch 3 of the Manila RTC.

In the meantime, another notice of garnishment was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75 (Exhibit "22-Malayan").

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against

the defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking
Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total

amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by was of interest

for the duration of the delay since July 27, 1992
(ninety days after defendant insurer's receipt of the
required proof of loss and notice of loss) at the rate
of twice the ceiling prescribed by the Monetary
Board, on the following amounts:

1) P50,000,000.00 — from July 27,

1992 up to the time said amount
was deposited with this Court on
January 7, 1994;

2) P24,040,518.58 — from July 27,

1992 up to the time when the writs
of attachments were received by
defendant Malayan;
 2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory

damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the

following amounts:

1) P1,000,000.00 as exemplary
damages;

2) P1,000,000.00 as, and for,

attorney's fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff

to pay its loan obligations with defendant RCBC in the amount of
P68,785,069.04, as of April 27, 1992, with interest thereon at the
rate stipulated in the respective promissory notes (without
surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby
ordered to release immediately to the plaintiff the amount of P50,000,000.00
deposited with the Court by defendant Malayan, together with all the interest
earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with
the amount awarded in its favor. MICO and RCBC disputed the trial court's findings of liability
on their part. The Court of Appeals party granted GOYU's appeal, but sustained the findings of
the trial court with respect to MICO and RCBC's liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby
modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total

amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus
 deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu
receives the said amount at the rate of thirty-seven
(37%) percent per annum which is twice the ceiling
prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;

a) To pay the plaintiff actual and compensatory

damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL

COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI
D. LAO:

a) To pay the plaintiff jointly and severally the

following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorney's fees.

4. And on RCBC's Counterclaim, ordering the plaintiff Goyu &

Sons, Inc. to pay its loan obligation with RCBC in the amount of
P68,785,069.04 as of April 27, 1992 without any interest,
surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to
immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per
O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together
with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review
and consequent reversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which
case, by virtue of the Court of Appeals' resolution dated August 7, 1996, was consolidated with
C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBC's
right to intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU (the
debtor), where the subject insurance policies were attached in favor of Sebastian.
After a careful reviews of the material facts as found by the two courts below in relation to the
pertinent and applicable laws, we find merit in the submission of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which
are now submitted in the petitions before us. This Court, however, discerns one primary and
central issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance
policies taken by GOYU, the mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter
executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these
mortgage contracts that GOYU shall insure the mortgaged property with any of the insurance
companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an
insurance company acceptable to RCBC. Bases on their stipulations in the mortgage contracts,
GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC.
Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also
Exh. "51-RCBC" to "59-RCBC"), copies of which were delivered to GOYU, RCBC, and MICO.
However, because these endorsements do not bear the signature of any officer of GOYU, the
trial court, as well as the Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in
the same mortgaged property, such that each one of them may insure the same property for
his own sole benefit. There is no question that GOYU could insure the mortgaged property for
its own exclusive benefit. In the present case, although it appears that GOYU obtained the
subject insurance policies naming itself as the sole payee, the intentions of the parties as shown
by their contemporaneous acts, must be given due consideration in order to better serve the
interest of justice and equity.

It is to be noted that nine endorsement documents were prepared by Alchester in favor of

RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any
specific insurance policy in favor of any particular beneficiary or payee other than the insured
had not such named payee or beneficiary been specifically disclosed by the insured itself. It is
also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a
sister company of RCBC, and not just from any other insurance company. Alchester would not
have found out that the subject pieces of property were mortgaged to RCBC had not such
information been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester
would not have known of GOYU's intention of obtaining insurance coverage in compliance with
its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have
endorsed the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule
in favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine
National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public, policy, fair dealing,
good faith and justice, and its purpose is to forbid one to speak against his own
act, representations, or commitments to the injury of one to whom they were
directed and who reasonably relied thereon. The doctrine of estoppel springs
from equitable principles and the equities in the case. It is designed to aid the
law in the administration of justice where without its aid injustice might result. It
has been applied by this Court wherever and whenever special circumstances of
a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr.
Yam, she prepared in quadruplicate on February 11, 1992 the nine endorsement documents for
GOYU's nine insurance policies in favor of RCBC. The original copies of each of these nine
endorsement documents were sent to GOYU, and the others were sent to RCBC and MICO,
while the fourth copies were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU has
not denied having received from Alchester the originals of these documents.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only
pursuant to the stipulation in the mortgage contracts. We find such reliance to be justified
under the circumstances of the case. GOYU failed to seasonably repudiate the authority of the
person or persons who prepared such endorsements. Over and above this, GOYU continued, in
the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the
occurrence of the loss insure against, it was too late for GOYU to disown the endorsements for
any imagined or contrived lack of authority of Alchester to prepare and issue said
endorsements. If there had not been actually an implied ratification of said endorsements by
virtue of GOYU's inaction in this case, GOYU is at the very least estopped from assailing their
operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements
while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good
faith that there was due endorsement pursuant to their mortgage contracts, is to countenance
grave contravention of public policy, fair dealing, good faith, and justice. Such an unjust
situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case,
the Court is bound to recognize RCBC's right to the proceeds of the insurance polices if not for
the actual endorsement of the policies, at least on the basis of the equitable principle of
estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the
proceeds of insurance shall exclusively apply to the interest of the person in whose name or for
whose benefit it is made. The peculiarity of the circumstances obtaining in the instant case
presents a justification to take exception to the strict application of said provision, it having
been sufficiently established that it was the intention of the parties to designate RCBC as the
party for whose benefit the insurance policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts
entered into between RCBC and GOYU in consideration of and for securing GOYU's credit
facilities from RCBC. The mortgage contracts contained common provisions whereby GOYU, as
mortgagor, undertook to have the mortgaged property properly covered against any loss by an
insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO,
no less than a sister company of RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency,

Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late,
the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities
extended by RCBC which was conditioned upon the endorsement of the insurance policies to
be taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement
documents prepared by Alchester, GOYU, despite the absence of its written conformity thereto,
obviously considered said endorsement to be sufficient compliance with its obligation under
the mortgage contracts since RCBC accordingly continued to extend the benefits of its credits
facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the
parties to constitute RCBC as the beneficiary of the various insurance policies obtained by
GOYU. The intention of the parties will have to be given full force and effect particular case. The
insurance proceeds may, therefore, be exclusively applied to RCBC, which under the factual
circumstances of the case, is truly the person or entity for whose benefit the polices were
clearly intended.

Moreover, the law's evident intention to protect the interests of the mortgage upon the
mortgaged property is expressed in Article 2127 of the Civil Code which states:

Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.
Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of
them appear to have been subject of the endorsements prepared and delivered by Alchester
for and upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None

Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92

b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54

c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"

Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43

d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"

Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43

e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76

f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan"

Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00

g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"

Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00

h. Policy Number CI/F-128-03341 None

Issue Date May 3, 1991
 Expiry Date May 3, 1992
Amount P10,000,000.00

i. Policy Number F-114-07402 Exhibit "8-Malayan"

Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20

j. Policy Number F-114-07525 Exhibit "9-Malayan"

Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by
MICO's witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no
endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement
documents, Exhibit "5-Malayan", refers to a certain insurance policy number ACIA-F-07066,
which is not among the insurance policies involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being
excessively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we
already ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies
can not be attached by GOYU's other creditors up to the extent of the GOYU's outstanding
obligation in RCBC's favor. Section 53 of the Insurance Code ordains that the insurance
proceeds of the endorsed policies shall be applied exclusively to the proper interest of the
person for whose benefit it was made. In this case, to the extent of GOYU's obligation with
RCBC, the interest of GOYU in the subject policies had been transferred to RCBC effective as of
the time of the endorsement. These policies may no longer be attached by the other creditors
of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in view of the results reached herein. Only
the two other policies amounting to P19,646,224.92 may be validly attached, garnished, and
levied upon by GOYU's other creditors. To the extent of GOYU's outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were endorsed to RCBC,
are, therefore, to be released from attachment, garnishment, and levy by the other creditors of
GOYU.

This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding
obligation with RCBC which the proceeds of the 8 insurance policies will discharge and
liquidate, or put differently, the actual amount of GOYU's liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total
obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial
court's exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and
Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their
execution is highly questionable for not only are these dated after the fire, but also because the
signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the
Court of Appeals speculated thusly:

. . . Hence, this Court is inclined to conclude that said promissory notes were pre-
signed by plaintiff in bank terms, as averred by plaintiff, in contemplation of the
speedy grant of future loans, for the same practice of procedure has always been
adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean
that the documents are spurious, for it is presumed that the ordinary course of business had
been followed (Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486
[1993]). The obligor and not the holder of the negotiable instrument has the burden of proof of
showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals,
210 SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of the loan
amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the
testimony of Go Song Hiap when he answered the queries of the trial court.

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you

received all the amounts stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to

29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

 WITNESS

A. The promissory Notes they did not give to me but the amount I
asked which is correct, Your Honor.

COURT

Q Your mean to say the amounts indicated in Exhibits 1 to 29-

RCBC is correct?

A Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds of the 29
promissory notes as hereinabove quotes, GOYU also offered and admitted to RCBC that is
obligation be fixed at P116,301,992.60 as shown in its letter date March 9, 1993, which
pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the
current past due account of this company in the amount of P116,301,992.60 as
of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of
Third Party Claims in the Urban case at Makati, Metro Manila and in the
Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71
paid from the Seaboard and Equitable insurance companies and other legitimate
deductions. We accept and confirm this amount of P116,301,992.60 as stated as
true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded
promissory notes are dated after the fire. It failed to consider that said notes had for their
origin transactions consummated prior to the fire. Thus, careful attention must be paid to the
fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes No.
908-91 and 952-91, loans already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should
be excluded for bearing dates which are after that of the fire, are mere renewals of previous
ones. The proceeds of the loan represented by these promissory notes were admittedly
received by GOYU. There is ample factual and legal basis for giving GOYU's judicial admission of
liability in the amount of P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have recovered from the
other insurers of the mortgage property will, nonetheless, have to be applied as payment
against GOYU's obligation. But, contrary to the lower courts' findings, payments effected by
GOYU prior to January 21, 1993 should no longer be deducted. Such payments had obviously
been duly considered by GOYU, in its aforequoted letter date March 9, 1993, wherein it
admitted that its past due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January
21, 1993, to wit:

Total Obligation as admitted by GOYU

as of January 21, 1993: P116,301,992.60

Broken down as follows:

Principal 1 Interest

Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2

LESS:

1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81

2) Proceeds from
Equitable Insurance
Company 2,756,373.00

3) Payment from
foreign department
negotiation: 203,584.89
___________

9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90

The need for the payment of interest due the principal amount of the obligation, which is the
cost of money to RCBC, the primary end and the ultimate reason for RCBC's existence and
being, was duly recognized by the trial court when it ruled favorably on RCBC's counterclaim,
ordering GOYU "to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of
April 27, 1992, with interest thereon at the rate stipulated in the respective promissory
notes (without surcharges and penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p.
479). Inexplicably, the Court of Appeals, without even laying down the factual or legal
justification for its ruling, modified the trial court's ruling and ordered GOYU "to pay the
principal amount of P68,785,069.04 without any interest, surcharges and penalties" (Rollo, p.
200).

It is to be noted in this regard that even the trial court hedgingly and with much uncertainty
deleted the payment of additional interest, penalties, and charges, in this manner:

Regarding defendant RCBC's commitment not to charge additional interest,

penalties and surcharges, the same does not require that it be embodied in a
document or some form of writing to be binding and enforceable. The principle
is well known that generally a verbal agreement or contract is no less binding
and effective than a written one. And the existence of such a verbal agreement
has been amply established by the evidence in this case. In any event, regardless
of the existence of such verbal agreement, it would still be unjust and inequitable
for defendant RCBC to charge the plaintiff with surcharges and penalties
considering the latter's pitiful situation. (Emphasis supplied).

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct
from that of surcharges and penalties. What may justify a court in not allowing the creditor to
charge surcharges and penalties despite express stipulation therefor in a valid agreement, may
not equally justify non-payment of interest. The charging of interest for loans forms a very
essential and fundamental element of the banking business, which may truly be considered to
be at the very core of its existence or being. It is inconceivable for a bank to grant loans for
which it will not charge any interest at all. We fail to find justification for the Court of Appeal's
outright deletion of the payment of interest as agreed upon in the respective promissory notes.
This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid
down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]),
shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts

or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of
recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the actual thereof, is imposed, as follows:
 1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

(pp. 95-97).

There being written stipulations as to the rate of interest owing on each specific promissory
note as summarized and tabulated by the trial court in its decision (pp. 470 and 471, Record)
such agreed interest rates must be followed. This is very clear from paragraph II, sub-paragraph
1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful
situation must be taken into account. We do not agree, however, that payment of any amount
as surcharges and penalties should altogether be deleted. Even assuming that RCBC, through its
responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its
assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot
accept the lower courts' finding that RCBC had thereby ipso facto effectively waived collection
of any additional interests, surcharges, and penalties from GOYU. Assurances of assistance are
one thing, but waiver of additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the
nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code.
Article 2227 thereof provides:

Art. 2227. Liquidated damages, whether intended as a indemnity or penalty,

shall be equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court
must consider the circumstances of each case. It should be stressed that the Court will not
make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of
the loans extended by them are generally iniquitous and unconscionable. What may be
iniquitous and unconscionable in one case, may be totally just and equitable in another. This
provision of law will have to be applied to the established facts of any given case. Given the
circumstance under which GOYU found itself after the occurrence of the fire, the Court rules
the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be
definitely iniquitous and unconscionable. The Court tempers these rates to 2% and 3%,
respectively. Furthermore, in the light of GOYU's offer to pay the amount of P116,301,992.60 to
RCBC as March 1993 (See: Exhibit "BB"), which RCBC refused, we find it more in keeping with
justice and equity for RCBC not to charge additional interest, surcharges, and penalties from
that time onward.

Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for
denying or withholding the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance
policies, RCBC has the right to claim the insurance proceeds, in substitution of the property lost
in the fire. Having assigned its rights, GOYU lost its standing as the beneficiary of the said
insurance policies.

Secondly, for an insurance company to be held liable for unreasonably delaying and
withholding payment of insurance proceeds, the delay must be wanton, oppressive, or
malevolent (Zenith Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It is generally agreed,
however, that an insurer may in good faith and honesty entertain a difference of opinion as to
its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim
should not be inflicted unless the evidence and circumstances show that such refusal was
willful and without reasonable cause as the facts appear to a reasonable and prudent man
(Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay,
101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW
47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith delayed
the release of the proceeds. The problem in the determination of who is the actual beneficiary
of the insurance policies, aggravated by the claim of various creditors who wanted to partake of
the insurance proceeds, not to mention the importance of the endorsement to RCBC, to our
mind, and as now borne out by the outcome herein, justified MICO in withholding payment to
GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail
itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for
specific performance and the other for foreclosure. In doing so, said the appellate court, the
second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199).
The Court of Appeals was too accommodating in giving due consideration to this argument of
GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA
G.R. CV No. 46247, the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of
Appeals pre-empted the resolution of said foreclosure case which is not before it. This is plain
reversible error if not grave abuse of discretion.

As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):

It should have been enough, nonetheless, for the appellate court to merely set
aside the questioned ordered of the trial court for having been issued by the
latter with grave abuse of discretion. In likewise enjoining permanently herein
petitioner "from entering in and interfering with the use or occupation and
enjoyment of petitioner's (now private respondent) residential house and
compound," the appellate court in effect, precipitately resolved with finality the
case for injunction that was yet to be heard on the merits by the lower court.
Elevated to the appellate court, it might be stressed, were mere incidents of the
principal case still pending with the trial court. In Municipality of Biñan, Laguna
vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would
have "no jurisdiction in a certiorari proceeding involving an incident in a case to
rule on the merits of the main case itself which was not on appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional
Trial Court, since it has been determined that RCBC has the right to the insurance proceeds, the
subject matter of intervention is rendered moot and academic. Respondent Sebastian must,
however, yield to the preferential right of RCBC over the MICO insurance policies. It is basic and
fundamental that the first mortgagee has superior rights over junior mortgagees or attaching
creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co.
of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December
16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a
new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-
65442 before Branch 3 of the Manila Trial Court for lack of merit;
 2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial
Banking Corporation the proceeds of the insurance policies in the amount of
P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits
"2" and "2-1"), less the amount of P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including

the interests earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial
Banking Corporation in the principal amount of P107,246,887.90, with interest at
the respective rates stipulated in each promissory note from January 21, 1993
until finality of this judgment, and surcharges at 2% and penalties at 3% from
January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance
Company, Inc. and the proceeds of the amount deposited with the trial court
and its earned interest. The total amount due RCBC at the time of the finality of
this judgment shall earn interest at the legal rate of 12% in lieu of all other
stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR
CV 48376 is DISMISSED for being moot and academic in view of the results herein arrived at.
Respondent Sebastian's right as attaching creditor must yield to the preferential rights of Rizal
Commercial Banking Corporation over the Malayan insurance policies as first mortgagee.

SO ORDERED.

G.R. No. 132607 May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY,
INC., respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking
a reversal of the decision of the Court of Appeal1 which affirmed the decision of the trial court
of origin finding the petitioner herein, Cebu Shipyard and Engineering Works, Inc. (CSEW)
negligent and liable for damages to the private respondent, William Lines, Inc., and to the
insurer, Prudential Guarantee Assurance Company, Inc.
The antecedent facts that matter are as follows:

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the
business of dry-docking and repairing of marine vessels while the private respondent,
Prudential Guarantee and Assurance, Inc. (Prudential), also a domestic corporation is in the
non-life insurance business.

William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V Manila City,
a luxury passenger-cargo vessel, which caught fire and sank on February 16, 1991. At the time
of the unfortunate occurrence sued upon, subject vessel was insured with Prudential for
P45,000,000.00 pesos for hull and machinery. The Hull Policy included an "Additional Perils
(INCHMAREE)" Clause covering loss of or damage to the vessel through the negligence of,
among others, ship repairmen. The Policy provided as follows:

Subject to the conditions of this Policy, this insurance also covers loss of or
damage to Vessel directly caused by the following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or

Repairers are not an Assured hereunder.

xxx xxx xxx

provided such loss or damage has not resulted from want of due diligence by the
Assured, the Owners or Managers of the Vessel, of any of them Masters,
Officers, Crew or Pilots are not to be considered Owners within the meaning of
this Clause should they hold shares in the Vessel. 2

Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairer's
Legal Liability Insurance Policy. The policy was for P10 million only, under the limited liability
clause, to wit:

7. Limit of Liability

The limit of liability under this insurance, in respect of any one accident or series
of accidents, arising out of one occurrence, shall be [P10 million], including
liability for costs and expense which are either:

(a) incurred with the written consent of the underwriters hereon, or

(b) awarded against the Assured.3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu
Shipyard in Lapulapu City for annual dry-docking and repair.

On February 6, 1991, an arrival conference was held between representatives of William Lines,
Inc. and CSEW to discuss the work to be undertaken on the M/V Manila City.

The contracts, denominated as Work Orders, were signed thereafter, with the following
stipulations:

10. The Contractor shall replace at its own work and at its own cost any work or
material which can be shown to be defective and which is communicated in
writing within one (1) month of redelivery of the vessel or if the vessel was not in
the Contractor's Possession, the withdrawal of the Contractor's workmen, or at
its option to pay a sum equal to the cost of such replacement at its own works.
These conditions shall apply to any such replacements.

11. Save as provided in Clause 10, the Contractor shall not be under any liability
to the Customer either in contract or for delict or quasi-delict or otherwise
except for negligence and such liability shall itself be subject to the following
overriding limitations and exceptions, namely:

(a) The total liability of the Contractor to the Customer (over and
above the liability to replace under Clause 10) or of any sub-
contractor shall be limited in respect of any defect or event (and a
series of accidents arising out of the same defect or event shall
constitute one defect or event) to the sum of Pesos Philippine
Currency One Million only.

(b) In no circumstance whatsoever shall the liability of the

Contractor or any Sub-Contractor include any sum in respect of
loss of profit or loss of use of the vessel or damages consequential
on such loss of use

xxx xxx xxx

20. The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect.4

While the M/V Manila City was undergoing dry-docking and repairs within the premises of
CSEW, the master, officers and crew of M/V Manila City stayed in the vessel using their cabins
as living quarters. Other employees hired by William Lines to do repairs and maintenance work
on the vessel were also present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire
and sank, resulting to its eventual total loss.

On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging
that the fire which broke out in M/V Manila City was caused by CSEW's negligence and lack of
care.

On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after
the latter had paid William Lines, Inc. the value of the hull and machinery insurance on the M/V
Manila City. As a result of such payment Prudential was subrogated to the claim of P45 million,
representing the value of the said insurance it paid.

On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as
follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against

the defendant, ordering the latter.

1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the subrogee,
the amount of Forty-five Million (P45 million) Pesos, with interest at the legal
rate until full payment is made.

2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven
Hundred Fifteen Thousand (P56,715,000.00) Pesos representing loss of income
of M/V MANILA CITY, with interest at the legal rate until full payment is made.

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11
million) as payment, in addition to what it received from the insurance company
to fully cover the injury or loss, in order to replace the M/V MANILA CITY, with
interest at the legal rate until full payment is made;

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-
Seven Thousand Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub (sic)
oil on board the vessel when she was completely gutted by fire at defendant,
Cebu Shipyard's quay, with interest at the legal rate until full payment is made;

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four
Thousand Six Hundred Seventy-seven Pesos and Ninety-five centavos
(P3,054.677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full payment
is made;

6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand
(P500,000 00) Pesos in moral damages;
 7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000.000.00) Pesos in attorney's fees; and to pay the costs of this suit.

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the
pendency of the appeal, CSEW and William Lines presented a "Joint Motion for Partial
Dismissal" with prejudice, on the basis of the amicable settlement inked between Cebu
Shipyard and William Lines only.

On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW
and William Lines were concerned.

On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court,
ruling thus:

WHEREFORE, the judgment of the lower court ordering the defendant, Cebu
Shipyard and Engineering Works, Inc. to pay the plaintiff Prudential Guarantee
and Assurance, Inc., the subrogee, the sum of P45 Million, with interest at the
legal rate until full payment is made, as contained in the decision of Civil Case
No. CEB-9935 is hereby AFFIRMED.

With the denial of its motion for reconsideration by the Court of Appeal's Resolution dated
February 13, 1998, CSEW found its way to this court via the present petition, contending that:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT

CSEW HAD "MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V MANILA
CITY AT THE TIME THE FIRE BROKE OUT.

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE

DOCTRINE OF RES IPSA LOQUITUR AGAINST CSEW.

III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY
LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED FINDINGS OF FACT
NOT SUPPORTED BY EVIDENCE.

IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEW'S

EXPERT EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.

V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT

PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.

VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION

AND THAT CSEW WAS NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS
UNDER THE SHIPREPAIR CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING
 CSEW'S LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P 1 MILLION IS NOT
VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE COURT.

Petitioner's version of the events that led to the fire runs as follows:

On February 13, 1991, the CSEW completed the drydocking of M/V Manila City
at its grave dock. It was then transferred to the docking quay of CSEW where the
remaining repair to be done was the replating of the top of Water Ballast Tank
No. 12 (Tank Top No. 12) which was subcontracted by CSEW to JNB General
Services. Tank Top No. 12 was at the rear section of the vessel, on level with the
flooring of the crew cabins located on the vessel's second deck.

At around seven o'clock in the morning of February 16, 1991, the JNB workers
trimmed and cleaned the tank framing which involved minor hotworks
(welding/cutting works). The said work was completed at about 10:00 a.m. The
JNB workers then proceeded to rig the steel plates, after which they had their
lunch break. The rigging was resumed at 1:00 p.m.

While in the process of rigging the second steel plate, the JNB workers noticed
smoke coming from the passageway along the crew cabins. When one of the
workers, Mr. Casas, proceeded to the passageway to ascertain the origin of the
smoke, he noticed that smoke was gathering on the ceiling of the passageway
but did not see any fire as the crew cabins on either side of the passageway were
locked. He immediately sought out the proprietor of JNB, Mr. Buenavista, and
the Safety officer CSEW, Mr. Aves, who sounded the fire alarm. CSEW's fire
brigade immediately responded as well as the other fire fighting units in Metro
Cebu. However, there were no WLI representative, officer or crew to guide the
firemen inside the vessel.

Despite the combined efforts of the firemen of the Lapulapu City Fire
Department, Mandaue Fire Cordova Fire Department, Emergency Rescue Unit
Foundation, and fire brigade of CSEW, the fire was not controlled until 2:00 a.m.,
of the following day, February 17, 1991.

On the early morning of February 17, 1991, gusty winds rekindled the flames on
the vessel and fire again broke out. Then the huge amounts of water pumped
into the vessel, coupled with the strong current, caused the vessel to tilt until it
capsized and sank.

When M/V Manila City capsized, steel and angle bars were noticed to have been
newly welded along the port side of the hull of the vessel, at the level of the
crew cabins. William Lines did not previously apply for a permit to do hotworks
on the said portion of the ship as it should have done pursuant to its work order
with CSEW.5
Respondent Prudential, on the other hand, theorized that the fire broke out in the following
manner:

At around eleven o'clock in the morning of February 16, 1991, the Chief Mate of
M/V Manila City was inspecting the various works being done by CSEW on the
vessel, when he saw that some workers of CSEW were cropping out steel plates
Tank Top No. 12 using acetylene, oxygen and welding torch. He also observed
that the rubber insulation wire coming out of the air-conditioning unit was
already burning, prompting him to scold the workers.

At 2:45 in the afternoon of the same day, witnesses saw smoke coming from
Tank No. 12. The vessel's reeferman reported such occurence to the Chief Mate
who immediately assembled the crew members to put out the fire. When it was
too hot for them to stay on board and seeing that the fire cannot be controlled,
the vessel's crew were forced to withdraw from CSEW's docking quay.

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was
insured with Prudential Guarantee, William Lines filed a claim for constructive
loss, and after a thorough investigation of the surrounding circumstances of the
tragedy, Prudential Guaranteed found the said insurance claim to be meritorious
and issued a check in favor of William Lines in the amount of P 45 million pesos
representing the total value of M/V Manila City's hull and machinery insurance.6

The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages for
the respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is
petitioner's submission that the finding of negligence by the Court of Appeals is not supported
by the evidence on record, and contrary to what the Court of Appeals found, petitioner did not
have management and control over M/V Manila City. Although it was brought to the premises
of CSEW for annual repair, William Lines, Inc. retained control over the vessel as the ship
captain remained in command and the ship's crew were still present. While it imposed certain
rules and regulations on William Lines, it was in the exercise of due diligence and not an
indication of CSEW's exclusive control over subject vessel. Thus, CSEW maintains that it did not
have exclusive control over the M/V Manila City and the trial court and the Court of Appeals
erred in applying the doctrine of res ipsa loquitur.

Time and again, this Court had occasion to reiterate the well-established rule that factual
findings by the Court of Appeals are conclusive on the parties and are not reviewable by this
Court. They are entitled to great weight and respect, even finality, especially when, as in this
case, the Court of Appeals affirmed the factual findings arrived at by the trial court. 7 When
supported by sufficient evidence, findings of fact by the Court of Appeals affirming those of the
trial court, are not to be disturbed on appeal. The rationale behind this doctrine is that review
of the findings of fact of the Court of Appeals is not a function that the Supreme Court normally
undertakes.8

Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire
which caused the total loss of subject M/V Manila City was due to the negligence of the
employees and workers of CSEW. Both courts found that the M/V Manila City was under the
custody and control of petitioner CSEW, when the ill-fated vessel caught fire. The decisions of
both the lower court and the Court of Appeals set forth clearly the evidence sustaining their
finding of actionable negligence on the part of CSEW. This factual finding is conclusive on the
parties. The court discerns no basis for disturbing such finding firmly anchored on enough
evidence. As held in the case of Roblett Industrial Construction Corporation vs. Court of Appeals,
"in the absence of any showing that the trial court failed to appreciate facts and circumstances
of weight and substance that would have altered its conclusion, no compelling reason exists for
the Court to impinge upon matters more appropriately within its province.9

Furthermore, in petitions for review on certiorari, only questions of law may be put into issue.
Questions of fact cannot be entertained. The finding of negligence by the Court of Appeals is a
question which this Court cannot look into as it would entail going into factual matters on which
the finding of negligence was based. Such an approach cannot be allowed by this Court in the
absence of clear showing that the case falls under any of the exceptions 10 to the well-
established principle.

The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and
sank by reason of the negligence of the workers of CSEW, when the said vessel was under the
exclusive custody and control of CSEW is accordingly upheld. Under the circumstances of the
case, the doctrine of res ipsa loquitur applies. For the doctrine of res ipsa loquitur to apply to a
given situation, the following conditions must concur (1) the accident was of a kind which does
not ordinarily occur unless someone is negligent; and (2) that the instrumentality or agency
which caused the injury was under the exclusive control of the person charged with negligence.

The facts and evidence on record reveal the concurrence of said conditions in the case under
scrutiny. First, the fire that occurred and consumed M/V Manila City would not have happened
in the ordinary course of things if reasonable care and diligence had been exercised. In other
words, some negligence must have occurred. Second, the agency charged with negligence, as
found by the trial court and the Court of Appeals and as shown by the records, is the herein
petitioner, Cebu Shipyard and Engineering Works, Inc., which had control over subject vessel
when it was docketed for annual repairs. So also, as found by the regional trial court, "other
responsible causes, including the conduct of the plaintiff, and third persons, are sufficiently
eliminated by the evidence. 11

What is more, in the present case the trial court found direct evidence to prove that the
workers and/or employees of CSEW were remiss in their duty of exercising due diligence in the
care of subject vessel. The direct evidence substantiates the conclusion that CSEW was really
negligent. Thus, even without applying the doctrine of res ipsa loquitur, in light of the direct
evidence on record, the ineluctable conclusion is that the petitioner, Cebu Shipyard and
Engineering Works, Inc., was negligent and consequently liable for damages to the respondent,
William Lines, Inc.

Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously
ruled on the inadmissibility of the expert testimonies it (petitioner) introduced on the probable
cause and origin of the fire. Petitioner maintains that the Court of Appeals erred in disregarding
the testimonies of the fire experts, Messrs. David Grey and Gregory Michael Southeard, who
testified on the probable origin of the fire in M/V Manila City. Petitioner avers that since the
said fire experts were one in their opinion that the fire did not originate in the area of Tank Top
No. 12 where the JNB workers were doing hotworks but on the crew accommodation cabins on
the portside No. 2 deck, the trial court and the Court of Appeals should have given weight to
such finding based on the testimonies of fire experts; petitioner argues.

But courts are not bound by the testimonies of expert witnesses. Although they may have
probative value, reception in evidence of expert testimonies is within the discretion of the
court. Section 49, Rule 130 of the Revised Rules of Court, provides:

Sec. 49. Opinion of expert witness. — The opinion of a witness on a matter

requiring special knowledge, skill, experience or training which he is shown to
possess, may be received in evidence.

The word "may" signifies that the use of opinion of an expert witness as evidence is a
prerogative of the courts. It is never mandatory for judges to give substantial weight to
expert testimonies. If from the facts and evidence on record, a conclusion is readily
ascertainable, there is no need for the judge to resort to expert opinion evidence. In the
case under consideration, the testimonies of the fire experts were not the only available
evidence on the probable cause and origin of the fire. There were witnesses who were
actually on board the vessel when the fire occurred. Between the testimonies of the fire
experts who merely based their findings and opinions on interviews and the testimonies
of those present during the fire, the latter are of more probative value. Verily, the trial
court and the Court of Appeals did not err in giving more weight to said testimonies.

On the issue of subrogation, petitioner contends that Prudential is not entitled to be

subrogated to the rights of William Lines, Inc., theorizing that (1) the fire which gutted M/V
Manila City was an excluded risk and (2) it is a co-assured under the Marine Hull Insurance
Policy.

It is petitioner's submission that the loss of M/V Manila City or damage thereto is expressly
excluded from the coverage of the insurance because the same resulted from "want of due
diligence by the Assured, Owners or Managers" which is not included in the risks insured
against. Again, this theory of petitioner is bereft of any factual or legal basis. It proceeds from a
wrong premise that the fire which gutted subject vessel was caused by the negligence of the
employees of William Lines, Inc. To repeat, the issue of who between the parties was negligent
has already been resolved against Cebu Shipyard and Engineering Works, Inc. Upon proof of
payment by Prudential to William Lines, Inc. the former was subrogated to the right of the
latter to indemnification from CSEW. As aptly ruled by the Court of Appeals, the law on the
manner is succinct and clear, to wit:

Art. 2207. If the plaintiffs 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. 12

Thus, when Prudential, after due verification of the merit and validity of the insurance claim of
William Lines, Inc., paid the latter the total amount covered by its insurance policy, it was
subrogated to the right of the latter to recover the insured loss from the liable party, CSEW.

Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-
assured under the subject insurance policy. To buttress its stance that it is a co-assured,
petitioner placed reliance on Clause 20 of the Work Order which states:

20 The insurance on the vessel should be maintained by the customer and/or

owner of the vessel during the period the contract is in effect. 13

According to petitioner, under the aforecited clause, William Lines, Inc., agreed to
assume the risk of loss of the vessel while under dry-dock or repair and to such extent, it
is benefited and effectively constituted as a co-assured under the policy.

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question
is clear in the sense that it requires William Lines to maintain insurance on the vessel during the
period of dry-docking or repair. Concededly, such a stipulation works to the benefit of CSEW as
the ship repairer. However, the fact that CSEW benefits from the said stipulation does not
automatically make it as a co-assured of William Lines. The intention of the parties to make
each other a co-assured under an insurance policy is to be gleaned principally from the
insurance contract or policy itself and not from any other contract or agreement because the
insurance policy denominates the assured and the beneficiaries of the insurance. The hull and
machinery insurance procured by William Lines, Inc. from Prudential named only "William
Lines, Inc." as the assured. There was no manifestation of any intention of William Lines, Inc. to
constitute CSEW as a co-assured under subject policy. It is axiomatic that when the terms of a
contract are clear its stipulations control. 14 Thus, when the insurance policy involved named
only William Lines, Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is
unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided
that:

Subject to the conditions of this Policy, this insurance also covers loss of or
damage to vessel directly caused by the following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or

Repairers are not an Assured hereunder 15 (emphasis supplied).

As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under
the policy, it would nullify any claim of William Lines, Inc. from Prudential for any loss or
damage caused by the negligence of CSEW. Certainly, no shipowner would agree to make a
shiprepairer a co-assured under such insurance policy; otherwise, any claim for loss or damage
under the policy would be invalidated. Such result could not have been intended by William
Lines, Inc.

Finally, CSEW argues that even assuming that it was negligent and therefore liable to William
Lines Inc., by stipulation in the Contract or Work Order its liability is limited to One Million
(P1,000,000.00) Pesos only, and Prudential a mere subrogee of William Lines, Inc., should only
be entitled to collect the sum stipulated in the said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per
se; as binding as an ordinary contract, the Court recognizes instances when reliance on such
contracts cannot be favored especially where the facts and circumstances warrant that subject
stipulations be disregarded. 16 Thus, in ruling on the validity and applicability of the stipulation
limiting the liability of CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts
and circumstances vis-a-vis the nature of the provision sought to be enforced should be
considered, bearing in mind the principles of equity and fair play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million
(P45,000,000.00) Pesos. To determine the validity and sustainability of the claim of William
Lines, Inc., for a total loss, Prudential conducted its own inquiry. Upon thorough investigation
by its hull surveyor, M/V Manila City was found to be beyond economical salvage and
repair. 17 The evaluation of the average adjuster also reported a constructive total loss. 18 The
said claim of William Lines, Inc., was then found to be valid and compensable such that
Prudential paid the latter the total value of its insurance claim. Furthermore, it was ascertained
that the replacement cost of the vessel (the price of a vessel similar to M/V Manila City),
amounts to Fifty Million (P 50,000,000.00) Pesos.19

Considering the aforestated circumstances, let alone the fact that negligence on the part of
petitioner has been sufficiently proven, it would indeed be unfair and inequitable to limit the
liability of petitioner to One Million Pesos only. As aptly held by the trial court, "it is rather
unconscionable if not overstrained." To allow CSEW to limit its liability to One Million Pesos
notwithstanding the fact that the total loss suffered by the assured and paid for by Prudential
amounted to Forty Five Million (P45,000,000.00) Pesos would sanction the exercise of a degree
of diligence short of what is ordinarily required because, then, it would not be difficult for
petitioner to escape liability by the simple expedient of paying an amount very much lower
than the actual damage or loss suffered by William Lines, Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated
September 3, 1997, and Resolution, dated February 13, 1998, of the Court of Appeals
AFFIRMED. No pronouncement as to costs.1âwphi1.nêt

SO ORDERED.

G.R. No. 105135 June 22, 1995

SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,

vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI, respondents.

QUIASON, J.:

This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse
and set aside the Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No.
29068, and its Resolution dated April 22, 1992, denying reconsideration thereof.

We grant the petition.

On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from
petitioner. He was issued Policy No. 3-903-766-X valued at P100,000.00, with double indemnity
in case of accidental death. The designated beneficiary was his mother, respondent Bernarda
Bacani.

On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim
with petitioner, seeking the benefits of the insurance policy taken by her son. Petitioner
conducted an investigation and its findings prompted it to reject the claim.

In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose
material facts relevant to the issuance of the policy, thus rendering the contract of insurance
voidable. A check representing the total premiums paid in the amount of P10,172.00 was
attached to said letter.

Petitioner claimed that the insured gave false statements in his application when he answered
the following questions:

5. Within the past 5 years have you:

a) consulted any doctor or other health practitioner?

b) submitted to:

EGG?
X-rays?
blood tests?
other tests?

c) attended or been admitted to any hospital or other medical

facility?

6. Have you ever had or sought advice for:

xxx xxx xxx

b) urine, kidney or bladder disorder? (Rollo, p. 53)

The deceased answered question No. 5(a) in the affirmative but limited his answer to a
consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital on
February 1986, for cough and flu complications. The other questions were answered in the
negative (Rollo, p. 53).

Petitioner discovered that two weeks prior to his application for insurance, the insured was
examined and confined at the Lung Center of the Philippines, where he was diagnosed for renal
failure. During his confinement, the deceased was subjected to urinalysis, ultra-sonography and
hematology tests.

On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando
Bacani, filed an action for specific performance against petitioner with the Regional Trial Court,
Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer with counterclaim and a list of
exhibits consisting of medical records furnished by the Lung Center of the Philippines.

On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for
Summary Judgment" where they manifested that they "have no evidence to refute the
documentary evidence of concealment/misrepresentation by the decedent of his health
condition (Rollo, p. 62).

Petitioner filed its Request for Admissions relative to the authenticity and due execution of
several documents as well as allegations regarding the health of the insured. Private
respondents failed to oppose said request or reply thereto, thereby rendering an admission of
the matters alleged.

Petitioner then moved for a summary judgment and the trial court decided in favor of private
respondents. The dispositive portion of the decision is reproduced as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against

the defendant, condemning the latter to pay the former the amount of One
Hundred Thousand Pesos (P100,000.00) the face value of insured's Insurance
Policy No. 3903766, and the Accidental Death Benefit in the amount of One
Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the
concept of reasonable attorney's fees and costs of suit.

Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).

In ruling for private respondents, the trial court concluded that the facts concealed by the
insured were made in good faith and under a belief that they need not be disclosed. Moreover,
it held that the health history of the insured was immaterial since the insurance policy was
"non-medical".

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The
appellate court ruled that petitioner cannot avoid its obligation by claiming concealment
because the cause of death was unrelated to the facts concealed by the insured. It also
sustained the finding of the trial court that matters relating to the health history of the insured
were irrelevant since petitioner waived the medical examination prior to the approval and
issuance of the insurance policy. Moreover, the appellate court agreed with the trial court that
the policy was "non-medical" (Rollo, pp. 4-5).

Petitioner's motion for reconsideration was denied; hence, this petition.

II

We reverse the decision of the Court of Appeals.

The rule that factual findings of the lower court and the appellate court are binding on this
Court is not absolute and admits of exceptions, such as when the judgment is based on a
misappreciation of the facts (Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded that indeed there was
concealment and misrepresentation, however, the same was made in "good faith" and the facts
concealed or misrepresented were irrelevant since the policy was "non-medical". We disagree.

Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to

communicate to the other, in good faith, all facts within his knowledge which are material to
the contract and as to which he makes no warranty, and which the other has no means of
ascertaining. Said Section provides:

A neglect to communicate that which a party knows and ought to communicate,

is called concealment.

Materiality is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom communication is due, in forming his estimate of
the disadvantages of the proposed contract or in making his inquiries (The Insurance Code, Sec.
31).

The terms of the contract are clear. The insured is specifically required to disclose to the insurer
matters relating to his health.

The information which the insured failed to disclose were material and relevant to the approval
and issuance of the insurance policy. The matters concealed would have definitely affected
petitioner's action on his application, either by approving it with the corresponding adjustment
for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a
medical examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the
information withheld does not depend on the state of mind of the insured. Neither does it
depend on the actual or physical events which ensue.

Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that
he was hospitalized for two weeks prior to filing his application for insurance, raises grave
doubts about his bonafides. It appears that such concealment was deliberate on his part.

The argument, that petitioner's waiver of the medical examination of the insured debunks the
materiality of the facts concealed, is untenable. We reiterate our ruling in Saturnino v.
Philippine American Life Insurance Company, 7 SCRA 316 (1963), that " . . . the waiver of a
medical examination [in a non-medical insurance contract] renders even more material the
information required of the applicant concerning previous condition of health and diseases
suffered, for such information necessarily constitutes an important factor which the insurer
takes into consideration in deciding whether to issue the policy or not . . . "
Moreover, such argument of private respondents would make Section 27 of the Insurance
Code, which allows the injured party to rescind a contract of insurance where there is
concealment, ineffective (See Vda. de Canilang v. Court of Appeals, supra).

Anent the finding that the facts concealed had no bearing to the cause of death of the insured,
it is well settled that the insured need not die of the disease he had failed to disclose to the
insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making inquiries (Henson v. The Philippine American
Life Insurance Co., 56 O.G. No. 48 [1960]).

We, therefore, rule that petitioner properly exercised its right to rescind the contract of
insurance by reason of the concealment employed by the insured. It must be emphasized that
rescission was exercised within the two-year contestability period as recognized in Section 48 of
The Insurance Code.

WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED
and SET ASIDE.

SO ORDERED.

G.R. No. 94149 May 5, 1992

AMERICAN HOME ASSURANCE, COMPANY, petitioner,

vs.
THE COURT OF APPEALS and NATIONAL MARINE CORPORATION and/or NATIONAL MARINE
CORPORATION (Manila), respondents.

PARAS, J.:

This is a petition for review on certiorari which seeks to annul and set aside the (a)
decision 1 dated May 30, 1990 of the Court of Appeals in C.A. G.R. SP. No. 20043 entitled
"American Home Assurance Company v. Hon. Domingo D. Panis, Judge of the Regional Trial
Court of Manila, Branch 41 and National Marine Corporation and/or National Marine
Corporation (Manila)", dismissing petitioner's petition for certiorari, and (b) resolution 2 dated
June 29, 1990 of the Court of Appeals denying petitioner's motion for reconsideration.

The undisputed facts of the case are follows:

Both petitioner American Home Assurance Co. and the respondent National Marine
Corporation are foreign corporations licensed to do business in the Philippines, the former
through its branch. The American Home Assurance Company (Philippines), Inc. and the latter
through its branch. The National Marine Corporation (Manila) (Rollo, p. 20, Annex L, p.1).

That on or about June 19, 1988, Cheng Hwa Pulp Corporation shipped 5,000 bales (1,000
ADMT) of bleached kraft pulp from Haulien, Taiwan on board "SS Kaunlaran", which is owned
and operated by herein respondent National Marine Corporation with Registration No. PID-224.
The said shipment was consigned to Mayleen Paper, Inc. of Manila, which insured the shipment
with herein petitioner American Home Assurance Co. as evidenced by Bill of Lading No. HLMN-
01.

On June 22, 1988, the shipment arrived in Manila and was discharged into the custody of the
Marina Port Services, Inc., for eventual delivery to the consignee-assured. However, upon
delivery of the shipment to Mayleen Paper, Inc., it was found that 122 bales had either been
damaged or lost. The loss was calculated to be 4,360 kilograms with an estimated value of
P61,263.41.

Mayleen Paper, Inc. then duly demanded indemnification from respondent National Marine
Corporation for the aforesaid damages/losses in the shipment but, for apparently no justifiable
reason, said demand was not heeded (Petition, p. 4).

As the shipment was insured with petitioner in the amount of US$837,500.00, Mayleen Paper,
Inc. sought recovery from the former. Upon demand and submission of proper documentation,
American Home Assurance paid Mayleen Paper, Inc. the adjusted amount of P31,506.75 for the
damages/losses suffered by the shipment, hence, the former was subrogated to the rights and
interests on Mayleen Paper, Inc.

On June 6, 1989, the petitioner, as subrogee, then brought suit against respondent for the
recovery of the amount of P31.506.75 and 25% of the total amount due as attorney's fees, by
filing a complaint for recovery of sum of money (Petition, p. 4).

Respondent, National Marine Corporation, filed a motion to dismiss dated August 7, 1989
stating that American Home Assurance Company had no cause of action based on Article 848 of
the Code of Commerce which provides "that claims for averages shall not be admitted if they
do not exceed 5% of the interest which the claimant may have in the vessel or in the cargo if it
be gross average and 1% of the goods damaged if particular average, deducting in both cases
the expenses of appraisal, unless there is an agreement to the contrary." It contended that
based on the allegations of the complaint, the loss sustained in the case was P35,506.75 which
is only .18% of P17,420,000.00, the total value of the cargo.

On the other hand, petitioner countered that Article 848 does not apply as it refers to averages
and that a particular average presupposes that the loss or damages is due to an inherent defect
of the goods, an accident of the sea, or a force majeure or the negligence of the crew of the
carrier, while claims for damages due to the negligence of the common carrier are governed by
the Civil Code provisions on Common Carriers.
In its order dated November 23, 1989, the Regional Trial Court sustained private respondent's
contention. In part it stated:

Before the Court for resolution is a motion for reconsideration filed by defendant
through counsel dated October 6, 1989.

The record shows that last August 8, 1989, defendant through counsel filed a
motion to dismiss plaintiff's complaint.

Resolving the said motion last September 18, 1989, the court ruled to defer
resolution thereof until after trial on the merits. In the motion now under
consideration, defendant prays for the reconsideration of the order of
September 18, 1989 and in lieu thereof, another order be entered dismissing
plaintiff's complaint.

There appears to be good reasons for the court to take a second look at the
issues raised by the defendant.

xxx xxx xxx

It is not disputed defendants that the loss suffered by the shipment is only .18%
or less that 1% of the interest of the consignee on the cargo Invoking the
provision of the Article 848 of the Code of Commerce which reads:

Claims for average shall not be admitted if they do not exceed five
percent of the interest which the claimant may have in the vessels
or cargo if it is gross average, and one percent of the goods
damaged if particular average, deducting in both cases the
expenses of appraisal, unless there is an agreement to the
contrary. (Emphasis supplied)

defendant claims that plaintiff is barred from suing for recovery.

Decisive in this case in whether the loss suffered by the cargo in question is a
"particular average."

Particular average, is a loss happening to the ship, freight, or

cargo which is not be (sic) shared by contributing among all those
interested, but must be borne by the owner of the subject to
which it occurs. (Black's Law Dictionary, Revised Fourth Edition, p.
172, citing Bargett v. Insurance Co. 3 Bosw. [N.Y.] 395).

as distinguished from general average which

 is a contribution by the several interests engaged in the maritime
venture to make good the loss of one of them for the voluntary
sacrifice of a part of the ship or cargo to save the residue of the
property and the lives of those on board, or for extraordinary
expenses necessarily incurred for the common benefit and safety
of all (Ibid., citing California Canneries Co. v. Canton Ins. Office 25
Cal. App. 303, 143 p. 549-553).

From the foregoing definition, it is clear that the damage on the cargo in
question, is in the nature of the "particular average." Since the loss is less than
1% to the value of the cargo and there appears to be no allegations as to any
agreement defendants and the consignee of the goods to the contrary, by
express provision of the law, plaintiff is barred from suing for recovery.

WHEREOF, plaintiff's complaint is hereby dismissed for lack of cause of action.

(Rollo, p. 27; Annex A, pp. 3-4).

The petitioner then filed a motion for reconsideration of the order of dismissal but same was
denied by the court in its order dated January 26, 1990 (supra).

Instead of filing an appeal from the order of the court a quo dismissing the complaint for
recovery of a sum of money, American Home Assurance Company filed a petition
for certiorari with the Court of Appeals to set aside the two orders or respondent judge in said
court (Rollo, p. 25).

But the Court of Appeals in its decision dated May 30, 1990, dismissed the petition as
constituting plain errors of law and not grave abuse of discretion correctible by certiorari (a
Special Civil Action). If at all, respondent court ruled that there are errors of judgment subject
to correction by certiorari as a mode of appeal but the appeal is to the Supreme Court under
Section 17 of the Judiciary Act of 1948 as amended by Republic Act No. 5440. Otherwise stated,
respondent Court opined that the proper remedy is a petition for review on certiorari with the
Supreme Court on pure questions of law (Rollo, p. 30).

Hence, this petition.

In a resolution dated December 10, 1990, this Court gave due course to the petition and
required both parties to file their respective memoranda (Rollo, p. 58).

The procedural issue in this case is whether or not certiorari was the proper remedy in the case
before the Court of Appeals.

The Court of Appeals ruled that appeal is the proper remedy, for aside from the fact that the
two orders dismissing the complaint for lack of cause of action are final orders within the
meaning of Rule 41, Section 2 of the Rules of Court, subject petition raised questions which if at
all, constituting grave abuse of discretion correctible by certiorari.

Evidently, the Court of Appeals did not err in dismissing the petition for certiorari for as ruled by
this Court, an order of dismissal whether right or wrong is a final order, hence, a proper subject
of appeal, not certiorari (Marahay v. Melicor, 181 SCRA 811 (1990]). However, where the fact
remains that respondent Court of Appeals obviously in the broader interests of justice,
nevertheless proceeded to decide the petition for certiorari and ruled on specific points raised
therein in a manner akin to what would have been done on assignments of error in a regular
appeal, the petition therein was therefore disposed of on the merits and not on a dismissal due
to erroneous choice of remedies or technicalities (Cruz v. I.A.C., 169 SCRA 14 (1989]). Hence, a
review of the decision of the Court of Appeals on the merits against the petitioner in this case is
in order.

On the main controversy, the pivotal issue to be resolved is the application of the law on
averages (Articles 806, 809 and 848 of the Code of Commerce).

Petitioner avers that respondent court failed to consider that respondent National Marine
Corporation being a common carrier, in conducting its business is regulated by the Civil Code
primarily and suppletorily by the Code of Commerce; and that respondent court refused to
consider the Bill of Lading as the law governing the parties.

Private respondent countered that in all matters not covered by the Civil Code, the rights and
obligations of the parties shall be governed by the Code of Commerce and by special laws
as provided for in Article 1766 of the Civil Code; that Article 806, 809 and 848 of the Code of
Commerce should be applied suppletorily as they provide for the extent of the common
carriers' liability.

This issue has been resolved by this Court in National Development Co. v. C.A. (164 SCRA 593
[1988]; citing Eastern Shipping Lines, Inc. v. I.A.C., 150 SCRA 469, 470 [1987] where it was held
that "the law of the country to which the goods are to be transported persons the liability of
the common carrier in case of their loss, destruction or deterioration." (Article 1753, Civil
Code). Thus, for cargoes transported to the Philippines as in the case at bar, the liability of the
carrier is governed primarily by the Civil Code and in all matters not regulated by said Code, the
rights and obligations of common carrier shall be governed by the Code of Commerce and by
special laws (Article 1766, Civil Code).

Corollary thereto, the Court held further that under Article 1733 of the Civil Code, common
carriers from the nature of their business and for reasons of public policy are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of passengers
transported by them according to all circumstances of each case. Thus, under Article 1735 of
the same Code, in all cases other than those mentioned in Article 1734 thereof, the common
carrier shall be presumed to have been at fault or to have acted negligently, unless it proves
that it has observed the extraordinary diligence required by law (Ibid., p. 595).
But more importantly, the Court ruled that common carriers cannot limit their liability for injury
or loss of goods where such injury or loss was caused by its own negligence. Otherwise stated,
the law on averages under the Code of Commerce cannot be applied in determining liability
where there is negligence (Ibid., p. 606).

Under the foregoing principle and in line with the Civil Code's mandatory requirement of
extraordinary diligence on common carriers in the car care of goods placed in their stead, it is
but reasonable to conclude that the issue of negligence must first be addressed before the
proper provisions of the Code of Commerce on the extent of liability may be applied.

The records show that upon delivery of the shipment in question of Mayleen's warehouse in
Manila, 122 bales were found to be damaged/lost with straps cut or loose, calculated by the so-
called "percentage method" at 4,360 kilograms and amounting to P61,263.41 (Rollo, p. 68).
Instead of presenting proof of the exercise of extraordinary diligence as required by law,
National Marine Corporation (NMC) filed its Motion to Dismiss dated August 7, 1989,
hypothetically admitting the truth of the facts alleged in the complaint to the effect that the
loss or damage to the 122 bales was due to the negligence or fault of NMC (Rollo, p. 179). As
ruled by this Court, the filing of a motion to dismiss on the ground of lack of cause of action
carries with it the admission of the material facts pleaded in the complaint (Sunbeam
Convenience Foods, Inc. v. C.A., 181 SCRA 443 [1990]). Such being the case, it is evident that the
Code of Commerce provisions on averages cannot apply.

On the other hand, Article 1734 of the Civil Code provides that common carriers are responsible
for loss, destruction or deterioration of the goods, unless due to any of the causes enumerated
therein. It is obvious that the case at bar does not fall under any of the exceptions. Thus,
American Home Assurance Company is entitled to reimbursement of what it paid to Mayleen
Paper, Inc. as insurer.

Accordingly, it is evident that the findings of respondent Court of Appeals, affirming the findings
and conclusions of the court a quo are not supported by law and jurisprudence.

PREMISES CONSIDERED, (1) the decisions of both the Court of Appeals and the Regional Trial
Court of Manila, Branch 41, appealed from are REVERSED; and (2) private respondent National
Marine Corporation is hereby ordered to reimburse the subrogee, petitioner American Home
Assurance Company, the amount of P31,506.75.

SO ORDERED.