[ G.R. NO.

147839, June 08, 2006 ] 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
GAISANO CAGAYAN, INC. PETITIONER, VS. INSURANCE COMPANY OF NORTH never communicated to it that they insured their properties; that it never consented to paying the claim of
AMERICA, RESPONDENT. the insured.[6]

AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision[1] 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:
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;

1. Warranted that the Company shall not be liable for any unpaid account in respect of the 2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for a period insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.
in excess of six (6) months from the date of the covering invoice or actual delivery of the
merchandise whichever shall first occur. With costs against the defendant-appellee.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close SO ORDERED.[10]
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 x[4] 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
xxxx 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
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.  Included in the delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is
the items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by not extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the
IMC and LSPI. 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]
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 Petitioner filed a motion for reconsideration [12] but it was denied by the CA in its Resolution dated April
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of 11, 2001.[13]
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 Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
rights against petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.[5] THE COURT OF APPEALS ERRED IN HOLDING THAT THE  INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.
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 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.
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.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner into it any alleged intention of the parties, the terms are to be understood literally just as they appear on
upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment between the face of the contract. [25] Thus, what were insured against were the accounts of IMC and LSPI with
respondent and its insured nor was its consent or approval ever secured; that this lack of privity forecloses petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the
any real interest on the part of respondent in the obligation to pay, limiting its interest to keeping the goods delivered.
insured goods safe from fire.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by
For its part, respondent counters that while ownership over the ready- made clothing materials was stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors payment of the purchase price the above described merchandise remains the property of the vendor until
who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the purchase price thereof is fully paid." [26]
the ready-made clothing materials since it failed to overcome the presumption of liability under Article
1265[16] of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide The Court is not persuaded.
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 The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
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 ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
expenses and cost of suit. [17] 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:
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 (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
evidence presented by the litigants or any of them. [18] The Supreme Court is not a trier of facts; it is not its the contract and the ownership in the goods has been retained by the seller merely to secure
function to analyze or weigh evidence all over again. [19]  Accordingly, findings of fact of the appellate performance by the buyer of his obligations under the contract, the goods are at the buyer's risk
court are generally conclusive on the Supreme Court. [20] from the time of such delivery;  (Emphasis supplied)

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.
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 Art. 2207.  If the plaintiff's property has been insured, and he has received indemnity from the insurance
interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract.  x x x
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 Petitioner failed to refute respondent's evidence.
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 As to LSPI, respondent failed to present sufficient evidence to prove its cause of action.   No evidentiary
is insured.[29] Anyone has an insurable interest in property who derives a benefit from its existence or weight can be given to Exhibit "F Levi Strauss", [42] a letter dated April 23, 1991 from petitioner's General
would suffer loss from its destruction. [30]  Indeed, a vendor or seller retains an insurable interest in the Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI.  It
property sold so long as he has any interest therein, in other words, so long as he would suffer by its only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
destruction, as where he has a vendor's lien. [31]  In this case, the insurable interest of IMC and LSPI building on February 25, 1991. 
pertain to the unpaid accounts appearing in their Books of Account 45 days after the time of the loss
covered by the policies. 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
The next question is: Is petitioner liable for the unpaid accounts? 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.
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 [32] of the
Civil Code is misplaced.  As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Code. 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
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for respondent is DELETED for lack of factual basis.
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:
 The lower court decided in favor of private respondent and required petitioner to pay, aside from the
[ G.R. No. 119599, March 20, 1997 ] insurance claim, consequential and liquidated damages amounting to P1,024,233.88, exemplary damages
amounting to P100,000.00, reimbursement in the amount equivalent to 10% of whatever is recovered as
MALAYAN INSURANCE CORPORATION, PETITIONER, VS. THE HON. COURT OF attorney's fees as well as the costs of the suit. On private respondent's motion for reconsideration,
APPEALS AND TKC MARKETING CORPORATION, RESPONDENTS. petitioner was also required to further pay interest at the rate of 12% per annum on all amounts due and
owing to the private respondent by virtue of the lower court decision counted from the inception of this
DECISION
case until the same is paid.
ROMERO, J.:
On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of
Clause 12 of the policies issued to private respondent, the same became automatically covered under
Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G.R. No.
subsection 1.1 of Section 1 of the Institute War Clauses. The arrests, restraints or detainments
43023[1] which affirmed, with slight modification, the decision of the Regional Trial Court of Cebu,
contemplated in the former clause were those effected by political or executive acts. Losses occasioned
Branch 15.
by riot or ordinary judicial processes were not covered therein. In other words, arrest, restraint or
detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by ordinary legal
Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of
processes. Hence, arrests by civil authorities, such as what happened in the instant case, is an excepted
soya bean meal which was loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for
risk under Clause 12 of the Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of
carriage from the port of Rio del Grande, Brazil, to the port of Manila. Said cargo was insured against the
Clause 12 of the Institute Cargo Clause and the consequent adoption or institution of the Institute War
risk of loss by petitioner Malayan Insurance Corporation for which it issued two (2) Marine Cargo Policy
Clauses (Cargo), the arrest and seizure by judicial processes which were excluded under the former
Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45,
policy became one of the covered risks.
both dated September 1989.
The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss
While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila, the civil
compensable, not only under the Institute War Clause but also under the Theft, Pilferage, and Non-
authorities arrested and detained it because of a lawsuit on a question of ownership and possession. As a
delivery Clause (TNPD) of the insurance policies, as read in relation to Section 130 of the Insurance
result, private respondent notified petitioner on October 4, 1989 of the arrest of the vessel and made a
Code and as held in Williams v. Cole.[2]
formal claim for the amount of US$916,886.66, representing the dollar equivalent on the policies, for
non-delivery of the cargo. Private respondent likewise sought the assistance of petitioner on what to do
Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port
with the cargo.
from completing the voyage due to its seizure by civil authorities, a peril insured against, the liability of
petitioner continued until the goods could have been transhipped. But due to the perishable nature of the
Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies.
goods, it had to be promptly sold to minimize loss. Accordingly, the sale of the goods being reasonable
Private respondent, accordingly, advised petitioner that it might tranship the cargo and requested an
and justified, it should not operate to discharge petitioner from its contractual liability.
extension of the insurance coverage until actual transhipment, which extension was approved upon
payment of additional premium. The insurance coverage was extended under the same terms and
Hence this petition, claiming that the Court of Appeals erred:
conditions embodied in the original policies while in the process of making arrangements for the
transhipment of the cargo from Durban to Manila, covering the period October 4-December 19, 1989.
1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric
2. In ruling that there was constructive total loss over the cargo.
ton or a total of P10,304,231.75 due to its perishable nature which could no longer stand a voyage of
twenty days to Manila and another twenty days for the discharge thereof. On January 5, 1990, private
3. In ruling that petitioner was in bad faith in declining private respondent's claim.
respondent forthwith reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the
exchange rate of P22.0138 per $1.00) representing private respondent's loss after the proceeds of the sale
4. In giving undue reliance to the doctrine that insurance policies are strictly construed against the
were deducted from the original claim of $916,886.66 or P20,184,159.55.
insurer.
Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of
In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not
ownership was an excepted risk under the marine insurance policies. This prompted private respondent to
compensable since the term "arrest" refers to "political or executive acts" and does not include a loss
file a complaint for damages praying that aside from its claim, it be reimbursed the amount of
caused by riot or by ordinary judicial process as in this case; (b) the deletion of the Free from Capture or
P128,770.88 as legal expenses and the interest it paid for the loan it obtained to finance the shipment
Seizure Clause would leave the assured covered solely for the perils specified by the wording of the
totalling P942,269.30. In addition, private respondent asked for moral damages amounting to
policy itself; (c) the rationale for the exclusion of an arrest pursuant to judicial authorities is to eliminate
P200,000.00, exemplary damages amounting to P200,000.00 and attorney's fees equivalent to 30% of
collusion between unscrupulous assured and civil authorities.
what will be awarded by the court.
As to the second assigned error, petitioner submits that any loss which private respondent may have
incurred was in the nature and form of unrecovered acquisition value brought about by a voluntary
sacrifice sale and not by arrest, detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief
that the arrest of the vessel was not a compensable risk under the policies issued. In fact, petitioner
supported private respondent by accommodating the latter's request for an extension of the insurance
coverage, notwithstanding that it was then under no legal obligation to do so.
Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals,
petitioner did not raise as an issue the award of exemplary damages. It cannot now, for the first time,
raise the same before this Court. Likewise, petitioner cannot submit for the first time on appeal its
argument that it was wrong for the Court of Appeals to have ruled the way it did based on facts that
would need inquiry into the evidence. Even if inquiry into the facts were possible, such was not necessary
because the coverage as ruled upon by the Court of Appeals is evident from the very terms of the
policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted
against it because the rule is that any ambiguity is to be taken contra proferentum. Risk policies should be
construed reasonably and in a manner as to make effective the intentions and expectations of the parties.
It added that the policies clearly stipulate that they cover the risks of non-delivery of an entire package
and that it was petitioner itself that invited and granted the extensions and collected premiums thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject
policies in relation to the excluded risks or warranty specifically stated therein.
By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase
"perils of the sea" to encompass the wide and varied range of risks that were covered. [3] The subject
policies contain the "Perils" clause which is a standard form in any marine insurance policy. Said clause
reads:
"Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take
upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves,
Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and
Detainments of all Kings, Princess and Peoples, of what Nation, condition, or quality soever, Barratry of
the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt,
detriment, or damage of the said goods and merchandise or any part thereof . AND in case of any loss or
misfortune it shall be lawful to the ASSURED, their factors, servants and assigns, to sue, labour, and
travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and
ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said
COMPANY, will contribute according to the rate and quantity of the sum herein INSURED. AND it is
expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or preserving
the Property insured shall be considered as a Waiver, or Acceptance of Abandonment. And it is agreed by
the said COMPANY, that this writing or Policy of INSURANCE shall be of as much Force and Effect as
the surest Writing or Policy of INSURANCE made in LONDON. And so the said MALAYAN
INSURANCE COMPANY, INC., are contented, and do hereby promise and bind themselves, their Heirs,
Executors, Goods and Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for
the true Performance of the Premises; confessing themselves paid the Consideration due unto them for
this INSURANCE at and after the rate arranged." (Underscoring supplied)
The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject policies is
specifically referred to as Clause 12 called the "Free from Capture & Seizure Clause" or the F.C. & S.
Clause which reads, thus:
"Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of
any attempt thereat; also from the consequences of hostilities and warlike operations, whether there be a
declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating
object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and
independently of the nature of the voyage or service which the vessel concerned or, in the case of a
collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent
power and for the purpose of this warranty 'power' includes any authorities maintaining naval, military or
air forces in association with power.
Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising
therefrom or piracy.
Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of
this insurance." (Underscoring supplied)
However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War Clauses
(Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides:
"1. This insurance covers:
1.1 The risks excluded from the standard form of English Marine Policy by the clause warranted free of
capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike
operations, whether there be a declaration of war or not; but this warranty shall not exclude collision,
contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire
unless caused directly (and independently of the nature on voyage or service which the vessel concerned
or, in the case of a collision any other vessel involved therein is performing) by a hostile act by or against
a belligerent power; and for the purpose of this warranty 'power' includes any authority maintaining
naval, military or air forces in association with a power. Further warranted free from the consequences of
civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy."
According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute War
Clauses (Cargo), among others, means that any "capture, arrest, detention, etc." pertained exclusively to
warlike operations if this Court strictly construes the heading of the said Clauses. However, it also claims
that the parties intended to include arrests, etc. even if it were not the result of hostilities or warlike
operations. It further claims that on the strength of jurisprudence on the matter, the term "arrests" would
only cover those arising from political or executive acts, concluding that whether private respondent's
claim is anchored on subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S.
Clause, the arrest of the vessel by judicial authorities is an excluded risk. [4]
This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils"
Clause, it assumed the risk of arrest caused solely by executive or political acts of the government of the
seizing state and thereby excludes "arrests" caused by ordinary legal processes, such as in the instant
case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court
agrees with the Court of Appeals and the private respondent that "arrest" caused by ordinary judicial
process is deemed included among the covered risks. This interpretation becomes inevitable when
subsection 1.1 of Section 1 of the Institute War Clauses provided that "this insurance covers the risks
excluded from the Standard Form of English Marine Policy by the clause 'Warranted free of capture,
seizure, arrest, etc. x x x'" or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by ordinary judicial
process is also a risk excluded from the Standard Form of English Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included
in the covered risk simply because the F.C. & S. Clause under the Institute War Clauses can only be
operative in case of hostilities or warlike operations on account of its heading "Institute War Clauses."
This Court agrees with the Court of Appeals when it held that ". . . Although the F.C. & S. Clause may
have originally been inserted in marine policies to protect against risks of war, (see generally G. Gilmore
& C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years
to include seizure or detention by civil authorities seems consistent with the general purposes of the
clause, x x x"[5] In fact, petitioner itself averred that subsection 1.1 of Section 1 of the Institute War
Clauses included "arrest" even if it were not a result of hostilities or warlike operations.[6] In this regard,
since what was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial
process, logically, such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of
the Institute War Clauses, regardless of whether or not said "arrest" by civil authorities occurred in a state
of war.
Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of
subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause was
"originally incorporated in insurance policies to eliminate the risks of warlike operations". It also averred
that the F.C. & S. Clause applies even if there be no war or warlike operations x x x" [7] In the same vein,
it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively
to warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent
incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest,
etc. even if it were not a result of hostilities or warlike operations." [8]
If a marine insurance company desires to limit or restrict the operation of the general provisions of its
contract by special proviso, exception, or exemption, it should express such limitation in clear and
unmistakable language.[13] Obviously, the deletion of the F.C. & S. Clause and the consequent
incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity.
If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the
subject policies, there would have been no controversy with respect to the interpretation of the subject
clauses.
Be that as it may, exceptions to the general coverage are construed most strongly against the company.
[14]
 Even an express exception in a policy is to be construed against the underwriters by whom the policy
is framed, and for whose benefit the exception is introduced. [15]
An insurance contract should be so interpreted as to carry out the purpose for which the parties entered
into the contract which is, to insure against risks of loss or damage to the goods. Such interpretation
should result from the natural and reasonable meaning of language in the policy. [16] Where restrictive
provisions are open to two interpretations, that which is most favorable to the insured is adopted. [17]
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving
any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. [18]A
contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its obligations. [19]
In view of the foregoing, this Court sees no need to discuss the other issues presented.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals
is AFFIRMED.

This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions
of the policy in order to avoid being liable for private respondent's claim.

This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest"
occasioned by executive or political acts of government which is interpreted as not referring to those
caused by ordinary legal processes as contained in the "Perils" Clause; deletes the F.C. & S. Clause
which excludes risks of arrest occasioned by executive or political acts of the government and naturally,
also those caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of Section 1 of
the Institute War Clauses which now includes in the coverage risks of arrest due to executive or political
acts of a government but then still excludes "arrests" occasioned by ordinary legal processes when
subsection 1.1 of Section 1 of said Clauses should also have included "arrests" previously excluded from
the coverage of the F.C. & S. Clause.

It has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd
conclusion or to render the policy nonsensical, should, by all means, be avoided. [9] Likewise, it must be
borne in mind that such contracts are invariably prepared by the companies and must be accepted by the
insured in the form in which they are written. [10] Any construction of a marine policy rendering it void
should be avoided.[11] Such policies will, therefore, be construed strictly against the company in order to
avoid a forfeiture, unless no other result is possible from the language used. [12]
 G.R. No. L-21821-22 and L-21824-27             May 31, 1966
DIOSDADO C. TY, plaintiff-appellant,
vs. FILIPINAS COMPAÑIA DE SEGUROS, et al., defendants-appellees.
Porfirio V. Villaroman for plaintiff-appellant.
Ramirez and Ortigas for defendants-appellees Filipinas Compañia de Seguros, Philippine Guaranty Co.,
Inc. and Universal Insurance and Indemnity Co.
Renato L. Liboro for defendant-appellee People's Surety and Insurance Co., Inc.
Perfecto P. R. Chua Cheng for defendant-appellee South Sea Surety and Insurance Co., Inc.
Gil Carlos and Associates for defendant-appellee Plaridel Surety and Insurance Co., Inc.
BARRERA, J.:
These are appeals instituted by Diosdado C. Ty from a single decision of the Court of First Instance of
Manila (in Civ. Cases Nos. 26343, 26344, 26404, 26405, 26406, 26442, which were tried together),
dismissing the six separate complaints he filed against six insurance companies (Filipinas Compañia de
Seguros, People's Surety & Insurance Co., Inc., South Sea Surety & Insurance Co., Inc., The Philippine
Guaranty Company, Inc., Universal Insurance & Indemnity Co., and Plaridel Surety & Insurance Co.,
Inc.) for collection from each of them, of the sum of P650.00, as compensation for the disability of his
left hand.
The facts of these cases are not controverted:
Plaintiff-appellant was an employee of Broadway Cotton Factory at Grace Park, Caloocan City, working
as mechanic operator, with monthly salary of P185.00. In the latter part of 1953, he took Personal
Accident Policies from several insurance companies, among which are herein defendants-appellees, on
different dates,1 effective for 12 months. During the effectivity of these policies, or on December 24,
1953, a fire broke out in the factory where plaintiff was working. As he was trying to put out said fire
with the help of a fire extinguisher, a heavy object fell upon his left hand. Plaintiff received treatment at
the National Orthopedic Hospital from December 26, 1953 to February 8, 1954, for the following
injuries, to wit:
(1) Fracture, simple, oraximal phalanx, index finger, left;
(2) Fracture, compound, communite proximal phalanx, middle finger, left and 2nd phalanx
simple;
(3) Fracture, compound, communite phalanx, 4th finger, left;
(4) Fracture, simple, middle phalanx, middle finger, left;
(5) Lacerated wound, sutured, volar aspect, small finger, left;
(6) Fracture, simple, chip, head, 1st phalanx 5th digit, left.
which injuries, the attending surgeon certified, would cause temporary total disability of appellant's left
hand.
As the insurance companies refused to pay his claim for compensation under the policies by reason of the
said disability of his left hand, Ty filed motions in the Municipal Court of Manila, which rendered
favorable decision. On appeal to the Court of First Instance by the insurance companies, the cases were
dismissed on the ground that under the uniform terms of the insurance policies, partial disability of the
insured caused by loss of either hand to be compensable, the loss must result in the amputation of that
hand. Hence, these appeals by the insured.1äwphï1.ñët
Plaintiff-appellant is basing his claim for indemnity under the provision of the insurance contract,
uniform in all the cases, which reads:
"INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through violent, external,
visible and accidental means, and which shall not prove fatal but shall result, independently of
all other causes and within sixty (60) days from the occurrence, thereof, in Total or Partial
Disability of the Insured, the Company shall pay, subject to the exceptions as provided for
hereinafter, the amount set opposite such injury.
xxx     xxx     xxx
PARTIAL DISABILITY
LOSS OF:
xxx     xxx     xxx
Either Hand P650.00
xxx     xxx     xxx
The loss of a hand shall mean the loss, by amputation through the bones of the wrist.
Appellant contends that to be entitled to indemnification under the foregoing provision, it is enough that
the insured is disabled to such an extent that he cannot substantially perform all acts or duties of the kind
necessary in the prosecution of his business. It is argued that what is compensable is the disability and not
the amputation of the hand. The definition of what constitutes loss of hand, placed in the contract,
according to appellant, consequently, makes the provision ambiguous and calls for the interpretation
thereof by this Court.
This is not the first time that the proper construction of this provision, which is uniformly carried in
personal accident policies, has been questioned. Herein appellant himself has already brought this matter
to the attention of this Court in connection with the other accident policies which he took and under
which he had tried to collect indemnity, for the identical injury that is the basis of the claims in these
cases. And, we had already ruled:
 While we sympathize with the plaintiff or his employer, for whose benefit the policies were
issued, we can not go beyond the clear and express conditions of the insurance policies, all of
which definite partial disability as loss of either hand by amputation through the bones of the
wrist. There was no such amputation in the case at bar. All that was found by the trial court,
which is not disputed on appeal, was that the physical injuries "caused temporary total
disability of plaintiff's left hand." Note that the disability of plaintiff's hand was merely
temporary, having been caused by fractures of the index, the middle and the fourth fingers of
the left hand.

We might add that the agreement contained in the insurance policies is the law between the parties. As
the terms of the policies are clear, express and specific that only amputation of the left hand should be
considered as a loss thereof, an interpretation that would include the mere fracture or other temporary
disability not covered by the policies would certainly be unwarranted. 2

We find no reason to depart from the foregoing ruling on the matter.

Plaintiff-appellant cannot come to the courts and claim that he was misled by the terms of the contract.
The provision is clear enough to inform the party entering into that contract that the loss to be considered
a disability entitled to indemnity, must be severance or amputation of that affected member from the body
of the insured.

Wherefore, finding no error in the decision appealed from, the same is hereby affirmed, without costs. So
ordered.
 [ G.R. No. 156167, May 16, 2005 ]

GULF RESORTS, INC., PETITIONER, VS. PHILIPPINE CHARTER INSURANCE

CORPORATION, RESPONDENT. a) Tilter House- P19,800.00- 0.551%

DECISION b) Power House- P41,000.00-0.551%

PUNO, J.: c) House Shed- P55,000.00 -0.540%

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner P100,000.00 for furniture, fixtures, lines air-con
GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. and operating equipment
Petitioner assails the appellate court decision [1] which dismissed its two appeals and affirmed the
judgment of the trial court.
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
4568061-9 (Exh. “H”) provided that the policy wording and rates in said policy be copied in the policy to
company’s liability for earthquake damage to petitioner’s properties. Petitioner avers that, pursuant to its
be issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of March
earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties
14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. “I”); that in the
within its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to the
computation of the premium, defendant’s Policy No. 31944 (Exh. “I”), which is the policy in question,
two swimming pools of petitioner.
contained on the right-hand upper portion of page 7 thereof, the following:
The facts as established by the court a quo, and affirmed by the appellate court are as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort Rate-Various
insured originally with the American Home Assurance Company (AHAC-AIU). In the first four
insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. “C”,
“D”, “E” and “F”; also Exhs. “1”, “2”, “3” and “4” respectively), the risk of loss from earthquake shock
was extended only to plaintiff’s two swimming pools, thus, “earthquake shock endt.” (Item 5 only) (Exhs. Premium - P37,420.60 F/L
“C-1”; “D-1,” and “E” and two (2) swimming pools only (Exhs. “C-1”; ‘D-1”, “E” and “F-1”). “Item 5”
in those policies referred to the two (2) swimming pools only (Exhs. “1-B”, “2-B”, “3-B” and “F-2”); that 2,061.52 – Typhoon
subsequently AHAC(AIU) issued in plaintiff’s favor Policy No. 206-4182383-0 covering the period
March 14, 1988 to March 14, 1989 (Exhs. “G” also “G-1”) and in said policy the earthquake endorsement 1,030.76 – EC
clause as indicated in Exhibits “C-1”, “D-1”, Exhibits “E” and “F-1” was deleted and the entry under
Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with AHAC (AIU) for
393.00 – ES
the period of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. “H”) which
carried the entry under “Endorsement/Warranties at Time of Issue”, which read “Endorsement to Include
Earthquake Shock (Exh. “6-B-1”) in the amount of P10,700.00 and paid P42,658.14 (Exhs. “6-A” and Doc. Stamps 3,068.10
“6-B”) as premium thereof, computed as follows:
F.S.T.; 776.89

Item -P7,691,000.00 - on the Clubhouse only @ .392%; Prem. Tax 409.05

1,500,000.00 - on the furniture, etc. contained in TOTAL 45,159.92;

the building above-mentioned@ .
490%;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
393,000.00- on the two swimming pools, only earthquake shock (ES); that in all the six insurance policies (Exhs. “C”, “D”, “E”, “F”, “G” and “H”), the
(against the peril of earthquake premium against the peril of earthquake shock is the same, that is P393.00 (Exhs. “C” and “1-B”; “2-B”
shock only) @ 0.100% and “3-B-1” and “3-B-2”; “F-02” and “4-A-1”; “G-2” and “5-C-1”; “6-C-1”; issued by AHAC (Exhs.
“C”, “D”, “E”, “F”, “G” and “H”) and in Policy No. 31944 issued by defendant, the shock endorsement
provide(sic):
116,600.00- other buildings include as follows:
In consideration of the payment by the insured to the company of the sum included additional premium that only the two swimming pools were insured against earthquake shock.
the Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the
contrary, that this insurance covers loss or damage to shock to any of the property insured by this Policy Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the
occasioned by or through or in consequence of earthquake (Exhs. “1-D”, “2-D”, “3-A”, “4-B”, “5-A”, “6- language used in an insurance contract or application is such as to create ambiguity the same should be
D” and “7-C”); resolved against the party responsible therefor, i.e., the insurance company which prepared the contract.
To the mind of [the] Court, the language used in the policy in litigation is clear and unambiguous hence
that in Exhibit “7-C” the word “included” above the underlined portion was deleted; that on July 16, 1990 there is no need for interpretation or construction but only application of the provisions therein.
an earthquake struck Central Luzon and Northern Luzon and plaintiff’s properties covered by Policy No.
31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged. [2] From the above observations the Court finds that only the two (2) swimming pools had earthquake shock
coverage and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant having
After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance admitted that the damage to the swimming pools was appraised by defendant’s adjuster at P386,000.00,
Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim, defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
then assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and
Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster, requested petitioner to submit Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is
various documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc., liable only for the damage caused to the two (2) swimming pools and that defendant has made known to
through its Vice-President A.R. de Leon,[4] rendered a preliminary report[5] finding extensive damage plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of the other
caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the
“except for the swimming pools, all affected items have no coverage for earthquake shocks.” [6] On action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the
August 11, 1990, petitioner filed its formal demand [7] for settlement of the damage to all its properties in plaintiff’s right to come to Court in the honest belief that their Complaint is meritorious. The prayer,
the Agoo Playa Resort. On August 23, 1990, respondent denied petitioner’s claim on the ground that its therefore, of defendant for damages is likewise denied.
insurance policy only afforded earthquake shock coverage to the two swimming pools of the resort.
[8]
 Petitioner and respondent failed to arrive at a settlement. [9] Thus, on January 24, 1991, petitioner filed a WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE
complaint[10] with the regional trial court of Pasig praying for the payment of the following: HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2)
swimming pools, with interest at 6% per annum from the date of the filing of the Complaint until
defendant’s obligation to plaintiff is fully paid.
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with
interest thereon, as computed under par. 29 of the policy (Annex “B”) until fully paid; No pronouncement as to costs.[13]

Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
Appeals based on the following assigned errors:[14]
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on
account of defendant’s refusal to pay the claims;
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY
NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE
3.) ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO
The sum of P500,000.00, by way of exemplary damages;
THE EARTHQUAKE OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANT’S RIGHT TO

4.) The sum of P500,000.00 by way of attorney’s fees and expenses of litigation; RECOVER UNDER DEFENDANT-APPELLEE’S POLICY (NO. 31944; EXH “I”) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
5.) Costs.[11]
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims. [12] ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
On the other hand, respondent filed a partial appeal, assailing the lower court’s failure to award it
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of attorney’s fees and damages on its compulsory counterclaim.
earthquake shock, the same premium it paid against earthquake shock only on the two swimming pools in
all the policies issued by AHAC(AIU) (Exhibits “C”, “D”, “E”, “F” and “G”). From this fact the Court After review, the appellate court affirmed the decision of the trial court and ruled, thus:
must consequently agree with the position of defendant that the endorsement rider (Exhibit “7-C”) means
However, after carefully perusing the documentary evidence of both parties, We are not convinced that
the last two (2) insurance contracts (Exhs. “G” and “H”), which the plaintiff-appellant had with AHAC Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the
(AIU) and upon which the subject insurance contract with Philippine Charter Insurance Corporation is insurance policy, because the rider is the more deliberate expression of the agreement of the contracting
said to have been based and copied (Exh. “I”), covered an extended earthquake shock insurance on all the parties.
insured properties
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.
We also find that the Court a quo was correct in not granting the plaintiff-appellant’s prayer for the
imposition of interest – 24% on the insurance claim and 6% on loss of income allegedly amounting to Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner
P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused on and against respondent. It was respondent which caused the ambiguity when it made the policy in issue.
the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable only, it then
cannot be said that it was in default and therefore liable for interest. Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools
Coming to the defendant-appellant’s prayer for an attorney’s fees, long-standing is the rule that the award from the coverage for the risk of fire. It should not be used to limit the respondent’s liability for
thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not earthquake shock to the two swimming pools only.
be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the
award thereof an exception rather than a rule, it is necessary for the court to make findings of facts and Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the
law that would bring the case within the exception and justify the grant of such award (Country Bankers extended coverage. The premium for the earthquake shock coverage was already included in the premium
Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, paid for the policy.
2002). Therefore, holding that the plaintiff-appellant’s action is not baseless and highly speculative, We
find that the Court a quo did not err in granting the same. Tenth, the parties’ contemporaneous and subsequent acts show that they intended to extend earthquake
shock coverage to all insured properties. When it secured an insurance policy from respondent, petitioner
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the told respondent that it wanted an exact replica of its latest insurance policy from American Home
Trial Court hereby AFFIRMED in toto. No costs.[15] Assurance Company (AHAC-AIU), which covered all the resort’s properties for earthquake shock
damage and respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that it
Petitioner filed the present petition raising the following issues: [16] was covered for earthquake shock. Respondent’s insurance adjuster, Bayne Adjusters and Surveyors,
Inc., likewise requested petitioner to submit the necessary documents for its building claims and other
repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance policy it
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
issued to petitioner covered all of the properties within the resort.
RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS,
RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE INSURED
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised
AGAINST THE RISK OF EARTHQUAKE SHOCK.
Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the
facts upon which this petition is based.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONER’S PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEY’S FEES On the other hand, respondent made the following counter arguments: [18]
AND EXPENSES OF LITIGATION.
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
Petitioner contends: coverage against earthquake shock to petitioner’s insured properties other than on the two swimming
pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were insured against
First, that the policy’s earthquake shock endorsement clearly covers all of the properties insured and not earthquake shock. From 1988 until 1990, the provisions in its policy were practically identical to its
only the swimming pools. It used the words “any property insured by this policy,” and it should be earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a letter [19] by its
interpreted as all inclusive. representative Manuel C. Quijano, categorically stated that its previous policy, from which respondent’s
policy was copied, covered only earthquake shock for the two swimming pools.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the
body of the insurance policy itself, which states that it is “[s]ubject to: Other Insurance Clause, Typhoon Second, petitioner’s payment of additional premium in the amount of P393.00 shows that the policy only
Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment covered earthquake shock damage on the two swimming pools. The amount was the same amount paid
Agreement On Long Term Policies.” [17] by petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No additional
premium was paid to warrant coverage of the other properties in the resort.
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement. Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the
two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it petitioner’s properties. As per its agreement with petitioner, respondent copied its policy from the
deleted the said qualification. AHAC-AIU policy provided by petitioner. Although the first five policies contained the said qualification
in their rider’s title, in the last two policies, this qualification in the title was deleted. AHAC-AIU,
through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not PREMIUM RECAPITULATION
make the policy incomplete, nor did it broaden the scope of the endorsement whose descriptive title was
merely enumerated. Any ambiguity in the policy can be easily resolved by looking at the other ITEM NOS. AMOUNT RATES PREMIUM
provisions, specially the enumeration of the items insured, where only the two swimming pools were
noted as covered for earthquake shock damage.
xxx
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase “Item
5 – P393,000.00 – on the two swimming pools only (against the peril of earthquake shock only)” meant 3 393,000.00 0.100%-E/S 393.00[22]
that only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two swimming pools as
“Item 3.” Third, Policy Condition No. 6 stated:

Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the 6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly
properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for or indirectly of any of the following occurrences, namely:--
coverage of the swimming pools against earthquake shock. No other premium was paid for earthquake
shock coverage on the other properties. In addition, the use of the qualifier “ANY” instead of “ALL” to (a) Earthquake, volcanic eruption or other convulsion of nature. [23]
describe the property covered was done deliberately to enable the parties to specify the properties
included for earthquake coverage. Fourth, the rider attached to the policy, titled “Extended Coverage Endorsement (To Include the Perils of
Explosion, Aircraft, Vehicle and Smoke),” stated, viz:
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in
the earthquake shock coverage. Petitioner’s own evidence shows that it only required respondent to ANNUAL PAYMENT AGREEMENT ON
follow the exact provisions of its previous policy from AHAC-AIU. Respondent complied with this LONG TERM POLICIES
requirement. Respondent’s only deviation from the agreement was when it modified the provisions
regarding the replacement cost endorsement. With regard to the issue under litigation, the riders of the
old policy and the policy in issue are identical.
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED
IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 ½ %
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
maintaining that only the two swimming pools were covered for earthquake shock. The adjuster’s letter
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
notifying petitioner to present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.

Petitioner anchors its claims on AHAC-AIU’s inadvertent deletion of the phrase “Item 5 Only” after the Earthquake Endorsement
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect
the parties’ clear intention to limit earthquake shock coverage to the two swimming pools.
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any additional premium the Company agrees, notwithstanding what is stated in the printed conditions of this
deficiency nor did it institute any action to reform the policy. The policy binds the petitioner. Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire) to any
of the property insured by this Policy occasioned by or through or in consequence of Earthquake.
Eighth, there is no basis for petitioner to claim damages, attorney’s fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby
considered to be in default, and therefore, it is not liable for interest. expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply also
to loss or damage occasioned by or through or in consequence of Earthquake. [24]
We hold that the petition is devoid of merit.
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar. earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured
properties.
First, in the designation of location of risk, only the two swimming pools were specified as included, viz:
It is basic that all the provisions of the insurance policy should be examined and interpreted in
ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril of earthquake shock only) consonance with each other. [25] All its parts are reflective of the true intent of the parties. The policy
[20] cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character. Petitioner cannot focus on the
Second, under the breakdown for premium payments,[21] it was stated that: earthquake shock endorsement to the exclusion of the other provisions. All the provisions and riders,
taken and interpreted together, indubitably show the intention of the parties to extend earthquake shock A.
If you are referring to Forte Insurance Agency, yes.
coverage to the two swimming pools only.

A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code Q.
defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify Is Forte Insurance Agency a department or division of your company?
another against loss, damage or liability arising from an unknown or contingent event. Thus, an insurance A.
contract exists where the following elements concur: No, sir. They are our insurance agency.

1. The insured has an insurable interest;

Q.
2. The insured is subject to a risk of loss by the happening of the designated peril; And they are independent of your company insofar as operations are concerned?
A.
3. The insurer assumes the risk; Yes, sir, they are separate entity.

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your
[26] instruction, is that not correct?
5. In consideration of the insurer's promise, the insured pays a premium.  (Emphasis ours)
A.
Yes, sir. The final action is still with us although they can recommend what insurance to take.
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured
against a specified peril. [27] In fire, casualty, and marine insurance, the premium payable becomes a debt
as soon as the risk attaches.[28] In the subject policy, no premium payments were made with regard to
earthquake shock coverage, except on the two swimming pools. There is no mention of any premium Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give
payable for the other resort properties with regard to earthquake shock. This is consistent with the history written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must extend
of petitioner’s previous insurance policies from AHAC-AIU. As borne out by petitioner’s witnesses: to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of the company.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the period
from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two swimming Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake
pools only? tremor in La Union?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a provision A.
here that it was only for item 5. Yes, sir.

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools Q.
only? And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. A.
Yes, sir. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the procurement
of this policy? Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your
A. instructions that all properties must be covered again by earthquake shock endorsement?
Yes, sir. A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit
"G"?

Q.
Did you also do this through your insurance agency? Atty. Mejia: Yes.
Witness: Q
. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A
. Yes, sir.
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I was contented already that the previous limitation
pertaining to the two swimming pools was already removed.
ATTY. MEJIA:
Petitioner also cited and relies on the attachment of the phrase “Subject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA
Warranty & Annual Payment Agreement on Long Term Policies” [29] to the insurance policy as proof What is your basis for stating that the coverage against earthquake shock as provided for in each of the
of the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely an six (6) policies extend to the two (2) swimming pools only?
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the policy
is subject, as required under Section 50, paragraph 2 of the Insurance Code.
WITNESS:
We also hold that no significance can be placed on the deletion of the qualification limiting the coverage
to the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the Because it says here in the policies, in the enumeration "Earthquake Shock Endorsement, in the Clauses
testimony of Juan Baranda III, underwriter for AHAC-AIU: and Warranties: Item 5 only (Earthquake Shock Endorsement)," sir.

DIRECT EXAMINATION OF JUAN BARANDA III [30]

TSN, August 11, 1992 ATTY. MEJIA:
pp. 9-12
Atty. Mejia:
Witness referring to Exhibit C-1, your Honor.
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by
counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of ( sic ) these six (6)
policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:

WITNESS: We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we
do cover earthquake shock. For building we covered it for full earthquake coverage which includes
earthquake shock?
Yes[,] I remember having gone over these policies at one point of time, sir.

COURT:

Q Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an
. earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in As far as earthquake shock endorsement you do not have a specific coverage for other things other than
Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock swimming pool? You are covering building? They are covered by a general insurance?
as provided for in each of the six (6) policies?

WITNESS:
xxx
Earthquake shock coverage could not stand alone. If we are covering building or another we can issue
earthquake shock solely but that the moment I see this, the thing that comes to my mind is either
insuring a swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.
WITNESS: DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiff's witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive
The extent of the coverage is only up to the two (2) swimming pools, sir.
[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G and
H respectively entend the coverage against earthquake shock to all the properties indicated in the
respective schedules attached to said policies, what can you say about that testimony of plaintiff's witness?
WITNESS:

As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you ATTY. ANDRES:
that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it, if
we are going to look at the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake shock, I think there is a As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for
substantial increase in the premium. We are not only going to consider the two (2) swimming pools of the the policies?
other as stated in the policy. As I see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
WITNESS:

COURT: My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued with
no specific attachments, premium rates and so on. It was inadvertent, sir.
They are the same, the premium rates? The Court also rejects petitioner's contention that respondent's contemporaneous and subsequent acts to
the issuance policy falsely gave the petitioner assurance that the coverage of the earthquake shock
endorsement included all its properties in the resort. Respondent only insured the properties as intended
by the petitioner. Petitoner's own witness testified to this agreement. viz:
WITNESS:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

They are the same in the sence ( sic ), in the amount of the coverage. If you are going to do some TSN, January 14, 1992
computation based on the rates you will arrive at the same premiums, your Honor.
pp. 4-5
CROSS-EXAMINATION OF JUAN BARANDA III Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty. Omlas
TSN, September 7, 1992 (sic) to copy from Exhibit "H" for purposes of procuring the policy from Philippine Charter Insurance
pp. 4-6 Corporation?
ATTY. ANDRES: A. I told him that the insurance that they will have to get will have the same provisions as this American
Home Insurance Policy No. 206-4568061-9.
Would you as a matter of practice [insure] swimming pools for fire insurance?

Q.
You are referring to Exhibit "H" of course?
WITNESS: A.
Yes, sir, to Exhibit "H".

No, we don't, sir.

Q.
So, all the provisions here will be the same except that of the premium rates?
Q. A.
That is why the phrase "earthquake shock to the two (2) swimming pools only" was placed, is it not? Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will be
limited to this one. I (sic) can even be lesser.
A. CROSS EXAMINATION OF LEOPOLDO MANTOHAC
Yes, sir.
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
ATTY. ANDRES:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during coverage of Exhibits “I” and “H” sometime in the third week of March, 1990 or thereabout?
your direct-examination, the phrase "Item no. 5 only" meaning to (sic) the two (2) swimming pools was A.
deleted from the policies issued by AIU, is it not? Yes, sir, about that time.
 that under Item 3 it was specific on the wordings that on the two swimming pools only, then
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as enclosed in parenthesis (against the peril[s] of earthquake shock only), and secondly, when I
scope of coverage of Exhibits “I” and “H” respectively? examined the summary of premium payment only Item 3 which refers to the swimming pools
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy wordings have a computation for premium payment for earthquake shock and all the other items have no
and rates were copied from the insurance policy I sent them but it was only when this case erupted that we computation for payment of premiums.
discovered some discrepancies.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the
general rule that insurance contracts are contracts of adhesion which should be liberally construed in
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time favor of the insured and strictly against the insurer company which usually prepares it. [31] A contract of
between those indicated in Exhibit “I” and those indicated in Exhibit “H” respectively? adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the
A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00 other party merely affixes his signature or his "adhesion" thereto. Through the years, the courts have held
on the two (2) swimming pools only against the peril of earthquake shock which I understood before that that in these type of contracts, the parties do not bargain on equal footing, the weaker party's participation
this provision will have to be placed here because this particular provision under the peril of earthquake being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the
shock only is requested because this is an insurance policy and therefore cannot be insured against fire, so weaker party whom the courts of justice must protect. [32] Consequently, any ambiguity therein is resolved
this has to be placed.
against the insurer, or construed liberally in favor of the insured. [33]
The verbal assurances allegedly given by respondent’s representative Atty. Umlas were not proved. Atty.
Umlas categorically denied having given such assurances.
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided. [34] Thus, we have called on lower courts to
Finally, petitioner puts much stress on the letter of respondent’s independent claims adjuster, Bayne
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of the
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors,
claims of contending parties. In Development Bank of the Philippines v. National Merchandising
Inc., respondent never meant to lead petitioner to believe that the endorsement for earthquake shock
Corporation, et al.,[35] the parties, who were acute businessmen of experience, were presumed to have
covered properties other than the two swimming pools, viz:
assented to the assailed documents with full knowledge.
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did
Adjusters and Surveyors, Inc.) not know the provisions of the policy. From the inception of the policy, petitioner had required the
TSN, January 26, 1993 respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The
pp. 22-26 testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is
reflective of petitioner’s knowledge, viz:
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the policy
issued by Philippine Charter Insurance Corporation? DIRECT EXAMINATION OF LEOPOLDO MANTOHAC [36]
A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance TSN, September 23, 1991
coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake pp. 20-21
shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in
the policy and he confirmed to me indeed only Item 3 which were the two swimming pools have coverage
for earthquake shock. Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo
Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we had
xxx with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American Home
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming Insurance policy are to be incorporated in the PCIC policy?
pools all affected items have no coverage for earthquake shock?
A.
Yes, sir.

xxx
Q.
What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that
the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
A. I based my statement on my findings, because upon my examination of the policy I found out
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-
9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically
in the replacement cost endorsement, but the principal provisions of the policy remained essentially
similar to AHAC-AIU’s policy. Consequently, we cannot apply the "fine print" or "contract of adhesion"
rule in this case as the parties’ intent to limit the coverage of the policy to the two swimming pools only
is not ambiguous.[37]

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

SO ORDERED.
 G.R. No. L-21574             June 30, 1966
SIMON DE LA CRUZ, plaintiff and appellee,
vs. THE CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.
BARRERA, J.:
This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision of the Court of
First Instance of Pangasinan (in Civ Case No. U-265), ordering it to indemnify therein plaintiff Simon de
la Cruz for the death of the latter's son, to pay the burial expenses, and attorney's fees.
Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the holder of
an accident insurance policy (No. ITO-BFE-170) underwritten by the Capital Insurance & Surety Co.,
Inc., for the period beginning November 13, 1956 to November 12, 1957. On January 1, 1957, in
connection with the celebration of the New Year, the Itogon-Suyoc Mines, Inc. sponsored a boxing
contest for general entertainment wherein the insured Eduardo de la Cruz, a non-professional boxer
participated. In the course of his bout with another person, likewise a non-professional, of the same
height, weight, and size, Eduardo slipped and was hit by his opponent on the left part of the back of the
head, causing Eduardo to fall, with his head hitting the rope of the ring. He was brought to the Baguio
General Hospital the following day. The cause of death was reported as hemorrhage, intracranial, left.
Simon de la Cruz, the father of the insured and who was named beneficiary under the policy, thereupon
filed a claim with the insurance company for payment of the indemnity under the insurance policy. As the
claim was denied, De la Cruz instituted the action in the Court of First Instance of Pangasinan for specific
performance. Defendant insurer set up the defense that the death of the insured, caused by his
participation in a boxing contest, was not accidental and, therefore, not covered by insurance. After due
hearing the court rendered the decision in favor of the plaintiff which is the subject of the present appeal.
It is not disputed that during the ring fight with another non-professional boxer, Eduardo slipped, which
was unintentional. At this opportunity, his opponent landed on Eduardo's head a blow, which sent the
latter to the ropes. That must have caused the cranial injury that led to his death. Eduardo was insured
"against death or disability caused by accidental means". Appellant insurer now contends that while the
death of the insured was due to head injury, said injury was sustained because of his voluntary
participation in the contest. It is claimed that the participation in the boxing contest was the "means" that
produced the injury which, in turn, caused the death of the insured. And, since his inclusion in the boxing
card was voluntary on the part of the insured, he cannot be considered to have met his death by
"accidental means".1äwphï1.ñët
The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical
meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the terms have
been taken to mean that which happen by chance or fortuitously, without intention and design, and which
is unexpected, unusual, and unforeseen. An accident is an event that takes place without one's foresight or
expectation — an event that proceeds from an unknown cause, or is an unusual effect of a known cause
and, therefore, not expected.1
Appellant however, would like to make a distinction between "accident or accidental" and "accidental
means", which is the term used in the insurance policy involved here. It is argued that to be considered
within the protection of the policy, what is required to be accidental is the  means that caused or brought
the death and not the death itself. It may be mentioned in this connection, that the tendency of court
decisions in the United States in recent years is to eliminate the fine distinction between the terms
"accidental" and "accidental means" and to consider them as legally synonymous. 2 But, even if we take
appellant's theory, the death of the insured in the case at bar would still be entitled to indemnification
under the policy. The generally accepted rule is that, death or injury does not result from accident or
accidental means within the terms of an
accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by anything
unforeseen except the death or injury. 3 There is no accident when a deliberate act is performed unless
some additional, unexpected, independent, and unforeseen happening occurs which produces or brings
about the result of injury or death. 4 In other words, where the death or injury is not the natural or probable
result of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within the protection of policies insuring against death or injury
from accident.
In the present case, while the participation of the insured in the boxing contest is voluntary, the injury
was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw him
to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the
deceased, perhaps he could not have received that blow in the head and would not have died. The fact
that boxing is attended with some risks of external injuries does not make any injuries received in the
course of the game not accidental. In boxing as in other equally physically rigorous sports, such as
basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever does, the injury or
death can only be accidental or produced by some unforeseen happening or event as what occurred in this
case.
Furthermore, the policy involved herein specifically excluded from its coverage —
(e) Death or disablement consequent upon the Insured engaging in football, hunting,
pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or motorcycling.
Death or disablement resulting from engagement in boxing contests was not declared outside of the
protection of the insurance contract. Failure of the defendant insurance company to include death
resulting from a boxing match or other sports among the prohibitive risks leads inevitably to the
conclusion that it did not intend to limit or exempt itself from liability for such death. 5
Wherefore, in view of the foregoing considerations, the decision appealed from is hereby affirmed, with
costs against appellant. so ordered.
 [ G.R. No. 181132, June 05, 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 petition[1] for review on certiorari under Rule 45 of the Rules, seeking to reverse and set aside
the Resolution[2] 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 petition[3] 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 P320,000.00 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.   because the beneficiary has a vested right to the indemnity, unless the insured reserves the right to change
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 answer[7] 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 752 [8] and 772[9] 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
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.   jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a
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]
Insular[12] and Grepalife[13] 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.
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
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 SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in
cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads - whose name or for whose benefit it is made unless otherwise specified in the policy.

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: 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
x x x x 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
(g) That the pleading asserting the claim states no cause of action. 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
A cause of action is the act or omission by which a party violates a right of another. [16]  A complaint states to the proceeds thereof.  Accordingly, respondents Insular and Grepalife have no legal obligation to turn
a cause of action when it contains the three (3) elements of a cause of action—(1) the legal right of the over the insurance proceeds to petitioners.  The revocation of Eva as a beneficiary in one policy and her
plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the defendant in disqualification as such in another are of no moment considering that the designation of the illegitimate
violation of the legal right.  If any of these elements is absent, the complaint becomes vulnerable to a children as beneficiaries in Loreto's insurance policies remains valid.  Because no legal proscription
motion to dismiss on the ground of failure to state a cause of action. [17] 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
When a motion to dismiss is premised on this ground, the ruling thereon should be based only on the Article 739 of the Civil Code or by the insurers themselves for reasons based on the insurance contracts,
facts alleged in the complaint.  The court must resolve the issue on the strength of such allegations, must be awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of
assuming them to be true.  The test of sufficiency of a cause of action rests on whether, hypothetically petitioners.  It is only in cases where the insured has not designated any beneficiary, [23] or when the
admitting the facts alleged in the complaint to be true, the court can render a valid judgment upon the designated beneficiary is disqualified by law to receive the proceeds, [24] that the insurance policy proceeds
same, in accordance with the prayer in the complaint.  This is the general rule. shall redound to the benefit of the estate of the insured.

However, this rule is subject to well-recognized exceptions, such that there is no hypothetical admission In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld.  In the same light,
of the veracity of the allegations if: 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
1. the falsity of the allegations is subject to judicial notice; 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.

2. such allegations are legally impossible;
SO ORDERED.
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—
 G.R. No. L-6114      October 30, 1954
SOUTHERN LUZON EMPLOYEES' ASSOCIATION, plaintiff, vs.
JUANITA GOLPEO, ET AL., defendants-appellants;
AQUILINO MALOLES , ET AL., defendants-appellees;
ELSIE HICBAN, ET AL., defendants;
MARCELINO CONCEPCION, ET AL., intervenors-appellants.
PARAS, C.J.:
The plaintiff, Southern Luzon Employees' Association is composed of laborers and employees of Laguna
tayabas Bus Co., and Batangas Transportation Company, and one of its purposes is mutual aid of its
members and their defendants in case of death. Roman A. Concepcion was a member until his death on
December 13, 1950. The association adopted on September 17, 1949 the following resolution:
RESOLVED: That a family record card of each member be printed wherein the members will
put down his dependents and/or beneficiaries.
BE IT RESOLVED, FURTHER, that a member may, if he chooses, put down his common-law
wife as his beneficiary and/or children had with her as the case may be; that in case of a
widower, he may put down his legitimate children with the first marriage who are below 21
years of age, single, and may at the same time, also name his common-law wife, if he has any,
as dependents and/or beneficiaries; and
BE IT RESOLVED: That such person so named by the member will be sole persons to be
recognized by the Association regarding claims for condolence contributions.
In the form required by the association to be accomplished by its members, with reference to the death
benefit, Roman A. Concepcion listed as his beneficiaries Aquilina Maloles, Roman M. Concepcion, Jr.,
Estela M. Concepcion, Rolando M. Concepcion and Robin M. Concepcion. After the death of Roman A.
Concepcion, the association was able to collect voluntary contributions from its members amounting to
P2,5055. Three sets of claimants presented themselves, namely, (1) Juanita Golpeo, legal wife of Roman
A. Concepcion, and her children, named beneficiaries by the deceased; and (3) Elsie Hicban, another
common law wife of Roman A. Concepcion, and her child. The plaintiff association was accordingly
constrained to institute in the Court of First Instance of Laguna the present action for interpleading
against the three conflicting claimants as defendants. Marcelino and Josefina Concepcion, children of the
deceased Roman A. Concepcion with Juanita Golpeo, intervened in their own rights, aligning themselves
with the defendants, Juanita Golpeo and her minor children. After hearing, the court rendered a decision,
declaring the defendants Aquilina Maloles and her children the sole beneficiaries of the sum of
P2,505.00, and ordering the plaintiff to deliver said amount to them. From this decision only the
defendants Juanita Golpeo and her minor children and the intervenors Marcelino and Josefina
Concepcion have appealed to this court.
The decision is based mainly on the theory that the contract between the plaintiff and the deceased
Roman A. Concepcion partook of the nature of an insurance and that, therefore, the amount in question
belonged exclusively to the beneficiaries, invoking the following pronouncements of this Court in the
case of Del Val vs. Del Val, 29 Phil., 534:
With the finding of the trial court that the proceeds of 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, which reads:
"The amounts which the underwriter must deliver to the person insured, in fulfillment of the
contract, shall be the property creditors of any kind whatsoever of the person who effected the
insurance in favor of the formers."
It is claimed by the attorney for the plaintiffs that the section just quoted in subordinated to the
provisions of the civil code as found in article 10035. This article reads:
"An heir by force of law surviving with others of the same character to a succession must bring
into the hereditary estate the property or securities he may bring into the hereditary estate the
property or securities he may have been received from the deceased during the life of the same,
by way of dowry, gift, or for any good consideration, in order to compute it in fixing the legal
portions and in the amount of the division."
Counsel also claims that the proceed of the insurance policy were donation or gift made by the
father during his lifetime to the defendant and that, as such, its ultimate destination is
determined by those provisions of the Civil Code which relate to donations, especially article
819. This article provides that "gifts made to children which are not betterments shall be
considered as part of their legal portion."
We cannot agree with these contention. The contract of life insurance is a special contract and
the destination of the proceeds thereof is determined by special laws which deal exclusively
with that subject. The Civil Code has no provisions which relate directly and specifically to
life-insurance contract or to the destination of life-insurance proceeds. That subject is regulate
exclusively by the Code of Commerce which provides for the terms of the contract, the
relations of the parties and the destination of the proceeds of the policy. (Supra, pp. 540-541.)
It is argued for the appellants, however, that the Insurance Law is not applicable because the plaintiff is a
mutual benefit association as defined in section 1628 of the Revised Administrative Code. This argument
evidently ignore the fact that the trial court has no considered the plaintiff as a regular insurance company
but merely ruled that the death benefit in question is analogous to an insurance. Moreover, section 1628
of the Revised Administrative Code defines a mutual benefit association as one, among others,
"providing for any method of accident or life insurance among its members out of dues or assessments
collected from the membership." The comparison made in the appealed decision is, therefore, well taken.
Appellant also contend that the stipulation between the plaintiff and the deceased Roman A. Concepcion
regarding the specification of the latter's beneficiaries, and the resolution of September 17, 1949, are void
for the being contrary to law, moral or public policy. Specifically, the appellants cite article 2012 of the
new Civil Code providing that "Any person who is forbidden from receiving any donation under article
739 cannot be named beneficiary of a life insurance policy and by the person who cannot make any
donation to him, according to said article." Inasmuch as, according to article 739 of the new Civil Code, a
donation is valid when made "between persons who are guilty or adultery or concubinage at the time of
the donation," it is alleged that the defendant-appellee Aquilina Maloles, cannot be named a beneficiary,
every assuming that the insurance law is applicable. Without considering the intimation in the brief for
the defendant appellees that appellant Juanita Golpeo, by her silence and actions, had acquiesced in the
illicit relations between her husband and appellee Aquilina Maloles, appellant argument would certainly
not apply to the children of Aquilina likewise named beneficiaries by the deceased Roman A.
Concepcion. As a matter of a fact the new Civil Code recognized certain successional rights of
illegitimate children. (Article 287.)

The other contention advanced rather exhaustively by counsel for appellants, and the citations in support
there of are either negative or rendered inapplicable by the decisive considerations already stated. In this
connection it is noteworthy that the estate of the deceased Roman A. Concepcion was not entirely left
without anything legally due it since it is an admitted fact that the sum of P2,500 was paid by Laguna
Tayabas Bus Co., employer of the deceased to the appellants under the Workmen's Compensation Act.
Wherefore, the appealed decision is affirmed, and it is so ordered without costs.
 G.R. No. L-28093 January 30, 1971
BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA LOURDES, JOSE,
JR., RODRIGO, LINEDA and LUIS, all surnamed CONSUEGRA, petitioners-appellants,
vs. GOVERNMENT SERVICE INSURANCE SYSTEM, COMMISSIONER OF PUBLIC
HIGHWAYS, HIGHWAY DISTRICT ENGINEER OF SURIGAO DEL NORTE,
COMMISSIONER OF CIVIL SERVICE, and ROSARIO DIAZ, respondents-appellees.
ZALDIVAR, J.:
Appeal on purely questions of law from the decision of the Court of First Instance of Surigao del Norte,
dated March 7, 1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are the following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman of the office of the
District Engineer in the province of Surigao del Norte. In his lifetime, Consuegra contracted two
marriages, the first with herein respondent Rosario Diaz, solemnized in the parish church of San Nicolas
de Tolentino, Surigao, Surigao, on July 15, 1937, out of which marriage were born two children, namely,
Jose Consuegra, Jr. and Pedro Consuegra, but both predeceased their father; and the second, which was
contracted in good faith while the first marriage was subsisting, with herein petitioner Basilia Berdin, on
May 1, 1957 in the same parish and municipality, out of which marriage were born seven children,
namely, Juliana, Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz, all surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when Consuegra died on
September 26, 1965, the proceeds of his life insurance under policy No. 601801 were paid by the GSIS to
petitioner Basilia Berdin and her children who were the beneficiaries named in the policy. Having been in
the service of the government for 22.5028 years, Consuegra was entitled to retirement insurance benefits
in the sum of P6,304.47 pursuant to Section 12(c) of Commonwealth Act 186 as amended by Republic
Acts 1616 and 3836. Consuegra did not designate any beneficiary who would receive the retirement
insurance benefits due to him. Respondent Rosario Diaz, the widow by the first marriage, filed a claim
with the GSIS asking that the retirement insurance benefits be paid to her as the only legal heir of
Consuegra, considering that the deceased did not designate any beneficiary with respect to his retirement
insurance benefits. Petitioner Basilia Berdin and her children, likewise, filed a similar claim with the
GSIS, asserting that being the beneficiaries named in the life insurance policy of Consuegra, they are the
only ones entitled to receive the retirement insurance benefits due the deceased Consuegra. Resolving the
conflicting claims, the GSIS ruled that the legal heirs of the late Jose Consuegra were Rosario Diaz, his
widow by his first marriage who is entitled to one-half, or 8/16, of the retirement insurance benefits, on
the one hand; and Basilia Berdin, his widow by the second marriage and their seven children, on the other
hand, who are entitled to the remaining one-half, or 8/16, each of them to receive an equal share of 1/16.
Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia Berdin and her
children1 filed on October 10, 1966 a petition for mandamus with preliminary injunction in the Court of
First Instance of Surigao, naming as respondents the GSIS, the Commissioner of Public Highways, the
Highway District Engineer of Surigao del Norte, the Commissioner of Civil Service, and Rosario Diaz,
praying that they (petitioners therein) be declared the legal heirs and exclusive beneficiaries of the
retirement insurance of the late Jose Consuegra, and that a writ of preliminary injunction be issued
restraining the implementation of the adjudication made by the GSIS. On October 26, 1966, the trial court
issued an order requiring therein respondents to file their respective answers, but refrained from issuing
the writ of preliminary injunction prayed for. On February 11, 1967, the parties submitted a stipulation of
facts, prayed that the same be admitted and approved and that judgment be rendered on the basis of the
stipulation of facts. On March 7, 1967, the court below rendered judgment, the pertinent portions of
which are quoted hereunder:
This Court, in conformity with the foregoing stipulation of facts, likewise is in full
accord with the parties with respect to the authority cited by them in support of said
stipulation and which is herein-below cited for purposes of this judgment, to wit:
"When two women innocently and in good faith are legally united in holy matrimony
to the same man, they and their children, born of said wedlock, will be regarded as
legitimate children and each family be entitled to one half of the estate. Lao & Lao
vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon
vs. Bejec, 74 Phil. 88.
WHEREFORE, in view of the above premises, this Court is of the opinion that the
foregoing stipulation of facts is in order and in accordance with law and the same is
hereby approved. Judgment, therefore, is hereby rendered declaring the petitioner
Basilia Berdin Vda. de Consuegra and her co-petitioners Juliana, Pacita, Maria
Lourdes, Jose, Jr., Rodrigo, Lenida and Luis, all surnamed Consuegra, beneficiary
and entitled to one-half (1/2) of the retirement benefit in the amount of Six Thousand
Three Hundred Four Pesos and Fourty-Seven Centavos (P6,304.47) due to the
deceased Jose Consuegra from the Government Service Insurance System or the
amount of P3,152.235 to be divided equally among them in the proportional amount
of 1/16 each. Likewise, the respondent Rosario Diaz Vda. de Consuegra is hereby
declared beneficiary and entitled to the other half of the retirement benefit of the late
Jose Consuegra or the amount of P3,152.235. The case with respect to the Highway
District Engineer of Surigao del Norte is hereby ordered dismissed.
Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her children.
It is the contention of appellants that the lower court erred in not holding that the designated beneficiaries
in the life insurance of the late Jose Consuegra are also the exclusive beneficiaries in the retirement
insurance of said deceased. In other words, it is the submission of appellants that because the deceased
Jose Consuegra failed to designate the beneficiaries in his retirement insurance, the appellants who were
the beneficiaries named in the life insurance should automatically be considered the beneficiaries to
receive the retirement insurance benefits, to the exclusion of respondent Rosario Diaz. From the
arguments adduced by appellants in their brief We gather that it is their stand that the system of life
insurance and the system of retirement insurance, that are provided for in Commonwealth Act 186 as
amended, are simply complementary to each other, or that one is a part or an extension of the other, such
that whoever is named the beneficiary in the life insurance is also the beneficiary in the retirement
insurance when no such beneficiary is named in the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Government Service Insurance System is Commonwealth Act
186 which was enacted by the National Assembly on November 14, 1936. As originally approved,
Commonwealth Act 186 provided for the compulsory membership in the Government Service Insurance
System of all regularly and permanently appointed officials and employees of the government,
considering as automatically insured on life all such officials and employees, and issuing to them the
corresponding membership policy under the terms and conditions as provided in the Act. 2
Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth Act 186 was
amended by Republic Act 660 which was enacted by the Congress of the Philippines on June 16, 1951,
and, among others, the amendatory Act provided that aside from the system of life insurance under the
Government Service Insurance System there was also established the system of retirement insurance.
Thus, We will note in Republic Act 660 that there is a chapter on life insurance and another chapter on
retirement insurance. 3 Under the chapter on life insurance are sections 8, 9 and 10 of Commonwealth
Act 186, as amended; and under the chapter on retirement insurance are sections 11, 12, 13 and 13-A. On
May 31, 1957, Republic Act 1616 was enacted by Congress, amending section 12 of Commonwealth Act
186 as amended by Republic Act 660, by adding thereto two new subsections, designated as subsections
(b) and (c). This subsection (c) of section 12 of Commonwealth Act 186, as amended by Republic Acts
660, 1616 and 3096, was again amended by Republic Act 3836 which was enacted on June 22,
1963.lâwphî1.ñèt The pertinent provisions of subsection (c) of Section 12 of Commonwealth Act 186, as
thus amended and reamended, read as follows:
(c) Retirement is likewise allowed to a member, regardless of age, who has rendered
at least twenty years of service. The benefit shall, in addition to the return of his
personal contributions plus interest and the payment of the corresponding employer's
premiums described in subsection (a) of Section 5 hereof, without interest, be only a
gratuity equivalent to one month's salary for every year of service, based on the
highest rate received, but not to exceed twenty-four months; Provided, That the
retiring officer or employee has been in the service of the said employer or office for
at least four years, immediately preceding his retirement.
xxx xxx xxx
The gratuity is payable by the employer or office concerned which is hereby
authorized to provide the necessary appropriation to pay the same from any
unexpended items of appropriations.
Elective or appointive officials and employees paid gratuity under this subsection
shall be entitled to the commutation of the unused vacation and sick leave, based on
the highest rate received, which they may have to their credit at the time of
retirement.
Jose Consuegra died on September 26, 1965, and so at the time of his death he had acquired rights under
the above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as finally amended by Rep.
Act 3836 on June 22, 1963. When Consuegra died on September 26, 1965, he had to his credit 22.5028
years of service in the government, and pursuant to the above-quoted provisions of subsection (c) of
Section 12 of Com. Act 186, as amended, on the basis of the highest rate of salary received by him which
was P282.83 per month, he was entitled to receive retirement insurance benefits in the amount of
P6,304.47. This is the retirement benefits that are the subject of dispute between the appellants, on the
one hand, and the appellee Rosario Diaz, on the other, in the present case. The question posed is: to
whom should this retirement insurance benefits of Jose Consuegra be paid, because he did not, or failed
to, designate the beneficiary of his retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on September 26, 1965, it
follows that he started in the government service sometime during the early part of 1943, or before 1943.
In 1943 Com. Act 186 was not yet amended, and the only benefits then provided for in said Com. Act
186 were those that proceed from a life insurance. Upon entering the government service Consuegra
became a compulsory member of the GSIS, being automatically insured on his life, pursuant to the
provisions of Com. Act 186 which was in force at the time. During 1943 the operation of the Government
Service Insurance System was suspended because of the war, and the operation was resumed sometime in
1946. When Consuegra designated his beneficiaries in his life insurance he could not have intended those
beneficiaries of his life insurance as also the beneficiaries of his retirement insurance because the
provisions on retirement insurance under the GSIS came about only when Com. Act 186 was amended by
Rep. Act 660 on June 16, 1951. Hence, it cannot be said that because herein appellants were designated
beneficiaries in Consuegra's life insurance they automatically became the beneficiaries also of his
retirement insurance. Rep. Act 660 added to Com. Act 186 provisions regarding retirement insurance,
which are Sections 11, 12, and 13 of Com. Act 186, as amended. Subsection (b) of Section 11 of Com.
Act 186, as amended by Rep. Act 660, provides as follows:
(b) Survivors benefit. — Upon death before he becomes eligible for retirement, his
beneficiaries as recorded in the application for retirement annuity filed with the
System shall be paid his own premiums with interest of three per centum per annum,
compounded monthly. If on his death he is eligible for retirement, then the automatic
retirement annuity or the annuity chosen by him previously shall be paid accordingly.
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186, as amended by
Rep. Act 660, clearly indicate that there is need for the employee to file an application for retirement
insurance benefits when he becomes a member of the GSIS, and he should state in his application the
beneficiary of his retirement insurance. Hence, the beneficiary named in the life insurance does not
automatically become the beneficiary in the retirement insurance unless the same beneficiary in the life
insurance is so designated in the application for retirement insurance.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a life insurance fund
and for a retirement insurance fund. There was no such provision in Com. Act 186 before it was amended
by Rep. Act 660. Thus, subsections (a) and (b) of Section 24 of Commonwealth Act 186, as amended by
Rep. Act 660, partly read as follows:
(a) Life insurance fund. — This shall consist of all premiums for life insurance
benefit and/or earnings and savings therefrom. It shall meet death claims as they may
arise or such equities as any member may be entitled to, under the conditions of his
policy, and shall maintain the required reserves to the end of guaranteeing the
fulfillment of the life insurance contracts issued by the System ...
(b) Retirement insurance fund. — This shall consist of all contributions for retirement
insurance benefit and of earnings and savings therefrom. It shall meet annuity
payments and establish the required reserves to the end of guaranteeing the
fulfillment of the contracts issued by the System. ...
Thus, We see that the GSIS offers two separate and distinct systems of benefits to its members — one is
the life insurance and the other is the retirement insurance. These two distinct systems of benefits are paid
out from two distinct and separate funds that are maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever is named the beneficiary in
the life insurance policy. As in the case of a life insurance provided for in the Insurance Act (Act 2427, as
amended), the beneficiary in a life insurance under the GSIS may not necessarily be a heir of the insured.
The insured in a life insurance may designate any person as beneficiary unless disqualified to be so under
the provisions of the Civil Code.4 And in the absence of any beneficiary named in the life insurance
policy, the proceeds of the insurance will go to the estate of the insured.

Retirement insurance is primarily intended for the benefit of the employee — to provide for his old age,
or incapacity, after rendering service in the government for a required number of years. If the employee
reaches the age of retirement, he gets the retirement benefits even to the exclusion of the beneficiary or
beneficiaries named in his application for retirement insurance. The beneficiary of the retirement
insurance can only claim the proceeds of the retirement insurance if the employee dies before retirement.
If the employee failed or overlooked to state the beneficiary of his retirement insurance, the retirement
benefits will accrue to his estate and will be given to his legal heirs in accordance with law, as in the case
of a life insurance if no beneficiary is named in the insurance policy.

It is Our view, therefore, that the respondent GSIS had correctly acted when it ruled that the proceeds of
the retirement insurance of the late Jose Consuegra should be divided equally between his first living
wife Rosario Diaz, on the one hand, and his second wife Basilia Berdin and his children by her, on the
other; and the lower court did not commit error when it confirmed the action of the GSIS, it being
accepted as a fact that the second marriage of Jose Consuegra to Basilia Berdin was contracted in good
faith. The lower court has correctly applied the ruling of this Court in the case of Lao, et al. vs. Dee Tim,
et al., 45 Phil. 739 as cited in the stipulation of facts and in the decision appealed from. 5 In the recent case
of Gomez vs. Lipana, L-23214, June 30, 1970, 6 this Court, in construing the rights of two women who
were married to the same man — a situation more or less similar to the case of appellant Basilia Berdin
and appellee Rosario Diaz — held "that since the defendant's first marriage has not been dissolved or
declared void the conjugal partnership established by that marriage has not ceased. Nor has the first wife
lost or relinquished her status as putative heir of her husband under the new Civil Code, entitled to share
in his estate upon his death should she survive him. Consequently, whether as conjugal partner in a still
subsisting marriage or as such putative heir she has an interest in the husband's share in the property here
in dispute.... " And with respect to the right of the second wife, this Court observed that although the
second marriage can be presumed to be void ab initio as it was celebrated while the first marriage was
still subsisting, still there is need for judicial declaration of such nullity. And inasmuch as the conjugal
partnership formed by the second marriage was dissolved before judicial declaration of its nullity, "[t]he
only lust and equitable solution in this case would be to recognize the right of the second wife to her
share of one-half in the property acquired by her and her husband and consider the other half as
pertaining to the conjugal partnership of the first marriage."

WHEREFORE, the decision appealed from is affirmed, with costs against petitioners-appellants. It is so
ordered.
 G.R. No. L-44059 October 28, 1977
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs. CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life
insurance policy of a legally married man claim the proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., Policy
No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same amount
Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He to her as his
wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing branch
of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the coverage in
the total amount of P11,745.73, representing the face value of the policy in the amount of P5,882.00 plus
the additional benefits for accidental death also in the amount of P5,882.00 and the refund of P18.00 paid
for the premium due November, 1969, minus the unpaid premiums and interest thereon due for January
and February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were merely
living as husband and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that she is
the one entitled to the insurance proceeds, not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance Co.,
Ltd. commenced an action for Interpleader before the Court of First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a pre-trial
order was entered reading as follows: ñé+.£ªwph!1
During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties
submit their evidence for the purpose of the pre-trial and make admissions for the
purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was married
to Pascuala Ebrado with whom she has six — (legitimate) namely; Hernando,
Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that during
the lifetime of the deceased, he was insured with Insular Life Assurance Co. Under
Policy No. 009929 whole life plan, dated September 1, 1968 for the sum of
P5,882.00 with the rider for accidental death benefit as evidenced by Exhibits A for
plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia
Ebrado; 3) that during the lifetime of Buenaventura Ebrado, he was living with his
common-wife, Carponia Ebrado, with whom she had 2 children although he was not
legally separated from his legal wife; 4) that Buenaventura in accident on October 21,
1969 as evidenced by the death Exhibit 3 and affidavit of the police report of his
death Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the Insular
Life Assurance Co. which was contested by Pascuala Ebrado who also filed claim for
the proceeds of said policy 6) that in view ofthe adverse claims the insurance
company filed this action against the two herein claimants Carponia and Pascuala
Ebrado; 7) that there is now due from the Insular Life Assurance Co. as proceeds of
the policy P11,745.73; 8) that the beneficiary designated by the insured in the policy
is Carponia Ebrado and the insured made reservation to change the beneficiary but
although the insured made the option to change the beneficiary, same was never
changed up to the time of his death and the wife did not have any opportunity to write
the company that there was reservation to change the designation of the parties
agreed that a decision be rendered based on and stipulation of facts as to who among
the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T. Ebrado
disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and directing the
payment of the insurance proceeds to the estate of the deceased insured. The trial court held: ñé+.£ªwph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by preponderance
of evidence in the same proceeding (the action brought to declare the nullity of the
donation).
It is, however, essential that such adultery or concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant Carponia T. Ebrado
were living together as husband and wife without being legally married and that the
marriage of the insured with the other defendant Pascuala Vda. de Ebrado was valid
and still existing at the time the insurance in question was purchased there is no
question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds of
the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the
Appellate Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance Code
(PD No. 612, as amended) does not contain any specific provision grossly resolutory of the prime
question at hand. Section 50 of the Insurance Act which provides that "(t)he insurance shag be applied
exclusively to the proper interest of the person in whose name it is made"  1 cannot be validly seized upon
to hold that the mm includes the beneficiary. The word "interest" highly suggests that the provision refers
only to the "insured" and not to the beneficiary, since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws against illicit relationships especially on property and descent
will be rendered nugatory, as the same could easily be circumvented by modes of insurance. Rather, the
general rules of civil law should be applied to resolve this void in the Insurance Law. Article 2011 of the
New Civil Code states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise specifically
provided for by the Insurance Law, the contract of life insurance is governed by the general rules of the
civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person who is forbidden
from receiving any donation under Article 739 cannot be named beneficiary of a fife insurance policy by
the person who cannot make a donation to him. 4 Common-law spouses are, definitely, barred from
receiving donations from each other. Article 739 of the new Civil Code provides: ñé+.£ªwph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the
time of donation;
Those made between persons found guilty of the same criminal offense, in
consideration thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of
his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the insured pays out of liberality, the beneficiary will
receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 of the
new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012 cannot be
laid aside: any person who cannot receive a donation cannot be named as beneficiary in the life insurance
policy of the person who cannot make the donation. 5 Under American law, a policy of life insurance is
considered as a testament and in construing it, the courts will, so far as possible treat it as a will and
determine the effect of a clause designating the beneficiary by rules under which wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a barrier between
common law spouses in record to Property relations since such hip ultimately encroaches upon the
nuptial and filial rights of the legitimate family There is every reason to hold that the bar in donations
between legitimate spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration As above pointed out, a beneficiary in a fife
insurance policy is no different from a donee. Both are recipients of pure beneficence. So long as manage
remains the threshold of family laws, reason and morality dictate that the impediments imposed upon
married couple should likewise be imposed upon extra-marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more reason should an illicit relationship be restricted by
these disabilities. Thus, in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: ñé+.
£ªwph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no
se enganen desponjandose el uno al otro por amor que han de consuno' (According
to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato
amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et
uxorem); then there is very reason to apply the same prohibitive policy to persons
living together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32
ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the
condition 6f those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement,
any other conclusion cannot stand the test of scrutiny. It would be to indict the frame
of the Civil Code for a failure to apply a laudable rule to a situation which in its
essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it as
what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an adherence to
its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons who
were guilty of adultery or concubinage at the time of the donation," Article 739 itself provides:  ñé+.
£ªwph!1
In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilty of the donee may be proved by
preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is a condition
precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed. On the
contrary, the law plainly states that the guilt of the party may be proved "in the same acting for
declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt of
the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the insured and the
beneficiary has been conveniently supplied by the stipulations between the parties in the pre-trial
conference of the case. It case agreed upon and stipulated therein that the deceased insured Buenaventura
C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate children; that during his
lifetime, the deceased insured was living with his common-law wife, Carponia Ebrado, with whom he has
two children. These stipulations are nothing less than judicial admissions which, as a consequence, no
longer require proof and cannot be contradicted. 8 A fortiori, on the basis of these admissions, a judgment
may be validly rendered without going through the rigors of a trial for the sole purpose of proving the
illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the parties even agreed "that
a decision be rendered based on this agreement and stipulation of facts as to who among the two
claimants is entitled to the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is
hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life insurance
policy. As a consequence, the proceeds of the policy are hereby held payable to the estate of the deceased
insured. Costs against Carponia T. Ebrado.

SO ORDERED.
 [ G.R. No. 124520, August 18, 1997 ]
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
SPOUSES NILO CHA AND STELLA UY CHA, AND UNITED INSURANCE CO., INC., STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
PETITIONERS, VS. COURT OF APPEALS AND CKS DEVELOPMENT CORPORATION, INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
RESPONDENTS. MORALS AND PUBLIC POLICY

DECISION II

PADILLA, J.:
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT
This petition for review on certiorari  under Rule 45 of the Rules of Court seeks to set aside a decision of OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE
respondent Court of Appeals. QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER
The undisputed facts of the case are as follows:
III
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.
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
2.       One of the stipulations of the one (1) year lease contract states:
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
“18. x x x. 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
IV
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; x x x” [1]
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
3.       Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
fire their merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with the
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE
United Insurance Co., Inc. (hereinafter United) without the written consent of private respondents CKS.
RESPONDENT CORPORATION.[2]
4.       On the day that the lease contract was to expire, fire broke out inside the leased premises.
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
5.       When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it
insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased premises
wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract (between the
is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the prior written
Cha spouses and United) be paid directly to CKS, based on its lease contract with Cha spouses.
of the latter.
6.       United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United.
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]
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
Sec. 18 of the Insurance Code provides:
as exemplary damages, P20,000.00 as attorney’s fees and costs of suit.
“Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of
8.       On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision** dated 11
some person having an insurable interest in the property insured.”
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.
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
In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
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
I
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:

“SECTION 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.

Section 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 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. 147839, June 08, 2006 ] 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
GAISANO CAGAYAN, INC. PETITIONER, VS. INSURANCE COMPANY OF NORTH majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract
AMERICA, RESPONDENT. 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
DECISION the insured.[6]

AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision[1] 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:
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;

1. Warranted that the Company shall not be liable for any unpaid account in respect of the 2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for a period insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.
in excess of six (6) months from the date of the covering invoice or actual delivery of the
merchandise whichever shall first occur. With costs against the defendant-appellee.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close SO ORDERED.[10]
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 x[4] 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
xxxx 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
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.  Included in the delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is
the items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by not extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the
IMC and LSPI. 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]
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 Petitioner filed a motion for reconsideration [12] but it was denied by the CA in its Resolution dated April
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of 11, 2001.[13]
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 Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
rights against petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.[5] 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.
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.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner into it any alleged intention of the parties, the terms are to be understood literally just as they appear on
upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment between the face of the contract. [25] Thus, what were insured against were the accounts of IMC and LSPI with
respondent and its insured nor was its consent or approval ever secured; that this lack of privity forecloses petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the
any real interest on the part of respondent in the obligation to pay, limiting its interest to keeping the goods delivered.
insured goods safe from fire.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by
For its part, respondent counters that while ownership over the ready- made clothing materials was stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors payment of the purchase price the above described merchandise remains the property of the vendor until
who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the purchase price thereof is fully paid." [26]
the ready-made clothing materials since it failed to overcome the presumption of liability under Article
1265[16] of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide The Court is not persuaded.
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 The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
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 ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
expenses and cost of suit. [17] 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:
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 (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
evidence presented by the litigants or any of them. [18] The Supreme Court is not a trier of facts; it is not its the contract and the ownership in the goods has been retained by the seller merely to secure
function to analyze or weigh evidence all over again. [19]  Accordingly, findings of fact of the appellate performance by the buyer of his obligations under the contract, the goods are at the buyer's risk
court are generally conclusive on the Supreme Court. [20] from the time of such delivery;  (Emphasis supplied)

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
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 insurance company of the insurance claim. [41] Respondent's action against petitioner is squarely
personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril sanctioned by Article 2207 of the Civil Code which provides:
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 Art. 2207.  If the plaintiff's property has been insured, and he has received indemnity from the insurance
interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. 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
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien violated the contract.  x x x
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 Petitioner failed to refute respondent's evidence.
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 As to LSPI, respondent failed to present sufficient evidence to prove its cause of action.   No evidentiary
would suffer loss from its destruction. [30]  Indeed, a vendor or seller retains an insurable interest in the weight can be given to Exhibit "F Levi Strauss", [42] a letter dated April 23, 1991 from petitioner's General
property sold so long as he has any interest therein, in other words, so long as he would suffer by its Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI.  It
destruction, as where he has a vendor's lien. [31]  In this case, the insurable interest of IMC and LSPI only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
pertain to the unpaid accounts appearing in their Books of Account 45 days after the time of the loss building on February 25, 1991. 
covered by the policies.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was
The next question is: Is petitioner liable for the unpaid accounts? 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
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 [32] of the case for recovery of the amount of P535,613.00.
Civil Code is misplaced.  As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil
Code. 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
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.  Accordingly, respondent is DELETED for lack of factual basis.
petitioner's obligation is for the payment of money.  As correctly stated by the CA, where the obligation No pronouncement as to costs.
consists in the payment of money, the failure of the debtor to make the payment even by reason of a SO ORDERED.
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
 [ G.R. No. 168115, June 08, 2007 ]
In an adhesion contract which is drafted and printed in advance and parties are not given a real arms'
VICENTE ONG LIM SING, JR.,PETITIONER, VS. FEB LEASING & FINANCE length opportunity to transact, the Courts treat this kind of contract strictly against their architects for the
CORPORATION, RESPONDENT. reason that the party entering into this kind of contract has no choice but to accept the terms and
conditions found therein even if he is not in accord therewith and for that matter may not have understood
DECISION all the terms and stipulations prescribed thereat. Contracts of this character are prepared unilaterally by
the stronger party with the best legal talents at its disposal. It is upon that thought that the Courts are
NACHURA, J.: called upon to analyze closely said contracts so that the weaker party could be fully protected.

Another instance is when the alleged lessee was required to insure the thing against loss, damage or
This is a petition for review on certiorari assailing the Decision [1] dated March 15, 2005 and the
destruction.
Resolution[2] dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.
In property insurance against loss or other accidental causes, the assured must have an insurable interest,
The facts are as follows:
32 Corpus Juris 1059.
On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease [3] of equipment and
x x x x
motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim)
executed an Individual Guaranty Agreement[4] with FEB to guarantee the prompt and faithful
It has also been held that the test of insurable interest in property is whether the assured has a right, title
performance of the terms and conditions of the aforesaid lease agreement. Corresponding Lease
or interest therein that he will be benefited by its preservation and continued existence or suffer a direct
Schedules with Delivery and Acceptance Certificates [5] over the equipment and motor vehicles formed
pecuniary loss from its destruction or injury by the peril insured against. If the defendants were to be
part of the agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross monthly rental
regarded as only a lessee, logically the lessor who asserts ownership will be the one directly benefited or
of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (P170,494.00).
injured and therefore the lessee is not supposed to be the assured as he has no insurable interest.
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears,
There is also an observation from the records that the actual value of each object of the contract would be
including penalty charges and insurance premiums, amounted to Three Million Four Hundred Fourteen
the result after computing the monthly rentals by multiplying the said rentals by the number of months
Thousand Four Hundred Sixty-Eight and 75/100 Pesos (P3,414,468.75). On August 23, 2000, FEB sent a
specified when the rentals ought to be paid.
letter to JVL demanding payment of the said amount. However, JVL failed to pay. [6]
Still another observation is the existence in the records of a Deed of Absolute Sale by and between the
On December 6, 2000, FEB filed a Complaint [7] with the Regional Trial Court of Manila, docketed as
same parties, plaintiff and defendants which was an exhibit of the defendant where the plaintiff sold to
Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL, Lim, and John Doe.
the same defendants one unit 1995 Mitsubishi L-200 STRADA DC PICK UP and in said Deed, The
Court noticed that the same terms as in the alleged lease were used in respect to warranty, as well as
In the Amended Answer,[8] JVL and Lim admitted the existence of the lease agreement but asserted that it
liability in case of loss and other conditions. This action of the plaintiff unequivocally exhibited their real
is in reality a sale of equipment on installment basis, with FEB acting as the financier. JVL and Lim
intention to execute the corresponding Deed after the defendants have paid in full and as heretofore
claimed that this intention was apparent from the fact that they were made to believe that when full
discussed and for the sake of emphasis the obscurity in the written contract cannot favor the party who
payment was effected, a Deed of Sale will be executed by FEB as vendor in favor of JVL and Lim as
caused the obscurity.
vendees.[9] FEB purportedly assured them that documenting the transaction as a lease agreement is just an
industry practice and that the proper documentation would be effected as soon as full payment for every
Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon the intention
item was made. They also contended that the lease agreement is a contract of adhesion and should,
of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be
therefore, be construed against the party who prepared it, i.e., FEB.
contrary to the evident intention of the parties, their contemporaneous and subsequent acts shall be
principally considered. If the doubts are cast upon the principal object of the contract in such a way that it
In upholding JVL and Lim's stance, the trial court stressed the contradictory terms it found in the lease
cannot be known what may have been the intention or will of the parties, the contract shall be null and
agreement. The pertinent portions of the Decision dated November 22, 2002 read:
void.[10]
A profound scrutiny of the provisions of the contract which is a contract of adhesion at once exposed the
Thus, the court concluded with the following disposition:
use of several contradictory terms. To name a few, in Section 9 of the said contract – disclaiming
warranty, it is stated that the lessor is not the manufacturer nor the latter's agent and therefore does not
guarantee any feature or aspect of the object of the contract as to its merchantability. Merchantability is a In this case, which is held by this Court as a sale on installment there is no chattel mortgage on the thing
term applied in a contract of sale of goods where conditions and warranties are made to apply. Article sold, but it appears amongst the Complaint's prayer, that the plaintiff elected to exact fulfillment of the
1547 of the Civil Code provides that unless a contrary intention appears an implied warranty on the part obligation.
of the seller that he has the right to sell and to pass ownership of the object is furnished by law together
with an implied warranty that the thing shall be free from hidden faults or defects or any charge or For the vehicles returned, the plaintiff can only recover the unpaid balance of the price because of the
encumbrance not known to the buyer. previous payments made by the defendants for the reasonable use of the units, specially so, as it appears,
these returned vehicles were sold at auction and that the plaintiff can apply the proceeds to the balance.
However, with respect to the unreturned units and machineries still in the possession of the defendants, it THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO STRICTLY APPLY
is this Court's view and so hold that the defendants are liable therefore and accordingly are ordered SECTION 7, RULE 18 OF THE 1997 RULES OF CIVIL PROCEDURE AND NOW ITEM 1, A(8) OF
jointly and severally to pay the price thereof to the plaintiff together with attorney's fee and the costs of A.M. NO. 03-1-09 SC (JUNE 8, 2004).
suit in the sum of Php25,000.00.
III
SO ORDERED.[11]

On December 27, 2002, FEB filed its Notice of Appeal. [12] Accordingly, on January 17, 2003, the court THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE APPEAL FOR
issued an Order[13] elevating the entire records of the case to the CA. FEB averred that the trial court FAILURE OF THE RESPONDENT TO FILE ON TIME ITS APPELLANT'S BRIEF AND TO
erred: SEPARATELY RULE ON THE PETITIONER'S MOTION TO DISMISS.

A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal IV
properties on installment and not of lease;

B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THE CONTRACT
R.A. No. 8556; BETWEEN THE PARTIES IS ONE OF A FINANCIAL LEASE AND NOT OF A CONTRACT OF
SALE.
C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the price
because of the previous payments made by the defendants for the reasonable use of the units; V

D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente Ong
Lim, Jr. to the Plaintiff-Appellant.[14] THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PAYMENTS PAID BY
THE PETITIONER TO THE RESPONDENT ARE "RENTALS" AND NOT INSTALLMENTS PAID
On March 15, 2005, the CA issued its Decision [15] declaring the transaction between the parties as a FOR THE PURCHASE PRICE OF THE SUBJECT MOTOR VEHICLES, HEAVY MACHINES AND
financial lease agreement under Republic Act (R.A.) No. 8556. [16] The fallo of the assailed Decision EQUIPMENT.
reads:
VI
WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November 2002
rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451
is REVERSED and SET ASIDE, and a new judgment is hereby ENTERED ordering appellees JVL THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PREVIOUS
Food Products and Vicente Ong Lim, Jr. to solidarily pay appellant FEB Leasing and Finance CONTRACT OF SALE INVOLVING THE PICK-UP VEHICLE IS OF NO CONSEQUENCE.
Corporation the amount of Three Million Four Hundred Fourteen Thousand Four Hundred Sixty
Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per VII
annum starting from the date of judicial demand on 06 December 2000, until full payment thereof. Costs
against appellees.
THE HONORABLE COURT OF APPEALS FAILED TO TAKE INTO CONSIDERATION THAT
SO ORDERED.[17]
THE CONTRACT OF LEASE, A CONTRACT OF ADHESION, CONCEALED THE TRUE
INTENTION OF THE PARTIES, WHICH IS A CONTRACT OF SALE.
Lim filed the instant Petition for Review on Certiorari under Rule 45 contending that:
VIII
I

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PETITIONER IS A

THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE LESSEE WITH INSURABLE INTEREST OVER THE SUBJECT PERSONAL PROPERTIES.
UNDATED COMPLAINT WAS FILED BY SATURNINO J. GALANG, JR., WITHOUT ANY
AUTHORITY FROM RESPONDENT'S BOARD OF DIRECTORS AND/OR SECRETARY'S
IX
CERTIFICATE.

II
THE HONORABLE COURT OF APPEALS ERRED IN CONSTRUING THE INTENTIONS OF THE
COURT A QUO IN ITS USAGE OF THE TERM MERCHANTABILITY.[18]
We affirm the ruling of the appellate court.
First, Lim can no longer question Galang's authority as FEB's authorized representative in filing the suit
against Lim. Galang was the representative of FEB in the proceedings before the trial court up to the
appellate court. Petitioner never placed in issue the validity of Galang's representation before the trial and
appellate courts. Issues raised for the first time on appeal are barred by estoppel. Arguments not raised in
the original proceedings cannot be considered on review; otherwise, it would violate basic principles of
fair play.[19]
Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters
agreed upon during the pre-trial conference, or in not dismissing the appeal for failure of FEB to file its
brief on time, or in not ruling separately on the petitioner's motion to dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of
the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due process.
In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the
demands of substantial justice and equity.[20] In Aguam v. Court of Appeals, the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on
the court, not a duty. The "discretion must be a sound one, to be exercised in accordance with the tenets
of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities,
however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's
primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits
unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid
to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded
the amplest opportunity for the proper and just determination of his cause, free from the unacceptable
plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the
policy of the court is to encourage hearings of appeals on their merits and the rules of procedure ought
not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not
override substantial justice. It is a far better and more prudent course of action for the court to excuse a
technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather
than dispose of the case on technicality and cause a grave injustice to the parties, giving a false
impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of
justice.[21]
Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract is not
void per se. It is as binding as any ordinary contract. A party who enters into an adhesion contract is free
to reject the stipulations entirely. [22] If the terms thereof are accepted without objection, then the contract
serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement between them,
and that no representations have been made other than as set forth herein. This Agreement shall not be
amended or altered in any manner, unless such amendment be made in writing and signed by the parties
hereto.
Petitioner's claim that the real intention of the parties was a contract of sale of personal property on
installment basis is more likely a mere afterthought in order to defeat the rights of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance Certificates is, in
point of fact, a financial lease within the purview of R.A. No. 8556. Section 3(d) thereof defines
"financial leasing" as:
[A] mode of extending credit through a non-cancelable lease contract under which the lessor purchases or
acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and
office machines, and other movable or immovable property in consideration of the periodic payment by
the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price
or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of
not less than two (2) years during which the lessee has the right to hold and use the leased property with
the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance,
insurance and preservation thereof, but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly periodic
payment of P170,494.00. The periodic payment by petitioner is sufficient to amortize at least 70% of the
purchase price or acquisition cost of the said movables in accordance with the Lease Schedules with
Delivery and Acceptance Certificates. "The basic purpose of a financial leasing transaction is to enable
the prospective buyer of equipment, who is unable to pay for such equipment in cash in one lump sum, to
lease such equipment in the meantime for his use, at a fixed rental sufficient to amortize at least 70% of
the acquisition cost (including the expenses and a margin of profit for the financial lessor) with the
expectation that at the end of the lease period the buyer/financial lessee will be able to pay any remaining
balance of the purchase price."[23]
The allegation of petitioner that the rent for the use of each movable constitutes the value of the vehicle
or equipment leased is of no moment. The law on financial lease does not prohibit such a circumstance
and this alone does not make the transaction between the parties a sale of personal property on
installment. In fact, the value of the lease, usually constituting the value or amount of the property
involved, is a benefit allowed by law to the lessor for the use of the property by the lessee for the duration
of the lease. It is recognized that the value of these movables depreciates through wear and tear upon use
by the lessee. In Beltran v. PAIC Finance Corporation,[24] we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading company.
Neither is it an ordinary leasing company; it does not make its profit by buying equipment and repeatedly
leasing out such equipment to different users thereof. But a financial lease must be preceded by a
purchase and sale contract covering the equipment which becomes the subject matter of the financial
lease. The financial lessor takes the role of the buyer of the equipment leased. And so the formal or
documentary tie between the seller and the real buyer of the equipment, i.e., the financial lessee, is
apparently severed. In economic reality, however, that relationship remains. The sale of the equipment by
the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to secure
the repayment over time of the purchase price of the equipment, plus financing charges, through the
payment of lease rentals; that legal title is the upfront security held by the financial lessor, a security
probably superior in some instances to a chattel mortgagee's lien. [25]
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered into the
lease contract with full knowledge of its terms and conditions. The contract was in force for more than
four years. Since its inception on March 9, 1995, JVL and Lim never questioned its provisions. They only
attacked the validity of the contract after they were judicially made to answer for their default in the order to determine the parties' intent. [32]
payment of the agreed rentals.
WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in
It is settled that the parties are free to agree to such stipulations, clauses, terms, and conditions as they CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23, 2005 are  AFFIRMED.
may want to include in a contract. As long as such agreements are not contrary to law, morals, good Costs against petitioner.
customs, public policy, or public order, they shall have the force of law between the parties.
[26]
 Contracting parties may stipulate on terms and conditions as they may see fit and these have the force SO ORDERED.
of law between them.[27]

The stipulation in Section 14 [28] of the lease contract, that the equipment shall be insured at the cost and
expense of the lessee against loss, damage, or destruction from fire, theft, accident, or other insurable risk
for the full term of the lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable
interest in the equipment and motor vehicles leased. Section 17 of the Insurance Code provides that the
measure of an insurable interest in property is the extent to which the insured might be damnified by loss
or injury thereof. It cannot be denied that JVL will be directly damnified in case of loss, damage, or
destruction of any of the properties leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the
merchantability of the equipment is a valid stipulation. Section 9.1 of the lease contract is stated as:

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT
IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT THERE ARE
NO WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS, EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS
TO ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS
FITNESS, SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO
WHETHER THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.[29]

In the financial lease agreement, FEB did not assume responsibility as to the quality, merchantability, or
capacity of the equipment. This stipulation provides that, in case of defect of any kind that will be found
by the lessee in any of the equipment, recourse should be made to the manufacturer. "The financial lessor,
being a financing company, i.e., an extender of credit rather than an ordinary equipment rental company,
does not extend a warranty of the fitness of the equipment for any particular use. Thus, the financial
lessee was precisely in a position to enforce such warranty directly against the supplier of the equipment
and not against the financial lessor. We find nothing contra legem or contrary to public policy in such a
contractual arrangement."[30]

Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a contract
of sale on installment in the same manner that a previous transaction between the parties over a 1995
Mitsubishi L-200 Strada DC-Pick-Up was initially covered by an agreement denominated as a lease and
eventually became the subject of a Deed of Absolute Sale.

We join the CA in rejecting this view because to allow the transaction involving the pick-up to be read
into the terms of the lease agreement would expand the coverage of the agreement, in violation of Article
1372 of the New Civil Code. [31] The lease contract subject of the complaint speaks only of a lease. Any
agreement between the parties after the lease contract has ended is a different transaction altogether and
should not be included as part of the lease. Furthermore, it is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall control. No amount of extrinsic aid is necessary in
 [ G.R. No. 113899, October 13, 1999 ]
GREAT PACIFIC LIFE ASSURANCE CORP., PETITIONER VS. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, RESPONDENTS.
DECISION
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision [1] dated May 17, 1993,
of the Court of Appeals and its Resolution [2] dated January 4, 1994 in CA-G.R. CV No. 18341. The
appellate court affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in
an insurance claim filed by private respondent against Great Pacific Life Assurance Co. The dispositive
portion of the trial court’s decision reads:
“WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy No. G-1907, in relation to Certification B-18558
liable and ordered to pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for damages, attorney’s fees and litigation expenses in the complaint
and counterclaim, with costs against the defendant and dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary, for lack of cause of action.” [3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP).
Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
“7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer,
diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.”[4]
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio,
to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to “massive cerebral hemorrhage.” Consequently, DBP
submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted
that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for “Specific
Performance with Damages.”[5] During the trial, Dr. Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia’s findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes were not ruled
out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court’s decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON THE
LIFE OF PLAINTIFF’S HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN BORROWERS,
INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON
OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP
THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH
WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP
INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION
FOR MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-
APPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO
LEUTERIO.”[6]
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group life
insurance contract from a complaint filed by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six thousand,
two hundred (P86,200.00) pesos without proof of the actual outstanding mortgage payable by the
mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of
Appeals affirmed the trial court’s judgment, Grepalife was held liable to pay the proceeds of insurance
contract in favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to
this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the
“mortgage redemption insurance,” is a device for the protection of both the mortgagee and the mortgagor.
On the part of the mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from
such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation. [7] In a similar vein, ample protection is given to the mortgagor
under such a concept so that in the event of death; the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness. [8] Consequently, where the mortgagor
pays the insurance premium under the group insurance policy, making the loss payable to the mortgagee,
the insurance is on the mortgagor’s interest, and the mortgagor continues to be a party to the contract. In
this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-
payable clause does not make the mortgagee a party to the contract. [9]
Section 8 of the Insurance Code provides:
“Unless the policy provides, where a mortgagor of property effects insurance in his own name providing
that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the
original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will
have the same effect, although the property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein
named, with the same effect as if it had been performed by the mortgagor.”
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance,
the policy stating that: “In the event of the debtor’s death before his indebtedness with the Creditor [DBP]
shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor.”[10] When DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment committed by the insured. Thereafter,
DBP collected the debt from the mortgagor and took the necessary action of foreclosure on the residential
lot of private respondent.[11] In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co.[12] we held:
“Insured, being the person with whom the contract was made, is primarily the proper person to bring suit
thereon. * * * Subject to some exceptions, insured may thus sue, although the policy is taken wholly or in
part for the benefit of another person named or unnamed, and although it is expressly made payable to
another as his interest may appear or otherwise. * * * Although a policy issued to a mortgagor is taken
out for the benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon in his
own name, especially where the mortgagee’s interest is less than the full amount recoverable under the
policy, * * *.’
And in volume 33, page 82, of the same work, we read the following:
‘Insured may be regarded as the real party in interest, although he has assigned the policy for the purpose
of collection, or has assigned as collateral security any judgment he may obtain.” [13]
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might
have recovered,[14] the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to
annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had knowledge
of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the same. [15]
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported by
the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia’s technical diagnosis
of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the widow’s
declaration that her husband had “possible hypertension several years ago” should not be considered as
hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy
on the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr.
Leuterio’s any previous hospital confinement. [16] Dr. Leuterio’s death certificate stated that hypertension
was only “the possible cause of death.” The private respondent’s statement, as to the medical history of
her husband, was due to her unreliable recollection of events. Hence, the statement of the physician was
properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:
“The insured, Dr. Leuterio, had answered in his insurance application that he was in good health and that
he had not consulted a doctor or any of the enumerated ailments, including hypertension; when he died
the attending physician had certified in the death certificate that the former died of cerebral hemorrhage,
probably secondary to hypertension. From this report, the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had concealed the fact that he had hypertension.
Contrary to appellant’s allegations, there was no sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the insured’s widow who was not even sure if the medicines
taken by Dr. Leuterio were for hypertension, the appellant had not proven nor produced any witness who
could attest to Dr. Leuterio’s medical history...
xxx
Appellant insurance company had failed to establish that there was concealment made by the insured,
hence, it cannot refuse payment of the claim.”[17]
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.[18] Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. [19] In the
case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to
pay the proceeds of the insurance.

And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio’s outstanding indebtedness to DBP at the time of the
mortgagor’s death. Hence, for private respondent’s failure to establish the same, the action for specific
performance should be dismissed. Petitioner’s claim is without merit. A life insurance policy is a valued
policy.[20] Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. [21] The
mortgagor paid the premium according to the coverage of his insurance, which states that:

“The policy states that upon receipt of due proof of the Debtor’s death during the terms of this insurance,
a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtor’s death before his indebtedness with the creditor shall have been fully paid, an
amount to pay the outstanding indebtedness shall first be paid to the Creditor and the balance of the Sum
Assured, if there is any shall then be paid to the beneficiary/ies designated by the debtor.” [22] (Emphasis
omitted)

However, we noted that the Court of Appeals’ decision was promulgated on May 17, 1993. In private
respondent’s memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagor’s outstanding loan. Considering this supervening event, the insurance proceeds shall inure to
the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should not
unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now rightly
belong to Dr. Leuterio’s heirs represented by his widow, herein private respondent Medarda Leuterio.

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in
CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the
insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor’s
indebtedness to Development Bank of the Philippines. Costs against petitioner.

SO ORDERED.
 G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs. HONORABLE COURT OF APPEALS, respondents.
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. L-16163             February 28, 1963
IGNACIO SATURNINO, in his own behalf and as the JUDICIAL GUARDIAN OF CARLOS
SATURNINO, minor, plaintiffs-appellants,
vs. THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.
MAKALINTAL, J.:
Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila to recover the sum of
P5,000.00, corresponding to the face value of an insurance policy issued by defendant on the life of
Estefania A. Saturnino, and the sum of P1,500.00 as attorney's fees. Defendant, now appellee, set up
special defenses in its answer, with a counterclaim for damages allegedly sustained as a result of the
unwarranted presentation of this case. Both the complaint and the counterclaim were dismissed by the
trial court; but appellants were declared entitled to the return of the premium already paid; plus interest at
6% up to January 8, 1959, when a check for the corresponding amount — P359.65 — was sent to them
by appellee.
The policy sued upon is one for 20-year endowment non-medical insurance. This kind of policy
dispenses with the medical examination of the applicant usually required in ordinary life policies.
However, detailed information is called for in the application concerning the applicant's health and
medical history. The written application in this case was submitted by Saturnino to appellee on
November 16, 1957, witnessed by appellee's agent Edward A. Santos. The policy was issued on the same
day, upon payment of the first year's premium of P339.25. On September 19, 1958 Saturnino died of
pneumonia, secondary to influenza. Appellants here, who are her surviving husband and minor child,
respectively, demanded payment of the face value of the policy. The claim was rejected and this suit was
subsequently instituted.
It appears that two months prior to the issuance of the policy or on September 9, 1957, Saturnino was
operated on for cancer, involving complete removal of the right breast, including the pectoral muscles
and the glands found in the right armpit. She stayed in the hospital for a period of eight days, after which
she was discharged, although according to the surgeon who operated on her she could not be considered
definitely cured, her ailment being of the malignant type.
Notwithstanding the fact of her operation Estefania A. Saturnino did not make a disclosure thereof in her
application for insurance. On the contrary, she stated therein that she did not have, nor had she ever had,
among other ailments listed in the application, cancer or other tumors; that she had not consulted any
physician, undergone any operation or suffered any injury within the preceding five years; and that she
had never been treated for nor did she ever have any illness or disease peculiar to her sex, particularly of
the breast, ovaries, uterus, and menstrual disorders. The application also recites that the foregoing
declarations constituted "a further basis for the issuance of the policy."
The question at issue is whether or not the insured made such false representations of material facts as to
avoid the policy. There can be no dispute that the information given by her in her application for
insurance was false, namely, that she had never had cancer or tumors, or consulted any physician or
undergone any operation within the preceding period of five years. Are the facts then falsely represented
material? The Insurance Law (Section 30) provides that "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 the
communication is due, in forming his estimate of the proposed contract, or in making his inquiries." It
seems to be the contention of appellants that the facts subject of the representation were not material in
view of the "non-medical" nature of the insurance applied for, which does away with the usual
requirement of medical examination before the policy is issued. The contention is without merit. If
anything, the waiver of medical examination 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. It is logical to assume that if appellee had been properly apprised of the insured's medical
history she would at least have been made to undergo medical examination in order to determine her
insurability.
Appellants argue that due information concerning the insured's previous illness and operation had been
given to appellees agent Edward A. Santos, who filled the application form after it was signed in blank by
Estefania A. Saturnino. This was denied by Santos in his testimony, and the trial court found such
testimony to be true. This is a finding of fact which is binding upon us, this appeal having been taken
upon questions of law alone. We do not deem it necessary, therefore, to consider appellee's additional
argument, which was upheld by the trial court, that in signing the application form in blank and leaving it
to Edward A. Santos to fill (assuming that to be the truth) the insured in effect made Santos her agent for
that purpose and consequently was responsible for the errors in the entries made by him in that capacity.
In the application for insurance signed by the insured in this case, she agreed to submit to a medical
examination by a duly appointed examiner of appellee if in the latter's opinion such examination was
necessary as further evidence of insurability. In not asking her to submit to a medical examination,
appellants maintain, appellee was guilty of negligence, which precluded it from finding about her actual
state of health. No such negligence can be imputed to appellee. It was precisely because the insured had
given herself a clean bill of health that appellee no longer considered an actual medical checkup
necessary.
Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured herself
did not know, since her doctor never told her, that the disease for which she had been operated on was
cancer. In the first place the concealment of the fact of the operation itself was fraudulent, as there could
not have been any mistake about it, no matter what the ailment. Secondly, in order to avoid a policy it is
not necessary to show actual fraud on the part of the insured. In the case of Kasprzyk v. Metropolitan
Insurance Co., 140 N.Y.S. 211, 214, it was held:
Moreover, if it were the law that an insurance company could not depend a policy on the
ground of misrepresentation, unless it could show actual knowledge on the part of the applicant
that the statements were false, then it is plain that it would be impossible for it to protect itself
and its honest policyholders against fraudulent and improper claims. It would be wholly at the
mercy of any one who wished to apply for insurance, as it would be impossible to show actual
fraud except in the extremest cases. It could not rely on an application as containing
information on which it could act. There would be no incentive to an applicant to tell the truth.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to
prove their case not covered by this stipulation of facts. 1äwphï1.ñët
In this jurisdiction a concealment, whether intentional or unintentional, entitles the insurer to rescind the
contract of insurance, concealment being defined as "negligence to communicate that which a party
knows and ought to communicate" (Sections 24 & 26, Act No. 2427). In the case of Argente v. West
Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce, The Law of Insurance,
2nd ed., Vol. 3:
 "The basis of the rule vitiating the contract in cases of concealment is that it misleads or
deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon.
The insurer, relying upon the belief that the assured will disclose every material fact within his
actual or presumed knowledge, is misled into a belief that the circumstance withheld does not
exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist."

The judgment appealed from, dismissing the complaint and awarding the return to appellants of the
premium already paid, with interest at 6% up to January 29, 1959, affirmed, with costs against appellants.
 [ G.R. No. 186983, February 22, 2012 ] proceeds of his term insurance, and P2,890,000.00 lump sum pension benefit upon maturity of his plan;
P100,000.00 as moral damages; and to pay the costs of the suit. The RTC ruled that Manuel was not
MA. LOURDES S. FLORENDO, PETITIONER, VS. PHILAM PLANS, INC., PERLA ABCEDE guilty of concealing the state of his health from his pension plan application.
AND MA. CELESTE ABCEDE, RESPONDENTS.
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, [17] holding that insurance
DECISION policies are traditionally contracts uberrimae fidae or contracts of utmost good faith. As such, it required
Manuel to disclose to Philam Plans conditions affecting the risk of which he was aware or material facts
ABAD, J.: that he knew or ought to know.[18]

This case is about an insured’s alleged concealment in his pension plan application of his true state of Issues Presented
health and its effect on the life insurance portion of that plan in case of death.

The Facts and the Case The issues presented in this case are:

1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he kept blank and
On October 23, 1997 Manuel Florendo filed an application for comprehensive pension plan with did not answer questions in his pension plan application regarding the ailments he suffered from;
respondent Philam Plans, Inc. (Philam Plans) after some convincing by respondent Perla Abcede. The
plan had a pre-need price of P997,050.00, payable in 10 years, and had a maturity value of P2,890,000.00 2. Whether or not the CA erred in holding that Manuel was bound by the failure of respondents Perla and
after 20 years.[1] Manuel signed the application and left to Perla the task of supplying the information Ma. Celeste to declare the condition of Manuel’s health in the pension plan application; and
needed in the application. [2] Respondent Ma. Celeste Abcede, Perla’s daughter, signed the application as
sales counselor.[3] 3. Whether or not the CA erred in finding that Philam Plans’ approval of Manuel’s pension plan
application and acceptance of his premium payments precluded it from denying Lourdes’ claim.
Aside from pension benefits, the comprehensive pension plan also provided life insurance coverage to
Florendo.[4] This was covered by a Group Master Policy that Philippine American Life Insurance Rulings of the Court
Company (Philam Life) issued to Philam Plans. [5] Under the master policy, Philam Life was to
automatically provide life insurance coverage, including accidental death, to all who signed up for Philam One. Lourdes points out that, seeing the unfilled spaces in Manuel’s pension plan application relating to
Plans’ comprehensive pension plan. [6] If the plan holder died before the maturity of the plan, his his medical history, Philam Plans should have returned it to him for completion. Since Philam Plans
beneficiary was to instead receive the proceeds of the life insurance, equivalent to the pre-need price. chose to approve the application just as it was, it cannot cry concealment on Manuel’s part. Further,
Further, the life insurance was to take care of any unpaid premium until the pension plan matured, Lourdes adds that Philam Plans never queried Manuel directly regarding the state of his health.
entitling the beneficiary to the maturity value of the pension plan. [7] Consequently, it could not blame him for not mentioning it. [19]

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 [8] to Manuel, with But Lourdes is shifting to Philam Plans the burden of putting on the pension plan application the true
petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly state of Manuel’s health. She forgets that since Philam Plans waived medical examination for Manuel, it
premiums.[9] had to rely largely on his stating the truth regarding his health in his application. For, after all, he knew
more than anyone that he had been under treatment for heart condition and diabetes for more than five
Eleven months later or on September 15, 1998, Manuel died of blood poisoning. Subsequently, Lourdes years preceding his submission of that application. But he kept those crucial facts from Philam Plans.
filed a claim with Philam Plans for the payment of the benefits under her husband’s plan. [10] Because
Manuel died before his pension plan matured and his wife was to get only the benefits of his life Besides, when Manuel signed the pension plan application, he adopted as his own the written
insurance, Philam Plans forwarded her claim to Philam Life. [11] representations and declarations embodied in it. It is clear from these representations that he concealed
his chronic heart ailment and diabetes from Philam Plans. The pertinent portion of his representations and
On May 3, 1999 Philam Plans wrote Lourdes a letter, [12] declining her claim. Philam Life found that declarations read as follows:
Manuel was on maintenance medicine for his heart and had an implanted pacemaker. Further, he suffered
from diabetes mellitus and was taking insulin. Lourdes renewed her demand for payment under the I hereby represent and declare to the best of my knowledge that:
plan[13] but Philam Plans rejected it, [14] prompting her to file the present action against the pension plan
company before the Regional Trial Court (RTC) of Quezon City. [15] xxxx
[16]
On March 30, 2006 the RTC rendered judgment,  ordering Philam Plans, Perla and Ma. Celeste,
(c) I have never been treated for heart condition, high blood pressure, cancer, diabetes, lung, kidney
solidarily, to pay Lourdes all the benefits from her husband’s pension plan, namely: P997,050.00, the or stomach disorder or any other physical impairment in the last five years.
 treatments. Pursuant to Section 27[27] of the Insurance Code, Manuel’s concealment entitles Philam Plans
to rescind its contract of insurance with him.
(d) I am in good health and physical condition.
Two. Lourdes contends that the mere fact that Manuel signed the application in blank and let Perla fill in
the required details did not make her his agent and bind him to her concealment of his true state of health.
Since there is no evidence of collusion between them, Perla’s fault must be considered solely her own
If your answer to any of the statements above reveal otherwise, please give details in the space and cannot prejudice Manuel.[28]
provided for:
But Manuel forgot that in signing the pension plan application, he certified that he wrote all the
information stated in it or had someone do it under his direction. Thus:
Since Manuel signed the application without filling in the details regarding his continuing treatments for
heart condition and diabetes, the assumption is that he has never been treated for the said illnesses in the APPLICATION FOR PENSION PLAN
last five years preceding his application. This is implicit from the phrase “If your answer to any of the
statements above (specifically, the statement: I have never been treated for heart condition or diabetes) (Comprehensive)
reveal otherwise, please give details in the space provided for.” But this is untrue since he had been on
“Coumadin,” a treatment for venous thrombosis, [21] and insulin, a drug used in the treatment of diabetes I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program described herein in
mellitus, at that time.[22] accordance with the General Provisions set forth in this application and hereby certify that the date and
other information stated herein are written by me or under my direction.  x x x.[29] (Emphasis
Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew that Manuel supplied)
had a pacemaker implanted on his chest in the 70s or about 20 years before he signed up for the pension
plan.[23] But by its tenor, the responsibility for preparing the application belonged to Manuel. Nothing in it
implies that someone else may provide the information that Philam Plans needed. Manuel cannot sign the Assuming that it was Perla who filled up the application form, Manuel is still bound by what it contains
application and disown the responsibility for having it filled up. If he furnished Perla the needed since he certified that he authorized her action. Philam Plans had every right to act on the faith of that
Date of confinement  : ____________________________ certification.

Name of Hospital or Clinic   :
Name of Attending Physician   :
Findings     :
____________________________ Lourdes could not seek comfort from her claim that Perla had assured Manuel that the state of his health
would not hinder the approval of his application and that what is written on his application made no
____________________________ difference to the insurance company. But, indubitably, Manuel was made aware when he signed the
pension plan application that, in granting the same, Philam Plans and Philam Life were acting on the truth
____________________________ of the representations contained in that application. Thus:

Others: (Please specify)  : ____________________________ DECLARATIONS AND REPRESENTATIONS

I agree that the insurance coverage of this application is based on the truth of the foregoing
information and delegated to her the filling up of the application, then she acted on his instruction, not on representations and is subject to the provisions of the Group Life Insurance Policy issued by THE
Philam Plans’ instruction. PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM PLANS, INC.[30] (Emphasis supplied)

Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he had a
pacemaker implant in the early 70s since this did not fall within the five-year timeframe that the As the Court said in New Life Enterprises v. Court of Appeals:[31]
disclosure contemplated.[24] But a pacemaker is an electronic device implanted into the body and
connected to the wall of the heart, designed to provide regular, mild, electric shock that stimulates the It may be true that x x x insured persons may accept policies without reading them, and that this is not
contraction of the heart muscles and restores normalcy to the heartbeat. [25] That Manuel still had his negligence per se. But, this is not without any exception. It is and was incumbent upon petitioner Sy to
pacemaker when he applied for a pension plan in October 1997 is an admission that he remained under read the insurance contracts, and this can be reasonably expected of him considering that he has been a
treatment for irregular heartbeat within five years preceding that application. businessman since 1965 and the contract concerns indemnity in case of loss in his money-making trade of
which important consideration he could not have been unaware as it was precisely the reason for his
Besides, as already stated, Manuel had been taking medicine for his heart condition and diabetes when he procuring the same.[32]
submitted his pension plan application. These clearly fell within the five-year period. More, even if
Perla’s knowledge of Manuel’s pacemaker may be applied to Philam Plans under the theory of imputed
knowledge,[26] it is not claimed that Perla was aware of his two other afflictions that needed medical The same may be said of Manuel, a civil engineer and manager of a construction company. [33] He could
be expected to know that one must read every document, especially if it creates rights and obligations
affecting him, before signing the same. Manuel is not unschooled that the Court must come to his succor.
It could reasonably be expected that he would not trifle with something that would provide additional
financial security to him and to his wife in his twilight years.

Three. In a final attempt to defend her claim for benefits under Manuel’s pension plan, Lourdes points
out that any defect or insufficiency in the information provided by his pension plan application should be
deemed waived after the same has been approved, the policy has been issued, and the premiums have
been collected. [34]

The Court cannot agree. The comprehensive pension plan that Philam Plans issued contains a one-year
incontestability period. It states:

VIII. INCONTESTABILITY

After this Agreement has remained in force for one (1) year, we can no longer contest for health reasons
any claim for insurance under this Agreement, except for the reason that installment has not been paid
(lapsed), or that you are not insurable at the time you bought this pension program by reason of age. If
this Agreement lapses but is reinstated afterwards, the one (1) year contestability period shall start again
on the date of approval of your request for reinstatement. [35]

The above incontestability clause precludes the insurer from disowning liability under the policy it issued
on the ground of concealment or misrepresentation regarding the health of the insured after a year of its
issuance.

Since Manuel died on the eleventh month following the issuance of his plan, [36] the one year
incontestability period has not yet set in. Consequently, Philam Plans was not barred from questioning
Lourdes’ entitlement to the benefits of her husband’s pension plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals in CA-G.R.
CV 87085 dated December 18, 2007.

SO ORDERED.
 [ G.R. No. 175666, July 29, 2013 ] docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial Court. The
main thesis of the Complaint was that the policy was obtained by fraud, concealment and/or
MANILA BANKERS LIFE INSURANCE CORPORATION, PETITIONER VS. CRESENCIA P. misrepresentation under the Insurance Code, [12] which thus renders it voidable under Article 1390 [13] of
ABAN, RESPONDENT. the Civil Code.

DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business from or
provide insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly
investigate those they insure within two years from effectivity of the policy and while the insured is still
alive. If they do not, they will be obligated to honor claims on the policies they issue, regardless of fraud,
concealment or misrepresentation. The law assumes that they will do just that and not sit on their laurels,
indiscriminately soliciting and accepting insurance business from any Tom, Dick and Harry.
Respondent filed a Motion to Dismiss [14] claiming that petitioner's cause of action was barred by
prescription pursuant to Section 48 of the Insurance Code, which provides as follows:
Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured shall have been in force during
the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement,
the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or his agent.

Assailed in this Petition for Review on Certiorari[1] are the September 28, 2005 Decision[2] of the Court of During the proceedings on the Motion to Dismiss, petitioner's investigator testified in court, stating
Appeals (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 Resolution [3] denying the petitioner's among others that the insurance underwriter who solicited the insurance is a cousin of respondent's
Motion for Reconsideration. [4] husband, Dindo Aban,[15] and that it was the respondent who paid the annual premiums on the policy. [16]

Factual Antecedents Ruling of the Regional Trial Court

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her niece, [5] as On December 9, 1997, the trial court issued an Order[17] granting respondent's Motion to Dismiss, thus:
her beneficiary.
WHEREFORE, defendant CRESENCIA P. ABAN's Motion to Dismiss is hereby granted. Civil Case
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of P100,000.00, in Sotero's No. 97-867 is hereby dismissed.
favor on August 30, 1993, after the requisite medical examination and payment of the insurance
premium.[6] SO ORDERED.[18]

On April 10, 1996,[7] when the insurance policy had been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996. Petitioner
conducted an investigation into the claim,[8] and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate;
In dismissing the case, the trial court found that Sotero, and not respondent, was the one who procured
the insurance; thus, Sotero could legally take out insurance on her own life and validly designate - as she
did — respondent as the beneficiary. It held further that under Section 48, petitioner had only two years
from the effectivity of the policy to question the same; since the policy had been in force for more than
two years, petitioner is now barred from contesting the same or seeking a rescission or annulment thereof.

2. Sotero was sickly since 1990; Petitioner moved for reconsideration, but in another Order [19] dated October 20, 1998, the trial court stood
its ground.
3. Sotero did not have the financial capability to pay the insurance premiums on Insurance Policy
No. 747411; Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner questioned
the dismissal of Civil Case No. 97-867, arguing that the trial court erred in applying Section 48 and
declaring that prescription has set in. It contended that since it was respondent - and not Sotero - who
4. Sotero did not sign the July 3, 1993 application for insurance;[9] [and]
obtained the insurance, the policy issued was rendered void ab initio for want of insurable interest.
5. Respondent was the one .who filed the insurance application, and x x x designated herself as Ruling of the Court of Appeals
the beneficiary.[10]
On September 28, 2005, the CA issued the assailed Decision, which contained the following decretal
For the above reasons, petitioner denied respondent's claim on April 16, 1997 and refunded the premiums portion:
paid on the policy.[11]

On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy, which was
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of merit. insurance in the latter's name without her knowledge and consent.

SO ORDERED.[20] Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given rise to
rights and obligations; as such, the action for the declaration of its nullity or inexistence does not
The CA thus sustained the trial court. Applying Section 48 to petitioner's case, the CA held that petitioner prescribe.[25]
may no longer prove that the subject policy was void ab initio or rescindible by reason of fraudulent
concealment or misrepresentation after the lapse of more than two years from its issuance. It ratiocinated Respondent's Arguments
that petitioner was equipped with ample means to determine, within the first two years of the policy,
whether fraud, concealment or misrepresentation was present when the insurance coverage was obtained. Respondent, on the other hand, essentially argues in her Comment [26] that the CA is correct in applying
If it failed to do so within the statutory two-year period, then the insured must be protected and allowed Section 48. She adds that petitioner's new allegation in its Petition that the policy is void  ab initio merits
to claim upon the policy. no attention, having failed to raise the same below, as it had claimed originally that the policy was merely
voidable.
Petitioner moved for reconsideration,[21] but the CA denied the same in its November 9, 2006 Resolution.
[22]
 Hence, the present Petition. On the issue of insurable interest, respondent echoes the CA's pronouncement that since it was Sotero
who obtained the insurance, insurable interest was present. Under Section 10 of the Insurance Code,
Issues Sotero had insurable interest in her own life, and could validly designate anyone as her beneficiary.
Respondent submits that the CA's findings of fact leading to such conclusion should be respected.

Petitioner raises the following issues for resolution: Our Ruling

I
The Court denies the Petition.

The Court will not depart from the trial and appellate courts' finding that it was Sotero who obtained the
[WHETHER] THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL
insurance for herself, designating respondent as her beneficiary. Both courts are in accord in this respect,
COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
and the Court is loath to disturb this. While petitioner insists that its independent investigation on the
CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.
claim reveals that it was respondent, posing as Sotero, who obtained the insurance, this claim is no longer
feasible in the wake of the courts' finding that it was Sotero who obtained the insurance for herself. This
II finding of fact binds the Court.

[WHETHER] THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE
INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.
III
With the above crucial finding of fact - that it was Sotero who obtained the insurance for herself -
petitioner's case is severely weakened, if not totally disproved. Allegations of fraud, which are predicated
on respondent's alleged posing as Sotero and forgery of her signature in the insurance application, are at
once belied by the trial and appellate courts' finding that Sotero herself took out the insurance for herself.
"[Fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract"[27] In the absence of proof of such fraudulent intent, no right to rescind arises.

[WHETHER] THE COURT OF APPEALS ERRED IN DENYING PETITIONER'S MOTION FOR Moreover, the results and conclusions arrived at during the investigation conducted unilaterally by
RECONSIDERATION.[23] petitioner after the claim was filed may simply be dismissed as self-serving and may not form the basis of
a cause of action given the existence and application of Section 48, as will be discussed at length below.
Petitioner's Arguments
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under
In praying that the CA Decision be reversed and that the case be remanded to the trial court for the the provision, an insurer is given two years - from the effectivity of a life insurance contract and while the
conduct of further proceedings, petitioner argues in its Petition and Reply [24] that Section 48 cannot apply insured is alive - to discover or prove that the policy is void ab initio or is rescindible by reason of the
to a case where the beneficiary under the insurance contract posed as the insured and obtained the policy fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period lapses,
under fraudulent circumstances. It adds that respondent, who was merely Sotero's niece, had no insurable or when the insured dies within the period, the insurer must make good on the policy, even though the
interest in the life of her aunt. policy was obtained by fraud, concealment, or misrepresentation. This is not to say that insurance fraud
must be rewarded, but that insurers who recklessly and indiscriminately solicit and obtain business must
Relying on the results of the investigation that it conducted after the claim for the insurance proceeds was be penalized, for such recklessness and lack of discrimination ultimately work to the detriment of bona
filed, petitioner insists that respondent's claim was spurious, as it appeared that Sotero did not actually fide takers of insurance and the public in general.
apply for insurance coverage, was unlettered, sickly, and had no visible source of income to pay for the
insurance premiums; and that respondent was an impostor, posing as Sotero and fraudulently obtaining Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives
insurers enough time to inquire whether the policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at insurance
fraud would be timely uncovered - thus deterring them from venturing into such nefarious enterprise. At
the same time, legitimate policy holders are absolutely protected from unwarranted denial of their claims
or delay in the collection of insurance proceeds occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may no longer be set up after the two-year period expires as
ordained under the law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the insured are
given the assurance that any dishonest scheme to obtain life insurance would be exposed, and attempts at
unduly denying a claim would be struck down. Life insurance policies that pass the statutory two-year
period are essentially treated as legitimate and beyond question, and the individuals who wield them are
made secure by the thought that they will be paid promptly upon claim. In this manner, Section 48
contributes to the stability of the insurance industry.
Section 48 prevents a situation where the insurer knowingly continues to accept annual premium
payments on life insurance, only to later on deny a claim on the policy on specious claims of fraudulent
concealment and misrepresentation, such as what obtains in the instant case. Thus, instead of conducting
at the first instance an investigation into the circumstances surrounding the issuance of insurance Policy
No. 747411 which would have timely exposed the supposed flaws and irregularities attending it as it now
professes, petitioner appears to have turned a blind eye and opted instead to continue collecting the
premiums on the policy. For nearly three years, petitioner collected the premiums and devoted the same
to its own profit. It cannot now deny the claim when it is called to account. Section 48 must be applied to
it with full force and effect.
The Court therefore agrees fully with the appellate court's pronouncement that -
[t]he "incontestability clause" is a provision in law that after a policy of life insurance made payable on
the death of the insured shall have been in force during the lifetime of the insured for a period of two (2)
years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is
void ab initio or is rescindible by reason of fraudulent concealment or misrepresentation of the insured or
his agent.
The purpose of the law is to give protection to the insured or his beneficiary by limiting the rescinding of
the contract of insurance on the ground of fraudulent concealment or misrepresentation to a period of
only two (2) years from the issuance of the policy or its last reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or
misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums as
long as the insured is still alive, only to raise the issue of fraudulent concealment or misrepresentation
when the insured dies in order to defeat the right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given the
stability to recover under the policy when the insured dies. The provision also makes clear when the two-
year period should commence in case the policy should lapse and is reinstated, that is, from the date of
the last reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how patent or well-founded,
will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance companies to
avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are concerned if
the insurance has been in force for at least two years during the insured’s lifetime. The phrase "during the
lifetime" found in Section 48 simply means that the policy is no longer considered in force after the
insured has died. The key phrase in the second paragraph of Section 48 is "for a period of two years."
As borne by the records, the policy was issued on August 30. 1993, the insured died on April 10, 1996,
and the claim was denied on April 16, 1997. The insurance policy was thus in force for a period of 3
years, 7 months, and 24 days. Considering that the insured died after the two-year period, the plaintiff-
appellant is, therefore, barred from proving that the policy is void ab initio by reason of the insured
fraudulent concealment or misrepresentation or want of insurable interest on the part of the beneficiary,
herein defendant-appellee.
Well-settled is the rule that it is the plaintiff-appellant's burden to show that the factual findings of the
trial court are not based on substantial evidence or that its conclusions are contrary to applicable law and
jurisprudence. The plaintiff-appellant failed to discharge that burden. [28]
Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the cousin of
respondent's husband, and thus insinuates that both connived to commit insurance fraud. If this were truly
the case, then petitioner would have discovered the scheme earlier if it had in earnest conducted an
investigation into the circumstances surrounding the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim was filed thereon more than two years later, naturally it
was unable to detect the scheme. For its negligence and inaction, the Court cannot sympathize with its
plight. Instead, its case precisely provides the strong argument for requiring insurers to diligently conduct
investigations on each policy they issue within the two-year period mandated under Section 48, and not
alter claims for insurance proceeds are filed with them.
Besides, if insurers cannot vouch for the integrity and honesty of their insurance agents/salesmen and the
insurance policies they issue, then they should cease doing business. If they could not properly screen
their agents or salesmen before taking them in to market their products, or if they do not thoroughly
investigate the insurance contracts they enter into with their clients, then they have only themselves to
blame. Otherwise said, insurers cannot be allowed to collect premiums on insurance policies, use these
amounts collected and invest the same through the years, generating profits and returns therefrom for
their own benefit, and thereafter conveniently deny insurance claims by questioning the authority or
integrity of their own agents or the insurance policies they issued to their premium-paying clients. This is
exactly one of the schemes which Section 48 aims to prevent.
Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping that
the inevitable may be put off for years - or even decades — by the pendency of these unnecessary court
cases. In the meantime, they benefit from collecting the interest and/or returns on both the premiums
previously paid by the insured and the insurance proceeds which should otherwise go to their
beneficiaries. The business of insurance is a highly regulated commercial activity in the country, [29] and is
imbued with public interest. [30] "[A]n insurance contract is a contract of adhesion which must be
construed liberally in favor of the insured and strictly against the insurer in order to safeguard the
[former's] interest."[31]
WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the November
9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286 are AFFIRMED.
SO ORDERED.
 [ G.R. No. 211212, June 08, 2016 ] In its Complaint, Sun Life alleged that Atty. Jesus Jr. did not disclose in his insurance application his
previous medical treatment at the National Kidney Transplant Institute in May and August of 1994.
SUN LIFE OF CANADA (PHILIPPINES), INC., PETITIONER, VS. MA. DAISY'S. SIBYA, According to Sun Life, the undisclosed fact suggested that the insured was in "renal failure" and at a high
JESUS MANUEL S. SIBYA III, JAIME LUIS S. SIBYA, AND THE ESTATE OF THE risk medical condition. Consequently, had it known such fact, it would not have issued the insurance
DECEASED ATTY. JESUS SIBYA, JR., RESPONDENTS. policy in favor of Atty. Jesus Jr. [11]

DECISION For their defense, the respondents claimed that Atty. Jesus Jr. did not commit misrepresentation in his
application for insurance. They averred that Atty. Jesus Jr. was in good faith when he signed the
REYES, J.: insurance application and even authorized Sun Life to inquire further into his medical history for
verification purposes. According to them, the complaint is just a ploy to avoid the payment of insurance
Before this Court is a petition for review on certiorari[1] under Rule 45 of the Rules of Court seeking to claims.[12]
annul and set aside the Decision[2] dated November 18, 2013 and Resolution [3] dated February 13, 2014 of
the Court of Appeals (CA) in CA-G.R. CV. No. 93269. In both instances, the CA affirmed the Ruling of the RTC
Decision[4] dated March 16, 2009 of the Regional Trial Court (RTC) of Makati City, Branch 136, in Civil
Case No. 01-1506, ordering petitioner Sun Life of Canada (Philippines), Inc. (Sun Life) to pay Ma. Daisy
S. Sibya (Ma. Daisy), Jesus Manuel S. Sibya III, and Jaime Luis S. Sibya (respondents) the amounts of On March 16, 2009, the RTC issued its Decision [13] dismissing the complaint for lack of merit. The RTC
P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00 as exemplary damages, held that Sun Life violated Sections 241, paragraph 1(b), (d), and (e) [14] and 242[15] of the Insurance Code
and P100,000.00 as attorney's fees and costs of suit. Insofar as the charges for violation of Sections 241 when it refused to pay the rightful claim of the respondents. Moreover, the RTC ordered Sun Life to pay
and 242 of Presidential Decree No. 612, or the Insurance Code of the Philippines, however, the CA the amounts of P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00 as
modified the decision of the RTC and absolved Sun Life therein. exemplary damages, and P100,000.00 as attorney's fees and costs of suit.

Statement of Facts of the Case The RTC held that Atty. Jesus Jr. did not commit material concealment and misrepresentation when he
applied for life insurance with Sun Life. It observed that given the disclosures and the waiver and
authorization to investigate executed by Atty. Jesus Jr. to Sun Life, the latter had all the means of
On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty. Jesus Jr.) applied for life insurance with Sun Life. In ascertaining the facts allegedly concealed by the applicant. [16]
his Application for Insurance, he indicated that he had sought advice for kidney problems. [5] Atty. Jesus
Jr. indicated the following in his application: Aggrieved, Sun Life elevated the case to the CA.

"Last 1987, had undergone lithotripsy due to kidney stone under Dr. Jesus Benjamin Mendoza at Ruling of the CA
National Kidney Institute, discharged after 3 days, no recurrence as claimed." [6]

On February 5, 2001, Sun Life approved Atty. Jesus Jr.'s application and issued Insurance Policy No. On appeal, the CA issued its Decision [17] dated November 18, 2013 affirming the RTC decision in
031097335. The policy indicated the respondents as beneficiaries and entitles them to a death benefit of ordering Sun Life to pay death benefits and damages in favor of the respondents. The CA, however,
P1,000,000.00 should Atty. Jesus Jr. dies on or before February 5, 2021, or a sum of money if Atty. Jesus modified the RTC decision by absolving Sun Life from the charges of violation of Sections 241 and 242
Jr. is still living on the endowment date. [7] of the Insurance Code.[18]

On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound in San Joaquin, Iloilo. As such, Ma. The CA ruled that the evidence on records show that there was no fraudulent intent on the part of Atty.
Daisy filed a Claimant's Statement with Sun Life to seek the death benefits indicated in his insurance Jesus Jr. in submitting his insurance application. Instead, it found that Atty. Jesus Jr. admitted in his
policy.[8] application that he had sought medical treatment for kidney ailment. [19]

In a letter dated August 27, 2001, however, Sun Life denied the claim on the ground that the details on Sun Life filed a Motion for Partial Reconsideration [20] dated December 11, 2013 but the same was denied
Atty. Jesus Jr.'s medical history were not disclosed in his application. Simultaneously, Sun Life tendered in a Resolution[21] dated February 13, 2014.
a check representing the refund of the premiums paid by Atty. Jesus Jr. [9]
Undaunted, Sun Life filed an appeal by way of petition for review on certiorari under Rule 45 of the
The respondents reiterated their claim against Sun Life thru a letter dated September 17, 2001. Sun Life, Rules of Court before this Court.
however, refused to heed the respondents' requests and instead filed a Complaint for Rescission before
the RTC and prayed for judicial confirmation of Atty. Jesus Jr.'s rescission of insurance policy. [10] The Issue
Essentially, the main issue of the instant case is whether or not the CA erred when it affirmed the RTC Given the express language of the Authorization, it cannot be said that [Atty. Jesus Jr.] concealed his
decision finding that there was no concealment or misrepresentation when Atty. Jesus Jr. submitted his medical history since [Sun Life] had the means of ascertaining [Atty. Jesus Jr.'s] medical record.
insurance application with Sun Life.
With regard to allegations of misrepresentation, we note that [Atty. Jesus Jr.] was not a medical doctor,
Ruling of the Court and his answer "no recurrence" may be construed as an honest opinion. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy
even though they are untrue.[24] (Citations omitted and italics in the original)
The petition has no merit.
Indeed, the intent to defraud on the part of the insured must be ascertained to merit rescission of the
In Manila Bankers Life Insurance Corporation v. Aban,[22] the Court held that if the insured dies within insurance contract. Concealment as a defense for the insurer to avoid liability is an affirmative defense
the two-year contestability period, the insurer is bound to make good its obligation under the policy, and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or
regardless of the presence or lack of concealment or misrepresentation. The Court held: insurer.[25] In the present case, Sun Life failed to clearly and satisfactorily establish its allegations, and is
therefore liable to pay the proceeds of the insurance.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under
the provision, an insurer is given two years - from the effectivity of a life insurance contract and while the Moreover, well-settled is the rule that this Court is not a trier of facts. Factual findings of the lower courts
insured is alive - to discover or prove that the policy is void ab initio or is rescindible by reason of the are entitled to great weight and respect on appeal, and in fact accorded finality when supported by
fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period substantial evidence on the record. [26]
lapses, or when the insured dies within the period, the insurer must make good on the policy, even
though the policy was obtained by fraud, concealment, or misrepresentation. This is not to say that WHEREFORE, the petition for review is DENIED. The Decision dated November 18, 2013 and
insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately solicit and obtain Resolution dated February 13, 2014 of the Court of Appeals in CA-G.R. CV. No. 93269 are
business must be penalized, for such recklessness and lack of discrimination ultimately work to the hereby AFFIRMED.
detriment of bona fide takers of insurance and the public in general. [23] (Emphasis ours)
SO ORDERED.
In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001. Thus, it has two years
from its issuance, to investigate and verify whether the policy was obtained by fraud, concealment, or
misrepresentation. Upon the death of Atty. Jesus Jr., however, on May 11, 2001, or a mere three months
from the issuance of the policy, Sun Life loses its right to rescind the policy. As discussed in Manila
Bankers, the death of the insured within the two-year period will render the right of the insurer to rescind
the policy nugatory. As such, the incontestability period will now set in.

Assuming, however, for the sake of argument, that the incontestability period has not yet set in, the Court
agrees, nonetheless, with the CA when it held that Sun Life failed to show that Atty. Jesus Jr. committed
concealment and misrepresentation.

As correctly observed by the CA, Atty. Jesus Jr. admitted in his application his medical treatment for
kidney ailment. Moreover, he executed an authorization in favor of Sun Life to conduct investigation in
reference with his medical history. The decision in part states:

Records show that in the Application for Insurance, [Atty. Jesus Jr.] admitted that he had sought medical
treatment for kidney ailment. When asked to provide details on the said medication, [Atty. Jesus Jr.]
indicated the following information: year ("1987"), medical procedure ("undergone lithotripsy due to
kidney stone"), length of confinement ("3 days"), attending physician ("Dr. Jesus Benjamin Mendoza")
and the hospital ("National Kidney Institute").

It appears that [Atty. Jesus Jr.] also signed the Authorization which gave [Sun Life] the opportunity to
obtain information on the facts disclosed by [Atty. Jesus Jr.] in his insurance application. x x x

x x x x
 G.R. No. L-4611        December 17, 1955
QUA CHEE GAN, plaintiff-appellee,
vs. LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER,
BARNES AND CO., LTD., defendant-appellant.
REYES, J. B. L., J.:
Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said
province, seeking to recover the proceeds of certain fire insurance policies totalling P370,000, issued by
the Law Union & Rock Insurance Co., Ltd., upon certain bodegas and merchandise of the insured that
were burned on June 21, 1940. The records of the original case were destroyed during the liberation of
the region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First
Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows:
Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the
latter to pay the former —
(a) Under the first cause of action, the sum of P146,394.48;
(b) Under the second cause of action, the sum of P150,000;
(c) Under the third cause of action, the sum of P5,000;
(d) Under the fourth cause of action, the sum of P15,000; and
(e) Under the fifth cause of action, the sum of P40,000;
all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the
Insurance Act from September 26, 1940, until each is paid, with costs against the defendant.
The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on
Appeal, 166-167.)
From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas
(designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks
of copra and of hemp, baled and loose, in which the appellee dealth extensively. They had been, with
their contents, insured with the defendant Company since 1937, and the lose made payable to the
Philippine National Bank as mortgage of the hemp and crops, to the extent of its interest. On June, 1940,
the insurance stood as follows:
Policy No. Property Insured
2637164 (Exhibit "LL") Bodega No. 1 (Building)
2637165 (Exhibit "JJ") Bodega No. 2 (Building)
Bodega No. 3 (Building)
Bodega No. 4 (Building)
Hemp Press — moved by steam engine
2637345 (Exhibit "X") Merchandise contents (copra and empty sacks of Bodega No. 1)
2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3
2637067 (Exhibit "GG") Merchandise contents (loose hemp) of Bodega No. 4
Total
Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one
week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren.
Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day, the fire
adjusters engaged by appellant insurance company arrived and proceeded to examine and photograph the
premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff
having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of
the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and
conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by
other persons in connivance with him.
With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother,
Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of arson, it
being claimed that they had set fire to the destroyed warehouses to collect the insurance. They were,
however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the
civil suit to collect the insurance money proceeded to its trial and termination in the Court below, with the
result noted at the start of this opinion. The Philippine National Bank's complaint in intervention was
dismissed because the appellee had managed to pay his indebtedness to the Bank during the pendecy of
the suit, and despite the fire losses.
In its first assignment of error, the insurance company alleges that the trial Court should have held that
the policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with
other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for
the first time in 1939, and the pertinent portions read as follows:
Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the
premises insured hereby, and it being declared and understood that there is an ample and
constant water supply with sufficient pressure available at all seasons for the same, it is hereby
 warranted that the said appliances shall be maintained in efficient working order during the
currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the
premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each 150 feet of external wall
measurement of building, protected, with not less than 100 feet of hose piping and nozzles for
every two hydrants kept under cover in convenient places, the hydrants being supplied with
water pressure by a pumping engine, or from some other source, capable of discharging at the
rate of not less than 200 gallons of water per minute into the upper story of the highest building
protected, and a trained brigade of not less than 20 men to work the same.'
It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the
appellee should have eleven (11) fire hydrants in the compound, and that he actually had only two (2),
with a further pair nearby, belonging to the municipality of Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to
claim violation of the so-called fire hydrants warranty, for the reason that knowing fully all that the
number of hydrants demanded therein never existed from the very beginning, the appellant neverthless
issued the policies in question subject to such warranty, and received the corresponding premiums. It
would be perilously close to conniving at fraud upon the insured to allow appellant to claims now as void
ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it
was informed, and after it had misled the defendant into believing that the policies were effective.
The insurance company was aware, even before the policies were issued, that in the premises insured
there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the
municipality of TAbaco, contrary to the requirements of the warranty in question. Such fact appears from
positive testimony for the insured that appellant's agents inspected the premises; and the simple denials of
appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is
moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to
which the insured was entitled, since the discount depended on the number of hydrants, and the fire
fighting equipment available (See "Scale of Allowances" to which the policies were expressly made
subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29,
pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has
knowledge of existing facts which, if insisted on, would invalidate the contract from its very
inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with
the facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The
law is charitable enough to assume, in the absence of any showing to the contrary, that an
insurance company intends to executed a valid contract in return for the premium received; and
when the policy contains a condition which renders it voidable at its inception, and this result is
known to the insurer, it will be presumed to have intended to waive the conditions and to
execute a binding contract, rather than to have deceived the insured into thinking he is insured
when in fact he is not, and to have taken his money without consideration. (29 Am. Jur.,
Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept
one's money for a policy of insurance which it then knows to be void and of no effect, though it
knows as it must, that the assured believes it to be valid and binding, is so contrary to the
dictates of honesty and fair dealing, and so closely related to positive fraud, as to the abhorent
to fairminded men. It would be to allow the company to treat the policy as valid long enough to
get the preium on it, and leave it at liberty to repudiate it the next moment. This cannot be
deemed to be the real intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for fraudulent purposes and
designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union Assurance
Co., 96 Atl. 540, 543-544).
The inequitableness of the conduct observed by the insurance company in this case is heightened by the
fact that after the insured had incurred the expense of installing the two hydrants, the company collected
the premiums and issued him a policy so worded that it gave the insured a discount much smaller than
that he was normaly entitledto. According to the "Scale of Allowances," a policy subject to a warranty of
the existence of one fire hydrant for every 150 feet of external wall entitled the insured to a discount of 7
1/2 per cent of the premium; while the existence of "hydrants, in compund" (regardless of number)
reduced the allowance on the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater
number of hydrants and fire fighting appliances reduced the risk of loss. But the appellant company, in
the particular case now before us, so worded the policies that while exacting the greater number of fire
hydrants and appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving
the insurance company a double benefit. No reason is shown why appellant's premises, that had been
insured with appellant for several years past, suddenly should be regarded in 1939 as so hazardous as to
be accorded a treatment beyond the limits of appellant's own scale of allowances. Such abnormal
treatment of the insured strongly points at an abuse of the insurance company's selection of the words and
terms of the contract, over which it had absolute control.
These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable
to the present case. It is not a question here whether or not the parties may vary a written contract by oral
evidence; but whether testimony is receivable so that a party may be, by reason of inequitable conduct
shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the
insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment . — It is
a well settled rule of law that an insurer which with knowledge of facts entitling it to treat a
policy as no longer in force, receives and accepts a preium on the policy, estopped to take
advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an
action to recover for a loss thereafter occurring and at the same time treat it as valid for the
purpose of earning and collecting further premiums." (29 Am. Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy under circumstances which it
knew rendered the policy void and then to accept and retain premiums under such a void
policy. Neither law nor good morals would justify such conduct and the doctrine of equitable
estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super
Ct. 457.)
Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly
interpreted aganst the prty that caused them,  1the "memo of warranty" invoked by appellant bars the latter
from questioning the existence of the appliances called for in the insured premises, since its initial
expression, "the undernoted appliances for the extinction of fire being kept on the premises insured
hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should the parol evidence rule apply.
The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally
rejected, since the appellant's argument thereon is based on the assumption that the insured was bound to
maintain no less than eleven hydrants (one per 150 feet of wall), which requirement appellant is estopped
from enforcing. The supposed breach of the wter pressure condition is made to rest on the testimony of
witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring
that the maximum quantity obtainable from the hydrants was 100 gallons a minute, when the warranty
called for 200 gallons a minute. The transcript shows, however, that Serra repeatedly refused and
professed inability to estimate the rate of discharge of the water, and only gave the "5-gallon per 3-
second" rate because the insistence of appellant's counsel forced the witness to hazard a guess.
Obviously, the testimony is worthless and insufficient to establish the violation claimed, specially since
the burden of its proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was
organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which the
warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for his
compound alone a fire fighting force that many municipalities in the Islands do not even possess. There is
no merit in appellant's claim that subordinate membership of the business manager (Co Cuan) in the fire
brigade, while its direction was entrusted to a minor employee unders the testimony improbable. A
business manager is not necessarily adept at fire fighting, the qualities required being different for both
activities.
Under the second assignment of error, appellant insurance company avers, that the insured violated the
"Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since
appellee admitted that there were 36 cans (latas) of gasoline in the building designed as "Bodega No. 2"
that was a separate structure not affected by the fire. It is well to note that gasoline is not specifically
mentioned among the prohibited articles listed in the so-called "hemp warranty." The cause relied upon
by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having
a flash point below 300o Fahrenheit", and is decidedly ambiguous and uncertain; for in ordinary parlance,
"Oils" mean "lubricants" and not gasoline or kerosene. And how many insured, it may well be wondered,
are in a position to understand or determine "flash point below 003o Fahrenheit. Here, again, by reason of
the exclusive control of the insurance company over the terms and phraseology of the contract, the
ambiguity must be held strictly against the insurer and liberraly in favor of the insured, specially to avoid
a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).
Insurance is, in its nature, complex and difficult for the layman to understand. Policies are
prepared by experts who know and can anticipate the hearing and possible complications of
every contingency. So long as insurance companies insist upon the use of ambiguous, intricate
and technical provisions, which conceal rather than frankly disclose, their own intentions, the
courts must, in fairness to those who purchase insurance, construe every ambiguity in favor of
the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the
very purpose for which the policy was procured (Moore vs. Aetna Life Insurance Co., LRA
1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly
and unmistakably, in the language and terms that the general public can readily understand, without resort
to obscure esoteric expression (now derisively termed "gobbledygook"). We reiterate the rule stated in
Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character, it ought to have been plainly
expressed in the policy.
This rigid application of the rule on ambiguities has become necessary in view of current business
practices. The courts cannot ignore that nowadays monopolies, cartels and concentrations of capital,
endowed with overwhelming economic power, manage to impose upon parties dealing with them
cunningly prepared "agreements" that the weaker party may not change one whit, his participation in the
"agreement" being reduced to the alternative to take it or leave it" labelled since Raymond Baloilles"
contracts by adherence" (con tracts d'adhesion), in contrast to these entered into by parties bargaining on
an equal footing, such contracts (of which policies of insurance and international bills of lading are prime
examples) obviously call for greater strictness and vigilance on the part of courts of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their becoming traps for the
unwarry (New Civil Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February
1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad,
habra de ser tenido en cuenta que al seguro es, practicamente un contrato de los llamados de
adhesion y por consiguiente en caso de duda sobre la significacion de las clausulas generales de
una poliza — redactada por las compafijas sin la intervencion alguna de sus clientes — se ha de
adoptar de acuerdo con el articulo 1268 del Codigo Civil, la interpretacion mas favorable al
asegurado, ya que la obscuridad es imputable a la empresa aseguradora, que debia haberse
explicado mas claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but
equally so for the insurer; in fact, it is mere so for the latter, since its dominant bargaining position carries
with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental
to his business, being no more than a customary 2 day's supply for the five or six motor vehicles used for
transporting of the stored merchandise (t. s. n., pp. 1447-1448). "It is well settled that the keeping of
inflammable oils on the premises though prohibited by the policy does not void it if such keeping is
incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to
the weight of authority, even though there are printed prohibitions against keeping certain articles on the
insured premises the policy will not be avoided by a violation of these prohibitions, if the prohibited
articles are necessary or in customary use in carrying on the trade or business conducted on the
premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the
"Hemp Warranty" forbade storage only "in the building to which this insurance applies and/or in any
building communicating therewith", and it is undisputed that no gasoline was stored in the burned
bodegas, and that "Bodega No. 2" which was not burned and where the gasoline was found, stood
isolated from the other insured bodegas.
The charge that the insured failed or refused to submit to the examiners of the insurer the books,
vouchers, etc. demanded by them was found unsubstantiated by the trial Court, and no reason has been
shown to alter this finding. The insured gave the insurance examiner all the date he asked for (Exhibits
AA, BB, CCC and Z), and the examiner even kept and photographed some of the examined books in his
possession. What does appear to have been rejected by the insured was the demand that he should submit
"a list of all books, vouchers, receipts and other records" (Age 4, Exhibit 9-c); but the refusal of the
insured in this instance was well justified, since the demand for a list of all the vouchers (which were not
in use by the insured) and receipts was positively unreasonable, considering that such listing was
superfluous because the insurer was not denied access to the records, that the volume of Qua Chee Gan's
business ran into millions, and that the demand was made just after the fire when everything was in
turmoil. That the representatives of the insurance company were able to secure all the date they needed is
proved by the fact that the adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit
L of the criminal case) that did not differ from that submitted by the insured (Exhibit J) except for the
valuation of the merchandise, as expressly found by the Court in the criminal case for arson. (Decision,
Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the
decision of the arson case (Exhibit WW) acquiting Qua Choc Gan, appellee in the present proceedings.
The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi
como su existencia de copra y abaca en las bodega al tiempo del incendio dur ante el periodo
comprendido desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que Qua Choc Gan
ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este
conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que le ha entregado el
mismo acusado Que Choc Gan en relacion con sus libros y lo ha encontrado correcto a
excepcion de los precios de abaca y copra que alli aparecen que no estan de acuerdo con los
precios en el mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue
preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer,
the Court referred the controversy to a government auditor, Apolonio Ramos; but the latter reached a
different result from the other two. Not only that, but Ramos reported two different valuations that could
be reached according to the methods employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promovar
el comercio y la finanza, pero en el caso presente ha resultado un tanto cumplicada y
acomodaticia, como lo prueba el resultado del examen hecho por los contadores Stewart y
Ramos, pues el juzgado no alcanza a ver como habiendo examinado las mismas partidas y los
mismos libros dichos contadores hayan de llegara dos conclusiones que difieron
sustancialmente entre si. En otras palabras, no solamente la comprobacion hecha por Stewart
difiere de la comprobacion hecha por Ramos sino que, segun este ultimo, su comprobacion ha
dado lugar a dos resultados diferentes dependiendo del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer
attempted to bolster its case with alleged photographs of certain pages of the insurance book (destroyed
by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B) and allegedly showing abnormal
purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained unconvinced of
the authenticity of those photographs, and rejected them, because they were not mentioned not introduced
in the criminal case; and considering the evident importance of said exhibits in establishing the motive of
the insured in committing the arson charged, and the absence of adequate explanation for their omission
in the criminal case, we cannot say that their rejection in the civil case constituted reversible error.
The next two defenses pleaded by the insurer, — that the insured connived at the loss and that the
fraudulently inflated the quantity of the insured stock in the burnt bodegas, — are closely related to each
other. Both defenses are predicted on the assumption that the insured was in financial difficulties and set
the fire to defraud the insurance company, presumably in order to pay off the Philippine National Bank,
to which most of the insured hemp and copra was pledged. Both defenses are fatally undermined by the
established fact that, notwithstanding the insurer's refusal to pay the value of the policies the extensive
resources of the insured (Exhibit WW) enabled him to pay off the National Bank in a short time; and if he
was able to do so, no motive appears for attempt to defraud the insurer. While the acquittal of the insured
in the arson case is not res judicata on the present civil action, the insurer's evidence, to judge from the
decision in the criminal case, is practically identical in both cases and must lead to the same result, since
the proof to establish the defense of connivance at the fire in order to defraud the insurer "cannot be
materially less convincing than that required in order to convict the insured of the crime of
arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly have contained the quantities of copra and
hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates, inferences and
conclusionsAs to the defense that the burned bodegas could not possibly have contained the quantities of
copra and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates,
inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who examined the premises
during and after the fire. His testimony, however, was based on inferences from the photographs and
traces found after the fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and
specially of the then Chief of the Loan Department of the National Bank's Legaspi branch, Porfirio
Barrios, and of Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly
before the fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of the
veracity and accuracy of these witnesses, and the appellant insurer has failed to substantiate its charges
aganst their character. In fact, the insurer's repeated accusations that these witnesses were later
"suspended for fraudulent transactions" without giving any details, is a plain attempt to create prejudice
against them, without the least support in fact.
Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp
burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the refusal of the Court below to accept its
inferences from the remains shown in the photographs of the burned premises. It appears, likewise, that
the adjuster's calculations of the maximum contents of the destroyed warehouses rested on the
assumption that all the copra and hemp were in sacks, and on the result of his experiments to determine
the space occupied by definite amounts of sacked copra. The error in the estimates thus arrived at
proceeds from the fact that a large amount of the insured's stock were in loose form, occupying less space
than when kept in sacks; and from Stewart's obvious failure to give due allowance for the compression of
the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of the overlying stock, as
shown by engineer Bolinas. It is probable that the errors were due to inexperience (Stewart himself
admitted that this was the first copra fire he had investigated); but it is clear that such errors render
valueles Stewart's computations. These were in fact twice passed upon and twice rejected by different
judges (in the criminal and civil cases) and their concordant opinion is practically conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the
opinions stated therein were based on ex parte investigations made at the back of the insured; and the
appellant did not present at the trial the original testimony and documents from which the conclusions in
the report were drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by the insured contained false and
fraudulent statements that avoided the insurance policy. But the trial Court found that the discrepancies
were a result of the insured's erroneous interpretation of the provisions of the insurance policies and claim
forms, caused by his imperfect knowledge of English, and that the misstatements were innocently made
and without intent to defraud. Our review of the lengthy record fails to disclose reasons for rejecting
these conclusions of the Court below. For example, the occurrence of previous fires in the premises
insured in 1939, altho omitted in the claims, Exhibits EE and FF, were nevertheless revealed by the
insured in his claims Exhibits Q (filed simultaneously with them), KK and WW. Considering that all
these claims were submitted to the smae agent, and that this same agent had paid the loss caused by the
1939 fire, we find no error in the trial Court's acceptance of the insured's explanation that the omission in
Exhibits EE and FF was due to inadvertance, for the insured could hardly expect under such
circumstances, that the 1939 would pass unnoticed by the insurance agents. Similarly, the 20 per cent
overclaim on 70 per cent of the hemo stock, was explained by the insured as caused by his belief that he
was entitled to include in the claim his expected profit on the 70 per cent of the hemp, because the same
was already contracted for and sold to other parties before the fire occurred. Compared with other cases
of over-valuation recorded in our judicial annals, the 20 per cent excess in the case of the insured is not
by itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134,
the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire
Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China Ins. Co., 47 Phil.
14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85
while the goods insured were inventoried at O13,113. Certainly, the insured's overclaim of 20 per cent in
the case at bar, duly explained by him to the Court a quo, appears puny by comparison, and can not be
regarded as "more than misstatement, more than inadvertence of mistake, more than a mere error in
opinion, more than a slight exaggeration" (Tan It vs. Sun Insurance Office, ante) that would entitle the
insurer to avoid the policy. It is well to note that the overchange of 20 per cent was claimed only on
a part (70 per cent) of the hemp stock; had the insured acted with fraudulent intent, nothing prevented
him from increasing the value of all of his copra, hemp and buildings in the same proportion. This also
applies to the alleged fraudulent claim for burned empty sacks, that was likewise explained to our
satisfaction and that of the trial Court. The rule is that to avoid a policy, the false swearing must be wilful
and with intent to defraud (29 Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of
fraudulent intent would not authorize the collection of the expected profit under the terms of the polices,
and the trial Court correctly deducte the same from its award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed. Costs
against the appellant. So ordered.
 G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs. COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of Appeals in CA-G.R.
SP No. 31916, entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing
the decision of the Insurance Commission in I.C. Case No. 3340 which awarded the claim of petitioner
Armando Geagonia against private respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del
Sur. On 22 December 1989, he obtained from the private respondent fire insurance policy No. F-
146222 for P100,000.00. The period of the policy was from 22 December 1989 to 22 December 1990 and
covered the following: "Stock-in-trade consisting principally of dry goods such as RTW's for men and
women wear and other usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile
Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his
inventory stocks amounting to P392,130.50, itemized as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
—————
P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the Company of any insurance or insurances
already affected, or which may subsequently be effected, covering any of the
property or properties consisting of stocks in trade, goods in process and/or
inventories only hereby insured, and unless such notice be given and the particulars
of such insurance or insurances be stated therein or endorsed in this policy pursuant
to Section 50 of the Insurance Code, by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this policy shall be deemed
forfeited, provided however, that this condition shall not apply when the total
insurance or insurances in force at the time of the loss or damage is not more than
P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San
Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were completely destroyed prompting
him to file with the private respondent a claim under the policy. On 28 December 1990, the private
respondent denied the claim because it found that at the time of the loss the petitioner's stocks-in-trade
were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00
each, issued by the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These
policies indicate that the insured was "Messrs. Discount Mart (Mr. Armando Geagonia, Prop.)" with a
mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu
City as their interest may appear subject to the terms of this policy. CO-
INSURANCE DECLARED: P100,000. — Phils. First CEB/F 24758.4
The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the
policy.
The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission
(Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for
attorney's fees and costs of litigation. He attached as Annex "AM" 6 thereof his letter of 18 January 1991
which asked for the reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two policies issued by the PFIC
were already in existence; however, he had no knowledge of the provision in the private respondent's
policy requiring him to inform it of the prior policies; this requirement was not mentioned to him by the
private respondent's agent; and had it been mentioned, he would not have withheld such information. He
further asserted that the total of the amounts claimed under the three policies was below the actual value
of his stocks at the time of loss, which was P1,000,000.00.
In its answer,7 the private respondent specifically denied the allegations in the complaint and set up as its
principal defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not violate
Condition 3 as he had no knowledge of the existence of the two fire insurance policies obtained from the
PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies without informing him or
securing his consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks.
These findings were based on the petitioner's testimony that he came to know of the PFIC policies only
when he filed his claim with the private respondent and that Cebu Tesing Textile obtained them and paid
for their premiums without informing him thereof. The Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent company to pay
complainant the sum of P100,000.00 with legal interest from the time the complaint
was filed until fully satisfied plus the amount of P10,000.00 as attorney's fees. With
costs. The compulsory counterclaim of respondent is hereby dismissed.
Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in
its resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a
petition for review. The petition was docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner knew of the existence of the two other policies issued by
the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the
insurance was taken in the name of private respondent [petitioner herein]. The policy
states that "DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)" was the
assured and that "TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not
by the Tesing Textiles which is alleged to have taken out the other insurance without
the knowledge of private respondent. This is shown by Premium Invoices nos. 46632
and 46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be
only the mortgagee of the goods insured but the party to which they were issued were
the "DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the
policies on the same property subject of the insurance with petitioner. Hence, in
failing to disclose the existence of these insurances private respondent violated
Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions
insurances is belied by his letter to petitioner [of 18 January 1991. The body of the
letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision
requiring me to inform your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your
representative did not mention about said requirement at the time
he was convincing me to insure with you. If he only die or even
inquired if I had other existing policies covering my
establishment, I would have told him so. You will note that at the
time he talked to me until I decided to insure with your company
the two policies aforementioned were already in effect. Therefore
I would have no reason to withhold such information and I would
have desisted to part with my hard earned peso to pay the
insurance premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested in protecting
my investments. The actual value of my stocks damaged by the
fire was estimated by the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months before the
fire, shows my merchandise inventory was already some
P595,455.75. . . . These will support my claim that the amount
claimed under the three policies are much below the value of my
stocks lost.
The letter contradicts private respondent's pretension that he did not know that there
were other insurances taken on the stock-in-trade and seriously puts in question his
credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition.
He contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or
excess of jurisdiction:
A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE
INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH
THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION
IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE
NOT PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND
C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN
AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior
knowledge of the two insurance policies issued by the PFIC when he obtained the fire insurance policy
from the private respondent, thereby, for not disclosing such fact, violating Condition 3 of the policy, and
(b) if he had, whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter was not
offered in evidence and thus should not have been considered in deciding the case. However, as correctly
pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's complaint in I.C.
Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It has attained the status
of a judicial admission and since its due execution and authenticity was not denied by the other party, the
petitioner is bound by it even if it were not introduced as an independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals disagreed and found otherwise in view of the explicit
admission by the petitioner in his letter to the private respondent of 18 January 1991, which was quoted
in the challenged decision of the Court of Appeals. These divergent findings of fact constitute an
exception to the general rule that in petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His
letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to
the contrary before the Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission made ante litem motam. It was, indeed, incredible that he did not know about the prior
policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No.
F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law.
Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a]
policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of
an immaterial provision does not avoid the policy." Such a condition is a provision which invariably
appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is
commonly known as the additional or "other insurance" clause and has been upheld as valid and as a
warranty that no other insurance exists. Its violation would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject
matter, the same interest therein, and the same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable
interest therein and both interests may be one policy, or each may take out a separate policy covering his
interest, either at the same or at separate times. 18 The mortgagor's insurable interest covers the full value
of the mortgaged property, even though the mortgage debt is equivalent to the full value of the
property.19 The mortgagee's insurable interest is to the extent of the debt, since the property is relied upon
as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His
insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not
exceeding the value of the mortgaged property. 20 Thus, separate insurances covering different insurable
interests may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual
practice. The mortgagee may be made the beneficial payee in several ways. He may become the assignee
of the policy with the consent of the insurer; or the mere pledgee without such consent; or the original
policy may contain a mortgage clause; or a rider making the policy payable to the mortgagee "as his
interest may appear" may be attached; or a "standard mortgage clause," containing a collateral
independent contract between the mortgagee and insurer, may be attached; or the policy, though by its
terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty
to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the
proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest
may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer
but not made a party to the contract himself. Hence, any act of the mortgagor which defeats his right will
also defeat the right of the mortgagee. 22 This kind of policy covers only such interest as the mortgagee
has at the issuing of the policy.23
On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the
terms of an agreement by which the mortgagor is to pay the premiums upon such insurance. 24 It has been
noted, however, that although the mortgagee is himself the insured, as where he applies for a policy, fully
informs the authorized agent of his interest, pays the premiums, and obtains on the assurance that it
insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage
clause which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their
interest may appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance
and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of any insurance or insurances already
effected, or which may subsequently be effected covering any of the property hereby
insured, and unless such notice be given and the particulars of such insurance or
insurances be stated in or endorsed on this Policy by or on behalf of the Company
before the occurrence of any loss or damage, all benefits under this Policy shall be
forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the
objects thereby assured must be declared by the insured in writing and he must cause the
company to add or insert it in the policy, without which such policy shall be null and void, and
the insured will not be entitled to indemnity in case of loss," Condition 3 in the private
respondent's policy No. F-14622 does not absolutely declare void any violation thereof. It
expressly provides that the condition "shall not apply when the total insurance or insurances in
force at the time of the loss or damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor
of the insured and strictly against the company, the reason being, undoubtedly, to afford the greatest
protection which the insured was endeavoring to secure when he applied for insurance. It is also a
cardinal principle of law that forfeitures are not favored and that any construction which would result in
the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is possible to
construe the policy in a manner which would permit recovery, as, for example, by finding a waiver for
such forfeiture. 29 Stated differently, provisions, conditions or exceptions in policies which tend to work a
forfeiture of insurance policies should be construed most strictly against those for whose benefits they are
inserted, and most favorably toward those against whom they are intended to operate.  30 The reason for
this is that, except for riders which may later be inserted, the insured sees the contract already in its final
form and has had no voice in the selection or arrangement of the words employed therein. On the other
hand, the language of the contract was carefully chosen and deliberated upon by experts and legal
advisers who had acted exclusively in the interest of the insurers and the technical language employed
therein is rarely understood by ordinary laymen. 31
With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally
free from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude
that (a) the prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to
the extent exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other insurance "covering
any of the property or properties consisting of stocks in trade, goods in process and/or inventories only
hereby insured," and the portion regarding the insured's declaration on the subheading CO-INSURANCE
that the co-insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists
where the same person is insured by several insurers separately in respect of the same subject and
interest. As earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged
property are distinct and separate. Since the two policies of the PFIC do not cover the same interest as
that covered by the policy of the private respondent, no double insurance exists. The non-disclosure then
of the former policies was not fatal to the petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance
in force at the time of loss does not exceed P200,000.00, the private respondent was amenable to assume
a co-insurer's liability up to a loss not exceeding P200,000.00. What it had in mind was to discourage
over-insurance. Indeed, the rationale behind the incorporation of "other insurance" clause in fire policies
is to prevent over-insurance and thus avert the perpetration of fraud. When a property owner obtains
insurance policies from two or more insurers in a total amount that exceeds the property's value, the hijacked truck was recovered two weeks later without its cargo.
insured may have an inducement to destroy the property for the purpose of collecting the insurance. The
public as well as the insurer is interested in preventing a situation in which a fire would be profitable to On March 8, 1995, Philippines First, after due investigation and adjustment, and pursuant to the Marine
the insured.32 Policy, paid Wyeth P2,133,257.00 as indemnity. Philippines First then demanded reimbursement from
Reputable, having been subrogated to the rights of Wyeth by virtue of the payment. The latter, however,
[ G.R. No. 184300, July 11, 2012 ] ignored the demand.

MALAYAN INSURANCE CO., INC., PETITIONER, VS. PHILIPPINES FIRST INSURANCE
CO., INC. AND REPUTABLE FORWARDER SERVICES, INC., RESPONDENTS.
DECISION
REYES, J.:
Before the Court is a petition for review on certiorari filed by petitioner Malayan Insurance Co., Inc.
(Malayan) assailing the Decision [1] dated February 29, 2008 and Resolution [2] dated August 28, 2008 of
the Court of Appeals (CA) in CA-G.R. CV No. 71204 which affirmed with modification the decision of
the Regional Trial Court (RTC), Branch 38 of Manila.
Consequently, Philippines First instituted an action for sum of money against Reputable on August 12,
1996.[8] In its complaint, Philippines First stated that Reputable is a “private corporation engaged in the
business of a common carrier.” In its answer, [9] Reputable claimed that it is a private carrier. It also
claimed that it cannot be made liable under the contract of carriage with Wyeth since the contract was not
signed by Wyeth’s representative and that the cause of the loss was  force majeure, i.e., the hijacking
incident.
Subsequently, Reputable impleaded Malayan as third-party defendant in an effort to collect the amount
covered in the SR Policy. According to Reputable, “it was validly insured with [Malayan] for
P1,000,000.00 with respect to the lost products under the latter’s Insurance Policy No. SR-0001 02577
effective February 1, 1994 to February 1, 1995” and that the SR Policy covered the risk of robbery or
hijacking.[10]

Antecedent Facts Disclaiming any liability, Malayan argued, among others, that under Section 5 of the SR Policy, the
insurance does not cover any loss or damage to property which at the time of the happening of such loss
or damage is insured by any marine policy and that the SR Policy expressly excluded third-party liability.
Since 1989, Wyeth Philippines, Inc. (Wyeth) and respondent Reputable Forwarder Services, Inc.
(Reputable) had been annually executing a contract of carriage, whereby the latter undertook to transport After trial, the RTC rendered its Decision [11] finding Reputable liable to Philippines First for the amount
and deliver the former’s products to its customers, dealers or salesmen. [3] of indemnity it paid to Wyeth, among others. In turn, Malayan was found by the RTC to be liable to
Reputable to the extent of the policy coverage. The dispositive portion of the RTC decision provides:
On November 18, 1993, Wyeth procured Marine Policy No. MAR 13797 (Marine Policy) from
respondent Philippines First Insurance Co., Inc. (Philippines First) to secure its interest over its own WHEREFORE, on the main Complaint, judgment is hereby rendered finding [Reputable] liable for the
products. Philippines First thereby insured Wyeth’s nutritional, pharmaceutical and other products usual loss of the Wyeth products and orders it to pay [Philippines First] the following:
or incidental to the insured’s business while the same were being transported or shipped in the
Philippines. The policy covers all risks of direct physical loss or damage from any external cause, if by 1. the amount of P2,133,257.00 representing the amount paid by [Philippines First] to Wyeth for
land, and provides a limit of P6,000,000.00 per any one land vehicle. the loss of the products in question;

On December 1, 1993, Wyeth executed its annual contract of carriage with Reputable. It turned out, 2. the amount of P15,650.00 representing the adjustment fees paid by [Philippines First] to hired
however, that the contract was not signed by Wyeth’s representative/s. [4] Nevertheless, it was admittedly adjusters/surveyors;
signed by Reputable’s representatives, the terms thereof faithfully observed by the parties and, as
previously stated, the same contract of carriage had been annually executed by the parties every year 3. the amount of P50,000.00 as attorney’s fees; and
since 1989.[5]
4. the costs of suit.
Under the contract, Reputable undertook to answer for “all risks with respect to the goods and shall be
liable to the COMPANY (Wyeth), for the loss, destruction, or damage of the goods/products due to any
and all causes whatsoever, including theft, robbery, flood, storm, earthquakes, lightning, and other force On the third-party Complaint, judgment is hereby rendered finding [Malayan] liable to indemnify
majeure while the goods/products are in transit and until actual delivery to the customers, salesmen, and [Reputable] the following:
dealers of the COMPANY”. [6] The contract also required Reputable to secure an insurance policy on
Wyeth’s goods.[7] Thus, on February 11, 1994, Reputable signed a Special Risk Insurance Policy (SR 1. the amount of P1,000,000.00 representing the proceeds of the insurance policy;
Policy) with petitioner Malayan for the amount of P1,000,000.00.
2. the amount of P50,000.00 as attorney’s fees; and
On October 6, 1994, during the effectivity of the Marine Policy and SR Policy, Reputable received from
Wyeth 1,000 boxes of Promil infant formula worth P2,357,582.70 to be delivered by Reputable to 3. the costs of suit. 
Mercury Drug Corporation in Libis, Quezon City. Unfortunately, on the same date, the truck carrying
Wyeth’s products was hijacked by about 10 armed men. They threatened to kill the truck driver and two SO ORDERED.[12]
of his helpers should they refuse to turn over the truck and its contents to the said highway robbers. The
Dissatisfied, both Reputable and Malayan filed their respective appeals from the RTC decision. Malayan insists that the CA failed to properly resolve the issue on the “statutory limitations on the
liability of common carriers” and the “difference between an ‘other insurance clause’ and an ‘over
Reputable asserted that the RTC erred in holding that its contract of carriage with Wyeth was binding insurance clause’.”
despite Wyeth’s failure to sign the same. Reputable further contended that the provisions of the contract
are unreasonable, unjust, and contrary to law and public policy. Malayan also contends that the CA erred when it held that Reputable is a private carrier and should be
bound by the contractual stipulations in the contract of carriage. This argument is based on its assertion
For its part, Malayan invoked Section 5 of its SR Policy, which provides: that Philippines First judicially admitted in its complaint that Reputable is a common carrier and as such,
Reputable should not be held liable pursuant to Article 1745(6) of the Civil Code. [16] Necessarily, if
Section 5. INSURANCE WITH OTHER COMPANIES. The insurance does not cover any loss or Reputable is not liable for the loss, then there is no reason to hold Malayan liable to Reputable.
damage to property which at the time of the happening of such loss or damage is insured by or would but
for the existence of this policy, be insured by any Fire or Marine policy or policies except in respect of Further, Malayan posits that there resulted in an impairment of contract when the CA failed to apply the
any excess beyond the amount which would have been payable under the Fire or Marine policy or express provisions of Section 5 (referred to by Malayan as over insurance clause) and Section 12
policies had this insurance not been effected. (referred to by Malayan as other insurance clause) of its SR Policy as these provisions could have been
read together there being no actual conflict between them.

Malayan argued that inasmuch as there was already a marine policy issued by Philippines First securing
the same subject matter against loss and that since the monetary coverage/value of the Marine Policy is
more than enough to indemnify the hijacked cargo, Philippines First alone must bear the loss.
Malayan sought the dismissal of the third-party complaint against it. In the alternative, it prayed that it be
held liable for no more than P468,766.70, its alleged pro-rata share of the loss based on the amount
covered by the policy, subject to the provision of Section 12 of the SR Policy, which states:
12. OTHER INSURANCE CLAUSE. If at the time of any loss or damage happening to any property
hereby insured, there be any other subsisting insurance or insurances, whether effected by the insured or
by any other person or persons, covering the same property, the company shall not be liable to pay or
contribute more than its ratable proportion of such loss or damage.
On February 29, 2008, the CA rendered the assailed decision sustaining the ruling of the RTC, the
decretal portion of which reads:
WHEREFORE, in view of the foregoing, the assailed Decision dated 29 September 2000, as modified in
the Order dated 21 July 2001, is AFFIRMED with MODIFICATION in that the award of attorney’s
fees in favor of Reputable is DELETED.
Reputable, meanwhile, contends that it is exempt from liability for acts committed by thieves/robbers
who act with grave or irresistible threat whether it is a common carrier or a private/special carrier. It,
however, maintains the correctness of the CA ruling that Malayan is liable to Philippines First for the full
amount of its policy coverage and not merely a ratable portion thereof under Section 12 of the SR Policy.
Finally, Philippines First contends that the factual finding that Reputable is a private carrier should be
accorded the highest degree of respect and must be considered conclusive between the parties, and that a
review of such finding by the Court is not warranted under the circumstances. As to its alleged judicial
admission that Reputable is a common carrier, Philippines First proffered the declaration made by
Reputable that it is a private carrier. Said declaration was allegedly reiterated by Reputable in its third
party complaint, which in turn was duly admitted by Malayan in its answer to the said third-party
complaint. In addition, Reputable even presented evidence to prove that it is a private carrier.
As to the applicability of Sections 5 and 12 in the SR Policy, Philippines First reiterated the ruling of the
CA. Philippines First, however, prayed for a slight modification of the assailed decision, praying that
Reputable and Malayan be rendered solidarily liable to it in the amount of P998,000.00, which represents
the balance from the P1,000.000.00 coverage of the SR Policy after deducting P2,000.00 under Section
10 of the said SR Policy.[17]
Issues

SO ORDERED.[13]
The liability of Malayan under the SR Policy hinges on the following issues for resolution:

The CA ruled, among others, that: (1) Reputable is estopped from assailing the validity of the contract of
carriage on the ground of lack of signature of Wyeth’s representative/s; (2) Reputable is liable under the 1) Whether Reputable is a private carrier;
contract for the value of the goods even if the same was lost due to fortuitous event; and (3) Section 12 of
the SR Policy prevails over Section 5, it being the latter provision; however, since the ratable proportion 2) Whether Reputable is strictly bound by the stipulations in its contract of carriage with Wyeth, such
provision of Section 12 applies only in case of double insurance, which is not present, then it should not that it should be liable for any risk of loss or damage, for any cause whatsoever, including that due
be applied and Malayan should be held liable for the full amount of the policy coverage, that is, to theft or robbery and other force majeure;
P1,000,000.00.[14]
3) Whether the RTC and CA erred in rendering “nugatory” Sections 5 and Section 12 of the SR Policy;
On March 14, 2008, Malayan moved for reconsideration of the assailed decision but it was denied by the and
CA in its Resolution dated August 28, 2008. [15]
4) Whether Reputable should be held solidarily liable with Malayan for the amount of P998,000.00
Hence, this petition. due to Philippines First.
 Under Article 1732 of the Civil Code, common carriers are persons, corporations, firms, or associations
engaged in the business of carrying or transporting passenger or goods, or both by land, water or air for
The Court’s Ruling compensation, offering their services to the public. On the other hand, a private carrier is one wherein the
carriage is generally undertaken by special agreement and it does not hold itself out to carry goods for the
general public.[28] A common carrier becomes a private carrier when it undertakes to carry a special
On the first issue – Reputable cargo or chartered to a special person only.[29] For all intents and purposes, therefore, Reputable
is a private carrier. operated as a private/special carrier with regard to its contract of carriage with Wyeth.

The Court agrees with the RTC and CA that Reputable is a private carrier. The issue of whether a carrier On the second issue – Reputable is
is private or common on the basis of facts found by a trial court and/or the appelle court can be valid and bound by the terms of the contract
reviewable question of law.[18]  In this case , the conclusion derived by both the RTC and the CA that of carriage.
Reputable is a private carrier finds sufficient basis, not only from the facts on record, but also from
prevailing law and jurisprudence. The extent of a private carrier’s obligation is dictated by the stipulations of a contract it entered into,
provided its stipulations, clauses, terms and conditions are not contrary to law, morals, good customs,
Malayan relies on the alleged judicial admission of Philippines First in its complaint that Reputable is a public order, or public policy. “The Civil Code provisions on common carriers should not be applied
common carrier.[19] Invoking Section 4, Rule 129 of the Rules on Evidence that “an admission verbal or where the carrier is not acting as such but as a private carrier. Public policy governing common carriers
written, made by a party in the course of the proceeding in the same case, does not require proof,” it is has no force where the public at large is not involved.” [30]
Malayan’s position that the RTC and CA should have ruled that Reputable is a common carrier.
Consequently, pursuant to Article 1745(6) of the Civil Code, the liability of Reputable for the loss of Thus, being a private carrier, the extent of Reputable’s liability is fully governed by the stipulations of the
Wyeth’s goods should be dispensed with, or at least diminished. contract of carriage, one of which is that it shall be liable to Wyeth for the loss of the goods/products due
to any and all causes whatsoever, including theft, robbery and other force majeure while the
It is true that judicial admissions, such as matters alleged in the pleadings do not require proof, and need goods/products are in transit and until actual delivery to Wyeth’s customers, salesmen and dealers. [31]
not be offered to be considered by the court. “The court, for the proper decision of the case, may and
should consider, without the introduction of evidence, the facts admitted by the parties.” [20] The rule on On the third issue – other insurance
judicial admission, however, also states that such allegation, statement, or admission is conclusive as vis-à-vis over insurance.
against the pleader,[21] and that the facts alleged in the complaint are deemed admissions of the
plaintiff and binding upon him.[22] In this case, the pleader or the plaintiff who alleged that Reputable is Malayan refers to Section 5 of its SR Policy as an “over insurance clause” and to Section 12 as a
a common carrier was Philippines First. It cannot, by any stretch of imagination, be made conclusive as “modified ‘other insurance’ clause”.[32] In rendering inapplicable said provisions in the SR Policy, the CA
against Reputable whose nature of business is in question. ruled in this wise:

It should be stressed that Philippines First is not privy to the SR Policy between Wyeth and Reputable; Since Sec. 5 calls for [Malayan’s] complete absolution in case the other insurance would be sufficient to
rather, it is a mere subrogee to the right of Wyeth to collect from Reputable under the terms of the cover the entire amount of the loss, it is in direct conflict with Sec. 12 which provides only for a
contract of carriage. Philippines First is not in any position to make any admission, much more a pro[-]rated contribution between the two insurers. Being the later provision, and pursuant to the rules on
definitive pronouncement, as to the nature of Reputable’s business and there appears no other connection interpretation of contracts, Sec. 12 should therefore prevail.
between Philippines First and Reputable which suggests mutual familiarity between them.
x x x x
Moreover, records show that the alleged judicial admission of Philippines First was essentially disputed
by Reputable when it stated in paragraphs 2, 4, and 11 of its answer that it is actually a private or special x x x [T]he intention of both Reputable and [Malayan] should be given effect as against the wordings of
carrier.[23] In addition, Reputable stated in paragraph 2 of its third-party complaint that it is “a private Sec. 12 of their contract, as it was intended by the parties to operate only in case of double insurance, or
carrier engaged in the carriage of goods.” [24] Such allegation was, in turn, admitted by Malayan in where the benefits of the policies of both plaintiff-appellee and [Malayan] should pertain to Reputable
paragraph 2 of its answer to the third-party complaint. [25] There is also nothing in the records which show alone. But since the court a quo correctly ruled that there is no double insurance in this case inasmuch as
that Philippines First persistently maintained its stance that Reputable is a common carrier or that it even Reputable was not privy thereto, and therefore did not stand to benefit from the policy issued by plaintiff-
contested or proved otherwise Reputable’s position that it is a private or special carrier. appellee in favor of Wyeth, then [Malayan’s] stand should be rejected.

Hence, in the face of Reputable’s contrary admission as to the nature of its own business, what was stated
by Philippines First in its complaint is reduced to nothing more than mere allegation, which must be
proved for it to be given any weight or value. The settled rule is that mere allegation is not proof. [26]
More importantly, the finding of the RTC and CA that Reputable is a special or private carrier is
warranted by the evidence on record, primarily, the unrebutted testimony of Reputable’s Vice President
and General Manager, Mr. William Ang Lian Suan, who expressly stated in open court that Reputable
serves only one customer, Wyeth. [27]
To rule that Sec. 12 operates even in the absence of double insurance would work injustice to Reputable
which, despite paying premiums for a [P]1,000,000.00 insurance coverage, would not be entitled to
recover said amount for the simple reason that the same property is covered by another insurance policy,
a policy to which it was not a party to and much less, from which it did not stand to benefit. Plainly, this
unfair situation could not have been the intention of both Reputable and [Malayan] in signing the
insurance contract in question.[33]
In questioning said ruling, Malayan posits that Sections 5 and 12 are separate provisions applicable under
distinct circumstances. Malayan argues that “it will not be completely absolved under Section 5 of its
policy if it were the assured itself who obtained additional insurance coverage on the same property and
the loss incurred by [Wyeth’s] cargo was more than that insured by [Philippines First’s] marine policy.
On the other hand, Section 12 will not completely absolve Malayan if additional insurance coverage on
the same cargo were obtained by someone besides [Reputable], in which case [Malayan’s] SR policy will
contribute or share ratable proportion of a covered cargo loss.” [34]
Malayan’s position cannot be countenanced.
Section 5 is actually the other insurance clause (also called “additional insurance” and “double
insurance”), one akin to Condition No. 3 in issue in Geagonia v. CA,[35] which validity was upheld by the
Court as a warranty that no other insurance exists. The Court ruled that Condition No. 3 [36] is a condition
which is not proscribed by law as its incorporation in the policy is allowed by Section 75 of the Insurance
Code. It was also the Court’s finding that unlike the other insurance clauses, Condition No. 3 does not
absolutely declare void any violation thereof but expressly provides that the condition “shall not apply
when the total insurance or insurances in force at the time of the loss or damage is not more than
P200,000.00.”
In this case, similar to Condition No. 3 in Geagonia, Section 5 does not provide for the nullity of the SR
Policy but simply limits the liability of Malayan only up to the excess of the amount that was not covered
by the other insurance policy. In interpreting the “other insurance clause” in Geagonia, the Court ruled
that the prohibition applies only in case of double insurance. The Court ruled that in order to
constitute a violation of the clause, the other insurance must be upon same subject matter, the same
interest therein, and the same risk. Thus, even though the multiple insurance policies involved were all
issued in the name of the same assured, over the same subject matter and covering the same risk, it was
ruled that there was no violation of the “other insurance clause” since there was no double insurance.
Section 12 of the SR Policy, on the other hand, is the over insurance clause. More particularly, it covers
the situation where there is over insurance due to double insurance. In such case, Section 15 provides that
Malayan shall “not be liable to pay or contribute more than its ratable proportion of such loss or damage.”
This is in accord with the principle of contribution provided under Section 94(e) of the Insurance Code,
[37]
 which states that “where the insured is over insured by double insurance, each insurer is bound, as
between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for
which he is liable under his contract.”
Clearly, both Sections 5 and 12 presuppose the existence of a double insurance. The pivotal question that
now arises is whether there is double insurance in this case such that either Section 5 or Section 12 of the
SR Policy may be applied.
By the express provision of Section 93 of the Insurance Code, double insurance exists where the same
person is insured by several insurers separately in respect to the same subject and interest. The requisites
in order for double insurance to arise are as follows:[38]
undisputed that Wyeth is the recognized insured of Philippines First under its Marine Policy, while
Reputable is the recognized insured of Malayan under the SR Policy. The fact that Reputable procured
Malayan’s SR Policy over the goods of Wyeth pursuant merely to the stipulated requirement under its
contract of carriage with the latter does not make Reputable a mere agent of Wyeth in obtaining the said
SR Policy.
The interest of Wyeth over the property subject matter of both insurance contracts is also different and
distinct from that of Reputable’s. The policy issued by Philippines First was in consideration of the legal
and/or equitable interest of Wyeth over its own goods. On the other hand, what was issued by Malayan to
Reputable was over the latter’s insurable interest over the safety of the goods, which may become the
basis of the latter’s liability in case of loss or damage to the property and falls within the contemplation of
Section 15 of the Insurance Code. [39]
Therefore, even though the two concerned insurance policies were issued over the same goods and cover
the same risk, there arises no double insurance since they were issued to two different persons/entities
having distinct insurable interests. Necessarily, over insurance by double insurance cannot likewise exist.
Hence, as correctly ruled by the RTC and CA, neither Section 5 nor Section 12 of the SR Policy can be
applied.
Apart from the foregoing, the Court is also wont to strictly construe the controversial provisions of the
SR Policy against Malayan. This is in keeping with the rule that:
“Indemnity and liability insurance policies are construed in accordance with the general rule of resolving
any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A
contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its
obligations.”[40] (Emphasis supplied)
Moreover, the CA correctly ruled that:
To rule that Sec. 12 operates even in the absence of double insurance would work injustice to Reputable
which, despite paying premiums for a [P]1,000,000.00 insurance coverage, would not be entitled to
recover said amount for the simple reason that the same property is covered by another insurance policy,
a policy to which it was not a party to and much less, from which it did not stand to benefit. x x x [41]
On the fourth issue – Reputable is not
solidarily liable with Malayan.    

There is solidary liability only when the obligation expressly so states, when the law so provides or when
1. The person insured is the same;
the nature of the obligation so requires.
2. Two or more insurers insuring separately;
3. There is identity of subject matter;
In Heirs of George Y. Poe v. Malayan lnsurance Company., Inc., [42] the Court ruled that:
4. There is identity of interest insured; and
5. There is identity of the risk or peril insured against.
[Where the insurance contract provides for indemnity against liability to third persons, the liability of the
insurer is direct and such third persons can directly sue the insurer. The direct liability of the insurer
In the present case, while it is true that the Marine Policy and the SR Policy were both issued over the
under indemnity contracts against third party[-]liability does not mean, however, that the insurer can be
same subject matter, i.e. goods belonging to Wyeth, and both covered the same peril insured against, it is,
held solidarily liable with the insured and/or the other parties found at fault, since they are being held
however, beyond cavil that the said policies were issued to two different persons or entities. It is
liable under different obligations. The liability of the insured carrier or vehicle owner is based on
tort, in accordance with the provisions of the Civil Code; while that of the insurer arises from
contract, particularly, the insurance policy:[43] (Citation omitted and emphasis supplied)

Suffice it to say that Malayan's and Reputable's respective liabilities arose from different obligations-
Malayan's is based on the SR Policy while Reputable's is based on the contract of carriage.

All told, the Court finds no reversible error in the judgment sought to be reviewed.

WHEREFORE, premises considered, the petition is DENIED. The Decision dated February 29, 2008
and Resolution dated August 28, 2008 of the Court of Appeals in CA-G.R. CV No. 71204 are
hereby AFFIRMED.

Cost against petitioner Malayan Insurance Co., Inc.

SO ORDERED.
 G.R. No. 87434 August 5, 1992
PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. and TAGUM PLASTICS,
INC., petitioners,
vs. SWEET LINES, INC., DAVAO VETERANS ARRASTRE AND PORT SERVICES, INC. and
HON. COURT OF APPEALS, respondents.
REGALADO, J.:
A maritime suit 1 was commenced on May 12, 1978 by herein Petitioner Philippine American General
Insurance Co., Inc. (Philamgen) and Tagum Plastics, Inc. (TPI) against private respondents Sweet Lines,
Inc. (SLI) and Davao Veterans Arrastre and Port Services, Inc. (DVAPSI), along with S.C.I. Line (The
Shipping Corporation of India Limited) and F.E. Zuellig, Inc., as co-defendants in the court a quo,
seeking recovery of the cost of lost or damaged shipment plus exemplary damages, attorney's fees and
costs allegedly due to defendants' negligence, with the following factual backdrop yielded by the findings
of the court below and adopted by respondent court:
It would appear that in or about March 1977, the vessel SS "VISHVA YASH"
belonging to or operated by the foreign common carrier, took on board at Baton
Rouge, LA, two (2) consignments of cargoes for shipment to Manila and later for
transhipment to Davao City, consisting of 600 bags Low Density Polyethylene 631
and another 6,400 bags Low Density Polyethylene 647, both consigned to the order
of Far East Bank and Trust Company of Manila, with arrival notice to Tagum
Plastics, Inc., Madaum, Tagum, Davao City. Said cargoes were covered, respectively,
by Bills of Lading Nos. 6 and 7 issued by the foreign common carrier (Exhs. E and
F). The necessary packing or Weight List (Exhs. A and B), as well as the Commercial
Invoices (Exhs. C and D) accompanied the shipment. The cargoes were likewise
insured by the Tagum Plastics Inc. with plaintiff Philippine American General
Insurance Co., Inc., (Exh. G).
In the course of time, the said vessel arrived at Manila and discharged its cargoes in
the Port of Manila for transhipment to Davao City. For this purpose, the foreign
carrier awaited and made use of the services of the vessel called M/V "Sweet Love"
owned and operated by defendant interisland carrier.
Subject cargoes were loaded in Holds Nos. 2 and 3 of the interisland carrier. These
were commingled with similar cargoes belonging to Evergreen Plantation and also
Standfilco.
On May 15, 1977, the shipment(s) were discharged from the interisland carrier into
the custody of the consignee. A later survey conducted on July 8, 1977, upon the
instance of the plaintiff, shows the following:
Of the cargo covered by Bill of Lading No. 25 or (2)6, supposed to contain 6,400
bags of Low Density Polyethylene 647 originally inside 160 pallets, there were
delivered to the consignee 5,413 bags in good order condition. The survey shows
shortages, damages and losses to be as follows:
Undelivered/Damaged bags as tallied during discharge from
vessel-173 bags; undelivered and damaged as noted and observed
whilst stored at the pier-699 bags; and shortlanded-110 bags
(Exhs. P and P-1).
Of the 600 bags of Low Density Polyethylene 631, the survey conducted on the same
day shows an actual delivery to the consignee of only 507 bags in good order
condition. Likewise noted were the following losses, damages and shortages, to wit:
Undelivered/damaged bags and tally sheets during discharge
from vessel-17 bags.
Undelivered and damaged as noted and observed whilst stored at
the pier-66 bags; Shortlanded-10 bags.
Therefore, of said shipment totalling 7,000 bags, originally contained in 175 pallets,
only a total of 5,820 bags were delivered to the consignee in good order condition,
leaving a balance of 1,080 bags. Such loss from this particular shipment is what any
or all defendants may be answerable to (sic).
As already stated, some bags were either shortlanded or were missing, and some of
the 1,080 bags were torn, the contents thereof partly spilled or were fully/partially
emptied, but, worse, the contents thereof contaminated with foreign matters and
therefore could no longer serve their intended purpose. The position taken by the
consignee was that even those bags which still had some contents were considered as
total losses as the remaining contents were contaminated with foreign matters and
therefore did not (sic) longer serve the intended purpose of the material. Each bag
was valued, taking into account the customs duties and other taxes paid as well as
charges and the conversion value then of a dollar to the peso, at P110.28 per bag
(see Exhs. L and L-1 M and O). 2
Before trial, a compromise agreement was entered into between petitioners, as plaintiffs, and defendants
S.C.I. Line and F.E. Zuellig, upon the latter's payment of P532.65 in settlement of the claim against them.
Whereupon, the trial court in its order of August 12, 1981 3 granted plaintiffs' motion to dismiss grounded
on said amicable settlement and the case as to S.C.I. Line and F.E. Zuellig was consequently "dismissed
with prejudice and without pronouncement as to costs."
The trial court thereafter rendered judgment in favor of herein petitioners on this dispositive portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Philippine
General American Insurance Company Inc. and against the remaining defendants,
Sweet Lines Inc. and Davao Veterans Arrastre Inc. as follows:
Defendant Sweet Lines, Inc. is ordered to pay said plaintiff the sum of P34,902.00,
with legal interest thereon from date of extrajudicial demand on April 28, 1978 (Exh.
M) until fully paid;
 Defendant Sweet Lines Inc. and Davao Veterans Arrastre and (Port) Services Inc. are
directed to pay jointly and severally, the plaintiff the sum of P49,747.55, with legal
interest thereon from April 28, 1978 until fully paid;
Each of said defendants are ordered to pay the plaintiffs the additional sum of P5,000
is reimbursable attorney's fees and other litigation expenses;
Each of said defendants shall pay one-fourth (1/4) costs. 4
Due to the reversal on appeal by respondent court of the trial court's decision on the ground of
prescription, 5 in effect dismissing the complaint of herein petitioners, and the denial of their motion for
reconsideration, 6 petitioners filed the instant petition for review on certiorari, faulting respondent
appellate court with the following errors: (1) in upholding, without proof, the existence of the so-called
prescriptive period; (2) granting arguendo that the said prescriptive period does exist, in not finding the
same to be null and void; and (3) assuming arguendo that the said prescriptive period is valid and legal, in
failing to conclude that petitioners substantially complied therewith. 7
Parenthetically, we observe that herein petitioners are jointly pursuing this case, considering their
common interest in the shipment subject of the present controversy, to obviate any question as to who the
real party in interest is and to protect their respective rights as insurer and insured. In any case, there is no
impediment to the legal standing of Petitioner Philamgen, even if it alone were to sue herein private
respondents in its own capacity as insurer, it having been subrogated to all rights of recovery for loss of
or damage to the shipment insured under its Marine Risk Note No. 438734 dated March 31, 1977 8 in
view of the full settlement of the claim thereunder as evidenced by the subrogation receipt 9 issued in its
favor by Far East Bank and Trust Co., Davao Branch, for the account of petitioner TPI.
Upon payment of the loss covered by the policy, the insurer's entitlement to subrogation pro tanto, being
of the highest equity, equips it with a cause of action against a third party in case of contractual
breach. 10 Further, the insurer's subrogatory right to sue for recovery under the bill of lading in case of
loss of or damage to the cargo is jurisprudentially upheld. 11 However, if an insurer, in the exercise of its
subrogatory right, may proceed against the erring carrier and for all intents and purposes stands in the
place and in substitution of the consignee, a fortiori such insurer is presumed to know and is just as bound
by the contractual terms under the bill of lading as the insured.
On the first issue, petitioners contend that it was error for the Court of Appeals to reverse the appealed
decision on the supposed ground of prescription when SLI failed to adduce any evidence in support
thereof and that the bills of lading said to contain the shortened periods for filing a claim and for
instituting a court action against the carrier were never offered in evidence. Considering that the existence
and tenor of this stipulation on the aforesaid periods have allegedly not been established, petitioners
maintain that it is inconceivable how they can possibly comply therewith. 12 In refutation, SLI avers that
it is standard practice in its operations to issue bills of lading for shipments entrusted to it for carriage and
that it in fact issued bills of lading numbered MD-25 and MD-26 therefor with proof of their existence
manifest in the records of the case. 13 For its part, DVAPSI insists on the propriety of the dismissal of the
complaint as to it due to petitioners' failure to prove its direct responsibility for the loss of and/or damage
to the cargo. 14
On this point, in denying petitioner's motion for reconsideration, the Court of Appeals resolved that
although the bills of lading were not offered in evidence, the litigation obviously revolves on such bills of
lading which are practically the documents or contracts sued upon, hence, they are inevitably involved
and their provisions cannot be disregarded in the determination of the relative rights of the parties
thereto. 15
Respondent court correctly passed upon the matter of prescription, since that defense was so considered
and controverted by the parties. This issue may accordingly be taken cognizance of by the court even if
not inceptively raised as a defense so long as its existence is plainly apparent on the face of relevant
pleadings. 16 In the case at bar, prescription as an affirmative defense was seasonably raised by SLI in its
answer, 17 except that the bills of lading embodying the same were not formally offered in evidence, thus
reducing the bone of contention to whether or not prescription can be maintained as such defense and, as
in this case, consequently upheld on the strength of mere references thereto.
As petitioners are suing upon SLI's contractual obligation under the contract of carriage as contained in
the bills of lading, such bills of lading can be categorized as actionable documents which under the Rules
must be properly pleaded either as causes of action or defenses, 18 and the genuineness and due execution
of which are deemed admitted unless specifically denied under oath by the adverse party.  19 The rules on
actionable documents cover and apply to both a cause of action or defense based on said documents. 20
In the present case and under the aforestated assumption that the time limit involved is a prescriptive
period, respondent carrier duly raised prescription as an affirmative defense in its answer setting forth
paragraph 5 of the pertinent bills of lading which comprised the stipulation thereon by parties, to wit:
5. Claims for shortage, damage, must be made at the time of delivery to consignee or
agent, if container shows exterior signs of damage or shortage. Claims for non-
delivery, misdelivery, loss or damage must be filed within 30 days from accrual.
Suits arising from shortage, damage or loss, non-delivery or misdelivery shall be
instituted within 60 days from date of accrual of right of action. Failure to file claims
or institute judicial proceedings as herein provided constitutes waiver of claim or
right of action. In no case shall carrier be liable for any delay, non-delivery,
misdelivery, loss of damage to cargo while cargo is not in actual custody of carrier. 21
In their reply thereto, herein petitioners, by their own assertions that —
2. In connection with Pars. 14 and 15 of defendant Sweet Lines, Inc.'s Answer,
plaintiffs state that such agreements are what the Supreme Court considers as
contracts of adhesion (see Sweet Lines, Inc. vs. Hon. Bernardo Teves, et al., G.R. No.
L-37750, May 19, 1978) and, consequently, the provisions therein which are contrary
to law and public policy cannot be availed of by answering defendant as valid
defenses. 22
thereby failed to controvert the existence of the bills of lading and the aforequoted provisions therein,
hence they impliedly admitted the same when they merely assailed the validity of subject stipulations.
Petitioners' failure to specifically deny the existence, much less the genuineness and due execution, of the
instruments in question amounts to an admission. Judicial admissions, verbal or written, made by the
parties in the pleadings or in the course of the trial or other proceedings in the same case are conclusive,
no evidence being required to prove the same, and cannot be contradicted unless shown to have been
made through palpable mistake or that no such admission was made. 23 Moreover, when the due
execution and genuineness of an instrument are deemed admitted because of the adverse party's failure to
make a specific verified denial thereof, the instrument need not be presented formally in evidence for it
may be considered an admitted fact. 24
Even granting that petitioners' averment in their reply amounts to a denial, it has the procedural earmarks
of what in the law on pleadings is called a negative pregnant, that is, a denial pregnant with the admission
of the substantial facts in the pleading responded to which are not squarely denied. It is in effect an
admission of the averment it is directed to. 25 Thus, while petitioners objected to the validity of such
agreement for being contrary to public policy, the existence of the bills of lading and said stipulations
were nevertheless impliedly admitted by them.
We find merit in respondent court's comments that petitioners failed to touch on the matter of the non-
presentation of the bills of lading in their brief and earlier on in the appellate proceedings in this case,
hence it is too late in the day to now allow the litigation to be overturned on that score, for to do so would
mean an over-indulgence in technicalities. Hence, for the reasons already advanced, the non-inclusion of
the controverted bills of lading in the formal offer of evidence cannot, under the facts of this particular
case, be considered a fatal procedural lapse as would bar respondent carrier from raising the defense of
prescription. Petitioners' feigned ignorance of the provisions of the bills of lading, particularly on the time
limitations for filing a claim and for commencing a suit in court, as their excuse for non-compliance
therewith does not deserve serious attention.
It is to be noted that the carriage of the cargo involved was effected pursuant to an "Application for
Delivery of Cargoes without Original Bill of Lading" issued on May 20, 1977 in Davao City 26 with the
notation therein that said application corresponds to and is subject to the terms of bills of lading MD-25
and MD-26. It would be a safe assessment to interpret this to mean that, sight unseen, petitioners
acknowledged the existence of said bills of lading. By having the cargo shipped on respondent carrier's
vessel and later making a claim for loss on the basis of the bills of lading, petitioners for all intents and
purposes accepted said bills. Having done so they are bound by all stipulations contained
therein. 27 Verily, as petitioners are suing for recovery on the contract, and in fact even went as far as
assailing its validity by categorizing it as a contract of adhesion, then they necessarily admit that there is
such a contract, their knowledge of the existence of which with its attendant stipulations they cannot now
be allowed to deny.
On the issue of the validity of the controverted paragraph 5 of the bills of lading above quoted which
unequivocally prescribes a time frame of thirty (30) days for filing a claim with the carrier in case of loss
of or damage to the cargo and sixty (60) days from accrual of the right of action for instituting an action
in court, which periods must concur, petitioners posit that the alleged shorter prescriptive period which is
in the nature of a limitation on petitioners' right of recovery is unreasonable and that SLI has the burden
of proving otherwise, citing the earlier case of Southern Lines, Inc. vs. Court of Appeals, et al. 28 They
postulate this on the theory that the bills of lading containing the same constitute contracts of adhesion
and are, therefore, void for being contrary to public policy, supposedly pursuant to the dictum in Sweet
Lines, Inc. vs. Teves, et al. 29
Furthermore, they contend, since the liability of private respondents has been clearly established, to bar
petitioners' right of recovery on a mere technicality will pave the way for unjust enrichment.  30 Contrarily,
SLI asserts and defends the reasonableness of the time limitation within which claims should be filed
with the carrier; the necessity for the same, as this condition for the carrier's liability is uniformly adopted
by nearly all shipping companies if they are to survive the concomitant rigors and risks of the shipping
industry; and the countervailing balance afforded by such stipulation to the legal presumption of
negligence under which the carrier labors in the event of loss of or damage to the cargo. 31
It has long been held that Article 366 of the Code of Commerce applies not only to overland and river
transportation but also to maritime
transportation. 32 Moreover, we agree that in this jurisdiction, as viewed from another angle, it is more
accurate to state that the filing of a claim with the carrier within the time limitation therefor under Article
366 actually constitutes a condition precedent to the accrual of a right of action against a carrier for
damages caused to the merchandise. The shipper or the consignee must allege and prove the fulfillment
of the condition and if he omits such allegations and proof, no right of action against the carrier can
accrue in his favor. As the requirements in Article 366, restated with a slight modification in the assailed
paragraph 5 of the bills of lading, are reasonable conditions precedent, they are not limitations of
action. 33 Being conditions precedent, their performance must precede a suit for enforcement 34 and the
vesting of the right to file spit does not take place until the happening of these conditions. 35
Now, before an action can properly be commenced all the essential elements of the cause of action must
be in existence, that is, the cause of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed by agreement of the parties or
implied by law must be performed or complied with before commencing the action, unless the conduct of
the adverse party has been such as to prevent or waive performance or excuse non-performance of the
condition. 36
It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of
action consists of the operative facts which give rise to such right of action. The right of action does not
arise until the performance of all conditions precedent to the action and may be taken away by the
running of the statute of limitations, through estoppel, or by other circumstances which do not affect the
cause of action. 37 Performance or fulfillment of all conditions precedent upon which a right of action
depends must be sufficiently alleged, 38 considering that the burden of proof to show that a party has a
right of action is upon the person initiating the suit. 39
More particularly, where the contract of shipment contains a reasonable requirement of giving notice of
loss of or injury to the goods, the giving of such notice is a condition precedent to the action for loss or
injury or the right to enforce the carrier's liability. Such requirement is not an empty formalism. The
fundamental reason or purpose of such a stipulation is not to relieve the carrier from just liability, but
reasonably to inform it that the shipment has been damaged and that it is charged with liability therefor,
and to give it an opportunity to examine the nature and extent of the injury. This protects the carrier by
affording it an opportunity to make an investigation of a claim while the matter is fresh and easily
investigated so as to safeguard itself from false and fraudulent claims. 40
Stipulations in bills of lading or other contracts of shipment which require notice of claim for loss of or
damage to goods shipped in order to impose liability on the carrier operate to prevent the enforcement of
the contract when not complied with, that is, notice is a condition precedent and the carrier is not liable if
notice is not given in accordance with the stipulation, 41 as the failure to comply with such a stipulation in
a contract of carriage with respect to notice of loss or claim for damage bars recovery for the loss or
damage suffered. 42
On the other hand, the validity of a contractual limitation of time for filing the suit itself against a carrier
shorter than the statutory period therefor has generally been upheld as such stipulation merely affects the
shipper's remedy and does not affect the liability of the carrier. In the absence of any statutory limitation
and subject only to the requirement on the reasonableness of the stipulated limitation period, the parties to
a contract of carriage may fix by agreement a shorter time for the bringing of suit on a claim for the loss
of or damage to the shipment than that provided by the statute of limitations. Such limitation is not
contrary to public policy for it does not in any way defeat the complete vestiture of the right to recover,
but merely requires the assertion of that right by action at an earlier period than would be necessary to
defeat it through the operation of the ordinary statute of limitations. 43
In the case at bar, there is neither any showing of compliance by petitioners with the requirement for the
filing of a notice of claim within the prescribed period nor any allegation to that effect. It may then be
said that while petitioners may possibly have a cause of action, for failure to comply with the above
condition precedent they lost whatever right of action they may have in their favor or, token in another
sense, that remedial right or right to relief had prescribed. 44
The shipment in question was discharged into the custody of the consignee on May 15, 1977, and it was
from this date that petitioners' cause of action accrued, with thirty (30) days therefrom within which to
file a claim with the carrier for any loss or damage which may have been suffered by the cargo and
thereby perfect their right of action. The findings of respondent court as supported by petitioners' formal
offer of evidence in the court below show that the claim was filed with SLI only on April 28, 1978, way
beyond the period provided in the bills of lading 45 and violative of the contractual provision, the
inevitable consequence of which is the loss of petitioners' remedy or right to sue. Even the filing of the
complaint on May 12, 1978 is of no remedial or practical consequence, since the time limits for the filing
thereof, whether viewed as a condition precedent or as a prescriptive period, would in this case be
productive of the same result, that is, that petitioners had no right of action to begin with or, at any rate,
their claim was time-barred.
What the court finds rather odd is the fact that petitioner TPI filed a provisional claim with DVAPSI as
early as June 14, 1977 46 and, as found by the trial court, a survey fixing the extent of loss of and/or
damage to the cargo was conducted on July 8, 1977 at the instance of petitioners. 47 If petitioners had the
opportunity and awareness to file such provisional claim and to cause a survey to be conducted soon after
the discharge of the cargo, then they could very easily have filed the necessary formal, or even a
provisional, claim with SLI itself 48 within the stipulated period therefor, instead of doing so only on
April 28, 1978 despite the vessel's arrival at the port of destination on May 15, 1977. Their failure to
timely act brings us to no inference other than the fact that petitioners slept on their rights and they must
now face the consequences of such inaction.
The ratiocination of the Court of Appeals on this aspect is worth reproducing:
xxx xxx xxx
It must be noted, at this juncture, that the aforestated time limitation in the
presentation of claim for loss or damage, is but a restatement of the rule prescribed
under Art. 366 of the Code of Commerce which reads as follows:
Art. 366. Within the twenty-four hours following the receipt of
the merchandise, the claim against the carrier for damage or
average which may be found therein upon opening the packages,
may be made, provided that the indications of the damage or
average which gives rise to the claim cannot be ascertained from
the outside part of the packages, in which case the claims shall be
admitted only at the time of the receipt.
After the periods mentioned have elapsed, or the transportation
charges have been paid, no claim shall be admitted against the
carrier with regard to the condition in which the goods
transported were delivered.
Gleanable therefrom is the fact that subject stipulation even lengthened the period for
presentation of claims thereunder. Such modification has been sanctioned by the
Supreme Court. In the case of Ong Yet (M)ua Hardware Co., Inc. vs. Mitsui
Steamship Co., Ltd., et al., 59 O.G. No. 17, p. 2764, it ruled that Art. 366 of the Code
of Commerce can be modified by a bill of lading prescribing the period of 90 days
after arrival of the ship, for filing of written claim with the carrier or agent, instead of
the 24-hour time limit after delivery provided in the aforecited legal provision.
Tested, too, under paragraph 5 of said Bill of Lading, it is crystal clear that the
commencement of the instant suit on May 12, 1978 was indeed fatally late. In view of
the express provision that "suits arising from
. . . damage or loss shall be instituted within 60 days from date of accrual of right of
action," the present action necessarily fails on ground of prescription.
In the absence of constitutional or statutory prohibition, it is
usually held or recognized that it is competent for the parties to a
contract of shipment to agree on a limitation of time shorter than
the statutory period, within which action for breach of the
contract shall be brought, and such limitation will be enforced if
reasonable . . . (13 C.J.S. 496-497)
A perusal of the pertinent provisions of law on the matter would disclose that there is
no constitutional or statutory prohibition infirming paragraph 5 of subject Bill of
Lading. The stipulated period of 60 days is reasonable enough for appellees to
ascertain the facts and thereafter to sue, if need be, and the 60-day period agreed upon
by the parties which shortened the statutory period within which to bring action for
breach of contract is valid and binding. . . . (Emphasis in the original text.) 49
As explained above, the shortened period for filing suit is not unreasonable and has in fact been generally
recognized to be a valid business practice in the shipping industry. Petitioners' advertence to the Court's
holding in the Southern Lines case, supra, is futile as what was involved was a claim for refund of excess
payment. We ruled therein that non-compliance with the requirement of filing a notice of claim under
Article 366 of the Code of Commerce does not affect the consignee's right of action against the carrier
because said requirement applies only to cases for recovery of damages on account of loss of or damage
to cargo, not to an action for refund of overpayment, and on the further consideration that neither the
Code of Commerce nor the bills of lading therein provided any time limitation for suing for refund of
money paid in excess, except only that it be filed within a reasonable time.
The ruling in Sweet Lines categorizing the stipulated limitation on venue of action provided in the subject
bill of lading as a contract of adhesion and, under the circumstances therein, void for being contrary to
public policy is evidently likewise unavailing in view of the discrete environmental facts involved and the
fact that the restriction therein was unreasonable. In any case, Ong Yiu vs. Court of Appeals, et
al., 50 instructs us that "contracts of adhesion wherein one party imposes a ready-made form of contract on
the other . . . are contracts not entirely prohibited. The one who adheres to the contract is in reality free to
reject it entirely; if he adheres he gives his consent." In the present case, not even an allegation of
ignorance of a party excuses non-compliance with the contractual stipulations since the responsibility for
ensuring full comprehension of the provisions of a contract of carriage devolves not on the carrier but on
the owner, shipper, or consignee as the case may be.
While it is true that substantial compliance with provisions on filing of claim for loss of or damage to
cargo may sometimes suffice, the invocation of such an assumption must be viewed vis-a-vis the object
or purpose which such a provision seeks to attain and that is to afford the carrier a reasonable opportunity
to determine the merits and validity of the claim and to protect itself against unfounded
impositions. 51 Petitioners' would nevertheless adopt an adamant posture hinged on the issuance by SLI of
a "Report on Losses and Damages," dated May 15, 1977, 52 from which petitioners theorize that this The testimony of petitioners' own witness, Roberto Cabato, Jr., Marine and Aviation Claims Manager of
charges private respondents with actual knowledge of the loss and damage involved in the present case as petitioner Philamgen, was definitely inconclusive and the responsibility for the loss or damage could still
would obviate the need for or render superfluous the filing of a claim within the stipulated period. not be ascertained therefrom:

Withal, it has merely to be pointed out that the aforementioned report bears this notation at the lower part Q In other words, Mr. Cabato, you only computed the loss on the
thereof: "Damaged by Mla. labor upon unloading; B/L noted at port of origin," as an explanation for the basis of the figures submitted to you and based on the documents
cause of loss of and/or damage to the cargo, together with an iterative note stating that "(t)his Copy like the survey certificate and the certificate of the arrastre?
should be submitted together with your claim invoice or receipt within 30 days from date of issue
otherwise your claim will not be honored." A Yes, sir.

Moreover, knowledge on the part of the carrier of the loss of or damage to the goods deducible from the Q Therefore, Mr. Cabato, you have no idea how or where these
issuance of said report is not equivalent to nor does it approximate the legal purpose served by the filing losses were incurred?
of the requisite claim, that is, to promptly apprise the carrier about a consignee's intention to file a claim
and thus cause the prompt investigation of the veracity and merit thereof for its protection. It would be an
unfair imposition to require the carrier, upon discovery in the process of preparing the report on losses or A No, sir.
damages of any and all such loss or damage, to presume the existence of a claim against it when at that
time the carrier is expectedly concerned merely with accounting for each and every shipment and x x x           x x x          x x x
assessing its condition. Unless and until a notice of claim is therewith timely filed, the carrier cannot be
expected to presume that for every loss or damage tallied, a corresponding claim therefor has been filed Q Mr. Witness, you said that you processed and investigated the
or is already in existence as would alert it to the urgency for an immediate investigation of the soundness claim involving the shipment in question. Is it not a fact that in
of the claim. The report on losses and damages is not the claim referred to and required by the bills of your processing and investigation you considered how the
lading for it does not fix responsibility for the loss or damage, but merely states the condition of the shipment was transported? Where the losses could have occurred
goods shipped. The claim contemplated herein, in whatever form, must be something more than a notice and what is the extent of the respective responsibilities of the
that the goods have been lost or damaged; it must contain a claim for compensation or indicate an intent bailees and/or carriers involved?
to claim. 53

x x x           x x x          x x x
Thus, to put the legal effect of respondent carrier's report on losses or damages, the preparation of which
is standard procedure upon unloading of cargo at the port of destination, on the same level as that of a
notice of claim by imploring substantial compliance is definitely farfetched. Besides, the cited notation A With respect to the shipment being transported, we have of
on the carrier's report itself makes it clear that the filing of a notice of claim in any case is imperative if course to get into it in order to check whether the shipment
carrier is to be held liable at all for the loss of or damage to cargo. coming in to this port is in accordance with the policy condition,
like in this particular case, the shipment was transported to
Manila and transhipped through an interisland vessel in
Turning now to respondent DVAPSI and considering that whatever right of action petitioners may have accordance with the policy. With respect to the losses, we have a
against respondent carrier was lost due to their failure to seasonably file the requisite claim, it would be general view where losses could have occurred. Of course we
awkward, to say the least, that by some convenient process of elimination DVAPSI should proverbially will have to consider the different bailees wherein the shipment
be left holding the bag, and it would be pure speculation to assume that DVAPSI is probably responsible must have passed through, like the ocean vessel, the interisland
for the loss of or damage to cargo. Unlike a common carrier, an arrastre operator does not labor under a vessel and the arrastre, but definitely at that point and time we
presumption of negligence in case of loss, destruction or deterioration of goods discharged into its cannot determine the extent of each liability. We are only
custody. In other words, to hold an arrastre operator liable for loss of and/or damage to goods entrusted to interested at that point and time in the liability as regards the
it there must be preponderant evidence that it did not exercise due diligence in the handling and care of underwriter in accordance with the policy that we issued.
the goods.

x x x           x x x          x x x
Petitioners failed to pinpoint liability on any of the original defendants and in this seemingly wild goose-
chase, they cannot quite put their finger down on when, where, how and under whose responsibility the
loss or damage probably occurred, or as stated in paragraph 8 of their basic complaint filed in the court Q Mr. Witness, from the documents, namely, the survey of
below, whether "(u)pon discharge of the cargoes from the original carrying vessel, the SS VISHVA Manila Adjusters and Surveyors Company, the survey of Davao
YASH," and/or upon discharge of the cargoes from the interisland vessel the MV "SWEET LOVE," in Arrastre contractor and the bills of lading issued by the defendant
Davao City and later while in the custody of defendant arrastre operator. 54 Sweet Lines, will you be able to tell the respective liabilities of
the bailees and/or carriers concerned?

A No, sir. (Emphasis ours.) 55

Neither did nor could the trial court, much less the Court of Appeals, precisely establish the stage in the
course of the shipment when the goods were lost, destroyed or damaged. What can only be inferred from
the factual findings of the trial court is that by the time the cargo was discharged to DVAPSI, loss or
damage had already occurred and that the same could not have possibly occurred while the same was in
the custody of DVAPSI, as demonstrated by the observations of the trial court quoted at the start of this
opinion.

ACCORDINGLY, on the foregoing premises, the instant petition is DENIED and the dismissal of the
complaint in the court a quo as decreed by respondent Court of Appeals in its challenged judgment is
hereby AFFIRMED.

SO ORDERED.
 [ G.R. No. 190702, February 27, 2017 ] On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported the loss
and filed a claim with respondent for the insurance proceeds of P1,500,000.00. [18] After investigation,
JAIME T. GAISANO, PETITIONER, VS. DEVELOPMENT INSURANCE AND SURETY respondent denied petitioner's claim on the ground that there was no insurance contract. [19] Petitioner, through
CORPORATION, RESPONDENT. counsel, sent a final demand on July 7, 1997.[20] Respondent, however, refused to pay the insurance proceeds or
return the premium paid on the vehicle.
DECISION
On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages [21] with the RTC
JARDELEZA, J.: where it sought to collect the insurance proceeds from respondent. In its Answer, [22] respondent asserted that the
non-payment of the premium rendered the policy ineffective. The premium was received by the respondent
This is a petition for review on certiorari[1] seeking to nullify the Court of Appeals' (CA) September 11, 2009 only on October 2, 1996, and there was no known loss covered by the policy to which the payment could be
Decision[2] and November 24, 2009 Resolution[3] in CA-G.R. CV No. 81225. The CA reversed the September applied.[23]
24, 2003 Decision[4] of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The RTC granted Jaime T.
Gaisano's (petitioner) claim on the proceeds of the comprehensive commercial vehicle policy issued by In its Decision[24] dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the premium
Development Insurance and Surety Corporation (respondent), viz.: paid as of September 27, even if the check was received only on September 28 because (1) respondent's agent,
Trans-Pacific, acknowledged payment of the premium on that date, September 27, and (2) the check that
IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-appellant ordered petitioner issued was honored by respondent in acknowledgment of the authority of the agent to receive it.
[25]
to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent per annum from the date of the  Instead of returning the premium, respondent sent a checklist of requirements to petitioner and assigned an
denial of the claim on October 9, 1996 until payment. underwriter to investigate the claim. [26] The RTC ruled that it would be unjust and inequitable not to allow a
recovery on the policy while allowing respondent to retain the premium paid. [27] Thus, petitioner was awarded
SO ORDERED.[5] an indemnity of P1,500,000.00 and attorney's fees of P50,000.00. [28]

I After respondent's motion for reconsideration was denied, [29] it filed a Notice of Appeal. [30] Records were
forwarded to the CA.[31]

The CA granted respondent's appeal. [32] The CA upheld respondent's position that an insurance contract
The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with plate number
becomes valid and binding only after the premium is paid pursuant to Section 77 of the Insurance Code
GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the insurance business. [6] On
(Presidential Decree No. 612, as amended by Republic Act No. 10607). [33] It found that the premium was not
September 27, 1996, respondent issued a comprehensive commercial vehicle policy [7] to petitioner in the
yet paid at the time of the loss on September 27, but only a day after or on September 28, 1996, when the check
amount of P1,500,000.00 over the vehicle for a period of one year commencing on September 27, 1996 up to
was picked up by Trans-Pacific. [34] It also found that none of the exceptions to Section 77 obtains in this case.
September 27, 1997.[8] Respondent also issued two other commercial vehicle policies to petitioner covering two [35]
 Nevertheless, the CA ordered respondent to return the premium it received in the amount of P55,620.60,
other motor vehicles for the same period. [9]
with interest at the rate of 6% per annum from the date of the denial of the claim on October 9, 1996 until
payment.[36]
To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific Underwriters
Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's Ark Merchandising
Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract between
(Noah's Ark).[10] Noah's Ark immediately processed the payments and issued a Far East Bank check dated
him and respondent.[37] He submits that it comes within the exceptions to the rule in Section 77 of the Insurance
September 27, 1996 payable to Trans-Pacific on the same day. [11] The check bearing the amount of P140,893.50
Code that no contract of insurance becomes binding unless and until the premium thereof has been paid. The
represents payment for the three insurance policies, with P55,620.60 for the premium and other charges over
prohibitive tenor of Section 77 does not apply because the parties stipulated for the payment of premiums.
the vehicle.[12] However, nobody from Trans-Pacific picked up the check that day (September 27) because its [38]
 The parties intended the contract of insurance to be immediately effective upon issuance, despite non-
president and general manager, Rolando Herradura, was celebrating his birthday. Trans-Pacific informed
payment of the premium, because respondent trusted petitioner. [39] He adds that respondent waived its right to a
Noah's Ark that its messenger would get the check the next day, September 28. [13]
pre-payment in full of the terms of the policy, and is in estoppel.[40]
In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing manager
Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the return of
Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the vicinity of SM
the premiums paid, then he should be able to recover the full amount of P140,893.50, and not merely
Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine National Police Traffic
P55,620.60.[41] The insurance policy covered three vehicles yet respondent's intention was merely to disregard
Management Command at Camp Crame in Quezon City. [14] Despite search and retrieval efforts, the vehicle was
the contract for only the lost vehicle. [42] According to petitioner, the principle of mutuality of contracts is
not recovered.[15]
violated, at his expense, if respondent is allowed to be excused from performance on the insurance contract
only for one vehicle, but not as to the two others, just because no loss is suffered as to the two. To allow this
Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an official
"would be to place exclusively in the hands of one of the contracting parties the right to decide whether the
receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60 for the premium
contract should stand or not x x x." [43]
and other charges over the vehicle. [16] The check issued to Trans-Pacific for P140,893.50 was deposited with
Metrobank for encashment on October 1, 1996. [17]
For failure of respondent to tile its comment to the petition, we declared respondent to have waived its right to
file a comment in our June 15, 2011 Resolution. [44]
The lone issue here is whether there is a binding insurance contract between petitioner and respondent.
II
We deny the petition.
Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. [45] Just like any other contract, it requires a cause or
consideration. The consideration is the premium, which must be paid at the time and in the way and manner
specified in the policy.[46] If not so paid, the policy will lapse and be forfeited by its own terms. [47]
The law, however, limits the parties' autonomy as to when payment of premium may be made for the contract
to take effect. The general rule in insurance laws is that unless the premium is paid, the insurance policy is not
valid and binding.[48] Section 77 of the Insurance Code, applicable at the time of the issuance of the policy,
provides:
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof has been paid, except in the case
of a life or an industrial life policy whenever the grace period provision applies.
In Tibay v. Court of Appeals,[49] we emphasized the importance of this rule. We explained that in an insurance
contract, both the insured and insurer undertake risks. On one hand, there is the insured, a member of a group
exposed to a particular peril, who contributes premiums under the risk of receiving nothing in return in case the
contingency does not happen; on the other, there is the insurer, who undertakes to pay the entire sum agreed
upon in case the contingency happens. This risk-distributing mechanism operates under a system where, by
prompt payment of the premiums, the insurer is able to meet its legal obligation to maintain a legal reserve fund
needed to meet its contingent obligations to the public. The premium, therefore, is the  elixir vitae or source of
life of the insurance business:
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is
primarily a risk-distributing device, a mechanism by which all members of a group exposed to a particular risk
contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to
exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled upon
the happening of the contingency to pay the entire sum agreed upon, and the insured, that of parting with the
amount required as premium. without receiving anything therefor in case the contingency does not happen. To
ensure payment tor these losses, the law mandates all insurance companies to maintain a legal reserve fund in
favor of those claiming under their policies. It should be understood that the integrity of this fund cannot be
secured and maintained if by judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an express agreement to the contrary. For what could
prevent the insurance applicant from deliberately or willfully holding back full premium payment and wait for
the risk insured against to transpire and then conveniently pass on the balance of the premium to be deducted
from the proceeds of the insurance? x x x
xxx
And so it must be. For it cannot be disputed that premium is the  elixir vitae of the insurance business because
by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the public, hence, the
imperative need for its prompt payment and full satisfaction. It must be emphasized here that all actuarial
calculations and various tabulations of probabilities of losses under the risks insured against are based on the
sound hypothesis of prompt payment of premiums. Upon this bedrock insurance firms are enabled to other the
assurance of security to the public at favorable rates. x x x [50] (Citations omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's agent, Trans-Pacific,
only on September 28, 1996. No payment of premium had thus been made at the time of the loss of the vehicle
on September 27, 1996. While petitioner claims that Trans-Pacific was informed that the check was ready for
pick-up on September 27, 1996, the notice of the availability of the check, by itself, does not produce the effect
of payment of the premium. Trans-Pacific could not be considered in delay in accepting the check because
when it informed petitioner that it will only be able to pick-up the check the next day, petitioner did not protest
to this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there was no payment of premium
yet to make the insurance policy effective.
There are, of course, exceptions to the rule that no insurance contract takes effect unless premium is paid.
In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,[51] we said:
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an
agreement to extend the period to pay the premium. But are there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it
shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, wherein
we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium
and partial payment has been made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly
show that the petitioners and private respondent intended subject insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner.
Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the
premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals
in its Resolution denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity
of the contract, We are not prepared to rule that the request to make installment payments duly approved by the
insurer would prevent the entire contract of insurance from going into effect despite payment and acceptance of
the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer
of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as
conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually
unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are
not paid, but docs not expressly prohibit an agreement granting credit extension, and such an agreement is not
contrary to morals, good customs, public order or public policy (De Leon,' The Insurance Code, p. 175). So is
an understanding to allow insured to pay premiums in installments not so prescribed. At the very least, both
parties should be deemed in estoppel to question the arrangement they have voluntarily accepted.
We cannot sustain petitioner's claim that the parties agreed that the insurance contract is immediately effective
upon issuance despite non payment of the premiums. Even if there is a waiver of pre-payment of premiums,
that in itself does not become an exception to Section 77, unless the insured clearly gave a credit term or
extension. This is the clear import of the fourth exception in the UCPB General Insurance Co., Inc. To rule
otherwise would render nugatory the requirement in Section 77 that "[n]otwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and
until the premium thereof has been paid, x x x." Moreover, the policy itself states:

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the basis of
fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the this Contract and deemed incorporated herein, has applied to the company for the insurance hereinafter
premium. This simply means that if the insurer has granted the insured a credit term for the payment of the contained, subject to the payment of the Premium as consideration for such insurance.[57] (Emphasis supplied.)
premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even
though the premium is paid after the loss but within the credit term. The policy states that the insured's application for the insurance is subject to the payment of the premium. There
is no waiver of pre-payment, in full or in installment, of the premiums under the policy. Consequently,
x x x respondent cannot be placed in estoppel.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy became
against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums effective for lack of premium payment.
despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section, since
Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section 77. [52] (Citations The consequence of this declaration is that petitioner is entitled to a return of the premium paid for the vehicle
omitted.) in the amount of P55,620.60 under the principle of unjust enrichment. There is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or when a person retains money or property of another
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or industrial against the fundamental principles of justice, equity and good conscience. [58] Petitioner cannot claim the full
life policy, whenever the grace period provision applies, as expressly provided by Section 77 itself; (2) where amount of P140,893.50, which includes the payment of premiums for the two other vehicles. These two policies
the insurer acknowledged in the policy or contract of insurance itself the receipt of premium, even if premium are not affected by our ruling on the policy subject of this case because they were issued as separate and
has not been actually paid, as expressly provided by Section 78 itself; (3) where the parties agreed that premium independent contracts of insurance. [59] We, however, find that the award shall earn legal interest of 6% from the
payment shall be in installments and partial payment has been made at the time of loss, as held in  Makati time of extrajudicial demand on July 7, 1997. [60]
Tuscany Condominium Corp. v. Court of Appeals;[53] (4) where the insurer granted the insured a credit term for
the payment of the premium, and loss occurs before the expiration of the term, as held in  Makati Tuscany WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009 and the
Condominium Corp.; and (5) where the insurer is in estoppel as when it has consistently granted a 60 to 90-day Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that respondent should
credit term for the payment of premiums. return the amount of P55,620.60 with the legal interest computed at the rate of 6%  per annum reckoned from
July 7, 1997 until finality of this judgment. Thereafter, the total amount shall earn interest at the rate of 6%  per
The insurance policy in question does not fall under the first to third exceptions laid out in UCPB General annum from the finality of this judgment until its full satisfaction.
Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not contain an
acknowledgment of the receipt of premium but merely a statement of account on its face; [54] and (3) no payment
of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties intended the
contract of insurance to be immediately effective upon issuance, despite non-payment of the premium. This
waiver to a pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in  Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the insurers
have consistently granted the insured a credit extension or term for the payment of the premium. Here,
however, petitioner failed to establish the fact of a grant by respondent of a credit term in his favor, or that the
grant has been consistent. While there was mention of a credit agreement between Trans-Pacific and
respondent, such arrangement was not proven and was internal between agent and principal. [55] Under the
principle of relativity of contracts, contracts bind the parties who entered into it. It cannot favor or prejudice a
third person, even if he is aware of the contract and has acted with knowledge. [56]
 G.R. No. L-28501 September 30, 1982
PEDRO ARCE, plaintiff-appellee,
vs. THE CAPITAL INSURANCE & SURETY CO., INC., defendant-appellant.
ABAD SANTOS, J.:
In Civil Case No. 66466 of the Court of First Instance of Manila, the Capital Insurance and Surety Co.,
Inc., (COMPANY) was ordered to pay Pedro Arce (INSURED) the proceeds of a fire insurance policy.
Not satisfied with the decision, the company appealed to this Court on questions of law.
The INSURED was the owner of a residential house in Tondo, Manila, which had been insured with the
COMPANY since 1961 under Fire Policy No. 24204. On November 27, 1965, the COMPANY sent to
the INSURED Renewal Certificate No. 47302 to cover the period December 5, 1965 to December 5,
1966. The COMPANY also requested payment of the corresponding premium in the amount of P 38.10.
Anticipating that the premium could not be paid on time, the INSURED, thru his wife, promised to pay it
on January 4, 1966. The COMPANY accepted the promise but the premium was not paid on January 4,
1966. On January 8, 1966, the house of the INSURED was totally destroyed by fire.
On January 10, 1966, INSURED's wife presented a claim for indemnity to the COMPANY. She was told
that no indemnity was due because the premium on the policy was not paid. Nonetheless the COMPANY
tendered a check for P300.00 as financial aid which was received by the INSURED's daughter, Evelina
R. Arce. The voucher for the check which Evelina signed stated that it was "in full settlement (ex gratia)
of the fire loss under Claim No. F-554 Policy No. F-24202." Thereafter the INSURED and his wife went
to the office of the COMPANY to have his signature on the check Identified preparatory to encashment.
At that time the COMPANY reiterated that the check was given "not as an obligation, but as a
concession" because the renewal premium had not been paid, The INSURED cashed the check but then
sued the COMPANY on the policy.
The court a quo held that since the COMPANY could have demanded payment of the premium,
mutuality of obligation requires that it should also be liable on its policy. The court a quo also held that
the INSURED was not bound by the signature of Evelina on the check voucher because he did not
authorize her to sign the waiver.
The appeal is impressed with merit.
The trial court cited Capital Insurance and Surety Co., Inc. vs. Delgado, L-18567, Sept. 30, 1963, 9
SCRA 177, to support its first proposition. In that case, this Court said:
On the other hand, the preponderance of the evidence shows that appellee issued fire
insurance policy No. C-1137 in favor of appellants covering a certain property
belonging to the latter located in Cebu City; that appellants failed to pay a balance of
P583.95 on the premium charges due, notwithstanding demands made upon them. As
with the issuance of the policy to appellants the same became effective and binding
upon the contracting parties, the latter can not avoid the obligation of paying the
premiums agreed upon. In fact, appellant Mario Delgado, in a letter marked in the
record as Exhibit G, expressly admitted his unpaid account for premiums and asked
for an extension of time to pay the same. It is clear from the foregoing that appellants
are under obligation to pay the amount sued upon. (At p. 180.)
Upon the other hand, Sec. 72 of the Insurance Act, as amended by R.A. No. 3540 reads:
SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the perils insured against, unless there is clear agreement to grant credit
extension for the premium due. No policy issued by an insurance company is valid
and binding unless and until the premium thereof has been paid "  (Italics supplied.)
(p. 11, Appellant's Brief.)
Morever, the parties in this case had stipulated:
IT IS HEREBY DECLARED AND AGREED that not. withstanding anything to the
contrary contained in the within policy, this insurance will be deemed valid and
binding upon the Company only when the premium and documentary stamps therefor
have actually been paid in full and duly acknowledged in an official receipt signed by
an authorized official/representative of the Company, " (pp. 45-46, Record on
Appeal.)
It is obvious from both the Insurance Act, as amended, and the stipulation of the parties that time is of the
essence in respect of the payment of the insurance premium so that if it is not paid the contract does not
take effect unless there is still another stipulation to the contrary. In the instant case, the INSURED was
given a grace period to pay the premium but the period having expired with no payment made, he cannot
insist that the COMPANY is nonetheless obligated to him.
It is to be noted that Delgado was decided in the light of the Insurance Act before Sec. 72 was amended
by the addition of the underscored portion, supra, Prior to the amendment, an insurance contract was
effective even if the premium had not been paid so that an insurer was obligated to pay indemnity in case
of loss and correlatively he had also the right to sue for payment of the premium. But the amendment to
Sec. 72 has radically changed the legal regime in that unless the premium is paid there is no insurance.
With the foregoing, it is not necessary to dwell at length on the trial court's second proposition that the
INSURED had not authorized his daughter Evelina to make a waiver because the INSURED had nothing
to waive; his policy ceased to have effect when he failed to pay the premium.
We commiserate with the INSURED. We are wen aware that many insurance companies have fallen into
the condemnable practice of collecting premiums promptly but resort to all kinds of excuses to deny or
delay payment of just claims. Unhappily the instant case is one where the insurer has the law on its side.
WHEREFORE, the decision of the court a quo is reversed; the appellee's complaint is dismissed. No
special pronouncement as to costs.
SO ORDERED.
 [ G.R. No. 119655, May 24, 1996 ] petitioners to pay their premium in full.

SPS. ANTONIO A. TIBAY AND VIOLETA R. TIBAY AND OFELIA M. RORALDO, We find no merit in the petition; hence, we affirm the Court of Appeals.
VICTORINA M. RORALDO, VIRGILIO M. RORALDO, MYRNA M. RORALDO
ANDROSABELLA M. RORALDO, PETITIONERS, VS. COURTOF APPEALS AND FORTUNE Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
LIFE AND GENERAL INSURANCE CO., INC., RESPONDENTS. damage or liability arising from an unknown or contingent event. [4] The consideration is the premium,
which must be paid at the time and in the way and manner specified in the policy, and if not so paid, the
policy will lapse and be forfeited by its own terms. [5]
BELLOSILLO, J.:
The pertinent provisions in the Policy on premium read-
May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?
THIS POLICY OF INSURANCE WITNESSETH, THAT only after payment to the Company in
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE) issued accordance with Policy Condition No. 2 of the total premiums by the insured  as stipulated above for the
Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their two-storey period aforementioned for insuring against Loss or Damage by Fire or Lightning as herein appears, the
residential building located at 5855 Zobel Street, Makati City, together with all their personal effects Property herein described x x x
therein. The insurance was for P600,000.00 covering the period from 23 January 1987 to 23 January
1988. On 23 January 1987, of the total premium of P2,983.50, petitioner Violeta Tibay only paid P600.00 2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the
thus leaving a considerable balance unpaid. premium has been fully paid to and duly receipted by the Company in the manner provided herein.

On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10 March
1987 Violeta Tibay paid the balance of the premium. On the same day, she filed with FORTUNE a claim
on the fire insurance policy. Her claim was accordingly referred to its adjuster, Goodwill Adjustment
Services, Inc. (GASI), which immediately wrote Violeta requesting her to furnish it with the necessary
documents for the investigation and processing of her claim. Petitioner forthwith complied. On 28 March
1987 she signed a non-waiver agreement with GASI to the effect that any action taken by the companies
or their representatives in investigating the claim made by the claimant for his loss which occurred at
5855 Zobel Roxas, Makati on March 8, 1987, or in the investigating or ascertainment of the amount of
actual cash value and loss, shall not waive or invalidate any condition of the policies of such companies
held by said claimant, nor the rights of either or any of the parties to this agreement, and such action shall
not be, or be claimed to be, an admission of liability on the part of said companies or any of them. [1]
In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition
No. 2 and of Sec. 77 of the Insurance Code. Efforts to settle the case before the Insurance Commission
proved futile. On 3 March 1988 Violeta and the other petitioners sued FORTUNE for damages in the
amount of P600,000.00 representing the total coverage of the fire insurance policy plus 12% interest per
annum, P 100,000.00 moral damages, and attorney’s fees equivalent to 20% of the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value of
the insured building and personal properties in the amount of P600,000.00 plus interest at the legal rate of
6% per annum from the filing of the complaint until full payment, and attorney’s fees equivalent to 20%
of the total amount claimed plus costs of suit. [2]
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be liable
to plaintiff-appellees therein but ordering defendant-appellant to return to the former the premium of
P2,983.50 plus 12% interest from 10 March 1987 until full payment. [3]
Hence this petition for review with petitioners contending mainly that contrary to the conclusion of the
appellate court, FORTUNE remains liable under the subject fire insurance policy inspite of the failure of
Any supplementary agreement seeking to amend this condition prepared by agent, broker or Company
official, shall be deemed invalid and of no effect.                               
Except only in those specific cases where corresponding rules and regulations which are or may hereafter
be in force provide for the payment of the stipulated premiums in periodic installments at fixed
percentage, it is hereby declared, agreed and warranted that this policy shall be deemed effective, valid
and binding upon the Company only when the premiums therefor have actually been paid in full and duly
acknowledged in a receipt signed by any authorized official or representative/agent of the Company in
such manner as provided herein, (Italics supplied).[6]
Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only
been partially paid and the balance paid only after the peril insured against has occurred, the insurance
contract did not take effect and the insured cannot collect at all on the policy. This is fully supported by
Sec. 77 of the Insurance Code which provides-
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been
paid, except in the case of a life or an industrial life policy whenever the grace period provision applies
(Italics supplied).
Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has been
paid." This leads us to the manner of payment envisioned by the law to make the insurance policy
operative and binding. For whatever judicial construction may be accorded the disputed phrase must
ultimately yield to the clear mandate of the law. The principle that where the law does not distinguish the
court should neither distinguish assumes that the legislature made no qualification on the use of a general
word or expression. In Escosura v. San Miguel Brewery, Inc., [7] the Court through Mr. Justice Jesus G.
Barrera, interpreting the phrase "with pay" used in connection with leaves of absence with pay granted to
employees, ruled -
x x x the legislative practice seems to be that when the intention is to distinguish between full and partial
payment, the modifying term is used x x x
Citing C. A. No. 647 governing maternity leaves of married women in government, R. A. No. 679
regulating employment of women and children, R.A. No. 843 granting vacation and sick leaves to judges
of municipal courts and justices of the peace, and finally, Art. 1695 of the New Civil Code providing that
every househelp shall be allowed four (4) days vacation each month, which laws simply stated "with
pay," the Court concluded that it was undisputed that in all these laws the phrase "with pay" used without
any qualifying adjective meant that the employee was entitled to full compensation during his leave of
absence.
Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial payment of
the premium due and the express stipulation thereof to the contrary, petitioners rely heavily on the 1967
case of Philippine Phoenix and Insurance Co., Inc. v. Woodworks, Inc.[8] where the Court through Mr.
Justice Arsenio P. Dizon sustained the ruling of the trial court that partial payment of the premium made
the policy effective during the whole period of the policy. In that case, the insurance company
commenced action against the insured for the unpaid balance on a fire insurance policy. In its defense the
insured claimed that nonpayment of premium produced the cancellation of the insurance contract. Ruling
otherwise the Court held-
It is clear x x x that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by appellee and
delivered to appellant, and that on September 22 of the same year, the latter paid to the former the sum of
P3,000.00 on account of the total premium of P6,051.95 due thereon. There is, consequently, no doubt at
all that, as between the insurer and the insured, there was not only a perfected contract of insurance but a
partially performed one as far as the payment of the agreed premium was concerned. Thereafter the
obligation of the insurer to pay the insured the amount, for which the policy was issued in case the
conditions therefor had been complied with, arose and became binding upon it, while the obligation of
the insured to pay the remainder of the total amount of the premium due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the factual
scenario is different. In Phoenix it was the insurance company that sued for the balance of the premium,
i.e., it recognized and admitted the existence of an insurance contract with the insured. In the case before
us, there is, quite unlike in Phoenix, a specific stipulation that (t)his policy xxx is not in force until the
premium has been fully paid and duly receipted by the Company x x x.  Resultantly, it is correct to say
that in Phoenix a contract was perfected upon partial payment of the premium since the parties had not
otherwise stipulated that prepayment of the premium in full was a condition precedent to the existence of
a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the
premium without any other precondition to its enforceability as in the instant case, the insurer in effect
had shown its intention to continue with the existing contract of insurance, as in fact it was enforcing its
right to collect premium, or exact specific performance from the insured. This is not so here. By express
agreement of the parties, no vinculum juris or bond of law was to be established until full payment was
effected prior to the occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals [9] the parties mutually agreed that the
premiums could be paid in installments, which in fact they did for three (3) years, hence, this Court
refused to invalidate the insurance policy. In giving effect to the policy, the Court quoted with approval
the Court of Appeals-
The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire
premium. Here, the parties x x x agreed to make the premiums payable in installments, and there is no
pretense that the parties never envisioned to make the insurance contract binding between them. It was
renewed for two succeeding years, the second and third policies being a renewal/replacement for the
previous one. And the insured never informed the insurer that it was terminating the policy because the
terms were unacceptable.
While it maybe true that under Section 77 of the Insurance Code, the parties may not agree to make the
insurance contract valid and binding without payment of premiums, there is nothing in said section which
suggests that the parties may not agree to allow payment of the premiums in installment, or to consider
the contract as valid and binding upon payment of the first premium. Otherwise we would allow the
insurer to renege on its liability under the contract, had a loss incurred (sic) before completion of payment
of the entire premium, despite its voluntary acceptance of partial payments, a result eschewed by basic
considerations of fairness and equity x x x.
These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or implied,
of prepayment in full by the insurer: impliedly, by suing for the balance of the premium as inPhoenix,
and expressly, by agreeing to make premiums payable in installments as in Tuscany. But contrary to the
stance taken by petitioners, there is no waiver express or implied in the case at bench. Precisely, the
insurer and the insured expressly stipulated that (t)his policy including any renewal thereof and/or any
indorsement thereon is not in force until the premium has been fully paid to and duly receipted by the
Company x x x and that this policy shall be deemed effective, valid and binding upon the Company only
when the premiums therefor have actually been paid in full and duly acknowledged.
Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77 of
the Insurance Code the payment of partial premium by the assured in this particular instance should not
be considered the payment required by the law and the stipulation of the parties. Rather, it must be taken
in the concept of a deposit to be held in trust by the insurer until such time that the full amount has been
tendered and duly receipted for. In other words, as expressly agreed upon in the contract, full payment
must be made before the risk occurs for the policy to be considered effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever
resulted from the fractional payment of premium. The insurance contract itself expressly provided that
the policy would be effective only when the premium was paid in full. It would have been altogether
different were it not so stipulated. Ergo, petitioners had absolute freedom of choice whether or not to be
insured by FORTUNE under the terms of its policy and they freely opted to adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is the
intention of the parties as expressed in the policy. [10] Courts have no other function but to enforce the
same. The rule that contracts of insurance will be construed in favor of the insured and most strongly partial payment of premiums is not mentioned at all as among the exceptions provided in Secs. 77 and 78,
against the insurer should not be permitted to have the effect of making a plain agreement ambiguous and no policy of insurance can ever pretend to be efficacious or effective until premium has been fully paid.
then construe it in favor of the insured. [11] Verily, it is elemental law that the payment of premium is
requisite to keep the policy of insurance in force. If the premium is not paid in the manner prescribed in And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
the policy as intended by the parties the policy is ineffective. Partial payment even when accepted as a because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the
partial payment will not keep the policy alive even for such fractional part of the year as the part payment public, hence, the imperative need for its prompt payment and full satisfaction. [16] It must be emphasized
bears to the whole payment. [12] here that all actuarial calculations and various tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock insurance
Applying further the rules of statutory construction, the position maintained by petitioners becomes even firms are enabled to offer the assurance of security to the public at favorable rates. But once payment of
more untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court of Appeals, premium is left to the whim and caprice of the insured, as when the courts tolerate the payment of a mere
[13]
 speaks only of two (2) statutory exceptions to the requirement of payment of the entire premium as a P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and the balance to be paid
prerequisite to the validity of the insurance contract. These exceptions are: (a) in case the insurance even after the risk insured against has occurred, as petitioners have done in this case, on the principle that
coverage relates to life or industrial life (health) insurance when a grace period applies, and (b) when the the strength of the vinculum juris is not measured by any specific amount of premium payment, we will
insurer makes a written acknowledgment of the receipt of premium, this acknowledgment being declared surely wreak havoc on the business and set to naught what has taken actuarians centuries to devise to
by law to, be then conclusive evidence of the premium payment. [14] arrive at a fair and equitable distribution of risks and benefits between the insurer and the insured.

A maxim of recognized practicality is the rule that the expressed exception or exemption excludes
others. Exceptio firm at regulim in casibus non exceptis. The express mention of exceptions operates to
exclude other exceptions; conversely, those which are not within the enumerated exceptions are deemed
included in the general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and the
law has not expressly excepted partial payments, there is no valid and binding contract. Hence, in the
absence of clear waiver of prepayment in full by the insurer, the insured cannot collect on the proceeds of
the policy.
The terms of the insurance policy constitute the measure of the insurer’s liability. In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit
their liability and to impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.[17] The validity of these limitations is by law passed upon by the Insurance
Commissioner who is empowered to approve all forms of policies, certificates or contracts of insurance
which insurers intend to issue or deliver. That the policy contract in the case at bench was approved and
allowed issuance simply reaffirms the validity of such policy, particularly the provision in question.

In the desire to safeguard the interest of the assured, itmust not be ignored that the contract of insurance is WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24
primarily a risk-distributing device, a mechanism by which all members of a group exposed to a March 1995 is AFFIRMED.
particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses
occur due to exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of
being compelled upon the happening of the contingency to pay the entire sum agreed upon, and the
insured, that of parting with the amount required as premium, without receiving anything therefor in case
the contingency does not happen. To ensure payment for these losses, the law mandates all insurance
companies to maintain a legal reserve fund in favor of those claiming under their policies. [15] It should be
understood that the integrity of this fund cannot be secured and maintained if by judicial fiat partial
offerings of premiums were to be construed as a legal nexus between the applicant and the insurer despite
an express agreement to the contrary. For what could prevent the insurance applicant from deliberately or
wilfully holding back full premium payment and wait for the risk insured against to transpire and then
conveniently pass on the balance of the premium to be deducted from the proceeds of the insurance?
Worse, what if the insured makes an initial payment of only 10%, or even 1%, of the required premium,
and when the risk occurs simply points to the proceeds from where to source the balance? Can an
insurance company then exist and survive upon the payment of 1%, or even 10%, of the premium
stipulated in the policy on the basis that, after all, the insurer can deduct from the proceeds of the
insurance should the risk insured against occur?

Interpreting the contract of insurance stringently against the insurer but liberally in favor of the insured
despite clearly defined obligations of the parties to the policy can be carried out to extremes that there is
the danger that we may, so to speak, "kill the goose that lays the golden egg." We are well aware of
insurance companies falling into the despicable habit of collecting premiums promptly yet resorting to all
kinds of excuses to deny or delay payment of just insurance claims. But, in this case, the law is
manifestly on the side of the insurer. For as long as the current Insurance Code remains unchanged and

G.R. No. 137172, April 04, 2001 ]
UCPB GENERAL INSURANCE CO. INC., PETITIONER, VS. MASAGANA TELAMART, INC.,
RESPONDENT.
RESOLUTION
DAVIDE JR., C.J.:
In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision [1] of the Court
of Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent to
consign the sum of P225,753.95 as full payment of the premiums for the renewal of the five insurance
policies on Respondent's properties; (b) declaring the replacement-renewal policies effective and binding
from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay Respondent P18,645,000.00 as
indemnity for the burned properties covered by the renewal-replacement policies. The modification
consisted in the (1) deletion of the trial court's declaration that three of the policies were in force from
August 1991 to August 1992; and (2) reduction of the award of the attorney's fees from 25% to 10% of
the total amount due the Respondent.
The material operative facts upon which the appealed judgment was based are summarized by the Court
of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies
(Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila]....
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00
P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties located at 2410-2432 and 2442-2450 Taft
Avenue, Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five
(5) Equitable Bank Manager's Checks in the total amount of P225,753.45 as renewal premium payments
for which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by
defendant. On July 14, 1992, Masagana made its formal demand for indemnification for the burned
insured properties. On the same day, defendant returned the five (5) manager's checks stating in its letter
(Exhibit "R"/"8", Record, p. 192) that it was rejecting Masagana's claim on the following grounds:
"a)
Said policies expired last May 22, 1992 and were not renewed for another term;
b)
Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and
c) The properties covered by the said policies were burned in a fire that took place last June 13, 1992, or
before tender of premium payment."
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the
premiums on 13 July 1992 did not result in the renewal of the policies, having been made beyond the
effective date of renewal as provided under Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days in advance of the end of the policy
period mails or delivers to the assured at the address shown in the policy notice of its intention not to
renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the
assured shall be entitled to renew the policy upon payment of the premium due on the effective date of
renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which
had procured insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day
credit term for the renewal of the policies. Such a practice had existed up to the time the claims were
filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but
premium was paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-
1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991
was issued by UCPB on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or
more than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire
Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991 was issued on May 7,
1990 but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-
1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on
May 3, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X-1").
Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued
on May 7, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-
1"). Fire Insurance Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990 was
issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12,
1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December
10, 1988 but premium therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB"
and "BB-1"). Fire Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only
on July 25, 1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22, 1990
(Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22, 1989 but premium
was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to
May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15,
1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was
issued on November 22, 1988 but premium therefor was collected only on March 15, 1989 under O.R.
NO. 38573 for insurance risks coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and
"FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof
that no timely notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar
Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April
15, 1992 as indicated on Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p.
320) was sent not earlier than said date, or within 45 days from the expiry dates of the policies as
provided under Policy Condition No. 26; (2) Defendant insurer unconditionally accepted, and issued an
official receipt for, the premium payment on July 1 [3], 1992 which indicates defendant's willingness to
assume the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed
Esteban Adjusters and Valuers to investigate plaintiff's claim as shown by the letter dated July 17, 1992 2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the
(Exhibit "11", Record, p. 254). premiums on the renewed policies.

In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies
issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992... had
been extended or renewed by an implied credit arrangement though actual payment of premium was
tendered on a later date and after the occurrence of the (fire) risk insured against." We resolved this issue
in the negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela v. Court of
Appeals[2]; South Sea Surety and Insurance Co., Inc. v. Court of Appeals [3]; and Tibay v. Court of
Appeals.[4] Accordingly, we reversed and set aside the decision of the Court of Appeals.
3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all
that the notice sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent
to Zuellig was ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by
Respondent within the 60- to 90-day credit term and were duly accepted and received by Petitioner's
cashier.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the
motion that we had made in the decision our own findings of facts, which are not in accord with those of
the trial court and the Court of Appeals. The courts below correctly found that no notice of non-renewal
was made within 45 days before 22 May 1992, or before the expiration date of the fire insurance policies.
Thus, the policies in question were renewed by operation of law and were effective and valid on 30 June
1992 when the fire occurred, since the premiums were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on
the extension of credit or time to pay the premium nor consider a policy binding before actual payment. It
urges the Court to take judicial notice of the fact that despite the express provision of Section 77 of the
Insurance Code, extension of credit terms in premium payment has been the prevalent practice in the
insurance industry. Most insurance companies, including Petitioner, extend credit terms because Section
77 of the Insurance Code is not a prohibitive injunction but is merely designed for the protection of the
parties to an insurance contract. The Code itself, in Section 78, authorizes the validity of a policy
notwithstanding non-payment of premiums.
The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978
(P.D. No. 1460) must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to
90-day credit term for the payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18
December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the
Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read:

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril
Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- insured against, unless there is clear agreement to grant the insured credit extension of the premium
to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days after the due due. No policy issued by an insurance company is valid and binding unless and until the premium thereof
dates. By extending credit and habitually accepting payments 60 to 90 days from the effective dates of has been paid. (Underscoring supplied)
the policies, it has implicitly agreed to modify the tenor of the insurance policy and in effect waived the
provision therein that it would pay only for the loss or damage in case the same occurred after payment of
the premium.
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an
Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the trial agreement to extend the period to pay the premium. But are there exceptions to Section 77?
court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail
to Respondent a notice of non-renewal and sent by personal delivery a copy thereof to Respondent's The answer is in the affirmative.
broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware of the notice of
non-renewal. A reading of Section 66 of the Insurance Code readily shows that in order for an insured to The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
be entitled to a renewal of a non-life policy, payment of the premium due on the effective date of renewal whenever the grace period provision applies.
should first be made. Respondent's argument that Section 77 is not a prohibitive provision finds no
authoritative support. The second is that covered by Section 78 of the Insurance Code, which provides:

Upon a meticulous review of the records and reevaluation of the issues raised in the motion for
reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion for
reconsideration. The following facts, as found by the trial court and the Court of Appeals, are indeed duly
established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were
annually renewed.
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals,
[5]
 wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on installments. The records hereby AFFIRMED in toto.
clearly show that the petitioners and private respondent intended subject insurance policies to be binding
and effective notwithstanding the staggered payment of the premiums. The initial insurance contract
entered into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the
insurer to continue collecting and accepting the premiums, although paid on installments, and later deny
liability on the lame excuse that the premiums were not prepaid in full.

Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for reconsideration of its decision:

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule that the request to make installment payments duly
approved by the insurer would prevent the entire contract of insurance from going into effect despite
payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in
effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy
binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from
stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good customs,
public order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to allow
insured to pay premiums in installments not so prescribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss but within the credit term.

Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a
credit term within which to pay the premiums. That agreement is not against the law, morals, good
customs, public order or public policy. The agreement binds the parties. Article 1306 of the Civil Code
provides:

ART. 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment
of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said
Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to
Section 77.

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and
a new one is hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show
that a reversible error was committed by the Court of Appeals in its challenged decision, which is
 [ G.R. No. 130421, June 28, 1999 ] respondent.

AMERICAN HOME ASSURANCE COMPANY, PETITIONER, VS. ANTONIO CHUA, The trial court decreed as follows:
RESPONDENT.
WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the [petitioner]
DAVIDE, JR. C.J.: ordering the latter to pay the former the following:

In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, petitioner
seeks the reversal of the decision[1] of the Court of Appeals in CA-G.R. CV No. 40751, which affirmed in 1. P200,000.00, representing the amount of the insurance, plus legal interest from the date of
toto the decision of the Regional Trial Court, Makati City, Branch 150 (hereafter trial court), in Civil filing of this case;
Case No. 91-1009. 2. P200,000.00 as moral damages;
3. P200,000.00 as loss of profit;
Petitioner is a domestic corporation engaged in the insurance business. Sometime in 1990, respondent 4. P100,000.00 as exemplary damages;
obtained from petitioner a fire insurance covering the stock-in-trade of his business, Moonlight 5. P50,000.00 as attorney's fees; and
Enterprises, located at Valencia, Bukidnon. The insurance was due to expire on 25 March 1990. 6. Cost of suit.

On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of P2,983.50 to On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court of Appeals
petitioner's agent, James Uy, as payment for the renewal of the policy. In turn, the latter delivered found that respondent's claim was substantially proved and petitioner's unjustified refusal to pay the claim
Renewal Certificate No. 00099047 to respondent. The check was drawn against a Manila bank and entitled respondent to the award of damages.
deposited in petitioner's bank account in Cagayan de Oro City. The corresponding official receipt was
issued on 10 April. Subsequently, a new insurance policy, Policy No. 206-4234498-7, was issued, Its motion for reconsideration of the judgment having been denied, petitioner filed the petition in this
whereby petitioner undertook to indemnify respondent for any damage or loss arising from fire up to case. Petitioner reiterates its stand that there was no existing insurance contract between the parties. It
P200,000 for the period 25 March 1990 to 25 March 1991. invokes Section 77 of the Insurance Code, which provides:

On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was estimated between
P4,000,000 and P5,000,000. Respondent filed an insurance claim with petitioner and four other co-
insurers, namely, Pioneer Insurance and Surety Corporation, Prudential Guarantee and Assurance, Inc.,
Filipino Merchants Insurance Co. and Domestic Insurance Company of the Philippines. Petitioner refused
to honor the claim notwithstanding several demands by respondent, thus, the latter filed an action against
petitioner before the trial court.
In its defense, petitioner claimed there was no existing insurance contract when the fire occurred since
respondent did not pay the premium. It also alleged that even assuming there was a contract, respondent
violated several conditions of the policy, particularly: (1) his submission of fraudulent income tax return
and financial statements; (2) his failure to establish the actual loss, which petitioner assessed at P70,000;
and (3) his failure to notify to petitioner of any insurance already effected to cover the insured goods.
These violations, petitioner insisted, justified the denial of the claim.
The trial court ruled in favor of respondent. It found that respondent paid by way of check a day before
the fire occurred. The check, which was deposited in petitioner's bank account, was even acknowledged
in the renewal certificate issued by petitioner's agent. It declared that the alleged fraudulent documents
were limited to the disparity between the official receipts issued by the Bureau of Internal Revenue (BIR)
and the income tax returns for the years 1987 to 1989. All the other documents were found to be genuine.
Nonetheless, it gave credence to the BIR certification that respondent paid the corresponding taxes due
for the questioned years.
As to respondent's failure to notify petitioner of the other insurance contracts covering the same goods,
the trial court held that petitioner failed to show that such omission was intentional and fraudulent.
Finally, it noted that petitioner's investigation of respondent's claim was done in collaboration with the
representatives of other insurance companies who found no irregularity therein. In fact, Pioneer Insurance
and Surety Corporation and Prudential Guarantee and Assurance, Inc. promptly paid the claims filed by
An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued
by an insurance company is valid and binding unless and until the premium thereof has been paid, except
in the case of life or an industrial life policy whenever the grace period provision applies.
and cites the case of Arce v. Capital Insurance & Surety Co., Inc., [2] where we ruled that unless and until
the premium is paid there is no insurance.
Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract was not yet
subsisting pursuant to Article 1249[3] of the Civil Code, which recognizes that a check can only effect
payment once it has been cashed. Although respondent testified that he gave the check on 5 April to a
certain James Uy, the check, drawn against a Manila bank and deposited in a Cagayan de Oro City bank,
could not have been cleared by 6 April, the date of the fire. In fact, the official receipt issued for
respondent's check payment was dated 10 April 1990, four days after the fire occurred.
Citing jurisprudence,[4] petitioner also contends that respondent's non-disclosure of the other insurance
contracts rendered the policy void. It underscores the trial court's neglect in considering the Commission
on Audit's certification that the BIR receipts submitted by respondent were, in effect, fake since they
were issued to other persons. Finally, petitioner argues that the award of damages was excessive and
unreasonable considering that it did not act in bad faith in denying respondent's claim.
Respondent counters that the issue of non-payment of premium is a question of fact which can no longer
be assailed. The trial court's finding on the matter, which was affirmed by the Court of Appeals, is
conclusive.
Respondent refutes the reason for petitioner's denial of his claim. As found by the trial court, petitioner's
loss adjuster admitted prior knowledge of respondent's existing insurance contracts with the other
insurance companies. Nonetheless, the loss adjuster recommended the denial of the claim, not because of binding. The only exceptions are life and industrial life insurance. [6] Whether payment was indeed made
the said contracts, but because he was suspicious of the authenticity of certain documents which is a question of fact which is best determined by the trial court. The trial court found, as affirmed by the
respondent submitted in filing his claim. Court of Appeals, that there was a valid check payment by respondent to petitioner. Well-settled is the
rule that the factual findings and conclusions of the trial court and the Court of Appeals are entitled to
To bolster his argument, respondent cites Section 66 of the Insurance Code, [5] which requires the insurer great weight and respect, and will not be disturbed on appeal in the absence of any clear showing that the
to give a notice to the insured of its intention to terminate the policy forty-five days before the policy trial court overlooked certain facts or circumstances which would substantially affect the disposition of
period ends. In the instant case, petitioner opted not to terminate the policy. Instead, it renewed the policy the case.[7] We see no reason to depart from this ruling.
by sending its agent to respondent, who was issued a renewal certificate upon delivery of his check
payment for the renewal of premium. At this precise moment the contract of insurance was executed and According to the trial court the renewal certificate issued to respondent contained the acknowledgment
already in effect. Respondent also claims that it is standard operating procedure in the provinces to pay that premium had been paid. It is not disputed that the check drawn by respondent in favor of petitioner
insurance premiums by check when collected by insurance agents. and delivered to its agent was honored when presented and petitioner forthwith issued its official receipt
to respondent on 10 April 1990. Section 306 of the Insurance Code provides that any insurance company
On the issue of damages, respondent maintains that the amounts awarded were reasonable. He cites which delivers a policy or contract of insurance to an insurance agent or insurance broker shall be
numerous trips he had to make from Cagayan de Oro City to Manila to follow up his rightful claim. He deemed to have authorized such agent or broker to receive on its behalf payment of any premium which
imputes bad faith on petitioner who made enforcement of his claim difficult in the hope that he would is due on such policy or contract of insurance at the time of its issuance or delivery or which becomes due
eventually abandon it. He further emphasizes that the adjusters of the other insurance companies thereon.[8] In the instant case, the best evidence of such authority is the fact that petitioner accepted the
recommended payment of his claim, and they complied therewith. check and issued the official receipt for the payment. It is, as well, bound by its agent's acknowledgment
of receipt of payment.
In its reply, petitioner alleges that the petition questions the conclusions of law made by the trial court
and the Court of Appeals. Section 78 of the Insurance Code explicitly provides:

Petitioner invokes respondent's admission that his check for the renewal of the policy was received only An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence
on 10 April 1990, taking into account that the policy period was 25 March 1990 to 25 March 1991. The of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall
official receipt was dated 10 April 1990. Anent respondent's testimony that the check was given to not be binding until the premium is actually paid.
petitioner's agent, a certain James Uy, the latter points out that even respondent was not sure if Uy was
indeed its agent. It faults respondent for not producing Uy as his witness and not taking any receipt from This Section establishes a legal fiction of payment and should be interpreted as an exception to Section
him upon presentment of the check. Even assuming that the check was received a day before the 77.[9]
occurrence of the fire, there still could not have been any payment until the check was cleared.
Is respondent guilty of the policy violations imputed against him? We are not convinced by petitioner's
Moreover, petitioner denies respondent's allegation that it intended a renewal of the contract for the arguments. The submission of the alleged fraudulent documents pertained to respondent's income tax
renewal certificate clearly specified the following conditions: returns for 1987 to 1989. Respondent, however, presented a BIR certification that he had paid the proper
taxes for the said years. The trial court and the Court of Appeals gave credence to the certification and it
Subject to the payment by the assured of the amount due prior to renewal date, the policy shall be being a question of fact, we hold that said finding is conclusive.
renewed for the period stated.
Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers, non-
Any payment tendered other than in cash is received subject to actual cash collection. disclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is common in
fire insurance policies and is known as the "other insurance clause." The purpose for the inclusion of this
Subject to no loss prior to premium payment. If there be any loss, and is not covered [sic]. clause is to prevent an increase in the moral hazard. We have ruled on its validity and the case
of Geagonia v. Court of Appeals [10] clearly illustrates such principle. However, we see an exception in the
Petitioner asserts that an insurance contract can only be enforced upon the payment of the premium, instant case.
which should have been made before the renewal period.
Citing Section 29[11] of the Insurance Code, the trial court reasoned that respondent's failure to disclose
Finally, in assailing the excessive damages awarded to respondent petitioner stresses that the policy in was not intentional and fraudulent. The application of Section 29 is misplaced. Section 29 concerns
issue was limited to a liability of P200,000; but the trial court granted the following monetary awards: concealment which is intentional. The relevant provision is Section 75, which provides that:
P200,000 as actual damages; P200,000 as moral damages; P100,000 as exemplary damages; and P50,000
as attorney's fees. A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach
of an immaterial provision does not avoid the policy.
The following issues must be resolved: first, whether there was a valid payment of premium, considering
that respondent's check was cashed after the occurrence of the fire; second, whether respondent violated To constitute a violation the other existing insurance contracts must be upon the same subject matter and
the policy by his submission of fraudulent documents and non-disclosure of the other existing insurance with the same interest and risk.[12] Indeed, respondent acquired several co-insurers and he failed to
contracts; and finally, whether respondent is entitled to the award of damages. disclose this information to petitioner. Nonetheless, petitioner is estopped from invoking this argument.
The trial court cited the testimony of petitioner's loss adjuster who admitted previous knowledge of the
The general rule in insurance laws is that unless the premium is paid the insurance policy is not valid and co-insurers. Thus,
COURT: Neither can we approve the award of moral and exemplary damages. At the core of this case is
petitioner's alleged breach of its obligation under a contract of insurance. Under Article 2220 of the Civil
  Code, moral damages may be awarded in breaches of contracts where the defendant acted fraudulently or
  in bad faith. We find no such fraud or bad faith. It must again be stressed that moral damages are
Q emphatically not intended to enrich a plaintiff at the expense of the defendant. Such damages are awarded
The matter of additional insurance of other companies, was that ever discussed in your investigation? only to enable the injured party to obtain means, diversion or amusements that will serve to obviate the
moral suffering he has undergone, by reason of the defendant's culpable action. Its award is aimed at the
 
  restoration, within the limits of the possible, of the spiritual status quo ante, and it must be proportional to
the suffering inflicted.[14] When awarded, moral damages must not be palpably and scandalously
A
Yes, sir. excessive as to indicate that it was the result of passion, prejudice or corruption on the part of the trial
court judge.[15]
 
 
The law[16] is likewise clear that in contracts and quasi-contracts the court may award exemplary damages
Q In other words, from the start, you were aware the insured was insured with other companies like Pioneer and so if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Nothing
on? thereof can be attributed to petitioner which merely tried to resist what it claimed to be an unfounded
  claim for enforcement of the fire insurance policy.
 
A As to attorney's fees, the general rule is that attorney's fees cannot be recovered as part of damages
Yes, Your Honor. because of the policy that no premium should be placed on the right to litigate. [17] In short, the grant of
attorney's fees as part of damages is the exception rather than the rule; counsel's fees are not awarded
 
  every time a party prevails in a suit. It can be awarded only in the cases enumerated in Article 2208 of the
Civil Code, and in all cases it must be reasonable. [18] Thereunder, the trial court may award attorney's fees
Q But in your report you never recommended the denial of the claim simply because of the non-disclosure of other where it deems just and equitable that it be so granted. While we respect the trial court's exercise of its
insurance? [sic] discretion in this case, the award of P50,000 is unreasonable and excessive. It should be reduced to
  P10,000.
 
A Yes, Your Honor. WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. No. 40751 is hereby MODIFIED by a) deleting the awards of P200,000 for loss of
  profit, P200,000 as moral damages and P100,000 as exemplary damages, and b) reducing the award of
  attorney's fees from P50,000 to P10,000.
Q In other words, to be emphatic about this, the only reason you recommended the denial of the claim, you found
three documents to be spurious. That is your only basis?
 
 
A
Yes, Your Honor.[13] [Emphasis supplied]

Indubitably, it cannot be said that petitioner was deceived by respondent by the latter's non-disclosure of
the other insurance contracts when petitioner actually had prior knowledge thereof. Petitioner's loss
adjuster had known all along of the other existing insurance contracts, yet, he did not use that as basis for
his recommendation of denial. The loss adjuster, being an employee of petitioner, is deemed a
representative of the latter whose awareness of the other insurance contracts binds petitioner. We,
therefore, hold that there was no violation of the "other insurance" clause by respondent.

Petitioner is liable to pay its share of the loss. The trial court and the Court of Appeals were correct in
awarding P200,000 for this. There is, however, merit in petitioner's grievance against the damages and
attorney's fees awarded.

There is no legal and factual basis for the award of P200,000 for loss of profit. It cannot be denied that
the fire totally gutted respondent's business; thus, respondent no longer had any business to operate. His
loss of profit cannot be shouldered by petitioner whose obligation is limited to the object of insurance,
which was the stock-in-trade, and not the expected loss in income or profit.
 G.R. No. 95546 November 6, 1992
MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,
vs. THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by
American International Underwriters (Phils.), Inc., respondent.
BELLOSILLO, J.:
This case involves a purely legal question: whether payment by installment of the premiums due on an
insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as
the Insurance Code, as amended, which provides:
Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is
exposed to the peril insured against. Notwithstanding any agreement to the contrary,
no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except in the case of a
life or an industrial life policy whenever the grace period provision applies.
Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by
American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany
Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building
and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total premium of
P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982 and
16 November 1982, all of which were accepted by private respondent.
On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-9210596,
which replaced and renewed the previous policy, for a term covering 1 March 1983 to 1 March 1984. The
premium in the amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3
August 1983, 9 September 1983, and 21 November 1983. All payments were likewise accepted by
private respondent.
On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance
Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy,
petitioner made two installment payments, both accepted by private respondent, the first on 6 February
1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to
pay the balance of the premium.
Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for
Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-
9210651. It explained that it discontinued the payment of premiums because the policy did not contain a
credit clause in its favor and the receipts for the installment payments covering the policy for 1984-85, as
well as the two (2) previous policies, stated the following reservations:
2. Acceptance of this payment shall not waive any of the company rights to deny
liability on any claim under the policy arising before such payments or after the
expiration of the credit clause of the policy; and
3. Subject to no loss prior to premium payment. If there be any loss such is not
covered.
Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy.
It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its
answer with amended counterclaim, sought the refund of P924,206.10 representing the premium
payments for 1982-85.
After some incidents, petitioner and private respondent moved for summary judgment.
On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following
findings:
While it is true that the receipts issued to the defendant contained the aforementioned
reservations, it is equally true that payment of the premiums of the three
aforementioned policies (being sought to be refunded) were made during the lifetime
or term of said policies, hence, it could not be said, inspite of the reservations, that no
risk attached under the policies. Consequently, defendant's counterclaim for refund is
not justified.
As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view
of the reservation in the receipts ordinarily issued by the plaintiff on premium
payments the only plausible conclusion is that plaintiff has no right to demand their
payment after the lapse of the term of said policy on March 1, 1985. Therefore, the
defendant was justified in refusing to pay the same. 1
Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a
decision 2 modifying that of the trial court by ordering herein petitioner to pay the balance of the
premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and
affirming the denial of the counterclaim. The appellate court thus explained —
The obligation to pay premiums when due is ordinarily as indivisible obligation to
pay the entire premium. Here, the parties herein agreed to make the premiums
payable in installments, and there is no pretense that the parties never envisioned to
make the insurance contract binding between them. It was renewed for two
succeeding years, the second and third policies being a renewal/replacement for the
previous one. And the insured never informed the insurer that it was terminating the
policy because the terms were unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties may not
agree to make the insurance contract valid and binding without payment of
premiums, there is nothing in said section which suggests that the parties may not
agree to allow payment of the premiums in installment, or to consider the contract as
valid and binding upon payment of the first premium. Otherwise, we would allow the
insurer to renege on its liability under the contract, had a loss incurred (sic) before
completion of payment of the entire premium, despite its voluntary acceptance of
partial payments, a result eschewed by a basic considerations of fairness and equity.
 To our mind, the insurance contract became valid and binding upon payment of the In Arce, no payment was made by the insured at all despite the grace period given. In the case before Us,
first premium, and the plaintiff could not have denied liability on the ground that petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of
payment was not made in full, for the reason that it agreed to accept installment the 1982 and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it
payment. . . . 3 refused to pay the balance.

Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982,
1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance Code, as
amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss for
occurring before payment of premiums.
It argues that where the premiums is not actually paid in full, the policy would only be effective if there is
an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the Insurance Code.
The absence of an express acknowledgment in the policies of such receipt of the corresponding premium
payments, and petitioner's failure to pay said premiums on or before the effective dates of said policies
rendered them invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance
upon mere partial payment of the premiums because under Sec. 77 of the Insurance Code, no contract of
insurance is valid and binding unless the premium thereof has been paid, notwithstanding any agreement
to the contrary. As a consequence, petitioner seeks a refund of all premium payments made on the alleged
invalid insurance policies.
It appearing from the peculiar circumstances that the parties actually intended to make three (3) insurance
contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the
balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP-9210651)
in March 1985. Moreover, as correctly observed by the appellate court, where the risk is entire and the
contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was
exposed to the risk insured for any period, however brief or momentary.
WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED.
Costs against petitioner.
SO ORDERED.

We hold that the subject policies are valid even if the premiums were paid on installments. The records
clearly show that petitioner and private respondent intended subject insurance policies to be binding and
effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered
into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the
insurer to continue collecting and accepting the premiums, although paid on installments, and later deny
liability on the lame excuse that the premiums were not prepared in full.

We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and
conclusion of the appellate court contained in its Resolution denying the motion to reconsider its
Decision —

While the import of Section 77 is that prepayment of premiums is strictly required as

a condition to the validity of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually unpaid.
Section 77 merely precludes the parties from stipulating that the policy is valid even
if premiums are not paid, but does not expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary to morals, good customs, public
order or public policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in installments not so proscribed. At
the very least, both parties should be deemed in estoppel to question the arrangement
they have voluntarily accepted. 4

The reliance by petitioner on Arce vs. Capital Surety and Insurance

Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar.
 [ G.R. No. 183526, August 25, 2009 ] Eulogio's second Application for Reinstatement and issued a receipt for the amount Eulogio deposited.

VIOLETA R. LALICAN, PETITIONER, VS. THE INSULAR LIFE ASSURANCE COMPANY A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory arrest secondary to
LIMITED, AS REPRESENTED BY THE PRESIDENT VICENTE R. AVILON, RESPONDENT. electrocution.

DECISION Without knowing of Eulogio's death, Malaluan forwarded to the Insular Life Regional Office in the City
of San Fernando, on 18 September 1998, Eulogio's second Application for Reinstatement of Policy No.
CHICO-NAZARIO, J.: 9011992 and P17,500.00 deposit. However, Insular Life no longer acted upon Eulogio's second
Application for Reinstatement, as the former was informed on 21 September 1998 that Eulogio had
already passed away.
Challenged in this Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court are the
Decision[2] dated 30 August 2007 and the Orders dated 10 April 2008[3] and 3 July 2008[4] of the Regional
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full proceeds of Policy
Trial Court (RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its assailed Decision, the RTC
No. 9011992.
dismissed the claim for death benefits filed by petitioner Violeta R. Lalican (Violeta) against respondent
Insular Life Assurance Company Limited (Insular Life); while in its questioned Orders dated 10 April
In a letter[12] dated 14 January 1999, Insular Life informed Violeta that her claim could not be granted
2008 and 3 July 2008, respectively, the RTC declared the finality of the aforesaid Decision and denied
since, at the time of Eulogio's death, Policy No. 9011992 had already lapsed, and Eulogio failed to
petitioner's Notice of Appeal.
reinstate the same. According to the Application for Reinstatement, the policy would only be considered
reinstated upon approval of the application by Insular Life during the applicant's "lifetime and good
The factual and procedural antecedents of the case, as culled from the records, are as follows:
health," and whatever amount the applicant paid in connection thereto was considered to be a deposit
only until approval of said application. Enclosed with the 14 January 1999 letter of Insular Life to Violeta
Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
was DBP Check No. 0000309734, for the amount of P25,417.00, drawn in Violeta's favor, representing
the full refund of the payments made by Eulogio on Policy No. 9011992.
During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April 1997, Insular
Life, through Josephine Malaluan (Malaluan), its agent in Gapan City, issued in favor of Eulogio Policy
On 12 February 1998, Violeta requested a reconsideration of the disallowance of her claim. In a
No. 9011992,[5] which contained a 20-Year Endowment Variable Income Package Flexi Plan worth
letter[13] dated 10 March 1999, Insular Life stated that it could not find any reason to reconsider its
P500,000.00,[6] with two riders valued at P500,000.00 each. [7] Thus, the value of the policy amounted to
decision rejecting Violeta's claim. Insular Life again tendered to Violeta the above-mentioned check in
P1,500,000.00. Violeta was named as the primary beneficiary.
the amount of P25,417.00.
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a quarterly basis in the
Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the Cabanatuan District
amount of P8,062.00, payable every 24 April, 24 July, 24 October and 24 January of each year, until the
Office of Insular Life. Violeta's counsel subsequently sent a letter [14] dated 8 July 1999 to Insular Life,
end of the 20-year period of the policy. According to the Policy Contract, there was a grace period of 31
demanding payment of the full proceeds of Policy No. 9011992. On 11 August 1999, Insular Life
days for the payment of each premium subsequent to the first. If any premium was not paid on or before
responded to the said demand letter by agreeing to conduct a re-evaluation of Violeta's claim.
the due date, the policy would be in default, and if the premium remained unpaid until the end of the
grace period, the policy would automatically lapse and become void. [8]
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the RTC, on 11
October 1999, a Complaint for Death Claim Benefit, [15] which was docketed as Civil Case No. 2177.
Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he failed to pay the
Violeta alleged that Insular Life engaged in unfair claim settlement practice and deliberately failed to act
premium due on 24 January 1998, even after the lapse of the grace period of 31 days. Policy No.
with reasonable promptness on her insurance claim. Violeta prayed that Insular Life be ordered to pay her
9011992, therefore, lapsed and became void.
death claim benefits on Policy No. 9011992, in the amount of P1,500,000.00, plus interests, attorney's
fees, and cost of suit.
Eulogio submitted to the Cabanatuan District Office of Insular Life, through Malaluan, on 26 May 1998,
an Application for Reinstatement [9] of Policy No. 9011992, together with the amount of P8,062.00 to pay
Insular Life filed with the RTC an Answer with Counterclaim, [16] asserting that Violeta's Complaint had
for the premium due on 24 January 1998. In a letter [10] dated 17 July 1998, Insular Life notified Eulogio
no legal or factual bases. Insular Life maintained that Policy No. 9011992, on which Violeta sought to
that his Application for Reinstatement could not be fully processed because, although he already
recover, was rendered void by the non-payment of the 24 January 1998 premium and non-compliance
deposited P8,062.00 as payment for the 24 January 1998 premium, he left unpaid the overdue interest
with the requirements for the reinstatement of the same. By way of counterclaim, Insular Life prayed that
thereon amounting to P322.48. Thus, Insular Life instructed Eulogio to pay the amount of interest and to
Violeta be ordered to pay attorney's fees and expenses of litigation incurred by the former.
file another application for reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums
that subsequently became due on 24 April 1998 and 24 July 1998, plus interest.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for the reinstatement of
Policy No. 9011992 had been complied with and the defenses put up by Insular Life were purely invented
On 17 September 1998, Eulogio went to Malaluan's house and submitted a second Application for
and illusory.
Reinstatement[11] of Policy No. 9011992, including the amount of P17,500.00, representing payments for
the overdue interest on the premium for 24 January 1998, and the premiums which became due on 24
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life.
April 1998 and 24 July 1998. As Malaluan was away on a business errand, her husband received
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to have the same
reinstated:
[The] arguments [of Insular Life] are not without basis. When the premiums for April 24 and July 24,
1998 were not paid by [Eulogio] even after the lapse of the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and conditions of the contract between [Insular Life] and
[Eulogio] which are written in [the] Policy provisions of Policy No. 9011992 x x x. [17]
The RTC, taking into account the clear provisions of the Policy Contract between Eulogio and Insular
Life and the Application for Reinstatement Eulogio subsequently signed and submitted to Insular Life,
held that Eulogio was not able to fully comply with the requirements for the reinstatement of Policy No.
9011992:
The well-settled rule is that a contract has the force of law between the parties. In the instant case, the
terms of the insurance contract between [Eulogio] and [Insular Life] were spelled out in the policy
provisions of Insurance Policy No. 9011992. There is likewise no dispute that said insurance contract is
by nature a contract of adhesion[,] which is defined as "one in which one of the contracting parties
imposes a ready-made form of contract which the other party may accept or reject but cannot modify."
(Polotan, Sr. vs. CA, 296 SCRA 247).
x x x x
The New Lexicon Webster's Dictionary defines ambiguity as the "quality of having more than one
meaning" and "an idea, statement or expression capable of being understood in more than one sense."
In Nacu vs. Court of Appeals, 231 SCRA 237 (1994), the Supreme Court stated that[:]
"Any ambiguity in a contract, whose terms are susceptible of different interpretations as a result thereby,
must be read and construed against the party who drafted it on the assumption that it could have been
avoided by the exercise of a little care."
In the instant case, the dispute arises from the afore-quoted provisions written on the face of the
second application for reinstatement. Examining the said provisions, the court finds the same
clearly written in terms that are simple enough to admit of only one interpretation. They are
clearly not ambiguous, equivocal or uncertain that would need further construction. The same are
written on the very face of the application just above the space where [Eulogio] signed his name. It
is inconceivable that he signed it without reading and understanding its import.
Similarly, the provisions of the policy provisions (sic) earlier mentioned are written in simple and clear
layman's language, rendering it free from any ambiguity that would require a legal interpretation or
construction. Thus, the court believes that [Eulogio] was well aware that when he filed the said
application for reinstatement, his lapsed policy was not automatically reinstated and that its approval was
subject to certain conditions. Nowhere in the policy or in the application for reinstatement was it
ever mentioned that the payment of premiums would have the effect of an automatic and
immediate renewal of the lapsed policy. Instead, what was clearly stated in the application for
reinstatement is that pending approval thereof, the premiums paid would be treated as a "deposit
only and shall not bind the company until this application is finally approved during my/our"
lifetime and good health[.]"
Again, the court finds nothing in the aforesaid provisions that would even suggest an ambiguity either in
the words used or in the manner they were written. [Violeta] did not present any proof that [Eulogio] was
not conversant with the English language. Hence, his having personally signed the application for
reinstatement[,] which consisted only of one page, could only mean that he has read its contents and that
he understood them. x x x
Therefore, consistent with the above Supreme Court ruling and finding no ambiguity both in the policy
provisions of Policy No. 9011992 and in the application for reinstatement subject of this case, the court
finds no merit in [Violeta's] contention that the policy provision stating that [the lapsed policy of Eulogio]
should be reinstated during his lifetime is ambiguous and should be construed in his favor. It is true that
[Eulogio] submitted his application for reinstatement, together with his premium and interest payments,
to [Insular Life] through its agent Josephine Malaluan in the morning of September 17, 1998.
Unfortunately, he died in the afternoon of that same day. It was only on the following day, September 18,
1998 that Ms. Malaluan brought the said document to [the regional office of Insular Life] in San
Fernando, Pampanga for approval. As correctly pointed out by [Insular Life] there was no more
application to approve because the applicant was already dead and no insurance company would
issue an insurance policy to a dead person.[18] (Emphases ours.)
The RTC, in the end, explained that:
While the court truly empathizes with the [Violeta] for the loss of her husband, it cannot express the same
by interpreting the insurance agreement in her favor where there is no need for such interpretation. It is
conceded that [Eulogio's] payment of overdue premiums and interest was received by [Insular Life]
through its agent Ms. Malaluan. It is also true that [the] application for reinstatement was filed by
[Eulogio] a day before his death. However, there is nothing that would justify a conclusion that such
receipt amounted to an automatic reinstatement of the policy that has already lapsed. The evidence
suggests clearly that no such automatic renewal was contemplated in the contract between
[Eulogio] and [Insular Life]. Neither was it shown that Ms. Malaluan was the officer authorized to
approve the application for reinstatement and that her receipt of the documents submitted by
[Eulogio] amounted to its approval.[19] (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered and finding that [Violeta] has failed to establish
by preponderance of evidence her cause of action against the defendant, let this case be, as it is
hereby DISMISSED.[20]
On 14 September 2007, Violeta filed a Motion for Reconsideration [21] of the afore-mentioned RTC
Decision. Insular Life opposed[22] the said motion, averring that the arguments raised therein were merely
a rehash of the issues already considered and addressed by the RTC. In an Order [23] dated 8 November
2007, the RTC denied Violeta's Motion for Reconsideration, finding no cogent and compelling reason to
disturb its earlier findings. Per the Registry Return Receipt on record, the 8 November 2007 Order of the
RTC was received by Violeta on 3 December 2007.
In the interim, on 22 November 2007, Violeta filed with the RTC a Reply [24] to the Motion for
Reconsideration, wherein she reiterated the prayer in her Motion for Reconsideration for the setting aside
of the Decision dated 30 August 2007. Despite already receiving on 3 December 2007, a copy of the RTC
Order dated 8 November 2007, which denied her Motion for Reconsideration, Violeta still filed with the
RTC, on 26 February 2008, a Reply Extended Discussion elaborating on the arguments she had
previously made in her Motion for Reconsideration and Reply.
On 10 April 2008, the RTC issued an Order, [25] declaring that the Decision dated 30 August 2007 in Civil
Case No. 2177 had already attained finality in view of Violeta's failure to file the appropriate notice of November 2007 Order on 3 December 2007. Thus, Violeta had 15 days[30] from said date of receipt, or
appeal within the reglementary period. Thus, any further discussions on the issues raised by Violeta in until 18 December 2007, to file a Notice of Appeal. Violeta filed a Notice of Appeal only on 20 May
her Reply and Reply Extended Discussion would be moot and academic. 2008, more than five months after receipt of the RTC Order dated 8 November 2007 denying her Motion
for Reconsideration.
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion, [26] praying that the Order
dated 10 April 2008 be set aside and that she be allowed to file an appeal with the Court of Appeals. Violeta's claim that her former counsel's failure to file the proper remedy within the reglementary period
was an honest mistake, attributable to the latter's deteriorating health, is unpersuasive.
In an Order[27] dated 3 July 2008, the RTC denied Violeta's Notice of Appeal with Motion given that the
Decision dated 30 August 2007 had long since attained finality. Violeta merely made a general averment of her former counsel's poor health, lacking relevant details and
supporting evidence. By Violeta's own admission, her former counsel's health rapidly deteriorated only
Violeta directly elevated her case to this Court via the instant Petition for Review on Certiorari, raising by the first week of July 2008. The events pertinent to Violeta's Notice of Appeal took place months
the following issues for consideration: before July 2008, i.e., a copy of the RTC Order dated 8 November 2007, denying Violeta's Motion for
Reconsideration of the Decision dated 30 August 2007, was received on 3 December 2007; and Violeta's
1. Whether or not the Decision of the court a quo dated August 30, 2007, can still be reviewed Notice of Appeal was filed on 20 May 2008. There is utter lack of proof to show that Violeta's former
despite having allegedly attained finality and despite the fact that the mode of appeal that has been counsel was already suffering from ill health during these times; or that the illness of Violeta's former
availed of by Violeta is erroneous? counsel would have affected his judgment and competence as a lawyer.

2. Whether or not the Regional Trial Court in its original jurisdiction has decided the case on a Moreover, the failure of her former counsel to file a Notice of Appeal within the reglementary period
question of law not in accord with law and applicable decisions of the Supreme Court? binds Violeta, which failure the latter cannot now disown on the basis of her bare allegation and self-
serving pronouncement that the former was ill. A client is bound by his counsel's mistakes and
negligence.[31]
Violeta insists that her former counsel committed an honest mistake in filing a Reply, instead of a Notice
The Court, therefore, finds no reversible error on the part of the RTC in denying Violeta's Notice of
of Appeal of the RTC Decision dated 30 August 2007; and in the computation of the reglementary period
Appeal for being filed beyond the reglementary period. Without an appeal having been timely filed, the
for appealing the said judgment. Violeta claims that her former counsel suffered from poor health, which
RTC Decision dated 30 August 2007 in Civil Case No. 2177 already became final and executory.
rapidly deteriorated from the first week of July 2008 until the latter's death just shortly after the filing of
the instant Petition on 8 August 2008. In light of these circumstances, Violeta entreats this Court to admit
A judgment becomes "final and executory" by operation of law. Finality becomes a fact when the
and give due course to her appeal even if the same was filed out of time.
reglementary period to appeal lapses and no appeal is perfected within such period. As a consequence, no
court (not even this Court) can exercise appellate jurisdiction to review a case or modify a decision that
Violeta further posits that the Court should address the question of law arising in this case involving the
has become final.[32] When a final judgment is executory, it becomes immutable and unalterable. It may
interpretation of the second sentence of Section 19 of the Insurance Code, which provides:
no longer be modified in any respect either by the court, which rendered it or even by this Court. The
doctrine is founded on considerations of public policy and sound practice that, at the risk of occasional
Section. 19. x x x [I]nterest in the life or health of a person insured must exist when the insurance takes errors, judgments must become final at some definite point in time. [33]
effect, but need not exist thereafter or when the loss occurs.
The only recognized exceptions to the doctrine of immutability and unalterability are the correction of
clerical errors, the so-called nunc pro tunc entries, which cause no prejudice to any party, and void
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own life when he judgments.[34] The instant case does not fall under any of these exceptions.
reinstated Policy No. 9011992 just before he passed away on 17 September 1998. The RTC should have
construed the provisions of the Policy Contract and Application for Reinstatement in favor of the insured Even if the Court ignores the procedural lapses committed herein, and proceeds to resolve the substantive
Eulogio and against the insurer Insular Life, and considered the special circumstances of the case, to rule issues raised, the Petition must still fail.
that Eulogio had complied with the requisites for the reinstatement of Policy No. 9011992 prior to his
death, and that Violeta is entitled to claim the proceeds of said policy as the primary beneficiary thereof. Violeta makes it appear that her present Petition involves a question of law, particularly, whether Eulogio
had an existing insurable interest in his own life until the day of his death.
The Petition lacks merit.
An insurable interest is one of the most basic and essential requirements in an insurance contract. In
At the outset, the Court notes that the elevation of the case to us via the instant Petition for Review general, an insurable interest is that interest which a person is deemed to have in the subject matter
on Certiorari is not justified. Rule 41, Section 1 of the Rules of Court, [28] provides that no appeal may be insured, where he has a relation or connection with or concern in it, such that the person will derive
taken from an order disallowing or dismissing an appeal. In such a case, the aggrieved party may file a pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer
Petition for Certiorari under Rule 65 of the Rules of Court. [29] pecuniary loss or damage from its destruction, termination, or injury by the happening of the event
insured against.[35] The existence of an insurable interest gives a person the legal right to insure the
Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had long become final subject matter of the policy of insurance. [36] Section 10 of the Insurance Code indeed provides that every
and executory. Violeta filed a Motion for Reconsideration thereof, but the RTC denied the same in an person has an insurable interest in his own life. [37] Section 19 of the same code also states that an interest
Order dated 8 November 2007. The records of the case reveal that Violeta received a copy of the 8 in the life or health of a person insured must exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs. [38] by the Company during my/our lifetime and good health. If this application is disapproved, I/We also
agree to accept the refund of all payments made in connection herewith, without interest, and to surrender
Upon more extensive study of the Petition, it becomes evident that the matter of insurable interest is the receipts for such payment.[41] (Emphases ours.)
entirely irrelevant in the case at bar. It is actually beyond question that while Eulogio was still alive, he
had an insurable interest in his own life, which he did insure under Policy No. 9011992. The real point of
contention herein is whether Eulogio was able to reinstate the lapsed insurance policy on his life before In the instant case, Eulogio's death rendered impossible full compliance with the conditions for
his death on 17 September 1998. reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his Application for
Reinstatement and deposit the amount for payment of his overdue premiums and interests thereon with
The Court rules in the negative. Malaluan; but Policy No. 9011992 could only be considered reinstated after the Application for
Reinstatement had been processed and approved by Insular Life during Eulogio's lifetime and good
Before proceeding, the Court must correct the erroneous declaration of the RTC in its 30 August 2007 health.
Decision that Policy No. 9011992 lapsed because of Eulogio's non-payment of the premiums which
became due on 24 April 1998 and 24 July 1998. Policy No. 9011992 had lapsed and become void Relevant herein is the following pronouncement of the Court in Andres v. The Crown Life Insurance
earlier, on 24 February 1998, upon the expiration of the 31-day grace period for payment of the Company,[42] citing McGuire v. The Manufacturer's Life Insurance Co. [43]:
premium, which fell due on 24 January 1998, without any payment having been made.
"The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogio's filing of his first application does not give the insured absolute right to such reinstatement by the mere filing of an
Application for Reinstatement with Insular Life, through Malaluan, on 26 May 1998, constitutes an application. The insurer has the right to deny the reinstatement if it is not satisfied as to the
admission that Policy No. 9011992 had lapsed by then. Insular Life did not act on Eulogio's first insurability of the insured and if the latter does not pay all overdue premium and all other indebtedness to
Application for Reinstatement, since the amount Eulogio simultaneously deposited was sufficient to the insurer. After the death of the insured the insurance Company cannot be compelled to entertain
cover only the P8,062.00 overdue premium for 24 January 1998, but not the P322.48 overdue interests an application for reinstatement of the policy because the conditions precedent to reinstatement can no
thereon. On 17 September 1998, Eulogio submitted a second Application for Reinstatement to Insular longer be determined and satisfied." (Emphases ours.)
Life, again through Malaluan, depositing at the same time P17,500.00, to cover payment for the overdue
interest on the premium for 24 January 1998, and the premiums that had also become due on 24 April
1998 and 24 July 1998. On the very same day, Eulogio passed away.
It does not matter that when he died, Eulogio's Application for Reinstatement and deposits for the
overdue premiums and interests were already with Malaluan. Insular Life, through the Policy Contract,
To reinstate a policy means to restore the same to premium-paying status after it has been permitted to
expressly limits the power or authority of its insurance agents, thus:
lapse.[39] Both the Policy Contract and the Application for Reinstatement provide for specific conditions
for the reinstatement of a lapsed policy.
Our agents have no authority to make or modify this contract, to extend the time limit for payment of
The Policy Contract between Eulogio and Insular Life identified the following conditions for premiums, to waive any lapsation, forfeiture or any of our rights or requirements, such powers being
reinstatement should the policy lapse: limited to our president, vice-president or persons authorized by the Board of Trustees and only in
writing.[44] (Emphasis ours.)
10. REINSTATEMENT

You may reinstate this policy at any time within three years after it lapsed if the following conditions are
met: (1) the policy has not been surrendered for its cash value or the period of extension as a term
insurance has not expired; (2) evidence of insurability satisfactory to [Insular Life] is furnished; (3)
overdue premiums are paid with compound interest at a rate not exceeding that which would have been
applicable to said premium and indebtedness in the policy years prior to reinstatement; and (4)
indebtedness which existed at the time of lapsation is paid or renewed. [40]
Additional conditions for reinstatement of a lapsed policy were stated in the Application for
Reinstatement which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until this application is approved by
the Company during my/our lifetime and good health and until all other Company requirements
for the reinstatement of said Policy are fully satisfied.
I/We further agree that any payment made or to be made in connection with this application shall be
considered as deposit only and shall not bind the Company until this application is finally approved
Malaluan did not have the authority to approve Eulogio's Application for Reinstatement. Malaluan still
had to turn over to Insular Life Eulogio's Application for Reinstatement and accompanying deposits, for
processing and approval by the latter.
The Court agrees with the RTC that the conditions for reinstatement under the Policy Contract and
Application for Reinstatement were written in clear and simple language, which could not admit of any
meaning or interpretation other than those that they so obviously embody. A construction in favor of the
insured is not called for, as there is no ambiguity in the said provisions in the first place. The words
thereof are clear, unequivocal, and simple enough so as to preclude any mistake in the appreciation of the
same.
Violeta did not adduce any evidence that Eulogio might have failed to fully understand the import and
meaning of the provisions of his Policy Contract and/or Application for Reinstatement, both of which he
voluntarily signed. While it is a cardinal principle of insurance law that a policy or contract of insurance
is to be construed liberally in favor of the insured and strictly as against the insurer company, yet,
contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the
terms, which the parties themselves have used. If such terms are clear and unambiguous, they must be
taken and understood in their plain, ordinary and popular sense. [45]
 Eulogio's death, just hours after filing his Application for Reinstatement and depositing his payment for
overdue premiums and interests with Malaluan, does not constitute a special circumstance that can
persuade this Court to already consider Policy No. 9011992 reinstated. Said circumstance cannot override
the clear and express provisions of the Policy Contract and Application for Reinstatement, and operate to
remove the prerogative of Insular Life thereunder to approve or disapprove the Application for
Reinstatement. Even though the Court commiserates with Violeta, as the tragic and fateful turn of events
leaves her practically empty-handed, the Court cannot arbitrarily burden Insular Life with the payment of
proceeds on a lapsed insurance policy. Justice and fairness must equally apply to all parties to a case.
Courts are not permitted to make contracts for the parties. The function and duty of the courts consist
simply in enforcing and carrying out the contracts actually made. [46]

Policy No. 9011992 remained lapsed and void, not having been reinstated in accordance with the Policy
Contract and Application for Reinstatement before Eulogio's death. Violeta, therefore, cannot claim any
death benefits from Insular Life on the basis of Policy No. 9011992; but she is entitled to receive the full
refund of the payments made by Eulogio thereon.

WHEREFORE, premises considered, the Court DENIES the instant Petition for Review

on Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMS the Orders dated 10 April 2008
and 3 July 2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177, denying petitioner Violeta
R. Lalican's Notice of Appeal, on the ground that the Decision dated 30 August 2007 subject thereof, was
already final and executory. No costs.
 [ G.R. No. 121833, October 17, 2008 ] WHEREFORE, judgment is hereby rendered as follows:

ABOITIZ SHIPPING CORPORATION, PETITIONER, VS. COURT OF APPEALS, MALAYAN 1. In Civil Case No. 138072 (R-81-526-CV), the defendants are adjudged liable and ordered to
INSURANCE COMPANY, INC., COMPAGNIE MARITIME DES CHARGEURS REUNIS, AND pay to the plaintiffs jointly and severally the amount of P128,896.79; the third-party defendant
F.E. ZUELLIG (M), INC., RESPONDENTS. Aboitiz is adjudged liable to reimburse and ordered to pay the defendants or whosoever of them paid
the plaintiff up to the said amount;

TINGA, J.: 2. In Civil Case No. 138761, Aboitiz is adjudged liable and ordered to pay plaintiff the amount of
One Hundred Sixty Three-Thousand Seven Hundred Thirteen Pesos and Thirty-Eight Centavos
(P163,713.38).
Before this Court are three consolidated Rule 45 petitions all involving the issue of whether the real and
hypothecary doctrine may be invoked by the shipowner in relation to the loss of cargoes occasioned by
the sinking of M/V P. Aboitiz on 31 October 1980. The petitions filed by Aboitiz Shipping Corporation 3. In Civil Case No. 138762, defendant Aboitiz is adjudged liable and ordered to pay plaintiff the
(Aboitiz) commonly seek the computation of its liability in accordance with the Court's pronouncement sum of Seventy Three Thousand Five Hundred Sixty-Nine Pesos and Ninety-Four Centavos
in Aboitiz Shipping Corporation v. General Accident Fire and Life Assurance Corporation, Ltd. (P73,569.94); and Sixty-Four Thousand Seven Hundred Four Pesos and Seventy-Seven Centavos
[1]
 (hereafter referred to as "the 1993 GAFLAC case"). (P64,704.77);

The three petitions stemmed from some of the several suits filed against Aboitiz before different regional 4. In Civil Case No. 139083, defendant Aboitiz is adjudged liable and ordered to pay plaintiff the
trial courts by shippers or their successors-in-interest for the recovery of the monetary value of the amount of One Hundred Fifty-Six Thousand Two Hundred Eighty-Seven Pesos and Sixty-Four
cargoes lost, or by the insurers for the reimbursement of whatever they paid. The trial courts awarded to Centavos (P156,287.64);
various claimants the amounts of P639,862.02, P646,926.30, and P87,633.81 in G.R. Nos. 121833,
130752 and 137801, respectively. In Civil Case No. 138879, defendant Aboitiz is adjudged liable and ordered to pay plaintiff the amount of
Fifty-Two Thousand Six Hundred Eighty-Nine Pesos and Fifty Centavos (P52,689.50).
ANTECEDENTS
All the aforesaid award shall bear interest at the legal rate from the filing of the respective complaints.
Considering that there is no clear showing that the cases fall under Article 2208, Nos. 4 and 5, of the
G.R. No. 121833 Civil Code, and in consonance with the basic rule that there be no penalty (in terms of attorney's fees)
imposed on the right to litigate, no damages by way of attorney's fees are awarded; however, costs of the
Respondent Malayan Insurance Company, Inc. (Malayan) filed five separate actions against several party/parties to whom judgment awards are made shall be made by the party ordered to pay the said
defendants for the collection of the amounts of the cargoes allegedly paid by Malayan under various judgment awards.
marine cargo policies[2] issued to the insurance claimants. The five civil cases, namely, Civil Cases No.
138761, No. 139083, No. 138762, No. R-81-526 and No. 138879, were consolidated and heard before the SO ORDERED.[3]
Regional Trial Court (RTC) of Manila, Branch 54.
Aboitiz, CMCR and Zuellig appealed the RTC decision to the Court of Appeals. The appeal was
The defendants in Civil Case No. 138761 and in Civil Case No. 139083 were Malayan International docketed as CA-G.R. SP No. 35975-CV. During the pendency of the appeal, the Court promulgated the
Shipping Corporation, a foreign corporation based in Malaysia, its local ship agent, Litonjua Merchant decision in the 1993 GAFLAC case.
Shipping Agency (Litonjua), and Aboitiz. The defendants in Civil Case No. 138762 were Compagnie
Maritime des Chargeurs Reunis (CMCR), its local ship agent, F.E. Zuellig (M), Inc. (Zuellig), and On 31 March 1995, the Court of Appeals (Ninth Division) affirmed the RTC decision. It disregarded
Aboitiz. Malayan also filed Civil Case No. R-81-526 only against CMCR and Zuellig. Thus, defendants Aboitiz's argument that the sinking of the vessel was caused by a force majeure, in view of this Court's
CMCR and Zuellig filed a third-party complaint against Aboitiz. In the fifth complaint docketed as Civil finding in a related case, Aboitiz Shipping Corporation v. Court of Appeals, et al. (the 1990 GAFLAC
Case No. 138879, only Aboitiz was impleaded as defendant. case).[4] In said case, this Court affirmed the Court of Appeals' finding that the sinking of  M/V P.
Aboitiz was caused by the negligence of its officers and crew. It is one of the numerous collection suits
The shipments were supported by their respective bills of lading and insured separately by Malayan against Aboitiz, which eventually reached this Court in connection with the sinking of M/V P. Aboitiz.
against the risk of loss or damage. In the five consolidated cases, Malayan sought the recovery of
amounts totaling P639,862.02. As to the computation of Aboitiz's liability, the Court of Appeals again based its ruling on the 1990
GAFLAC case that Aboitiz's liability should be based on the declared value of the shipment in
Aboitiz raised the defenses of lack of jurisdiction, lack of cause of action and prescription. It also claimed consonance with the exceptional rule under Section 4(5) [5] of the Carriage of Goods by Sea Act.
that M/V P. Aboitiz was seaworthy, that it exercised extraordinary diligence and that the loss was caused
by a fortuitous event. Aboitiz moved for reconsideration[6] to no avail. Hence, it filed this petition for review on certiorari
docketed as G.R. No. 121833.[7] The instant petition is based on the following grounds:
After trial on the merits, the RTC of Manila rendered a Decision dated 27 November 1989, adjudging
Aboitiz liable on the money claims. The decretal portion reads:
THE COURT OF APPEALS SHOULD HAVE LIMITED THE RECOVERABLE AMOUNT FROM THE COURT OF APPEALS GRAVELY ERRED WHEN IT RULED THAT THE LOWER COURT
ASC TO THAT AMOUNT STIPULATED IN THE BILL OF LADING. HAD MADE AN EXPRESS FINDING OF THE ACTUAL NEGLIGENCE OF ABOITIZ IN THE
SINKING OF THE M/V P. ABOITIZ THEREBY DEPRIVING ABOITIZ OF THE BENEFIT OF THE
IN THE ALTERNATIVE, THE COURT OF APPEALS SHOULD HAVE FOUND THAT THE TOTAL DOCTRINE OF THE REAL AND HYPOTHECARY NATURE OF MARITIME LAW. [20]
LIABILITY OF ASC IS LIMITED TO THE VALUE OF THE VESSEL OR THE INSURANCE
PROCEEDS THEREOF.[8] THE COURT OF APPEALS ERRED IN NOT GIVING WEIGHT TO THE GAFLAC CASE DECIDED
BY THE HONORABLE COURT WHICH SUPPORTS THE APPLICABILITY OF THE REAL AND
On 4 December 1995, the Court issued a Resolution [9] denying the petition. Aboitiz moved for HYPOTHECARY NATURE OF MARITIME LAW IN THE PRESENT CASE. [21]
reconsideration, arguing that the limited liability doctrine enunciated in the 1993 GAFLAC case should
be applied in the computation of its liability. In the Resolution [10] dated 6 March 1996, the Court granted G.R. No. 137801
the motion and ordered the reinstatement of the petition and the filing of a comment.
On 27 February 1981, Equitable Insurance Corporation (Equitable) filed an action for damages against
G.R. No. 130752 Aboitiz to recover by way of subrogation the value of the cargoes insured by Equitable that were lost in
the sinking of M/V P. Aboitiz.[22] The complaint, which was docketed as Civil Case No. 138395, was later
Respondents Asia Traders Insurance Corporation (Asia Traders) and Allied Guarantee Insurance amended to implead Seatrain Pacific Services S.A. and Citadel Lines, Inc. as party defendants. [23] The
Corporation (Allied) filed separate actions for damages against Aboitiz to recover by way of subrogation complaint against the latter defendants was subsequently dismissed upon motion in view of the amicable
the value of the cargoes insured by them and lost in the sinking of the vessel M/V P. Aboitiz. The two settlement reached by the parties.
actions were consolidated and heard before the RTC of Manila, Branch 20.
On 7 September 1989, the RTC of Manila, Branch 7, rendered judgment [24] ordering Aboitiz to pay
[11]
Aboitiz reiterated the defense of force majeure. The trial court rendered a decision  on 25 April 1990 Equitable the amount of P87,633.81, plus legal interest and attorney's fees. [25] It found that Aboitiz was
ordering Aboitiz to pay damages in the amount of P646,926.30. Aboitiz sought reconsideration, arguing guilty of contributory negligence and, therefore, liable for the loss.
that the trial court should have considered the findings of the Board of Marine Inquiry that the sinking of
the M/V P. Aboitiz was caused by a typhoon and should have applied the real and hypothecary doctrine In its appeal, docketed as CA-G.R. CV No. 43458, Aboitiz invoked the doctrine of limited liability and
in limiting the monetary award in favor of the claimants. The trial court denied Aboitiz's motion for claimed that the typhoon was the proximate cause of the loss. On 27 November 1998, the Court of
reconsideration. Appeals rendered a decision, affirming the RTC decision. [26]

Aboitiz elevated the case to the Court of Appeals. While the appeal was pending, this Court promulgated The Court of Appeals (Fifteenth Division) ruled that the loss of the cargoes and the sinking of the vessel
the decision in the 1993 GAFLAC case. The Court of Appeals subsequently rendered a decision on 30 were due to its unseaworthiness and the failure of the crew to exercise extraordinary diligence. Said
May 1994, affirming the RTC decision. [12] findings were anchored on the 1990 GAFLAC case and on this Court's resolution dated November 13,
1989 in G.R. No. 88159, dismissing Aboitiz's petition and affirming the findings of the appellate court on
Aboitiz appealed the Court of Appeals decision to this Court. [13] In a Resolution dated 20 September the vessel's unseaworthiness and the crew's negligence.
1995,[14] the Court denied the petition for raising factual issues and for failure to show that the Court of
Appeals committed any reversible error. Aboitiz's motion for reconsideration was also denied in a Its motion for reconsideration[27] having been denied,[28] Aboitiz filed before this Court a petition for
Resolution dated 22 November 1995. [15] review on certiorari, docketed as G.R. No. 137801,[29] raising this sole issue, to wit:

The 22 November 1995 Resolution became final and executory. On 26 February 1996, Asia Traders and WHETHER OR NOT THE DOCTRINE OF REAL AND HYPOTHECARY NATURE OF MARITIME
Allied filed a motion for execution before the RTC of Manila, Branch 20. Aboitiz opposed the motion. LAW (ALSO KNOWN AS THE "LIMITED LIABILITY RULE") APPLIES. [30]
On 16 August 1996, the trial court granted the motion and issued a writ of execution.
ISSUES
Alleging that it had no other speedy, just or adequate remedy to prevent the execution of the judgment,
Aboitiz filed with the Court of Appeals a petition for certiorari and prohibition with an urgent prayer for
preliminary injunction and/or temporary restraining order docketed as CA-G.R. SP No. 41696. [16] The
The principal issue common to all three petitions is whether Aboitiz can avail limited liability on the
petition was mainly anchored on this Court's ruling in the 1993 GAFLAC case.
basis of the real and hypothecary doctrine of maritime law. Corollary to this issue is the determination of
actual negligence on the part of Aboitiz.
On 8 August 1997, the Court of Appeals (Special Seventeenth Division) rendered the assailed decision
dismissing the petition.[17] Based on the trial court's finding that Aboitiz was actually negligent in
These consolidated petitions similarly posit that Aboitiz's liability to respondents should be limited to the
ensuring the seaworthiness of M/V P. Aboitiz, the appellate court held that the real and hypothecary
value of the insurance proceeds of the lost vessel plus pending freightage and not correspond to the full
doctrine enunciated in the 1993 GAFLAC case may not be applied in the case.
insurable value of the cargoes paid by respondents, based on the Court's ruling in the
1993 GAFLAC case.
In view of the denial of its motion for reconsideration, [18] Aboitiz filed before this Court the instant
petition for review on certiorari docketed as G.R. No. 130752. [19] The petition attributes the following
Respondents in G.R. No. 121833 counter that the limited liability rule should not be applied because
errors to the Court of Appeals:
there was a finding of negligence in the care of the goods on the part of Aboitiz based on this Court's
Resolution dated 4 December 1995 in G.R. No. 121833, which affirmed the trial court's finding of
negligence on the part of the vessel's captain. Likewise, respondent in G.R. No. 137801 relies on the
finding of the trial court, as affirmed by the appellate court, that Aboitiz was guilty of negligence.
Respondents in G.R No. 130752 argue that this Court had already affirmed in toto the appellate court's
finding that the vessel was not seaworthy and that Aboitiz failed to exercise extraordinary diligence in the
handling of the cargoes. This being the law of the case, Aboitiz should not be entitled to the limited
liability rule as far as this petition is concerned, respondents contend.
RULING of the COURT
These consolidated petitions are just among the many others elevated to this Court involving Aboitiz's
liability to shippers and insurers as a result of the sinking of its vessel, M/V P. Aboitiz, on 31 October
1980 in the South China Sea. One of those petitions is the 1993 GAFLAC case, docketed as G.R. No.
100446.[31]
The 1993 GAFLAC case was an offshoot of an earlier final and executory judgment in the
1990 GAFLAC case, where the General Accident Fire and Life Assurance Corporation, Ltd. (GAFLAC),
as judgment obligee therein, sought the execution of the monetary award against Aboitiz. The trial court
granted GAFLAC's prayer for execution of the full judgment award. The appellate court dismissed
Aboitiz's petition to nullify the order of execution, prompting Aboitiz to file a petition with this Court.
In the 1993 GAFLAC case, Aboitiz argued that the real and hypothecary doctrine warranted the
immediate stay of execution of judgment to prevent the impairment of the other creditors' shares.
Invoking the rule on the law of the case, private respondent therein countered that the 1990 GAFLAC
case had already settled the extent of Aboitiz's liability.
Following the doctrine of limited liability, however, the Court declared in the 1993 GAFLAC case that
claims against Aboitiz arising from the sinking of M/V P. Aboitiz should be limited only to the extent of
the value of the vessel. Thus, the Court held that the execution of judgments in cases already resolved
with finality must be stayed pending the resolution of all the other similar claims arising from the sinking
of M/V P. Aboitiz. Considering that the claims against Aboitiz had reached more than 100, the Court
found it necessary to collate all these claims before their payment from the insurance proceeds of the
vessel and its pending freightage. As a result, the Court exhorted the trial courts before whom similar
cases remained pending to proceed with trial and adjudicate these claims so that the pro-rated share of
each claim could be determined after all the cases shall have been decided. [32]
In the 1993 GAFLAC case, the Court applied the limited liability rule in favor of Aboitiz based on the
trial court's finding therein that Aboitiz was not negligent. The Court explained, thus:
x x x In the few instances when the matter was considered by this Court, we have been consistent in this
jurisdiction in holding that the only time the Limited Liability Rule does not apply is when there is an
actual finding of negligence on the part of the vessel owner or agent x x x. The pivotal question, thus, is
whether there is finding of such negligence on the part of the owner in the instant case.
A careful reading of the decision rendered by the trial court in Civil Case No. 144425 as well as the
entirety of the records in the instant case will show that there has been no actual finding of negligence
on the part of petitioner. x x x
The same is true of the decision of this Court in G.R. No. 89757 affirming the decision of the Court of
Appeals in CA-G.R. CV No. 10609 since both decisions did not make any new and additional finding of
fact. Both merely affirmed the factual findings of the trial court, adding that the cause of the sinking of
the vessel was because of unseaworthiness due to the failure of the crew and the master to exercise
extraordinary diligence. Indeed, there appears to have been no evidence presented sufficient to form a
conclusion that petitioner shipowner itself was negligent, and no tribunal, including this Court, will add
or subtract to such evidence to justify a conclusion to the contrary. [33] (Citations entitled) (Emphasis
supplied)
The ruling in the 1993 GAFLAC case cited the real and hypothecary doctrine in maritime law that the
shipowner or agent's liability is merely co-extensive with his interest in the vessel such that a total loss
thereof results in its extinction. "No vessel, no liability" expresses in a nutshell the limited liability rule. [34]
In this jurisdiction, the limited liability rule is embodied in Articles 587, 590 and 837 under Book III of
the Code of Commerce, thus:
Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which
may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he
may exempt himself therefrom by abandoning the vessel with all her equipment and the freight it may
have earned during the voyage.
Art. 590. The co-owners of the vessel shall be civilly liable in the proportion of their interests in the
common fund for the results of the acts of the captain referred to in Art. 587.
Each co-owner may exempt himself from this liability by the abandonment, before a notary, of the part of
the vessel belonging to him.
Art. 837. The civil liability incurred by shipowners in the case prescribed in this section, shall be
understood as limited to the value of the vessel with all its appurtenances and freightage served during the
voyage.
These articles precisely intend to limit the liability of the shipowner or agent to the value of the vessel, its
appurtenances and freightage earned in the voyage, provided that the owner or agent abandons the vessel.
[35]
 When the vessel is totally lost in which case there is no vessel to abandon, abandonment is not
required. Because of such total loss the liability of the shipowner or agent for damages is extinguished.
[36]
 However, despite the total loss of the vessel, its insurance answers for the damages for which a
shipowner or agent may be held liable. [37]
Nonetheless, there are exceptional circumstances wherein the ship agent could still be held answerable
despite the abandonment of the vessel, as where the loss or injury was due to the fault of the shipowner
and the captain. The international rule is to the effect that the right of abandonment of vessels, as a legal
limitation of a shipowner's liability, does not apply to cases where the injury or average was occasioned
by the shipowner's own fault. [38] Likewise, the shipowner may be held liable for injuries to passengers
notwithstanding the exclusively real and hypothecary nature of maritime law if fault can be attributed to
the shipowner.[39]
As can be gleaned from the foregoing disquisition in the 1993 GAFLAC case, the Court applied the
doctrine of limited liability in view of the absence of an express finding that Aboitiz's negligence was the
direct cause of the sinking of the vessel. The circumstances in the 1993 GAFLAC case, however, are not
obtaining in the instant petitions.
A perusal of the decisions of the courts below in all three petitions reveals that there is a categorical
finding of negligence on the part of Aboitiz. For instance, in G.R. No. 121833, the RTC therein expressly
stated that the captain of M/V P. Aboitiz was negligent in failing to take a course of action that would liability doctrine, a shipowner or ship agent may be held liable for damages when the sinking of the
prevent the vessel from sailing into the typhoon. In G.R. No. 130752, the RTC concluded that Aboitiz vessel is attributable to the actual fault or negligence of the shipowner or its failure to ensure the
failed to show that it had exercised the required extraordinary diligence in steering the vessel before, seaworthiness of the vessel. The instant petitions cannot be spared from the application of the exception
during and after the storm. In G.R. No. 137801, the RTC categorically stated that the sinking of M/V P. to the doctrine of limited liability in view of the unanimous findings of the courts below that both Aboitiz
Aboitiz was attributable to the negligence or fault of Aboitiz. In all instances, the Court of Appeals and the crew failed to ensure the seaworthiness of the M/V P. Aboitiz.
affirmed the factual findings of the trial courts.
WHEREFORE, the petitions in G.R. Nos. 121833, 130752 and 137801 are DENIED. The decisions of
The finding of actual fault on the part of Aboitiz is central to the issue of its liability to the respondents. the Court of Appeals in CA-G.R. SP No. 35975-CV, CA-G.R. SP No. 41696 and CA-G.R. CV No.
Aboitiz's contention, that with the sinking of M/V P. Aboitiz, its liability to the cargo shippers and 43458 are hereby AFFIRMED. Costs against petitioner.
shippers should be limited only to the insurance proceeds of the vessel absent any finding of fault on the
part of Aboitiz, is not supported by the record. Thus, Aboitiz is not entitled to the limited liability rule SO ORDERED.
and is, therefore, liable for the value of the lost cargoes as so duly alleged and proven during trial.

Events have supervened during the pendency of the instant petitions. On two other occasions, the Court
ruled on separate petitions involving monetary claims against Aboitiz as a result of the 1980 sinking

of the vessel M/V P. Aboitiz. One of them is the consolidated petitions of Monarch Ins. Co., Inc v. Court
of Appeals,[40] Allied Guarantee Insurance Company v. Court of Appeals [41] and Equitable Insurance
Corporation v. Court of Appeals[42] (hereafter collectively referred to as Monarch Insurance) promulgated
on 08 June 2000. This time, the petitioners consisted of claimants against Aboitiz because either the
execution of the judgment awarding full indemnification of their claims was stayed or set aside or the
lower courts awarded damages only to the extent of the claimants' proportionate share in the insurance
proceeds of the vessel.

In Monarch Insurance, the Court deemed it fit to settle once and for all this factual issue by declaring that
the sinking of M/V P. Aboitiz was caused by the concurrence of the unseaworthiness of the vessel and the
negligence of both Aboitiz and the vessel's crew and master and not because of force majeure.
Notwithstanding this finding, the Court did not reverse but reiterated instead the pronouncement
in GAFLAC to the effect that the claimants be treated as "creditors in an insolvent corporation whose
assets are not enough to satisfy the totality of claims against it." [43] The Court explained that the peculiar
circumstances warranted that procedural rules of evidence be set aside to prevent frustrating the just
claims of shippers/insurers. Thus, the Court in Monarch Insurance ordered Aboitiz to institute the
necessary limitation and distribution action before the proper RTC and to deposit with the said court the
insurance proceeds of and the freightage earned by the ill-fated ship.

However, on 02 May 2006, the Court rendered a decision in Aboitiz Shipping Corporation v. New India
Assurance Company, Ltd.[44] (New India), reiterating the well-settled principle that the exception to the
limited liability doctrine applies when the damage is due to the fault of the shipowner or to the concurrent
negligence of the shipowner and the captain. Where the shipowner fails to overcome the presumption of
negligence, the doctrine of limited liability cannot be applied. [45] In New India, the Court clarified that the
earlier pronouncement in Monarch Insurance was not an abandonment of the doctrine of limited liability
and that the circumstances therein still made the doctrine applicable. [46]

In New India, the Court declared that Aboitiz failed to discharge its burden of showing that it exercised
extraordinary diligence in the transport of the goods it had on board in order to invoke the limited liability
doctrine. Thus, the Court rejected Aboitiz's argument that the award of damages to respondent therein
should be limited to its pro rata share in the insurance proceeds from the sinking of M/V P. Aboitiz.

The instant petitions provide another occasion for the Court to reiterate the well-settled doctrine of the
real and hypothecary nature of maritime law. As a general rule, a ship owner's liability is merely co-
extensive with his interest in the vessel, except where actual fault is attributable to the shipowner. Thus,
as an exception to the limited
 [ G.R. NO. 137775, March 31, 2005 ]
 25,000 cases Pale Pilsen  Estancia, Iloilo
FGU INSURANCE CORPORATION, PETITIONER, VS. THE COURT OF APPEALS, SAN  1
 350 cases Cerveza Negra  Estancia, Iloilo
MIGUEL CORPORATION, AND ESTATE OF ANG GUI, REPRESENTED BY LUCIO,
JULIAN, AND JAIME, ALL SURNAMED ANG, AND CO TO, RESPONDENTS.
 15,000 cases Pale Pilsen   San Jose, Antique
DECISION  2
 200 cases Cerveza Negra  San Jose, Antique

CHICO-NAZARIO, J.:

Before Us are two separate Petitions for review assailing the Decision [1] of the Court of Appeals in CA- The consignee for the cargoes covered by Bill of Lading No. 1 was SMC’s Beer Marketing Division
G.R. CV No. 49624 entitled, “San Miguel Corporation, Plaintiff-Appellee versus Estate of Ang Gui, (BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while the consignee for the cargoes covered by Bill
represented by Lucio, Julian and Jaime, all surnamed Ang, and Co To, Defendants-Appellants, Third– of Lading No. 2 was SMC’s BMD-San Jose Beer Sales Office, San Jose, Antique.
Party Plaintiffs versus FGU Insurance Corporation, Third-Party Defendant-Appellant,” which affirmed in
toto the decision[2] of the Regional Trial Court of Cebu City, Branch 22.  The dispositive portion of the The D/B Lucio was towed by the M/T ANCO all the way from Mandaue City to San Jose, Antique.   The
Court of Appeals decision reads: vessels arrived at San Jose, Antique, at about one o’clock in the afternoon of 30 September 1979.   The
tugboat M/T ANCO left the barge immediately after reaching San Jose, Antique.
WHEREFORE, for all the foregoing, judgment is hereby rendered as follows:
When the barge and tugboat arrived at San Jose, Antique, in the afternoon of 30 September 1979, the
1) Ordering defendants to pay plaintiff the sum of P1,346,197.00 and an interest of 6% per annum to be clouds over the area were dark and the waves were already big.  The arrastre workers unloading the
reckoned from the filing of this case on October 2, 1990; cargoes of SMC on board the D/B Lucio began to complain about their difficulty in unloading the
cargoes.  SMC’s District Sales Supervisor, Fernando Macabuag, requested ANCO’s representative to
2) Ordering defendants to pay plaintiff the sum of P25,000.00 for attorney’s fees and an additional sum of transfer the barge to a safer place because the vessel might not be able to withstand the big waves.
P10,000.00 as litigation expenses;
ANCO’s representative did not heed the request because he was confident that the barge could withstand
3) With cost against defendants. the waves.  This, notwithstanding the fact that at that time, only the M/T ANCO was left at the wharf of
San Jose, Antique, as all other vessels already left the wharf to seek shelter. With the waves growing
For the Third-Party Complaint: bigger and bigger, only Ten Thousand Seven Hundred Ninety (10,790) cases of beer were discharged into
the custody of the arrastre operator.
1) Ordering third-party defendant FGU Insurance Company to pay and reimburse defendants the amount
of P632,700.00.[3] At about ten to eleven o’clock in the evening of 01 October 1979, the crew of D/B Lucio abandoned the
vessel because the barge’s rope attached to the wharf was cut off by the big waves.  At around midnight,
The Facts the barge run    aground and was broken and the cargoes of beer in the barge were swept away.

Evidence shows that Anco Enterprises Company (ANCO), a partnership between Ang Gui and Co To,
was engaged in the shipping business.     It owned the M/T ANCO tugboat and the D/B Lucio barge
which were operated as common carriers.  Since the D/B Lucio had no engine of its own, it could not
maneuver by itself and had to be towed by a tugboat for it to move from one place to another.
As a result, ANCO failed to deliver to SMC’s consignee Twenty-Nine Thousand Two Hundred Ten
(29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra.   The value per case
of Pale Pilsen was Forty-Five Pesos and Twenty Centavos (P45.20).  The value of a case of Cerveza
Negra was Forty-Seven Pesos and Ten Centavos (P47.10), hence, SMC’s claim against ANCO amounted
to One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00).

On 23 September 1979, San Miguel Corporation (SMC) shipped from Mandaue City, Cebu, on board the As a consequence of the incident, SMC filed a complaint for Breach of Contract of Carriage and
D/B Lucio, for towage by M/T ANCO, the following cargoes: Damages against ANCO for the amount of One Million Three Hundred Forty-Six Thousand One
Hundred Ninety-Seven Pesos (P1,346,197.00) plus interest, litigation expenses and Twenty-Five Percent
(25%) of the total claim as attorney’s fees.

 Bill of Lading No.  Shipment   Destination

Upon Ang Gui’s death, ANCO, as a partnership, was dissolved hence, on 26 January 1993, SMC filed a
second amended complaint which was admitted by the Court impleading the surviving partner, Co To
and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang.  The substituted
defendants adopted the original answer with counterclaim of ANCO “since the substantial allegations of for the amount of the lost shipment.  With respect to the Third-Party complaint, the court a quo found
the original complaint and the amended complaint are practically the same.” FGU liable to bear Fifty-Three Percent (53%) of the amount of the lost cargoes.   According to the trial
court:
ANCO admitted that the cases of beer Pale Pilsen and Cerveza Negra mentioned in the complaint were
indeed loaded on the vessel belonging to ANCO.  It claimed however that it had an agreement with SMC . . . Evidence is to the effect that the D/B Lucio, on which the cargo insured, run-aground and was broken
that ANCO would not be liable for any losses or damages resulting to the cargoes by reason of fortuitous and the beer cargoes on the said barge were swept away.  It is the sense of this Court that the risk insured
event.  Since the cases of beer Pale Pilsen and Cerveza Negra were lost by reason of a storm, a fortuitous against was the cause of the loss..
event which battered and sunk the vessel in which they were loaded, they should not be held liable. 
ANCO further asserted that there was an agreement between them and SMC to insure the cargoes in Since the total cargo was 40,550 cases which had a total amount of P1,833,905.00 and the amount of the
order to recover indemnity in case of loss.  Pursuant to that agreement, the cargoes to the extent of policy was only for P858,500.00, defendants as assured, therefore, were considered co-insurers of third-
Twenty Thousand (20,000) cases was insured with FGU    Insurance Corporation (FGU) for the total party defendant FGU Insurance Corporation to the extent of 975,405.00 value of the cargo. 
amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) per Marine Insurance Consequently, inasmuch as there was partial loss of only P1,346,197.00, the assured shall bear 53% of
Policy No. 29591. the loss…[4] [Emphasis ours]

Subsequently, ANCO, with leave of court, filed a Third-Party Complaint against FGU, alleging that The appellate court affirmed in toto the decision of the lower court and denied the motion for
before the vessel of ANCO left for San Jose, Antique with the cargoes owned by SMC, the cargoes, to reconsideration and the supplemental motion for reconsideration.
the extent of Twenty Thousand (20,000) cases, were insured with FGU for a total amount of Eight
Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) under Marine Insurance Policy No. Hence, the petitions.
29591.  ANCO further alleged that on or about 02 October 1979, by reason of very strong winds and
heavy waves brought about by a passing typhoon, the vessel run aground near the vicinity of San Jose, The Issues
Antique, as a result of which, the vessel was totally wrecked and its cargoes owned by SMC were lost
and/or destroyed.  According to ANCO, the loss of said cargoes occurred as a result of risks insured
against in the insurance policy and during the existence and lifetime of said insurance policy.  ANCO In G.R. No. 137775, the grounds for review raised by petitioner FGU can be summarized into two: 1)
went on to assert that in the remote possibility that the court will order ANCO to pay SMC’s claim, the Whether or not respondent Court of Appeals committed grave abuse of discretion in holding FGU liable
third-party defendant corporation should be held liable to indemnify or reimburse ANCO whatever under the insurance contract considering the circumstances surrounding the loss of the cargoes; and 2)
amounts, or damages, it may be required to pay to SMC. Whether or not the Court of Appeals committed an error of law in holding that the doctrine of  res
judicata applies in the instant case.
In its answer to the Third-Party complaint, third-party defendant FGU admitted the existence of the
Insurance Policy under Marine Cover Note No. 29591 but maintained that the alleged loss of the cargoes In G.R. No. 140704, petitioner Estate of Ang Gui and Co To assail the decision of the appellate court
covered by the said insurance policy cannot be attributed directly or indirectly to any of the risks insured based on the following assignments of error: 1) The Court of Appeals committed grave abuse of
against in the said insurance policy.  According to FGU, it is only liable under the policy to Third-party discretion in affirming the findings of the lower court that the negligence of the crewmembers of the D/B
Plaintiff ANCO and/or Plaintiff SMC in case of any of the following: Lucio was the proximate cause of the loss of the cargoes; and 2) The respondent court acted with grave
abuse of discretion when it ruled that the appeal was without merit despite the fact that said court had
a) total loss of the entire shipment; accepted the decision in Civil Case No. R-19341, as affirmed by the Court of Appeals and the Supreme
Court, as res judicata.
b) loss of any case as a result of the sinking of the vessel; or
Ruling of the Court
c) loss as a result of the vessel being on fire.

Furthermore, FGU alleged that the Third-Party Plaintiff ANCO and Plaintiff SMC failed to exercise First, we shall endeavor to dispose of the common issue raised by both petitioners in their respective
ordinary diligence or the diligence of a good father of the family in the care and supervision of the petitions for review, that is, whether or not the doctrine of res judicata applies in the instant case.
cargoes insured to prevent its loss and/or destruction.
It is ANCO’s contention that the decision in Civil Case No. R-19341, [5] which was decided in its favor,
Third-Party defendant FGU prayed for the dismissal of the Third-Party Complaint and asked for actual, constitutes res judicata with respect to the issues raised in the case at bar.
moral, and exemplary damages and attorney’s fees. [1]
The contention is without merit.  There can be no res judicata as between Civil Case No. R-19341 and the
The trial court found that while the cargoes were indeed lost due to fortuitous event, there was failure on case at bar.  In order for res judicata to be made applicable in a case, the following essential requisites
ANCO’s part, through their representatives, to observe the degree of diligence required that would must be present: 1) the former judgment must be final; 2) the former judgment must have been rendered
exonerate them from liability.  The trial court thus held the Estate of Ang Gui and Co To liable to SMC by a court having jurisdiction over the subject matter and the parties; 3) the former judgment must be a
judgment or order on the merits; and 4) there must be between the first and second action identity of
parties, identity of subject matter, and identity of causes of action. [6] Therefore, based on the foregoing discussion, we are reversing the findings of the Court of Appeals that
there is res judicata.
There is no question that the first three elements of res judicata as enumerated above are indeed satisfied
by the decision in Civil Case No. R-19341.  However, the doctrine is still inapplicable due to the absence Anent ANCO’s first assignment of error, i.e., the appellate court committed error in concluding that the
of the last essential requisite of identity of parties, subject matter and causes of action. negligence of ANCO’s representatives was the proximate cause of the loss, said issue is a question of fact
assailing the lower court’s appreciation of evidence on the negligence or lack thereof of the crewmembers
The parties in Civil Case No. R-19341 were ANCO as plaintiff and FGU as defendant while in the instant of the D/B Lucio. As a rule, findings of fact of lower courts, particularly when affirmed by the appellate
case, SMC is the plaintiff and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed court, are deemed final and conclusive.  The Supreme Court cannot review such findings on appeal,
Ang and Co To as defendants, with the latter merely impleading FGU as third-party defendant. especially when they are borne out by the records or are based on substantial evidence. [9] As held in the
case of Donato v. Court of Appeals,[10] in this jurisdiction, it is a fundamental and settled rule that
The subject matter of Civil Case No. R-19341 was the insurance contract entered into by ANCO, the findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless
owner of the vessel, with FGU covering the vessel D/B Lucio, while in the instant case, the subject matter for strong and cogent reasons because the trial court is in a better position to examine real evidence, as
of litigation is the loss of the cargoes of SMC, as shipper, loaded in the D/B Lucio and the resulting well as to observe the demeanor of the witnesses while testifying in the case. [11]
failure of ANCO to deliver to SMC’s consignees the lost cargo.  Otherwise stated, the controversy in the
first case involved the rights and liabilities of the shipowner vis-à-vis that of the insurer, while the present It is not the function of this Court to analyze or weigh evidence all over again, unless there is a showing
case involves the rights and liabilities of the shipper vis-à-vis that of the shipowner.  Specifically, Civil that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute
Case No. R-19341 was an action for Specific Performance and Damages based on FGU Marine Hull palpable error or grave abuse of discretion.[12]
Insurance Policy No. VMF-MH-13519 covering the vessel D/B Lucio, while the instant case is an action
for Breach of Contract of Carriage and Damages filed by SMC against ANCO based on Bill of Lading A careful study of the records shows no cogent reason to fault the findings of the lower court, as
No. 1 and No. 2, with defendant ANCO seeking reimbursement from FGU under Insurance Policy No. sustained by the appellate court, that ANCO’s representatives failed to exercise the extraordinary degree
MA-58486, should the former be held liable to pay SMC. of diligence required by the law to exculpate them from liability for the loss of the cargoes.

Moreover, the subject matter of the third-party complaint against FGU in this case is different from that
in Civil Case No. R-19341.  In the latter, ANCO was suing FGU for the insurance contract over the
vessel while in the former, the third-party complaint arose from the insurance contract covering the
cargoes on board the D/B Lucio.
The doctrine of res judicata precludes the re-litigation of a particular fact or issue already passed upon by
a court of competent jurisdiction in a former judgment, in another action between the same parties based
on a different claim or cause of action.  The judgment in the prior action operates as estoppel only as to
those matters in issue or points controverted, upon the determination of which the finding or judgment
was rendered.[7] If a particular point or question is in issue in the second action, and the judgment will
depend on the determination of that particular point or question, a former judgment between the same
parties or their privies will be final and conclusive in the second if that same point or question was in
issue and adjudicated in the first suit. [8]
Since the case at bar arose from the same incident as that involved in Civil Case No. R-19341, only
findings with respect to matters passed upon by the court in the former judgment are conclusive in the
disposition of the instant case.  A careful perusal of the decision in Civil Case No. R-19341 will reveal
that the pivotal issues resolved by the lower court, as affirmed by both the Court of Appeals and the
Supreme Court, can be summarized into three legal conclusions: 1) that the D/B Lucio before and during
the voyage was seaworthy; 2) that there was proper notice of loss made by ANCO within the
reglementary period; and 3) that the vessel D/B Lucio was a constructive total loss.
Said decision, however, did not pass upon the issues raised in the instant case.  Absent therein was any
discussion regarding the liability of ANCO for the loss of the cargoes.  Neither did the lower court pass
upon the issue of the alleged negligence of the crewmembers of the D/B Lucio being the cause of the loss
of the cargoes owned by SMC.
First, ANCO admitted that they failed to deliver to the designated consignee the Twenty Nine Thousand
Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra.
Second, it is borne out in the testimony of the witnesses on record that the barge D/B Lucio had no engine
of its own and could not maneuver by itself.  Yet, the patron of ANCO’s tugboat M/T ANCO left it to
fend for itself notwithstanding the fact that as the two vessels arrived at the port of San Jose, Antique,
signs of the impending storm were already manifest.  As stated by the lower court, witness Mr. Anastacio
Manilag testified that the captain or patron of the tugboat M/T ANCO left the barge D/B Lucio
immediately after it reached San Jose, Antique, despite the fact that there were already big waves and the
area was already dark.  This is corroborated by defendants’ own witness, Mr. Fernando Macabueg. [13]
The trial court continued:
At that precise moment, since it is the duty of the defendant to exercise and observe extraordinary
diligence in the vigilance over the cargo of the plaintiff, the patron or captain of M/T ANCO,
representing the defendant could have placed D/B Lucio in a very safe location before they left knowing
or sensing at that time the coming of a typhoon.  The presence of big waves and dark clouds could have
warned the patron or captain of M/T ANCO to insure the safety of D/B Lucio including its cargo.   D/B
Lucio being a barge, without its engine, as the patron or captain of M/T ANCO knew, could not possibly
maneuver by itself.  Had the patron or captain of M/T ANCO, the representative of the defendants
observed extraordinary diligence in placing the D/B Lucio in a safe place, the loss to the cargo of the
plaintiff could not have occurred.  In short, therefore, defendants through their representatives, failed to
observe the degree of diligence required of them under the provision of Art. 1733 of the Civil Code of the
Philippines.[14]
Petitioners Estate of Ang Gui and Co To, in their Memorandum, asserted that the contention of likewise transferred, but to no avail.  The D/B Lucio had no engine and could not maneuver by itself. 
respondents SMC and FGU that “the crewmembers of D/B Lucio should have left port at the onset of the Even if ANCO’s representatives wanted to transfer it, they no longer had any means to do so as the
typhoon is like advising the fish to jump from the frying pan into the fire and an advice that borders on tugboat M/T ANCO had already departed, leaving the barge to its own devices.   The captain of the
madness.”[15] tugboat should have had the foresight not to leave the barge alone considering the pending storm.

The argument does not persuade.  The records show that the D/B Lucio was the only vessel left at San While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster, ANCO
Jose, Antique, during the time in question.  The other vessels were transferred and temporarily moved to could not escape liability to respondent SMC.  The records clearly show the failure of petitioners’
Malandong, 5 kilometers from wharf where the barge remained. [16] Clearly, the transferred vessels were representatives to exercise the extraordinary degree of diligence mandated by law.   To be exempted from
definitely safer in Malandong than at the port of San Jose, Antique, at that particular time, a fact which responsibility, the natural disaster should have been the proximate and only cause of the loss. [20] There
petitioners failed to dispute must have been no contributory negligence on the part of the common carrier.   As held in the case
of Limpangco Sons v. Yangco Steamship Co.:[21]
ANCO’s arguments boil down to the claim that the loss of the cargoes was caused by the
typhoon Sisang, a fortuitous event (caso fortuito), and there was no fault or negligence on their part.  In . . . To be exempt from liability because of an act of God, the tug must be free from any previous
fact, ANCO claims that their crewmembers exercised due diligence to prevent or minimize the loss of the negligence or misconduct by which that loss or damage may have been occasioned.   For, although the
cargoes but their efforts proved no match to the forces unleashed by the typhoon which, in petitioners’ immediate or proximate cause of the loss in any given instance may have been what is termed an act of
own words was, by any yardstick, a natural calamity, a fortuitous event, an act of God, the consequences God, yet, if the tug unnecessarily exposed the two to such accident by any culpable act or omission of its
of which petitioners could not be held liable for. [17] own, it is not excused.[22]

The Civil Code provides: Therefore, as correctly pointed out by the appellate court, there was blatant negligence on the part of M/T
ANCO’s crewmembers, first in leaving the engine-less barge D/B Lucio at the mercy of the storm
Art. 1733.  Common carriers, from the nature of their business and for reasons of public policy are bound without the assistance of the tugboat, and again in failing to heed the request of SMC’s representatives to
to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers have the barge transferred to a safer place, as was done by the other vessels in the port; thus, making said
transported by them, according to all the circumstances of each case. blatant negligence the proximate cause of the loss of the cargoes.

Such extraordinary diligence in vigilance over the goods is further expressed in Articles 1734, 1735, and We now come to the issue of whether or not FGU can be held liable under the insurance policy to
1745 Nos. 5, 6, and 7 . . . reimburse ANCO for the loss of the cargoes despite the findings of the respondent court that such loss
was occasioned by the blatant negligence of the latter’s employees.
Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless
the same is due to any of the following causes only: One of the purposes for taking out insurance is to protect the insured against the consequences of his own
negligence and that of his agents.  Thus, it is a basic rule in insurance that the carelessness and negligence
(1)     Flood, storm, earthquake, lightning, or other natural disaster or calamity; of the insured or his agents constitute no defense on the part of the insurer. [23] This rule however
presupposes that the loss has occurred due to causes which could not have been prevented by the insured,
.  .  . despite the exercise of due diligence.

Art. 1739. In order that the common carrier may be exempted from responsibility, the natural
disaster must have been the proximate and only cause of the loss.  However, the common carrier must
exercise due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm,
or other natural disaster in order that the common carrier may be exempted from liability   for the loss,
destruction, or deterioration of the goods . . . (Emphasis supplied)
The question now is whether there is a certain degree of negligence on the part of the insured or his
agents that will deprive him the right to recover under the insurance contract.  We say there is.  However,
to what extent such negligence must go in order to exonerate the insurer from liability must be evaluated
in light of the circumstances surrounding each case.  When evidence show that the insured’s negligence
or recklessness is so gross as to be sufficient to constitute a willful act, the insurer must be exonerated.

Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor from
liability)[18] by definition, are extraordinary events not foreseeable or avoidable, events that could not be
foreseen, or which though foreseen, were inevitable.  It is therefore not enough that the event should not
have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to
avoid.[19]
In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was it
unavoidable.  In fact, the other vessels in the port of San Jose, Antique, managed to transfer to another
place, a circumstance which prompted SMC’s District Sales Supervisor to request that the D/B Lucio be
In the case of Standard Marine Ins. Co. v. Nome Beach L. & T. Co., [24] the United States Supreme Court
held that:
The ordinary negligence of the insured and his agents has long been held as a part of the risk which the
insurer takes upon himself, and the existence of which, where it is the proximate cause of the loss, does
not absolve the insurer from liability.  But willful exposure, gross negligence, negligence amounting to
misconduct, etc., have often been held to release the insurer from such liability. [25] [Emphasis ours]
. . .
 hereby AFFIRMED with MODIFICATION dismissing the third-party complaint.
In the case of Williams v. New England Insurance Co., 3 Cliff. 244, Fed. Cas. No. 17,731, the owners of
an insured vessel attempted to put her across the bar at Hatteras Inlet.  She struck on the bar and was
wrecked.  The master knew that the depth of water on the bar was such as to make the attempted passage
dangerous.  Judge Clifford held that, under the circumstances, the loss was not within the protection of
the policy, saying:

Authorities to prove that persons insured cannot recover for a loss occasioned by their own wrongful acts
are hardly necessary, as the proposition involves an elementary principle of universal application.  Losses
may be recovered by the insured, though remotely occasioned by the negligence or misconduct of the
master or crew, if proximately caused by the perils insured against, because such mistakes and negligence
are incident to navigation and constitute a part of the perils which those who engage in such adventures
are obliged to incur; but it was never supposed that the insured could recover indemnity for a loss
occasioned by his own wrongful act or by that of any agent for whose conduct he was responsible.
[26]
 [Emphasis ours]

From the above-mentioned decision, the United States Supreme Court has made a distinction between
ordinary negligence and gross negligence or negligence amounting to misconduct and its effect on the
insured’s right to recover under the insurance contract.  According to the Court, while mistake and
negligence of the master or crew are incident to navigation and constitute a part of the perils that the
insurer is obliged to incur, such negligence or recklessness must not be of such gross character as to
amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability
under the insurance contract.

In the case at bar, both the trial court and the appellate court had concluded from the evidence that the
crewmembers of both the D/B Lucio and the M/T ANCO were blatantly negligent.  To wit:

There was blatant negligence on the part of the employees of defendants-appellants when the patron
(operator) of the tug boat immediately left the barge at the San Jose, Antique wharf despite the looming
bad weather.  Negligence was likewise exhibited by the defendants-appellants’ representative who did
not heed Macabuag’s request that the barge be moved to a more secure place.  The prudent thing to do, as
was done by the other sea vessels at San Jose, Antique during the time in question, was to transfer the
vessel to a safer wharf.  The negligence of the defendants-appellants is proved by the fact that on 01
October 1979, the only simple vessel left at the wharf in San Jose was the D/B Lucio. [27] [Emphasis ours]

As stated earlier, this Court does not find any reason to deviate from the conclusion drawn by the lower
court, as sustained by the Court of Appeals, that ANCO’s representatives had failed to exercise
extraordinary diligence required of common carriers in the shipment of SMC’s cargoes.  Such blatant
negligence being the proximate cause of the loss of the cargoes amounting to One Million Three Hundred
Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00)

This Court, taking into account the circumstances present in the instant case, concludes that the blatant
negligence of ANCO’s employees is of such gross character that it amounts to a wrongful act which must
exonerate FGU from liability under the insurance contract.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 24 February 1999 is
 [ G.R. No. 116940, June 11, 1997 ]
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., PETITIONER, VS.
COURT OF APPEALS AND FELMAN SHIPPING  LINES, RESPONDENTS.
DECISION
BELLOSILLO, J.:
This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe the
extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to be
subrogated to the rights of the insured upon payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board “MV Asilda,” a vessel owned and
operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola
softdrink bottles to be transported from Zamboanga City to Cebu City for consignee Coca-Cola Bottlers
Philippines, Inc., Cebu.[1] The shipment was insured with petitioner Philippine American General
Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG.
“MV Asilda” left the port of Zamboanga in fine weather at eight o’clock in the evening of the same day.
At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of
Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of 1-liter
Coca-Cola softdrink bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with
respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles
that sank with “MV Asilda.” Respondent denied the claim thus prompting the consignee to file an
insurance claim with PHILAMGEN which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which
disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the
shipowner for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total loss of “MV Asilda” and its cargo were
due to the vessel’s unseaworthiness as she was put to sea in an unstable condition. It further alleged that
the vessel was improperly manned and that its officers were grossly negligent in failing to take
appropriate measures to proceed to a nearby port or beach after the vessel started to list.
On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no right
of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event,
FELMAN had abandoned all its rights, interests and ownership over “MV Asilda” together with her
freight and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587 of the
Code of Commerce.[2]
On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of
Appeals set aside the dismissal and remanded the case to the lower court for trial on the merits. FELMAN
filed a petition for certiorari with this Court but it was subsequently denied on 13 February 1989.
On 28 February 1992 the trial court rendered judgment in favor of FELMAN. [3] It ruled that “MV Asilda”
was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the Philippine
Coast Guard and the shipowner’s surveyor attesting to its seaworthiness. Thus the loss of the vessel and
its entire shipment could only be attributed to either a fortuitous event, in which case, no liability should
attach unless there was a stipulation to the contrary, or to the negligence of the captain and his crew, in
which case, Art. 587 of the Code of Commerce should apply.
The lower court further ruled that assuming “MV Asilda” was unseaworthy, still PHILAMGEN could not
recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its implied
warranty on the vessel’s seaworthiness. Resultantly, the payment made by PHILAMGEN to the assured
was an undue, wrong and mistaken payment. Since it was not legally owing, it did not give
PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994
respondent appellate court rendered judgment finding “MV Asilda” unseaworthy for being top- heavy as
2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other words, while the
vessel possessed the necessary Coast Guard certification indicating its seaworthiness with respect to the
structure of the ship itself, it was not seaworthy with respect to the cargo. Nonetheless, the appellate court
denied the claim of PHILAMGEN on the ground that the assured’s implied warranty of seaworthiness
was not complied with. Perfunctorily, PHILAMGEN was not properly subrogated to the rights and
interests of the shipper. Furthermore, respondent court held that the filing of notice of abandonment had
absolved the shipowner/agent from liability under the limited liability rule.
The issues for resolution in this petition are: (a) whether “MV Asilda” was seaworthy when it left the port
of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce should apply;
and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions which the shipper
had against FELMAN, the shipowner.
“MV Asilda” was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain as
well as the chief mate of the vessel confirmed that the weather was fine when they left the port of
Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink
bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes
for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles on deck.
[4]
 The ship captain stated that around four o’clock in the morning of 7 July 1983 he was awakened by the
officer on duty to inform him that the vessel had hit a floating log. At that time he noticed that the
weather had deteriorated with strong southeast winds inducing big waves. After thirty minutes he
observed that the vessel was listing slightly to starboard and would not correct itself despite the heavy
rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside until the vessel
was balanced. At about seven o’clock in the morning, the master of the vessel stopped the engine because
the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to starboard.
The shifting of cargo took about an hour afterwhich he rang the engine room to resume full speed.
At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide on
his next move, some of the cargo on deck were thrown overboard and seawater entered the engine room
and cargo holds of the vessel. At that instance, the master of the vessel ordered his crew to abandon ship.
Shortly thereafter, “MV Asilda” capsized and sank. He ascribed the sinking to the entry of seawater
through a hole in the hull caused by the vessel’s collision with a partially submerged log. [5]
The Elite Adjusters, Inc., submitted a report regarding the sinking of “MV Asilda.” The report, which
was adopted by the Court of Appeals, reads -
We found in the course of our investigation that a reasonable explanation for the series of lists
experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel was top-
heavy which is to say that while the vessel may not have been overloaded, yet the distribution or stowage
of the cargo on board was done in such a manner that the vessel was in top-heavy condition at the time of
her departure and which condition rendered her unstable and unseaworthy for that particular voyage.
In this connection, we wish to call attention to the fact that this vessel was designed as a fishing vessel x
x x x and it was not designed to carry a substantial amount or quantity of cargo on deck. Therefore, we
believe strongly that had her cargo been confined to those that could have been accommodated under
deck, her stability would not have been affected and the vessel would not have been in any danger of
capsizing, even given the prevailing weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was rendered
unseaworthy for the purpose of carrying the type of cargo because the weight of the deck cargo so
decreased the vessel’s metacentric height as to cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out that
ships are precisely designed to be able to navigate safely even during heavy weather and frequently we
hear of ships safely and successfully weathering encounters with typhoons and although they may sustain
some amount of damage, the sinking of ship during heavy weather is not a frequent occurrence and is not
likely to occur unless they are inherently unstable and unseaworthy x x x x
We believe, therefore, and so hold that the proximate cause of the sinking of the M/V “Asilda” was her
condition of unseaworthiness arising from her having been top-heavy when she departed from the Port of
Zamboanga. Her having capsized and eventually sunk was bound to happen and was therefore in the
category of an inevitable occurrence (underscoring supplied). [6]
We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate
cause of the sinking of “MV Asilda” was its being top-heavy. Contrary to the ship captain’s allegations,
evidence shows that approximately 2,500 cases of softdrink bottles were stowed on deck. Several days
after “MV Asilda” sank, an estimated 2,500 empty Coca-Cola plastic cases were recovered near the
vicinity of the sinking. Considering that the ship’s hatches were properly secured, the empty Coca-Cola
cases recovered could have come only from the vessel’s deck cargo. It is settled that carrying a deck
cargo raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not
interfere with the proper management of the ship. However, in this case it was established that “MV
Asilda” was not designed to carry substantial amount of cargo on deck. The inordinate loading of cargo
deck resulted in the decrease of the vessel’s metacentric height [7] thus making it unstable. The strong
winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage and as such
merely contributed to its already unstable and unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. [8] Simply put,
the ship agent is liable for the negligent acts of the captain in the care of goods loaded on the vessel. This
liability however can be limited through abandonment of the vessel, its equipment and freightage as
provided in Art. 587. Nonetheless, there are exceptional circumstances wherein the ship agent could still
be held answerable despite the abandonment, as where the loss or injury was due to the fault of the
shipowner and the captain.[9] The international rule is to the effect that the right of abandonment of
vessels, as a legal limitation of a shipowner’s liability, does not apply to cases where the injury or
average was occasioned by the shipowner’s own fault. [10] It must be stressed at this point that Art. 587
speaks only of situations where the fault or negligence is committed solely by the captain. Where the
shipowner is likewise to be blamed, Art. 587 will not apply, and such situation will be covered by the
provisions of the Civil Code on common carrier. [11]
It was already established at the outset that the sinking of “MV Asilda” was due to its unseaworthiness
even at the time of its departure from the port of Zamboanga. It was top-heavy as an excessive amount of
cargo was loaded on deck. Closer supervision on the part of the shipowner could have prevented this fatal
miscalculation. As such, FELMAN was equally negligent. It cannot therefore escape liability through the
expedient of filing a notice of abandonment of the vessel by virtue of Art. 587 of the Code of Commerce.
Under Art 1733 of the Civil Code, “(c)ommon 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 the passengers transported by them, according to all the circumstances of each case x x x x" In
the event of loss of goods, common carriers are presumed to have acted negligently. FELMAN, the
shipowner, was not able to rebut this presumption.
In relation to the question of subrogation, respondent appellate court found “MV Asilda” unseaworthy
with reference to the cargo and therefore ruled that there was breach of warranty of seaworthiness that
rendered the assured not entitled to the payment of is claim under the policy. Hence, when PHILAMGEN
paid the claim of the bottling firm there was in effect a “voluntary payment” and no right of subrogation
accrued in its favor. In other words, when PHILAMGEN paid it did so at its own risk.
It is generally held that in every marine insurance policy the assured impliedly warrants to the assurer that
the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the
face of the policy.[12] Thus Sec. 113 of the Insurance Code provides that “(i)n every marine insurance
upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a
warranty is implied that the ship is seaworthy.” Under Sec. 114, a ship is “seaworthy when reasonably fit
to perform the service, and to encounter the ordinary perils of the voyage, contemplated by the parties to
the policy.” Thus it becomes the obligation of the cargo owner to look for a reliable common carrier
which keeps its vessels in seaworthy condition. He may have no control over the vessel but he has full
control in the selection of the common carrier that will transport his goods. He also has full discretion in
the choice of assurer that will underwrite a particular venture.
We need not belabor the alleged breach of warranty of seaworthiness by the assured as painstakingly
pointed out by FELMAN to stress that subrogation will not work in this case. In policies where the law
will generally imply a warranty of seaworthiness, it can only be excluded by terms in writing in the
policy in the clearest language. [13] And where the policy stipulates that the seaworthiness of the vessel as
between the assured and the assurer is admitted, the question of seaworthiness cannot be raised by the
assurer without showing concealment or misrepresentation by the assured. [14]
The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2) instances
has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No.
100367-PAG reads “(t)he liberties as per Contract of Affreightment the presence of the Negligence
Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of
Affreightment as between the Assured and the Company shall not prejudice the insurance. The
seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted.” [15]
The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states
“(t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted x x x
x"[16]

The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two things:
(a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of
unseaworthiness is assumed by the insurance company. [17] The insertion of such waiver clauses in cargo
policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. Thus
it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of unseaworthiness
so that if the ship should sink by unseaworthiness, as what occurred in this case, PHILAMGEN is liable.

Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN’s action
against FELMAN is squarely sanctioned by Art. 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. 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.

In Pan Malayan Insurance Corporation v. Court of Appeals, [18] we said that payment by the assurer to the
assured operates as an equitable assignment to the assurer of all the remedies which the assured may have
against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of any privity of contract or upon payment by the insurance
company of the insurance claim. It accrues simply upon payment by the insurance company of the
insurance claim.

The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice
and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice,
equity and good conscience ought to pay. [19] Therefore, the payment made by PHILAMGEN to Coca-
Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee against
FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss of the
7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.

WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay
petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-
five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29
November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code. [20]
SO ORDERED.
 [ G.R. No. 172156, November 23, 2007 ]
MALAYAN INSURANCE CO., INC.,[1] PETITIONER, VS. REGIS BROKERAGE CORP.,
RESPONDENT.
DECISION
TINGA, J,:
We consider whether an insurer, in an action for recoupment instituted in its capacity as the subrogee of
the insured, may be conferred favorable relief even if it failed to introduce in evidence the insurance
contract or policy, or even allege the existence nay recite the substance and attach a copy of such
document in the complaint. The answer is as self-evident as meets the eye.
This Petition for Review under Rule 45 was filed by petitioner Malayan Insurance Co., Inc. (Malayan),
[2]
 assailing the Decision[3] dated 23 December 2005 of the Court of Appeals in C.A. G.R. SP No. 90505,
as well as its Resolution[4] dated 5 April 2006 denying petitioner’s motion for reconsideration.
The facts require little elaboration. Around 1 February 1995, Fasco Motors Group loaded 120 pieces of
“motors” on board China Airlines Flight 621 bound for Manila from the United States. The cargo was to
be delivered to consignee ABB Koppel, Inc. (ABB Koppel). [5] When the cargo arrived at the Ninoy
Aquino International Airport, it was discharged without exception and forwarded to People’s Aircargo &
Warehousing Corp.’s (Paircargo’s) warehouse for temporary storage pending release by the Bureau of
Customs. Paircargo remained in possession of the cargo until 7 March 1995, at which point respondent
Regis Brokerage Corp. (Regis) withdrew the cargo and delivered the same to ABB Koppel at its
warehouse.[6] When the shipment arrived at ABB Koppel’s warehouse, it was discovered that only 65 of
the 120 pieces of motors were actually delivered and that the remaining 55 motors, valued at
US$2,374.35, could not be accounted for. [7]
The shipment was purportedly insured with Malayan by ABB Koppel. Demand was first made upon
Regis and Paircargo for payment of the value of the missing motors, but both refused to pay. [8] Thus,
Malayan paid ABB Koppel the amount of P156,549.55 apparently pursuant to its insurance agreement,
and Malayan was on that basis subrogated to the rights of ABB Koppel against Regis and Paircargo. [9] On
24 June 1996, Malayan filed a complaint for damages against Regis and Paircargo with the Metropolitan
Trial Court (MeTC) of Manila, Branch 9. In the course of trial, Malayan presented Marine Risk Note No.
RN-0001-19832 (Marine Risk Note) dated 21 March 1995 as proof that the cargo was insured by
Malayan.[10]
The MeTC rendered a Decision[11] dated 25 May 2001 adjudging Regis alone liable to Malayan in the
amount of P156,549.00 as actual damages, P15,000.00 as attorney’s fees, and costs of suits. With the
exception of the award of attorney’s fees, the MeTC decision was affirmed on appeal to the Regional
Trial Court (RTC) of Manila, through a Decision dated 28 February 2005. [12]
Regis filed a petition for review with the Court of Appeals seeking the reversal of the MeTC and RTC
decisions. On 23 December 2005, the Court of Appeals promulgated its decision vacating the RTC
judgment and ordering the dismissal of Malayan’s complaint. The central finding that formed the Court
of Appeals decision was that the Marine Risk Note presented as proof that the cargo was insured was
invalid.[13] It was observed that the Marine Risk Note was procured from Malayan only on 21 March
1995, when in fact the insured, ABB Koppel, had learned of the partial loss of the motors as early as 7
March 1995.[14] The appellate court noted that under Section 3 of the Insurance Code, the past event
which may be insured against must be unknown to the parties and so for that reason the insurance
contract in this case violated Section 3. The Court of Appeals further ruled that the due execution and
authenticity of the subrogation receipt presented before the trial court by Malayan were not duly proven
since the signatories thereto were not presented by Malayan before the trial court to identify their
signatures thereon, and neither was evidence presented to establish the genuineness of such signatures. [15]
Malayan filed a motion for reconsideration with the Court of Appeals where it contended that the Marine
Risk Note is “an open policy per Marine Open Cargo Policy No. OPEN POLICY-0001-00410 issued
before February 1, 1995.”[16] The motion was denied by the appellate court, [17] which pointed out that
Malayan “did not present the aforecited marine open cargo policy as would indicate the date of its
issuance.”[18]
Hence, the present petition instituted by Malayan. According to Malayan, the lost cargo was insured not
only by the Marine Risk Note but by the anteceding Marine Insurance Policy No. M/OP/95/0001-410
(Marine Insurance Policy) which it issued in favor of ABB Koppel on 20 January 1995, or many days
before the motors were transported to Manila. A copy of the Marine Insurance Policy was attached to the
present petition, but it is clear and no pretense was made that said policy had not been presented at the
trial.
The key arguments raised before us by Malayan flow from the existence of the Marine Insurance Policy.
Pains are taken to establish that there existed as between Malayan and ABB Koppel an “open policy”
under Section 60 of the Insurance Code, wherein the value of the thing insured is not agreed upon but left
to be ascertained in case of loss, and that the Marine Risk Note was nothing but a determination of the
value of the thing insured pursuant to the open policy as established by the Marine Insurance Policy.
Unfortunately for Malayan, the Court could not attribute any evidentiary weight to the Marine Insurance
Policy.
It is elementary that this Court is not a trier of facts. We generally refer to the trial court and the Court of
Appeals on matters relating to the admission and evaluation of the evidence. In this case, while the trial
courts and the Court of Appeals arrived at differing conclusions, we essentially agree with the Court of
Appeals’ analysis of Malayan’s cause of action, and its ordained result. It appeared that at the very
instance the Marine Risk Note was offered in evidence, Regis already posed its objection to the
admission of said document on the ground that such was “immaterial, impertinent and irrelevant to this
case because the same was issued on March 21, 1995 which is after the occurrence of the loss on
February 1, 1995.”[19] Because the trial courts failed to duly consider whether the Marine Risk Note
sufficiently established a valid insurance covering the subject motors, the Court of Appeals acted
correctly in the exercise of its appellate jurisdiction in setting aside the appealed decisions.
Tellingly, Malayan’s argument before this Court is not that the Court of Appeals erred in its evaluation of
the Marine Risk Note following that document’s terms alone, but that the appellate court could not
consider the import of the purported Marine Insurance Policy. Indeed, since no insurance policy was
presented at the trial by Malayan, or even before the Court of Appeals, [20] there certainly is no basis for
this Court to admit or consider the same, notwithstanding Malayan’s attempt to submit such document to
us along with its present petition. As we recently held:
Similarly, petitioner in this case cannot "enervate" the COMELEC's findings by introducing new
evidence before this Court, which in any case is not a trier of facts, and then ask it to substitute its own
judgment and discretion for that of the COMELEC.
The rule in appellate procedure is that a factual question may not be raised for the first time on appeal,
and documents forming no part of the proofs before the appellate court will not be considered in
disposing of the issues of an action. This is true whether the decision elevated for review originated from
a regular court or an administrative agency or quasi-judicial body, and whether it was rendered in a civil
case, a special proceeding, or a criminal case. Piecemeal presentation of evidence is simply not in accord
with orderly justice.[21]
Since the Marine Insurance Policy was never presented in evidence before the trial court or the Court of
Appeals even, there is no legal basis to consider such document in the resolution of this case, reflective as
that document may have been of the pre-existence of an insurance contract between Malayan and ABB
Koppel even prior to the loss of the motors. In fact, it appears quite plain that Malayan’s theory of the
case it pursued before the trial court was that the perfected insurance contract which it relied upon as
basis for its right to subrogation was not the Marine Insurance Policy but the Marine Risk Note which,
unlike the former, was actually presented at the trial and offered in evidence. The Claims Processor of
Malayan who testified in court in behalf of his employer actually acknowledged that the “proof that ABB
Koppel insured the [shipment] to [Malayan]” was the Marine Risk Note, and not the Marine Insurance
Policy.[22] Even the very complaint filed by Malayan before the MeTC stated that “[t]he subject shipment
was insured by [Malayan] under Risk Note No. 0001-19832,” [23] and not by the Marine Insurance Policy,
which was not adverted to at all in the complaint. [24]
Thus, we can only consider the Marine Risk Note in determining whether there existed a contract of
insurance between ABB Koppel and Malayan at the time of the loss of the motors. However, the very
terms of the Marine Risk Note itself are quite damning. It is dated 21 March 1995, or after the occurrence
of the loss, and specifically states that Malayan “ha[d] this day noted the above-mentioned risk in your
favor and hereby guarantee[s] that this document has all the force and effect of the terms and conditions
in the Corporation’s printed form of the standard Marine Cargo Policy and the Company’s Marine Open
Policy.” It specifies that at risk are the 120 pieces of motors which unfortunately had already been
compromised as of the date of the Marine Risk Note itself. [25]
Certainly it would be obtuse for us to even entertain the idea that the insurance contract between Malayan
and ABB Koppel was actually constituted by the Marine Risk Note alone. We find guidance on this point
in Aboitiz Shipping Corporation v. Philippine American General Insurance, Co., [26] where a trial court
had relied on the contents of a marine risk note, not the insurance policy itself, in dismissing a complaint.
For this act, the Court faulted the trial court in “[obviously mistaking] said Marine Risk Note as an
insurance policy when it is not.” [27] The Court proceeded to characterize the marine risk note therein as
“an acknowledgment or declaration of the private respondent confirming the specific shipment covered
by its Marine Open Policy, the evaluation of the cargo, and the chargeable premium,” [28] a description that
is reflective as well of the present Marine Risk Note, if not of marine risk notes in this country in general.
Malayan correctly points out that the Marine Risk Note itself adverts to “Marine Cargo Policy Number
Open Policy-0001-00410” as well as to “the standard Marine Cargo Policy and the Company’s Marine
Open Policy.” What the Marine Risk Note bears, as a matter of evidence, is that it is not apparently the
contract of insurance by itself, but merely a complementary or supplementary document to the contract of
insurance that may have existed as between Malayan and ABB Koppel. And while this observation may
deviate from the tenor of the assailed Court of Appeals’ Decision, it does not presage any ruling in favor
of petitioner. Fundamentally, since Malayan failed to introduce in evidence the Marine Insurance Policy
itself as the main insurance contract, or even advert to said document in the complaint, ultimately then it
failed to establish its cause of action for restitution as a subrogee of ABB Koppel.
Malayan’s right of recovery as a subrogee of ABB Koppel cannot be predicated alone on the liability of
the respondent to ABB Koppel, even though such liability will necessarily have to be established at the
trial for Malayan to recover. Because Malayan’s right to recovery derives from contractual subrogation as
an incident to an insurance relationship, and not from any proximate injury to it inflicted by the
respondents, it is critical that Malayan establish the legal basis of such right to subrogation by presenting
the contract constitutive of the insurance relationship between it and ABB Koppel. Without such legal
basis, its cause of action cannot survive.
Our procedural rules make plain how easily Malayan could have adduced the Marine Insurance Policy.
Ideally, this should have been accomplished from the moment it filed the complaint. Since the Marine
Insurance Policy was constitutive of the insurer-insured relationship from which Malayan draws its right
to subrogation, such document should have been attached to the complaint itself, as provided for in
Section 7, Rule 9 of the 1997 Rules of Civil Procedure:
SECTION 7. Action or defense based on document.—Whenever an action or defense is based upon a
written instrument or document, the substance of such instrument or document shall be set forth in the
pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be
deemed to be a part of the pleading, or said copy may with like effect be set forth in the pleading.
Thus, in an action to enforce or rescind a written contract of lease, the lease contract is the basis of the
action and therefore a copy of the same must either be set forth in the complaint or its substance recited
therein, attaching either the original or a copy to the complaint. [29] The rule has been held to be
imperative, mandatory and not merely directory, though must be given a reasonable construction and not
be extended in its scope so as to work injustice. [30] It was incumbent on Malayan, whose right of
subrogation derived from the Marine Insurance Policy, to set forth the substance of such contract in its
complaint and to attach an original or a copy of such contract in the complaint as an exhibit. Its failure to
do so harbingers a more terminal defect than merely excluding the Marine Insurance Policy as relevant
evidence, as the failure actually casts an irremissible cloud on the substance of Malayan’s very cause of
action. Since Malayan alluded to an actionable document, the contract of insurance between it and ABB
Koppel, as integral to its cause of action against Regis and Paircargo, the contract of insurance should
have been attached to the complaint.
It may be that there is no specific provision in the Rules of Court which prohibits the admission in
evidence of an actionable document in the event a party fails to comply with the requirement of the rule
on actionable documents under Section 7, Rule 9. [31] Yet such qualification does not provide safe harbor
for Malayan as it did not even present the Marine Insurance Policy at the trial, relying instead on the
Marine Risk Note only and by its lonesome to constitute the insurer-insured relationship between it and
ABB Koppel, or more precisely as stated in its Formal Offer of Evidence, “to prove that the shipment
subject of this case was covered by an insurance policy with the plaintiffs.” [32] Before the MeTC, Regis
objected to the admission of the Marine Risk Note on the ground of immateriality and irrelevance
because it “was issued on March 21, 1995 which is after the occurrence of the loss on February 1,
1995.”[33] The Court of Appeals upheld this objection of Regis as basis for the dismissal of the complaint.
In our view, Malayan may have not been of the precise belief that the Marine Risk Note is the insurance
contract itself as even the purpose stated in its Formal Offer may admit to an interpretation that alludes to
“an insurance policy with the plaintiffs” that may stand independent of the Marine Risk Note. Yet if that
were so, it remains incomprehensible and inexcusable why Malayan neglected to attach it to its complaint All told, we hold that Malayan was not able to establish its cause of action as stated in its complaint,
as required by Section 7, Rule 9, or even offer it in the Marine Insurance Policy which constitutes the based as it was on its right to be subrogated to ABB Koppel under the insurance contract which it failed
insurance contract as evidence before the trial court. to present as an actionable document, or as evidence before the trial court. The result reached by the
Court of Appeals – the dismissal of the instant complaint – is thus correct. As such, there is no need to
It cannot be denied from the only established facts that Malayan and ABB Koppel comported as if there consider the other issues raised in the petition.
was an insurance relationship between them and documents exist that evince the presence of such legal
relationship. But under these premises, the very insurance contract emerges as the white elephant in the WHEREFORE, the petition is DENIED. Costs against petitioner.
room – an obdurate presence which everybody reacts to, yet legally invisible as a matter of evidence
since no attempt had been made to prove its corporeal existence in the court of law. It may seem SO ORDERED.
commonsensical to conclude anyway that there was a contract of insurance between Malayan and ABB
Koppel since they obviously behaved in a manner that indicates such relationship, yet the same
conclusion could be had even if, for example, those parties staged an elaborate charade to impress on the
world the existence of an insurance contract when there actually was none. While there is absolutely no
indication of any bad faith of such import by Malayan or ABB Koppel, the fact that the
“commonsensical” conclusion can be drawn even if there was bad faith that convinces us to reject such
line of thinking.

The Court further recognizes the danger as precedent should we sustain Malayan’s position, and not only
because such a ruling would formally violate the rule on actionable documents. Malayan would have us
effectuate an insurance contract without having to consider its particular terms and conditions, and on a
blind leap of faith that such contract is indeed valid and subsisting. The conclusion further works to the
utter prejudice of defendants such as Regis or Paircargo since they would be deprived the opportunity to
examine the document that gives rise to the plaintiff’s right to recover against them, or to raise arguments
or objections against the validity or admissibility of such document. If a legal claim is irrefragably
sourced from an actionable document, the defendants cannot be deprived of the right to examine or utilize
such document in order to intelligently raise a defense. The inability or refusal of the plaintiff to submit
such document into evidence constitutes an effective denial of that right of the defendant which is
ultimately rooted in due process of law, to say nothing on how such failure fatally diminishes the
plaintiff’s substantiation of its own cause of action.

Indeed, in the absence of any evidentiary consideration of the actual Marine Insurance Policy, the
substance of Malayan’s right to recovery as the subrogee of ABB Koppel is not duly confirmed. There
can be no consideration of the particular terms and conditions in the insurance contract that specifically
give rise to Malayan’s right to be subrogated to ABB Koppel, or to such terms that may have absolved
Malayan from the duty to pay the insurance proceeds to that consignee. The particular date as to when
such insurance contract was constituted cannot be established with certainty without the contract itself,
and that point is crucial since there can be no insurance on a risk that had already occurred by the time the
contract was executed. Since the documents in evidence and testimonies allude to “marine insurance” or
“marine risk note,” it also is a legitimate question whether the particular marine insurance relationship
between Malayan and ABB Koppel also covers cargo delivered not by ships at sea but by airplane flights,
as had occurred in this case. Only the actual policy itself could definitively settle such a question.

We can even note legitimate questions concerning the integrity or viability of the Marine Insurance
Policy as belatedly presented before this court. For one, Regis observes that the “Marine Cargo Policy
Number” as denominated in the Risk Note reads: “Open Policy-0001-00410,” while the copy of the
Marine Insurance Policy submitted before us is numbered “M/OP/95001-410.” The variance may
ultimately be explainable, yet the non-presentation of the Marine Insurance Policy before the trial court
precludes the due evaluation of the reason for the difference in numbering.
 [ G.R. No. 161539, June 27, 2008 ] 411) AND THE FAIRLY RECENT DECISION IN WALLEM PHILIPPINES SHIPPING, INC.
AND SEACOAST MARITIME CORP. VS. PRUDENTIAL GUARANTEE AND ASSURANCE,
INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., PETITIONER, VS. FGU INC. AND COURT OF APPEALS, G.R. NO. 152158, 07 FEBRUARY 2003.
INSURANCE CORPORATION, RESPONDENT.
4. ASSUMING ARGUENDO THAT PETITIONER IS LIABLE, THE COURT OF APPEALS
DECISION SERIOUSLY ERRED IN AFFIRMING THE AWARD OF 12% INTEREST DESPITE THE FACT
THAT THE OBLIGATION PURPORTEDLY BREACHED DOES NOT CONSTITUTE A LOAN
AUSTRIA-MARTINEZ, J.: OF FORBEARANCE OF MONEY AND DESPITE THE CLEAR GUIDELINES SET FORTH BY
THIS HONORABLE COURT IN EASTERN SHIPPING LINES, INC. VS. COURT OF APPEALS.
In a Decision dated July 1, 1999 in Civil Case No. 95-73532, the Regional Trial Court (RTC) of Manila, (234 SCRA 78).[5]
Branch 30, ordered International Container Terminal Services, Inc. (petitioner) to pay FGU Insurance
Corporation (respondent) the following sums: (1) P1,875,068.88 with 12% interest per annum from The rule in our jurisdiction is that only questions of law may be entertained by this Court in a petition for
January 3, 1995 until fully paid; (2) P50,000.00 as attorney's fees; and (3) P10,000.00 as litigation review on certiorari. This rule, however, is not ironclad and admits certain exceptions, such as when (1)
expenses.[1] the conclusion is grounded on speculations, surmises or conjectures; (2) the inference is manifestly
mistaken, absurd or impossible; (3) there is grave abuse of discretion; (4) the judgment is based on a
Petitioner's liability arose from a lost shipment of "14 Cardboards 400 kgs. of Silver Nitrate 63.53 FCT misapprehension of facts; (5) the findings of fact are conflicting; (6) there is no citation of specific
Analytically Pure (purity 99.98 PCT)," shipped by Hapag-Lloyd AG through the vessel Hannover evidence on which the factual findings are based; (7) the findings of absence of facts are contradicted by
Express from Hamburg, Germany on July 10, 1994, with Manila, Philippines as the port of discharge, and the presence of evidence on record; (8) the findings of the CA are contrary to those of the trial court; (9)
Republic Asahi Glass Corporation (RAGC) as consignee. Said shipment was insured by FGU Insurance the CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would
Corporation (FGU). When RAGC's customs broker, Desma Cargo Handlers, Inc., was claiming the justify a different conclusion; (10) the findings of the CA are beyond the issues of the case; and (11) such
shipment, petitioner, which was the arrastre contractor, could not find it in its storage area. At the behest findings are contrary to the admissions of both parties. [6] In the present case, there is nothing on record
of petitioner, the National Bureau of Investigation (NBI) conducted an investigation. The AAREMA which will show that it falls within the exceptions. Hence, the petition must be denied.
Marine and Cargo Surveyors, Inc. also conducted an inquiry. Both found that the shipment was lost while
in the custody and responsibility of petitioner. Petitioner posits that its liability for the lost shipment should be limited to P3,500.00 per package as
provided in Philippine Ports Authority Administrative Order No. 10-81 (PPA AO 10-81), under Article
As insurer, FGU paid RAGC the amount of P1,835,068.88 on January 3, 1995. [2] In turn, FGU sought VI, Section 6.01 of which provides:
reimbursement from petitioner, but the latter refused. This constrained FGU to file with the RTC of
Manila Civil Case No. 95-73532 for a sum of money. Section 6.01. Responsibility and Liability for Losses and Damages; Exceptions  - The CONTRACTOR
shall at its own expense handle all merchandise in all work undertaken by it hereunder deligently [sic]
After trial, the RTC rendered its Decision dated July 1, 1999 finding petitioner liable. and in a skillful, workman-like and efficient manner; that the CONTRACTOR shall be solely responsible
as an independent CONTRACTOR, and hereby agrees to accept liability and to promptly pay to the
Petitioner appealed to the Court of Appeals (CA), which, in the assailed Decision [3] dated October 22, shipping company consignees, consignors or other interested party or parties for the loss, damage, or non-
2003, affirmed the RTC Decision. Petitioner filed a motion for reconsideration which the CA denied in delivery of cargoes to the extent of the actual invoice value of each package which in no case shall be
its Resolution dated January 8, 2004. [4] more than THREE THOUSAND FIVE HUNDRED PESOS (P3,500.00) (for import cargo) x x x for each
package unless the value of the cargo importation is otherwise specified or manifested or
Hence, the present petition for review on certiorari under Rule 45 of the Rules of Court, with the communicated in writing together with the declared bill of lading value and supported by a
following assignment of errors: certified packing list to the CONTRACTOR by the interested party or parties before the discharge
x x x of the goods, as well as all damage that may be suffered on account of loss, damage, or destruction
1. THE COURT OF APPEALS SERIOUSLY ERRED IN FAILING TO APPLY THE of any merchandise while in custody or under the control of the CONTRACTOR in any pier, shed,
LIMITATION OF LIABILITY OF P3,5000 PER PACKAGE WHICH LIMITS PETITIONER'S warehouse facility or other designated place under the supervision of the AUTHORITY x x x.
[7]
LIABILITY, IF ANY, TO A TOTAL OF ONLY P49,000.00 PURSUANT TO PPA  (Emphasis supplied)
ADMINISTRATIVE ORDER NO. 10-81.
The CA summarily ruled that PPA AO 10-81 is not applicable to
2. THE COURT OF APPEALS SERIOUSLY ERRED IN UPHOLDING THE MARINE OPEN this case without laying out the reasons therefor.
POLICY DESPITE THE FACT THAT THE SAME WAS NO LONGER IN FORCE AT THE TIME
THE SHIPMENT WAS LOADED ON BOARD THE CARRYING VESSEL. PPA AO 10-81 is the management contract between by the Philippine Ports Authority and the cargo
handling services providers. In Summa Insurance Corporation v. Court of Appeals,[8] the Court ruled that:
3. THE COURT OF APPEALS SERIOUSLY ERRED IN FAILING TO DISMISS THE
COMPLAINT ON THE GROUND OF RESPONDENT'S FAILURE TO OFFER THE In the performance of its job, an arrastre operator is bound by the management contract it had executed
INSURANCE POLICY IN EVIDENCE PURSUANT TO THIS HONORABLE COURT'S with the Bureau of Customs. However, a management contract, which is a sort of a stipulation  pour
DECISION IN HOME INSURANCE CORPORATION VS. COURT OF APPEALS (225 SCRA autrui within the meaning of Article 1311 of the Civil Code, is also binding on a consignee because it is
incorporated in the gate pass and delivery receipt which must be presented by the consignee before as the issues raised therein arose from the very existence of an insurance contract between Malayan
delivery can be effected to it. The insurer, as successor-in-interest of the consignee, is likewise bound by Insurance and its consignee, ABB Koppel, even prior to the loss of the shipment. In Wallem Philippines
the management contract. Indeed, upon taking delivery of the cargo, a consignee (and necessarily its Shipping, Inc. v. Prudential Guarantee and Assurance, Inc., [19] the Court ruled that the insurance contract
successor-in- interest) tacitly accepts the provisions of the management contract, including those which must be presented in evidence in order to determine the extent of the coverage. This was also the ruling
are intended to limit the liability of one of the contracting parties, the arrastre operator. of the Court in Home Insurance Corporation v. Court of Appeals. [20]

However, a consignee who does not avail of the services of the arrastre operator is not bound by the However, as in every general rule, there are admitted exceptions. In Delsan Transport Lines, Inc. v. Court
management contract. Such an exception to the rule does not obtain here as the consignee did in fact of Appeals,[21] the Court stated that the presentation of the insurance policy was not fatal because the loss
accept delivery of the cargo from the arrastre operator. [9] of the cargo undoubtedly occurred while on board the petitioner's vessel, unlike in Home Insurance in
which the cargo passed through several stages with different parties and it could not be determined when
While it appears in the present case that the RAGC availed itself of petitioner's services and therefore, the damage to the cargo occurred, such that the insurer should be liable for it.
PPA AO 10-81 should apply, the Court finds that the extent of petitioner's liability should cover the
actual value of the lost shipment and not the P3,500.00 limit per package as provided in said Order. As in Delsan, there is no doubt that the loss of the cargo in the present case occurred while in petitioner's
custody. Moreover, there is no issue as regards the provisions of Marine Open Policy No.
It is borne by the records that when Desma Cargo Handlers was negotiating for the discharge of the MOP-12763, such that the presentation of the contract itself is necessary for perusal, not to mention that
shipment, it presented Hapag-Lloyd's Bill of Lading, [10] Degussa's Commercial Invoice, which indicates its existence was already admitted by petitioner in open court. [22] And even though it was not offered in
that value of the shipment, including seafreight charges, was DM94.960,00 (CFR Manila), [11] and evidence, it still can be considered by the court as long as they have been properly identified by testimony
Degussa's Packing List, which likewise notes that the value of the shipment was DM94.960,00. [12] It is duly recorded and they have themselves been incorporated in the records of the case. [23]
highly unlikely that petitioner was not made aware of the actual value of the shipment, since it had to
examine the pertinent documents for stripping purposes and, later on, for the discharge of the shipment to Finally, petitioner questions the imposition of a 12% interest rate, instead of 6%, on its adjudged liability.
the consignee or its representative. In fact, the NBI Report dated September 26, 1994 on the investigation The ruling in Prudential Guarantee and Assurance Inc. v. Trans-Asia Shipping Lines, Inc.,
[24]
conducted by it regarding the loss of the shipment shows that petitioner's Admeasurer Rosco Esquibal  to wit:
was shown the Bill of Lading by Desma Brokerage's representative, Rey Villanueva. [13] Esquibal also
stated that another representative of Desma Brokerage, Joey Laurente, went to their office and furnished This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, inscribed the rule of thumb in the
him a copy of the "processed papers of the fourteen cartons of Asahi Glass cargoes." [14] application of interest to be imposed on obligations, regardless of their source. Eastern emphasized
beyond cavil that when the judgment of the court awarding a sum of money becomes final and executory,
By its own act of not charging the corresponding arrastre fees based on the value of the shipment after it the rate of legal interest, regardless of whether the obligation involves a loan or forbearance of money,
came to know of such declared value from the marine insurance policy, petitioner cannot escape liability shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by
for the actual value of the shipment. The value of the merchandise or shipment may be declared or stated then an equivalent to a forbearance of credit.
not only in the bill of lading or shipping manifest, but also in other documents required by law before the
shipment is cleared from the piers. [15] We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the finality
of judgment until the full satisfaction thereof must be imposed on the total amount of liability adjudged to
Petitioner insists that Marine Open Policy No. MOP-12763 under which the shipment was insured was no PRUDENTIAL. It is clear that the interim period from the finality of judgment until the satisfaction
longer in force at the time it was loaded on board the Hannover Express on June 10, 1994, as provided in of the same is deemed equivalent to a forbearance of credit, hence, the imposition of the aforesaid
the Endorsement portion of the policy, which states: "IT IS HEREBY DECLARED AND AGREED that interest.[25] (Emphasis supplied)
effective June 10, 1994, this policy is deemed CANCELLED." [16] FGU, on the other hand, insists that it
was under Marine Risk Note No. 9798, which was executed on May 26, 1994, that said shipment was is instructive. The CA did not commit any error in applying the same.
covered.
The Court notes, however, an apparent clerical error made in the dispositive portion of the RTC Decision.
It must be emphasized that a marine risk note is not an insurance policy. It is only an acknowledgment or While it appears that FGU paid RAGC the amount of P1,835,068.88, as shown in the Subrogation
declaration of the insurer confirming the specific shipment covered by its marine open policy, the Receipt, [26] as prayed for in its Complaint,[27] the RTC awarded the sum of 1,875,068.88. Thus, a
evaluation of the cargo and the chargeable premium. [17] It is the marine open policy which is the main necessary modification should be made on this score.
insurance contract. In other words, the marine open policy is the blanket insurance to be undertaken by
FGU on all goods to be shipped by RAGC during the existence of the contract, while the marine risk note WHEREFORE, the petition is DENIED. The Decision dated October 22, 2003 and Resolution dated
specifies the particular goods/shipment insured by FGU on that specific transaction, including the sum January 8, 2004 of the Court of Appeals are AFFIRMED, with the modification that the award in the
insured, the shipment particulars as well as the premium paid for such shipment. In any event, as it RTC Decision dated July 1, 1999 should be P1,835,068.88 instead of P1,875,068.88.
stands, it is evident that even prior to the cancellation by FGU of Marine Open Policy No. MOP-12763
on June 10, 1994, it had already undertaken to insure the shipment of the 400 kgs. of silver nitrate, Costs against petitioner.
specially since RAGC had already paid the premium on the insurance of said shipment.
SO ORDERED.
Indeed, jurisprudence has it that the marine insurance policy needs to be presented in evidence before the
trial court or even belatedly before the appellate court. In Malayan Insurance Co., Inc. v. Regis
Brokerage Corp.,[18] the Court stated that the presentation of the marine insurance policy was necessary,
 5. On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be
invited to attend a conference with our Production, Safety and Security personnel whereby they will
[ G.R. Nos. 180880-81, September 25, 2009 ] be briefed on, and given copies of Shipyard safety regulations.

KEPPEL CEBU SHIPYARD, INC., PETITIONER, VS. PIONEER INSURANCE AND SURETY 6. An adequate number of officers and crew must remain on board at all times to ensure the safety
CORPORATION, RESPONDENT. of the vessel and compliance of safety regulations by crew and owner employed workmen.

7. The ship's officers/crew or owner appointed security personnel shall maintain watch against
pilferage and acts of sabotage.
NACHURA, J.:
8. The yard must be informed and instructed to provide the necessary security arrangement
Before us are the consolidated petitions filed by the parties--Pioneer Insurance and Surety coverage should there be inadequate or no crew on board to provide the expressed safety and security
Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc. [2] (KCSI)--to review on certiorari the enforcement.
Decision[3] dated December 17, 2004 and the Amended Decision [4] dated December 20, 2007 of the Court
of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934.
9. The Owner shall be liable to Keppel Cebu Shipyard for any death and/or bodily injuries for the
[K]eppel Cebu Shipyard's employees and/or contract workers; theft and/or damages to Keppel Cebu
On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) executed a Shiprepair
Shipyard's properties and other liabilities which are caused by the workers of the Owner.
Agreement[5] wherein KCSI would renovate and reconstruct WG&A's M/V "Superferry 3" using its dry
docking facilities pursuant to its restrictive safety and security rules and regulations. Prior to the
execution of the Shiprepair Agreement, "Superferry 3" was already insured by WG&A with Pioneer for 10. The invoice shall be based on quotation reference 99-KCSI-211 dated December 20, 1999 tariff
US$8,472,581.78. The Shiprepair Agreement reads-- dated March 15, 1998.

SHIPREPAIR AGREEMENT[6] 11. Payment term shall be as follows:

12. The Owner and Keppel Cebu Shipyard shall endeavor to settle amicably any dispute that may
Company: WG & A JEBSENS SHIPMANAGEMENT INC. arise under this Agreement. Should all efforts for an amicable settlement fail, the disputes shall be
Address: Harbour Center II, Railroad & Chicago Sts. submitted for arbitration in Metro Manila in accordance with provisions of Executive Order No. 1008
Port Area, City of Manila under the auspices of the Philippine Arbitration Commission.

We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V "SUPERFERRY 3" and KEPPEL

CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-
named vessel ordered by the Owner's Authorized Representative shall be carried out under the Keppel (Signed)
Cebu Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and
security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the BARRY CHIA SOO HOCK (Signed)
parties:
(Printed Name/Signature Above Name) (Printed Name/Signature Above Name)
1. 1. The Owner shall inform its insurer of Clause 20[7] and 22 (a)[8] (refer at the back hereof) and
shall include Keppel Cebu Shipyard as a co-assured in its insurance policy.

2. The Owner shall waive its right to claim for any loss of profit or loss of use or damages Vice President - Operations Authorized Representative
consequential on such loss of use resulting from the delay in the redelivery of the above vessel.
Keppel Cebu Shipyard, Inc. for and in behalf of:
3. Owner's sub-contractors or workers are not permitted to work in the yard without the written
approval of the Vice President - Operations.
WG & A Jebsens Shipmgmt.
4. In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard
the vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all
claims, damages, or liabilities arising from death or bodily injuries to Owner's workers, or damages
to the vessel or other property however caused. JAN. 26, 2000 ________________________

Date Date
 responsibility for the loss of the subject vessel. As KCSI continuously refused to pay despite repeated
On February 8, 2000, in the course of its repair, M/V "Superferry 3" was gutted by fire. Claiming that the demands, Pioneer, on August 7, 2000, filed a Request for Arbitration before the Construction Industry
extent of the damage was pervasive, WG&A declared the vessel's damage as a "total constructive loss" Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:
and, hence, filed an insurance claim with Pioneer.
1. To pay to the claimant Pioneer Insurance and Surety Corporation the sum of U.S.$8,472,581.78 or its
On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of US$8,472,581.78. equivalent amount in Philippine Currency, plus interest thereon computed from the date of the "Loss and
WG&A, in turn, executed a Loss and Subrogation Receipt[9] in favor of Pioneer, to wit: Subrogation Receipt" on 16 June 2000 or from the date of filing of [the] "Request for Arbitration," as
may be found proper;
LOSS AND SUBROGATION RECEIPT
2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens
Shipmanagement, Inc. the sum of P500,000,000.00 plus interest thereon from the date of filing [of the]
"Request for Arbitration" or date of the arbitral award, as may be found proper;
16 June 2000
3. To pay to the claimants herein the sum of P3,000,000.00 for and as attorney's fees; plus other damages
as may be established during the proceedings, including arbitration fees and other litigation expenses, and
the costs of suit.
Our Claim Ref: MH-NIL-H0-99-00018
US$8,472,581.78
------------------------------------------------ It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the "Shiprepair Agreement"
(Annex "A") as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very
RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any
DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE legal effect whatsoever.[10]
HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS THREE HUNDRED
SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction, compromise and discharge of all KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of Withdrawal of
claims for loss and expenses sustained to the vessel "SUPERFERRY 3" insured under Policy Nos. MH- Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby
H0-99-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as follows: dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the
remaining claimant.
Fire on board at Keppel Cebu Shipyard
In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: (1) on January 26,
on 08 February 2000
2000, M/V "Superferry 3" arrived at KCSI in Lapu-Lapu City, Cebu, for dry docking and repairs; (2) on
the same date, WG&A signed a ship repair agreement with KCSI; and (3) a fire broke out on board M/V
"Superferry 3" on February 8, 2000, while still dry docked in KCSI's shipyard. [11]
and in consideration of which the undersigned hereby assigns and transfers to the said company each and
all claims and demands against any person, persons, corporation or property arising from or connected As regards the disputed facts, below are the respective positions of the parties, viz.:
with such loss or damage and the said company is subrogated in the place of and to the claims and
demands of the undersigned against said person, persons, corporation or property in the premises to the
Pioneer's Theory of the Case:
extent of the amount above-mentioned.

WILLIAM, GOTHONG & ABOITIZ, INC.

&/OR ABOITIZ SHIPPING CORP.
First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated
By: (Signed) to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of the
Respondent. Claimant cited documentary references on the Statutory Source of the Principle of
______________________________________ Subrogation. Claimant then proceeded to explain that the Right of Subrogation:
Witnesses: (Signed)
Is by Operation of Law
______________________________________ exists in Property Insurance
(Signed) is not Dependent Upon Privity of Contract.

______________________________________
Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that
the Right of Subrogation Entitles Insurer to Recover from the Liable Party.
Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any
Second, Respondent Keppel had custody of and control over the M/V "Superferry 3" while said vessel B. Dr. Joniga's authority to request the execution of owner's hot works in the passenger areas was
was in Respondent Keppel's premises. In its Draft Decision, Claimant stated: expressly recognized by the Yard Project Superintendent Orcullo.

A. The evidence presented during the hearings indubitably proves that respondent not only took
custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry- Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by the
docking and repair of the vessel. yard, and the owner's hotworks were conducted by welders who remained employees of the yard.
Claimant contends that the need, if any, for an owner's application for a hot work permit was canceled out
B. The presence on board the M/V Superferry 3 of its officers and crew does not relieve the by the yard's actual knowledge of Sevillejo's whereabouts and the fact that he was in deck A doing
respondent of its responsibility for said vessel. owner's hotworks.

C. Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the vessel Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard
inside its graving dock and applied its own safety rules to the dry-docking and repairs of the vessel. did so at its own risk, and acted as a Less Than Prudent Ship Repairer.

The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a
D. The practice of allowing a shipowner and its sub-contractors to perform maintenance works
disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders
while the vessel was within respondent's premises does not detract from the fact that control and
never became employees of the owner so as to obligate the latter to be responsible for their conduct and
custody over M/V Superferry 3 was transferred to the yard.
performance.

Claimant enumerated further badges of yard negligence.

From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V
Superferry 3. According to Claimant:
Third, the Vessel's Safety Manual cannot be relied upon as proof of the Master's continuing control over
A. Yard's water supply was inadequate.
the vessel.

Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant, B. Yard Fire Fighting Efforts and Equipment Were Inadequate.
the Yard is liable under the ruling laid down by the Supreme Court in the "Manila City" case. Claimant
asserts that said ruling is applicable hereto as The Law of the Case. C. Yard Safety Practices and Procedures Were Unsafe or Inadequate.

Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of  Res Ipsa D. Yard Safety Assistants and Firewatch-Men were Overworked.
Loquitur, but from its negligence in this case.

Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder. According Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented its
to Claimant; case against:

In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is (i) Non-removal of the life jackets theory.
solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons: (ii) Hole-in-the[-]floor theory.
(iii) Need for a plan theory.
A. The "Control Test" - The yard exercised control over Sevillejo. The power of control is not (iv) The unauthorized hot works theory.
diminished by the failure to exercise control. (v) The Marina report theory.

B. There was no independent work contract between Joniga and Sevillejo - Joniga was not the
employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred.
C. The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owner's hot works
under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.
The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved
in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by
Respondent.

KCSI's Theory of the Case

Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck A. Claimant
argued that: 1. The Claimant has no standing to file the Request for Arbitration and the Tribunal has no jurisdiction
over the case:
A. The yard, not Dr. Joniga, gave the welders their marching orders, and
(a) There is no valid arbitration agreement between the Yard and the Vessel Owner. On January 26, 2000, ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could have come
when the ship repair agreement (which includes the arbitration agreement) was signed by WG&A from the cutting of any of the sides of the door. Consequently, the cutting itself of the bulkhead door
Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping. Consequently, when under the hazardous conditions created by Dr. Joniga, rather than the positioning of the door's bottom
another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it had no authority to edge, was the proximate cause of the fire.
do so. There is, as a result, no binding arbitration agreement between the Vessel Owner and the Yard to
which the Claimant can claim to be subrogated and which can support CIAC jurisdiction. (d) The Manila City case is irrelevant to this dispute and in any case, does not establish governing
precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault. Apart
(b) The Claimant is not a real party in interest and has no standing because it has not been subrogated to from the differences in the factual setting of the two cases, the Manila City pronouncements regarding the
the Vessel Owner. For the reason stated above, the insurance policies on which the Claimant bases its res ipsa loquitur doctrine are obiter dicta without value as binding precedent. Furthermore, even if the
right of subrogation were not validly obtained. In any event, the Claimant has not been subrogated to any principle were applied to create a presumption of negligence by the Yard, however, that presumption is
rights which the Vessel may have against the Yard because: conclusively rebutted by the evidence on record.

i. The Claimant has not proved payment of the proceeds of the policies to any specific party. As a (e) The Vessel's deliberate acts and its negligence created the inherently hazardous conditions in which
consequence, it has also not proved payment to the Vessel Owner. the cutting work that could otherwise be done safely ended up causing a fire and the damage to the
Vessel. The fire was a direct and logical consequence of the Vessel's decisions to: (1) take Angelino
ii. The Claimant had no legally demandable obligation to pay under the policies and did so only Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do
voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive Total unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the requirements for
Loss "unless the expense of recovering and repairing the vessel would exceed the Agreed Value" of P360 and obtaining a hot work permit in violation of the Yard's Safety Rules and without removing the
million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel did flammable ceiling and life jackets below, contrary to the requirements not only of the Yard's Safety Rules
not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its payment was but also of the demands of standard safe practice and the Vessel's own explicit safety and hot work
voluntary, and there was no resulting subrogation to the Vessel. policies.

iii. There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant asserts a (f) The vessel has not presented any proof to show that the Yard was remiss in its fire fighting
right of payment only by virtue of Article 1236, then there is no legal subrogation under Article 2207 and preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary
it does not succeed to the Vessel's rights under the Ship [R]epair Agreement and the arbitration equipment and trained personnel and employed all those resources immediately and fully to putting out
agreement. It does not have a right to demand arbitration and will have only a purely civil law claim for the 8 February 2000 fire.
reimbursement to the extent that its payment benefited the Yard which should be filed in court. Second,
since the Yard is not liable for the fire and the resulting damage to the Vessel, then it derived no benefit 4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this
from the Claimant's payment to the Vessel Owner. Third, in any event, the Claimant has not proved circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel for that
payment of the proceeds to the Vessel Owner. activity caused the fire, the Yard may still not be held liable for the resulting damage.

2. The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and voluntarily
accepted that agreement. Moreover, there are no signing or other formal defects that can invalidate the
agreement.
3. The proximate cause of the fire and damage to the Vessel was not any negligence committed by
Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary,
the proximate cause of the fire was Dr. Joniga's and the Vessel's deliberate decision to have Angelino
Sevillejo undertake cutting work in inherently dangerous conditions created by them.
i.
(a) The Claimant's material witnesses lied on the record and the Claimant presented no credible proof of
any negligence by Angelino Sevillejo.
(b) Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot work permit
for the bulkhead cutting and also neglected or refused to have the ceiling and the flammable lifejackets ii.
removed from underneath the area where he instructed Angelino Sevillejo to cut the bulkhead door.
These decisions or oversights guaranteed that the cutting would be done in extremely hazardous
conditions and were the proximate cause of the fire and the resulting damage to the Vessel.
(c) The Yard's expert witness, Dr. Eric Mullen gave the only credible account of the cause and the
iii.
mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the bulkhead
door resulted in sparks or hot molten slag which fell through pre-existing holes on the deck floor and
came into contact with and ignited the flammable lifejackets stored in the ceiling void directly below; and
(a) The Yard's only contractual obligation to the Vessel in respect of the 26 January 2000 Work Order
was to supply welders for the Promenade Deck restaurant who would then perform welding work "per
owner[`s] instruction." Consequently, once it had provided those welders, including Angelino Sevillejo,
its obligation to the Vessel was fully discharged and no claim for contractual breach, or for damages on
account thereof, may be raised against the Yard.
(b) The Yard is also not liable to the Vessel/Claimant on the basis of quasi-delict.
The Vessel exercised supervision and control over Angelino Sevillejo when he was doing work
at the Promenade Deck restaurant and especially when he was instructed by Dr. Joniga to cut the
bulkhead door. Consequently, the Vessel was the party with actual control over his tasks and is
deemed his true and effective employer for purposes of establishing Article 2180 employer liability.
Even assuming that the Yard was Angelino Sevillejo's employer, the Yard may nevertheless not
be held liable under Article 2180 because Angelino Sevillejo was acting beyond the scope of his
tasks assigned by the Yard (which was only to do welding for the Promenade Deck restaurant) when
he cut the bulkhead door pursuant to instructions given by the Vessel.
The Yard is nonetheless not liable under Article 2180 because it exercised due diligence in the
selection and supervision of Angelino Sevillejo.
 permit, discussing the work in a production meeting, and complying with the conditions of the hotwork
5. Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million paid by permit prior to implementation. By the requirement that all hotworks are to be done by the Yard, the
the Claimant. Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated in that
he was not even a foreman, and that the instructions to him was (sic) by an authorized person. The
(a) Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount greater Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact that no
than that which the Vessel could have recovered, even if the Claimant may have paid a higher amount foreman was included in the five welders issued to the Vessel was never raised in this dispute. As
under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the MV discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work
Superferry 3, at the time of the fire. order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of the
Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the fire that
(b) Under the Ship [R]epair Agreement, the liability of the Yard is limited to P50 million - a stipulation damaged the vessel.[14]
which, under the law and decisions of the Supreme Court, is valid, binding and enforceable.

(c) The Vessel breached its obligation under Clause 22 (a) of the Yard's Standard Terms to name the Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered KCSI to pay
Yard as co-assured under the policies - a breach which makes the Vessel liable for damages. This liability Pioneer the amount of P25,000,000.00, with interest at 6% per annum from the time of the filing of the
should in turn be set-off against the Claimant's claim for damages. case up to the time the decision is promulgated, and 12% interest per annum added to the award, or any
balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration costs
The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondent be imposed on both parties on a pro rata basis.[15]
enumerated and disputed these as follows:
Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise filed
1. Claimant's counsel contends that the cutting of the bulkhead door was covered by the 26 its own appeal and the same was docketed as CA-G.R. SP No. 73934. The cases were consolidated.
January 2000 Work Order.
On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision, disposing as
2. Claimant's counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have follows:
Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000.
WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED
3. Claimant's counsel contends that under Article 1727 of the Civil Code, "The contractor is while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioner's claims in
responsible for the work done by persons employed by him." its entirety. No costs.

4. Claimant's counsel contends that "[t]he second reason why there was no job spec or job order The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata.
for this cutting work, [is] the cutting work was known to the yard and coordinated with Mr. Gerry
Orcullo, the yard project superintendent." SO ORDERED.[16]

5. Claimant's counsel also contends, to make the Vessel's unauthorized hot works activities seem
less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting that it suffered
Superintendent, admitted that "No hot works could really be hidden from the Yard, your Honors, from serious errors in the appreciation of the evidence and from gross misapplication of the law and
because the welding cables and the gas hoses emanating from the dock will give these hotworks jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the same
away apart from the assertion and the fact that there were also safety assistants supposedly going Decision.
around the vessel."
On December 20, 2007, an Amended Decision was promulgated by the Special Division of Five - Former
Fifteenth Division of the CA - in light of the dissent of Associate Justice Lucas P. Bersamin, [17] joined by
Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads--
Respondent disputed the above by presenting its own argument in its Final Memorandum. [12]
WHEREFORE, premises considered, the Court hereby decrees that:
[13]
On October 28, 2002, the CIAC rendered its Decision  declaring both WG&A and KCSI guilty of
1. Pioneer's Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer
negligence, with the following findings and conclusions--
P25 Million, without legal interest, within 15 days from the finality of this Amended Decision, subject to
the following modifications:
The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment to
the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a contractual 1.1 - Pioneer's Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby
obligation of the Yard. However, by requiring, according to its own regulations, that only Yard welders ordered to pay Pioneer P25 Million without legal interest;
are to undertake hotworks, it follows that there are certain qualifications of Yard welders that would be
requisite of yard welders against those of the vessel welders. To the Tribunal, this means that yard 2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its  Petition (CA-G.R.
welders are aware of the Yard safety rules and regulations on hotworks such as applying for a hotwork
SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25 THAT SUPERVISED AND CONTROLLED THE REPAIR WORKS.
Million, without legal interest, within 15 days from the finality of this Amended Decision; and
C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY
3. The rest of the disposition in the original Decision remains the same. ALONE COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME.

SO ORDERED.[18] D. THE YARD AUTHORIZED THE HOT WORK OF YARD WELDER ANGELINO SEVILLEJO.

Hence, these petitions. Pioneer bases its petition on the following grounds:
E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE PROXIMATE CAUSE OF THE
I LOSS.

F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY TO THE

THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON NON- LOSS.
FACTS LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS REMAIN TO
INVALIDATE THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE VIII
OF THE CONSTITUTION.
IV
II

THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE

THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE
THE SUM OF P50,000,000.00, IN THAT: FOR THE VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS.

A. STARE DECISIS RENDERS INAPPLICABLE ANY INVOCATION OF LIMITED LIABILITY BY V

THE YARD.

B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC POLICY. THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLE FOR INTEREST.
C. THE VESSEL OWNER DID NOT AGREE THAT THE YARD'S LIABILITY FOR LOSS OR
VI
DAMAGE TO THE VESSEL ARISING FROM YARD'S NEGLIGENCE IS LIMITED TO THE SUM
OF P50,000,000.00 ONLY.

D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT LIABILITY, IN THAT: THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR
ARBITRATION COSTS.[19]
(i) THE YARD HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V "SUPERFERRY 3")
ON 08 FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;
On the other hand, KCSI cites the following grounds for the allowance of its petition, to wit:
(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS
EXCLUSIVELY PERFORMED BY YARD WORKERS. 1. ABSENCE OF YARD RESPONSIBILITY

III

IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT

THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS CONCURRENTLY EXPLANATION, THE CIAC'S RULING THAT THE YARD WAS EQUALLY NEGLIGENT
NEGLIGENT, CONSIDERING THAT: BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS PERMIT FOR THE CUTTING WORK
DONE BY ANGELINO SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWN
THAT RULING TO BE COMPLETELY WRONG AND BASELESS.
A. DR. JONIGA, THE VESSEL'S PASSAGE TEAM LEADER, DID NOT SUPERVISE OR
CONTROL THE REPAIRS.
2. NO CONSTRUCTIVE TOTAL LOSS
B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO
 A. The issue of negligence
IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT
EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo) on
ITSELF EXPLAINED WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS. the accommodation area of the vessel, specifically on Deck A. As established before the CIAC -

3. FAILURE OR REFUSAL TO ADDRESS
KEPPEL'S MOTION FOR RECONSIDERATION
FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE
EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION,
KEPPEL'S PARTIAL MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION WHICH
SHOWED: 1) WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL
OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE
REQUIRED TO REIMBURSE PIONEER'S PAYMENTS TO THE VESSEL OWNER IN VIEW OF
THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER
ALONE SHOULD BEAR THE COSTS OF ARBITRATION.
The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling, [22] p. 20). Angelino
Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and
as he did so, smoke came up from under Deck A. He got another container of water which he also poured
whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight
the fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void,
it was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to
direct water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely
difficult because the life jackets and the construction materials of the Deck B ceiling were combustible
and permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B
accommodation areas at various locations, where there were combustible materials. Respondent points to
cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B (Exh. 1-
Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[24]

4. FAILURE TO CREDIT FOR SALVAGE RECOVERY Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the time the
fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot works
done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the scope of
Sevillejo's assigned tasks, the same not having been authorized under the Work Order [25] dated January
26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself negligent,
EVEN IF THE COURT OF APPEAL'S RULINGS ON ALL OF THE FOREGOING ISSUES WERE
through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to remove the life jackets
CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE
from the ceiling void, causing the immediate spread of the fire to the other areas of the ship.
DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED
(P25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE
We rule in favor of Pioneer.
VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO
REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION. [20]
First. The Shiprepair Agreement is clear that WG&A, as owner of M/V "Superferry 3," entered into a
contract for the dry docking and repair of the vessel under KCSI's Standard Conditions of Contract for
Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it said that
To our minds, these errors assigned by both Pioneer and KCSI may be summed up in the following core WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI.
issues:
Second. Pursuant to KCSI's rules and regulations on safety and security, only employees of KCSI may
A. To whom may negligence over the fire that broke out on board M/V "Superferry 3" be imputed? undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is
supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSI's Vice
B. Is subrogation proper? If proper, to what extent can subrogation be made? President for Operations before WG&A could effect any work performed by its own workers or sub-
contractors. In the exercise of this authority, KCSI's Vice-President for Operations, in the letter dated
C. Should interest be imposed on the award of damages? If so, how much? January 2, 1997, banned any hot works from being done except by KCSI's workers, viz.:

D. Who should bear the cost of the arbitration?
To resolve these issues, it is imperative that we digress from the general rule that in petitions for review
under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the disparate
findings of fact of the CIAC and the CA which led them to different conclusions, we are constrained to
revisit the factual circumstances surrounding this controversy. [21]
The Court's Ruling
The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be
carried out only by shipyard workers x x x.[26]
WG&A recognized and complied with this restrictive directive such that, during the arrival conference on
January 26, 2000, Dr. Joniga, the vessel's passage team leader in charge of its hotel department,
specifically requested KCSI to finish the hot works started by the vessel's contractors on the passenger
accommodation decks.[27] This was corroborated by the statements of the vessel's hotel manager Marcelo
Rabe[28] and the vessel's quality control officer Joselito Esteban. [29] KCSI knew of the unfinished hot
works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug confirmed that
KCSI was aware "that the owners of this vessel (M/V `Superferry 3') had undertaken their own (hot)
works prior to arrival alongside (sic) on 26 th January," and that no hot work permits could thereafter be
issued to WG&A's own workers because "this was not allowed for the Superferry 3." [30] This shows that
Dr. Joniga had authority only to request the performance of hot works by KCSI's welders as needed in the
repair of the vessel while on dry dock.
Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V
"Superferry 3," aside from its promenade deck. This was a recognition of Dr. Joniga's authority to request
the conduct of hot works even on the passenger accommodation decks, subject to the provision of the
January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship.
At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of
KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and
cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the
protection bars at the tourist dining salon of Deck B, [31] at a rate of P150.00/welder/hour. [32] In fact,
Orcullo, Project Superintendent of KCSI, admitted that "as early as February 3, 2000 (five days before
the fire) [the Yard] had acknowledged Dr. Joniga's authority to order such works or additional jobs." [33]
It is evident, therefore, that although the January 26, 2000 Work Order was a special order for the supply
of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The Work
Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter.
Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latter's direct
control and supervision.
Indeed, KCSI was the employer of Sevillejo--paying his salaries; retaining the power and the right to
discharge or substitute him with another welder; providing him and the other welders with its equipment;
giving him and the other welders marching orders to work on the vessel; and monitoring and keeping
track of his and the other welders' activities on board, in view of the delicate nature of their work.
[34]
 Thus, as such employee, aware of KCSI's Safety Regulations on Vessels Afloat/Dry, which
specifically provides that "(n)o hotwork (welding/cutting works) shall be done on board [the] vessel
without [a] Safety Permit from KCSI Safety Section," [35] it was incumbent upon Sevillejo to obtain the
required hot work safety permit before starting the work he did, including that done on Deck A where the
fire started.
Fifth. There was a lapse in KCSI's supervision of Sevillejo's work at the time the fire broke out.
It was established that no hot works could be hidden from or remain undetected by KCSI because the
welding cables and the gas hoses emanating from the dock would give the hot works away. Moreover,
KCSI had roving fire watchmen and safety assistants who were moving around the vessel. [36] This was
confirmed by Restituto Rebaca (Rebaca), KCSI's Safety Supervisor, who actually spotted Sevillejo on
Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire watchman, or
a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot
work. However, it is noteworthy that, after purportedly scolding Sevillejo for working without a permit
and telling him to stop until the permit was acquired and the other safety measures were observed,
Rebaca left without pulling Sevillejo out of the work area or making sure that the latter did as he was
told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead door at
Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the door level with the
deck, until the fire broke out.
This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of
the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSI's own fire expert, who observed
that--
4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a cutter.
The dangers of ignition occurring as a result of the two processes are similar in that both electric arc
welding and hot cutting produce heat at the work area and sparks and incendive material that can travel
some distance from the work area. Hence, the safety precautions that are expected to be applied by the
supervisor are the same for both types of work. However, the quantity and incendivity of the spray from
the hot cutting are much greater than those of sparks from electric arc welding, and it may well be that
Angelino Sevillejo would not have a full appreciation of the dangers involved. This made it all the
more important that the supervisor, who should have had such an appreciation, ensured that the
appropriate safety precautions were carried out.[37]
In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized by
KCSI to do the hot works on M/V "Superferry 3" to the exclusion of other workers, failed to comply with
the strict safety standards of KCSI, not only because he worked without the required permit, fire watch,
fire buckets, and extinguishers, but also because he failed to undertake other precautionary measures for
preventing the fire. For instance, he could have, at the very least, ensured that whatever combustible
material may have been in the vicinity would be protected from the sparks caused by the welding torch.
He could have easily removed the life jackets from the ceiling void, as well as the foam mattresses, and
covered any holes where the sparks may enter.
Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible
precautionary measures, including those above mentioned, before allowing Sevillejo to continue with his
hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started
yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc
welder, Rebaca should have replaced him.
There is negligence when an act is done without exercising the competence that a reasonable person in
the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to another.
Those who undertake any work calling for special skills are required to exercise reasonable care in what
they do.[38] Verily, there is an obligation all persons have - to take due care which, under ordinary
circumstances of the case, a reasonable and prudent man would take. The omission of that care
constitutes negligence. Generally, the degree of care required is graduated according to the danger a
person or property may be subjected to, arising from the activity that the actor pursues or the
instrumentality that he uses. The greater the danger, the greater the degree of care required. Extraordinary
risk demands extraordinary care. Similarly, the more imminent the danger, the higher degree of care
warranted.[39] In this aspect,
KCSI failed to exercise the necessary degree of caution and foresight called for by the circumstances.
We cannot subscribe to KCSI's position that WG&A, through Dr. Joniga, was negligent.
On the one hand, as discussed above, Dr. Joniga had authority to request the performance of hot works in
the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work Order
and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the
cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing,
but failed to supervise him with the degree of care warranted by the attendant circumstances.
Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void for two reasons -
(1) the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent
upon him to remove the same. It was shown during the hearings before the CIAC that the removal of the
life jackets would not have made much of a difference. The fire would still have occurred due to the
presence of other combustible materials in the area. This was the uniform conclusion of both
WG&A's[40] and KCSI's[41] fire experts. It was also proven during the CIAC proceedings that KCSI did
not see the life jackets as being in the way of the hot works, thus, making their removal from storage (a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it
unnecessary.[42] from the peril;

These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in (b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x.
the performance of his assigned task. His negligence was the proximate cause of the fire on board M/V
"Superferry 3." As he was then definitely engaged in the performance of his assigned tasks as an
employee of KCSI, his negligence gave rise to the vicarious liability of his employer [43] under Article It appears, however, that in the execution of the insurance policies over M/V "Superferry 3," WG&A and
2180 of the Civil Code, which provides-- Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss Provision of
which reads--
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own act or omission,
but also for those of persons for whom one is responsible. Total Loss

x x x x In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the
repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be
Employers shall be liable for the damages caused by their employees and household helpers acting within taken into account.
the scope of their assigned tasks, even though the former are not engaged in any business or industry.
There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and
x x x x repairing the Vessel would exceed the Agreed Value in policies on Hull and Machinery . In making this
determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of
The responsibility treated of in this article shall cease when the persons herein mentioned prove that they damages arising from the same accident shall be taken into account, but expenses incurred prior to tender
observed all the diligence of a good father of a family to prevent damage. of abandonment shall not be considered if such are to be claimed separately under the Sue and Labor
clause. x x x.

KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal
presumption of its negligence in supervising Sevillejo. [44] Consequently, it is responsible for the damages
caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is
proof that the employee has, by his negligence, caused damage to another in order to make the employer
responsible for the tortuous act of the former. [45] From the foregoing disquisition, there is ample proof of
the employee's negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full
amount of the insurance coverage and, by operation of law, it was entitled to be subrogated to the rights
of WG&A to claim the amount of the loss. It further argues that the limitation of liability clause found in
the Shiprepair Agreement is null and void for being iniquitous and against public policy.
KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there is no
proof of payment of the insurance proceeds. KCSI insists on the validity of the limited-liability clause up
to P50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair Agreement.
KCSI also claims that the salvage value of the vessel should be deducted from whatever amount it will be
made to pay to Pioneer.
We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V "Superferry 3."
In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates made by three (3)
disinterested and qualified shipyards for the cost of the repair of the vessel, specifically: (a)
P296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000
turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine
currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and (c)
P301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore
Technologies Marine Ltd. All the estimates showed that the repair expense would exceed
P270,000,000.00, the amount equivalent to ¾ of the vessel's insured value of P360,000,000.00. Thus,
WG&A opted to abandon M/V "Superferry 3" and claimed from Pioneer the full amount of the policies.
Pioneer paid WG&A's claim, and now demands from KCSI the full amount of P360,000,000.00, by
virtue of subrogation.
KCSI denies the liability because, aside from its claim that it cannot be held culpable for negligence
resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only
US$3,800,000.00 or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence &
Young.
In the face of this apparent conflict, we hold that Section 139 of the Insurance Code should govern,
because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine
insurance policies in question expressly provided the following:

In marine insurance, a constructive total loss occurs under any of the conditions set forth in Section 139
of the Insurance Code, which provides--
Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any
particular portion hereof separately valued by the policy, or otherwise separately insured, and recover for
a total loss thereof, when the cause of the loss is a peril insured against:
IMPORTANT
This insurance is subject to English jurisdiction, except in the event that loss or losses are payable in the
Philippines, in which case if the said laws and customs of England shall be in conflict with the laws of the
Republic of the Philippines, then the laws of the Republic of the Philippines shall govern. (Underscoring
supplied.)

The CA held that Section 139 of the Insurance Code is merely permissive on account of the word "may"
in the provision. This is incorrect. Properly considered, the word "may" in the provision is intended to
grant the insured (WG&A) the option or discretion to choose the abandonment of the thing insured (M/V
"Superferry 3"), or any particular portion thereof separately valued by the policy, or otherwise separately
insured, and recover for a total loss when the cause of the loss is a peril insured against. This option or
discretion is expressed as a right in Section 131 of the same Code, to wit:
Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under Section
one hundred thirty-nine.
It cannot be denied that M/V "Superferry 3" suffered widespread damage from the fire that occurred on
February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A from Pioneer.
The estimates given by the three disinterested and qualified shipyards show that the damage to the ship
would exceed P270,000,000.00, or ¾ of the total value of the policies - P360,000,000.00. These estimates
constituted credible and acceptable proof of the extent of the damage sustained by the vessel. It is
significant that these estimates were confirmed by the Adjustment Report dated June 5, 2000 submitted
by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted to verify and
confirm the extent of the damage. The Adjustment Report verified and confirmed that the damage to the
vessel amounted to a constructive total loss and that the claim for P360,000,000.00 under the policies was
compensable.[46] It is also noteworthy that KCSI did not cross-examine Henson Lim, Director of Richards
Hogg, whose affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a
constructive total loss.
Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its
policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and
Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this
note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply
because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation.
[47]
 The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of the
insurance proceeds to the former, and no controverting evidence was presented by KCSI to rebut the
presumed authority of the signatory to receive such payment.
On the matter of subrogation, Article 2207 of the Civil Code provides--
Art. 2207. If the plaintiff's property has been insured and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.
Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that
he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its
remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an
insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
with respect to any loss covered by the policy. It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to
enforce payment.[48]
We have held that payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode
that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good
conscience, ought to pay.[49]
We cannot accept KCSI's insistence on upholding the validity Clause 20, which provides that the limit of
its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the
insurance policies, as found in the Shiprepair Agreement.
Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are
unfair and inequitable under the premises. It was established during arbitration that WG&A did not
voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&A's fleet manager,
testified that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and
22(a) were found, because he did not want WG&A to be bound by them. However, considering that it
was only KCSI that had shipyard facilities large enough to accommodate the dry docking and repair of
big vessels owned by WG&A, such as M/V "Superferry 3," in Cebu, he had to sign the front portion of
the Shiprepair Agreement; otherwise, the vessel would not be accepted for dry docking. [50]
Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a "take-it-or-leave-
it" basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the
other party merely affixes his signature signifying his adhesion thereto. Although not invalid,  per se, a
contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant
bargaining party, and its option is reduced to the alternative of "taking it or leaving it," completely
depriving such party of the opportunity to bargain on equal footing. [51]
Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated for the full
insured value of the vessel or, at the very least, for its actual market value. There was clearly no intention
on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively
proved, since a waiver by implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of
the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual
intention to relinquish the right. [52] This has not been demonstrated in this case.
Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to
limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss
in the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is
ordinarily required. It would not be difficult for a negligent party to escape liability by the simple
expedient of paying an amount very much lower than the actual damage or loss sustained by the other. [53]
Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to 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 contract. Undeniably, the hull and machinery insurance procured by
WG&A from Pioneer named only the former as the assured. There was no manifest intention on the part
of WG&A to constitute KCSI as a co-assured under the policies. To have deemed KCSI as a co-assured
under the policies would have had the effect of nullifying any claim of WG&A from Pioneer for any loss
or damage caused by the negligence of KCSI. No ship owner would agree to make a ship repairer a co-
assured under such insurance policy. Otherwise, any claim for loss or damage under the policy would be
rendered nugatory. WG&A could not have intended such a result. [54]
Nevertheless, we concur with the position of KCSI that the salvage value of the damaged M/V
"Superferry 3" should be taken into account in the grant of any award. It was proven before the CIAC
that the machinery and the hull of the vessel were separately sold for P25,290,000.00 (or US$468,333.33)
and US$363,289.50, respectively. WG&A's claim for the upkeep of the wreck until the same were sold
amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the
machinery and the hull, for a net recovery of US$673,812.87, or equivalent to P30,252,648.09, at
P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering
this salvage value in the award would amount to unjust enrichment on the part of Pioneer.

C. On the imposition of interest

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the award in favor of
Pioneer in the amount of P350,146,786.89 should earn interest at 6% per annum from the filing of the
case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per
annum from the date the award becomes final and executory until its full satisfaction.

D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the cost of arbitration, on a  pro rata basis.
We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it was entitled
to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer that only
KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself for perceived
wrongful acts and conditions. Otherwise, we would be putting a price on the right to litigate on the part of
Pioneer.

WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No. 180896-97 and
the Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and
the Amended Decision dated December 20, 2007 of the Court of Appeals is MODIFIED. Accordingly,
KCSI is ordered to pay Pioneer the amount of P360,000,000.00 less P30,252,648.09, equivalent to the
salvage value recovered by Pioneer from M/V "Superferry 3," or the net total amount of
P329,747,351.91, with six percent (6%) interest per annum reckoned from the time the Request for
Arbitration was filed until this Decision becomes final and executory, plus twelve percent (12%) interest
per annum on the said amount or any balance thereof from the finality of the Decision until the same will
have been fully paid. The arbitration costs shall be borne by both parties on a pro rata basis. Costs against
KCSI.

SO ORDERED.
 [ G.R. No. 194320, February 01, 2012 ]
MALAYAN INSURANCE CO., INC., PETITIONER, VS. RODELIO ALBERTO AND ENRICO
ALBERTO REYES, RESPONDENTS.
DECISION
VELASCO JR., J.:
The Case
Before Us is a Petition for Review on Certiorari under Rule 45, seeking to reverse and set aside the July
28, 2010 Decision[1] of the Court of Appeals (CA) and its October 29, 2010 Resolution [2] denying the
motion for reconsideration filed by petitioner Malayan Insurance Co., Inc. (Malayan Insurance). The July
28, 2010 CA Decision reversed and set aside the Decision [3] dated February 2, 2009 of the Regional Trial
Court, Branch 51 in Manila.
The Facts
At around 5 o'clock in the morning of December 17, 1995, an accident occurred at the corner of EDSA
and Ayala Avenue, Makati City, involving four (4) vehicles, to wit: (1) a Nissan Bus operated by Aladdin
Transit with plate number NYS 381; (2) an Isuzu Tanker with plate number PLR 684; (3) a Fuzo Cargo
Truck with plate number PDL 297; and (4) a Mitsubishi Galant with plate number TLM 732. [4]
Based on the Police Report issued by the on-the-spot investigator, Senior Police Officer 1 Alfredo M.
Dungga (SPO1 Dungga), the Isuzu Tanker was in front of the Mitsubishi Galant with the Nissan Bus on
their right side shortly before the vehicular incident. All three (3) vehicles were at a halt along EDSA
facing the south direction when the Fuzo Cargo Truck simultaneously bumped the rear portion of the
Mitsubishi Galant and the rear left portion of the Nissan Bus.  Due to the strong impact, these two
vehicles were shoved forward and the front left portion of the Mitsubishi Galant rammed into the rear
right portion of the Isuzu Tanker. [5]
Previously, particularly on December 15, 1994, Malayan Insurance issued Car Insurance Policy No. PV-
025-00220 in favor of First Malayan Leasing and Finance Corporation (the assured), insuring the
aforementioned Mitsubishi Galant against third party liability, own damage and theft, among others.  
Having insured the vehicle against such risks, Malayan Insurance claimed in its Complaint dated October
18, 1999 that it paid the damages sustained by the assured amounting to PhP 700,000. [6]
Maintaining that it has been subrogated to the rights and interests of the assured by operation of law upon
its payment to the latter, Malayan Insurance sent several demand letters to respondents Rodelio Alberto
(Alberto) and Enrico Alberto Reyes (Reyes), the registered owner and the driver, respectively, of the
Fuzo Cargo Truck, requiring them to pay the amount it had paid to the assured.  When respondents
refused to settle their liability, Malayan Insurance was constrained to file a complaint for damages for
gross negligence against respondents.[7]
In their Answer, respondents asserted that they cannot be held liable for the vehicular accident, since its
proximate cause was the reckless driving of the Nissan Bus driver. They alleged that the speeding bus,
coming from the service road of EDSA, maneuvered its way towards the middle lane without due regard
to Reyes' right of way.  When the Nissan Bus abruptly stopped, Reyes stepped hard on the brakes but the
braking action could not cope with the inertia and failed to gain sufficient traction.  As a consequence, the
Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the vehicle
in front of it.  The Nissan Bus, on the other hand, sideswiped the Fuzo Cargo Truck, causing damage to
the latter in the amount of PhP 20,000. Respondents also controverted the results of the Police Report,
asserting that it was based solely on the biased narration of the Nissan Bus driver. [8]
After the termination of the pre-trial proceedings, trial ensued.  Malayan Insurance presented the
testimony of its lone witness, a motor car claim adjuster, who attested that he processed the insurance
claim of the assured and verified the documents submitted to him.  Respondents, on the other hand, failed
to present any evidence.
In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885, ruled in favor of
Malayan Insurance and declared respondents liable for damages. The dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff against defendants jointly and
severally to pay plaintiff the following:
1. The amount of P700,000.00 with legal interest from the time of the filing of the complaint;
2. Attorney's fees of P10,000.00 and;
3. Cost of suit.
SO ORDERED.[9]
Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV No. 93112. In its
Decision dated July 28, 2010, the CA reversed and set aside the Decision of the trial court and ruled in
favor of respondents, disposing:
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the assailed
Decision dated 2 February 2009 REVERSED and SET ASIDE. The Complaint dated 18 October 1999
is hereby DISMISSED for lack of merit. No costs.
SO ORDERED.[10]
The CA held that the evidence on record has failed to establish not only negligence on the part of
respondents, but also compliance with the other requisites and the consequent right of Malayan Insurance
to subrogation.[11] It noted that the police report, which has been made part of the records of the trial
court, was not properly identified by the police officer who conducted the on-the-spot investigation of the
subject collision. It, thus, held that an appellate court, as a reviewing body, cannot rightly appreciate
firsthand the genuineness of an unverified and unidentified document, much less accord it evidentiary
value.[12]
Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a police report is
a prima facie evidence of the facts stated in it.  And inasmuch as they never questioned the presentation
of the report in evidence, respondents are deemed to have waived their right to question its authenticity
and due execution.[13]
In its Resolution dated October 29, 2010, the CA denied the motion for reconsideration. Hence, Malayan
Insurance filed the instant petition. The petition has merit.

The Issues Admissibility of the Police Report

Malayan Insurance contends that, even without the presentation of the police investigator who prepared
In its Memorandum[14] dated June 27, 2011, Malayan Insurance raises the following issues for Our the police report, said report is still admissible in evidence, especially since respondents failed to make a
consideration: timely objection to its presentation in evidence. [16] Respondents counter that since the police report was
never confirmed by the investigating police officer, it cannot be considered as part of the evidence on
record.[17]
I
Indeed, under the rules of evidence, a witness can testify only to those facts which the witness knows of
his or her personal knowledge, that is, which are derived from the witness' own perception.
WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE POLICE REPORT SINCE [18]
 Concomitantly, a witness may not testify on matters which he or she merely learned from others either
THE POLICE INVESTIGATOR WHO PREPARED THE SAME DID NOT ACTUALLY TESTIFY IN because said witness was told or read or heard those matters. [19] Such testimony is considered hearsay and
COURT THEREON. may not be received as proof of the truth of what the witness has learned. This is known as the hearsay
rule.[20]
II
As discussed in D.M. Consunji, Inc. v. CA,[21] "Hearsay is not limited to oral testimony or statements; the
general rule that excludes hearsay as evidence applies to written, as well as oral statements."
WHETHER THE SUBROGATION OF MALAYAN INSURANCE IS IMPAIRED AND/OR
DEFICIENT. There are several exceptions to the hearsay rule under the Rules of Court, among which are entries in
official records.[22] Section 44, Rule 130 provides:

On the other hand, respondents submit the following issues in its Memorandum [15] dated July 7, 2011: Entries in official records made in the performance of his duty by a public officer of the Philippines, or
by a person in the performance of a duty specially enjoined by law are prima facie evidence of the facts
I therein stated.

WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT FOR FAILURE OF In Alvarez v. PICOP Resources,[23] this Court reiterated the requisites for the admissibility in evidence, as
MALAYAN INSURANCE TO OVERCOME THE BURDEN OF PROOF REQUIRED TO an exception to the hearsay rule of entries in official records, thus: (a) that the entry was made by a public
ESTABLISH THE NEGLIGENCE OF RESPONDENTS. officer or by another person specially enjoined by law to do so; (b) that it was made by the public officer
in the performance of his or her duties, or by such other person in the performance of a duty specially
II enjoined by law; and (c) that the public officer or other person had sufficient knowledge of the facts by
him or her stated, which must have been acquired by the public officer or other person personally or
through official information.
WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN INSURANCE ARE
Notably, the presentation of the police report itself is admissible as an exception to the hearsay rule even
SUFFICIENT TO CLAIM FOR THE AMOUNT OF DAMAGES.
if the police investigator who prepared it was not presented in court, as long as the above requisites could
be adequately proved.[24]
III
Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator, prepared the report, and he did
so in the performance of his duty. However, what is not clear is whether SPO1 Dungga had sufficient
WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS PASSED COMPLIANCE personal knowledge of the facts contained in his report.  Thus, the third requisite is lacking.
AND REQUISITES AS PROVIDED UNDER PERTINENT LAWS.
Respondents failed to make a timely objection to the police report's presentation in evidence; thus, they
are deemed to have waived their right to do so. [25] As a result, the police report is still admissible in
Essentially, the issues boil down to the following: (1) the admissibility of the police report; (2) the evidence.
sufficiency of the evidence to support a claim for gross negligence; and (3) the validity of subrogation in
the instant case. Sufficiency of Evidence

Our Ruling Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck, bumped the rear of the
Mitsubishi Galant, he is presumed to be negligent unless proved otherwise. It further contends that
respondents failed to present any evidence to overturn the presumption of negligence. [26] Contrarily,
respondents claim that since Malayan Insurance did not present any witness who shall affirm any
negligent act of Reyes in driving the Fuzo Cargo truck before and after the incident, there is no evidence
which would show negligence on the part of respondents. [27]
We agree with Malayan Insurance. Even if We consider the inadmissibility of the police report in
evidence, still, respondents cannot evade liability by virtue of the res ipsa loquitur doctrine. The D.M.
Consunji, Inc. case is quite elucidating:
Petitioner's contention, however, loses relevance in the face of the application of res ipsa loquitur by the
CA. The effect of the doctrine is to warrant a presumption or inference that the mere fall of the elevator
was a result of the person having charge of the instrumentality was negligent. As a rule of evidence, the
doctrine of res ipsa loquitur is peculiar to the law of negligence which recognizes that prima
facie negligence may be established without direct proof and furnishes a substitute for specific proof of
negligence.
The concept of res ipsa loquitur has been explained in this wise:
While negligence is not ordinarily inferred or presumed, and while the mere happening of an accident or
injury will not generally give rise to an inference or presumption that it was due to negligence on
defendant's part, under the doctrine of res ipsa loquitur, which means, literally, the thing or transaction
speaks for itself, or in one jurisdiction, that the thing or instrumentality speaks for itself, the facts or
circumstances accompanying an injury may be such as to raise a presumption, or at least permit an
inference of negligence on the part of the defendant, or some other person who is charged with
negligence.
x x x where it is shown that the thing or instrumentality which caused the injury complained of was under
the control or management of the defendant, and that the occurrence resulting in the injury was such as in
the ordinary course of things would not happen if those who had its control or management used proper
care, there is sufficient evidence, or, as sometimes stated, reasonable evidence, in the absence of
explanation by the defendant, that the injury arose from or was caused by the defendant's want of care.
One of the theoretical bases for the doctrine is its necessity, i.e., that necessary evidence is absent or not
available.
The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge of the
instrumentality which causes the injury either knows the cause of the accident or has the best opportunity
of ascertaining it and that the plaintiff has no such knowledge, and therefore is compelled to allege
negligence in general terms and to rely upon the proof of the happening of the accident in order to
establish negligence. The inference which the doctrine permits is grounded upon the fact that the chief
evidence of the true cause, whether culpable or innocent, is practically accessible to the defendant but
inaccessible to the injured person.
It has been said that the doctrine of res ipsa loquitur furnishes a bridge by which a plaintiff, without
knowledge of the cause, reaches over to defendant who knows or should know the cause, for any
explanation of care exercised by the defendant in respect of the matter of which the plaintiff complains.
The res ipsa loquitur doctrine, another court has said, is a rule of necessity, in that it proceeds on the
theory that under the peculiar circumstances in which the doctrine is applicable, it is within the power of
the defendant to show that there was no negligence on his part, and direct proof of defendant's negligence
is beyond plaintiff's power. Accordingly, some courts add to the three prerequisites for the application of
the res ipsa loquitur doctrine the further requirement that for the res ipsa loquitur doctrine to apply, it
must appear that the injured party had no knowledge or means of knowledge as to the cause of the
accident, or that the party to be charged with negligence has superior knowledge or opportunity for
explanation of the accident.
The CA held that all the requisites of res ipsa loquitur are present in the case at bar:
There is no dispute that appellee's husband fell down from the 14th floor of a building to the basement
while he was working with appellant's construction project, resulting to his death. The construction site is
within the exclusive control and management of appellant. It has a safety engineer, a project
superintendent, a carpenter leadman and others who are in complete control of the situation therein. The
circumstances of any accident that would occur therein are peculiarly within the knowledge of the
appellant or its employees. On the other hand, the appellee is not in a position to know what caused the
accident. Res ipsa loquitur is a rule of necessity and it applies where evidence is absent or not readily
available, provided the following requisites are present: (1) the accident was of a kind which does not
ordinarily occur unless someone is negligent; (2) the instrumentality or agency which caused the injury
was under the exclusive control of the person charged with negligence; and (3) the injury suffered must
not have been due to any voluntary action or contribution on the part of the person injured. x x x.
No worker is going to fall from the 14th floor of a building to the basement while performing work in a
construction site unless someone is negligent[;] thus, the first requisite for the application of the rule
of res ipsa loquitur is present. As explained earlier, the construction site with all its paraphernalia and
human resources that likely caused the injury is under the exclusive control and management of
appellant[;] thus[,] the second requisite is also present. No contributory negligence was attributed to the
appellee's deceased husband[;] thus[,] the last requisite is also present. All the requisites for the
application of the rule of res ipsa loquitur are present, thus a reasonable presumption or inference of
appellant's negligence arises. x x x.
Petitioner does not dispute the existence of the requisites for the application of  res ipsa loquitur, but
argues that the presumption or inference that it was negligent did not arise since it "proved that it
exercised due care to avoid the accident which befell respondent's husband."
Petitioner apparently misapprehends the procedural effect of the doctrine. As stated earlier, the
defendant's negligence is presumed or inferred when the plaintiff establishes the requisites for the
application of res ipsa loquitur. Once the plaintiff makes out a prima facie case of all the elements, the
burden then shifts to defendant to explain. The presumption or inference may be rebutted or overcome by
other evidence and, under appropriate circumstances a disputable presumption, such as that of due care or
innocence, may outweigh the inference. It is not for the defendant to explain or prove its defense to
prevent the presumption or inference from arising. Evidence by the defendant of say, due care, comes
into play only after the circumstances for the application of the doctrine has been established. [28]
In the case at bar, aside from the statement in the police report, none of the parties disputes the fact that
the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the
vehicle in front of it. Respondents, however, point to the reckless driving of the Nissan Bus driver as the
proximate cause of the collision, which allegation is totally unsupported by any evidence on record. And
assuming that this allegation is, indeed, true, it is astonishing that respondents never even bothered to file
a cross-claim against the owner or driver of the Nissan Bus.
What is at once evident from the instant case, however, is the presence of all the requisites for the
application of the rule of res ipsa loquitur. To reiterate, res ipsa loquitur is a rule of necessity which
applies where evidence is absent or not readily available. As explained in D.M. Consunji, Inc., it is partly presented by Malayan Insurance are already part of the evidence on record, and since it is not disputed
based upon the theory that the defendant in charge of the instrumentality which causes the injury either that the insurance company, indeed, paid PhP 700,000 to the assured, then there is a valid subrogation in
knows the cause of the accident or has the best opportunity of ascertaining it and that the plaintiff has no the case at bar. As explained in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety Corporation:
such knowledge, and, therefore, is compelled to allege negligence in general terms and to rely upon the
proof of the happening of the accident in order to establish negligence. Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that
he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its
As mentioned above, the requisites for the application of the res ipsa loquitur rule are the following: (1) remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an
the accident was of a kind which does not ordinarily occur unless someone is negligent; (2) the insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
instrumentality or agency which caused the injury was under the exclusive control of the person charged with respect to any loss covered by the policy. It contemplates full substitution such that it places the
with negligence; and (3) the injury suffered must not have been due to any voluntary action or party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to
contribution on the part of the person injured. [29] enforce payment.

In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the Mitsubishi Galant
unless someone is negligent. Also, the Fuzo Cargo Truck was under the exclusive control of its driver,
Reyes. Even if respondents avert liability by putting the blame on the Nissan Bus driver, still, this
allegation was self-serving and totally unfounded. Finally, no contributory negligence was attributed to
the driver of the Mitsubishi Galant. Consequently, all the requisites for the application of the doctrine
of res ipsa loquitur are present, thereby creating a reasonable presumption of negligence on the part of
respondents.
We have held that payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode
that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good
conscience, ought to pay.[33]

It is worth mentioning that just like any other disputable presumptions or inferences, the presumption of
negligence may be rebutted or overcome by other evidence to the contrary. It is unfortunate, however, Considering the above ruling, it is only but proper that Malayan Insurance be subrogated to the rights of
that respondents failed to present any evidence before the trial court. Thus, the presumption of negligence the assured.
remains. Consequently, the CA erred in dismissing the complaint for Malayan Insurance's adverted
failure to prove negligence on the part of respondents. WHEREFORE, the petition is hereby GRANTED.  The CA's July 28, 2010 Decision and October 29,
2010 Resolution in CA-G.R. CV No. 93112 are hereby REVERSED and SET ASIDE. The Decision
Validity of Subrogation dated February 2, 2009 issued by the trial court in Civil Case No. 99-95885 is hereby REINSTATED.
Malayan Insurance contends that there was a valid subrogation in the instant case, as evidenced by the No pronouncement as to cost.
claim check voucher[30] and the Release of Claim and Subrogation Receipt [31] presented by it before the
trial court. Respondents, however, claim that the documents presented by Malayan Insurance do not SO ORDERED.
indicate certain important details that would show proper subrogation.

As noted by Malayan Insurance, respondents had all the opportunity, but failed to object to the
presentation of its evidence.  Thus, and as We have mentioned earlier, respondents are deemed to have
waived their right to make an objection. As this Court held in Asian Construction and Development
Corporation v. COMFAC Corporation:

The rule is that failure to object to the offered evidence renders it admissible, and the court cannot,
on its own, disregard such evidence. We note that ASIAKONSTRUCT's counsel of record before the
trial court, Atty. Bernard Dy, who actively participated in the initial stages of the case stopped attending
the hearings when COMFAC was about to end its presentation. Thus, ASIAKONSTRUCT could not
object to COMFAC's offer of evidence nor present evidence in its defense; ASIAKONSTRUCT was
deemed by the trial court to have waived its chance to do so.

Note also that when a party desires the court to reject the evidence offered, it must so state in the
form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal. Because of a party's failure to timely object, the evidence becomes part of the evidence in
the case. Thereafter, all the parties are considered bound by any outcome arising from the offer of
evidence properly presented.[32] (Emphasis supplied.)

Bearing in mind that the claim check voucher and the Release of Claim and Subrogation Receipt
 G.R. No. L-27778 December 16, 1927
UY HY & CO., plaintiff-appellant,
vs. THE PRUDENTIAL ASSURANCE CO., LTD., defendant-appellant.
STATEMENT
Plaintiff alleges that it is a general mercantile copartnership duly registered in the merchantile register of
the City of Manila, engaged in the sale and purchase of general merchandise, with its principal office at
1001 Calle Aceyteros in the City of Manila. That defendant is a foreign insurance company duly licensed
to do business in the Philippine Islands, where it is represented by F. E. Zuellig, Inc., 90 Calle Rosario,
Manila. That on April 20, 1926, the defendant undertook to and did insure against loss and damage by
fire the property, goods, wares and merchandise of the plaintiff for the sum of P30,000, all of which is
evidenced by its policy No. 90119. That on May 10, 1926, and while the policy was in full force and
effect, the property therein described was destroyed by fire without the fault or negligence of the plaintiff.
That in accord with the terms and conditions of the policy, plaintiff notified the defendant of the fire and
of its loss and requested payment of the P30,000, the full amount of the policy, and at the same time
submitted evidence to verify its claims, but that defendant, without any legal or just ground, refused to
pay the claim or any part of it. Wherefore, plaintiff prays for a corresponding judgment against the
defendant, with interest and costs.
For answer the defendant makes a general and specific denial, and as a special defense alleges that in the
policy in question, it was agreed that in the event of loss, should the plaintiff make a fraudulent claim or
any false declaration or use any fraudulent means or devices to obtain payment for its loss, the policy
should become null and void. That after the fire plaintiff did present a claim under oath of its manager for
P30,000, the alleged amount of its loss. That said claim was false and fraudulent, in that it was therein
represented that the value of merchandise at the time of the fire was P32,523.30, whereas in truth and in
fact a large part of the merchandise claimed and represented in plaintiff's proof of loss was not in the
building at the time of the fire, and that the value of the merchandise which was actually consumed or
damaged by the fire was a very small part of the claim made by the plaintiff, "and by reason of such
fraudulent claim and false declaration made and used in support thereof, all benefit under said policy has
been forfeited." Defendant prays that plaintiff's complaint be dismissed, and that it have judgment for
costs.lawphi1.net
As a result of the trial, the lower court rendered judgment for the plaintiff for P16,000, with legal interest
from June 10, 1926, and costs, to which both plaintiff and defendant duly excepted and filed their
respective motions for a new trial which were overruled, and exceptions duly taken, from which both
parties appeal, and the plaintiff assigns the following error:
The lower court erred in rendering judgment against the defendant, sentencing it to pay the
plaintiff the sum of sixteen thousand pesos (P16,000) only instead of thirty thousand
pesos(30,000), which is the amount stipulated in the insurance policy, and to which the plaintiff
has a right, in the light of the evidence adduced in this case.
The defendant assigns the following errors:
I. The trial court erred in admitting in evidence in this case over the objections of counsel for
the defendant the alleged Chinese books of the plaintiff, Exhibits H and G, and the supposed
translations of parts of said books, Exhibits L and M, the Secret Service report, Exhibit E, the
alleged invoices of the plaintiff, Exhibits N-1 to N-104, with the supposed transactions of those
in the Chinese language.
II. The trial court erred in finding that the reasonable amount of the loss suffered by the
plaintiff in this case by reason of the fire in question was P16,000, instead of the sum of
P4,823.20, as claimed by the defendant.
III. The trial court erred in failing to hold under the evidence in this case that the plaintiff's
claim for loss in the sum of P30,000, under the policy in question, was fraudulent, and that false
declarations and proofs had been made and used in supports of said claim, by reason of which
all benefits under the policy had been forfeited by the plaintiff.
IV. The trial court erred in failing to hold that the plaintiff had violated condition 11, of the
policy, Exhibit B, by refusing to produce and deliver to the defendant the invoices or duplicates
thereof of the merchandise upon demand of the adjusters.
V. The trial court erred in rendering judgment in this case in favor of the plaintiff and against
the defendant for the sum of P16, 000, with legal interest thereon from June 10, 1926, and
costs, and in not dismissing the complaint, with costs against the plaintiff.
JOHNS, J.:
The policy in question purports to insure plaintiff's goods, wares and merchandise against loss by fire in
the amount of P30,000, between April 20, 1926, and April 20, 1927. Among other conditions, the policy
provides:
11. On the happening of any loss damage the Insured shall forthwith give notice thereof to the
Company, and shall within 15 days after the loss or damage, or such further time as the
Company may in writing allow in that behalf, deliver to the Company
(a) A claim in writing for the loss and damage containing as particular an account as may be
reasonably practicable of all the several articles or items of property damaged or destroyed, and
of the amount of the loss or damage thereto respectively having regard to their value at the time
of the loss or damage, not including profit of any kind.
12. On the happening of any loss or damage the Company may, so long as the claim is not
adjusted and without incurring any liability, (a) Enter and take and keep possession of the
building or premises where the loss or damage has happened. (b) Take possession of or require
to be delivered to it any property of the Insured in the building or on the premises at the time of
the loss or damage. (c) Examine, sort, arrange or remove all or any of such property. (d) Sell or
dispose of, for account of whom it may concern, any salvage or other property taken possession
of or removed.
13. If the claim be in any respect fraudulent, or if any false declaration be made or used in
support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting
on his behalf to obtain any benefit under this Policy; or, if the loss or damage be occasioned by
the willful act, or with connivance of the Insured; or, if the Insured or anyone acting on his
belief shall hinder or obstruct the Company in doing any of the acts referred to in Condition 12;
 or, if the claim be made and rejected and an action or suit be not commenced within three
months after such rejection or (in case of an Arbitration taking place pursuance of the 18th
Condition of this Policy) within three months after the Arbitrator or Arbitrators or Umpire shall
have made their award, all benefit under this Policy shall be forfeited.
The fire in question occurred on the 10th of May, 1926, and on the 14th of May, the plaintiff submitted
proof of its loss in the usual form verified by the oath of its manager, known in the record as Exhibit F, to
which was attached what is known as the "Particular of the Claim," which among other things recites:
When Goods are the subject of the claim the quantities and prices must be verified by Account
Books and Vouchers, or by Independent Persons, the prices being the net market prices
immediately before the fire, exclusive of any profits." And follows a description of the property
lost and damaged in the fire, and its "Value before the fire," amounting to P32,523.30, together
with a statement of the "Amount Claimed" as P30,000.
It is vigorously contented by the defendant that this proof of loss and the "Particulars of the Claim" are
false and fraudulent, and that they were made with the intent to mislead and deceive as to the amount and
value of the goods in the building at the time of the fire, and that by reason thereof, under the terms and
conditions of the policy, the plaintiff is not entitled to recover anything. From our point of view, that is
the important an decisive question in this case. If plaintiff's proof of loss was made in good faith and is
substantially correct, then it should have a judgment for the full amount of its policy. If, on the other
hand, it is false and fraudulent and was knowingly and willfully made with intent to deceive and commit
a fraud, plaintiff ought not to recover anything on its policy.
On the morning of the fire the manager of the insurance agent and a Mr. Heintsch, one of its employees,
went to the building in question for the purpose of making an inspection, after which and upon return to
their office, Henry Hunter Bayne & Co., certified public accountants and adjusters of fire losses, were
employed to take an inventory of the damaged merchandise and to adjust the amount of the loss. James
R. Herridge and James Chalmers Glegg of that firm also went at once to the scene of the fire and placed a
guard around the premises to see that nothing was removed. The evidence shows that the fire was an
ordinary one, and that it did not start in plaintiff's bodegas but in those marked M and N on the plan
Exhibit D. Plaintiff's bodegas were constructed mostly of stone, and the roof was of iron and strong
materials, to which very little damage was done. In truth and in fact, plaintiff was damage much more by
waters than by fire. May 11th p. m. Glegg and Zulueta of the firm of Bayne & Company went to the
plaintiff's premises where the fire occurred, and took an actual, detailed inventory of all the merchandise
in the store and bodegas. The merchandise in the store was not damaged either by fire or water, and all of
it was turned over to, and accepted by, the plaintiff, with an estimated value of P1,453.13. It appears from
inventory which they made, known in the record as Exhibit 8, that the merchandise and effects in
plaintiff's bodegas after the fire was of the value of P4,823.20, and under the heading of the "Name of
Articles," is listed all of the different articles and merchandise found in the  bodegas after the fire, and
under the heading of "Quantity definitely ascertained" is given the amount of each specific article found
there at that time, and under another heading is a statement of "Quantity estimated including that
definitely ascertained" showing the different estimates as to articles that may have been mutilated or
destroyed by the fire, and under the heading of "Total Loss" is given the value of the amount of each
article, making a total of P4,823.20, as compared with the total of "P32, 532.30," as claimed by the
plaintiff. For example, in plaintiff's proof of loss, claim is made for 100 cases of sardines of the value of
P915, and under this heading in the inventory of Glegg and Zulueta, Exhibit 8, appears 8, appears 15 full
cases, 2 broken cases and loose tins 25 cases of the value of P228.75. Plaintiff claims 60 cases of salmon
of the value of P630. There is no salmon at all in Exhibit 8. Plaintiff claims 30 cases of condensed milk of
the value of P523, and on Exhibit 8, there is no condensed milk. Plaintiff claims 10 cases of Bear milk of
the value of P165. On Exhibit 8 appear 2 cases only of Bear brand milk of the value of P38. Plaintiff
claims 500 sacks of Mayaban rice of the value of P4,700, 200 sacks of Makan rice of the value of P1,840,
and 350 sacks of Tikitiki of the value of P1,225. The corresponding entry of Exhibit 8 is Mayaban rice
and Makan rice 20 sacks of both kinds actually found and 150 sacks kinds estimated of the value of
P1,380. Tikitiki 492 sacks found and 500 sacks estimated of the value of P1,750. Plaintiff claims
chocolates and candies of the value of P3,500, cigars and cigarettes of the value of P8,500, fixtures in the
bodega of the value of P800. On Exhibit 8, it appears that there are no cigars or cigarettes. Such is a fair
comparison between the two statements as to the articles destroyed by the fire, from which it is very
apparent that either plaintiff's claim for the inventory made after the fire is false and fraudulent.
After Exhibit 8 was completed showing that the value of the merchandise in the bodegas at the time of
the fire was P4,823.20, Glegg and Zulueta and Heintsch, as the representative of the insurance company,
went with Tan Chong U, the manager of the plaintiff, and F. M. Britto to plaintiff's bodegas for the
purpose of checking the inventory made by the adjustors and comparing it with the claim made by the
plaintiff. Arriving upon the scene, they asked Tan Chong U to point out to them where the missing
merchandise and effects had been stored which he was unable to do, and the only explanation which he
could make was that the missing merchandise and effect had been completely consumed by the fire, and
that no trace of them whatever was left. It also appears that Mr. Herridge on behalf of the adjustors made
demand upon Tan Chong U as the manager of the plaintiff to furnish him with all the invoices of the
merchandise which the plaintiff claims to have stored in his bodegas at the time of the fire, with the
exception of the alleged invoices of the cigars, cigarettes and candies, which were previously delivered,
in response to which Tan Chong U stated that it was impossible for him to deliver the invoices because
many of them were no in his possession as he had made the purchases in cash.
It further appears that immediately after the fire four different photographs were taken of the merchandise
as it appeared after the fire, all of which corroborate the inventory know as Exhibit 8 as to the amount,
kind and quality of the merchandise in the bodegas at the time of the fire, and are conclusive proof that
plaintiff's claim for P30,000 is both false and fraudulent.
While it is true that a small portion of the merchandise might have been consumed, and the evidence of
its existence completely destroyed by the fire, yet in very nature of things, a large portion of it would not
be destroyed, and some evidence would be left by which the amount, kind and quality of it could be
substantially ascertained and determined.
Photography is an exact science. Witness pro and con may testify, but a photograph of a scene is not a
false witness, and is conclusive evidence of the actual facts appearing on the photograph.
Based upon the oral evidence of the defendant, together with the photographs in question, which
convingly show the actual conditions in the bodegas immediately after the fire, we are clearly of the
opinion that plaintiff's claim is false and fraudulent within the terms and definitions of the policy, and that
the value of the merchandise destroyed by the fire would not exceed P5,000.
Although much latitude should be given to the insured in presenting his proof of claim as to the value of
his loss, in particular as to price, kind and quality of the property destroyed, yet where the proof is
conclusive, as in this case, that the insured made a claim for a large amount of property which was never
in the bodegas at the time of the of the fire and for a much larger amount of property than was actually in
the bodegas, it makes the whole claim false and fraudulent, the legal effect of which is to bar plaintiff
from recovery of the amount of its actual loss.
The judgment of the lower court is reversed and the complaint dismissed, with costs. So ordered.
 [ G.R. No. 200784, August 07, 2013 ] WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff. Defendant is
hereby ordered:
MALAYAN INSURANCE COMPANY, INC., PETITIONER, VS. PAP CO., LTD. (PHIL.
BRANCH), RESPONDENT. a) To pay plaintiff the sum of FIFTEEN MILLION PESOS (P15,000,000.00) as and for indemnity for
the loss under the fire insurance policy, plus interest thereon at the rate of 12% per annum from the
DECISION time of loss on October 12, 1997 until fully paid;
 
MENDOZA, J.:
b) To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (PhP500,000.00) as and by
Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court is the October 27, way of attorney’s fees; [and,]
2011 Decision[1] of the Court of Appeals (CA), which affirmed with modification the September 17, 2009
 
Decision[2] of the Regional Trial Court, Branch 15, Manila (RTC), and its February 24, 2012
Resolution[3] denying the motion for reconsideration filed by petitioner Malayan Insurance Company.,
Inc. (Malayan). c) To pay the costs of suit.

The Facts SO ORDERED.[5]

The RTC explained that Malayan is liable to indemnify PAP for the loss under the subject fire insurance
The undisputed factual antecedents were succinctly summarized by the CA as follows: policy because, although there was a change in the condition of the thing insured as a result of the
transfer of the subject machineries to another location, said insurance company failed to show proof that
On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance Policy No. F-00227- such transfer resulted in the increase of the risk insured against. In the absence of proof that the alteration
000073 to PAP Co., Ltd. (PAP Co.) for the latter’s machineries and equipment located at Sanyo Precision of the thing insured increased the risk, the contract of fire insurance is not affected per Article 169 of the
Phils. Bldg., Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite (Sanyo Building). The insurance, which Insurance Code.
was for Fifteen Million Pesos (?15,000,000.00) and effective for a period of one (1) year, was procured
by PAP Co. for Rizal Commercial Banking Corporation (RCBC), the mortgagee of the insured The RTC further stated that PAP’s notice to Rizal Commercial Banking Corporation (RCBC) sufficiently
machineries and equipment. complied with the notice requirement under the policy considering that it was RCBC which procured the
insurance. PAP acted in good faith in notifying RCBC about the transfer and the latter even conducted an
After the passage of almost a year but prior to the expiration of the insurance coverage, PAP Co. renewed inspection of the machinery in its new location.
the policy on an “as is” basis. Pursuant thereto, a renewal policy, Fire Insurance Policy No. F-00227-
000079, was issued by Malayan to PAP Co. for the period May 13, 1997 to May 13, 1998. Not contented, Malayan appealed the RTC decision to the CA basically arguing that the trial court erred
in ordering it to indemnify PAP for the loss of the subject machineries since the latter, without notice
On October 12, 1997 and during the subsistence of the renewal policy, the insured machineries and and/or consent, transferred the same to a location different from that indicated in the fire insurance
equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim with Malayan in the policy.
amount insured.
Ruling of the CA
In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at the time of the
loss, the insured machineries and equipment were transferred by PAP Co. to a location different from that
indicated in the policy. Specifically, that the insured machineries were transferred in September 1996 On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC decision but deleted
from the Sanyo Building to the Pace Pacific Bldg., Lot 14, Block 14, Phase III, PEZA, Rosario, Cavite the attorney’s fees. The decretal portion of the CA decision reads:
(Pace Pacific). Contesting the denial, PAP Co. argued that Malayan cannot avoid liability as it was
informed of the transfer by RCBC, the party duty-bound to relay such information. However, Malayan
WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan Insurance Company
reiterated its denial of PAP Co.’s claim. Distraught, PAP Co. filed the complaint below against Malayan.
[4] must indemnify PAP Co. Ltd the amount of Fifteen Million Pesos (PhP15,000,000.00) for the loss under
the fire insurance policy, plus interest thereon at the rate of 12% per annum from the time of loss on
October 12, 1997 until fully paid. However, the Five Hundred Thousand Pesos (PhP500,000.00) awarded
Ruling of the RTC to PAP Co., Ltd. as attorney’s fees is DELETED. With costs.

SO ORDERED.[6]
On September 17, 2009, the RTC handed down its decision, ordering Malayan to pay PAP Company Ltd
(PAP) an indemnity for the loss under the fire insurance policy as well as for attorney’s fees. The The CA wrote that Malayan failed to show proof that there was a prohibition on the transfer of the
dispositive portion of the RTC decision reads: insured properties during the efficacy of the insurance policy. Malayan also failed to show that its
contractual consent was needed before carrying out a transfer of the insured properties. Despite its bare
claim that the original and the renewed insurance policies contained provisions on transfer limitations of
the insured properties, Malayan never cited the specific provisions.
C.
The CA further stated that even if there was such a provision on transfer restrictions of the insured
properties, still Malayan could not escape liability because the transfer was made during the subsistence
of the original policy, not the renewal policy. PAP transferred the insured properties from the Sanyo
Factory to the Pace Pacific Building (Pace Factory) sometime in September 1996. Therefore, Malayan
was aware or should have been aware of such transfer when it issued the renewal policy on May 14,
1997. The CA opined that since an insurance policy was a contract of adhesion, any ambiguity must be
resolved against the party that prepared the contract, which, in this case, was Malayan.
D.
Finally, the CA added that Malayan failed to show that the transfer of the insured properties increased the
risk of the loss. It, thus, could not use such transfer as an excuse for not paying the indemnity to PAP.
Although the insurance proceeds were payable to RCBC, PAP could still sue Malayan to enforce its
rights on the policy because it remained a party to the insurance contract.
II
Not in conformity with the CA decision, Malayan filed this petition for review anchored on the following
TRANSFERRED TO A LOCATION DIFFERENT FROM WHAT WAS INDICATED IN
THE INSURANCE POLICY.
IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE
CONDITIONS AND LIMITATIONS TO THE RENEWAL POLICY WHICH ARE THE
REASONS WHY ITS CLAIM WAS DENIED IN THE FIRST PLACE. IN FACT, THE BEST
PROOF THAT RESPONDENT PAP CO. RECOGNIZES THESE CONDITIONS AND
LIMITATIONS IS THE FACT THAT ITS ENTIRE EVIDENCE FOCUSED ON ITS
FACTUAL ASSERTION THAT IT SUPPOSEDLY NOTIFIED PETITIONER MALAYAN
OF THE TRANSFER AS REQUIRED BY THE INSURANCE POLICY.
MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE
WAS AN INCREASE IN RISK BECAUSE OF THE UNILATERAL TRANSFER OF THE
INSURED PROPERTIES. IN FACT, THIS PIECE OF EVIDENCE WAS UNREBUTTED BY
RESPONDENT PAP CO.

GROUNDS
THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND
ESTABLISHED DECISIONS OF THE HONORABLE COURT WHEN IT IMPOSED INTEREST
I AT THE RATE OF TWELVE PERCENT (12%) INTEREST FROM THE TIME OF THE LOSS
UNTIL FULLY PAID.

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN

ACCORDANCE WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE
COURT WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT AND THUS
A. JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY
RULING IN THE QUESTIONED DECISION AND RESOLUTION THAT PETITIONER
IS NOT A LOAN OR FORBEARANCE OF MONEY FROM WHICH A BREACH
MALAYAN IS LIABLE UNDER THE INSURANCE CONTRACT BECAUSE:
ENTITLES A PLAINTIFF TO AN AWARD OF INTEREST AT THE RATE OF TWELVE
PERCENT (12%) PER ANNUM.

B. MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE

A. CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER
MALAYAN WAS ABLE TO PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF
THE RENEWAL POLICY ISSUED TO RESPONDENT PAP CO., THERE IS AN
AFFIRMATIVE WARRANTY OR A REPRESENTATION MADE BY THE INSURED
THAT THE “LOCATION OF THE RISK” WAS AT THE SANYO BUILDING. IT IS
LIKEWISE UNDISPUTED THAT WHEN THE RENEWAL POLICY WAS ISSUED TO
RESPONDENT PAP CO., THE INSURED PROPERTIES WERE NOT AT THE SANYO
BUILDING BUT WERE AT A DIFFERENT LOCATION, THAT IS, AT THE PACE
FACTORY AND IT WAS IN THIS DIFFERENT LOCATION WHEN THE LOSS INSURED
AGAINST OCCURRED. THESE SET OF UNDISPUTED FACTS, BY ITSELF ALREADY
ENTITLES PETITIONER MALAYAN TO CONSIDER THE RENEWAL POLICY AS
AVOIDED OR RESCINDED BY LAW, BECAUSE OF CONCEALMENT,
MISREPRESENTATION AND BREACH OF AN AFFIRMATIVE WARRANTY UNDER
SECTIONS 27, 45 AND 74 IN RELATION TO SECTION 31 OF THE INSURANCE CODE,
RESPECTIVELY.
B. RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT
COMMIT CONCEALMENT, MISREPRESENTATION OR BREACH OF AN
AFFIRMATIVE WARRANTY WHEN IT FAILED TO PROVE THAT IT INFORMED
PETITIONER MALAYAN THAT THE INSURED PROPERTIES HAD BEEN
SHOULD NOT HAVE BEEN APPLIED BY THE COURT OF APPEALS BECAUSE THERE
WAS NEVER ANY FINDING THAT PETITIONER MALAYAN UNJUSTIFIABLY
REFUSED OR WITHHELD THE PROCEEDS OF THE INSURANCE POLICY BECAUSE
IN THE FIRST PLACE, THERE WAS A LEGITIMATE DISPUTE OR DIFFERENCE IN
OPINION ON WHETHER RESPONDENT PAP CO. COMMITTED CONCEALMENT,
MISREPRESENTATION AND BREACH OF AN AFFIRMATIVE WARRANTY WHICH
ENTITLES PETITIONER MALAYAN TO RESCIND THE INSURANCE POLICY AND/OR
TO CONSIDER THE CLAIM AS VOIDED.
III
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN
ACCORDANCE WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE
COURT WHEN IT AGREED WITH THE TRIAL COURT AND HELD IN THE QUESTIONED
DECISION THAT THE PROCEEDS OF THE INSURANCE CONTRACT IS PAYABLE TO
RESPONDENT PAP CO. DESPITE THE EXISTENCE OF A MORTGAGEE CLAUSE IN THE
INSURANCE POLICY.
IV properties under the fire insurance policy.

THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND
JURISPRUDENCE WHEN IT HELD IN THE QUESTIONED DECISION AND RESOLUTION
THAT THE INTERPRETATION MOST FAVORABLE TO THE INSURED SHALL BE
ADOPTED.[7]
Malayan basically argues that it cannot be held liable under the insurance contract because PAP
committed concealment, misrepresentation and breach of an affirmative warranty under the renewal
policy when it transferred the location of the insured properties without informing it. Such transfer
affected the correct estimation of the risk which should have enabled Malayan to decide whether it was
willing to assume such risk and, if so, at what rate of premium. The transfer also affected Malayan’s
ability to control the risk by guarding against the increase of the risk brought about by the change in
conditions, specifically the change in the location of the risk.
Malayan claims that PAP concealed a material fact in violation of Section 27 of the Insurance
Code[8] when it did not inform Malayan of the actual and new location of the insured properties. In fact,
before the issuance of the renewal policy on May 14, 1997, PAP even informed it that there would be no
changes in the renewal policy. Malayan also argues that PAP is guilty of breach of warranty under the
renewal policy in violation of Section 74 of the Insurance Code [9] when, contrary to its affirmation in the
renewal policy that the insured properties were located at the Sanyo Factory, these were already
transferred to the Pace Factory. Malayan adds that PAP is guilty of misrepresentation upon a material fact
in violation of Section 45 of the Insurance Code [10] when it informed Malayan that there would be no
changes in the original policy, and that the original policy would be renewed on an “as is” basis.
Malayan further argues that PAP failed to discharge the burden of proving that the transfer of the insured
properties under the insurance policy was with its knowledge and consent. Granting that PAP informed
RCBC of the transfer or change of location of the insured properties, the same is irrelevant and does not
bind Malayan considering that RCBC is a corporation vested with separate and distinct juridical
personality. Malayan did not consent to be the principal of RCBC. RCBC did not also act as Malayan’s
representative.
With regard to the alleged increase of risk, Malayan insists that there is evidence of an increase in risk as
a result of the unilateral transfer of the insured properties. According to Malayan, the Sanyo Factory was
occupied as a factory of automotive/computer parts by the assured and factory of zinc & aluminum die
cast and plastic gear for copy machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2
A, while Pace Factory was occupied as factory that repacked silicone sealant to plastic cylinders with a
rate of 0.657% under 6.1.2 A.
PAP’s position
On the other hand, PAP counters that there is no evidence of any misrepresentation, concealment or
deception on its part and that its claim is not fraudulent. It insists that it can still sue to protect its rights
and interest on the policy notwithstanding the fact that the proceeds of the same was payable to RCBC,
and that it can collect interest at the rate of 12% per annum on the proceeds of the policy because its
claim for indemnity was unduly delayed without legal justification.
The Court’s Ruling
The Court agrees with the position of Malayan that it cannot be held liable for the loss of the insured
As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP obtained a ?
15,000,000.00 fire insurance policy from Malayan covering its machineries and equipment effective for
one (1) year or until May 13, 1997; that the policy expressly stated that the insured properties were
located at “Sanyo Precision Phils. Building, Phase III, Lots 4 & 6, Block 15, EPZA, Rosario, Cavite”;
that before its expiration, the policy was renewed [11] on an “as is” basis for another year or until May 13,
1998; that the subject properties were later transferred to the Pace Factory also in PEZA; and that on
October 12, 1997, during the effectivity of the renewal policy, a fire broke out at the Pace Factory which
totally burned the insured properties.
The policy forbade the removal of the insured properties unless sanctioned by Malayan 
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as regards the property
affected unless the insured, before the occurrence of any loss or damage, obtains the sanction of the
company signified by endorsement upon the policy, by or on behalf of the Company:
xxxxxxxxxxxx
(c) If property insured be removed to any building or place other than in that which is herein stated to
be insured.[12]
Evidently, by the clear and express condition in the renewal policy, the removal of the insured property to
any building or place required the consent of Malayan. Any transfer effected by the insured, without the
insurer’s consent, would free the latter from any liability.
The respondent failed to notify, and to obtain the consent of, Malayan regarding the removal  
The records are bereft of any convincing and concrete evidence that Malayan was notified of the transfer
of the insured properties from the Sanyo factory to the Pace factory. The Court has combed the records
and found nothing that would show that Malayan was duly notified of the transfer of the insured
properties.
What PAP did to prove that Malayan was notified was to show that it relayed the fact of transfer to
RCBC, the entity which made the referral and the named beneficiary in the policy. Malayan and RCBC
might have been sister companies, but such fact did not make one an agent of the other. The fact that
RCBC referred PAP to Malayan did not clothe it with authority to represent and bind the said insurance
company. After the referral, PAP dealt directly with Malayan.
The respondent overlooked the fact that during the November 9, 2006 hearing, [13] its counsel stipulated in
open court that it was Malayan’s authorized insurance agent, Rodolfo Talusan, who procured the original
policy from Malayan, not RCBC. This was the reason why Talusan’s testimony was dispensed with.
Moreover, in the previous hearing held on November 17, 2005, [14] PAP’s hostile witness, Alexander
Barrera, Administrative Assistant of Malayan, testified that he was the one who procured Malayan’s
renewal policy, not RCBC, and that RCBC merely referred fire insurance clients to Malayan. He stressed,
however, that no written referral agreement exists between RCBC and Malayan. He also denied that PAP
notified Malayan about the transfer before the renewal policy was issued. He added that PAP, through
Maricar Jardiniano (Jardiniano), informed him that the fire insurance would be renewed on an “as is
basis.”[15]
Q Do you know a certain Maricar Jardiniano?
Granting that any notice to RCBC was binding on Malayan, PAP’s claim that it notified RCBC and
Malayan was not indubitably established. At best, PAP could only come up with the hearsay testimony of A Yes, sir.
its principal witness, Branch Manager Katsumi Yoneda (Mr. Yoneda), who testified as follows:
Q What did you do as Branch Manager of Pap Co. Ltd.?  
A What I did I instructed my Secretary, because these equipment was bank loan and because of the insurance I
Q Why do you know her?
told my secretary to notify.

  A Because she is my secretary.

Q To notify whom?  

A I told my Secretary to inform the bank. Q So how many secretaries did you have at that time?

A Two, sir.

Q You are referring to RCBC?  

A Yes, sir. Q What happened with the instruction that you gave to your secretary Dory Ramos about the matter
of informing the defendant Malayan Insurance Co of the new location of the insured properties?

A She informed me that the notification was already given to Malayan Insurance.

Q Aside from what she told you how did you know that the information was properly relayed by the
said secretary, Dory Ramos, to Malayan Insurance?
Q After the RCBC was informed in the manner you stated, what did you do regarding the new
location of these properties at Pace Pacific Bldg. insofar as Malayan Insurance Company is A I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.
concerned?
 
A After that transfer, we informed the RCBC about the transfer of the equipment and also Malayan
Insurance but we were not able to contact Malayan Insurance so I instructed again my secretary
Q Now after you were told by your secretary, Dory Ramos, that she was able to inform Malayan
to inform Malayan about the transfer.
Insurance Company about the transfer of the properties insured to the new location, do you know
what happened insofar this information was given to the defendant Malayan Insurance?
 
A I heard that someone from Malayan Insurance came over to our company.
Q Who was the secretary you instructed to contact Malayan Insurance, the defendant in this case?
 
A Dory Ramos.
Q Did you come to know who was that person who came to your place at Pace Pacific?
 
A I do not know, sir.
Q How many secretaries do you have at that time in your office?
 
A Only one, sir.
Q How did you know that this person from Malayan Insurance came to your place?
 
 Malayan argues that the change of location of the subject properties from the Sanyo Factory to the Pace
A It is according to the report given to me. Factory increased the hazard to which the insured properties were exposed. Malayan wrote:

  With regards to the exposure of the risk under the old location, this was occupied as factory of
automotive/computer parts by the assured, and factory of zinc & aluminum die cast, plastic gear for copy
Q Who gave that report to you? machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A. But under Pace Pacific Mfg.
Corporation this was occupied as factory that repacks silicone sealant to plastic cylinders with a rate of
0.657% under 6.1.2 A. Hence, there was an increase in the hazard as indicated by the increase in rate. [18]
A Dory Ramos.
The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to a hazardous
 
environment and negatively affected the fire rating stated in the renewal policy. The increase in tariff rate
from 0.449% to 0.657% put the subject properties at a greater risk of loss. Such increase in risk would
Q Was that report in writing or verbally done? necessarily entail an increase in the premium payment on the fire policy.

A Verbal.[16] [Emphases supplied]
The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no personal knowledge of
the notice to either Malayan or RCBC. PAP should have presented his secretaries, Dory Ramos and
Maricar Jardiniano, at the witness stand. His testimony alone was unreliable.
Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the insured properties were
transferred to a different location only after the renewal of the fire insurance policy.
COURT
 
Q When did you transfer the machineries and equipments before the renewal or after the renewal of
the insurance?
A After the renewal.
COURT  concealment.
Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the importance
of the issue, PAP failed to refute Malayan’s argument on the increased risk.
Malayan is entitled to rescind the insurance contract 
Considering that the original policy was renewed on an “as is basis,” it follows that the renewal policy
carried with it the same stipulations and limitations. The terms and conditions in the renewal policy
provided, among others, that the location of the risk insured against is at the Sanyo factory in PEZA. The
subject insured properties, however, were totally burned at the Pace Factory. Although it was also located
in PEZA, Pace Factory was not the location stipulated in the renewal policy. There being an unconsented
removal, the transfer was at PAP’s own risk. Consequently, it must suffer the consequences of the fire.
Thus, the Court agrees with the report of Cunningham Toplis Philippines, Inc., an international loss
adjuster which investigated the fire incident at the Pace Factory, which opined that “[g]iven that the
location of risk covered under the policy is not the location affected, the policy will, therefore, not
respond to this loss/claim.”[19]
It can also be said that with the transfer of the location of the subject properties, without notice
and without Malayan’s consent, after the renewal of the policy, PAP clearly committed concealment,
misrepresentation and a breach of a material warranty. Section 26 of the Insurance Code provides:
Section 26. A neglect to communicate that which a party knows and ought to communicate, is called a

  Under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a contract of
insurance.”
Q You understand my question?
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the insurance
A Yes, Your Honor.[17] [Emphasis supplied] contract in case of an alteration in the use or condition of the thing insured. Section 168 of the Insurance
Code provides, as follows:
This enfeebles PAP’s position that the subject properties were already transferred to the Pace factory
before the policy was renewed. Section 68. An alteration in the use or condition of a thing insured from that to which it is limited by the
policy made without the consent of the insurer, by means within the control of the insured, and increasing
The transfer from the Sanyo Factory to the PACE Factory increased the risk.  the risks, entitles an insurer to rescind a contract of fire insurance.

The courts below held that even if Malayan was not notified thereof, the transfer of the insured properties Accordingly, an insurer can exercise its right to rescind an insurance contract when the following
to the Pace Factory was insignificant as it did not increase the risk. conditions are present, to wit:
1) the policy limits the use or condition of the thing insured;

2) there is an alteration in said use or condition;

3) the alteration is without the consent of the insurer;

4) the alteration is made by means within the insured’s control; and

5) the alteration increases the risk of loss. [20]

In the case at bench, all these circumstances are present. It was clearly established that the renewal policy
stipulated that the insured properties were located at the Sanyo factory; that PAP removed the properties
without the consent of Malayan; and that the alteration of the location increased the risk of loss.

WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is

hereby REVERSED and SET ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby
declared NOT liable for the loss of the insured machineries and equipment suffered by PAP Co., Ltd.

SO ORDERED.
 [ G.R. No. 198588, July 11, 2012 ] are responsible in the event of loss and/or damage during the currency of this policy, whilst contained in
the building of one lofty storey in height, constructed of concrete and/or hollow blocks with portion of
UNITED MERCHANTS CORPORATION, PETITIONER, VS. COUNTRY BANKERS galvanized iron sheets, under galvanized iron rood, occupied as Christmas lights storage. [5]
INSURANCE CORPORATION, RESPONDENT.

DECISION On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A to form
part of the Insurance Policy. Endorsement F/96-154 provides that UMC’s stocks in trade were insured
CARPIO, J.: against additional perils, to wit: “typhoon, flood, ext. cover, and full earthquake.” The sum insured was
also increased to P50,000,000.00 effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC issued
The Case Endorsement F/96-157 where the name of the assured was changed from Alfredo Tan to UMC.

On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment
This Petition for Review on Certiorari [1] seeks to reverse the Court of Appeals’ Decision [2] dated 16 June Corporation (CRM) to investigate and evaluate UMC’s loss by reason of the fire. CBIC’s reinsurer,
2011 and its Resolution[3] dated 8 September 2011 in CA-G.R. CV No. 85777. The Court of Appeals Central Surety, likewise requested the National Bureau of Investigation (NBI) to conduct a parallel
reversed the Decision[4] of the Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim investigation. On 6 July 1996, UMC, through CRM, submitted to CBIC its Sworn Statement of Formal
on the Insurance Policy is void. Claim, with proofs of its loss.

The Facts On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from CBIC.
On 25 February 1997, UMC received CBIC’s letter, dated 10 January 1997, rejecting UMC’s claim due
to breach of Condition No. 15 of the Insurance Policy. Condition No. 15 states:
The facts, as culled from the records, are as follows:
If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or
Petitioner United Merchants Corporation (UMC) is engaged in the business of buying, selling, and if any fraudulent means or devices are used by the Insured or anyone acting in his behalf to obtain any
manufacturing Christmas lights. UMC leased a warehouse at 19-B Dagot Street, San Jose Subdivision, benefit under this Policy; or if the loss or damage be occasioned by the willful act, or with the connivance
Barrio Manresa, Quezon City, where UMC assembled and stored its products. of the Insured, all the benefits under this Policy shall be forfeited. [6]

On 6 September 1995, UMC’s General Manager Alfredo Tan  insured UMC’s stocks in trade of
Christmas lights against fire with defendant Country Bankers Insurance Corporation (CBIC) for
P15,000,000.00.  The Fire Insurance Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice No.
12959A, valid until 6 September 1996, states:
On 19 February 1998, UMC filed a Complaint[7] against CBIC with the RTC of Manila. UMC anchored
its insurance claim on the Insurance Policy, the Sworn Statement of Formal Claim earlier submitted, and
the Certification dated 24 July 1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio J.
Garcia of the Bureau of Fire Protection. The Certification dated 24 July 1996 provides that:

AMOUNT OF INSURANCE: FIFTEEN This is to certify that according to available records of this office, on or about 6:10 P.M. of July 3, 1996,
a fire broke out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon
City incurring an estimated damage of Fifty-Five Million Pesos (P55,000,000.00) to the building and
MILLION PESOS contents, while the reported insurance coverage amounted to Fifty Million Pesos (P50,000,000.00) with
Country Bankers Insurance Corporation.
PHILIPPINE
The Bureau further certifies that no evidence was gathered to prove that the establishment was willfully,
feloniously and intentionally set on fire.
CURRENCY
That the investigation of the fire incident is already closed being ACCIDENTAL in nature. [8]

x x x In its Answer with Compulsory Counterclaim [9] dated 4 March 1998,  CBIC admitted the issuance of the
Insurance Policy to UMC but raised the following defenses: (1) that the Complaint states no cause of
PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the properties of the action; (2)  that UMC’s claim has already prescribed; and (3) that UMC’s fire claim is tainted with fraud. 
Assured or held by them in trust, on commissions, or on joint account with others and/or for which they CBIC alleged that UMC’s claim was fraudulent because UMC’s Statement of Inventory showed that it
had no stocks in trade as of  31 December 1995, and that UMC’s suspicious purchases for the year 1996 General Insurance, the insurer of Perfect Investment Company, Inc., the warehouse owner.  When asked
did not even amount to P25,000,000.00. UMC’s GIS and Financial Reports further revealed that it had to bring documents related to the insurance of Perfect Investment Company, Inc., Batallones brought the
insufficient capital, which meant UMC could not afford the alleged P50,000,000.00 worth of stocks in papers of Perpetual Investment, Inc.
trade.
The Ruling of the Regional Trial Court
In its Reply[10] dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance Policy.
UMC claimed that it did not make any false declaration because the invoices were genuine and the
Statement of Inventory was for internal revenue purposes only, not for its insurance claim. On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the dispositive
portion of which reads:
During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMC’s
disbursing officer. Ebora testified that UMC’s stocks in trade, at the time of the fire, consisted of: (1) raw WHEREFORE, judgment is hereby rendered in favor of plaintiff and ordering defendant to pay plaintiff:
materials for its Christmas lights; (2)  Christmas lights already assembled; and (3) Christmas lights
purchased from local suppliers. These stocks in trade were delivered from August 1995 to May 1996. She a) the sum of P43,930,230.00 as indemnity with interest thereon at 6% per annum from November 2003
stated that Straight Cargo Commercial Forwarders delivered the imported materials to the warehouse, until fully paid;
evidenced by delivery receipts. However, for the year 1996, UMC had no importations and only bought b) the sum of P100,000.00 for exemplary damages;
from its local suppliers. Ebora identified the suppliers as Fiber Technology Corporation from which c) the sum of P100,000.00 for attorney’s fees; and
UMC bought stocks worth P1,800,000.00 on 20 May 1996; Fuze Industries Manufacturer Philippines d) the costs of suit.
from which UMC bought stocks worth P19,500,000.00 from 20 January 1996 to 23 February 1996; and
Tomco Commercial Press from which UMC bought several Christmas boxes. Ebora testified that all Defendant’s counterclaim is denied for lack of merit.
these deliveries were not yet paid. Ebora also presented UMC’s Balance Sheet, Income Statement and
Statement of Cash Flow. Per her testimony, UMC’s purchases amounted to P608,986.00 in 1994; SO ORDERED.[11]
P827,670.00 in 1995; and P20,000,000.00 in 1996. Ebora also claimed that UMC had sales only from its
fruits business but no sales from its Christmas lights for the year 1995.
The RTC found no dispute as to UMC’s fire insurance contract with CBIC. Thus, the RTC ruled for
The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25 workers to UMC’s entitlement to the insurance proceeds, as follows:
assemble and pack Christmas lights for UMC from 28 March 1996 to 3 July 1996. The third witness,
Metropolitan Bank and Trust Company (MBTC) Officer Cesar Martinez, stated that UMC opened letters Fraud is never presumed but must be proved by clear and convincing evidence. (see Alonso v. Cebu
of credit with MBTC for the year 1995 only. The fourth witness presented was Ernesto Luna (Luna), the Country Club, 417 SCRA 115 [2003]) Defendant failed to establish by clear and convincing evidence
delivery checker of Straight Commercial Cargo Forwarders. Luna affirmed the delivery of UMC’s goods that the documents submitted to the SEC and BIR were true. It is common business practice for
to its warehouse on 13 August 1995, 6 September 1995,         8 September 1995, 24 October 1995, 27 corporations to have 2 sets of reports/statements for tax purposes. The stipulated documents of plaintiff
October 1995, 9 November 1995, and 19 December 1995. Lastly, CRM’s adjuster Dominador Victorio (Exhs. 2 – 8) may not have been accurate.
testified that he inspected UMC’s warehouse and prepared preliminary reports in this connection.
The conflicting findings of defendant’s adjuster, CRM Adjustment [with stress] and that made by Atty.
On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a Securities Cabrera & Mr. Lazaro for Central Surety shall be resolved in favor of the former. Definitely the former’s
and Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera), and NBI Investigator finding is more credible as it was made soon after the fire while that of the latter was done 4 months later.
Arnold Lazaro (Lazaro). Caguindagan testified that he inspected the burned warehouse on 5 July 1996, Certainly it would be a different situation as the site was no longer the same after the clearing up
took pictures of it and referred the claim to an independent adjuster. The SEC representative’s testimony operation which is normal after a fire incident. The Christmas lights and parts could have been swept
was dispensed with, since the parties stipulated on the existence of certain documents, to wit: (1) UMC’s away. Hence the finding of the latter appears to be speculative to benefit the reinsurer and which
GIS for 1994-1997; (2) UMC’s Financial Report as of       31 December 1996; (3) SEC Certificate that defendant wants to adopt to avoid liability.
UMC did not file GIS or Financial Reports for certain years; and (4) UMC’s Statement of Inventory as of
31 December 1995 filed with the BIR. The CRM Adjustment report found no arson and confirmed substantial stocks in the burned
warehouse (Exhs. QQQ) [underscoring supplied]. This is bolstered by the BFP certification that there was
Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMC’s claim. On 19 no proof of arson and the fire was accidental (Exhs. PPP). The certification by a government agency like
November 1996, they concluded that arson was committed based from their interview BFP is presumed to be a regular performance of official duty. “Absent convincing evidence to the
with barangay officials and the pictures showing that blackened surfaces were present at different parts of contrary, the presumption of regularity in the performance of official functions has to be upheld.” (People
the warehouse. On cross-examination, Lazaro admitted that they did not conduct a forensic investigation vs. Lapira, 255 SCRA 85) The report of UCPB General Insurance’s adjuster also found no arson so that
of the warehouse, nor did they file a case for arson. the burned warehouse owner PIC was indemnified.[12]

For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the  documents of UCPB
Hence, CBIC filed an appeal with the Court of Appeals (CA). February 12, 1996
February 20, 1996
The Ruling of the Court of Appeals February 23, 1996

On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of the Exhs.  “EE”-“HH”, Tomco Commercial 1,712,000.00 December 19, 1995
Decision reads: inclusive Press January 24, 1996
February 21, 1996
WHEREFORE, in view of the foregoing premises, the instant appeal is GRANTED and the  Decision of November 24, 1995
the Regional Trial Court, of the National Judicial Capital Region, Branch 3 of the City of Manila dated
June 16, 2005 in Civil Case No. 98-87370 is REVERSED  and SET ASIDE. The plaintiff-appellee’s
claim upon its insurance policy is deemed avoided. Exhs. “II”-“QQ”, Precious Belen Trading 2,720,400.00 January 13, 1996
inclusive January 19, 1996
SO ORDERED.[13] January 26, 1996
February 3, 1996
February 13, 1996
The CA ruled that UMC’s claim under the Insurance Policy is void. The CA found that the fire was February 20, 1996
intentional in origin, considering the array of evidence submitted by CBIC, particularly the pictures taken February 27, 1996
and the reports of Cabrera and Lazaro, as opposed to UMC’s failure to explain the details of the alleged
fire accident. In addition, it found that UMC’s claim was overvalued through fraudulent transactions. The
Exhs. “RR”- “EEE”, Wisdom Manpower 361,966.00 April 3, 1996
CA ruled:
inclusive Services April 12, 1996
April 19, 1996
We have meticulously gone over the entirety of the evidence submitted by the parties and have come up
April 26, 1996
with a conclusion that the claim of the plaintiff-appellee was indeed overvalued by transactions which
May 3, 1996
were fraudulently concocted so that the full coverage of the insurance policy will have to be fully
May 10, 1996
awarded to the plaintiff-appellee.
May 17, 1996
May 24, 1996
First, We turn to the backdrop of the plaintiff-appellee’s case, thus, [o]n September 6, 1995 its stocks-in-
June 7, 1996
trade were insured for Fifteen Million Pesos and on May 7, 1996 the same was increased to 50 Million
June 14, 1996
Pesos. Two months thereafter, a fire gutted the plaintiff-appellee’s warehouse.
June 21, 1996
June 28, 1996
Second, We consider the reported purchases of the plaintiff-appellee as shown in its financial report dated
July 5, 1996
December 31, 1996 vis-à-vis the testimony of Ms. Ebora thus:

1994- P608,986.00 Exhs. “GGG”- “NNN”, Costs of Letters of Credit 15,159,144.71 May 29, 1995
1995- P827,670.00 inclusive for imported raw June 15, 1995
1996- P20,000,000.00 (more or less) which were purchased for a period of one month. materials July 5, 1995
September 4, 1995
Third, We shall also direct our attention to the alleged true and complete purchases of the plaintiff- October 2, 1995
appellee as well as the value of all stock-in-trade it had at the time that the fire occurred. Thus: October 27, 1995
January 8, 1996
March 19, 1996
Exhibit Source Amount (pesos) Dates Covered

Exhs. “GGG-11” -  SCCFI statements of 384,794.38 June 15, 1995

Exhs. “P”-“DD”, Fuze Industries 19,550,400.00 January 20, 1996 “GGG-24”, account June 28, 1995
inclusive Manufacturer Phils. January 31, 1996 “HHH-12”, “HHH-22”, August 1, 1995
“III-11”, “III-14”, September 4, 1995 At the outset, CBIC assails this petition as defective since what UMC ultimately wants this Court to
“JJJ-13”, “KKK-11”, September 8, 1995 review are questions of fact. However, UMC argues that where the findings of the CA are in conflict with
“LLL-5” September 11, 1995 those of the trial court, a review of the facts may be made. On this procedural issue, we find UMC’s
October 30, 199[5] claim meritorious.
November 10, 1995
December 21, 1995 A petition for review under Rule 45 of the Rules of Court specifically provides that only questions of law
may be raised. The findings of fact of the CA are final and conclusive and this Court will not review them
on appeal,[17] subject to exceptions as when the findings of the appellate court conflict with the findings of
TOTAL 44,315,024.31 the trial court.[18]  Clearly, the present case falls under the exception. Since UMC properly raised the
conflicting findings of the lower courts, it is proper for this Court to resolve such contradiction.

Fourth, We turn to the allegation of fraud by the defendant-appellant by thoroughly looking through the
pieces of evidence that it adduced during the trial. The latter alleged that fraud is present in the case at bar
as shown by the discrepancy of the alleged purchases from that of the reported purchases made by
plaintiff-appellee. It had also averred that fraud is present when upon verification of the address of Fuze
Industries, its office is nowhere to be found. Also, the defendant-appellant expressed grave doubts as to
the purchases of the plaintiff-appellee sometime in 1996 when such purchases escalated to a high 19.5
Million Pesos without any contract to back it up.[14]
On 7 July 2011, UMC filed a Motion for Reconsideration, [15] which the CA denied in its Resolution dated
8 September 2011. Hence, this petition.
The Issues
UMC seeks a reversal and raises the following issues for resolution:
I.
WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW,
APPLICABLE JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON AND
FRAUD IN THE ABSENCE OF “MATERIALLY CONVINCING EVIDENCE.”
II.
WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW,
APPLICABLE JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER
BREACHED ITS WARRANTY.[16]
The Ruling of the Court
Having settled the procedural issue, we proceed to the primordial issue which boils down to whether
UMC is entitled to claim from CBIC the full coverage of its fire insurance policy.
UMC contends that because it had already established a prima facie case against CBIC which failed to
prove its defense, UMC is entitled to claim the full coverage under the Insurance Policy. On the other
hand, CBIC contends that because arson and fraud attended the claim, UMC is not entitled to recover
under Condition No. 15 of the Insurance Policy.
Burden of proof is the duty of any party to present evidence to establish his claim or defense by the
amount of evidence required by law,[19]  which is preponderance of evidence in civil cases. [20]  The party,
whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of proof to obtain a
favorable judgment.[21]  Particularly, in insurance cases, once an insured makes out a prima facie case in
its favor, the burden of evidence shifts to the insurer to controvert the insured’s prima facie case.[22]  In
the present case, UMC established a prima facie case against CBIC. CBIC does not dispute that UMC’s
stocks in trade were insured against fire under the Insurance Policy and that the warehouse, where
UMC’s stocks in trade were stored, was gutted by fire on 3 July 1996, within the duration of the fire
insurance. However, since CBIC alleged an excepted risk, then the burden of evidence shifted to CBIC to
prove such exception.
An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the burden
of establishing that the loss comes within the purview of the exception or limitation. [23] If loss is proved
apparently within a contract of insurance, the burden is upon the insurer to establish that the loss arose
from a cause of loss which is excepted or for which it is not liable, or from a cause which limits its
liability.[24] In the present case, CBIC failed to discharge its primordial burden of establishing that the
damage or loss was caused by arson, a limitation in the policy.
In prosecutions for arson, proof of the crime charged is complete where the evidence establishes: (1)
the corpus delicti, that is, a fire caused by a criminal act; and (2) the identity of the defendants as the one
responsible for the crime.[25] Corpus delicti means the substance of the crime, the fact that a crime has
actually been committed.[26] This is satisfied by proof of the bare occurrence of the fire and of its having
been intentionally caused.[27]
In the present case, CBIC’s evidence did not prove that the fire was intentionally caused by the
insured. First, the findings of CBIC’s witnesses, Cabrera and Lazaro, were based on an investigation
conducted more than four months after the fire. The testimonies of Cabrera and Lazaro, as to the boxes
doused with kerosene as told to them by barangay officials, are hearsay because the barangay officials
were not presented in court. Cabrera and Lazaro even admitted that they did not conduct a forensic
investigation of the warehouse nor did they file a case for arson. [28] Second, the Sworn Statement of
Formal Claim submitted by UMC, through CRM, states that the cause of the fire was “faulty electrical
wiring/accidental in nature.” CBIC is bound by this evidence because in its Answer, it admitted that it
designated CRM to evaluate UMC’s loss. Third, the Certification by the Bureau of Fire Protection states
that the fire was accidental in origin. This Certification enjoys the presumption of regularity, which CBIC
failed to rebut.
Contrary to UMC’s allegation, CBIC’s failure to prove arson does not mean that it also failed to prove
fraud. Qua Chee Gan v. Law Union [29] does not apply in the present case. In Qua Chee Gan,[30] the Court
dismissed the allegation of fraud based on the dismissal of the arson case against the insured, because the
evidence was identical in both cases, thus:
While the acquittal of the insured in the arson case is not res judicata on the present civil action, the
insurer’s evidence, to judge from the decision in the criminal case, is practically identical in both cases
and must lead to the same result, since the proof to establish the defense of connivance at the fire in order
to defraud the insurer “cannot be materially less convincing than that required in order to convict the
insured of the crime of arson” (Bachrach vs. British American Assurance Co., 17 Phil. 536). [31]
In the present case, arson and fraud are two separate grounds based on two different sets of evidence,
either of which can void the insurance claim of UMC. The absence of one does not necessarily result in
the absence of the other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under the policy shall be forfeited,
if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, to
wit:
15. If the claim be in any respect fraudulent, or if any false declaration be made or used in support
thereof, or if any fraudulent means or devices are used by the Insured or anyone acting in his behalf to
obtain any benefit under this Policy; or if the loss or damage be occasioned by the willful act, or with the
connivance of the Insured, all the benefits under this Policy shall be forfeited.
The invoices, however, cannot be taken as genuine. The invoices reveal that the stocks in trade purchased
for 1996 amounts to P20,000,000.00 which were purchased in one month. Thus, UMC needs to prove
purchases amounting to P30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in
the Statement of Inventory it submitted to the BIR, which is considered an entry in official records,
[34]
 UMC stated that it had no stocks in trade as of 31 December 1995. In its defense, UMC alleged that it
did not include as stocks in trade the raw materials to be assembled as Christmas lights, which it had on
31 December 1995. However, as proof of its loss, UMC submitted invoices for raw materials, knowing
that the insurance covers only stocks in trade.
Equally important, the invoices (Exhibits “P”-“DD”) from Fuze Industries Manufacturer Phils. were
suspicious. The purchases, based on the invoices and without any supporting contract, amounted to
P19,550,400.00 worth of Christmas lights from 20 January 1996 to 23 February 1996. The
uncontroverted testimony of Cabrera revealed that there was no Fuze Industries Manufacturer Phils.
located at “55 Mahinhin St., Teacher’s Village, Quezon City,” the business address appearing in the
invoices and the records of the Department of Trade & Industry. Cabrera testified that:
A: Then we went personally to the address as I stated a while ago appearing in the record furnished by
the United Merchants Corporation to the adjuster, and the adjuster in turn now, gave us our basis in
conducting investigation, so we went to this place which according to the records, the address of this
company but there was no office of this company.
Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City and discover the address
indicated by the United Merchants as the place of business of Fuze Industries Manufacturer, Phils. was a
residential place, what then did you do after determining that it was a residential place?
A: We went to the owner of the alleged company as appearing in the Department of Trade & Industry
record, and as appearing a certain Chinese name Mr. Huang, and the address as appearing there is
somewhere in Binondo. We went personally there together with the NBI Agent and I am with them when
the subpoena was served to them, but a male person approached us and according to him, there was no
Fuze Industries Manufacturer, Phils., company in that building sir. [35]

In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,[32]  the Court held that where a fire insurance In Yu Ban Chuan v. Fieldmen’s Insurance, Co., Inc., [36] the Court ruled that the submission of false
policy provides that “if the claim be in any respect fraudulent, or if any false declaration be made or used invoices to the adjusters establishes a clear case of fraud and misrepresentation which voids the insurer’s
in support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting on his liability as per condition of the policy. Their falsity is the best evidence of the fraudulent character of
behalf to obtain any benefit under this Policy,” and the evidence is conclusive that the proof of claim plaintiff’s claim.[37] In Verendia v. Court of Appeals, [38] where the insured presented a fraudulent lease
which the insured submitted was false and fraudulent both as to the kind, quality and amount of the goods contract to support his claim for insurance  benefits, the Court held that by its false declaration, the
and their value destroyed by the fire, such a proof of claim is a bar against the insured from recovering on insured forfeited all benefits under the policy provision similar to Condition No. 15 of the Insurance
the policy even for the amount of his actual loss. Policy in this case.

In the present case, as proof of its loss of stocks in trade amounting to P50,000,000.00, UMC submitted Furthermore, UMC’s Income Statement indicated that the purchases or costs of sales are P827,670.00 for
its Sworn Statement of Formal Claim together with the following documents: (1) letters of credit and 1995 and P1,109,190.00 for 1996 or a total of P1,936,860.00. [39] To corroborate this fact, Ebora testified
invoices for raw materials, Christmas lights and cartons purchased; (2) charges for assembling the that:
Christmas lights; and (3) delivery receipts of the raw materials. However, the charges for assembling the
Christmas lights and delivery receipts could not support its insurance claim. The Insurance Policy Q: Based on your 1995 purchases, how much were the purchases made in 1995?
provides that CBIC agreed to insure UMC’s stocks in trade. UMC defined stock in trade as tangible
personal property kept for sale or traffic.[33] Applying UMC’s definition, only the letters of credit and A: The purchases made by United Merchants Corporation for the last year 1995 is P827,670 .[00] sir
invoices for raw materials, Christmas lights and cartons may be considered.
Q: And how about in 1994? contracts, are to be construed according to the sense and meaning of the terms which the parties
themselves have used.[52] If such terms are clear and unambiguous, they must be taken and understood in
A: In 1994, it’s P608,986.00 sir. their plain, ordinary and popular sense. Courts are not permitted to make contracts for the parties; the
function and duty of the courts is simply to enforce and carry out the contracts actually made. [53]
Q: These purchases were made for the entire year of 1995 and 1994 respectively, am I correct?
WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision and the 8 September
A: Yes sir, for the year 1994 and 1995.[40] (Emphasis supplied) 2011 Resolution of the Court of Appeals in  CA-G.R. CV No. 85777.

SO ORDERED.
In its 1996 Financial Report, which UMC admitted as existing, authentic and duly executed during the 4
December 2002 hearing, it had P1,050,862.71 as total assets and P167,058.47 as total liabilities. [41]

Thus, either amount in UMC’s Income Statement or Financial Reports is twenty-five times the claim
UMC seeks to enforce. The RTC itself recognized that UMC padded its claim when it only allowed
P43,930,230.00 as insurance claim. UMC supported its claim of P50,000,000.00 with the Certification
from the Bureau of Fire Protection stating that “x x x a fire broke out at United Merchants Corporation
located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage of Fifty- Five
Million Pesos (P55,000,000.00) to the building and contents x x x.” However, this Certification only
proved that the estimated damage of P55,000,000.00 is shared by both the building and the stocks in
trade.

It has long been settled that a false and material statement made with an intent to deceive or defraud voids
an insurance policy.[42]  In Yu Cua v. South British Insurance Co.,[43] the claim was fourteen times bigger
than the real loss; in Go Lu v. Yorkshire Insurance Co,[44] eight times; and in Tuason v. North China
Insurance Co.,[45] six times. In the present case, the claim is twenty five times the actual claim proved.

The most liberal human judgment cannot attribute such difference to mere innocent error in estimating or
counting but to a deliberate intent to demand from insurance companies payment for indemnity of goods
not existing at the time of the fire. [46] This constitutes the so-called “fraudulent claim” which, by express
agreement between the insurers and the insured, is a ground for the exemption of insurers from civil
liability.[47]

In its Reply, UMC admitted the discrepancies when it stated that “discrepancies in its statements were
not  covered by the warranty such that any discrepancy in the declaration in other instruments or
documents as to matters that may have some relation to the insurance coverage voids the policy.” [48]

On UMC’s allegation that it did not breach any warranty, it may be argued that the discrepancies do not,
by themselves, amount to a breach of warranty. However, the Insurance Code provides that “a policy may
declare that a violation of specified provisions thereof shall avoid it.” [49] Thus, in fire insurance policies,
which contain provisions such as Condition No. 15 of the Insurance Policy, a fraudulent discrepancy
between the actual loss and that claimed in the proof of loss voids the insurance policy. Mere filing of
such a claim will exonerate the insurer. [50]

Considering that all the circumstances point to the inevitable conclusion that UMC padded its claim and
was guilty of fraud, UMC violated Condition No. 15 of the Insurance Policy. Thus, UMC forfeited
whatever benefits it may be entitled under the Insurance Policy, including its insurance claim.

While it is a cardinal principle of insurance law that a contract of insurance is to be construed liberally in
favor of the insured and strictly against the insurer company, [51] contracts of insurance, like other
 [ G.R. No. 170852, September 12, 2008 ] perfection was not dependent on the acceptance by the NLRC of the appeal of petitioners in the labor
case. Thus, respondent correctly paid the indebtedness of petitioners. [11]
SPOUSES NOE AND CLARITA QUIAMCO, PETITIONERS, CORONA, VS. CAPITAL
INSURANCE & SURETY CO., INC., RESPONDENT. Hence this petition raising two issues: (1) whether the surety agreement was perfected and (2) whether
petitioners are liable to respondent.
RESOLUTION
Petitioners argue that one of the conditions of the bond was to stay the execution of the judgment in the
CORONA, J.: labor case:

This is a petition for review on certiorari [1] of the August 25, 2005 decision[2] and November 24, 2005 "WHEREAS, [petitioners] being dissatisfied with the decision/judgment desired to stay and suspend the
resolution[3] of the Court of Appeals (CA) in CA-G.R. CV No. 74390. execution of the same pending appeal;

Petitioner spouses Noe and Clarita Quiamco are husband and wife engaged in the sea transportation
business. On April 30, 1997, a decision in a labor case [4] was rendered against Clarita as representative of
Sto. Niño Ferry Boat Services. Petitioners received the decision on May 7, 1997. [5]
Petitioners then applied for a supersedeas bond with respondent Capital Insurance & Surety Co., Inc., a
surety and non-life insurance company. This bond was required in order to perfect their appeal to the
National Labor Relations Commission (NLRC). Respondent required petitioners to do the following: (1)
to issue and deliver to it an undated check in the amount equivalent to that of the supersedeas bond which
it would issue; (2) to execute a supplementary counter-guaranty with chattel mortgage over the sea vessel
M/L Gretchen 2 owned by petitioners and to surrender their original copy of certificate of ownership over
the vessel; (3) to execute an indemnity agreement wherein petitioners would agree to indemnify
respondent all damages it might sustain in its capacity as surety and (4) to pay the premiums. Except for
the original copy of the certificate of ownership of M/L Gretchen 2, these requirements were complied
with.[6]
Accordingly, the bond was issued on May 23, 1997 and delivered to petitioners who filed it in the NLRC
on May 24, 1997.[7]
On July 16, 1997, the NLRC dismissed the appeal for petitioners' failure to post the bond within 10 days
from receipt of the decision (May 7, 1997). [8] This made the decision in the labor case final against them.
On June 17, 1998, a writ of execution for the amount of P461,514.67 was served by the sheriff of the
NLRC on respondent to collect on the supersedeas bond. This was to fully satisfy the judgment amount in
the labor case. Respondent paid to the NLRC the amount guaranteed by the bond. It notified petitioners
and forthwith deposited the undated check. It was, however, dishonored because the account was already
closed.[9]
WHEREAS, in order to stay the execution of the above-mentioned decision/judgment, [petitioners]
are willing to post bond xxxx"[12] (Emphasis supplied)
Therefore, they insist that the surety agreement was not perfected because the execution of the judgment
was not stayed considering that the NLRC rejected the bond for being posted out of time and dismissed
the appeal.
We disagree.
There is no dispute that the parties entered into a contract of suretyship wherein respondent as surety
bound itself solidarily with petitioners (the principal debtors) to fulfill an obligation. [13] The obligation
was to pay the monetary award in the labor case should the decision become final and executory against
petitioners.
Contracts are perfected by mere consent. This is manifested by the meeting of the offer and the
acceptance upon the object and cause which are to constitute the contract. [14] Here, the object of the
contract was the issuance of the bond. [15] The cause or consideration consisted of the premiums paid. The
bond was issued after petitioners complied with the requirements. At this point, the contract of suretyship
was perfected.
Petitioners cannot insist that the contract was subject to a suspensive condition, [16] that is, the stay of the
judgment of the labor arbiter. This was not a condition for the perfection of the contract but merely a
statement of the purpose of the bond in its "whereas" clauses. Aside from this, there was no mention of
the condition that before the contract could become valid and binding, perfection of the appeal was
necessary.[17] If the intention was to make it a suspensive condition, then the parties should have made it
clear in certain and unambiguous terms.

On December 3, 1998, respondent filed in the Regional Trial Court (RTC) of Cebu City, Branch 22, [10] a From the moment the contract is perfected, the parties are bound to comply with what is expressly
complaint for sum of money and damages with prayer for a writ of preliminary attachment against stipulated as well as with what is required by the nature of the obligation in keeping with good faith,
petitioners. The RTC ruled in favor of respondent. It ordered petitioners to pay to respondent the amount usage and the law.[18] A surety is considered in law to be on the same footing as the principal debtor in
of P461,514.67 plus legal interest of 6% per annum, attorney's fees equivalent to 10% of P461,514.67 relation to whatever is adjudged against the latter. [19] Accordingly, as surety of petitioners, respondent
and P10,000 as litigation expenses. was obliged to pay on the bond when a writ of execution was served on it. Consequently, it now has the
right to seek full reimbursement from petitioners for the amount paid. [20]
On appeal, the CA affirmed the RTC's decision but deleted the award of attorney's fees and litigation
expenses for lack of basis. Reconsideration was denied in a resolution dated November 24, 2005. The CA Moreover, petitioners[21] signed an indemnity agreement which contained the following stipulations:
agreed with the RTC that the surety agreement between petitioners and respondent had been perfected. Its
INDEMNIFICATION: - To indemnify the SURETY for all damages, payments, advances, losses, costs,
taxes, penalties, charges, attorney's fees and expenses of whatever kind and nature that the SURETY may
at any time sustain or incur as a consequence of having become surety upon the above-mentioned bond,
and to pay, reimburse and make good to the SURETY, its successors and assigns, all sums or all
money which it shall pay or become liable to pay by virtue to said bond even if said payment/s or
liability exceeds the amount of the bond. The indemnity for attorney's fees shall be twenty (20%) percent
of the amount claimed by the SURETY, but in no case less than TWO THOUSAND PESOS (P2,000.00),
whether the SURETY'S claim is settled judicially or extra-judicially.

INCONSTESTABILITY OF PAYMENT MADE BY THE SURETY: - Any payment or disbursement

made by the SURETY on account of the above-mentioned bond, either in the belief that the SURETY
was obligated to made such payment or in the belief that said payment was necessary in order to avoid a
greater loss or obligation for which the SURETY might be liable by virtue of the terms of the above-
mentioned bond shall be final, and will not be contested by the undersigned, who jointly and
severally bind themselves to indemnity the SURETY for any such payment or disbursement.
(Emphasis supplied)

Undoubtedly, under these provisions, they are obligated to reimburse respondent. [22]

One final note. It was never respondent's obligation to inquire about the deadline for which the bond was
being issued. It was the duty of petitioners to make sure it was filed on time. The delay in filing the bond
was purely the result of petitioners' negligence or oversight. They should bear the consequences.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.
 [ G.R. Nos. 158820-21, June 05, 2009 ] Commission (CIAC).

STRONGHOLD INSURANCE COMPANY, INCORPORATED, PETITIONER, VS. TOKYU In the complaint, respondent prayed that Gabriel, Tico, and petitioner be held jointly and severally liable
CONSTRUCTION COMPANY, LTD., RESPONDENT. for the payment of the additional costs it incurred in completing the project covered by the subcontract
agreement; for liquidated damages; for the excess downpayment paid to Gabriel; for exemplary damages;
DECISION and for attorney's fees.[18]

NACHURA, J.: Gabriel denied liability and argued that the delay in the completion of the project was caused by
respondent.  She also contended that the original subcontract agreement was novated by the revised scope
of work and completion schedule. To counter respondent's monetary demands, she claimed that it was, in
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the Court of
fact, respondent who had an unpaid balance.
Appeals (CA) Decision[1] dated January 21, 2003 and its Resolution[2] dated June 25, 2003.
For its part, Tico averred that it actually treated respondent's demand as a claim on the performance and
The factual and procedural antecedents follow:
surety bonds it issued; but it could not make payment since the claim was still subject to determination,
findings, and recommendation of its assigned independent adjuster. [19]
Respondent Tokyu Construction Company, Ltd., a member of a consortium of four (4) companies, was
awarded by the Manila International Airport Authority a contract for the construction of the Ninoy
On the other hand, petitioner interposed the following special and affirmative defenses: 1) the surety and
Aquino International Airport (NAIA) Terminal 2 (also referred to as "the project"). On July 2, 1996,
performance bonds had expired; 2) the premium on the bonds had not been paid by Gabriel; 3) the
respondent entered into a Subcontract Agreement [3] with G.A. Gabriel Enterprises, owned and managed
contract for which the bonds were issued was set aside/novated; 4) the requisite notices were not made
by Remedios P. Gabriel (Gabriel), for the construction of the project's Storm Drainage System (SDS) for
which thus barred respondent's claims against it; and 5) the damages claimed were not arbitrable. [20]
P33,007,752.00 and Sewage Treatment Plant (STP) for P23,500,000.00, or a total contract price of
P56,507,752.00. The parties agreed that the construction of the SDS and STP would be completed on
On February 5, 1999, the parties signed the Terms of Reference [21] (TOR) wherein their admission of
August 10, 1997 and May 31, 1997, respectively. [4]
facts, their respective positions and claims, the issues to be determined, and the amount of arbitration fees
were summarized and set forth.
In accordance with the terms of the agreement, respondent paid Gabriel 15% of the contract price, as
advance payment, for which the latter obtained from petitioner Stronghold Insurance Company, Inc.
On August 24, 1999, the CIAC rendered a decision,[22] the dispositive portion of which reads:
Surety Bonds[5] dated February 26, 1996[6] and April 15, 1996,[7] to guarantee its repayment to respondent.
Gabriel also obtained from petitioner Performance Bonds [8] to guarantee to respondent due and timely
performance of the work.[9] Both bonds were valid for a period of one year from date of issue. WHEREFORE, award is hereby made as follows:

In utter defiance of the parties' agreements, Gabriel defaulted in the performance of her obligations.  On
February 10, 1997, in a letter [10] sent to Gabriel, respondent manifested its intention to terminate the
subcontract agreement.  Respondent also demanded that petitioner comply with its undertaking under its
bonds.
On February 26, 1997, both parties (respondent and Gabriel) agreed to revise the scope of work, reducing
the contract price for the SDS phase from P33,007,752.00 to P1,175,175.00 [11] and the STP from
P23,500,000.00 to P11,095,930.50,[12] fixing the completion time on May 31, 1997.
Gabriel thereafter obtained from Tico Insurance Company, Inc. (Tico) Surety [13] and
Performance[14] Bonds to guarantee the repayment of the advance payment given by respondent to Gabriel
and the completion of the work for the SDS, respectively.
Still, Gabriel failed to accomplish the works within the agreed completion period. Eventually, on April
26, 1997, Gabriel abandoned the project. On August 8, 1997, respondent served a letter [15] upon Gabriel
terminating their agreement since the latter had only completed 63.48% of the SDS project, valued at
P744,965.00; and 46.60% of the STP, valued at P5,171,032.48. Respondent thereafter demanded from
Gabriel the return of the balance of the advance payment. Respondent, likewise, demanded the payment
of the additional amount that it incurred in completing the project. [16] Finally, respondent made formal
demands against petitioner and Tico to make good their obligations under their respective performance
and surety bonds.  However, all of them failed to heed respondent's demand. Hence, respondent filed a
complaint[17] against petitioner, Tico, and Gabriel, before the Construction Industry Arbitration
1. On Tokyu's claims for cost overrun and cost of materials, equipment, manpower contributed
prior to alleged takeover, Gabriel is found liable to pay Tokyu the amount of P1,588,527.00.
2. On Tokyu's claim of liquidated damages, Gabriel is found liable to pay Tokyu the amount of
P662,666.44.
3. On Tokyu's claim against Tico, we find Tico to be jointly and severally liable with Gabriel on
its Performance Bond for the payment of the amounts stated in numbers [1] and [2] above but its
liability to Tokyu shall not exceed the amount of P238,401.39 on its performance bond.  The claim
against Tico on its Surety Bond is hereby dismissed.
4. With regard to the claim for the return of the unrecouped down payment, we find that Gabriel is
liable to pay Tokyu the amount [of] P7,588,613.18.
5. With regard to Tokyu's claim against Stronghold on its Surety Bonds, we find Stronghold liable
jointly and severally with Gabriel for the payment of the unrecouped down payment but only up to
the amount of P6,701,063.60. The claim against Stronghold on its Performance Bonds is hereby
dismissed.
6. The counterclaim of Gabriel against Tokyu is not contested.  Tokyu is held liable to pay
Gabriel on her counterclaim of P1,007,515.78.
7. The net amount due Gabriel for its unpaid progress billing is P1,190,108.41. Tokyu is held 5.1. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS
liable to pay this amount to Gabriel. AFTER THE BONDS HAVE BEEN INVALIDATED, LAPSED AND EXPIRED.

The amount adjudged in favor of Tokyu against Gabriel is P9,642,182.43 The amount adjudged in
favor of Gabriel against Tokyu is P2,197,624.19.  Offsetting these two amounts, there is a net award
in favor of Tokyu of P7,642,182.43. Payment of this amount or any portion thereof shall inure to the
benefit of and reduce pro tanto the liability of the respondents sureties. (Art. 1217, Civil Code)
All other claims or counterclaims not included in the foregoing disposition are hereby denied.  The costs
of arbitration shall be shared by the parties pro rata on the basis of their claims and counterclaims as
reflected in the TOR.
SO ORDERED.[23]
5.2. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS
WHICH WERE ISSUED WITHOUT THE EXISTENCE OF ANY PRINCIPAL CONTRACT.
5.3. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS
AND CONFUSED THE LEGAL EFFECTS, IMPORT AND SIGNIFICANCE BETWEEN A
GUARANTY (UNDER THE CIVIL CODE) AND SURETY UNDER THE INSURANCE CODE.
5.4. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS BONDS
WHERE THE PRINCIPAL CONTRACT UNDER WHICH THE BONDS WERE ISSUED HAD BEEN
NOVATED.[26]

The CIAC refused to resolve the issue of novation since respondent had already terminated the agreement Apart from the errors specifically assigned in its petition and memorandum, petitioner asks this Court to
by sending a letter to Gabriel. It further held that petitioner's liabilities under the surety and performance address the issue of whether the CIAC had jurisdiction to take cognizance of insurance claims.  Petitioner
bonds were not affected by the revision of the scope of work, contract price, and completion time. insists that respondent's claim against it is not related to the construction dispute, hence, it should have
been lodged with the regular courts.
Petitioner and respondent separately appealed the CIAC decision to the CA via a petition for review
under Rule 43 of the Rules of Court.  The appeals were docketed as CA-G.R. SP Nos. 54920 (petitioner) The argument is misplaced.
and 55167 (respondent) which were later consolidated.  On January 21, 2003, the CA rendered a
decision[24] modifying the awards made by the Arbitral Tribunal, thus: Section 4 of Executive Order (E.O.) No. 1008, or the Construction Industry Arbitration Law, provides:

WHEREFORE, the appealed decision/award of the Arbitral Tribunal is hereby MODIFIED in that:
1. On TOKYU's claim for liquidated damages, GABRIEL is found liable to pay TOKYU the
amount of P1,699,843.95.
2. STRONGHOLD and TICO are ordered to pay TOKYU from their respective performance
bonds, jointly and severally with GABRIEL the cost of overrun and liquidated damages in the
amount of P1,588,570.00 and P1,699,843.95 or the total amount of P3,288,370.95 but TICO's
liability for liquidated damages shall be limited only to those accruing from the SDS phase of the
Project and only in the amount of P70,992.77.
3. STRONGHOLD is further ordered to pay TOKYU from its surety bonds, jointly and severally
with GABRIEL, the total unrecouped downpayments in the amount of P7,588,613.18.
4. The aggregate amount adjudged in favor of TOKYU against GABRIEL is P10,876,984.13
while the total amount adjudged in favor of Gabriel is P2,197,624.19.  Offsetting these two (2)
amounts against each other, there is a net award in favor of TOKYU in the amount of P8,679,359.94.
Payment of this net amount or any portion thereof by GABRIEL shall in (sic) inure to the benefit and
reduce pro tanto the liability of the sureties STRONGHOLD and TICO.
SEC. 4. Jurisdiction. - The CIAC shall have original and exclusive jurisdiction over disputes arising from,
or connected with, contracts entered into by parties involved in construction in the Philippines, whether
the dispute arises before or after the completion of the contract, or after the abandonment or breach
thereof. These disputes may involve government or private contracts.  For the Board to acquire
jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials
and workmanship, violation of the terms of agreement, interpretation and/or application of contractual
time and delays, maintenance and defects, payment, default of employer or contractor, and changes in
contract cost.
Excluded from the coverage of the law are disputes arising from employer-employee relationships which
shall continue to be covered by the Labor Code of the Philippines.
Clearly, E.O. 1008 expressly vests in the CIAC original and exclusive jurisdiction over disputes arising
from or connected with construction contracts entered into by parties that have agreed to submit their
dispute to voluntary arbitration.[27]
In this case, the CIAC validly acquired jurisdiction over the dispute. Petitioner submitted itself to the
jurisdiction of the Arbitral Tribunal when it signed the TOR. [28]  The TOR states:

In all other respects, the same appealed decision/award is AFFIRMED. II. STIPULATION/ADMISSION OF FACTS
No pronouncement as to costs. xxxx
[25]
SO ORDERED.
11. The Construction Industry Arbitration Commission has jurisdiction over the instant case by
virtue of Section 12.10 (Arbitration Clause) of the Subcontract Agreement. [29]
Hence, the instant petition, anchored on the following grounds:
After recognizing the CIAC's jurisdiction, petitioner cannot be permitted to now question that same As early as February 10, 1997, respondent already sent a letter [35] to Gabriel informing the latter of the
authority it earlier accepted, only because it failed to obtain a favorable decision.   This is especially true delay incurred in the performance of the work, and of the former's intention to terminate the subcontract
in the instant case since petitioner is challenging the tribunal's jurisdiction for the first time before this agreement to prevent further losses.  Apparently, Gabriel had already been in default even prior to the
Court. aforesaid letter; and demands had been previously made but to no avail.  By reason of said default,
Gabriel's liability had arisen; as a consequence, so also did the liability of petitioner as a surety arise.
With the issue of jurisdiction resolved, we proceed to the merits of the case.
A contract of suretyship is an agreement whereby a party, called the surety, guarantees the performance
It is well to note that Gabriel did not appeal the CIAC decision and Tico's petition before this Court has by another party, called the principal or obligor, of an obligation or undertaking in favor of another party,
been denied with finality.[30] Hence, the CIAC and CA decisions have become final and executory as to called the obligee.[36] By its very nature, under the laws regulating suretyship, the liability of the surety is
Gabriel and Tico, and in that respect, they shall not be disturbed by this Court. joint and several but is limited to the amount of the bond, and its terms are determined strictly by the
terms of the contract of suretyship in relation to the principal contract between the obligor and the
Thus, the sole issue that confronts us is whether or not petitioner is liable under its bonds.   To resolve the obligee.[37]
same, we need to inquire into the following corollary issues:
By the language of the bonds issued by petitioner, it guaranteed the full and faithful compliance by
1) whether the bonds (surety and performance) are null and void having been secured without a valid and Gabriel of its obligations in the construction of the SDS and STP specifically set forth in the subcontract
existing principal contract; agreement, and the repayment of the 15% advance payment given by respondent.   These guarantees made
by petitioner gave respondent the right to proceed against the former following Gabriel's non-compliance
2) whether the bonds were invalidated by the modification of the subcontract agreement without notice to with her obligation.
the surety; and
Confusion, however, transpired when Gabriel and respondent agreed, on February 26, 1997, to reduce the
3) whether the bonds for which petitioner was being made liable already expired. scope of work and, consequently, the contract price. Petitioner viewed such revision as novation of the
original subcontract agreement; and since no notice was given to it as a surety, it resulted in the
Initially, petitioner argued that the surety and performance bonds (which were accessory contracts) were extinguishment of its obligation.
of no force and effect since they were issued ahead of the execution of the principal contract.   To support
this contention, it now adds that the bonds were actually secured through misrepresentation, as petitioner We wish to stress herein the nature of suretyship, which actually involves two types of relationship --- the
was made to believe that the principal contract was already in existence when the bonds were issued, but underlying principal relationship between the creditor (respondent) and the debtor (Gabriel), and the
it was, in fact, yet to be executed. [31] accessory surety relationship between the principal (Gabriel) and the surety (petitioner).The creditor
accepts the surety's solidary undertaking to pay if the debtor does not pay.  Such acceptance, however,
We are not persuaded. does not change in any material way the creditor's relationship with the principal debtor nor does it make
the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does
In the first place, as correctly observed by respondent, the claim of misrepresentation was never raised by not give the surety the right to intervene in the principal contract.  The surety's role arises only upon the
petitioner as a defense in its Answer.  Settled is the rule that points of law, theories, issues, and arguments debtor's default, at which time, it can be directly held liable by the creditor for payment as a solidary
not adequately brought to the attention of the trial court need not be, and ordinarily will not be, obligor.[38]
considered by a reviewing court.  They cannot be raised for the first time on appeal.  To allow this would
be offensive to the basic rules of fair play, justice, and due process. [32] The surety is considered in law as possessed of the identity of the debtor in relation to whatever is
adjudged touching upon the obligation of the latter.  Their liabilities are so interwoven as to be
Besides, even if we look into the merit of such contention, the CA is correct in holding that there was no inseparable.  Although the contract of a surety is, in essence, secondary only to a valid principal
evidentiary support of petitioner's claim of misrepresentation. [33]  This being a factual issue, we respect obligation, the surety's liability to the creditor is direct, primary, and absolute; he becomes liable for the
the finding made in the assailed decision. We have repeatedly held that we are not a trier of facts.  We debt and duty of another although he possesses no direct or personal interest over the obligations nor does
generally rely upon, and are bound by, the conclusions on factual matters made by the lower courts, he receive any benefit therefrom. [39]
which are better equipped and have better opportunity to assess the evidence first-hand, including the
testimony of the witnesses.[34] Indeed, a surety is released from its obligation when there is a material alteration of the principal contract
in connection with which the bond is given, such as a change which imposes a new obligation on the
Petitioner also contends that the principal contract (original subcontract agreement) was novated by the promising party, or which takes away some obligation already imposed, or one which changes the legal
revised scope of work and contract schedule, without notice to the surety, thereby rendering the bonds effect of the original contract and not merely its form.  However, a surety is not released by a change in
invalid and ineffective.  Finally, it avers that no liability could attach because the subject bonds expired the contract, which does not have the effect of making its obligation more onerous. [40]
and were replaced by the Tico bonds.
In the instant case, the revision of the subcontract agreement did not in any way make the obligations of
Again, we do not agree. both the principal and the surety more onerous. To be sure, petitioner never assumed added obligations,
nor were there any additional obligations imposed, due to the modification of the terms of the contract.
Petitioner's liability was not affected by the revision of the contract price, scope of work, and contract Failure to receive any notice of such change did not, therefore, exonerate petitioner from its liabilities as
schedule.  Neither was it extinguished because of the issuance of new bonds procured from Tico. surety.
Neither can petitioner be exonerated from liability simply because the bonds it issued were replaced by
those issued by Tico.

The Court notes that petitioner issued four bonds, namely: 1) Performance Bond No. 43601 which
guaranteed the full and faithful compliance of Gabriel's obligations for the construction of the SDS; 2)
Performance Bond No. 13608 for the construction of the STP; 3) Surety Bond No. 065493 which
guaranteed the repayment of the 15% advance payment for the SDS project; and 4) Surety Bond No.
068189 for the STP project.  Under the surety agreements, the first and third bonds were to expire on
February 25, 1997 or one year from date of issue of the bonds, while the second and fourth bonds were to
expire one year from April 15, 1996.

The impending expiration of the first and third bonds prompted respondent to require Gabriel to arrange
for their (the bonds) immediate revalidation. Thus, in a letter dated February 21, 1997, respondent asked
that the performance bond for the SDS phase be extended until May 31, 1998; and for the surety bond,
until June 30, 1997.[41]  Contrary to petitioner's contention, this should not be construed as a recognition
on the part of respondent that the bonds were no longer valid by reason of the modification of the
subcontract agreement. There was indeed a need for the renewal of petitioner's bonds because they were
about to expire, pursuant to the terms of the surety agreements.  Since petitioner refused to revalidate the
aforesaid bonds, Gabriel was constrained to secure the required bonds from Tico which issued, on
February 25, 1997, the new performance and surety bonds (for the SDS phase) replacing those of
petitioner's.  The performance bond was coterminous with the final acceptance of the project, while the
surety bond was to expire on February 26, 1998.

Notwithstanding the issuance of the new bonds, the fact remains that the event insured against, which is
the default in the performance of Gabriel's obligations set forth in the subcontract agreement, already
took place. By such default, petitioner's liability set in.  Thus, petitioner remains solidarily liable with
Gabriel, subject only to the limitations on the amount of its liability as provided for in the Bonds
themselves.

Considering that the performance bonds issued by petitioner were valid only for a period of one year, its
liabilities should further be limited to the period prior to the expiration date of said bonds.   As to
Performance Bond No. 43601 for the SDS project, the same was valid only for one year from February
26, 1996; while Performance Bond No. 13608 was valid only for one year from April 15, 1996.
Logically, petitioner can be held solidarily liable with Gabriel only for the cost overrun and liquidated
damages accruing during the above periods.  The assailed CA decision is, therefore, modified in this
respect.

WHEREFORE, premises considered, the petition is DENIED.  The Decision of the Court of Appeals
dated January 21, 2003 and its Resolution dated June 25, 2003 are AFFIRMED with
the MODIFICATION that petitioner Stronghold Insurance, Company, Inc. is jointly and severally liable
with Remedios P. Gabriel only for the cost overrun and liquidated damages accruing during the
effectivity of its bonds.

All other aspects of the assailed decision STAND.

SO ORDERED.
 explained that being an accessory contract, the bond cannot exist without a principal agreement as it is
essential that the copy of the basic contract be submitted to the proposed surety for the appreciation of the
[ G.R. No. 177839, January 18, 2012 ] extent of the obligation to be covered by the bond applied for. [8]

FIRST LEPANTO-TAISHO INSURANCE CORPORATION (NOW KNOWN AS FLT PRIME On April 9, 2002, respondent formally demanded from petitioner the payment of its claim under the
INSURANCE CORPORATION), PETITIONER, VS. CHEVRON PHILIPPINES, INC. surety bond.  However, petitioner reiterated its position that without the basic contract subject of the
(FORMERLY KNOWN AS CALTEX [PHILIPPINES], INC.), RESPONDENT. bond, it cannot act on respondent's claim; petitioner also contested the amount of Fumitechniks' supposed
obligation.[9]
DECISION
Alleging that petitioner unjustifiably refused to heed its demand for payment, respondent prayed for
VILLARAMA, JR., J.: judgment ordering petitioner to pay the sum of P15,080,030.30, plus interest, costs and attorney's fees
equivalent to ten percent of the total obligation. [10]
Before this Court is a Rule 45 Petition assailing the Decision[1] dated November 20, 2006 and
Resolution[2] dated May 8, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86623, which reversed Petitioner, in its Answer with Counterclaim, [11] asserted that the Surety Bond was issued for the purpose
the Decision[3] dated August 5, 2005 of the Regional Trial Court (RTC) of Makati City, Branch 59 in of securing the performance of the obligations embodied in the Principal Agreement stated therein, which
Civil Case No 02-857. contract should have been attached and made part thereof.

Respondent Chevron Philippines, Inc., formerly Caltex Philippines, Inc., sued petitioner First Lepanto-
Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) for the payment of
unpaid oil and petroleum purchases made by its distributor Fumitechniks Corporation (Fumitechniks).
Fumitechniks, represented by Ma. Lourdes Apostol, had applied for and was issued Surety Bond FLTICG
(16) No. 01012 by petitioner for the amount of P15,700,000.00.  As stated in the attached rider, the bond
was in compliance with the requirement for the grant of a credit line with the respondent "to guarantee
payment/remittance of the cost of fuel products withdrawn within the stipulated time in accordance with
the terms and conditions of the agreement." The surety bond was executed on October 15, 2001 and will
expire on October 15, 2002.[4]
Fumitechniks defaulted on its obligation.  The check dated December 14, 2001 it issued to respondent in
the amount of P11,461,773.10, when presented for payment, was dishonored for reason of  "Account
Closed." In a letter dated February 6, 2002, respondent notified petitioner of Fumitechniks' unpaid
purchases in the total amount of P15,084,030.30. In its letter-reply dated February 13, 2002, petitioner
through its counsel, requested that it be furnished copies of the documents such as delivery receipts.
[5]
 Respondent complied by sending copies of invoices showing deliveries of fuel and petroleum products
between November 11, 2001 and December 1, 2001.
Simultaneously, a letter[6] was sent to Fumitechniks demanding that the latter submit to petitioner  the
following: (1) its comment on respondent's February 6, 2002 letter; (2) copy of the  agreement secured by
the Bond, together with copies of documents such as delivery receipts; and (3) information on the
particulars, including "the terms and conditions, of any arrangement that [Fumitechniks] might have
made or any ongoing negotiation with Caltex in connection with the settlement of the obligations subject
of the Caltex letter."
In its letter dated March 1, 2002, Fumitechniks through its counsel wrote petitioner's counsel informing
that it cannot submit the requested agreement since no such agreement was executed between
Fumitechniks and respondent.  Fumitechniks also enclosed a copy of another surety bond issued by CICI
General Insurance Corporation in favor of respondent to secure the obligation of Fumitechniks and/or
Prime Asia Sales and Services, Inc. in the amount of P15,000,000.00. [7] Consequently, petitioner advised
respondent of the non-existence of the principal agreement as confirmed by Fumitechniks.  Petitioner
After trial, the RTC rendered judgment dismissing the complaint as well as petitioner's counterclaim. 
Said court found that the terms and conditions of the oral credit line agreement between respondent and
Fumitechniks have not been relayed to petitioner and neither were the same conveyed even during trial.
Since the surety bond is a mere accessory contract, the RTC concluded that the bond cannot stand in the
absence of the written agreement secured thereby. In holding that petitioner cannot be held liable under
the bond it issued to Fumitechniks, the RTC noted the practice of petitioner, as testified on by its
witnesses, to attach a copy of the written agreement (principal contract) whenever it issues a surety bond,
or to be submitted later if not yet in the possession of the assured, and in case of failure to submit the said
written agreement, the surety contract will not be binding despite payment of the premium.
Respondent filed a motion for reconsideration while petitioner filed a motion for partial reconsideration
as to the dismissal of its counterclaim. With the denial of their motions, both parties filed their respective
notice of appeal.
The CA ruled in favor of respondent, the dispositive portion of its decision reads:
WHEREFORE, the appealed Decision is REVERSED and SET ASIDE.  A new judgment is hereby
entered ORDERING defendant-appellant First Lepanto-Taisho Insurance Corporation to pay plaintiff-
appellant Caltex (Philippines) Inc. now Chevron Philippines, Inc. the sum of P15,084,030.00.
SO ORDERED.[12]
According to the appellate court, petitioner cannot insist on the submission of a written agreement to be
attached to the surety bond considering that respondent was not aware of such requirement and unwritten
company policy. It also declared that petitioner is estopped from assailing the oral credit line agreement,
having consented to the same upon presentation by Fumitechniks of the surety bond it issued.
Considering that such oral contract between Fumitechniks and respondent has been partially executed,
the CA ruled that the provisions of the Statute of Frauds do not apply.
With the denial of its motion for reconsideration, petitioner appealed to this Court raising the following
issues:
I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN ITS ONLY  PESOS (P15,700,000.00), Philippine Currency, for the payment of which sum, well and truly to
INTERPRETATION OF THE PROVISIONS OF THE SURETY BOND WHEN IT HELD THAT THE be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and
SURETY BOND SECURED AN ORAL CREDIT LINE AGREEMENT NOTWITHSTANDING THE severally, firmly by  these presents:
STIPULATIONS THEREIN CLEARLY SHOWING BEYOND DOUBT THAT WHAT WAS BEING
SECURED WAS A WRITTEN AGREEMENT, PARTICULARLY, THE WRITTEN AGREEMENT A The conditions of this obligation are as follows:
COPY OF WHICH WAS EVEN REQUIRED TO BE ATTACHED TO THE SURETY BOND AND
MADE A PART THEREOF. WHEREAS, the above-bounden principal, on  15th day of October, 2001  entered into [an] agreement  
with  CALTEX PHILIPPINES, INC.  of ________________  to fully and faithfully
II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING
OUT THE QUESTIONED RESPONDENT'S EVIDENCE FOR BEING CONTRARY TO THE PAROL a copy of which is attached hereto and made a part hereof:
EVIDENCE RULE, IMMATERIAL AND IRRELEVANT AND CONTRARY TO THE STATUTE OF
FRAUDS. WHEREAS, said Obligee__ requires said principal to give a good and sufficient bond in the above stated
sum to secure the full and faithful performance on his part of said agreement__.
III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING
OUT THE RESPONDENT'S MOTION FOR RECONSIDERATION OF THE RTC DECISION FOR NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings,
BEING A MERE SCRAP OF PAPER AND PRO FORMA AND, CONSEQUENTLY, IN NOT covenants, terms, conditions, and agreements stipulated in said agreement__ then this obligation shall be
DECLARING THE RTC DECISION AS FINAL AND EXECUTORY IN SO FAR AS IT DISMISSED null and void; otherwise it shall remain in full force and effect.
THE COMPLAINT.
The liability of First Lepanto-Taisho Insurance Corporation under this bond will expire on  October 15,
IV. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE 2002__.
RTC DECISION AND IN NOT GRANTING PETITIONER'S COUNTERCLAIM. [13]
x x x x[18] (Emphasis supplied.)

The main issue to be resolved is one of first impression: whether a surety is liable to the creditor in the
absence of a written contract with the principal. The rider attached to the bond sets forth the following:

Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called WHEREAS, the Principal has applied for a Credit Line in the amount of PESOS:   Fifteen Million Seven
the surety, guarantees the performance by another party, called the principal or obligor, of an obligation Hundred thousand only (P15,700,000.00), Philippine Currency with the Obligee for the purchase of Fuel
or undertaking in favor of a third party, called the obligee. It includes official recognizances, stipulations, Products;
bonds or undertakings issued under Act 536, [14] as amended.  Suretyship arises upon the solidary binding
of a person - deemed the surety - with the principal debtor, for the purpose of fulfilling an obligation. [15]  WHEREAS, the obligee requires the Principal to post a bond to guarantee payment/remittance of the
Such undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a cost of fuel products withdrawn within the stipulated time in accordance with terms and conditions
principal contract.  Although the contract of a surety is in essence secondary only to a valid principal of the agreement;
obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom.  And notwithstanding the IN NO CASE, however, shall the liability of the Surety hereunder exceed the sum of PESOS: Fifteen
fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a million seven hundred thousand only (P15,700,000.00), Philippine Currency.
regular party to the undertaking. [16]
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings,
The extent of a surety's liability is determined by the language of the suretyship contract or bond itself.   It covenants, terms and conditions and agreements stipulated in said undertakings, then this obligation shall
cannot be extended by implication, beyond the terms of the contract. [17]  Thus, to determine whether be null and void; otherwise, it shall remain in full force and effect.
petitioner is liable to respondent under the surety bond, it becomes necessary to examine the terms of the
contract itself. The liability of FIRST LEPANTO-TAISHO INSURANCE CORPORATION, under this Bond will
expire on  10.15.01_. Furthermore, it is hereby understood that FIRST LEPANTO-TAISHO
Surety Bond FLTICG (16) No. 01012 is a standard form used by petitioner, which states: INSURANCE CORPORATION will not be liable for any claim not presented to it in writing within
fifteen (15) days from the expiration of this bond, and that the Obligee hereby waives its right to claim or
That we, FUMITECHNIKS CORP. OF THE PHILS.   of #154 Anahaw St., Project 7, Quezon City   as file any court action against the Surety after the termination of fifteen (15) days from the time its cause of
principal and First Lepanto-Taisho Insurance Corporation a corporation duly organized and existing action accrues.[19]
under and by virtue of the laws of the Philippines as Surety, are held firmly bound unto CALTEX
PHILIPPINES, INC.  of ______ in the sum of FIFTEEN MILLION SEVEN HUNDRED THOUSAND
Petitioner posits that non-compliance with the submission of the written agreement, which by the express
terms of the surety bond, should be attached and made part thereof, rendered the bond ineffective. Since Q: Is it the practice or procedure at Caltex to reduce distributorship account into writing?
all stipulations and provisions of the surety contract should be taken and interpreted together, in this case,
the unmistakable intention of the parties was to secure only those terms and conditions of the written
agreement.  Thus, by deleting the required submission and attachment of the written agreement to the
surety bond and replacing it with the oral credit agreement, the obligations of the surety have been xxxx
extended beyond the limits of the surety contract.

On the other hand, respondent contends that the surety bond had been delivered by petitioner to
Fumitechniks which paid the premiums and delivered the bond to respondent, who in turn, opened the A: No, its not a practice to make an agreement.
credit line which Fumitechniks availed of to purchase its merchandise from respondent on credit. 
Respondent points out that a careful reading of the surety contract shows that there is no such
requirement of submission of the written credit agreement for the bond's effectivity.  Moreover,
respondent's witnesses had already explained that distributorship accounts are not covered by written xxxx
distribution agreements. Supplying the details of these agreements is allowed as an exception to the parol
evidence rule even if it is proof of an oral agreement.  Respondent argues that by introducing documents
that petitioner sought to exclude, it never intended to change or modify the contents of the surety bond
but merely to establish the actual terms of the distribution agreement between Fumitechniks and Atty. Quiroz:
respondent, a separate agreement that was executed shortly after the issuance of the surety bond.  
Because petitioner still issued the bond and allowed it to be delivered to respondent despite the fact that a
copy of the written distribution agreement was never attached thereto, respondent avers that clearly, such
attaching of the copy of the principal agreement, was for evidentiary purposes only.  The real intention of Q: What was the reason why you are not reducing your agreement with your client into writing?
the bond was to secure the payment of all the purchases of Fumitechniks from respondent up to the
maximum amount allowed under the bond. A: Well, of course as I said, there is no fix pricing in terms of distributorship agreement, its usually with
regards to direct service to the customers which have direct fixed price.
A reading of Surety Bond FLTICG (16) No. 01012 shows that it secures the payment of purchases on
credit by Fumitechniks in accordance with the terms and conditions of the "agreement" it entered into
with respondent. The word "agreement" has reference to the distributorship agreement, the principal
xxxx
contract and by implication included the credit agreement mentioned in the rider. However, it turned out
that respondent has executed written agreements only with its direct customers but not distributors like
Fumitechniks and it also never relayed the terms and conditions of its distributorship agreement to the
petitioner after the delivery of the bond. This was clearly admitted by respondent's Marketing
Q: These supposed terms and conditions that you agreed with [Fumitechniks], did you relay to the
Coordinator, Alden Casas Fajardo, who testified as follows:
defendant...

Atty. Selim: A: Yes Sir.

Q: Mr. Fajardo[,] you mentioned during your cross-examination that the surety bond as part of the xxxx
requirements of [Fumitechniks] before the Distributorship Agreement was approved?

A: Yes Sir.

Q: How did you relay that, how did you relay the terms and conditions to the defendant?

A: I don't know, it was during the time for collection because I collected them and explain the terms and
xxxx
conditions.
 the validity or legality of the surety contract but on the creditor's right to demand performance.

Q: You testified awhile ago that you did not talk to the defendant First Lepanto-Taisho Insurance It bears stressing that the contract of suretyship imports entire good faith and confidence between the
Corporation? parties in regard to the whole transaction, although it has been said that the creditor does not stand as a
A: I was confused with the question. I'm talking about Malou Apostol.
fiduciary in his relation to the surety. The creditor is generally held bound to a faithful observance of the
rights of the surety and to the performance of every duty necessary for the protection of those rights. [24] 
Moreover, in this jurisdiction, obligations arising from contracts have the force of law between the parties
and should be complied with in good faith. [25]  Respondent is charged with notice of the specified form of
the agreement or at least the disclosure of basic terms and conditions of its distributorship and credit
Q: So, in your answer, you have not relayed those terms and conditions to the defendant First Lepanto, you
have not? agreements with its client Fumitechniks after its acceptance of the bond delivered by the latter.  However,
it never made any effort to relay those terms and conditions of its contract with Fumitechniks upon the
A: Yes Sir. commencement of its transactions with said client, which obligations are covered by the surety bond
issued by petitioner.  Contrary to respondent's assertion, there is no indication in the records that
petitioner had actual knowledge of its alleged business practice of not having  written contracts with
distributors; and even assuming petitioner was aware of such practice, the bond issued to Fumitechniks
Q: And as of this present, you have not yet relayed the terms and conditions? and accepted by respondent specifically referred to a "written agreement."

A: Yes Sir. As to the contention of petitioner that respondent's motion for reconsideration filed before the trial court
should have been deemed not filed for being pro forma, the Court finds it to be without merit. The mere
fact that a motion for reconsideration reiterates issues already passed upon by the court does not, by itself,
make it a pro forma motion.  Among the ends to which a motion for reconsideration is addressed is
precisely to convince the court that its ruling is erroneous and improper, contrary to the law or evidence;
the movant has to dwell of necessity on issues already passed upon. [26]

Respondent, however, maintains that the delivery of the bond and acceptance of premium payment by Finally, we hold that the trial court correctly dismissed petitioner's counterclaim for moral damages and
petitioner binds the latter as surety, notwithstanding the non-submission of the oral distributorship and attorney's fees.  The filing alone of a civil action should not be a ground for an award of moral damages
credit agreement which understandably cannot be attached to the bond. in the same way that a clearly unfounded civil action is not among the grounds for moral damages.
[27]
 Besides, a juridical person is generally not entitled to moral damages because, unlike a natural person,
The contention has no merit. it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental
anguish or moral shock.[28]  Although in some recent cases we have held that the Court may allow the
The law is clear that a surety contract should be read and interpreted together with the contract entered grant of moral damages to corporations, it is not automatically granted; there must still be proof of the
into between the creditor and the principal.  Section 176 of the Insurance Code states: existence of the factual basis of the damage and its causal relation to the defendant's acts. This is so
because moral damages, though incapable of pecuniary estimation, are in the category of an award
Sec. 176.  The liability of the surety or sureties shall be joint and several with the obligor and shall be designed to compensate the claimant for actual injury suffered and not to impose a penalty on the
limited to the amount of the bond.  It is determined strictly by the terms of the contract of suretyship in wrongdoer.[29]  There is no evidence presented to establish the factual basis of petitioner's claim for moral
relation to the principal contract between the obligor and the obligee. (Emphasis supplied.) damages.

Petitioner is likewise not entitled to attorney's fees.  The settled rule is that no premium should be placed
A surety contract is merely a collateral one, its basis is the principal contract or undertaking which it on the right to litigate and that not every winning party is entitled to an automatic grant of attorney's fees.
[30]
secures.[21] Necessarily, the stipulations in such principal agreement must at least be communicated or   In pursuing its claim on the surety bond, respondent was acting on the belief that it can collect on the
made known to the surety particularly in this case where the bond expressly guarantees the payment of obligation of Fumitechniks notwithstanding the non-submission of the written principal contract.
respondent's fuel products withdrawn by Fumitechniks in accordance with the terms and conditions of
their agreement.  The bond specifically makes reference to a written agreement.  It is basic that if the WHEREFORE, the petition for review on certiorari is PARTLY GRANTED.  The Decision dated
terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal November 20, 2006 and Resolution dated May 8, 2007 of the Court of Appeals in CA-G.R. CV No.
meaning of its stipulations shall control. [22]  Moreover, being an onerous undertaking, a surety agreement 86623, are REVERSED and SET ASIDE.  The Decision dated August 5, 2005 of the Regional Trial
is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. [23]  Court of Makati City, Branch 59 in Civil Case No. 02-857 dismissing respondent's complaint as well as
Having accepted the bond, respondent as creditor must be held bound by the recital in the surety bond petitioner's counterclaim, is hereby REINSTATED and UPHELD.
that the terms and conditions of its distributorship contract be reduced in writing or at the very least
communicated in writing to the surety.  Such non-compliance by the creditor (respondent) impacts not on
 G.R. No. 96452 May 7, 1992
PERLA COMPANIA DE SEGUROS, INC. petitioner,
vs. THE COURT OF APPEALS, HERMINIO LIM and EVELYN LIM, respondents.
NOCON, J.:
These are two petitions for review on certiorari, one filed by Perla Compania de Seguros, Inc. in G.R. No.
96452, and the other by FCP Credit Corporation in G.R. No. 96493, both seeking to annul and set aside
the decision dated July 30, 1990 1 of the Court of Appeals in CA-G.R. No. 13037, which reversed the
decision of the Regional Trial Court of Manila, Branch VIII in Civil Case No. 83-19098 for replevin and
damages. The dispositive portion of the decision of the Court of Appeals reads, as follows:
WHEREFORE, the decision appealed from is reversed; and appellee Perla Compania
de Seguros, Inc. is ordered to indemnify appellants Herminio and Evelyn Lim for the
loss of their insured vehicle; while said appellants are ordered to pay appellee FCP
Credit Corporation all the unpaid installments that were due and payable before the
date said vehicle was carnapped; and appellee Perla Compania de Seguros, Inc. is
also ordered to pay appellants moral damages of P12,000.00 for the latter's mental
sufferings, exemplary damages of P20,000.00 for appellee Perla Compania de
Seguros, Inc.'s unreasonable refusal on sham grounds to honor the just insurance
claim of appellants by way of example and correction for public good, and attorney's
fees of P10,000.00 as a just and equitable reimbursement for the expenses incurred
therefor by appellants, and the costs of suit both in the lower court and in this
appeal. 2
The facts as found by the trial court are as follows:
On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed a promissory
note in favor Supercars, Inc. in the sum of P77,940.00, payable in monthly installments according to the
schedule of payment indicated in said note, 3 and secured by a chattel mortgage over a brand new red
Ford Laser 1300 5DR Hatchback 1981 model with motor and serial No. SUPJYK-03780, which is
registered under the name of private respondent Herminio Lim 4 and insured with the petitioner Perla
Compania de Seguros, Inc. (Perla for brevity) for comprehensive coverage under Policy No. PC/41PP-
QCB-43383. 5
On the same date, Supercars, Inc., with notice to private respondents spouses, assigned to petitioner FCP
Credit Corporation (FCP for brevity) its rights, title and interest on said promissory note and chattel
mortgage as shown by the Deed of Assignment. 6
At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at the back of
Broadway Centrum along N. Domingo Street, Quezon City. Private respondent Evelyn Lim, who was
driving said car before it was carnapped, immediately called up the Anti-Carnapping Unit of the
Philippine Constabulary to report said incident and thereafter, went to the nearest police substation at
Araneta, Cubao to make a police report regarding said incident, as shown by the certification issued by
the Quezon City police. 7
On November 10, 1982, private respondent Evelyn Lim reported said incident to the Land Transportation
Commission in Quezon City, as shown by the letter of her counsel to said office, 8 in compliance with the
insurance requirement. She also filed a complaint with the Headquarters, Constabulary Highway Patrol
Group. 9
On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla but said claim
was denied on November 18, 1982 10 on the ground that Evelyn Lim, who was using the vehicle before it
was carnapped, was in possession of an expired driver's license at the time of the loss of said vehicle
which is in violation of the authorized driver clause of the insurance policy, which states, to wit:
AUTHORIZED DRIVER:
Any of the following: (a) The Insured (b) Any person driving on the Insured's order,
or with his permission. Provided that the person driving is permitted, in accordance
with the licensing or other laws or regulations, to drive the Scheduled Vehicle, or has
been permitted and is not disqualified by order of a Court of Law or by reason of any
enactment or regulation in that behalf. 11
On November 17, 1982, private respondents requests from petitioner FCP for a suspension of payment on
the monthly amortization agreed upon due to the loss of the vehicle and, since the carnapped vehicle
insured with petitioner Perla, said insurance company should be made to pay the remaining balance of the
promissory note and the chattel mortgage contract.
Perla, however, denied private respondents' claim. Consequently, petitioner FCP demanded that private
respondents pay the whole balance of the promissory note or to return the vehicle 12 but the latter refused.
On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in turn filed an
amended third party complaint against petitioner Perla on December 8, 1983. After trial on the merits, the
trial court rendered a decision, the dispositive portion which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1. Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and severally,
plaintiff the sum of P55,055.93 plus interest thereon at the rate of 24% per
annum from July 2, 1983 until fully paid;
2. Ordering defendants to pay plaintiff P50,000.00 as and for attorney's fees; and the
costs of suit.
Upon the other hand, likewise, ordering the DISMISSAL of the Third-Party
Complaint filed against Third-Party Defendant. 13
Not satisfied with said decision, private respondents appealed the same to the Court of Appeals, which
reversed said decision.
After petitioners' separate motions for reconsideration were denied by the Court of Appeals in its
resolution of December 10, 1990, petitioners filed these separate petitions for review on certiorari.
Petitioner Perla alleged that there was grave abuse of discretion on the part of the appellate court in
holding that private respondents did not violate the insurance contract because the authorized driver
clause is not applicable to the "Theft" clause of said Contract.
For its part, petitioner FCP raised the issue of whether or not the loss of the collateral exempted the
debtor from his admitted obligations under the promissory note particularly the payment of interest,
litigation expenses and attorney's fees.
We find no merit in Perla's petition.
The comprehensive motor car insurance policy issued by petitioner Perla undertook to indemnify the
private respondents against loss or damage to the car (a) by accidental collision or overturning, or
collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b)
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft; and (c) by
malicious act.14
Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's consent
or knowledge, such taking constitutes theft, and, therefore, it is the "THEFT"' clause, and not the
"AUTHORIZED DRIVER" clause that should apply. As correctly stated by the respondent court in its
decision:
. . . Theft is an entirely different legal concept from that of accident. Theft is
committed by a person with the intent to gain or, to put it in another way, with the
concurrence of the doer's will. On the other hand, accident, although it may proceed
or result from negligence, is the happening of an event without the concurrence of the
will of the person by whose agency it was caused. (Bouvier's Law Dictionary, Vol. I,
1914 ed., p. 101).
Clearly, the risk against accident is distinct from the risk against theft. The
"authorized driver clause" in a typical insurance policy is in contemplation or
anticipation of accident in the legal sense in which it should be understood, and not in
contemplation or anticipation of an event such as theft. The distinction — often
seized upon by insurance companies in resisting claims from their assureds —
between death occurring as a result of accident and death occurring as a result of
intent may, by analogy, apply to the case at bar. Thus, if the insured vehicle had
figured in an accident at the time she drove it with an expired license, then, appellee
Perla Compania could properly resist appellants' claim for indemnification for the
loss or destruction of the vehicle resulting from the accident. But in the present case.
The loss of the insured vehicle did not result from an accident where intent was
involved; the loss in the present case was caused by theft, the commission of which
was attended by intent. 15
It is worthy to note that there is no causal connection between the possession of a valid driver's license
and the loss of a vehicle. To rule otherwise would render car insurance practically a sham since an
insurance company can easily escape liability by citing restrictions which are not applicable or germane
to the claim, thereby reducing indemnity to a shadow.
We however find the petition of FCP meritorious.
This Court agrees with petitioner FCP that private respondents are not relieved of their obligation to pay
the former the installments due on the promissory note on account of the loss of the automobile. The
chattel mortgage constituted over the automobile is merely an accessory contract to the promissory note.
Being the principal contract, the promissory note is unaffected by whatever befalls the subject matter of
the accessory contract. Therefore, the unpaid balance on the promissory note should be paid, and not just
the installments due and payable before the automobile was carnapped, as erronously held by the Court of
Appeals.
However, this does not mean that private respondents are bound to pay the interest, litigation expenses
and attorney's fees stipulated in the promissory note. Because of the peculiar relationship between the
three contracts in this case, i.e., the promissory note, the chattel mortgage contract and the insurance
policy, this Court is compelled to construe all three contracts as intimately interrelated to each other,
despite the fact that at first glance there is no relationship whatsoever between the parties thereto.
Under the promissory note, private respondents are obliged to pay Supercars, Inc. the amount stated
therein in accordance with the schedule provided for. To secure said promissory note, private respondents
constituted a chattel mortgage in favor of Supercars, Inc. over the automobile the former purchased from
the latter. The chattel mortgage, in turn, required private respondents to insure the automobile and to
make the proceeds thereof payable to Supercars, Inc. The promissory note and chattel mortgage were
assigned by Supercars, Inc. to petitioner FCP, with the knowledge of private respondents. Private
respondents were able to secure an insurance policy from petitioner Perla, and the same was made
specifically payable to petitioner FCP. 16
The insurance policy was therefore meant to be an additional security to the principal contract, that is, to
insure that the promissory note will still be paid in case the automobile is lost through accident or theft.
The Chattel Mortgage Contract provided that:
THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL
CAUSE THE PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE
INSURED AGAINST LOSS OR DAMAGE BY ACCIDENT, THEFT AND FIRE
FOR A PERIOD OF ONE YEAR FROM DATE HEREOF AND EVERY YEAR
THEREAFTER UNTIL THE MORTGAGE OBLIGATION IS FULLY PAID WITH
AN INSURANCE COMPANY OR COMPANIES ACCEPTABLE TO THE
MORTGAGEE IN AN AMOUNT NOT LESS THAN THE OUTSTANDING
BALANCE OF THE MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE
ALL LOSS, IF ANY, UNDER SUCH POLICY OR POLICIES, PAYABLE TO THE
MORTGAGE OR ITS ASSIGNS AS ITS INTERESTS MAY APPEAR AND
FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE
MORTGAGEE, . . . . 17
It is clear from the abovementioned provision that upon the loss of the insured vehicle, the insurance
company Perla undertakes to pay directly to the mortgagor or to their assignee, FCP, the outstanding
balance of the mortgage at the time of said loss under the mortgage contract. If the claim on the insurance
policy had been approved by petitioner Perla, it would have paid the proceeds thereof directly to
petitioner FCP, and this would have had the effect of extinguishing private respondents' obligation to
petitioner FCP. Therefore, private respondents were justified in asking petitioner FCP to demand the
unpaid installments from petitioner Perla.
Because petitioner Perla had unreasonably denied their valid claim, private respondents should not be
made to pay the interest, liquidated damages and attorney's fees as stipulated in the promissory note. As
mentioned above, the contract of indemnity was procured to insure the return of the money loaned from
petitioner FCP, and the unjustified refusal of petitioner Perla to recognize the valid claim of the private
respondents should not in any way prejudice the latter.

Private respondents can not be said to have unduly enriched themselves at the expense of petitioner FCP
since they will be required to pay the latter the unpaid balance of its obligation under the promissory note.

In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring petitioner
Perla to indemnify private respondents for the loss of their insured vehicle. However, the latter should be
ordered to pay petitioner FCP the amount of P55,055.93, representing the unpaid installments from
December 30, 1982 up to July 1, 1983, as shown in the statement of account prepared by petitioner
FCP, 18 plus legal interest from July 2, 1983 until fully paid.

As to the award of moral damages, exemplary damages and attorney's fees, private respondents are
legally entitled to the same since petitioner Perla had acted in bad faith by unreasonably refusing to honor
the insurance claim of the private respondents. Besides, awards for moral and exemplary damages, as
well as attorney's fees are left to the sound discretion of the Court. Such discretion, if well exercised, will
not be disturbed on appeal. 19

WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require private
respondents to pay petitioner FCP the amount of P55,055.93, with legal interest from July 2, 1983 until
fully paid. The decision appealed from is hereby affirmed as to all other respects. No pronouncement as
to costs.

SO ORDERED.
 [ G.R. No. 173773, November 28, 2012 ] under the same circumstances although under a different policy and insurance company. This, considered
with the principle that an insured may not recover more than its interest in any property subject of an
PARAMOUNT INSURANCE CORPORATION, PETITIONER, VS. SPOUSES YVES AND insurance, leads the court to dismiss this action.
MARIA TERESA REMONDEULAZ, RESPONDENTS.
SO ORDERED.[4]
DECISION

PERALTA, J.: Not in conformity with the trial court’s Order, respondents interposed an appeal to the Court of Appeals
(appellate court).
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the reversal
and setting aside of the Decision [1] dated April 12, 2005 and Resolution [2] dated July 20, 2006 of the Court In its Decision dated April 12, 2005, the appellate court reversed and set aside the Order issued by the
of Appeals in CA-G.R. CV No. 61490. trial court, to wit:

The undisputed facts follow. Indeed, the trial court erred when it dismissed the action on the ground of double recovery since it is clear
that the subject car is different from the one insured with another insurance company, the Standard
On May 26, 1994, respondents insured with petitioner their 1994 Toyota Corolla sedan under a Insurance Company. In this case, defendant-appellee [herein petitioner] denied the reimbursement for the
comprehensive motor vehicle insurance policy for one year. lost vehicle on the ground that the said loss could not fall within the concept of the “theft clause” under
the insurance policy x x x
During the effectivity of said insurance, respondents’ car was unlawfully taken. Hence, they immediately
reported the theft to the Traffic Management Command of the PNP who made them accomplish a x x x x
complaint sheet.  In said complaint sheet, respondents alleged that a certain Ricardo Sales ( Sales) took
possession of the subject vehicle to add accessories and improvements thereon, however, Sales failed to WHEREFORE, the October 7, 1998 Order of the Regional Trial Court of Makati City, Branch 63, is
return the subject vehicle within the agreed three-day period. hereby REVERSED and SET ASIDE

As a result, respondents notified petitioner to claim for the reimbursement of their lost vehicle. However, x x x.
petitioner refused to pay.
SO ORDERED.[5]
Accordingly, respondents lodged a complaint for a sum of money against petitioner before the Regional
Trial Court of Makati City (trial court) praying for the payment of the insured value of their car plus
damages on April 21, 1995. Petitioner, thereafter, filed a motion for reconsideration against said Decision, but the same was denied
by the appellate court in a Resolution dated July 20, 2006.
After presentation of respondents’ evidence, petitioner filed a Demurrer to Evidence.
Consequently, petitioner filed a petition for review on certiorari before this Court praying that the
Acting thereon, the trial court dismissed the complaint filed by respondents. The full text of said appellate court’s Decision and Resolution be reversed and set aside.
Order[3] reads:
In its petition, petitioner raises this issue for our resolution:
Before the Court is an action filed by the plaintiffs, spouses Yves and Maria Teresa Remondeulaz against
the defendant, Paramount Insurance Corporation, to recover from the defendant the insured value of [the] Whether or not the Court of Appeals decided the case a quo in a way not in accord with law and/or
motor vehicle. applicable jurisprudence when it promulgated in favor of the respondents Remondeulaz, making
Paramount liable for the alleged “theft” of respondents’ vehicle. [6]
It appears that on 26 May 1994, plaintiffs insured their vehicle, a 1994 Toyota Corolla XL with chassis
number EE-100-9524505, with defendant under Private Car Policy No. PC-37396 for Own Damage,
Theft, Third-Party Property Damage and Third-Party Personal Injury, for the period commencing 26 May Essentially, the issue is whether or not petitioner is liable under the insurance policy for the loss of
1994 to 26 May 1995. Then on 1 December 1994, defendants received from plaintiff a demand letter respondents’ vehicle.
asking for the payment of the proceeds in the amount of PhP409,000.00 under their policy. They alleged
the loss of the vehicle and claimed the same to be covered by the policy’s provision on “Theft.” Petitioner argues that the loss of respondents’ vehicle is not a peril covered by the policy. It maintains
Defendant disagreed and refused to pay. that it is not liable for the loss, since the car cannot be classified as stolen as respondents entrusted the
possession thereof to another person.
It appears, however, that plaintiff had successfully prosecuted and had been awarded the amount claimed
in this action, in another action (Civil Case No. 95-1524 entitled Sps. Yves and Maria Teresa We do not agree.
Remondeulaz versus Standard Insurance Company, Inc.), which involved the loss of the same vehicle
Adverse to petitioner’s claim, respondents’ policy clearly undertook to indemnify the insured against loss
of or damage to the scheduled vehicle when caused by theft, to wit:
SECTION III – LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify the insured against loss of
or damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: –
In the instant case, Sales did not have juridical possession over the vehicle.  Here, it is apparent that the
taking of respondents’ vehicle by Sales is without any consent or authority from the former.
Records would show that respondents entrusted possession of their vehicle only to the extent that
Sales will introduce repairs and improvements thereon, and not to permanently deprive them of
possession thereof.  Since, Theft can also be committed through misappropriation, the fact that Sales
failed to return the subject vehicle to respondents constitutes Qualified Theft.  Hence, since respondents’
car is undeniably covered by a Comprehensive Motor Vehicle Insurance Policy that allows for recovery
in cases of theft, petitioner is liable under the policy for the loss of respondents’ vehicle under the “theft
clause.”

(a) by accidental collision or overturning, or collision or overturning consequent upon mechanical All told, Sales’ act of depriving respondents of their motor vehicle at, or soon after the transfer of
breakdown or consequent upon wear and tear; physical possession of the movable property, constitutes theft under the insurance policy, which is
compensable.[12]
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;
WHEREFORE, the instant petition is DENIED. The Decision dated April 12, 2005 and Resolution
(c) by malicious act; dated July 20, 2006 of the Court of Appeals are hereby AFFIRMED in toto.

(d) whilst in transit (including the [process] of loading and unloading) incidental to such transit by road, SO ORDERED.
rail, inland waterway, lift or elevator.[7]

Apropos, we now resolve the issue of whether the loss of respondents’ vehicle falls within the concept of
the “theft clause” under the insurance policy.

In People v. Bustinera,[8] this Court had the occasion to interpret the “theft clause” of an insurance policy.
In this case, the Court explained that when one takes the motor vehicle of another without the latter’s
consent even if the motor vehicle is later returned, there is theft – there being intent to gain as the use of
the thing unlawfully taken constitutes gain.

Also, in Malayan Insurance Co., Inc. v. Court of Appeals,[9] this Court held that the taking of a vehicle by
another person without the permission or authority from the owner thereof is sufficient to place it within
the ambit of the word theft as contemplated in the policy, and is therefore, compensable.

Moreover, the case of Santos v. People[10] is worthy of note. Similarly in Santos, the owner of a car
entrusted his vehicle to therein petitioner Lauro Santos who owns a repair shop for carburetor repair and
repainting.  However, when the owner tried to retrieve her car, she was not able to do so since Santos had
abandoned his shop.  In the said case, the crime that was actually committed was Qualified Theft.
However, the Court held that because of the fact that it was not alleged in the information that the object
of the crime was a car, which is a qualifying circumstance, the Court found that Santos was only guilty of
the crime of Theft and merely considered the qualifying circumstance as an aggravating circumstance in
the imposition of the appropriate penalty.  The Court therein clarified the distinction between the crime of
Estafa and Theft, to wit:

x x x The principal distinction between the two crimes is that in theft the thing is taken while in estafa the
accused receives the property and converts it to his own use or benefit. However, there may be theft even
if the accused has possession of the property. If he was entrusted only with the material or physical
(natural) or de facto possession of the thing, his misappropriation of the same constitutes theft , but if he
has the juridical possession of the thing, his conversion of the same constitutes embezzlement or estafa. [11]
 [ G.R. No. 198174, September 02, 2013 ]
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of respondent in this
ALPHA INSURANCE AND SURETY CO., PETITIONER, VS. ARSENIA SONIA CASTOR, wise:
RESPONDENT.
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
DECISION defendant ordering the latter as follows:

PERALTA, J.: 1. To pay plaintiff the amount of P466,000.00 plus legal interest of 6% per annum from the time
of demand up to the time the amount is fully settled;
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision[1] dated May 31, 2011 and Resolution [2] dated August 10, 2011 of the Court of Appeals (CA) in 2. To pay attorney’s fees in the sum of P65,000.00; and
CA-G.R. CV No. 93027.
3. To pay the costs of suit.
The facts follow.
All other claims not granted are hereby denied for lack of legal and factual basis. [3]
On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The contract Aggrieved, petitioner filed an appeal with the CA.
of insurance obligates the petitioner to pay the respondent the amount of Six Hundred Thirty Thousand
Pesos (P630,000.00) in case of loss or damage to said vehicle during the period covered, which is from On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon City’s decision.
February 26, 2007 to February 26, 2008. The fallo reads:
On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar Lanuza
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision, dated
(Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tune-up. However, Lanuza no
December 19, 2008, of Branch 215 of the Regional Trial Court of Quezon City, in Civil Case No. Q-07-
longer returned the motor vehicle to respondent and despite diligent efforts to locate the same, said efforts
61099, is hereby AFFIRMED in toto.
proved futile. Resultantly, respondent promptly reported the incident to the police and concomitantly
notified petitioner of the said loss and demanded payment of the insurance proceeds in the total sum of
SO ORDERED.[4]
P630,000.00.

In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating among others, Petitioner filed a Motion for Reconsideration against said decision, but the same was denied in a
thus: Resolution dated August 10, 2011.

Hence, the present petition wherein petitioner raises the following grounds for the allowance of its
Upon verification of the documents submitted, particularly the Police Report and your Affidavit, which
petition:
states that the culprit, who stole the Insure[d] unit, is employed with you. We would like to invite you on
the provision of the Policy under Exceptions to Section-III, which we quote:
1. WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
1.) The Company shall not be liable for: GROSSLY OR GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF
THE PRIVATE RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT
EXCEPTION DOES NOT COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF
x x x x
THE INSURANCE POLICY ARE [AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH
THAT THE PARTIES THEMSELVES DISAGREE ABOUT THE MEANING OF PARTICULAR
(4) Any malicious damage caused by the Insured, any member of his family or by “A PERSON IN THE
PROVISIONS, THE POLICY WILL BE CONSTRUED BY THE COURTS LIBERALLY IN
INSURED’S SERVICE.”
FAVOR OF THE ASSURED AND STRICTLY AGAINST THE INSURER.
In view [of] the foregoing, we regret that we cannot act favorably on your claim.
2. WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE
In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and argued that the JUDGMENT OF THE TRIAL COURT.[5]
exception refers to damage of the motor vehicle and not to its loss. However, petitioner’s denial of
respondent’s insured claim remains firm.
Simply, the core issue boils down to whether or not the loss of respondent’s vehicle is excluded under the
insurance policy.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner before the
Regional Trial Court (RTC) of Quezon City on September 10, 2007.
We rule in the negative.

Significant portions of Section III of the Insurance Policy states:
SECTION III – LOSS OR DAMAGE
The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to
the Schedule Vehicle and its accessories and spare parts whilst thereon:
(a) by accidental collision or overturning, or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading) incidental to such transit by
road, rail, inland waterway, lift or elevator.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft perpetrated by
the driver of the insured is not an exception to the coverage from the insurance policy, since Section III
thereof did not qualify as to who would commit the theft. Thus:
Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance policy
subject of this case. This is evident from the very provision of Section III – “Loss or Damage.” The
insurance company, subject to the limits of liability, is obligated to indemnify the insured against theft.
Said provision does not qualify as to who would commit the theft. Thus, even if the same is committed by
the driver of the insured, there being no categorical declaration of exception, the same must be covered.
As correctly pointed out by the plaintiff, “(A)n insurance contract should be interpreted as to carry out the
purpose for which the parties entered into the contract which is to insure against risks of loss or damage
to the goods. Such interpretation should result from the natural and reasonable meaning of language in
the policy. Where restrictive provisions are open to two interpretations, that which is most favorable to
the insured is adopted.” The defendant would argue that if the person employed by the insured would
commit the theft and the insurer would be held liable, then this would result to an absurd situation where
the insurer would also be held liable if the insured would commit the theft. This argument is certainly
flawed. Of course, if the theft would be committed by the insured himself, the same would be an
exception to the coverage since in that case there would be fraud on the part of the insured or breach of
material warranty under Section 69 of the Insurance Code. [7]
Moreover, contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and popular sense. [8] Accordingly, in
interpreting the exclusions in an insurance contract, the terms used specifying the excluded classes
therein are to be given their meaning as understood in common speech. [9]

EXCEPTIONS TO SECTION III Adverse to petitioner’s claim, the words “loss” and “damage” mean different things in common ordinary
usage. The word “loss” refers to the act or fact of losing, or failure to keep possession, while the word
“damage” means deterioration or injury to property.
The Company shall not be liable to pay for:
Therefore, petitioner cannot exclude the loss of respondent’s vehicle under the insurance policy under
paragraph 4 of “Exceptions to Section III,” since the same refers only to “malicious damage,” or more
1. Loss or Damage in respect of any claim or series of claims arising out of one event, the first specifically, “injury” to the motor vehicle caused by a person under the insured’s service. Paragraph 4
amount of each and every loss for each and every vehicle insured by this Policy, such amount being clearly does not contemplate “loss of property,” as what happened in the instant case.
equal to one percent (1.00%) of the Insured’s estimate of Fair Market Value as shown in the Policy
Schedule with a minimum deductible amount of Php3,000.00; Further, the CA aptly ruled that “malicious damage,” as provided for in the subject policy as one of the
exceptions from coverage, is the damage that is the direct result from the deliberate or willful act of the
2. Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures insured, members of his family, and any person in the insured’s service, whose clear plan or purpose was
or breakages; to cause damage to the insured vehicle for purposes of defrauding the insurer, viz.:

3. Damage to tires, unless the Schedule Vehicle is damaged at the same time; This interpretation by the Court is bolstered by the observation that the subject policy appears to clearly
delineate between the terms “loss” and “damage” by using both terms throughout the said policy. x x x
4. Any malicious damage caused by the Insured, any member of his family or by a person in the
Insured’s service.[6] x x x x

In denying respondent’s claim, petitioner takes exception by arguing that the word “damage,” under If the intention of the defendant-appellant was to include the term “loss” within the term “damage” then
paragraph 4 of “Exceptions to Section III,” means loss due to injury or harm to person, property or logic dictates that it should have used the term “damage” alone in the entire policy or otherwise included
reputation, and should be construed to cover malicious “loss” as in “theft.” Thus, it asserts that the loss of a clear definition of the said term as part of the provisions of the said insurance contract. Which is why
respondent’s vehicle as a result of it being stolen by the latter’s driver is excluded from the policy. the Court finds it puzzling that in the said policy’s provision detailing the exceptions to the policy’s
coverage in Section III thereof, which is one of the crucial parts in the insurance contract, the insurer,
We do not agree. after liberally using the words “loss” and “damage” in the entire policy, suddenly went specific by using
the word “damage” only in the policy’s exception regarding “malicious damage.” Now, the defendant-
appellant would like this Court to believe that it really intended the word “damage” in the term
“malicious damage” to include the theft of the insured vehicle.

The Court does not find the particular contention to be well taken.

True, it is a basic rule in the interpretation of contracts that the terms of a contract are to be construed
according to the sense and meaning of the terms which the parties thereto have used. In the case of
property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the
assured, determine the import of the various terms and provisions embodied in the policy.
However, when the terms of the insurance policy are ambiguous, equivocal or uncertain, such
that the parties themselves disagree about the meaning of particular provisions, the policy will be
construed by the courts liberally in favor of the assured and strictly against the insurer.[10]

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer from
non-compliance with his obligation. Thus, in Eternal Gardens Memorial Park Corporation v. Philippine
American Life Insurance Company,[11] this Court ruled –

It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest.
Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of resolving
any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A
contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from non-compliance with its obligations.

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should construe them in such
a way as to preclude the insurer from non-compliance with his obligation. Being a contract of adhesion,
the terms of an insurance contract are to be construed strictly against the party which prepared the
contract, the insurer. By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. [12]

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED.

Accordingly, the Decision dated May 31, 2011 and Resolution dated August 10, 2011 of the Court of
Appeals are hereby AFFIRMED.

SO ORDERED.
 [ G.R. No. 113899, October 13, 1999 ]
GREAT PACIFIC LIFE ASSURANCE CORP., PETITIONER VS. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, RESPONDENTS.
DECISION
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision [1] dated May 17, 1993,
of the Court of Appeals and its Resolution [2] dated January 4, 1994 in CA-G.R. CV No. 18341. The
appellate court affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in
an insurance claim filed by private respondent against Great Pacific Life Assurance Co. The dispositive
portion of the trial court’s decision reads:
“WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy No. G-1907, in relation to Certification B-18558
liable and ordered to pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for damages, attorney’s fees and litigation expenses in the complaint
and counterclaim, with costs against the defendant and dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary, for lack of cause of action.” [3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP).
Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
“7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer,
diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.”[4]
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio,
to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to “massive cerebral hemorrhage.” Consequently, DBP
submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted
that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for “Specific
Performance with Damages.”[5] During the trial, Dr. Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia’s findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes were not ruled
out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court’s decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON THE
LIFE OF PLAINTIFF’S HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN BORROWERS,
INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON
OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP
THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH
WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP
INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION
FOR MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-
APPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO
LEUTERIO.”[6]
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group life
insurance contract from a complaint filed by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six thousand,
two hundred (P86,200.00) pesos without proof of the actual outstanding mortgage payable by the
mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of
Appeals affirmed the trial court’s judgment, Grepalife was held liable to pay the proceeds of insurance
contract in favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to
this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the
“mortgage redemption insurance,” is a device for the protection of both the mortgagee and the mortgagor.
On the part of the mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from
such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation. [7] In a similar vein, ample protection is given to the mortgagor
under such a concept so that in the event of death; the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness. [8] Consequently, where the mortgagor
pays the insurance premium under the group insurance policy, making the loss payable to the mortgagee,
the insurance is on the mortgagor’s interest, and the mortgagor continues to be a party to the contract. In
this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-
payable clause does not make the mortgagee a party to the contract. [9]
Section 8 of the Insurance Code provides:
“Unless the policy provides, where a mortgagor of property effects insurance in his own name providing
that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the
original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will
have the same effect, although the property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein
named, with the same effect as if it had been performed by the mortgagor.”
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance,
the policy stating that: “In the event of the debtor’s death before his indebtedness with the Creditor [DBP]
shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor.”[10] When DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment committed by the insured. Thereafter,
DBP collected the debt from the mortgagor and took the necessary action of foreclosure on the residential
lot of private respondent.[11] In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co.[12] we held:
“Insured, being the person with whom the contract was made, is primarily the proper person to bring suit
thereon. * * * Subject to some exceptions, insured may thus sue, although the policy is taken wholly or in
part for the benefit of another person named or unnamed, and although it is expressly made payable to
another as his interest may appear or otherwise. * * * Although a policy issued to a mortgagor is taken
out for the benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon in his
own name, especially where the mortgagee’s interest is less than the full amount recoverable under the
policy, * * *.’
And in volume 33, page 82, of the same work, we read the following:
‘Insured may be regarded as the real party in interest, although he has assigned the policy for the purpose
of collection, or has assigned as collateral security any judgment he may obtain.” [13]
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might
have recovered,[14] the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to
annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had knowledge
of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the same. [15]
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported by
the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia’s technical diagnosis
of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the widow’s
declaration that her husband had “possible hypertension several years ago” should not be considered as
hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy
on the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr.
Leuterio’s any previous hospital confinement. [16] Dr. Leuterio’s death certificate stated that hypertension
was only “the possible cause of death.” The private respondent’s statement, as to the medical history of
her husband, was due to her unreliable recollection of events. Hence, the statement of the physician was
properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:
“The insured, Dr. Leuterio, had answered in his insurance application that he was in good health and that
he had not consulted a doctor or any of the enumerated ailments, including hypertension; when he died
the attending physician had certified in the death certificate that the former died of cerebral hemorrhage,
probably secondary to hypertension. From this report, the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had concealed the fact that he had hypertension.
Contrary to appellant’s allegations, there was no sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the insured’s widow who was not even sure if the medicines
taken by Dr. Leuterio were for hypertension, the appellant had not proven nor produced any witness who
could attest to Dr. Leuterio’s medical history...
xxx
Appellant insurance company had failed to establish that there was concealment made by the insured,
hence, it cannot refuse payment of the claim.”[17]
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.[18] Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. [19] In the
case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to
pay the proceeds of the insurance.

And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio’s outstanding indebtedness to DBP at the time of the
mortgagor’s death. Hence, for private respondent’s failure to establish the same, the action for specific
performance should be dismissed. Petitioner’s claim is without merit. A life insurance policy is a valued
policy.[20] Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. [21] The
mortgagor paid the premium according to the coverage of his insurance, which states that:

“The policy states that upon receipt of due proof of the Debtor’s death during the terms of this insurance,
a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtor’s death before his indebtedness with the creditor shall have been fully paid, an
amount to pay the outstanding indebtedness shall first be paid to the Creditor and the balance of the Sum
Assured, if there is any shall then be paid to the beneficiary/ies designated by the debtor.” [22] (Emphasis
omitted)

However, we noted that the Court of Appeals’ decision was promulgated on May 17, 1993. In private
respondent’s memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagor’s outstanding loan. Considering this supervening event, the insurance proceeds shall inure to
the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should not
unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now rightly
belong to Dr. Leuterio’s heirs represented by his widow, herein private respondent Medarda Leuterio.

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in
CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the
insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor’s
indebtedness to Development Bank of the Philippines. Costs against petitioner.

SO ORDERED.