GENERAL PROVISIONS
Republic of the Philippines Recibi la suma de seis mil pesos de Don Joaquin letter notifying Mr. Herrer of this acceptance. The
SUPREME COURT Herrer de Manila como prima dela Renta Vitalicia
Manila solicitada por dicho Don Joaquin Herrer hoy,
sujeta al examen medico y aprobacion de la
EN BANC Oficina Central de la Compañ ia.
G.R. No. L-15895             November 29, 1920 The application was immediately forwarded to the
head office of the company at Montreal, Canada.
On November 26, 1917, the head office gave notice
RAFAEL ENRIQUEZ, as administrator of the
of acceptance by cable to Manila. (Whether on the
estate of the late Joaquin Ma. Herrer, plaintiff-
same day the cable was received notice was sent
appellant,
by the Manila office of Herrer that the application
vs.
had been accepted, is a disputed point, which will
SUN LIFE ASSURANCE COMPANY OF
be discussed later.) On December 4, 1917, the
CANADA, defendant-appellee.
policy was issued at Montreal. On December 18,
1917, attorney Aurelio A. Torres wrote to the
Jose A. Espiritu for appellant.
Manila office of the company stating that Herrer
Cohn, Fisher and DeWitt for appellee.
desired to withdraw his application. The following
day the local office replied to Mr. Torres, stating
that the policy had been issued, and called
attention to the notification of November 26,
1917. This letter was received by Mr. Torres on
MALCOLM, J.: the morning of December 21, 1917. Mr. Herrer
died on December 20, 1917.
This is an action brought by the plaintiff ad
administrator of the estate of the late Joaquin Ma. As above suggested, the issue of fact raised by the
Herrer to recover from the defendant life evidence is whether Herrer received notice of
insurance company the sum of pesos 6,000 paid acceptance of his application. To resolve this
by the deceased for a life annuity. The trial court question, we propose to go directly to the
gave judgment for the defendant. Plaintiff appeals. evidence of record.
The undisputed facts are these: On September 24, The chief clerk of the Manila office of the Sun Life
1917, Joaquin Herrer made application to the Sun Assurance Company of Canada at the time of the
Life Assurance Company of Canada through its trial testified that he prepared the letter
office in Manila for a life annuity. Two days later introduced in evidence as Exhibit 3, of date
he paid the sum of P6,000 to the manager of the November 26, 1917, and handed it to the local
company's Manila office and was given a receipt manager, Mr. E. E. White, for signature. The
reading as follows: witness admitted on cross-examination that after
preparing the letter and giving it to he manager,
MANILA, I. F., 26 de septiembre, 1917. he new nothing of what became of it. The local
manager, Mr. White, testified to having received
the cablegram accepting the application of Mr.
PROVISIONAL RECEIPT Pesos 6,000
Herrer from the home office on November 26,
1917. He said that on the same day he signed a
witness further said that letters, after being
signed, were sent to the chief clerk and placed on
the mailing desk for transmission. The witness
could not tell if the letter had every actually been
placed in the mails. Mr. Tuason, who was the chief
clerk, on November 26, 1917, was not called as a
witness. For the defense, attorney Manuel Torres
testified to having prepared the will of Joaquin Ma.
Herrer, that on this occasion, Mr. Herrer
mentioned his application for a life annuity, and
that he said that the only document relating to the
transaction in his possession was the provisional
receipt. Rafael Enriquez, the administrator of the
estate, testified that he had gone through the
effects of the deceased and had found no letter of
notification from the insurance company to Mr.
Herrer.
Our deduction from the evidence on this issue
must be that the letter of November 26, 1917,
notifying Mr. Herrer that his application had been
accepted, was prepared and signed in the local
office of the insurance company, was placed in the
ordinary channels for transmission, but as far as
we know, was never actually mailed and thus was
never received by the applicant.
Not forgetting our conclusion of fact, it next
becomes necessary to determine the law which
should be applied to the facts. In order to reach
our legal goal, the obvious signposts along the way
must be noticed.
Until quite recently, all of the provisions
concerning life insurance in the Philippines were
found in the Code of Commerce and the Civil Code.
In the Code of the Commerce, there formerly
existed Title VIII of Book III and Section III of Title
III of Book III, which dealt with insurance
contracts. In the Civil Code there formerly existed
and presumably still exist, Chapters II and IV,
entitled insurance contracts and life annuities,
respectively, of Title XII of Book IV. On the after
1 |I N S U R A N C E
GENERAL PROVISIONS
July 1, 1915, there was, however, in force the
Insurance Act. No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act
expressly repealed Title VIII of Book II and Section
III of Title III of Book III of the code of Commerce.
The law of insurance is consequently now found in
the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with
life insurance, it is silent as to the methods to be
followed in order that there may be a contract of
insurance. On the other hand, the Civil Code, in
article 1802, not only describes a contact of life
annuity markedly similar to the one we are
considering, but in two other articles, gives strong
clues as to the proper disposition of the case. For
instance, article 16 of the Civil Code provides that
"In matters which are governed by special laws,
any deficiency of the latter shall be supplied by the
provisions of this Code." On the supposition,
therefore, which is incontestable, that the special
law on the subject of insurance is deficient in
enunciating the principles governing acceptance,
the subject-matter of the Civil code, if there be
any, would be controlling. In the Civil Code is
found article 1262 providing that "Consent is
shown by the concurrence of offer and acceptance
with respect to the thing and the consideration
which are to constitute the contract. An
acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge. The contract, in such case,
is presumed to have been entered into at the place
where the offer was made." This latter article is in
opposition to the provisions of article 54 of the
Code of Commerce.
If no mistake has been made in announcing the
successive steps by which we reach a conclusion,
then the only duty remaining is for the court to
apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance,
and expressly repealed the provisions in the Code
of Commerce on the same subject, and having thus
left a void in the commercial law, it would seem
logical to make use of the only pertinent provision
of law found in the Civil code, closely related to
the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by
letter shall bind the person making the offer only
from the date it came to his knowledge, may not
be the best expression of modern commercial
usage. Still it must be admitted that its
enforcement avoids uncertainty and tends to
security. Not only this, but in order that the
principle may not be taken too lightly, let it be
noticed that it is identical with the principles
announced by a considerable number of
respectable courts in the United States. The courts
who take this view have expressly held that an
acceptance of an offer of insurance not actually or
constructively communicated to the proposer
does not make a contract. Only the mailing of
acceptance, it has been said, completes the
contract of insurance, as the locus poenitentiae is
ended when the acceptance has passed beyond
the control of the party. (I Joyce, The Law of
Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case
is found to be the second paragraph of article
1262 of the Civil Code providing that an
acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge. The pertinent fact is, that
according to the provisional receipt, three things
had to be accomplished by the insurance company
before there was a contract: (1) There had to be a
medical examination of the applicant; (2) there
had to be approval of the application by the head
office of the company; and (3) this approval had in
some way to be communicated by the company to
the applicant. The further admitted facts are that
the head office in Montreal did accept the
application, did cable the Manila office to that
effect, did actually issue the policy and did,
through its agent in Manila, actually write the
letter of notification and place it in the usual
channels for transmission to the addressee. The
fact as to the letter of notification thus fails to
concur with the essential elements of the general
rule pertaining to the mailing and delivery of mail
matter as announced by the American courts,
namely, when a letter or other mail matter is
addressed and mailed with postage prepaid there
is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have
been transmitted to him in the ordinary course of
the mails. But if any one of these elemental facts
fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have
been received by the addressee unless it is shown
that it was deposited in the post-office, properly
addressed and stamped. (See 22 C.J., 96, and 49 L.
R. A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the
case at bar was not perfected because it has not
been proved satisfactorily that the acceptance of
the application ever came to the knowledge of the
applicant.lawph!l.net
Judgment is reversed, and the plaintiff shall have
and recover from the defendant the sum of P6,000
with legal interest from November 20, 1918, until
paid, without special finding as to costs in either
instance. So ordered.
Mapa, C.J., Araullo, Avanceña and Villamor, JJ.,
concur.
Johnson, J., dissents.
2 |I N S U R A N C E
GENERAL PROVISIONS
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
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
3 |I N S U R A N C E
GENERAL PROVISIONS
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.
4 |I N S U R A N C E
GENERAL PROVISIONS
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.
5 |I N S U R A N C E
GENERAL PROVISIONS
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
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."

In the case referred to in No. 1, ACCORDINGLY, the appealed judgment of the

the action for declaration of lower court is hereby affirmed. Carponia T.
nullity may be brought by the Ebrado is hereby declared disqualified to be the
spouse of the donor or beneficiary of the late Buenaventura C. Ebrado in
donee; and the guilty of the donee his life insurance policy. As a consequence, the
may be proved by preponderance proceeds of the policy are hereby held payable to
of evidence in the same action. the estate of the deceased insured. Costs against
Carponia T. Ebrado.
The underscored clause neatly conveys that no
criminal conviction for the offense is a condition SO ORDERED.
precedent. In fact, it cannot even be from the
aforequoted provision that a prosecution is Teehankee (Chairman), Makasiar, Muñ;oz Palma,
needed. On the contrary, the law plainly states Fernandez and Guerrero, JJ., concur.1äw
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

6 |I N S U R A N C E
GENERAL PROVISIONS
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-1669             August 31, 1950
PAZ LOPEZ DE CONSTANTINO, plaintiff-
appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-
appellee.
x---------------------------------------------------------x
G.R. No. L-1670             August 31, 1950
AGUSTINA PERALTA, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-
appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and
Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First
Instance of Manila, call for decision of the question
whether the beneficiary in a life insurance policy
may recover the amount thereof although the
insured died after repeatedly failing to pay the
stipulated premiums, such failure having been
caused by the last war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04
as annual premium duly paid to it, the Asia Life
Insurance Company (a foreign corporation
incorporated under the laws of Delaware, U.S.A.),
issued on September 27, 1941, its Policy No.
93912 for P3,000, whereby it insured the life of
Arcadio Constantino for a term of twenty years.
The first premium covered the period up to
September 26, 1942. The plaintiff Paz Lopez de
Constantino was regularly appointed beneficiary.
The policy contained these stipulations, among
others:
This POLICY OF INSURANCE is issued in
consideration of the written and printed
application here for a copy of which is
attached hereto and is hereby made a part
hereof made a part hereof, and of the
payment in advance during the lifetime
and good health of the Insured of the
annual premium of One Hundred fifty-
eight and 4/100 pesos Philippine
currency1 and of the payment of a like
amount upon each twenty-seventh day of
September hereafter during the term of
Twenty years or until the prior death of
the Insured. (Emphasis supplied.)
xxx     xxx     xxx
All premium payments are due in advance
and any unpunctuality in making any such
payment shall cause this policy to lapse
unless and except as kept in force by the
Grace Period condition or under Option 4
below. (Grace of 31 days.)
After that first payment, no further premiums
were paid. The insured died on September 22,
1944.
It is admitted that the defendant, being an
American corporation , had to close its branch
office in Manila by reason of the Japanese
occupation, i.e. from January 2, 1942, until the
year 1945.
Second case. On August 1, 1938, the defendant
Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment
Participating with Accident Indemnity), covering
the lives of the spouses Tomas Ruiz and Agustina
Peralta, for the sum of P3,000. The annual
premium stipulated in the policy was regularly
paid from August 1, 1938, up to and including
September 30, 1941. Effective August 1, 1941, the
mode of payment of premiums was changed from
annual to quarterly, so that quarterly premiums
were paid, the last having been delivered on
November 18, 1941, said payment covering the
period up to January 31, 1942. No further
payments were handed to the insurer. Upon the
Japanese occupation, the insured and the insurer
became separated by the lines of war, and it was
impossible and illegal for them to deal with each
other. Because the insured had borrowed on the
policy an mount of P234.00 in January, 1941, the
cash surrender value of the policy was sufficient
to maintain the policy in force only up to
September 7, 1942. Tomas Ruiz died on February
16, 1945. The plaintiff Agustina Peralta is his
beneficiary. Her demand for payment met with
defendant's refusal, grounded on non-payment of
the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in
consideration of the written and printed
application herefor, a copy of which is
attached hereto and is hereby made apart
hereof, and of the payment in advance
during the life time and good health of the
Insured of the annual premium of Two
hundred and 43/100 pesos Philippine
currency and of the payment of a like
7 |I N S U R A N C E
GENERAL PROVISIONS
amount upon each first day of August
hereafter during the term of Twenty years
or until the prior death of either of the
Insured. (Emphasis supplied.)
xxx     xxx     xxx
All premium payments are due in advance
and any unpunctuality in making any such
payment shall cause this policy to lapse
unless and except as kept in force by the
Grace Period condition or under Option 4
below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are
entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They
allege that non-payment of the premiums was
caused by the closing of defendant's offices in
Manila during the Japanese occupation and the
impossible circumstances created by war.
Defendant on the other hand asserts that the
policies had lapsed for non-payment of premiums,
in accordance with the contract of the parties and
the law applicable to the situation.
The lower court absolved the defendant. Hence
this appeal.
The controversial point has never been decided in
this jurisdiction. Fortunately, this court has had
the benefit of extensive and exhaustive
memoranda including those of amici curiae. The
matter has received careful consideration,
inasmuch as it affects the interest of thousands of
policy-holders and the obligations of many
insurance companies operating in this country.
Since the year 1917, the Philippine law on
Insurance was found in Act No. 2427, as amended,
and the Civil Code.2 Act No. 2427 was largely
copied from the Civil Code of California. 3 And this
court has heretofore announced its intention to
supplement the statutory laws with general
principles prevailing on the subject in the United
State.4
In Young vs. Midland Textile Insurance Co. (30
Phil., 617), we said that "contracts of insurance
are contracts of indemnity upon the terms and
conditions specified in the policy. The parties have
a right to impose such reasonable conditions at
the time of the making of the contract as they may
deem wise and necessary. The rate of premium is
measured by the character of the risk assumed.
The insurance company, for a comparatively small
consideration, undertakes to guarantee the
insured against loss or damage, upon the terms
and conditions agreed upon, and upon no other,
and when called upon to pay, in case of loss, the
insurer, therefore, may justly insists upon a
fulfillment of these terms. If the insured cannot
bring himself within the conditions of the policy,
he is not entitled for the loss. The terms of the
policy constitute the measure of the insurer's
liability, and in order to recover the insured must
show himself within those terms; and if it appears
that the contract has been terminated by a
violation, on the part of the insured, of its
conditions, then there can be no right of recovery.
The compliance of the insured with the terms of
the contract is a condition precedent to the right
of recovery."
Recall of the above pronouncements is
appropriate because the policies in question
stipulate that "all premium payments are due in
advance and any unpunctuality in making any
such payment shall cause this policy to lapse."
Wherefore, it would seem that pursuant to the
express terms of the policy, non-payment of
premium produces its avoidance.
The conditions of contracts of Insurance,
when plainly expressed in a policy, are
binding upon the parties and should be
enforced by the courts, if the evidence
brings the case clearly within their
meaning and intent. It tends to bring the
law itself into disrepute when, by astute
and subtle distinctions, a plain case is
attempted to be taken without the
operation of a clear, reasonable and
material obligation of the contract.
Mack vs. Rochester German Ins. Co., 106
N.Y., 560, 564. (Young vs. Midland Textile
Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this
court held that a life policy was avoided because
the premium had not been paid within the time
fixed, since by its express terms, non-payment of
any premium when due or within the thirty-day
period of grace, ipso facto caused the policy to
lapse. This goes to show that although we take the
view that insurance policies should be
conserved5 and should not lightly be thrown out,
still we do not hesitate to enforce the agreement
of the parties.
Forfeitures of insurance policies are not
favored, but courts cannot for that reason
alone refuse to enforce an insurance
contract according to its meaning. (45
C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that
inasmuch as the non-payment of premium was the
consequence of war, it should be excused and
should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on
Insurance, says that in determining the effect of
non-payment of premiums occasioned by war, the
American cases may be divided into three groups,
according as they support the so-called
Connecticut Rule, the New York Rule, or the
United States Rule.
8 |I N S U R A N C E
GENERAL PROVISIONS
The first holds the view that "there are two
elements in the consideration for which the
annual premium is paid — First, the mere
protection for the year, and second, the privilege
of renewing the contract for each succeeding year
by paying the premium for that year at the time
agreed upon. According to this view of the
contract, the payment of premiums is a condition
precedent, the non-performance would be illegal
necessarily defeats the right to renew the
contract."
The second rule, apparently followed by the
greater number of decisions, hold that "war
between states in which the parties reside merely
suspends the contracts of the life insurance, and
that, upon tender of all premiums due by the
insured or his representatives after the war has
terminated, the contract revives and becomes fully
operative."
The United States rule declares that the contract is
not merely suspended, but is abrogated by reason
of non-payments is peculiarly of the essence of the
contract. It additionally holds that it would be
unjust to allow the insurer to retain the reserve
value of the policy, which is the excess of the
premiums paid over the actual risk carried during
the years when the policy had been in force. This
rule was announced in the well-known
Statham6 case which, in the opinion of Professor
Vance, is the correct rule.7
The appellants and some amici curiae contend
that the New York rule should be applied here.
The appellee and other amici curiae contend that
the United States doctrine is the orthodox view.
We have read and re-read the principal cases
upholding the different theories. Besides the
respect and high regard we have always
entertained for decisions of the Supreme Court of
the United States, we cannot resist the conviction
that the reasons expounded in its decision of the
Statham case are logically and judicially sound.
Like the instant case, the policy involved in the
Statham decision specifies that non-payment on
time shall cause the policy to cease and determine.
Reasoning out that punctual payments were
essential, the court said:
. . . it must be conceded that promptness
of payment is essential in the business of
life insurance. All the calculations of the
insurance company are based on the
hypothesis of prompt payments. They not
only calculate on the receipt of the
premiums when due, but on
compounding interest upon them. It is on
this basis that they are enabled to offer
assurance at the favorable rates they do.
Forfeiture for non-payment is an
necessary means of protecting
themselves from embarrassment. Unless
it were enforceable, the business would
be thrown into confusion. It is like the
forfeiture of shares in mining enterprises,
and all other hazardous undertakings.
There must be power to cut-off
unprofitable members, or the success of
the whole scheme is endangered. The
insured parties are associates in a great
scheme. This associated relation exists
whether the company be a mutual one or
not. Each is interested in the engagements
of all; for out of the co-existence of many
risks arises the law of average, which
underlies the whole business. An essential
feature of this scheme is the mathematical
calculations referred to, on which the
premiums and amounts assured are
based. And these calculations, again, are
based on the assumption of average
mortality, and of prompt payments and
compound interest thereon. Delinquency
cannot be tolerated nor redeemed, except
at the option of the company. This has
always been the understanding and the
practice in this department of business.
Some companies, it is true, accord a grace
of thirty days, or other fixed period,
within which the premium in arrear may
be paid, on certain conditions of
continued good health, etc. But this is a
matter of stipulation, or of discretion, on
the part of the particular company. When
no stipulation exists, it is the general
understanding that time is material, and
that the forfeiture is absolute if the
premium be not paid. The extraordinary
and even desperate efforts sometimes
made, when an insured person is in
extremes to meet a premium coming due,
demonstrates the common view of this
matter.
The case, therefore, is one in which time
is material and of the essence and of the
essence of the contract. Non-payment at
the day involves absolute forfeiture if
such be the terms of the contract, as is the
case here. Courts cannot with safety vary
the stipulation of the parties by
introducing equities for the relief of the
insured against their own negligence.
In another part of the decision, the United States
Supreme Court considers and rejects what is, in
effect, the New York theory in the following words
and phrases:
The truth is, that the doctrine of the
revival of contracts suspended during the
war is one based on considerations of
equity and justice, and cannot be invoked
to revive a contract which it would be
unjust or inequitable to revive.
In the case of Life insurance, besides the
materiality of time in the performance of
the contract, another strong reason exists
why the policy should not be revived. The
parties do not stand on equal ground in
9 |I N S U R A N C E
GENERAL PROVISIONS
reference to such a revival. It would
operate most unjustly against the
company. The business of insurance is
founded on the law of average; that of life
insurance eminently so. The average rate
of mortality is the basis on which it rests.
By spreading their risks over a large
number of cases, the companies calculate
on this average with reasonable certainty
and safety. Anything that interferes with
it deranges the security of the business. If
every policy lapsed by reason of the war
should be revived, and all the back
premiums should be paid, the companies
would have the benefit of this average
amount of risk. But the good risks are
never heard from; only the bar are sought
to be revived, where the person insured is
either dead or dying. Those in health can
get the new policies cheaper than to pay
arrearages on the old. To enforce a revival
of the bad cases, whilst the company
necessarily lose the cases which are
desirable, would be manifestly unjust. An
insured person, as before stated, does not
stand isolated and alone. His case is
connected with and co-related to the
cases of all others insured by the same
company. The nature of the business, as a
whole, must be looked at to understand
the general equities of the parties.
The above consideration certainly lend
themselves to the approval of fair-minded men.
Moreover, if, as alleged, the consequences of war
should not prejudice the insured, neither should
they bear down on the insurer.
Urging adoption of the New York theory, counsel
for plaintiff point out that the obligation of the
insured to pay premiums was excused during the
war owing to impossibility of performance, and
that consequently no unfavorable consequences
should follow from such failure.
The appellee answers, quite plausibly, that the
periodic payment of premiums, at least those after
the first, is not an obligation of the insured, so
much so that it is not a debt enforceable by action
of the insurer.
Under an Oklahoma decision, the annual
premium due is not a debt. It is not an
obligation upon which the insurer can
maintain an action against insured; nor is
its settlement governed by the strict rule
controlling payments of debts. So, the
court in a Kentucky case declares, in the
opinion, that it is not a debt. . . . The fact
that it is payable annually or semi-
annually, or at any other stipulated time,
does not of itself constitute a promise to
pay, either express or implied. In case of
non-payment the policy is forfeited,
except so far as the forfeiture may be
saved by agreement, by waiver, estoppel,
or by statute. The payment of the
premium is entirely optional, while a debt
may be enforced at law, and the fact that
the premium is agreed to be paid is
without force, in the absence of an
unqualified and absolute agreement to
pay a specified sum at some certain time.
In the ordinary policy there is no promise
to pay, but it is optional with the insured
whether he will continue the policy or
forfeit it. (3 Couch, Cyc. on Insurance, Sec.
623, p. 1996.)
It is well settled that a contract of
insurance is sui generis. While the insured
by an observance of the conditions may
hold the insurer to his contract, the latter
has not the power or right to compel the
insured to maintain the contract relation
with it longer than he chooses. Whether
the insured will continue it or not is
optional with him. There being no
obligation to pay for the premium, they did
not constitute a debt. (Noble vs. Southern
States M.D. Ins. Co., 157 Ky., 46; 162 S.W.,
528.) (Emphasis ours.)
It should be noted that the parties contracted not
only for peacetime conditions but also for times of
war, because the policies contained provisions
applicable expressly to wartime days. The logical
inference, therefore, is that the parties
contemplated uninterrupted operation of the
contract even if armed conflict should ensue.
For the plaintiffs, it is again argued that in view of
the enormous growth of insurance business since
the Statham decision, it could now be relaxed and
even disregarded. It is stated "that the relaxation
of rules relating to insurance is in direct
proportion to the growth of the business. If there
were only 100 men, for example, insured by a
Company or a mutual Association, the death of one
will distribute the insurance proceeds among the
remaining 99 policy-holders. Because the loss
which each survivor will bear will be relatively
great, death from certain agreed or specified
causes may be deemed not a compensable loss.
But if the policy-holders of the Company or
Association should be 1,000,000 individuals, it is
clear that the death of one of them will not
seriously prejudice each one of the 999,999
surviving insured. The loss to be borne by each
individual will be relatively small."
The answer to this is that as there are (in the
example) one million policy-holders, the "losses"
to be considered will not be the death of one but
the death of ten thousand, since the proportion of
1 to 100 should be maintained. And certainly such
losses for 10,000 deaths will not be "relatively
small."
After perusing the Insurance Act, we are firmly
persuaded that the non-payment of premiums is
such a vital defense of insurance companies that
since the very beginning, said Act no. 2427
10 |I N S U R A N C E
GENERAL PROVISIONS
expressly preserved it, by providing that after the
policy shall have been in force for two years, it
shall become incontestable (i.e. the insurer shall
have no defense) except for fraud, non-payment of
premiums, and military or naval service in time of
war (sec. 184 [b], Insurance Act). And when
Congress recently amended this section (Rep. Act
No. 171), the defense of fraud was eliminated,
while the defense of nonpayment of premiums was
preserved. Thus the fundamental character of the
undertaking to pay premiums and the high
importance of the defense of non-payment
thereof, was specifically recognized.

In keeping with such legislative policy, we feel no

hesitation to adopt the United States Rule, which
is in effect a variation of the Connecticut rule for
the sake of equity. In this connection, it appears
that the first policy had no reserve value, and that
the equitable values of the second had been
practically returned to the insured in the form of
loan and advance for premium.

For all the foregoing, the lower court's decision

absolving the defendant from all liability on the
policies in question, is hereby affirmed, without
costs.

Moran, C.J., Ozaeta, Paras, Pablo, Montemayor,

Tuason, and Reyes, JJ., concur.

11 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
FIRST DIVISION
G.R. No. 112329           January 28, 2000
VIRGINIA A. PEREZ, petitioner,
vs.
COURT OF APPEALS and BF LIFEMAN
INSURANCE CORPORATION, respondents.
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts,
must be assented to by both parties, either in
person or through their agents and so long as an
application for insurance has not been either
accepted or rejected, it is merely a proposal or an
offer to make a contract.
Petitioner Virginia A. Perez assails the decision of
respondent Court of Appeals dated July 9, 1993 in
CA-G.R. CV 35529 entitled, "BF Lifeman Insurance
Corporations; Plaintiff-Appellant versus Virginia
A. Perez. Defendant-Appellee," which declared
Insurance Policy 056300 for P50,000.00 issued by
private respondent corporation in favor of the
deceased Primitivo B. Perez, null and void and
rescinded, thereby reversing the decision
rendered by the Regional Trial Court of Manila,
Branch XVI.
The facts of the case as summarized by
respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF
Lifeman Insurance Corporation since 1980 for
P20,000.00. Sometime in October 1987, an agent
of the insurance corporation, Rodolfo Lalog,
visited Perez in Guinayangan, Quezon and
convinced him to apply for additional insurance
coverage of P50,000.00, to avail of the ongoing
promotional discount of P400.00 if the premium
were paid annually.1âwphi1.nêt
On October 20, 1987, Primitivo B. Perez
accomplished an application form for the
additional insurance coverage of P50,000.00. On
the same day, petitioner Virginia A. Perez,
Primitivo's wife, paid P2,075.00 to Lalog. The
receipt issued by Lalog indicated the amount
received was a "deposit."1 Unfortunately, Lalog
lost the application form accomplished by Perez
and so on October 28, 1987, he asked the latter to
fill up another application form. 2 On November 1,
1987, Perez was made to undergo the required
medical examination, which he passed.3
Pursuant to the established procedure of the
company, Lalog forwarded the application for
additional insurance of Perez, together with all its
supporting papers, to the office of BF Lifeman
Insurance Corporation at Gumaca, Quezon which
office was supposed to forward the papers to the
Manila office.
On November 25, 1987, Perez died in an accident.
He was riding in a banca which capsized during a
storm. At the time of his death, his application
papers for the additional insurance of P50,000.00
were still with the Gumaca office. Lalog testified
that when he went to follow up the papers, he
found them still in the Gumaca office and so he
personally brought the papers to the Manila office
of BF Lifeman Insurance Corporation. It was only
on November 27, 1987 that said papers were
received in Manila.
Without knowing that Perez died on November
25, 1987, BF Lifeman Insurance Corporation
approved the application and issued the
corresponding policy for the P50,000.00 on
December 2, 1987.4
Petitioner Virginia Perez went to Manila to claim
the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first
insurance policy for P20,000.00 (double
indemnity in case of accident) but the insurance
company refused to pay the claim under the
additional policy coverage of P50,000.00, the
proceeds of which amount to P150,000.00 in view
of a triple indemnity rider on the insurance policy.
In its letter' of January 29, 1988 to Virginia A.
Perez, the insurance company maintained that the
insurance for P50,000.00 had not been perfected
at the time of the death of Primitivo Perez.
Consequently, the insurance company refunded
the amount of P2,075.00 which Virginia Perez had
paid.
On September 21, 1990, private respondent BF
Lifeman Insurance Corporation filed a complaint
against Virginia A. Perez seeking the rescission
and declaration of nullity of the insurance contract
in question.
Petitioner Virginia A. Perez, on the other hand,
averred that the deceased had fulfilled all his
prestations under the contract and all the
elements of a valid contract are present. She then
filed a counterclaim against private respondent
for the collection of P150,000.00 as actual
damages, P100,000.00 as exemplary damages,
P30,000.00 as attorney's fees and P10,000.00 as
expenses for litigation.
On October 25, 1991, the trial court rendered a
decision in favor of petitioner, the dispositive
portion of which reads as follows:
WHEREFORE PREMISES CONSIDERED,
judgment is hereby rendered in favor of
defendant Virginia A. Perez, ordering the
plaintiff BF Lifeman Insurance
Corporation to pay to her the face value of
BF Lifeman Insurance Policy No. 056300,
plus double indemnity under the SARDI
or in the total amount of P150,000.00
(any refund made and/or premium
deficiency to be deducted therefrom).
SO ORDERED.5
12 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
The trial court, in ruling for petitioner, held that
the premium for the additional insurance of
P50,000.00 had been fully paid and even if the
sum of P2,075.00 were to be considered merely as
partial payment, the same does not affect the
validity of the policy. The trial court further stated
that the deceased had fully complied with the
requirements of the insurance company. He paid,
signed the application form and passed the
medical examination. He should not be made to
suffer the subsequent delay in the transmittal of
his application form to private respondent's head
office since these were no longer within his
control.
The Court of Appeals, however, reversed the
decision of the trial court saying that the
insurance contract for P50,000.00 could not have
been perfected since at the time that the policy
was issued, Primitivo was already dead. 6 Citing the
provision in the application form signed by
Primitivo which states that:
. . . there shall be no contract of insurance
unless and until a policy is issued on this
application and that the policy shall not
take effect until the first premium has
been paid and the policy has been
delivered to and accepted by me/us in
person while I/we, am/are in good health
the Court of Appeals held that the contract of
insurance had to be assented to by both parties
and so long as the application for insurance has
not been either accepted or rejected, it is merely
an offer or proposal to make a contract.
Petitioner's motion for reconsideration having
been denied by respondent court, the instant
petition for certiorari was filed on the ground that
there was a consummated contract of insurance
between the deceased and BF Lifeman Insurance
Corporation and that the condition that the policy
issued by the corporation be delivered and
received by the applicant in good health, is
potestative, being dependent upon the will of the
insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated
consideration, one party undertakes to
compensate the other for loss on a specified
subject by specified perils. 7 A contract, on the
other hand, is a meeting of the minds between two
persons whereby one binds himself, with respect
to the other to give something or to render some
service.8 Under Article 1318 of the Civil Code,
there is no contract unless the following requisites
concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject
matter of the contract;
(3) Cause of the obligation which is
established.
Consent must be manifested by the meeting of the
offer and the acceptance upon the thing and the
cause which are to constitute the contract. The
offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance,
paid P2,075.00 and submitted the results of his
medical examination, his application was subject
to the acceptance of private respondent BF
Lifeman Insurance Corporation. The perfection of
the contract of insurance between the deceased
and respondent corporation was further
conditioned upon compliance with the following
requisites stated in the application form:
there shall be no contract of insurance
unless and until a policy is issued on this
application and that the said policy shall
not take effect until the premium has
been paid and the policy delivered to and
accepted by me/us in person while I/We,
am/are in good health.9
The assent of private respondent BF Lifeman
Insurance Corporation therefore was not given
when it merely received the application form and
all the requisite supporting papers of the
applicant. Its assent was given when it issues a
corresponding policy to the applicant. Under the
abovementioned provision, it is only when the
applicant pays the premium and receives and
accepts the policy while he is in good health that
the contract of insurance is deemed to have been
perfected.
It is not disputed, however, that when Primitivo
died on November 25, 1987, his application
papers for additional insurance coverage were
still with the branch office of respondent
corporation in Gumaca and it was only two days
later, or on November 27, 1987, when Lalog
personally delivered the application papers to the
head office in Manila. Consequently, there was
absolutely no way the acceptance of the
application could have been communicated to the
applicant for the latter to accept inasmuch as the
applicant at the time was already dead. In the case
of Enriquez vs. Sun Life Assurance Co. of
Canada,10 recovery on the life insurance of the
deceased was disallowed on the ground that the
contract for annuity was not perfected since it had
not been proved satisfactorily that the acceptance
of the application ever reached the knowledge of
the applicant.
Petitioner insists that the condition imposed by
respondent corporation that a policy must have
been delivered to and accepted by the proposed
insured in good health is potestative being
dependent upon the will of the corporation and is
therefore null and void.
13 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
We do not agree.
A potestative condition depends upon the
exclusive will of one of the parties. For this reason,
it is considered void. Article 1182 of the New Civil
Code states: When the fulfillment of the condition
depends upon the sole will the debtor, the
conditional obligation shall be void.
In the case at bar, the following conditions were
imposed by the respondent company for the
perfection of the contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to
and accepted by the applicant while he is
in good health.
The condition imposed by the corporation that the
policy must have been delivered to and accepted
by the applicant while he is in good health can
hardly be considered as a potestative or
facultative condition. On the contrary, the health
of the applicant at the time of the delivery of the
policy is beyond the control or will of the
insurance company. Rather, the condition is a
suspensive one whereby the acquisition of rights
depends upon the happening of an event which
constitutes the condition. In this case, the
suspensive condition was the policy must have
been delivered and accepted by the applicant
while he is in good health. There was non-
fulfillment of the condition, however, inasmuch as
the applicant was already dead at the time the
policy was issued. Hence, the non-fulfillment of
the condition resulted in the non-perfection of the
contract.
As stated above, a contract of insurance, like other
contracts, must be assented to by both parties
either in person or by their agents. So long as an Anent the appearance of the word
application for insurance has not been either "rescinded" in the dispositive portion of
accepted or rejected, it is merely an offer or the decision, to which defendant-appellee
proposal to make a contract. The contract, to be attaches undue significance and makes
binding from the date of application, must have capital of, it is clear that the use of the
been a completed contract, one that leaves words "and rescinded" is, as it is hereby
nothing to be done, nothing to be completed, declared, a superfluity. It is apparent from
nothing to be passed upon, or determined, before the context of the decision that the
it shall take effect. There can be no contract of insurance policy in question was found
insurance unless the minds of the parties have null and void, and did not have to be
met in agreement.11 "rescinded".13
Prescinding from the foregoing, respondent True, rescission presupposes the existence of a
corporation cannot be held liable for gross valid contract. A contract which is null and void is
negligence. It should be noted that an application no contract at all and hence could not be the
is a mere offer which requires the overt act of the subject of rescission.
insurer for it to ripen into a contract. Delay in
acting on the application does not constitute WHEREFORE, the decision rendered by the Court
acceptance even though the insured has of Appeals in CA-G.R. CV No. 35529 is AFFIRMED
forwarded his first premium with his application. insofar as it declared Insurance Policy No. 056300
The corporation may not be penalized for the for P50,000.00 issued by BF Lifeman Insurance
delay in the processing of the application papers. Corporation of no force and effect and hence null
Moreover, while it may have taken some time for and void. No costs.1âwphi1.nêt
the application papers to reach the main office, in
the case at bar, the same was acted upon less than SO ORDERED.
a week after it was received. The processing of
applications by respondent corporation normally
Davide, Jr., C.J., Puno, Kapunan and Pardo,
takes two to three weeks, the longest being a
JJ., concur.
month.12 In this case, however, the requisite
medical examination was undergone by the
deceased on November 1, 1987; the application
papers were forwarded to the head office on
November 27, 1987; and the policy was issued on
December 2, 1987. Under these circumstances, we
hold that the delay could not be deemed
unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the
Court of Appeals declared Insurance Policy
056300 for P50,000.00 null and void and
rescinded. The Court of Appeals corrected this in
its Resolution of the motion for reconsideration
filed by petitioner, thus:
14 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 198174               September 2, 2013
ALPHA INSURANCE AND SURETY
CO., PETITIONER,
vs.
ARSENIA SONIA CASTOR, RESPONDENT.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari
under Rule 45 of the Rules of Court assailing the
Decision1 dated May 31, 2011 and
Resolution2 dated August 10, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 93027.
The facts follow.
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 of insurance obligates the petitioner to
pay the respondent the amount of Six Hundred
Thirty Thousand Pesos (₱630,000.00) in case of
loss or damage to said vehicle during the period
covered, which is from February 26, 2007 to
February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent
instructed her driver, Jose Joel Salazar Lanuza
(Lanuza), to bring the above-described vehicle to a
nearby auto-shop for a tune-up. However, Lanuza
no longer returned the motor vehicle to
respondent and despite diligent efforts to locate
the same, said efforts 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 ₱630,000.00.
In a letter dated July 5, 2007, petitioner denied the
insurance claim of respondent, stating among
others, thus:
Upon verification of the documents submitted,
particularly the Police Report and your Affidavit,
which 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.) The Company shall not be liable for:
xxxx
(4) Any malicious damage caused by the Insured,
any member of his family or by "A PERSON IN THE
INSURED’S SERVICE."
In view [of] the foregoing, we regret that we
cannot act favorably on your claim.
In letters dated July 12, 2007 and August 3, 2007,
respondent reiterated her claim and argued that
the exception refers to damage of the motor
vehicle and not to its loss. However, petitioner’s
denial of respondent’s insured claim remains firm.
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.
In a Decision dated December 19, 2008, the RTC of
Quezon City ruled in favor of respondent in this
wise:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the plaintiff and
against the defendant ordering the latter as
follows:
To pay plaintiff the amount of ₱466,000.00 plus
legal interest of 6% per annum from the time of
demand up to the time the amount is fully settled;
To pay attorney’s fees in the sum of ₱65,000.00;
and
To pay the costs of suit.
All other claims not granted are hereby denied for
lack of legal and factual basis.3
Aggrieved, petitioner filed an appeal with the CA.
On May 31, 2011, the CA rendered a Decision
affirming in toto the RTC of Quezon City’s decision.
The fallo reads:
WHEREFORE, in view of all the foregoing, the
appeal is DENIED. Accordingly, the Decision, dated
December 19, 2008, of Branch 215 of the Regional
Trial Court of Quezon City, in Civil Case No. Q-07-
61099, is hereby AFFIRMED in toto.
SO ORDERED.4
Petitioner filed a Motion for Reconsideration
against said decision, but the same was denied in a
Resolution dated August 10, 2011.
Hence, the present petition wherein petitioner
raises the following grounds for the allowance of
its petition:
WITH DUE RESPECT TO THE HONORABLE COURT
OF APPEALS, IT ERRED AND GROSSLY OR
GRAVELY ABUSED ITS DISCRETION WHEN IT
ADJUDGED IN FAVOR OF THE PRIVATE
15 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
RESPONDENT AND AGAINST THE PETITIONER
AND RULED THAT EXCEPTION DOES NOT COVER
LOSS BUT ONLY DAMAGE BECAUSE 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.
WITH DUE RESPECT TO THE HONORABLE COURT
OF APPEALS, IT ERRED AND COMMITTED GRAVE
ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN
TOTO THE JUDGMENT OF THE TRIAL COURT.5
Simply, the core issue boils down to whether or
not the loss of respondent’s vehicle is excluded
under the insurance policy.
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.
xxxx
EXCEPTIONS TO SECTION III
The Company shall not be liable to pay for:
Loss or Damage in respect of any claim or series of
claims arising out of one event, the first amount of
each and every loss for each and every vehicle
insured by this Policy, such amount being 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;
Consequential loss, depreciation, wear and tear,
mechanical or electrical breakdowns, failures or
breakages;
Damage to tires, unless the Schedule Vehicle is
damaged at the same time;
Any malicious damage caused by the Insured, any
member of his family or by a person in the
Insured’s service.6
In denying respondent’s claim, petitioner takes
exception by arguing that the word "damage,"
under paragraph 4 of "Exceptions to Section III,"
means loss due to injury or harm to person,
property or reputation, and should be construed
to cover malicious "loss" as in "theft." Thus, it
asserts that the loss of respondent’s vehicle as a
result of it being stolen by the latter’s driver is
excluded from the policy.
We do not agree.
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
16 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
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
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.1âwphi1
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 specifically, "injury" to the motor vehicle
caused by a person under the insured’s service.
Paragraph 4 clearly does not contemplate "loss of
property," as what happened in the instant case.
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 insured, members of
his family, and any person in the insured’s service,
whose clear plan or purpose was to cause damage
to the insured vehicle for purposes of defrauding
the insurer, viz.:
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
xxxx
If the intention of the defendant-appellant was to
include the term "loss" within the term "damage"
then logic dictates that it should have used the
term "damage" alone in the entire policy or
otherwise included a clear definition of the said
term as part of the provisions of the said
insurance contract. Which is why 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, 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
17 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
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.

DIOSDADO M. PERALTA
Associate Justice

18 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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.
Achacoso, Nera and Ocampo for defendant and
appellant.
Agustin M. Gramata for plaintiff and appellee.
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
19 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
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.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala,

Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ.,
concur.

20 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
G.R. No. L-16142             April 29, 1961. presiding, dismissing the actions filed in the
Republic of the Philippines above-entitled cases.
SUPREME COURT DIOSDADO C. TY, plaintiff-appellant,
Manila vs. The facts found by the trial court, which are not
RELIANCE SURETY & INSURANCE CO., disputed in this appeal, are as follows:
EN BANC INC., defendant-appellee.
At different times within a period of two
G.R. No. L-16138             April 29, 1961 x---------------------------------------------------------x months prior to December 24, 1953, the
plaintiff herein Diosdado C. Ty, employed
DIOSDADO C. TY, plaintiff-appellant, G.R. No. L-16143             April 29, 1961 as operator mechanic foreman in the
vs. Broadway Cotton Factory, in Grace Park,
FIRST NATIONAL SURETY & ASSURANCE CO., DIOSDADO C. TY, plaintiff-appellant, Caloocan, Rizal, at a monthly salary of
INC., defendant-appellee. vs. P185.00, insured himself in 18 local
FAR EASTERN SURETY & INSURANCE CO., insurance companies, among which being
INC., defendant-appellee. the eight above named defendants, which
x---------------------------------------------------------x issued to him personal accident policies,
upon payment of the premium of P8.12
G.R. No. L-16139             April 29, 1961. x---------------------------------------------------------x for each policy. Plaintiff's beneficiary was
his employer, Broadway Cotton Factory,
DIOSDADO C. TY, plaintiff-appellant, G.R. No. L-16144             April 29, 1961 which paid the insurance premiums.
vs.
ASSOCIATED INSURANCE & SURETY CO., DIOSDADO C. TY, plaintiff-appellant, On December 24, 1953, a fire broke out
INC., defendant-appellee. vs. which totally destroyed the Broadway
CAPITAL INSURANCE & SURETY CO., Cotton Factory. Fighting his way out of
x---------------------------------------------------------x INC., defendant-appellee. the factory, plaintiff was injured on the
left hand by a heavy object. He was
G.R. No. L-16140             April 29, 1961 x---------------------------------------------------------x brought to the Manila Central University
hospital, and after receiving first aid
DIOSDADO C. TY, plaintiff-appellant, G.R. No. L-16145             April 29, 1961 there, he went to the National Orthopedic
vs. Hospital for treatment of his injuries
UNITED INSURANCE CO., INC., defendant- DIOSDADO C. TY, plaintiff-appellant, which were as follows:
appellee. vs.
CAPITAL INSURANCE & SURETY CO., 1. Fracture, simple, proximal phalanx
x---------------------------------------------------------x INC., defendant-appellee. index finger, left;

G.R. No. L-16141             April 29, 1961. V. B. Gesunundo for plaintiff-appellant. 2. Fracture, compound, comminuted,
M. Perez Cardenas for defendant-appellee. proximal phalanx, middle finger, left and
2nd phalanx, simple;
DIOSDADO C. TY. plaintiff-appellant,
vs. LABRADOR, J.:
PHILIPPINE SURETY & INSURANCE CO., 3. Fracture, compound, comminute
INC., defendant-appellee. Appeal from a judgment of the Court of First phalanx, 4th finger, left;
Instance of Manila, Hon. Gregorio S. Narvasa,
x---------------------------------------------------------x

21 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
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. He underwent
medical treatment in the Orthopedic
Hospital from December 26, 1953 to
February 8, 1954. The above-described
physical injuries have caused temporary
total disability of plaintiff's left hand.
Plaintiff filed the corresponding notice of
accident and notice of claim with all of the
abovenamed defendants to recover
indemnity under Part II of the policy,
which is similarly worded in all of the
policies, and which reads pertinently as
follows:
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:
PARTIAL DISABILITY
LOSS OF:
xxx     xxx     xxx
Either While we sympathize with the plaintiff or his
hand ............................................................................ employer, for whose benefit the policies were
P650.00 issued, we can not go beyond the clear and
express conditions of the insurance policies, all of
xxx     xxx     xxx which define partial disability as loss of either
hand by amputation through the bones of the
... The loss of a hand shall mean the loss wrist." There was no such amputation in the case
by amputation through the bones of the at bar. All that was found by the trial court, which
wrist.... is not disputed on appeal, was that the physical
injuries "caused temporary total disability of
plaintiff's left hand." Note that the disability of
Defendants rejected plaintiff's claim for
plaintiff's hand was merely temporary, having
indemnity for the reason that there being
been caused by fracture of the index, the middle
no severance of amputation of the left
and the fourth fingers of the left hand.
hand, the disability suffered by him was
not covered by his policy. Hence, plaintiff
sued the defendants in the Municipal We might add that the agreement contained in the
Court of this City, and from the decision of insurance policies is the law between the parties.
said Court dismissing his complaints, As the terms of the policies are clear, express and
plaintiff appealed to this Court. (Decision specific that only amputation of the left hand
of the Court of First Instance of Manila, should be considered as a loss thereof, an
pp. 223-226, Records). interpretation that would include the mere
fracture or other temporary disability not covered
by the policies would certainly be unwarranted.
In view of its finding, the court absolved the
defendants from the complaints. Hence this
appeal. WHEREFORE, the decision appealed from is
hereby affirmed, with costs against the plaintiff-
appellant.
The main contention of appellant in these cases is
that in order that he may recover on the insurance
policies issued him for the loss of his left hand, it is Bengzon, C.J., Padilla, Bautista Angelo, Concepcion,
not necessary that there should be an amputation Reyes, J.B.L., Barrera, Paredes and Dizon, JJ., concur.
thereof, but that it is sufficient if the injuries
prevent him from performing his work or labor
necessary in the pursuance of his occupation or
business. Authorities are cited to the effect that
"total disability" in relation to one's occupation
means that the condition of the insurance is such
that common prudence requires him to desist
from transacting his business or renders him
incapable of working. (46 C.J.S., 970). It is also
argued that obscure words or stipulations should
be interpreted against the person who caused the
obscurity, and the ones which caused the
obscurity in the cases at bar are the defendant
insurance companies.
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PANATON VS. MALAYAN INSURANCE CO.

2 COURT OF APPEALS REPORT 78

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PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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.
Delgado, Flores & Macapagal for appellant.
Andres Aguilar, Zacarias Gutierrez Lora, Gregorio
Sabater and Perkins, Ponce Enrile & Contreras for
appellee.
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
— 2637164 (Exhibit "LL")
(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
Bodega No. 1 (Building) a final decision dated July 9, 1941 (Exhibit WW).
Bodega No. 2 (Building)
Bodega No. 3 (Building)
2637165 (Exhibit "JJ")
Bodega No. 4 (Building)
Hemp Press — moved b
Merchandise contents (
2637345 (Exhibit "X")
1)
2637346 (Exhibit "Y") Merchandise contents (h
2637067 (Exhibit "GG") Merchandise contents (l
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
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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
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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
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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
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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 durante 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
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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
29 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
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.

Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo,

Labrador, and Concepcion, JJ., concur.

30 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Baguio City
SECOND DIVISION
G.R. No. 166245             April 9, 2008
ETERNAL GARDENS MEMORIAL PARK
CORPORATION, petitioner,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari
under Rule 45 which seeks to reverse and set
aside the November 26, 2004 Decision 1 of the
Court of Appeals (CA) in CA-G.R. CV No. 57810 is
the query: May the inaction of the insurer on the
insurance application be considered as approval
of the application?
The Facts
On December 10, 1980, respondent Philippine
American Life Insurance Company (Philamlife)
entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 2 with
petitioner Eternal Gardens Memorial Park
Corporation (Eternal). Under the policy, the
clients of Eternal who purchased burial lots from
it on installment basis would be insured by
Philamlife. The amount of insurance coverage
depended upon the existing balance of the
purchased burial lots. The policy was to be
effective for a period of one year, renewable on a
yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is
at least 18 but not more than 65 years of
age, is indebted to the Assured for the
unpaid balance of his loan with the
Assured, and is accepted for Life
Insurance coverage by the Company on
its effective date is eligible for insurance
under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required
for amounts of insurance up to
P50,000.00. However, a declaration of
good health shall be required for all Lot
Purchasers as part of the application. The
Company reserves the right to require
further evidence of insurability
satisfactory to the Company in respect of
the following:
1. Any amount of insurance in
excess of P50,000.00.
2. Any lot purchaser who is more
than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot
Purchaser at any time shall be the amount
of the unpaid balance of his loan
(including arrears up to but not exceeding
2 months) as reported by the Assured to
the Company or the sum of P100,000.00,
whichever is smaller. Such benefit shall
be paid to the Assured if the Lot
Purchaser dies while insured under the
Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot
Purchaser shall be effective on the date he
contracts a loan with the Assured.
However, there shall be no insurance if
the application of the Lot Purchaser is not
approved by the Company.3
Eternal was required under the policy to submit to
Philamlife a list of all new lot purchasers, together
with a copy of the application of each purchaser,
and the amounts of the respective unpaid balances
of all insured lot purchasers. In relation to the
instant petition, Eternal complied by submitting a
letter dated December 29, 1982, 4 containing a list
of insurable balances of its lot buyers for October
1982. One of those included in the list as "new
business" was a certain John Chuang. His balance
of payments was PhP 100,000. On August 2, 1984,
Chuang died.
Eternal sent a letter dated August 20, 1984 5 to
Philamlife, which served as an insurance claim for
Chuang’s death. Attached to the claim were the
following documents: (1) Chuang’s Certificate of
Death; (2) Identification Certificate stating that
Chuang is a naturalized Filipino Citizen; (3)
Certificate of Claimant; (4) Certificate of Attending
Physician; and (5) Assured’s Certificate.
In reply, Philamlife wrote Eternal a letter on
November 12, 1984,6 requiring Eternal to submit
the following documents relative to its insurance
claim for Chuang’s death: (1) Certificate of
Claimant (with form attached); (2) Assured’s
Certificate (with form attached); (3) Application
for Insurance accomplished and signed by the
insured, Chuang, while still living; and (4)
31 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Statement of Account showing the unpaid balance
of Chuang before his death.
Eternal transmitted the required documents
through a letter dated November 14, 1984, 7 which
was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not
furnished Eternal with any reply to the latter’s
insurance claim. This prompted Eternal to
demand from Philamlife the payment of the claim
for PhP 100,000 on April 25, 1986.8
In response to Eternal’s demand, Philamlife
denied Eternal’s insurance claim in a letter dated
May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he
entered into Contract #9558 and 9529
with Eternal Gardens Memorial Park in
October 1982 for the total maximum
insurable amount of P100,000.00 each.
No application for Group Insurance was
submitted in our office prior to his death
on August 2, 1984.
In accordance with our Creditor’s Group
Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of
good health shall be required for all Lot
Purchasers as party of the application."
We cite further the provision on Effective
Date of Coverage under the policy which
states that "there shall be no insurance if
the application is not approved by the
Company." Since no application had been
submitted by the Insured/Assured, prior
to his death, for our approval but was
submitted instead on November 15, 1984,
after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to
point out that Eternal Gardens being the
Assured was a party to the Contract and
was therefore aware of these pertinent
provisions.
With regard to our acceptance of
premiums, these do not connote our
approval per se of the insurance coverage
but are held by us in trust for the payor
until the prerequisites for insurance
coverage shall have been met. We will
however, return all the premiums which
have been paid in behalf of John Uy
Chuang.
Consequently, Eternal filed a case before the
Makati City Regional Trial Court (RTC) for a sum
of money against Philamlife, docketed as Civil Case
No. 14736. The trial court decided in favor of
Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered,
judgment is hereby rendered in favor of
Plaintiff ETERNAL, against Defendant
PHILAMLIFE, ordering the Defendant
PHILAMLIFE, to pay the sum of
P100,000.00, representing the proceeds
of the Policy of John Uy Chuang, plus legal
rate of interest, until fully paid; and, to
pay the sum of P10,000.00 as attorney’s
fees.
SO ORDERED.
The RTC found that Eternal submitted Chuang’s
application for insurance which he accomplished
before his death, as testified to by Eternal’s
witness and evidenced by the letter dated
December 29, 1982, stating, among others: "Encl:
Phil-Am Life Insurance Application Forms &
Cert."10 It further ruled that due to Philamlife’s
inaction from the submission of the requirements
of the group insurance on December 29, 1982 to
Chuang’s death on August 2, 1984, as well as
Philamlife’s acceptance of the premiums during
the same period, Philamlife was deemed to have
approved Chuang’s application. The RTC said that
since the contract is a group life insurance, once
proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the
Regional Trial Court of Makati in Civil
Case No. 57810 is REVERSED and SET
ASIDE, and the complaint is DISMISSED.
No costs.
SO ORDERED.11
The CA based its Decision on the factual finding
that Chuang’s application was not enclosed in
Eternal’s letter dated December 29, 1982. It
further ruled that the non-accomplishment of the
submitted application form violated Section 26 of
the Insurance Code. Thus, the CA concluded, there
being no application form, Chuang was not
covered by Philamlife’s insurance.
Hence, we have this petition with the following
grounds:
The Honorable Court of Appeals has
decided a question of substance, not
therefore determined by this Honorable
Court, or has decided it in a way not in
accord with law or with the applicable
jurisprudence, in holding that:
I. The application for insurance
was not duly submitted to
respondent PhilamLife before the
death of John Chuang;
II. There was no valid insurance
coverage; and
32 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
III. Reversing and setting aside
the Decision of the Regional Trial
Court dated May 29, 1996.
The Court’s Ruling
As a general rule, this Court is not a trier of facts
and will not re-examine factual issues raised
before the CA and first level courts, considering
their findings of facts are conclusive and binding
on this Court. However, such rule is subject to
exceptions, as enunciated in Sampayan v. Court of
Appeals:
(1) when the findings are grounded
entirely on speculation, surmises or
conjectures; (2) when the inference made
is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse
of discretion; (4) when the judgment is
based on a misapprehension of facts; (5)
when the findings of facts are conflicting;
(6) when in making its findings the [CA]
went beyond the issues of the case, or its
findings are contrary to the admissions of
both the appellant and the appellee;
(7) when the findings [of the CA] are
contrary to the trial court; (8) when the
findings are conclusions without citation
of specific evidence on which they are
based; (9) when the facts set forth in the
petition as well as in the petitioner’s main
and reply briefs are not disputed by the
respondent; (10) when the findings of fact
are premised on the supposed absence of
evidence and contradicted by the
evidence on record; and (11) when the
Court of Appeals manifestly overlooked
certain relevant facts not disputed by the
parties, which, if properly considered,
would justify a different
conclusion.12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC
were reversed by the CA; thus, this Court may
review them.
Eternal claims that the evidence that it presented
before the trial court supports its contention that
it submitted a copy of the insurance application of
Chuang before his death. In Eternal’s letter dated
December 29, 1982, a list of insurable interests of
buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal
added it was noted at the bottom of said letter that
the corresponding "Phil-Am Life Insurance
Application Forms & Cert." were enclosed in the
letter that was apparently received by Philamlife
on January 15, 1983. Finally, Eternal alleged that it
provided a copy of the insurance application
which was signed by Chuang himself and executed
before his death.
On the other hand, Philamlife claims that the
evidence presented by Eternal is insufficient,
arguing that Eternal must present evidence
showing that Philamlife received a copy of
Chuang’s insurance application.
The evidence on record supports Eternal’s
position.
The fact of the matter is, the letter dated
December 29, 1982, which Philamlife stamped as
received, states that the insurance forms for the
attached list of burial lot buyers were attached to
the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with
the attachments. Such receipt is an admission by
Philamlife against its own interest.13 The burden
of evidence has shifted to Philamlife, which must
prove that the letter did not contain Chuang’s
insurance application. However, Philamlife failed
to do so; thus, Philamlife is deemed to have
received Chuang’s insurance application.
To reiterate, it was Philamlife’s bounden duty to
make sure that before a transmittal letter is
stamped as received, the contents of the letter are
correct and accounted for.
Philamlife’s allegation that Eternal’s witnesses ran
out of credibility and reliability due to
inconsistencies is groundless. The trial court is in
the best position to determine the reliability and
credibility of the witnesses, because it has the
opportunity to observe firsthand the witnesses’
demeanor, conduct, and attitude. Findings of the
trial court on such matters are binding and
conclusive on the appellate court, unless some
facts or circumstances of weight and substance
have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect
the result of the case.15
An examination of the testimonies of the
witnesses mentioned by Philamlife, however,
reveals no overlooked facts of substance and
value.
Philamlife primarily claims that Eternal did not
even know where the original insurance
application of Chuang was, as shown by the
testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application
form which is required in case of new
coverage?
[Mendoza:]
A It is [a] standard operating procedure
for the new client to fill up two copies of
this form and the original of this is
submitted to Philamlife together with the
monthly remittances and the second copy
is remained or retained with the
33 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
marketing department of Eternal
Gardens.
Atty. Miranda:
We move to strike out the answer as it is
not responsive as counsel is merely
asking for the location and does not [ask]
for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know
where the original but when I submitted
with that payment together with the new
clients all the originals I see to it before I
sign the transmittal letter the originals
are attached therein.16
In other words, the witness admitted not knowing
where the original insurance application was, but
believed that the application was transmitted to
Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the
testimony of Manuel Cortez on whether one or
two insurance application forms were
accomplished and the testimony of Mendoza on
who actually filled out the application form, these
are minor inconsistencies that do not affect the
credibility of the witnesses. Thus, we ruled in
People v. Paredes that minor inconsistencies are
too trivial to affect the credibility of witnesses, and
these may even serve to strengthen their
credibility as these negate any suspicion that the
testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v.
People:
Minor discrepancies or inconsistencies do
not impair the essential integrity of the
prosecution’s evidence as a whole or
reflect on the witnesses’ honesty. The test
is whether the testimonies agree on
essential facts and whether the respective
versions corroborate and substantially
coincide with each other so as to make a
consistent and coherent whole.18
In the present case, the number of copies of the
insurance application that Chuang executed is not
at issue, neither is whether the insurance
application presented by Eternal has been
falsified. Thus, the inconsistencies pointed out by
Philamlife are minor and do not affect the
credibility of Eternal’s witnesses.
However, the question arises as to whether
Philamlife assumed the risk of loss without
approving the application.
This question must be answered in the
affirmative.
As earlier stated, Philamlife and Eternal entered
into an agreement denominated as Creditor Group
Life Policy No. P-1920 dated December 10, 1980.
In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot
Purchaser shall be effective on the date he
contracts a loan with the Assured.
However, there shall be no insurance if
the application of the Lot Purchaser is not
approved by the Company.
An examination of the above provision would
show ambiguity between its two sentences. The
first sentence appears to state that the insurance
coverage of the clients of Eternal already became
effective upon contracting a loan with Eternal
while the second sentence appears to require
Philamlife to approve the insurance contract
before the same can become effective.
It must be remembered that an insurance contract
is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against
the insurer in order to safeguard the latter’s
interest. Thus, in Malayan Insurance Corporation
v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies
are construed in accordance with the
general rule of resolving any ambiguity
therein in favor of the insured, where the
contract or policy is prepared by the
insurer. A contract of insurance, being a
contract of adhesion, par excellence,
any ambiguity therein should be
resolved against the insurer; in other
words, it should be construed liberally in
favor of the insured and strictly against
the insurer. Limitations of liability should
be regarded with extreme jealousy and
must be construed in such a way as to
preclude the insurer from noncompliance
with its obligations.19 (Emphasis
supplied.)
In the more recent case of Philamcare Health
Systems, Inc. v. Court of Appeals, we reiterated the
above ruling, stating that:
When the terms of insurance contract
contain limitations on liability, courts
should construe them in such a way as to
preclude the insurer from non-
compliance with his obligation. Being a
contract of adhesion, the terms of an
insurance contract are to be construed
strictly against the party which prepared
the contract, the insurer. By reason of the
exclusive control of the insurance
34 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
company over the terms and phraseology
of the insurance contract, ambiguity must
be strictly interpreted against the insurer
and liberally in favor of the insured,
especially to avoid forfeiture.20
Clearly, the vague contractual provision, in
Creditor Group Life Policy No. P-1920 dated
December 10, 1980, must be construed in favor of
the insured and in favor of the effectivity of the
insurance contract.
On the other hand, the seemingly conflicting
provisions must be harmonized to mean that upon
a party’s purchase of a memorial lot on
installment from Eternal, an insurance contract
covering the lot purchaser is created and the same
is effective, valid, and binding until terminated by
Philamlife by disapproving the insurance
application. The second sentence of Creditor
Group Life Policy No. P-1920 on the Effective Date
of Benefit is in the nature of a resolutory condition
which would lead to the cessation of the insurance
contract. Moreover, the mere inaction of the
insurer on the insurance application must not
work to prejudice the insured; it cannot be
interpreted as a termination of the insurance
contract. The termination of the insurance
contract by the insurer must be explicit and
unambiguous.
As a final note, to characterize the insurer and the
insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly
prepared by the insurer with vast amounts of
experience in the industry purposefully used to its
advantage. More often than not, insurance
contracts are contracts of adhesion containing
technical terms and conditions of the industry,
confusing if at all understandable to laypersons,
that are imposed on those who wish to avail of
insurance. As such, insurance contracts are
imbued with public interest that must be
considered whenever the rights and obligations of
the insurer and the insured are to be delineated.
Hence, in order to protect the interest of insurance
applicants, insurance companies must be
obligated to act with haste upon insurance
applications, to either deny or approve the same,
or otherwise be bound to honor the application as
a valid, binding, and effective insurance contract. 21
WHEREFORE, we GRANT the petition. The
November 26, 2004 CA Decision in CA-G.R. CV No.
57810 is REVERSED and SET ASIDE. The May 29,
1996 Decision of the Makati City RTC, Branch 138
is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP
100,000 representing the proceeds of the
Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the
rate of six percent (6%) per annum of PhP
100,000 from the time of extra-judicial
demand by Eternal until Philamlife’s
receipt of the May 29, 1996 RTC Decision
on June 17, 1996;
(3) To pay Eternal legal interest at the
rate of twelve percent (12%) per annum
of PhP 100,000 from June 17, 1996 until
full payment of this award; and
(4) To pay Eternal attorney’s fees in the
amount of PhP 10,000.
No costs.
SO ORDERED.
Carpio-Morales, Acting Chairperson, Tinga, Brion,
Chico-Nazario*, JJ., concur.
35 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 115278 May 23, 1995
FORTUNE INSURANCE AND SURETY CO.,
INC., petitioner,
vs.
COURT OF APPEALS and PRODUCERS BANK OF
THE PHILIPPINES, respondents.
DAVIDE, JR., J.:
The fundamental legal issue raised in this petition
for review on certiorari  is whether the petitioner
is liable under the Money, Security, and Payroll
Robbery policy it issued to the private respondent
or whether recovery thereunder is precluded
under the general exceptions clause thereof. Both
the trial court and the Court of Appeals held that
there should be recovery. The petitioner contends
otherwise.
This case began with the filing with the Regional
Trial Court (RTC) of Makati, Metro Manila, by
private respondent Producers Bank of the
Philippines (hereinafter Producers) against
petitioner Fortune Insurance and Surety Co., Inc.
(hereinafter Fortune) of a complaint for recovery
of the sum of P725,000.00 under the policy issued
by Fortune. The sum was allegedly lost during a
robbery of Producer's armored vehicle while it
was in transit to transfer the money from its Pasay
City Branch to its head office in Makati. The case
was docketed as Civil Case No. 1817 and assigned
to Branch 146 thereof.
After joinder of issues, the parties asked the trial
court to render judgment based on the following
stipulation of facts:
1. The plaintiff was insured by the
defendants and an insurance policy was
issued, the duplicate original of which is
hereto attached as Exhibit "A";
2. An armored car of the plaintiff, while in
the process of transferring cash in the
sum of P725,000.00 under the custody of
its teller, Maribeth Alampay, from its
Pasay Branch to its Head Office at 8737
Paseo de Roxas, Makati, Metro Manila on
June 29, 1987, was robbed of the said
cash. The robbery took place while the
armored car was traveling along Taft
Avenue in Pasay City;
3. The said armored car was driven by
Benjamin Magalong Y de Vera, escorted
by Security Guard Saturnino Atiga Y
Rosete. Driver Magalong was assigned by
PRC Management Systems with the
plaintiff by virtue of an Agreement
executed on August 7, 1983, a duplicate
original copy of which is hereto attached
as Exhibit "B";
4. The Security Guard Atiga was assigned
by Unicorn Security Services, Inc. with the
plaintiff by virtue of a contract of Security
Service executed on October 25, 1982, a
duplicate original copy of which is hereto
attached as Exhibit "C";
5. After an investigation conducted by the
Pasay police authorities, the driver
Magalong and guard Atiga were charged,
together with Edelmer Bantigue Y Eulalio,
Reynaldo Aquino and John Doe, with
violation of P.D. 532 (Anti-Highway
Robbery Law) before the Fiscal of Pasay
City. A copy of the complaint is hereto
attached as Exhibit "D";
6. The Fiscal of Pasay City then filed an
information charging the aforesaid
persons with the said crime before
Branch 112 of the Regional Trial Court of
Pasay City. A copy of the said information
is hereto attached as Exhibit "E." The case
is still being tried as of this date;
7. Demands were made by the plaintiff
upon the defendant to pay the amount of
the loss of P725,000.00, but the latter
refused to pay as the loss is excluded from
the coverage of the insurance policy,
attached hereto as Exhibit "A," specifically
under page 1 thereof, "General
Exceptions" Section (b), which is marked
as Exhibit "A-1," and which reads as
follows:
GENERAL EXCEPTIONS
The company shall not be
liable under this policy in
report of
x x x           x x x         
xxx
(b) any loss caused by any dishonest, fraudulent
or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representative of the Insured whether
acting alone or in conjunction with others. . . .
8. The plaintiff opposes the contention of the
defendant and contends that Atiga and Magalong
are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the
robbery.1
36 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
On 26 April 1990, the trial court rendered its
decision in favor of Producers. The dispositive
portion thereof reads as follows:
WHEREFORE, premises
considered, the Court finds for
plaintiff and against defendant,
and
(a) orders defendant to pay plaintiff the net
amount of P540,000.00 as liability under Policy
No. 0207 (as mitigated by the P40,000.00 special
clause deduction and by the recovered sum of
P145,000.00), with interest thereon at the legal
rate, until fully paid;
(b) orders defendant to pay plaintiff the sum of
P30,000.00 as and for attorney's fees; and
(c) orders defendant to pay costs of suit.
All other claims and
counterclaims are accordingly
dismissed forthwith.
SO ORDERED. 2
The trial court ruled that Magalong and Atiga were
not employees or representatives of Producers. It
Said:
The Court is satisfied that
plaintiff may not be said to have
selected and engaged Magalong
and Atiga, their services as
armored car driver and as
security guard having been
merely offered by PRC
Management and by Unicorn
Security and which latter firms
assigned them to plaintiff. The
wages and salaries of both
Magalong and Atiga are
presumably paid by their
respective firms, which alone
wields the power to dismiss
them. Magalong and Atiga are
assigned to plaintiff in fulfillment
of agreements to provide driving
services and property protection
as such — in a context which
does not impress the Court as
translating into plaintiff's power
to control the conduct of any
assigned driver or security guard,
beyond perhaps entitling plaintiff
to request are replacement for
such driver guard. The finding is
accordingly compelled that
neither Magalong nor Atiga were
plaintiff's "employees" in
avoidance of defendant's liability
under the policy, particularly the
general exceptions therein
embodied.
Neither is the Court prepared to
accept the proposition that driver
Magalong and guard Atiga were
the "authorized representatives"
of plaintiff. They were merely an
assigned armored car driver and
security guard, respectively, for
the June 29, 1987 money transfer
from plaintiff's Pasay Branch to
its Makati Head Office. Quite
plainly — it was teller Maribeth
Alampay who had "custody" of
the P725,000.00 cash being
transferred along a specified
money route, and hence
plaintiff's then designated
"messenger" adverted to in the
policy. 3
Fortune appealed this decision to the Court of
Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May
1994, it affirmed in toto the appealed decision.
The Court of Appeals agreed with the conclusion
of the trial court that Magalong and Atiga were
neither employees nor authorized representatives
of Producers and ratiocinated as follows:
A policy or contract of insurance
is to be construed liberally in
favor of the insured and strictly
against the insurance company
(New Life Enterprises vs. Court of
Appeals, 207 SCRA 669; Sun
Insurance Office, Ltd. vs. Court of
Appeals, 211 SCRA 554).
Contracts of insurance, like other
contracts, are to be construed
according to the sense and
meaning of the terms which the
parties themselves have used. If
such terms are clear and
unambiguous, they must be taken
and understood in their plain,
ordinary and popular sense (New
Life Enterprises Case, supra, p.
676; Sun Insurance Office, Ltd. vs.
Court of Appeals, 195 SCRA 193).
The language used by defendant-
appellant in the above quoted
stipulation is plain, ordinary and
simple. No other interpretation is
necessary. The word "employee"
must be taken to mean in the
ordinary sense.
The Labor Code is a special law
specifically dealing with/and
specifically designed to protect
labor and therefore its definition
as to employer-employee
relationships insofar as the
application/enforcement of said
37 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Code is concerned must
necessarily be inapplicable to an
insurance contract which
defendant-appellant itself had
formulated. Had it intended to
apply the Labor Code in defining
what the word "employee" refers
to, it must/should have so stated
expressly in the insurance policy.
Said driver and security guard
cannot be considered as
employees of plaintiff-appellee
bank because it has no power to
hire or to dismiss said driver and
security guard under the
contracts (Exhs. 8 and C) except
only to ask for their replacements
from the contractors.5
On 20 June 1994, Fortune filed this petition for
review on certiorari. It alleges that the trial court
and the Court of Appeals erred in holding it liable
under the insurance policy because the loss falls
within the general exceptions clause considering
that driver Magalong and security guard Atiga
were Producers' authorized representatives or
employees in the transfer of the money and
payroll from its branch office in Pasay City to its
head office in Makati.
According to Fortune, when Producers
commissioned a guard and a driver to transfer its
funds from one branch to another, they effectively
and necessarily became its authorized
representatives in the care and custody of the
money. Assuming that they could not be
considered authorized representatives, they were,
nevertheless, employees of Producers. It asserts
that the existence of an employer-employee
relationship "is determined by law and being such,
it cannot be the subject of agreement." Thus, if
there was in reality an employer-employee
relationship between Producers, on the one hand,
and Magalong and Atiga, on the other, the
provisions in the contracts of Producers with PRC
Management System for Magalong and with
Unicorn Security Services for Atiga which state
that Producers is not their employer and that it is
absolved from any liability as an employer, would
not obliterate the relationship.
Fortune points out that an employer-employee
relationship depends upon four standards: (1) the
manner of selection and engagement of the
putative employee; (2) the mode of payment of
wages; (3) the presence or absence of a power to
dismiss; and (4) the presence and absence of a
power to control the putative employee's conduct.
Of the four, the right-of-control test has been held
to be the decisive factor. 6 It asserts that the power
of control over Magalong and Atiga was vested in
and exercised by Producers. Fortune further
insists that PRC Management System and Unicorn
Security Services are but "labor-only" contractors
under Article 106 of the Labor Code which
provides:
Art. 106. Contractor or
subcontractor. — There is "labor-
only" contracting where the
person supplying workers to an
employer does not have
substantial capital or investment
in the form of tools, equipment,
machineries, work premises,
among others, and the workers
recruited and placed by such
persons are performing activities
which are directly related to the
principal business of such
employer. In such cases, the
person or intermediary shall be
considered merely as an agent of
the employer who shall be
responsible to the workers in the
same manner and extent as if the
latter were directly employed by
him.
Fortune thus contends that Magalong and Atiga
were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a
finding that a contractor is a "labor-only"
contractor is equivalent to a finding that there is
an employer-employee relationship between the
owner of the project and the employees of the
"labor-only" contractor.
On the other hand, Producers contends that
Magalong and Atiga were not its employees since
it had nothing to do with their selection and
engagement, the payment of their wages, their
dismissal, and the control of their conduct.
Producers argued that the rule in International
Timber Corp. is not applicable to all cases but only
when it becomes necessary to prevent any
violation or circumvention of the Labor Code, a
social legislation whose provisions may set aside
contracts entered into by parties in order to give
protection to the working man.
Producers further asseverates that what should be
applied is the rule in American President Lines vs.
Clave, 8 to wit:
In determining the existence of
employer-employee relationship,
the following elements are
generally considered, namely: (1)
the selection and engagement of
the employee; (2) the payment of
wages; (3) the power of
dismissal; and (4) the power to
control the employee's conduct.
Since under Producers' contract with PRC
Management Systems it is the latter which
assigned Magalong as the driver of Producers'
armored car and was responsible for his faithful
discharge of his duties and responsibilities, and
38 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
since Producers paid the monthly compensation
of P1,400.00 per driver to PRC Management
Systems and not to Magalong, it is clear that
Magalong was not Producers' employee. As to
Atiga, Producers relies on the provision of its
contract with Unicorn Security Services which
provides that the guards of the latter "are in no
sense employees of the CLIENT."
There is merit in this petition.
It should be noted that the insurance policy
entered into by the parties is a theft or robbery
insurance policy which is a form of casualty
insurance. Section 174 of the Insurance Code
provides:
Sec. 174. Casualty insurance is
insurance covering loss or
liability arising from accident or
mishap, excluding certain types
of loss which by law or custom
are considered as falling
exclusively within the scope of
insurance such as fire or marine.
It includes, but is not limited to,
employer's liability insurance,
public liability insurance, motor
vehicle liability insurance, plate
glass insurance, burglary and
theft insurance, personal accident
and health insurance as written
by non-life insurance
companies, and other
substantially similar kinds of
insurance. (emphases supplied)
Except with respect to compulsory motor vehicle
liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance
or to robbery insurance in particular. These
contracts are, therefore, governed by the general
provisions applicable to all types of insurance.
Outside of these, the rights and obligations of the
parties must be determined by the terms of their
contract, taking into consideration its purpose and
always in accordance with the general principles
of insurance law. 9
It has been aptly observed that in burglary,
robbery, and theft insurance, "the opportunity to
defraud the insurer — the moral hazard — is so
great that insurers have found it necessary to fill
up their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the
insurer assume the risk of all losses due to the
hazards insured against." 10 Persons frequently
excluded under such provisions are those in the
insured's service and employment. 11 The purpose
of the exception is to guard against liability should
the theft be committed by one having unrestricted
access to the property. 12 In such cases, the terms
specifying the excluded classes are to be given
their meaning as understood in common
speech. 13 The terms "service" and "employment"
are generally associated with the idea of selection,
control, and compensation. 14
A contract of insurance is a contract of adhesion,
thus any ambiguity therein should be resolved
against the insurer, 15 or it should be construed
liberally in favor of the insured and strictly against
the insurer. 16 Limitations of liability should be
regarded with extreme jealousy and must be
construed
in such a way, as to preclude the insurer from non-
compliance with its obligation. 17 It goes without
saying then that if the terms of the contract are
clear and unambiguous, there is no room for
construction and such terms cannot be enlarged
or diminished by judicial construction. 18
An insurance contract is a contract of indemnity
upon the terms and conditions specified
therein. 19 It is settled that the terms of the policy
constitute the measure of the insurer's
liability. 20 In the absence of statutory prohibition
to the contrary, insurance companies have the
same rights as individuals to limit their liability
and to impose whatever conditions they deem
best upon their obligations not inconsistent with
public policy.
With the foregoing principles in mind, it may now
be asked whether Magalong and Atiga qualify as
employees or authorized representatives of
Producers under paragraph (b) of the general
exceptions clause of the policy which, for easy
reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable
under this policy in respect of
x x x           x x x          x x x
(b) any loss caused by any
dishonest, fraudulent or
criminal act of the insured
or any officer, employee,
partner, director, trustee or
authorized representative of
the Insured whether acting
alone or in conjunction with
others. . . . (emphases
supplied)
There is marked disagreement between the
parties on the correct meaning of the terms
"employee" and "authorized representatives."
It is clear to us that insofar as Fortune is
concerned, it was its intention to exclude and
exempt from protection and coverage losses
arising from dishonest, fraudulent, or criminal
acts of persons granted or having unrestricted
access to Producers' money or payroll. When it
used then the term "employee," it must have had
in mind any person who qualifies as such as
generally and universally understood, or
39 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
jurisprudentially established in the light of the
four standards in the determination of the
employer-employee relationship, 21 or as
statutorily declared even in a limited sense as in
the case of Article 106 of the Labor Code which
considers the employees under a "labor-only"
contract as employees of the party employing
them and not of the party who supplied them to
the employer. 22
Fortune claims that Producers' contracts with PRC
Management Systems and Unicorn Security
Services are "labor-only" contracts.
Producers, however, insists that by the
express terms thereof, it is not the
employer of Magalong. Notwithstanding
such express assumption of PRC
Management Systems and Unicorn
Security Services that the drivers and the
security guards each shall supply to
Producers are not the latter's employees,
it may, in fact, be that it is because the
contracts are, indeed, "labor-only"
contracts. Whether they are is, in the light
of the criteria provided for in Article 106
of the Labor Code, a question of fact. Since
the parties opted to submit the case for
judgment on the basis of their stipulation
of facts which are strictly limited to the
insurance policy, the contracts with PRC
Management Systems and Unicorn
Security Services, the complaint for
violation of P.D. No. 532, and the
information therefor filed by the City
Fiscal of Pasay City, there is a paucity of
evidence as to whether the contracts
between Producers and PRC Management
Systems and Unicorn Security Services
are "labor-only" contracts.
But even granting for the sake of argument that
these contracts were not "labor-only" contracts,
and PRC Management Systems and Unicorn
Security Services were truly independent
contractors, we are satisfied that Magalong and
Atiga were, in respect of the transfer of Producer's
money from its Pasay City branch to its head office
in Makati, its "authorized representatives" who
served as such with its teller Maribeth Alampay.
Howsoever viewed, Producers entrusted the three
with the specific duty to safely transfer the money
to its head office, with Alampay to be responsible
for its custody in transit; Magalong to drive the
armored vehicle which would carry the money;
and Atiga to provide the needed security for the
money, the vehicle, and his two other companions.
In short, for these particular tasks, the three acted
as agents of Producers. A "representative" is
defined as one who represents or stands in the
place of another; one who represents others or
another in a special capacity, as an agent, and is
interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from
liability under the general exceptions clause of the
insurance policy.
WHEREFORE , the instant petition is hereby
GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 32946 dated 3 May 1994 as well as
that of Branch 146 of the Regional Trial Court of
Makati in Civil Case No. 1817 are REVERSED and
SET ASIDE. The complaint in Civil Case No. 1817 is
DISMISSED.
No pronouncement as to costs.
SO ORDERED.
Bellosillo and Kapunan, JJ., concur.
Padilla, J., took no part.
Quiason, J., is on leave.
40 |I N S U R A N C E
PARTIES TO THE CONTRACT OF INSURANCE
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2294             May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO.,
INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation,
Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the
petitioner ,Filipinas Cia. de Seguros, fire policy No.
29333 in the sum of P1000,000, covering
merchandise contained in a building located at No.
711 Roman Street, Binondo Manila. On February
27, 1942, or during the Japanese military
occupation, the building and insured merchandise
were burned. In due time the respondent
submitted to the petitioner its claim under the
policy. The salvage goods were sold at public
auction and, after deducting their value, the total
loss suffered by the respondent was fixed at
P92,650. The petitioner refused to pay the claim
on the ground that the policy in favor of the
respondent had ceased to be in force on the date
the United States declared war against Germany,
the respondent Corporation (though organized
under and by virtue of the laws of the Philippines)
being controlled by the German subjects and the
petitioner being a company under American
jurisdiction when said policy was issued on
October 1, 1941. The petitioner, however, in
pursuance of the order of the Director of Bureau
of Financing, Philippine Executive Commission,
dated April 9, 1943, paid to the respondent the
sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in
the Court of First Instance of Manila for the
purpose of recovering from the respondent the
sum of P92,650 above mentioned. The theory of
the petitioner is that the insured merchandise
were burned up after the policy issued in 1941 in
favor of the respondent corporation has ceased to
be effective because of the outbreak of the war
between the United States and Germany on
December 10, 1941, and that the payment made
by the petitioner to the respondent corporation
during the Japanese military occupation was
under pressure. After trial, the Court of First
Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the
Court of Appeals, the judgment of the Court of
First Instance of Manila was affirmed, with costs.
The case is now before us on appeal
by certiorari from the decision of the Court of
Appeals.
The Court of Appeals overruled the contention of
the petitioner that the respondent corporation
became an enemy when the United States
declared war against Germany, relying on English
and American cases which held that a corporation
is a citizen of the country or state by and under
the laws of which it was created or organized. It
rejected the theory that nationality of private
corporation is determine by the character or
citizenship of its controlling stockholders.
There is no question that majority of the
stockholders of the respondent corporation were
German subjects. This being so, we have to rule
that said respondent became an enemy
corporation upon the outbreak of the war
between the United States and Germany. The
English and American cases relied upon by the
Court of Appeals have lost their force in view of
the latest decision of the Supreme Court of the
United States in Clark vs. Uebersee Finanz
Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in
which the controls test has been adopted. In
"Enemy Corporation" by Martin Domke, a paper
presented to the Second International Conference
of the Legal Profession held at the Hague
(Netherlands) in August. 1948 the following
enlightening passages appear:
Since World War I, the determination of
enemy nationality of corporations has
been discussion in many countries,
belligerent and neutral. A corporation
was subject to enemy legislation when it
was controlled by enemies, namely
managed under the influence of
individuals or corporations, themselves
considered as enemies. It was the English
courts which first the Daimler case
applied this new concept of "piercing the
corporate veil," which was adopted by the
peace of Treaties of 1919 and the Mixed
Arbitral established after the First World
War.
The United States of America did not
adopt the control test during the First
World War. Courts refused to recognized
the concept whereby American-registered
corporations could be considered as
enemies and thus subject to domestic
legislation and administrative measures
regarding enemy property.
World War II revived the problem again.
It was known that German and other
enemy interests were cloaked by
domestic corporation structure. It was
not only by legal ownership of shares that
a material influence could be exercised on
the management of the corporation but
41 |I N S U R A N C E
PARTIES TO THE CONTRACT OF INSURANCE
also by long term loans and other factual
situations. For that reason, legislation on
enemy property enacted in various
countries during World War II adopted by
statutory provisions to the control test
and determined, to various degrees, the
incidents of control. Court decisions were
rendered on the basis of such newly
enacted statutory provisions in
determining enemy character of domestic
corporation.
The United States did not, in the
amendments of the Trading with the
Enemy Act during the last war, include as
did other legislations the applications of
the control test and again, as in World
War I, courts refused to apply this
concept whereby the enemy character of
an American or neutral-registered
corporation is determined by the enemy
nationality of the controlling
stockholders.
Measures of blocking foreign funds, the so
called freezing regulations, and other
administrative practice in the treatment
of foreign-owned property in the United
States allowed to large degree the
determination of enemy interest in
domestic corporations and thus the
application of the control test. Court
decisions sanctioned such administrative
practice enacted under the First War
Powers Act of 1941, and more recently,
on December 8, 1947, the Supreme Court
of the United States definitely approved of
the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a
Swiss corporation allegedly controlled by
German interest, the Court: "The property
of all foreign interest was placed within
the reach of the vesting power (of the
Alien Property Custodian) not to
appropriate friendly or neutral assets but
to reach enemy interest which
masqueraded under those innocent
fronts. . . . The power of seizure and
vesting was extended to all property of
any foreign country or national so that no
innocent appearing device could become
a Trojan horse."
It becomes unnecessary, therefore, to dwell at
length on the authorities cited in support of the
appealed decision. However, we may add that,
in Haw Pia vs. China Banking Corporation, * 45 Off
Gaz., (Supp. 9) 299, we already held that China
Banking Corporation came within the meaning of
the word "enemy" as used in the Trading with the
Enemy Acts of civilized countries not only because
it was incorporated under the laws of an enemy
country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as
amended,) in section 8, provides that "anyone
except a public enemy may be insured." It stands
to reason that an insurance policy ceases to be
allowable as soon as an insured becomes a public
enemy.
Effect of war, generally. — All intercourse
between citizens of belligerent powers
which is inconsistent with a state of war
is prohibited by the law of nations. Such
prohibition includes all negotiations,
commerce, or trading with the enemy; all
acts which will increase, or tend to
increase, its income or resources; all acts
of voluntary submission to it; or receiving
its protection; also all acts concerning the
transmission of money or goods; and all
contracts relating thereto are thereby
nullified. It further prohibits insurance
upon trade with or by the enemy, upon
the life or lives of aliens engaged in
service with the enemy; this for the
reason that the subjects of one country
cannot be permitted to lend their
assistance to protect by insurance the
commerce or property of belligerent,
alien subjects, or to do anything
detrimental too their country's interest.
The purpose of war is to cripple the
power and exhaust the resources of the
enemy, and it is inconsistent that one
country should destroy its enemy's
property and repay in insurance the value
of what has been so destroyed, or that it
should in such manner increase the
resources of the enemy, or render it aid,
and the commencement of war
determines, for like reasons, all trading
intercourse with the enemy, which prior
thereto may have been lawful. All
individuals therefore, who compose the
belligerent powers, exist, as to each other,
in a state of utter exclusion, and are
public enemies. (6 Couch, Cyc. of Ins. Law,
pp. 5352-5353.)
In the case of an ordinary fire policy,
which grants insurance only from year, or
for some other specified term it is plain
that when the parties become alien
enemies, the contractual tie is broken and
the contractual rights of the parties, so far
as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)
The respondent having become an enemy
corporation on December 10, 1941, the insurance
policy issued in its favor on October 1, 1941, by
the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the
insured goods were burned after December 10,
1941, and during the war, the respondent was not
entitled to any indemnity under said policy from
the petitioner. However, elementary rules of
justice (in the absence of specific provision in the
Insurance Law) require that the premium paid by
the respondent for the period covered by its policy
42 |I N S U R A N C E
PARTIES TO THE CONTRACT OF INSURANCE
from December 11, 1941, should be returned by P92,650 paid on April 19, 1943, in accordance
the petitioner. with the rate fixed in the Ballantyne scale.

The Court of Appeals, in deciding the case, stated Wherefore, the appealed decision is hereby
that the main issue hinges on the question of reversed and the respondent corporation is
whether the policy in question became null and ordered to pay to the petitioner the sum of
void upon the declaration of war between the P77,208.33, Philippine currency, less the amount
United States and Germany on December 10, of the premium, in Philippine currency, that
1941, and its judgment in favor of the respondent should be returned by the petitioner for the
corporation was predicated on its conclusion that unexpired term of the policy in question,
the policy did not cease to be in force. The Court of beginning December 11, 1941. Without costs. So
Appeals necessarily assumed that, even if the ordered.
payment by the petitioner to the respondent was
involuntary, its action is not tenable in view of the Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo
ruling on the validity of the policy. As a matter of and Bautista Angelo, JJ., concur.
fact, the Court of Appeals held that "any
intimidation resorted to by the appellee was not
unjust but the exercise of its lawful right to claim
for and received the payment of the insurance
policy," and that the ruling of the Bureau of
Financing to the effect that "the appellee was
entitled to payment from the appellant was, well
founded." Factually, there can be no doubt that the
Director of the Bureau of Financing, in ordering
the petitioner to pay the claim of the respondent,
merely obeyed the instruction of the Japanese
Military Administration, as may be seen from the
following: "In view of the findings and conclusion
of this office contained in its decision on
Administrative Case dated February 9, 1943 copy
of which was sent to your office and the
concurrence therein of the Financial Department
of the Japanese Military Administration,
and following the instruction of said authority, you
are hereby ordered to pay the claim of Messrs.
Christern, Huenefeld & Co., Inc. The payment of
said claim, however, should be made by means of
crossed check." (Emphasis supplied.)

It results that the petitioner is entitled to recover

what paid to the respondent under the
circumstances on this case. However, the
petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of

43 |I N S U R A N C E
BENEFICIARY IN LIFE INSURANCE
petitioner filed its Comment and/or Opposition to Needless to say, the applicable law in the instant
Republic of the Philippines Petition. case is the Insurance Act, otherwise known as Act
SUPREME COURT No. 2427 as amended, the policy having been
Manila When the petition was called for hearing on March procured in 1968. Under the said law, the
19, 1980, the respondent Judge Gregorio G. beneficiary designated in a life insurance contract
SECOND DIVISION Pineda, presiding Judge of the then Court of First cannot be changed without the consent of the
Instance of Rizal, Pasig Branch XXI, denied beneficiary because he has a vested interest in the
petitioner's Urgent Motion, thus allowing the policy (Gercio v. Sun Life Ins. Co. of Canada, 48
G.R. No. L-54216 July 19, 1989
private respondent to adduce evidence, the Phil. 53; Go v. Redfern and the International
consequence of which was the issuance of the Assurance Co., Ltd., 72 Phil. 71).
THE PHILIPPINE AMERICAN INSURANCE questioned Order granting the petition.
COMPANY, petitioner, In this regard, it is worth noting that the
vs.
Petitioner promptly filed a Motion for Beneficiary Designation Indorsement in the policy
HONORABLE GREGORIO G. PINEDA in his
Reconsideration but the same was denied in an which forms part of Policy Number 0794461 in
capacity as Judge of the Court of First Instance
Order June 10, 1980. Hence, this petition raising the name of Rodolfo Cailles Dimayuga states that
of Rizal, and RODOLFO C.
the following issues for resolution: the designation of the beneficiaries is irrevocable
DIMAYUGA, respondents. (Annex "A" of Petition in Sp. Proc. No. 9210, Annex
I "C" of the Petition for Review on Certiorari), to
wit:

PARAS, J.: WHETHER OR NOT THE

DESIGNATION OF THE It is hereby understood and
IRREVOCABLE BENEFICIARIES agreed that, notwithstanding the
Challenged before Us in this petition for review provisions of this policy to the
COULD BE CHANGED OR
on certiorari are the Orders of the respondent contrary, inasmuch as the
AMENDED WITHOUT THE
Judge dated March 19, 1980 and June 10, 1980 designation of the
CONSENT OF ALL THE
granting the prayer in the petition in Sp. Proc. No. primary/contingent
IRREVOCABLE BENEFICIARIES.
9210 and denying petitioner's Motion for beneficiary/beneficiaries in this
Reconsideration, respectively. Policy has been made without
II reserving the right to change said
The undisputed facts are as follows: beneficiary/ beneficiaries, such
WHETHER OR NOT THE designation may not be
IRREVOCABLE BENEFICIARIES surrendered to the Company,
On January 15, 1968, private respondent procured HEREIN, ONE OF WHOM IS released or assigned; and no
an ordinary life insurance policy from the ALREADY DECEASED WHILE right or privilege under the
petitioner company and designated his wife and THE OTHERS ARE ALL MINORS, Policy may be exercised, or
children as irrevocable beneficiaries of said policy. COULD VALIDLY GIVE CONSENT agreement made with the
TO THE CHANGE OR Company to any change in or
Under date February 22, 1980 private respondent AMENDMENT IN THE amendment to the Policy,
filed a petition which was docketed as Civil Case DESIGNATION OF THE without the consent of the said
No. 9210 of the then Court of First Instance of IRREVOCABLE BENEFICIARIES. beneficiary/beneficiaries.
Rizal to amend the designation of the beneficiaries
(Petitioner's Memorandum, p. 72,
in his life policy from irrevocable to revocable. We are of the opinion that his Honor, the Rollo)
respondent Judge, was in error in issuing the
Petitioner, on March 10, 1980 filed an Urgent questioned Orders.
Motion to Reset Hearing. Also on the same date,
44 |I N S U R A N C E
BENEFICIARY IN LIFE INSURANCE
Be it noted that the foregoing is a fact which the
private respondent did not bother to disprove.
Inevitably therefore, based on the aforequoted
provision of the contract, not to mention the law
then applicable, it is only with the consent of all
the beneficiaries that any change or amendment in
the policy concerning the irrevocable beneficiaries
may be legally and validly effected. Both the law
and the policy do not provide for any other
exception, thus, abrogating the contention of the
private respondent that said designation can be
amended if the Court finds a just, reasonable
ground to do so.
Similarly, the alleged acquiescence of the six (6)
children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot
be considered an effective ratification to the
change of the beneficiaries from irrevocable to
revocable. Indubitable is the fact that all the six (6)
children named as beneficiaries were minors at
the time,** for which reason, they could not
validly give their consent. Neither could they act
through their father insured since their interests
are quite divergent from one another. In point is
an excerpt from the Notes and Cases on Insurance
Law by Campos and Campos, 1960, reading-
The insured ... can do nothing to
divest the beneficiary of his
rights without his consent. He
cannot assign his policy, nor even
take its cash surrender value
without the consent of the
beneficiary. Neither can the
insured's creditors seize the
policy or any right thereunder.
The insured may not even add
another beneficiary because by
doing so, he diminishes the
amount which the beneficiary
may recover and this he cannot
do without the beneficiary's
consent.
Therefore, the parent-insured cannot exercise
rights and/or privileges pertaining to the
insurance contract, for otherwise, the vested
rights of the irrevocable beneficiaries would be
rendered inconsequential.
Of equal importance is the well-settled rule that
the contract between the parties is the law
binding on both of them and for so many times,
this court has consistently issued
pronouncements upholding the validity and
effectivity of contracts. Where there is nothing in
the contract which is contrary to law, good morals,
good customs, public policy or public order the
validity of the contract must be sustained.
Likewise, contracts which are the private laws of
the contracting parties should be fulfilled
according to the literal sense of their stipulations,
if their terms are clear and leave no room for
doubt as to the intention of the contracting
parties, for contracts are obligatory, no matter in
what form they may be, whenever the essential
requisites for their validity are present (Phoenix
Assurance Co., Ltd. vs. United States Lines, 22
SCRA 675, Phil. American General Insurance Co.,
Inc. vs. Mutuc, 61 SCRA 22.)
In the recent case of Francisco Herrera vs.
Petrophil Corporation, 146 SCRA 385, this Court
ruled that:
... it is settled that the parties may
establish such stipulations,
clauses, terms, and conditions as
they may want to include; and as
long as such agreements are not
contrary to law, good morals,
good customs, public policy or
public order, they shall have the
force of law between them.
Undeniably, the contract in the case at bar,
contains the indispensable elements for its
validity and does not in any way violate the law,
morals, customs, orders, etc. leaving no reason for
Us to deny sanction thereto.
Finally, the fact that the contract of insurance does
not contain a contingency when the change in the
designation of beneficiaries could be validly
effected means that it was never within the
contemplation of the parties. The lower court, in
gratuitously providing for such contingency, made
a new contract for them, a proceeding which we
cannot tolerate. Ergo, We cannot help but
conclude that the lower court acted in excess of its
authority when it issued the Order dated March
19, 1980 amending the designation of the
beneficiaries from "irrevocable" to "revocable"
over the disapprobation of the petitioner
insurance company.
WHEREFORE, premises considered, the
questioned Orders of the respondent Judge are
hereby nullified and set aside.
SO ORDERED.
Melencio-Herrera (Chairperson), Sarmiento and
Regalado, JJ., concur.
Padilla, J., took no part.
45 |I N S U R A N C E
BENEFICIARY IN PROPERTY INSURANCE
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and
UNITED INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule
45 of the Rules of Court seeks to set aside a
decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha,
as lessees, entered into a lease contract with
private respondent CKS Development Corporation
(hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease
contract states:
18. . . . The LESSEE shall not insure
against fire the chattels, merchandise,
textiles, goods and effects placed at any
stall or store or space in the leased
premises without first obtaining the
written consent and approval of the
LESSOR. If the LESSEE obtain(s) the
insurance thereof without the consent of
the LESSOR then the policy is deemed
assigned and transferred to the LESSOR
for its own benefit; . . .1
3. Notwithstanding the above stipulation in the
lease contract, the Cha spouses insured against
loss by fire the merchandise inside the leased
premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc.
(hereinafter United) without the written consent
of private respondent CKS.
4. On the day that the lease contract was to expire,
fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier
procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand
letter asking that the proceeds of the insurance
contract (between the Cha spouses and United) be
paid directly to CKS, based on its lease contract
with the Cha spouses.
6. United refused to pay CKS. Hence, the latter
filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court,
Branch 6, Manila, rendered a decision * ordering
therein defendant United to pay CKS the amount
of P335,063.11 and defendant Cha spouses to pay
P50,000.00 as exemplary damages, P20,000.00 as
attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA
GR CV No. 39328 rendered a decision ** dated 11
January 1996, affirming the trial court decision,
deleting however the awards for exemplary
damages and attorney's fees. A motion for
reconsideration by United was denied on 29
March 1996.
In the present petition, the following errors are
assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS
ERRED IN FAILING TO DECLARE THAT
THE STIPULATION IN THE CONTRACT OF
LEASE TRANSFERRING THE PROCEEDS
OF THE INSURANCE TO RESPONDENT IS
NULL AND VOID FOR BEING CONTRARY
TO LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS
ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS
A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE
PROVISION THEREIN TRANSFERRING
THE PROCEEDS OF THE INSURANCE TO
RESPONDENT MUST BE RULED OUT IN
FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS
ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE
WHICH IS NOT PRIVY TO THE SAID
POLICY IN CONTRAVENTION OF THE
INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS
ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A
STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR
BEING TOTALLY DEPENDENT ON THE
WILL OF THE RESPONDENT
CORPORATION.2
46 |I N S U R A N C E
BENEFICIARY IN PROPERTY INSURANCE
The core issue to be resolved in this case is
whether or not the aforequoted paragraph 18 of
the lease contract entered into between CKS and
the Cha spouses is valid insofar as it provides that
any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the
leased premises is deemed assigned or
transferred to the lessor (CKS) if said policy is
obtained without the prior written consent of the
latter.
It is, of course, basic in the law on contracts that
the stipulations contained in a contract cannot be
contrary to law, morals, good customs, public
order or public policy.3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance
on property shall be enforceable except
for the benefit of some person having an
insurable interest in the property insured.
A non-life insurance policy such as the fire
insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of
indemnity. Insurable interest in the property
insured must exist at the time the insurance takes
effect and at the time the loss occurs. 4 The basis of
such requirement of insurable interest in property
insured is based on sound public policy: to
prevent a person from taking out an insurance
policy on property upon which he has no
insurable interest and collecting the proceeds of
said policy in case of loss of the property. In such a
case, the contract of insurance is a mere wager
which is void under Section 25 of the Insurance
Code, which provides:
Sec. 25. Every stipulation in a policy of
Insurance for the payment of loss,
whether the person insured has or has
not any interest in the property insured,
or that the policy shall be received as
proof of such interest, and every policy SO ORDERED.
executed by way of gaming or wagering,
is void. Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ.,
concur.
In the present case, it cannot be denied that CKS
has no insurable interest in the goods and
merchandise inside the leased premises under the
provisions of Section 17 of the Insurance Code
which provide:
Sec. 17. The measure of an insurable
interest in property is the extent to which
the insured might be damnified by loss of
injury thereof.
Therefore, respondent CKS cannot, under the
Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by
the petitioner-spouses over their merchandise.
This insurable interest over said merchandise
remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under
the provision of the lease contract previously
quoted is void for being contrary to law and/or
public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Nilo
Cha and Stella Uy-Cha (herein co-petitioners). The
insurer (United) cannot be compelled to pay the
proceeds of the fire insurance policy to a person
(CKS) who has no insurable interest in the
property insured.
The liability of the Cha spouses to CKS for
violating their lease contract in that the Cha
spouses obtained a fire insurance policy over their
own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not
resolve in this case.
WHEREFORE, the decision of the Court of Appeals
in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds
of the fire insurance policy to petitioners Nilo Cha
and Stella Uy-Cha.
47 |I N S U R A N C E
BENEFICIARY IN PROPERTY INSURANCE

CHA VS. CA 86 SCAD 102

48 |I N S U R A N C E
CONCEALMENT
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE
COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO
HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip,
Salazar, Luna & Manalo for petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.
DE CASTRO, J.:
The two above-entitled cases were ordered
consolidated by the Resolution of this Court dated
April 29, 1970, (Rollo, No. L-31878, p. 58), because
the petitioners in both cases seek similar relief,
through these petitions for certiorari by way of
appeal, from the amended decision of respondent
Court of Appeals which affirmed in toto the
decision of the Court of First Instance of Cebu,
ordering "the defendants (herein petitioners Great
Pacific Ligfe Assurance Company and Mondragon)
jointly and severally to pay plaintiff (herein
private respondent Ngo Hing) the amount of
P50,000.00 with interest at 6% from the date of
the filing of the complaint, and the sum of
P1,077.75, without interest.
It appears that on March 14, 1957, private
respondent Ngo Hing filed an application with the
Great Pacific Life Assurance Company (hereinafter
referred to as Pacific Life) for a twenty-year
endownment policy in the amount of P50,000.00
on the life of his one-year old daughter Helen Go.
Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch
Manager of the Pacific Life in Cebu City wrote on
the corresponding form in his own handwriting
(Exhibit I-M). Mondragon finally type-wrote the
data on the application form which was signed by
private respondent Ngo Hing. The latter paid the
annual premuim the sum of P1,077.75 going over
to the Company, but he reatined the amount of
P1,317.00 as his commission for being a duly
authorized agebt of Pacific Life. Upon the payment
of the insurance premuim, the binding deposit
receipt (Exhibit E) was issued to private
respondent Ngo Hing. Likewise, petitioner
Mondragon handwrote at the bottom of the back
page of the application form his strong
recommendation for the approval of the insurance
application. Then on April 30, 1957, Mondragon
received a letter from Pacific Life disapproving the
insurance application (Exhibit 3-M). The letter
stated that the said life insurance application for
20-year endowment plan is not available for
minors below seven years old, but Pacific Life can
consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is
acceptable, the Juvenile Non-Medical Declaration
be sent to the company.
The non-acceptance of the insurance plan by
Pacific Life was allegedly not communicated by
petitioner Mondragon to private respondent Ngo
Hing. Instead, on May 6, 1957, Mondragon wrote
back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance
plan to children, pointing out that since 1954 the
customers, especially the Chinese, were asking for
such coverage (Exhibit 4-M).
It was when things were in such state that on May
28, 1957 Helen Go died of influenza with
complication of bronchopneumonia. Thereupon,
private respondent sought the payment of the
proceeds of the insurance, but having failed in his
effort, he filed the action for the recovery of the
same before the Court of First Instance of Cebu,
which rendered the adverse decision as earlier
refered to against both petitioners.
The decisive issues in these cases are: (1) whether
the binding deposit receipt (Exhibit E) constituted
a temporary contract of the life insurance in
question; and (2) whether private respondent Ngo
Hing concealed the state of health and physical
condition of Helen Go, which rendered void the
aforesaid Exhibit E.
1. At the back of Exhibit E are condition
precedents required before a deposit is
considered a BINDING RECEIPT. These conditions
state that:
A. If the Company or its agent,
shan have received the premium
deposit ... and the insurance
application, ON or PRIOR to the
date of medical
examination ... said insurance
shan be in force and in effect from
the date of such medical
examination, for such period as is
covered by the
deposit ..., PROVIDED the
company shall be satisfied that on
said date the applicant was
insurable on standard rates under
its rule for the amount of
49 |I N S U R A N C E
CONCEALMENT
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
50 |I N S U R A N C E
CONCEALMENT
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.
51 |I N S U R A N C E
CONCEALMENT
SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and

Melencio-Herrera, JJ., concur.

Fernandez, J., took no part.

52 |I N S U R A N C E
CONCEALMENT
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-30685 May 30, 1983
NG GAN ZEE, plaintiff-appellee,
vs.
ASIAN CRUSADER LIFE ASSURANCE
CORPORATION, defendant-appellant.
Alberto Q. Ubay for plaintiff-appellee.
Santiago F. A lidio for defendant-appellant.
ESCOLIN, J.:
This is an appeal from the judgment of the Court
of First Instance of Manila, ordering the appellant
Asian-Crusader Life Assurance Corporation to pay
the face value of an insurance policy issued on the
life of Kwong Nam the deceased husband of
appellee Ng Gan Zee. Misrepresentation and
concealment of material facts in obtaining the
policy were pleaded to avoid the policy. The lower
court rejected the appellant's theory and ordered
the latter to pay appellee "the amount of P
20,000.00, with interest at the legal rate from July
24, 1964, the date of the filing of the complaint,
until paid, and the costs. "
The Court of Appeals certified this appeal to Us, as
the same involves solely a question of law.
On May 12, 1962, Kwong Nam applied for a 20-
year endowment insurance on his life for the sum
of P20,000.00, with his wife, appellee Ng Gan Zee
as beneficiary. On the same date, appellant, upon
receipt of the required premium from the insured,
approved the application and issued the
corresponding policy. On December 6, 1963,
Kwong Nam died of cancer of the liver with
metastasis. All premiums had been religiously
paid at the time of his death.
On January 10, 1964, his widow Ng Gan Zee
presented a claim in due form to appellant for
payment of the face value of the policy. On the
same date, she submitted the required proof of
death of the insured. Appellant denied the claim
on the ground that the answers given by the
insured to the questions appealing in his
application for life insurance were untrue.
Appellee brought the matter to the attention of the
Insurance Commissioner, the Hon. Francisco Y.
Mandamus, and the latter, after conducting an
investigation, wrote the appellant that he had
found no material concealment on the part of the
insured and that, therefore, appellee should be
paid the full face value of the policy. This opinion
of the Insurance Commissioner notwithstanding,
appellant refused to settle its obligation.
Appellant alleged that the insured was guilty of
misrepresentation when he answered "No" to the
following question appearing in the application
for life insurance-
Has any life insurance company
ever refused your application for
insurance or for reinstatement of
a lapsed policy or offered you a
policy different from that applied
for? If, so, name company and
date.
In its brief, appellant rationalized its thesis thus:
... As pointed out in the foregoing
summary of the essential facts in
this case, the insured had in
January, 1962, applied for
reinstatement of his lapsed life
insurance policy with the Insular
Life Insurance Co., Ltd, but this
was declined by the insurance
company, although later on
approved for reinstatement with
a very high premium as a result
of his medical examination. Thus
notwithstanding the said insured
answered 'No' to the [above]
question propounded to him. ... 1
The lower court found the argument bereft of
factual basis; and We quote with approval its
disquisition on the matter-
On the first question there is no
evidence that the Insular Life
Assurance Co., Ltd. ever refused
any application of Kwong Nam
for insurance. Neither is there
any evidence that any other
insurance company has refused
any application of Kwong Nam
for insurance.
... The evidence shows that the
Insular Life Assurance Co., Ltd.
approved Kwong Nam's request
for reinstatement and
amendment of his lapsed
insurance policy on April 24,
1962 [Exh. L-2 Stipulation of
Facts, Sept. 22, 1965). The Court
notes from said application for
reinstatement and amendment,
Exh. 'L', that the amount applied
for was P20,000.00 only and not
for P50,000.00 as it was in the
lapsed policy. The amount of the
reinstated and amended policy
was also for P20,000.00. It
results, therefore, that when on
53 |I N S U R A N C E
CONCEALMENT
May 12, 1962 Kwong Nam
answered 'No' to the question
whether any life insurance
company ever refused his
application for reinstatement of a
lapsed policy he did not
misrepresent any fact.
... the evidence shows that the
application of Kwong Nam with
the Insular Life Assurance Co.,
Ltd. was for the reinstatement
and amendment of his lapsed
insurance policy-Policy No.
369531 -not an application for a
'new insurance policy. The
Insular Life Assurance Co., Ltd.
approved the said application on
April 24, 1962. Policy No. 369531
was reinstated for the amount of
P20,000.00 as applied for by
Kwong Nam [Exhs. 'L', 'L-l' and
'L-2']. No new policy was issued
by the Insular Life Assurance Co.,
Ltd. to Kwong Nam in connection
with said application for
reinstatement and amendment.
Such being the case, the Court
finds that there is no
misrepresentation on this
matter. 2
Appellant further maintains that when the insured
was examined in connection with his application
for life insurance, he gave the appellant's medical
examiner false and misleading information as to
his ailment and previous operation. The alleged
false statements given by Kwong Nam are as
follows:
Operated on for a Tumor
[mayoma] of the stomach. Claims
that Tumor has been associated
with ulcer of stomach. Tumor
taken out was hard and of a hen's
egg size. Operation was two [2]
years ago in Chinese General
Hospital by Dr. Yap. Now, claims
he is completely recovered.
To demonstrate the insured's misrepresentation,
appellant directs Our attention to:
[1] The report of Dr. Fu Sun Yuan the physician
who treated Kwong Nam at the Chinese General
Hospital on May 22, 1960, i.e., about 2 years
before he applied for an insurance policy on May
12, 1962. According to said report, Dr. Fu Sun
Yuan had diagnosed the patient's ailment as
'peptic ulcer' for which, an operation, known as a
'sub-total gastric resection was performed on the
patient by Dr. Pacifico Yap; and
[2] The Surgical Pathology Report of Dr. Elias
Pantangco showing that the specimen removed
from the patient's body was 'a portion of the
stomach measuring 12 cm. and 19 cm. along the
lesser curvature with a diameter of 15 cm. along
the greatest dimension.
On the bases of the above undisputed medical data
showing that the insured was operated on for
peptic ulcer", involving the excision of a portion of
the stomach, appellant argues that the insured's
statement in his application that a tumor, "hard
and of a hen's egg size," was removed during said
operation, constituted material concealment.
The question to be resolved may be propounded
thus: Was appellant, because of insured's
aforesaid representation, misled or deceived into
entering the contract or in accepting the risk at
the rate of premium agreed upon?
The lower court answered this question in the
negative, and We agree.
Section 27 of the Insurance Law [Act 2427]
provides:
Sec. 27. Such party a contract of
insurance must communicate to
the other, in good faith, all facts
within his knowledge which are
material to the contract, and
which the other has not the
means of ascertaining, and as to
which he makes no warranty. 3
Thus, "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 assurer, but he
designedly and intentionally withholds the
same." 4
It has also been held "that the concealment must,
in the absence of inquiries, be not only material,
but fraudulent, or the fact must have been
intentionally withheld." 5
Assuming that the aforesaid answer given by the
insured is false, as claimed by the appellant. Sec.
27 of the Insurance Law, above-quoted,
nevertheless requires that fraudulent intent on
the part of the insured be established to entitle the
insurer to rescind the contract. And as correctly
observed by the lower court, "misrepresentation
as a defense of the insurer to avoid liability is an
'affirmative' defense. The duty to establish such a
defense by satisfactory and convincing evidence
rests upon the defendant. The evidence before the
Court does not clearly and satisfactorily establish
that defense."
It bears emphasis that Kwong Nam had informed
the appellant's medical examiner that the tumor
for which he was operated on was "associated
with ulcer of the stomach." In the absence of
evidence that the insured had sufficient medical
knowledge as to enable him to distinguish
54 |I N S U R A N C E
CONCEALMENT
between "peptic ulcer" and "a tumor", his
statement that said tumor was "associated with
ulcer of the stomach, " should be construed as an
expression made in good faith of his belief as to
the nature of his ailment and operation. Indeed,
such statement must be presumed to have been
made by him without knowledge of its
incorrectness and without any deliberate intent
on his part to mislead the appellant.
While it may be conceded that, from the viewpoint
of a medical expert, the information
communicated was imperfect, the same was
nevertheless sufficient to have induced appellant
to make further inquiries about the ailment and
operation of the insured.
Section 32 of Insurance Law [Act No. 24271
provides as follows:
General Hospital or require copies of the hospital
records from the appellant before acting on the
application for insurance. The fact of the matter is
that the defendant was too eager to accept the
application and receive the insured's premium. It
would be inequitable now to allow the defendant
to avoid liability under the circumstances."
Finding no reversible error committed by the trial
court, the judgment appealed from is hereby
affirmed, with costs against appellant Asian-
Crusader life Assurance Corporation.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr.,
Guerrero and De Castro), JJ., concur.
Abad Santos, J., I reserve my vote.

Section 32. The right to

information of material facts
maybe waived either by the
terms of insurance or by neglect
to make inquiries as to such facts
where they are distinctly implied
in other facts of which
information is communicated.

It has been held that where, upon the face of the

application, a question appears to be not
answered at all or to be imperfectly answered, and
the insurers issue a policy without any further
inquiry, they waive the imperfection of the answer
and render the omission to answer more fully
immaterial. 6

As aptly noted by the lower court, "if the ailment

and operation of Kwong Nam had such an
important bearing on the question of whether the
defendant would undertake the insurance or not,
the court cannot understand why the defendant or
its medical examiner did not make any further
inquiries on such matters from the Chinese
55 |I N S U R A N C E
CONCEALMENT
Republic of the Philippines
SUPREME COURT
Manila
G.R. No. 211212 June 8, 2016
SUN LIFE OF CANADA (PHILIPPINES),
INC., Petitioner, v. MA. DAISY'S. SIBYA, JESUS
MANUEL S. SIBYA III, JAIME LUIS S. SIBYA, AND
THE ESTATE OF THE DECEASED ATTY. JESUS
SIBYA, JR., Respondents.
REYES, J.:
Before this Court is a petition for review
on certiorari[1] under Rule 45 of the Rules of Court
seeking to 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 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
P1,000,000.00 as death benefits, P100,000.00 as
moral damages, P100,000.00 as exemplary
damages, and P100,000.00 as attorney's fees and
costs of suit. Insofar as the charges for violation of
Sections 241 and 242 of Presidential Decree No.
612, or the Insurance Code of the Philippines,
however, the CA modified the decision of the RTC
and absolved Sun Life therein.
Statement of Facts of the Case
On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty.
Jesus Jr.) applied for life insurance with Sun Life.
In his Application for Insurance, he indicated that
he had sought advice for kidney problems. [5] Atty.
Jesus Jr. indicated the following in his application:
"Last 1987, had undergone lithotripsy due to
kidney stone under Dr. Jesus Benjamin Mendoza
at 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. 031097335. The policy indicated the
respondents as beneficiaries and entitles them to
a death benefit of P1,000,000.00 should Atty. Jesus
Jr. dies on or before February 5, 2021, or a sum of
money if Atty. Jesus Jr. is still living on the
endowment date.[7]
On May 11, 2001, Atty. Jesus Jr. died as a result of
a gunshot wound in San Joaquin, Iloilo. As such,
Ma. Daisy filed a Claimant's Statement with Sun
Life to seek the death benefits indicated in his
insurance policy.[8]
In a letter dated August 27, 2001, however, Sun
Life denied the claim on the ground that the
details on Atty. Jesus Jr.'s medical history were not
disclosed in his application. Simultaneously, Sun
Life tendered a check representing the refund of
the premiums paid by Atty. Jesus Jr.[9]
The respondents reiterated their claim against
Sun Life thru a letter dated September 17, 2001.
Sun Life, 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]
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.
According to Sun Life, the undisclosed fact
suggested that the insured was in "renal failure"
and at a high risk medical condition.
Consequently, had it known such fact, it would not
have issued the insurance policy in favor of Atty.
Jesus Jr.[11]
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
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 claims.[12]
Ruling of the RTC
On March 16, 2009, the RTC issued its
Decision[13] dismissing the complaint for lack of
merit. The RTC held that Sun Life violated Sections
241, paragraph 1(b), (d), and (e)[14] and 242[15] of
the Insurance Code when it refused to pay the
rightful claim of the respondents. Moreover, the
RTC ordered Sun Life to pay the amounts of
P1,000,000.00 as death benefits, P100,000.00 as
moral damages, P100,000.00 as exemplary
damages, and P100,000.00 as attorney's fees and
costs of suit.
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 ascertaining the facts allegedly
concealed by the applicant.[16]
56 |I N S U R A N C E
CONCEALMENT
Aggrieved, Sun Life elevated the case to the CA.
Ruling of the CA
[17]
On appeal, the CA issued its Decision  dated
November 18, 2013 affirming the RTC decision in
ordering Sun Life to pay death benefits and
damages in favor of the respondents. The CA,
however, modified the RTC decision by absolving
Sun Life from the charges of violation of Sections
241 and 242 of the Insurance Code. [18]
The CA ruled that the evidence on records show
that there was no fraudulent intent on the part of
Atty. Jesus Jr. in submitting his insurance
application. Instead, it found that Atty. Jesus Jr.
admitted in his application that he had sought
medical treatment for kidney ailment. [19]
Sun Life filed a Motion for Partial
Reconsideration[20] dated December 11, 2013 but
the same was denied in a Resolution [21] dated
February 13, 2014.
Undaunted, Sun Life filed an appeal by way of
petition for review on certiorari under Rule 45 of
the Rules of Court before this Court.
The Issue
Essentially, the main issue of the instant case is
whether or not the CA erred when it affirmed the
RTC decision finding that there was no
concealment or misrepresentation when Atty.
Jesus Jr. submitted his insurance application with
Sun Life.
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
Ruling of the Court right of the insurer to rescind the policy nugatory.
As such, the incontestability period will now set
in.
The petition has no merit.
Assuming, however, for the sake of argument, that
the incontestability period has not yet set in, the
In Manila Bankers Life Insurance Corporation v.
Court agrees, nonetheless, with the CA when it
Aban,[22] the Court held that if the insured dies
held that Sun Life failed to show that Atty. Jesus Jr.
within the two-year contestability period, the
committed concealment and misrepresentation.
insurer is bound to make good its obligation under
the policy, regardless of the presence or lack of
As correctly observed by the CA, Atty. Jesus Jr.
concealment or misrepresentation. The Court
admitted in his application his medical treatment
held:
for kidney ailment. Moreover, he executed an
authorization in favor of Sun Life to conduct
Section 48 serves a noble purpose, as it regulates investigation in reference with his medical history.
the actions of both the insurer and the insured. The decision in part states:
Under the provision, an insurer is given two years
- from the effectivity of a life insurance contract
Records show that in the Application for
and while the insured is alive - to discover or
Insurance, [Atty. Jesus Jr.] admitted that he had
prove that the policy is void ab initio or is
sought medical treatment for kidney ailment.
rescindible by reason of the fraudulent
When asked to provide details on the said
concealment or misrepresentation of the insured
medication, [Atty. Jesus Jr.] indicated the following
or his agent. After the two-year period lapses,
information: year ("1987"), medical procedure
or when the insured dies within the period, the
("undergone lithotripsy due to kidney stone"),
insurer must make good on the policy, even
length of confinement ("3 days"), attending
though the policy was obtained by fraud,
physician ("Dr. Jesus Benjamin Mendoza") and the
concealment, or misrepresentation. This is not
hospital ("National Kidney Institute").
to say that insurance fraud must be rewarded, but
that insurers who recklessly and indiscriminately
It appears that [Atty. Jesus Jr.] also signed the
solicit and obtain business must be penalized, for
Authorization which gave [Sun Life] the
such recklessness and lack of discrimination
opportunity to obtain information on the facts
ultimately work to the detriment of bona
disclosed by [Atty. Jesus Jr.] in his insurance
fide takers of insurance and the public in general.
[23] application. x x x
 (Emphasis ours)
x x x x
In the present case, Sun Life issued Atty. Jesus Jr.'s
policy on February 5, 2001. Thus, it has two years Given the express language of the Authorization, it
from its issuance, to investigate and verify cannot be said that [Atty. Jesus Jr.] concealed his
whether the policy was obtained by fraud, medical history since [Sun Life] had the means of
concealment, or misrepresentation. Upon the ascertaining [Atty. Jesus Jr.'s] medical record.
death of Atty. Jesus Jr., however, on May 11, 2001,
or a mere three months from the issuance of the With regard to allegations of misrepresentation,
57 |I N S U R A N C E
CONCEALMENT
we note that [Atty. Jesus Jr.] was not a medical
doctor, 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)

Indeed, the intent to defraud on the part of the

insured must be ascertained to merit rescission of
the insurance contract. Concealment as a defense
for the insurer to avoid liability is an affirmative
defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon
the provider or insurer.[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.

Moreover, well-settled is the rule that this Court is

not a trier of facts. Factual findings of the lower
courts are entitled to great weight and respect on
appeal, and in fact accorded finality when
supported by substantial evidence on the record.
[26]

WHEREFORE, the petition for review is DENIED.

The Decision dated November 18, 2013 and
Resolution dated February 13, 2014 of the Court
of Appeals in CA-G.R. CV. No. 93269 are
hereby AFFIRMED.

SO ORDERED.

Velasco, Jr., (Chairperson), and Perez, JJ., concur.

Peralta, and Jardeleza, JJ., on official leave.

58 |I N S U R A N C E
CONCEALMENT
On June 26, 1987, the insured died in a plane xxx xxx xxx
Republic of the Philippines crash. Respondent Bernarda Bacani filed a claim
SUPREME COURT with petitioner, seeking the benefits of the b) urine, kidney or bladder
Manila insurance policy taken by her son. Petitioner disorder? (Rollo, p. 53)
conducted an investigation and its findings
FIRST DIVISION prompted it to reject the claim. The deceased answered question No. 5(a) in the
affirmative but limited his answer to a
  In its letter, petitioner informed respondent consultation with a certain Dr. Reinaldo D.
Bernarda Bacani, that the insured did not disclose Raymundo of the Chinese General Hospital on
material facts relevant to the issuance of the February 1986, for cough and flu complications.
G.R. No. 105135 June 22, 1995 policy, thus rendering the contract of insurance The other questions were answered in the
voidable. A check representing the total premiums negative (Rollo, p. 53).
SUNLIFE ASSURANCE COMPANY OF paid in the amount of P10,172.00 was attached to
CANADA, petitioner, said letter.
vs. Petitioner discovered that two weeks prior to his
The Hon. COURT OF APPEALS and Spouses application for insurance, the insured was
Petitioner claimed that the insured gave false examined and confined at the Lung Center of the
ROLANDO and BERNARDA statements in his application when he answered Philippines, where he was diagnosed for renal
BACANI, respondents. the following questions: failure. During his confinement, the deceased was
subjected to urinalysis, ultra-sonography and
5. Within the past 5 years have hematology tests.
you:
QUIASON, J.: On November 17, 1988, respondent Bernarda
a) consulted any Bacani and her husband, respondent Rolando
This is a petition for review for certiorari under doctor or other Bacani, filed an action for specific performance
Rule 45 of the Revised Rules of Court to reverse health against petitioner with the Regional Trial Court,
and set aside the Decision dated February 21, practitioner? Branch 191, Valenzuela, Metro Manila. Petitioner
1992 of the Court of Appeals in CA-G.R. CV No. filed its answer with counterclaim and a list of
29068, and its Resolution dated April 22, 1992, exhibits consisting of medical records furnished
b) submitted to:
denying reconsideration thereof. by the Lung Center of the Philippines.
EGG?
We grant the petition. On January 14, 1990, private respondents filed a
X-rays?
blood tests? "Proposed Stipulation with Prayer for Summary
I other tests? Judgment" where they manifested that they "have
no evidence to refute the documentary evidence of
On April 15, 1986, Robert John B. Bacani procured c) attended or concealment/misrepresentation by the decedent
a life insurance contract for himself from been admitted of his health condition (Rollo, p. 62).
petitioner. He was issued Policy No. 3-903-766-X to any hospital
valued at P100,000.00, with double indemnity in or other medical Petitioner filed its Request for Admissions relative
case of accidental death. The designated facility? to the authenticity and due execution of several
beneficiary was his mother, respondent Bernarda documents as well as allegations regarding the
Bacani. health of the insured. Private respondents failed to
6. Have you ever had or sought
advice for: oppose said request or reply thereto, thereby
rendering an admission of the matters alleged.

59 |I N S U R A N C E
CONCEALMENT
Petitioner then moved for a summary judgment
and the trial court decided in favor of private
respondents. The dispositive portion of the
decision is reproduced as follows:
WHEREFORE, judgment is
hereby rendered in favor of the
plaintiffs and against the
defendant, condemning the latter
to pay the former the amount of
One Hundred Thousand Pesos
(P100,000.00) the face value of
insured's Insurance Policy No.
3903766, and the Accidental
Death Benefit in the amount of
One Hundred Thousand Pesos
(P100,000.00) and further sum of
P5,000.00 in the concept of
reasonable attorney's fees and
costs of suit.
Defendant's counterclaim is
hereby Dismissed (Rollo, pp. 43-
44).
In ruling for private respondents, the trial court
concluded that the facts concealed by the insured
were made in good faith and under a belief that
they need not be disclosed. Moreover, it held that
the health history of the insured was immaterial
since the insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which
affirmed the decision of the trial court. The
appellate court ruled that petitioner cannot avoid
its obligation by claiming concealment because
the cause of death was unrelated to the facts
concealed by the insured. It also sustained the
finding of the trial court that matters relating to
the health history of the insured were irrelevant
since petitioner waived the medical examination
prior to the approval and issuance of the
insurance policy. Moreover, the appellate court
agreed with the trial court that the policy was
"non-medical" (Rollo, pp. 4-5).
Petitioner's motion for reconsideration was
denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court
and the appellate court are binding on this Court
is not absolute and admits of exceptions, such as
when the judgment is based on a misappreciation
of the facts (Geronimo v. Court of Appeals, 224
SCRA 494 [1993]).
In weighing the evidence presented, the trial court
concluded that indeed there was concealment and
misrepresentation, however, the same was made
in "good faith" and the facts concealed or
misrepresented were irrelevant since the policy
was "non-medical". We disagree.
Section 26 of The Insurance Code is explicit in
requiring a party to a contract of insurance to
communicate to the other, in good faith, all facts
within his knowledge which are material to the
contract and as to which he makes no warranty,
and which the other has no means of ascertaining.
Said Section provides:
A neglect to communicate that
which a party knows and ought
to communicate, is called
concealment.
Materiality is to be determined not by the event,
but solely by the probable and reasonable
influence of the facts upon the party to whom
communication is due, in forming his estimate of
the disadvantages of the proposed contract or in
making his inquiries (The Insurance Code, Sec.
31).
The terms of the contract are clear. The insured is
specifically required to disclose to the insurer
matters relating to his health.
The information which the insured failed to
disclose were material and relevant to the
approval and issuance of the insurance policy. The
matters concealed would have definitely affected
petitioner's action on his application, either by
approving it with the corresponding adjustment
for a higher premium or rejecting the same.
Moreover, a disclosure may have warranted a
medical examination of the insured by petitioner
in order for it to reasonably assess the risk
involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA
443 (1993), we held that materiality of the
information withheld does not depend on the
state of mind of the insured. Neither does it
depend on the actual or physical events which
ensue.
Thus, "goad faith" is no defense in concealment.
The insured's failure to disclose the fact that he
was hospitalized for two weeks prior to filing his
application for insurance, raises grave doubts
about his bonafides. It appears that such
concealment was deliberate on his part.
The argument, that petitioner's waiver of the
medical examination of the insured debunks the
materiality of the facts concealed, is untenable. We
reiterate our ruling in Saturnino v. Philippine
American Life Insurance Company, 7 SCRA 316
(1963), that " . . . the waiver of a medical
examination [in a non-medical insurance contract]
renders even more material the information
required of the applicant concerning previous
condition of health and diseases suffered, for such
information necessarily constitutes an important
60 |I N S U R A N C E
CONCEALMENT
factor which the insurer takes into consideration
in deciding whether to issue the policy or not . . . "

Moreover, such argument of private respondents

would make Section 27 of the Insurance Code,
which allows the injured party to rescind a
contract of insurance where there is concealment,
ineffective (See Vda. de Canilang v. Court of
Appeals, supra).

Anent the finding that the facts concealed had no

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

We, therefore, rule that petitioner properly

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

WHEREFORE, the petition is GRANTED and the

Decision of the Court of Appeals is REVERSED and
SET ASIDE.

SO ORDERED.

Padilla, Davide, Jr., Bellosillo and Kapunan, JJ.,

concur.

61 |I N S U R A N C E
RIGHT TO RESCIND
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-34200 September 30, 1982
REGINA L. EDILLON, as assisted by her
husband, MARCIAL EDILLON, petitioners-
appellants,
vs.
MANILA BANKERS LIFE INSURANCE
CORPORATION and the COURT OF FIRST
INSTANCE OF RIZAL, BRANCH V, QUEZON
CITY, respondents-appellees.
K.V. Faylona for petitioners-appellants.
L. L. Reyes for respondents-appellees.
VASQUEZ, J.:
The question of law raised in this case that
justified a direct appeal from a decision of the
Court of First Instance Rizal, Branch V, Quezon
City, to be taken directly to the Supreme Court is
whether or not the acceptance by the private
respondent insurance corporation of the premium
and the issuance of the corresponding certificate
of insurance should be deemed a waiver of the
exclusionary condition of overage stated in the
said certificate of insurance.
The material facts are not in dispute. Sometime in
April 1969, Carmen O, Lapuz applied with
respondent insurance corporation for insurance
coverage against accident and injuries. She filled
up the blank application form given to her and
filed the same with the respondent insurance
corporation. In the said application form which
was dated April 15, 1969, she gave the date of her
birth as July 11, 1904. On the same date, she paid
the sum of P20.00 representing the premium for
which she was issued the corresponding receipt
signed by an authorized agent of the respondent
insurance corporation. (Rollo, p. 27.) Upon the
filing of said application and the payment of the
premium on the policy applied for, the respondent
insurance corporation issued to Carmen O. Lapuz
its Certificate of Insurance No. 128866. (Rollo, p.
28.) The policy was to be effective for a period of
90 days.
On May 31, 1969 or during the effectivity of
Certificate of Insurance No. 12886, Carmen O.
Lapuz died in a vehicular accident in the North
Diversion Road.
On June 7, 1969, petitioner Regina L. Edillon, a
sister of the insured and who was the named
beneficiary in the policy, filed her claim for the
proceeds of the insurance, submitting all the
necessary papers and other requisites with the
private respondent. Her claim having been denied,
Regina L. Edillon instituted this action in the Court
of First Instance of Rizal on August 27, 1969.
In resisting the claim of the petitioner, the
respondent insurance corporation relies on a
provision contained in the Certificate of Insurance,
excluding its liability to pay claims under the
policy in behalf of "persons who are under the age
of sixteen (16) years of age or over the age of sixty
(60) years ..." It is pointed out that the insured
being over sixty (60) years of age when she
applied for the insurance coverage, the policy was
null and void, and no risk on the part of the
respondent insurance corporation had arisen
therefrom.
The trial court sustained the contention of the
private respondent and dismissed the complaint;
ordered the petitioner to pay attorney's fees in the
sum of ONE THOUSAND (P1,000.00) PESOS in
favor of the private respondent; and ordered the
private respondent to return the sum of TWENTY
(P20.00) PESOS received by way of premium on
the insurancy policy. It was reasoned out that a
policy of insurance being a contract of adhesion, it
was the duty of the insured to know the terms of
the contract he or she is entering into; the insured
in this case, upon learning from its terms that she
could not have been qualified under the
conditions stated in said contract, what she should
have done is simply to ask for a refund of the
premium that she paid. It was further argued by
the trial court that the ruling calling for a liberal
interpretation of an insurance contract in favor of
the insured and strictly against the insurer may
not be applied in the present case in view of the
peculiar facts and circumstances obtaining
therein.
We REVERSE the judgment of the trial court. The
age of the insured Carmen 0. Lapuz was not
concealed to the insurance company. Her
application for insurance coverage which was on a
printed form furnished by private respondent and
which contained very few items of information
clearly indicated her age of the time of filing the
same to be almost 65 years of age. Despite such
information which could hardly be overlooked in
the application form, considering its prominence
thereon and its materiality to the coverage applied
for, the respondent insurance corporation
received her payment of premium and issued the
corresponding certificate of insurance without
question. The accident which resulted in the death
of the insured, a risk covered by the policy,
occurred on May 31, 1969 or FORTY-FIVE (45)
DAYS after the insurance coverage was applied
for. There was sufficient time for the private
respondent to process the application and to
notice that the applicant was over 60 years of age
and thereby cancel the policy on that ground if it
was minded to do so. If the private respondent
failed to act, it is either because it was willing to
waive such disqualification; or, through the
62 |I N S U R A N C E
RIGHT TO RESCIND
negligence or incompetence of its employees for the defendant into believing that
which it has only itself to blame, it simply the policies were effective.
overlooked such fact. Under the circumstances,
the insurance corporation is already deemed in The insurance company was
estoppel. It inaction to revoke the policy despite a aware, even before the policies
departure from the exclusionary condition were issued, that in the premises
contained in the said policy constituted a waiver insured there were only two fire
of such condition, as was held in the case of "Que hydrants installed by Que Chee
Chee Gan vs. Law Union Insurance Co., Ltd.,", 98 Gan and two others nearby,
Phil. 85. This case involved a claim on an owned by the municipality of
insurance policy which contained a provision as to Tabaco, contrary to the
the installation of fire hydrants the number of requirements of the warranty in
which depended on the height of the external wan question. Such fact appears from
perimeter of the bodega that was insured. When it positive testimony for the
was determined that the bodega should have insured that appellant's agents
eleven (11) fire hydrants in the compound as inspected the premises; and the
required by the terms of the policy, instead of only simple denials of appellant's
two (2) that it had, the claim under the policy was representative (Jamiczon) can
resisted on that ground. In ruling that the said not overcome that proof. That
deviation from the terms of the policy did not such inspection was made it
prevent the claim under the same, this Court moreover rendered probable by
stated the following: its being a prerequisite for the
fixing of the discount on the
We are in agreement with the premium to which the insured
trial Court that the appellant is was entitled, since the discount
barred by waiver (or rather depended on the number of
estoppel) to claim violation of the hydrants, and the fire fighting
so-called fire hydrants warranty, equipment available (See"'Scale
for the reason that knowing fully of Allowances" to which the
an that the number of hydrants policies were expressly made
demanded therein never existed subject). The law, supported by a
from the very beginning, the long line of cases, is expressed by
appellant nevertheless issued the American Jurisprudence (Vol. 29,
policies in question subject to pp. 611-612) to be as follows:
such warranty, and received the
corresponding premiums. It It is usually held that
would be perilously close to where the insurer, at the
conniving at fraud upon the time of the issuance of a
insured to allow appellant to policy of insurance, has
claim now as void ab initio the knowledge of existing facts
policies that it had issued to the which, if insisted on, would
plaintiff without warning of their invalidate the contract
fatal defect, of which it was from its very inception,
informed, and after it had misled such knowledge
constitutes a waiver of
conditions in the contract
inconsistent with the
known 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
execute 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 is 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
63 |I N S U R A N C E
RIGHT TO RESCIND
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 be abhorent to
fairminded men. It would
be to allow the company to
treat the policy as valid
long enough to get the
premium 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, 543544).
A similar view was upheld in the case of Capital
Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc.,
65 SCRA 134, which involved a violation of the
provision of the policy requiring the payment of
premiums before the insurance shall become
effective. The company issued the policy upon the
execution of a promissory note for the payment of
the premium. A check given subsequent by the
insured as partial payment of the premium was
dishonored for lack of funds. Despite such
deviation from the terms of the policy, the insurer
was held liable.
Significantly, in the case before
Us the Capital Insurance accepted
the promise of Plastic Era to pay
the insurance premium within PESOS as and for attorney's fees, and the costs of
thirty (30) days from the suit.
effective date of policy. By so
doing, it has impliedly agreed to SO ORDERED.
modify the tenor of the insurance
policy and in effect, waived the Teehankee (Chairman), Makasiar, Plana, Relova
provision therein that it would and Gutierrez, Jr., JJ., concur.
only pay for the loss or damage in
case the same occurs after the
Melencio-Herrera, J., took no part.
payment of the premium.
Considering that the insurance
policy is silent as to the mode of
payment, Capital Insurance is
deemed to have accepted the
promissory note in payment of
the premium. This rendered the
policy immediately operative on
the date it was delivered. The
view taken in most cases in the
United States:
... is that although one of
conditions of an insurance policy
is that "it shall not be valid or
binding until the first premium is
paid", if it is silent as to the mode
of payment, promissory notes
received by the company must be
deemed to have been accepted in
payment of the premium. In
other words, a requirement for
the payment of the first or initial
premium in advance or actual
cash may be waived by
acceptance of a promissory note...
WHEREFORE, the judgment appealed from is
hereby REVERSED and SET ASIDE. In lieu thereof,
the private respondent insurance corporation is
hereby ordered to pay to the petitioner the sum of
TEN THOUSAND (P10,000.00) PESOS as proceeds
of Insurance Certificate No. 128866 with interest
at the legal rate from May 31, 1969 until fully paid,
the further sum of TWO THOUSAND (P2,000.00)
64 |I N S U R A N C E
RIGHT TO RESCIND
FIRST DIVISION
G.R. No. 125678      March 18, 2002
PHILAMCARE HEALTH SYSTEMS,
INC., petitioner,
vs.
COURT OF APPEALS and JULITA
TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent
Julita Trinos, applied for a health care coverage
with petitioner Philamcare Health Systems, Inc. In
the standard application form, he answered no to
the following question:
Have you or any of your family members
ever consulted or been treated for high
blood pressure, heart trouble, diabetes,
cancer, liver disease, asthma or peptic
ulcer? (If Yes, give details).1
The application was approved for a period of one
year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement
No. P010194. Under the agreement, respondent’s
husband was entitled to avail of hospitalization
benefits, whether ordinary or emergency, listed
therein. He was also entitled to avail of "out-
patient benefits" such as annual physical
examinations, preventive health care and other
out-patient services.
Upon the termination of the agreement, the same
was extended for another year from March 1,
1989 to March 1, 1990, then from March 1, 1990
to June 1, 1990. The amount of coverage was
increased to a maximum sum of P75,000.00 per
disability.2
During the period of his coverage, Ernani suffered
a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning
March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits
under the health care agreement. However,
petitioner denied her claim saying that the Health
Care Agreement was void. According to petitioner,
there was a concealment regarding Ernani’s
medical history. Doctors at the MMC allegedly
discovered at the time of Ernani’s confinement
that he was hypertensive, diabetic and asthmatic,
contrary to his answer in the application form.
Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC,
he was attended by a physical therapist at home.
Later, he was admitted at the Chinese General
Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In
the morning of April 13, 1990, Ernani had fever
and was feeling very weak. Respondent was
constrained to bring him back to the Chinese
General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the
Regional Trial Court of Manila, Branch 44, an
action for damages against petitioner and its
president, Dr. Benito Reverente, which was
docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral
damages and attorney’s fees. After trial, the lower
court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the
Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the
medical and hospital coverage of the late
Ernani Trinos in the amount of
P76,000.00 plus interest, until the amount
is fully paid to plaintiff who paid the
same;
2. Defendants to pay the reduced amount
of moral damages of P10,000.00 to
plaintiff;
3. Defendants to pay the reduced amount
of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorney’s fees of
P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the
decision of the trial court but deleted all awards
for damages and absolved petitioner
Reverente.4 Petitioner’s motion for
reconsideration was denied.5 Hence, petitioner
brought the instant petition for review, raising the
primary argument that a health care agreement is
not an insurance contract; hence the
"incontestability clause" under the Insurance
Code6 does not apply.1âwphi1.nêt
Petitioner argues that the agreement grants
"living benefits," such as medical check-ups and
hospitalization which a member may immediately
enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter.
Petitioner also points out that only medical and
hospitalization benefits are given under the
agreement without any indemnification, unlike in
an insurance contract where the insured is
indemnified for his loss. Moreover, since Health
Care Agreements are only for a period of one year,
as compared to insurance contracts which last
longer,7 petitioner argues that the incontestability
clause does not apply, as the same requires an
effectivity period of at least two years. Petitioner
further argues that it is not an insurance company,
which is governed by the Insurance Commission,
65 |I N S U R A N C E
RIGHT TO RESCIND
but a Health Maintenance Organization under the
authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a
contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify
another against loss, damage or liability arising
from an unknown or contingent event. An
insurance contract exists where the following
elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss
by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a
general scheme to distribute actual losses
among a large group of persons bearing a
similar risk; and
5. In consideration of the insurer’s
promise, the insured pays a premium.8
Section 3 of the Insurance Code states that any
contingent or unknown event, whether past or
future, which may damnify a person having an
insurable interest against him, may be insured
against. Every person has an insurable interest in
the life and health of himself. Section 10 provides:
Every person has an insurable interest in
the life and health:
(1) of himself, of his spouse and of his
children;
(2) of any person on whom he depends
wholly or in part for education or
support, or in whom he has a pecuniary
interest;
(3) of any person under a legal obligation
to him for the payment of money,
respecting property or service, of which
death or illness might delay or prevent
the performance; and
(4) of any person upon whose life any
estate or interest vested in him depends.
In the case at bar, the insurable interest of
respondent’s husband in obtaining the health care
agreement was his own health. The health care
agreement was in the nature of non-life insurance,
which is primarily a contract of indemnity. 9 Once
the member incurs hospital, medical or any other
expense arising from sickness, injury or other
stipulated contingent, the health care provider
must pay for the same to the extent agreed upon
under the contract.
Petitioner argues that respondent’s husband
concealed a material fact in his application. It
appears that in the application for health
coverage, petitioners required respondent’s
husband to sign an express authorization for any
person, organization or entity that has any record
or knowledge of his health to furnish any and all
information relative to any hospitalization,
consultation, treatment or any other medical
advice or examination.10 Specifically, the Health
Care Agreement signed by respondent’s husband
states:
We hereby declare and agree that all
statement and answers contained herein
and in any addendum annexed to this
application are full, complete and true
and bind all parties in interest under the
Agreement herein applied for, that there
shall be no contract of health care
coverage unless and until an Agreement is
issued on this application and the full
Membership Fee according to the mode of
payment applied for is actually paid
during the lifetime and good health of
proposed Members; that no information
acquired by any Representative of
PhilamCare shall be binding upon
PhilamCare unless set out in writing in
the application; that any physician is, by
these presents, expressly authorized to
disclose or give testimony at anytime
relative to any information acquired by
him in his professional capacity upon any
question affecting the eligibility for health
care coverage of the Proposed
Members and that the acceptance of any
Agreement issued on this application
shall be a ratification of any correction in
or addition to this application as stated in
the space for Home Office
Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner
additionally required the applicant for
authorization to inquire about the applicant’s
medical history, thus:
I hereby authorize any person,
organization, or entity that has any record
or knowledge of my health and/or that of
__________ to give to the PhilamCare Health
Systems, Inc. any and all information
relative to any hospitalization,
consultation, treatment or any other
medical advice or examination. This
authorization is in connection with the
application for health care coverage
only. A photographic copy of this
authorization shall be as valid as the
original.12 (Underscoring ours)
Petitioner cannot rely on the stipulation regarding
"Invalidation of agreement" which reads:
Failure to disclose or misrepresentation
of any material information by the
member in the application or medical
66 |I N S U R A N C E
RIGHT TO RESCIND
examination, whether intentional or
unintentional, shall automatically
invalidate the Agreement from the very
beginning and liability of Philamcare shall
be limited to return of all Membership
Fees paid. An undisclosed or
misrepresented information is deemed
material if its revelation would have
resulted in the declination of the
applicant by Philamcare or the
assessment of a higher Membership Fee
for the benefit or benefits applied for.13
The answer assailed by petitioner was in response
to the question relating to the medical history of
the applicant. This largely depends on opinion
rather than fact, especially coming from
respondent’s husband who was not a medical
doctor. Where matters of opinion or judgment are
called for, answers made in good faith and without
intent to deceive will not avoid a policy even
though they are untrue.14 Thus,
(A)lthough false, a representation of the
expectation, intention, belief, opinion, or
judgment of the insured will not avoid the
policy if there is no actual fraud in
inducing the acceptance of the risk, or its
acceptance at a lower rate of premium,
and this is likewise the rule although the
statement is material to the risk, if the
statement is obviously of the foregoing
character, since in such case the insurer is
not justified in relying upon such
statement, but is obligated to make
further inquiry. There is a clear
distinction between such a case and one
in which the insured is fraudulently and
intentionally states to be true, as a matter
of expectation or belief, that which he
then knows, to be actually untrue, or the
impossibility of which is shown by the
facts within his knowledge, since in such
case the intent to deceive the insurer is
obvious and amounts to actual
fraud.15 (Underscoring ours)
The fraudulent intent on the part of the insured
must be established to warrant rescission of the
insurance contract.16 Concealment as a defense for
the health care provider or insurer to avoid
liability is an affirmative defense and the duty to
establish such defense by satisfactory and
convincing evidence rests upon the provider or
insurer. In any case, with or without the authority
to investigate, petitioner is liable for claims made
under the contract. Having assumed a
responsibility under the agreement, petitioner is
bound to answer the same to the extent agreed
upon. In the end, the liability of the health care
provider attaches once the member is hospitalized
for the disease or injury covered by the agreement
or whenever he avails of the covered benefits
which he has prepaid.
Under Section 27 of the Insurance Code, "a
concealment entitles the injured party to rescind a
contract of insurance." The right to rescind should
be exercised previous to the commencement of an
action on the contract.17 In this case, no rescission
was made. Besides, the cancellation of health care
agreements as in insurance policies require the
concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after
effective date of the policy of one or more of the
grounds mentioned;
3. Must be in writing, mailed or delivered to the
insured at the address shown in the policy;
4. Must state the grounds relied upon provided in
Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which
cancellation is based.18
None of the above pre-conditions was fulfilled in
this case. When the terms of insurance contract
contain limitations on liability, courts should
construe them in such a way as to preclude the
insurer from non-compliance with his
obligation.19 Being a contract of adhesion, the
terms of an insurance contract are to be construed
strictly against the party which prepared the
contract – the insurer.20 By reason of the exclusive
control of the insurance company over the terms
and phraseology of the insurance contract,
ambiguity must be strictly interpreted against the
insurer and liberally in favor of the insured,
especially to avoid forfeiture. 21 This is equally
applicable to Health Care Agreements. The
phraseology used in medical or hospital service
contracts, such as the one at bar, must be liberally
construed in favor of the subscriber, and if
doubtful or reasonably susceptible of two
interpretations the construction conferring
coverage is to be adopted, and exclusionary
clauses of doubtful import should be strictly
construed against the provider.22
Anent the incontestability of the membership of
respondent’s husband, we quote with approval
the following findings of the trial court:
(U)nder the title Claim procedures of
expenses, the defendant Philamcare
Health Systems Inc. had twelve months
from the date of issuance of the
Agreement within which to contest the
membership of the patient if he had
previous ailment of asthma, and six
months from the issuance of the
agreement if the patient was sick of
diabetes or hypertension. The periods
having expired, the defense of
concealment or misrepresentation no
longer lie.23
Finally, petitioner alleges that respondent was not
the legal wife of the deceased member considering
67 |I N S U R A N C E
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that at the time of their marriage, the deceased
was previously married to another woman who
was still alive. The health care agreement is in the
nature of a contract of indemnity. Hence, payment
should be made to the party who incurred the
expenses. It is not controverted that respondent
paid all the hospital and medical expenses. She is
therefore entitled to reimbursement. The records
adequately prove the expenses incurred by
respondent for the deceased’s hospitalization,
medication and the professional fees of the
attending physicians.24

WHEREFORE, in view of the foregoing, the

petition is DENIED. The assailed decision of the
Court of Appeals dated December 14, 1995
is AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

68 |I N S U R A N C E
RIGHT TO RESCIND
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-41014 November 28, 1988
PACIFIC BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and ORIENTAL
ASSURANCE CORPORATION, respondents.
Flores, Ocampo, Dizon and Domingo Law Office for
petitioner.
Cabochan and Reyes Law Office for respondents.
PARAS, J.:
This is a petition for review on certiorari of the
decision of respondent Court of Appeals * in CA-
G.R. No. 41735-R, entitled "Pacific Banking
Corporation vs. Oriental Assurance Corporation",
which set aside the decision of the Court of First
Instance (CFI) of Manila, ** which had in turn
granted the complaint for a sum of money in Civil
Case No. 56889.
As gathered from the records, the undisputed facts
of this case are as follows:
On October 21,1963, Fire Policy No. F-3770
(Exhibit "A"), an open policy, was issued to the
Paramount Shirt Manufacturing Co. (hereinafter
referred to as the insured, for brevity), by which
private respondent Oriental Assurance
Corporation bound itself to indemnify the insured
for any loss or damage, not exceeding P61,000.00,
caused by fire to its property consisting of stocks,
materials and supplies usual to a shirt factory,
including furniture, fixtures, machinery and
equipment while contained in the ground, second
and third floors of the building situated at number
256 Jaboneros St., San Nicolas, Manila, for a period
of one year commencing from that date to October
21, 1964.
The insured was at the time of the issuance of the
policy and is up to this time, a debtor of petitioner
in the amount of not less than Eight Hundred
Thousand Pesos (P800,000.00) and the goods
described in the policy were held in trust by the
insured for the petitioner under thrust receipts
(Record on Appeal, p. 4).
Said policy was duly endorsed to petitioner as
mortgagee/ trustor of the properties insured, with
the knowledge and consent of private respondent
to the effect that "loss if any under this policy is
payable to the Pacific Banking Corporation".
On January 4, 1964, while the aforesaid policy was
in full force and effect, a fire broke out on the
subject premises destroying the goods contained
in its ground and second floors (Record on Appeal,
p.5)
On January 24, 1964, counsel for the petitioner
sent a letter of demand to private respondent for
indemnity due to the loss of property by fire
under the endorsement of said policy (Brief for
Plaintiff-Appellee, pp. 16-17).
On January 28, 1964, private respondent informed
counsel for the petitioner that it was not yet ready
to accede to the latter's demand as the former is
awaiting the final report of the insurance adjuster,
H.H. Bayne Adjustment Company (Brief for
Plaintiff-Appellee, pp. 17-18).
On March 25, 1964, the said insurance adjuster
notified counsel for the petitioner that the insured
under the policy had not filed any claim with it,
nor submitted proof of loss which is a clear
violation of Policy Condition No.11, and for which
reason, determination of the liability of private
respondent could not be had (Supra, pp. 19-20).
On April 24, 1964, petitioner's counsel replied to
aforesaid letter asking the insurance adjuster to
verify from the records of the Bureau of Customs
the entries of merchandise taken into the customs
bonded warehouse razed by fire as a reliable
proof of loss (Supra, pp. 21-22). For failure of the
insurance company to pay the loss as demanded,
petitioner (plaintiff therein) on April 28, 1 964,
filed in the court a quo an action for a sum of
money against the private respondent, Oriental
Assurance Corporation, in the principal sum of
P61,000.00 issued in favor of Paramount Shirt
Manufacturing Co. (Record on Appeal, pp. 1-36).
On May 25, 1964, private respondent raised the
following defenses in its answer to wit: (a) lack of
formal claim by insured over the loss and (b)
premature filing of the suit as neither plaintiff nor
insured had submitted any proof of loss on the
basis of which defendant would determine its
liability and the amount thereof, either to the
private respondent or its ad . adjuster H.H. Bayne
Adjustment Co., both in violation of Policy
Condition No.11 (Record on Appeal, pp. 37-38).
At the trial, petitioner presented in evidence
Exhibit "H", which is a communication dated
December 22, 1965 of the insurance adjuster, H.H.
Bayne Adjustment Co. to Asian Surety Insurance
Co., Inc., revealing undeclared co-insurances with
the following: P30,000.00 with Wellington
Insurance; P25,000. 00 with Empire Surety and
P250,000.00 with Asian Surety; undertaken by
insured Paramount on the same property covered
by its policy with private respondent whereas the
only co-insurances declared in the subject policy
are those of P30,000.00 with Malayan P50,000.00
with South Sea and P25.000.00 with Victory (Brief
for the Defendant pp. 13-14).
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It will be noted that the defense of fraud and/or 1964, until the amount is fully (b) The record of the
violation of Condition No. 3 in the Policy, in the paid, P6,100.00, as attorney's case is bereft of proof of
form of non-declaration of co-insurances which fees, and the costs. such fraud.
was not pleaded in the answer was also not
pleaded in the Motion to Dismiss. SO ORDERED. (Record on Appeal, (c) The private
pp. 140-141) respondent insurer did
At any rate, on June 30, 1967, the trial court not even plead or in
denied private respondent's motion on the ground On appeal, the Court of Appeals reversed the anywise raise fraud as a
that the defense of lack of proof of loss or defects decision of the trial court (Decision promulgated defense in its answer or
therein was raised for the first time after the on April 23, 1975, Rollo, pp. 21-33). motion to dismiss and,
commencement of the suit and that it must be therefore, it should
deemed to have waived the requirement of proof Petitioner filed a motion for reconsideration of the have been considered
of loss (Sections 83 and 84, Insurance Act; Record said decision of the respondent Court of Appeals, waived.
on Appeal, p. 61). but this was denied on July 3,1975 for lack of
merit (Rollo, pp. 54-67), resulting in this petition (d) The total amount of
On September 9, 1967, the case was considered with the following assigned errors; insurance procured by
submitted for decision from which order private the insured from the
respondent filed a motion for reconsideration to I different companies
set the case or further reception of private amounted to hardly
respondent's additional evidence, "in order to onehalf (½) of the value
RESPONDENT COURT OF
prove that 'insured has committed a violation of of the goods insured.
APPEALS COMMITTED A GRAVE
condition No. 3 of the policy in relation to the
ERROR OF LAW IN CONCLUDING
other Insurance Clause.' " (Record on Appeal, pp. II
FRAUD FROM THE BARE FACT
61-69).
THAT THE INSURED
PARAMOUNT PROCURED RESPONDENT COURT ERRED IN
On September 30,1967, the case was set for the ADDITIONAL INSURANCES NOT HOLDING THAT
continuation of the hearing for the reception OTHER THAN THOSE STATED IN CONSIDERING THE VOTING ON
merely of the testimony of Alejandro Tan Gatue, THE POLICY IN SPITE OF THE THE PARTICULAR QUESTION OF
Manager of the Adjustment Co., over the vehement EXISTENCE OF CONTRARY FRAUD, THE FINDING OF THE
opposition of the petitioner (Record on Appeal, p. PRESUMPTIONS AND ADMITTED TRIAL COURT THEREON
129). FACT AND CIRCUMSTANCES SHOULD BE CONSIDERED
WHICH NEGATE THE AFFIRMED.
On April 18, 1 968, the trial court rendered a CORRECTNESS OF SAID
decision adjudging private respondent liable to CONCLUSION. III
the petitioner under the said contract of
insurance, the dispositive portion of which reads: (a) The respondent THE CONCURRING OPINION OF
Court did not consider MR. JUSTICE CHANCO IS
WHEREFORE, judgment is the legal presumption LEGALLY ERRONEOUS IN
hereby rendered ordering the against the existence of HOLDING THAT THE ACTION
defendant to pay the plaintiff fraud, which should be WAS PREMATURELY BROUGHT
P61,000.00, with interest at the established with such BECAUSE THE REQUIRED CLAIM
rate of 8% per annum from quantum of proof as is UNDER THE INSURANCE LAW
January 4, 1964, to April 28, required for any crime. HAS NOT BEEN FILED,
1964, and 12% from April 29, NOTWITHSTANDING THE
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LETTER, (EXHIBIT "C") OF
PETITIONER-APPELLANT'S
LAWYER WHICH IS A provides:
SUBSTANTIAL COMPLIANCE OF
THE LEGAL REQUIREMENTS
AND NOT HOLDING THAT
PRIVATE RESPONDENT
INSURER HAD ALREADY
WAIVED THE SUPPOSED
DEFECTS IN THE CLAIM FILED
BY PETITIONER-APPELLANT
FOR ITS FAILURE TO CALL THE
ATTENTION OF THE LAYER TO
SUCH ALLEGED DEFECTS AND
FOR ENDORSING THE CLAIM TO
ITS ADJUSTER FOR PROCESSING.
IV
RESPONDENT COURT OF
APPEALS COMMITTED A GRAVE
ERROR OF LAW IN NOT
INTERPRETING THE
PROVISIONS OF THE POLICY
LIBERALLY IN FAVOR OF THE
HEREIN PETITIONER-
APPELLANT, WHO IS NOT THE
INSURED BUT ONLY THE
ASSIGNEE/MORTGAGEE OF THE
PROPERTY INSURED.
V the insured was guilty of clear fraud (Rollo, p. 25).
RESPONDENT COURT OF
APPEALS COMMITTED A GRAVE
ERROR OF LAW IN DISMISSING
THE CASE AND IN NOT
AFFIRMING THE APPEALED
DECISION OF THE TRIAL COURT.
(Brief for Petitioners, pp. 1-3)
The crux of the controversy centers on two points:
(a) unrevealed co-insurances which violated
policy conditions No. 3 and (b) failure of the
insured to file the required proof of loss prior to
court action. Policy Condition No. 3 explicitly
3. The Insured shall give notice to
the Company of any insurance
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 benefit under this
policy shall be forfeited. (Record
on Appeal, p. 12)
It is not disputed that the insured failed to reveal
before the loss three other insurances. As found
by the Court of Appeals, by reason of said
unrevealed insurances, the insured had been
guilty of a false declaration; a clear
misrepresentation and a vital one because where
the insured had been asked to reveal but did not,
that was deception. Otherwise stated, had the
insurer known that there were many co-
insurances, it could have hesitated or plainly
desisted from entering into such contract. Hence,
Petitioner's contention that the allegation of fraud
is but a mere inference or suspicion is untenable.
In fact, concrete evidence of fraud or false
declaration by the insured was furnished by the
petitioner itself when the facts alleged in the
policy under clauses "Co-Insurances Declared"
and "Other Insurance Clause" are materially
different from the actual number of co-insurances
taken over the subject property. Consequently,
"the whole foundation of the contract fails, the risk
does not attach and the policy never becomes a
contract between the parties. Representations of
facts are the foundation of the contract and if the
foundation does not exist, the superstructure does
not arise. Falsehood in such representations is not
shown to vary or add to the contract, or to
terminate a contract which has once been made,
but to show that no contract has ever existed
(Tolentino, Commercial Laws of the Philippines, p.
991, Vol. II, 8th Ed.) A void or inexistent contract
is one which has no force and effect from the very
beginning, as if it had never been entered into, and
which cannot be validated either by time or by
ratification Tongoy v. C.A., 123 SCRA 99 [1983];
Avila v. C.A. 145 SCRA [1986]).
As the insurance policy against fire expressly
required that notice should be given by the
insured of other insurance upon the same
property, the total absence of such notice nullifies
the policy (Sta. Ana v. Commercial Union
Assurance Co., 55 Phil. 333 [1930]; Union
Manufacturing Co., Inc. vs. Philippine Guaranty
Co., Inc., 47 SCRA 276 [1972]; Pioneer Ins. &
Surety Corp., v. Yap, 61 SCRA 432 [1974]).
The argument that notice of co-insurances may be
made orally is preposterous and negates policy
condition No. 20 which requires every notice and
other communications to the insurer to be written
or printed.
Petitioner points out that Condition No. 3 in the
policy in relation to the "other insurance clause"
supposedly to have been violated, cannot certainly
defeat the right of the petitioner to recover the
insurance as mortgagee/assignee. Particularly
referring to the mortgage clause of the policy,
petitioner argues that considering the purpose for
which the endorsement or assignment was made,
that is, to protect the mortgagee/assignee against
any untoward act or omission of the insured, it
would be absurd to hold that petitioner is barred
from recovering the insurance on account of the
71 |I N S U R A N C E
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alleged violation committed by the insured (Rollo,
Brief for the petitioner, pp, 33-35).
It is obvious that petitioner has missed all
together the import of subject mortgage clause
which specifically provides:
Mortgage Clause
Loss, if any, under this policy,
shall be payable to the PACIFIC
BANKING CORPORATION Manila
mortgagee/trustor as its interest
may appear, it being hereby
understood and agreed that this
insurance as to the interest of the
mortgagee/trustor only herein,
shall not be invalidated by any
act or neglect—except fraud or
misrepresentation, or arson—of
the mortgagor or owner/trustee
of the property insured;
provided, that in case the
mortgagor or owner/ trustee
neglects or refuses to pay any
premium, the mortgagee/ trustor
shall, on demand pay the same.
(Rollo, p. 26)
The paragraph clearly states the exceptions to the
general rule that insurance as to the interest of the
mortgagee, cannot be invalidated; namely: fraud,
or misrepresentation or arson. As correctly found
by the Court of Appeals, concealment of the
aforecited
co-insurances can easily be fraud, or in the very
least, misrepresentation (Rollo, p. 27).
Undoubtedly, it is but fair and just that where the
insured who is primarily entitled to receive the
proceeds of the policy has by its fraud and/or
misrepresentation, forfeited said right, with more
reason petitioner which is merely claiming as
indorsee of said insured, cannot be entitled to
such proceeds.
Petitioner further stressed that fraud which was
not pleaded as a defense in private respondent's
answer or motion to dismiss, should be deemed to
have been waived.
It will be noted that the fact of fraud was tried by
express or at least implied consent of the parties.
Petitioner did not only object to the introduction
of evidence but on the contrary, presented the
very evidence that proved its existence.
Be that as it may, it is established that the
Supreme Court has ample authority to give
beyond the pleadings where in the interest of
justice and the promotion of public policy, there is
a need to make its own finding to support its
conclusion. Otherwise stated, the Court can
consider a fact which surfaced only after trial
proper (Maharlika Publishing Corp. v. Tagle, 142
SCRA 561 [1986]).
Generally, the cause of action on the policy
accrues when the loss occurs, But when the policy
provides that no action shall be brought unless the
claim is first presented extrajudicially in the
manner provided in the policy, the cause of action
will accrue from the time the insurer finally
rejects the claim for payment (Eagle Star
Insurance v. Chia Yu, 55 Phil 701 [1955]).
In the case at bar, policy condition No. 11
specifically provides that the insured shall on the
happening of any loss or damage give notice to the
company and shall within fifteen (15) days after
such loss or damage deliver to the private
respondent (a) a claim in writing giving particular
account as to the articles or goods destroyed and
the amount of the loss or damage and (b)
particulars of all other insurances, if any. Likewise,
insured was required "at his own expense to
produce, procure and give to the company all such
further particulars, plans, specifications, books,
vouchers, invoices, duplicates or copies thereof,
documents, proofs and information with respect
to the claim". (Record on Appeal, pp. 18-20).
The evidence adduced shows that twenty-four
(24) days after the fire, petitioner merely wrote
letters to private respondent to serve as a notice
of loss, thereafter, the former did not furnish the
latter whatever pertinent documents were
necessary to prove and estimate its loss. Instead,
petitioner shifted upon private respondent the
burden of fishing out the necessary information to
ascertain the particular account of the articles
destroyed by fire as well as the amount of loss. It
is noteworthy that private respondent and its
adjuster notified petitioner that insured had not
yet filed a written claim nor submitted the
supporting documents in compliance with the
requirements set forth in the policy. Despite the
notice, the latter remained unheedful. Since the
required claim by insured, together with the
preliminary submittal of relevant documents had
not been complied with, it follows that private
respondent could not be deemed to have finally
rejected petitioner's claim and therefore the
latter's cause of action had not yet arisen.
Compliance with condition No. 11 is a
requirement sine qua non to the right to maintain
an action as prior thereto no violation of
petitioner's right can be attributable to private
respondent. This is so, as before such final
rejection, there was no real necessity for bringing
suit. Petitioner should have endeavored to file the
formal claim and procure all the documents,
papers, inventory needed by private respondent
or its adjuster to ascertain the amount of loss and
after compliance await the final rejection of its
claim. Indeed, the law does not encourage
unnecessary litigation (Eagle Star Insurance Co.,
Ltd., et al. v. Chia Yu, p. 701, supra).<äre||
anº•1àw>
72 |I N S U R A N C E
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Verily, petitioner prematurely filed Civil Case No.
56889 and dismissal thereof was warranted under
the circumstances. 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 (Eagle Star Insurance Co., Ltd., et al. v.
Chia Yu, p. 702, supra; Taurus Taxi Co., Inc. v. The
Capital Ins. & Surety Co., Inc., 24 SCRA 458 [1968];
National Power Corp. v. CA, 145 SCRA 533
[1986]), 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 (Young
v. Midland Textile Ins. Co., 30 Phil. 617 [1919];
Union Manufacturing Co., Inc. v. Phil. Guaranty Co.,
Inc., p. 277 supra; Pichel v. Alonzo, III SCRA 341
[1982]; Gonzales v. CA, 124 SCRA 630 [1983]; GSIS
v. CA, 145 SCRA 311 [1986]; Herrera v. Petrophil
Corp., 146 SCRA 385 [1986]).
the courts is simply to enforce and carry out the
contracts actually made (Young v. Midland Textile
Ins. Co., 30 Phil. 617 [1915]; Union Manufacturing
Co. Inc. v. Phil. Guaranty Co. Inc., p. 276 supra).
Finally, the established rule in this jurisdiction
that findings of fact of the Court of Appeals when
supported by substantial evidence, are not
reviewable on appeal by certiorari, deserves
reiteration. Said findings of the appellate court are
final and cannot be disturbed by the Supreme
Court except in certain cases Lereos v. CA, 117
SCRA 395 [1985]; Dalida v. CA, 117 SCRA 480
[1982] Director of Lands v. CA, 117 SCRA 346
[1982]; Montesa v. CA, 117 SCRA 770 [1982];
Sacay v. Sandiganbayan, 142 SCRA 609 [1986];
Guita v. CA, 139 SCRA 576 [1985]; Manlapaz v. CA,
147 SCRA 238-239 [1987]).
PREMISES CONSIDERED, the petition is
DISMISSED for lack of merit, and the decision
appealed from is AFFIRMED. No costs.

Contracts of insurance are contracts of indemnity SO ORDERED.

upon the terms and conditions specified in the
policy. The parties have a right to impose such
Melencio-Herrera, (Chairman), Padilla, Sarmiento
reasonable conditions at the time of the making of
and Regalado, JJ., concur.
the contract as they may deem wise and
necessary. The agreement has the force of law
between the parties. The terms of the policy
constitute the measure of the insurer's liability,
and in order to recover, the insured must show
himself within those terms. The compliance of the
insured with the terms of the policy is a condition
precedent to the light of recovery (Stokes v.
Malayan Insurance Co., Inc., 127 SCRA 766 [1984]).

It appearing that insured has violated or failed to

perform the conditions under No. 3 and 11 of the
contract, and such violation or want of
performance has not been waived by the insurer,
the insured cannot recover, much less the herein
petitioner. Courts are not permitted to make
contracts for the parties; the function and duty of

73 |I N S U R A N C E
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Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 175666               July 29, 2013
MANILA BANKERS LIFE INSURANCE
CORPORATION, Petitioner.
vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance
Code is to compel insurers to solicit business from
or provide insurance coverage only to legitimate
and bona fide clients, by requiring them to
thoroughly investigate those they insure within
two years from effectivity of the policy and while
the insured is still alive. If they do not, they will be
obligated to honor claims on the policies they
issue, regardless of fraud, concealment or
misrepresentation. The law assumes that they will
do just that and not sit on their laurels,
indiscriminately soliciting and accepting
insurance business from any Tom, Dick and Harry.
Assailed in this Petition for Review on
Certiorari1 are the September 28, 2005
Decision2 of the Court of Appeals' (CA) in CA-G.R.
CV No. 62286 and its November 9, 2006
Resolution3 denying the petitioner’s Motion for
Reconsideration.4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a
life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating
respondent Cresencia P. Aban (Aban), her
niece,5 as her beneficiary.
Petitioner issued Insurance Policy No. 747411
(the policy), with a face value of ₱100,000.00, in
Sotero’s favor on August 30, 1993, after the
requisite medical examination and payment of the
insurance premium.6
On April 10, 1996, 7 when the insurance policy had
been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for
the insurance proceeds on July 9, 1996. Petitioner
conducted an investigation into the claim, 8 and
came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial
capability to pay the insurance premiums
on Insurance Policy No. 747411;
4. Sotero did not sign the July 3, 1993
application for insurance;9 and
5. Respondent was the one who filed the
insurance application, and x x x
designated herself as the beneficiary.10
For the above reasons, petitioner denied
respondent’s claim on April 16, 1997 and
refunded the premiums paid on the policy.11
On April 24, 1997, petitioner filed a civil case for
rescission and/or annulment of the policy, which
was docketed as Civil Case No. 97-867 and
assigned to Branch 134 of the Makati Regional
Trial Court. The main thesis of the Complaint was
that the policy was obtained by fraud,
concealment and/or misrepresentation under the
Insurance Code,12 which thus renders it voidable
under Article 139013 of the Civil Code.
Respondent filed a Motion to 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.
During the proceedings on the Motion to Dismiss,
petitioner’s investigator testified in court, stating
among others that the insurance underwriter who
solicited the insurance is a cousin of respondent’s
husband, Dindo Aban,15 and that it was the
respondent who paid the annual premiums on the
policy.16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an
Order17 granting respondent’s Motion to Dismiss,
thus:
WHEREFORE, defendant CRESENCIA P. ABAN’s
Motion to Dismiss is hereby granted. Civil Case No.
97-867 is hereby dismissed.
SO ORDERED.18
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In dismissing the case, the trial court found that
Sotero, and not respondent, was the one who
procured the insurance; thus, Sotero could legally
take out insurance on her own life and validly
designate – as she did – respondent as the
beneficiary. It held further that under Section 48,
petitioner had only two years from the effectivity
of the policy to question the same; since the policy
had been in force for more than two years,
petitioner is now barred from contesting the same
or seeking a rescission or annulment thereof.
Petitioner moved for reconsideration, but in
another Order19 dated October 20, 1998, the trial
court stood its ground.
Petitioner interposed an appeal with the CA,
docketed as CA-G.R. CV No. 62286. Petitioner
questioned the dismissal of Civil Case No. 97-867,
arguing that the trial court erred in applying
Section 48 and declaring that prescription has set
in. It contended that since it was respondent – and
not Sotero – who obtained the insurance, the
policy issued was rendered void ab initio for want
of insurable interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed
Decision, which contained the following decretal
portion:
WHEREFORE, in the light of all the foregoing, the
instant appeal is DISMISSED for lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying
Section 48 to petitioner’s case, the CA held that
petitioner may no longer prove that the subject
policy was void ab initio or rescindible by reason
of fraudulent concealment or misrepresentation
after the lapse of more than two years from its
issuance. It ratiocinated that petitioner was In praying that the CA Decision be reversed and
equipped with ample means to determine, within that the case be remanded to the trial court for the
the first two years of the policy, whether fraud, conduct of further proceedings, petitioner argues
concealment or misrepresentation was present in its Petition and Reply24 that Section 48 cannot
when the insurance coverage was obtained. If it apply to a case where the beneficiary under the
failed to do so within the statutory two-year insurance contract posed as the insured and
period, then the insured must be protected and obtained the policy under fraudulent
allowed to claim upon the policy. circumstances. It adds that respondent, who was
merely Sotero’s niece, had no insurable interest in
Petitioner moved for reconsideration, 21 but the CA the life of her aunt.
denied the same in its November 9, 2006
Resolution.22 Hence, the present Petition. Relying on the results of the investigation that it
conducted after the claim for the insurance
Issues proceeds was filed, petitioner insists that
respondent’s claim was spurious, as it appeared
Petitioner raises the following issues for that Sotero did not actually apply for insurance
resolution: coverage, was unlettered, sickly, and had no
visible source of income to pay for the insurance
premiums; and that respondent was an impostor,
I
posing as Sotero and fraudulently obtaining
insurance in the latter’s name without her
WHETHER THE COURT OF APPEALS ERRED IN knowledge and consent.
SUSTAINING THE ORDER OF THE TRIAL COURT
DISMISSING THE COMPLAINT ON THE GROUND
Petitioner adds that Insurance Policy No. 747411
OF PRESCRIPTION IN CONTRAVENTION (OF)
was void ab initio and could not have given rise to
PERTINENT LAWS AND APPLICABLE rights and obligations; as such, the action for the
JURISPRUDENCE.
declaration of its nullity or inexistence does not
prescribe.25
II
Respondent’s Arguments
WHETHER THE COURT OF APPEALS ERRED IN
SUSTAINING THE APPLICATION OF THE Respondent, on the other hand, essentially argues
INCONTESTABILITY PROVISION IN THE
in her Comment26 that the CA is correct in
INSURANCE CODE BY THE TRIAL COURT.
applying Section 48. She adds that petitioner’s
new allegation in its Petition that the policy is void
III ab initio merits no attention, having failed to raise
the same below, as it had claimed originally that
WHETHER THE COURT OF APPEALS ERRED IN the policy was merely voidable.
DENYING PETITIONER’S MOTION FOR
RECONSIDERATION.23
On the issue of insurable interest, respondent
echoes the CA’s pronouncement that since it was
Petitioner’s Arguments Sotero who obtained the insurance, insurable
interest was present. Under Section 10 of the
Insurance Code, Sotero had insurable interest in
75 |I N S U R A N C E
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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.
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and
appellate courts’ finding that it was Sotero who
obtained the insurance for herself, designating
respondent as her beneficiary. Both courts are in
accord in this respect, and the Court is loath to
disturb this. While petitioner insists that its
independent investigation on the claim reveals
that it was respondent, posing as Sotero, who
obtained the insurance, this claim is no longer
feasible in the wake of the courts’ finding that it
was Sotero who obtained the insurance for
herself. This finding of fact binds the Court.
With the above crucial finding of fact – that it was
Sotero who obtained the insurance for herself –
petitioner’s case is severely weakened, if not
totally disproved. Allegations of fraud, which are
predicated on respondent’s alleged posing as
Sotero and forgery of her signature in the
insurance application, are at once belied by the
trial and appellate courts’ finding that Sotero
herself took out the insurance for herself.
"Fraudulent intent on the part of the insured must
be established to entitle the insurer to rescind the
contract."27 In the absence of proof of such
fraudulent intent, no right to rescind arises.
Moreover, the results and conclusions arrived at
during the investigation conducted unilaterally by
petitioner after the claim was filed may simply be
dismissed as self-serving and may not form the
basis of a cause of action given the existence and
application of Section 48, as will be discussed at
length below.
Section 48 serves a noble purpose, as it regulates
the actions of both the insurer and the insured.
Under the provision, an insurer is given two years
– from the effectivity of a life insurance contract
and while the insured is alive – to discover or
prove that the policy is void ab initio or is
rescindible by reason of the fraudulent
concealment or misrepresentation of the insured
or his agent. After the two-year period lapses, or
when the insured dies within the period, the
insurer must make good on the policy, even
though the policy was obtained by fraud,
concealment, or misrepresentation. This is not to
say that insurance fraud must be rewarded, but
that insurers who recklessly and indiscriminately
solicit and obtain business must be penalized, for
such recklessness and lack of discrimination
ultimately work to the detriment of bona fide
takers of insurance and the public in general.
Section 48 regulates both the actions of the
insurers and prospective takers of life insurance.
It gives insurers enough time to inquire whether
the policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it
forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing
into such nefarious enterprise. At the same time,
legitimate policy holders are absolutely protected
from unwarranted denial of their claims or delay
in the collection of insurance proceeds occasioned
by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may
no longer be set up after the two-year period
expires as ordained under the law.
Thus, the self-regulating feature of Section 48 lies
in the fact that both the insurer and the insured
are given the assurance that any dishonest scheme
to obtain life insurance would be exposed, and
attempts at unduly denying a claim would be
struck down. Life insurance policies that pass the
statutory two-year period are essentially treated
as legitimate and beyond question, and the
individuals who wield them are made secure by
the thought that they will be paid promptly upon
claim. In this manner, Section 48 contributes to
the stability of the insurance industry.
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments on life insurance, only to later on deny a
claim on the policy on specious claims of
fraudulent concealment and misrepresentation,
such as what obtains in the instant case. Thus,
instead of conducting at the first instance an
investigation into the circumstances surrounding
the issuance of Insurance Policy No. 747411 which
would have timely exposed the supposed flaws
and irregularities attending it as it now professes,
petitioner appears to have turned a blind eye and
opted instead to continue collecting the premiums
on the policy. For nearly three years, petitioner
collected the premiums and devoted the same to
its own profit. It cannot now deny the claim when
it is called to account. Section 48 must be applied
to it with full force and effect.
The Court therefore agrees fully with the appellate
court’s pronouncement that –
the "incontestability clause" is a provision in law
that after a policy of life insurance made payable
on the death of the insured shall have been in
force during the lifetime of the insured for a
period of two (2) years from the date of its issue
or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is
rescindible by reason of fraudulent concealment
or misrepresentation of the insured or his agent.
The purpose of the law is to give protection to the
insured or his beneficiary by limiting the
rescinding of the contract of insurance on the
ground of fraudulent concealment or
misrepresentation to a period of only two (2)
76 |I N S U R A N C E
RIGHT TO RESCIND
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’s fraudulent concealment or
misrepresentation or want of insurable interest
on the part of the beneficiary, herein defendant-
appellee.
Well-settled is the rule that it is the plaintiff-
appellant’s burden to show that the factual
findings of the trial court are not based on
substantial evidence or that its conclusions are
contrary to applicable law and jurisprudence. The
plaintiff-appellant failed to discharge that
burden.28
Petitioner claims that its insurance agent, who
solicited the Sotero account, happens to be the
cousin of respondent’s husband, and thus
insinuates that both connived to commit
insurance fraud. If this were truly the case, then
petitioner would have discovered the scheme
earlier if it had in earnest conducted an
investigation into the circumstances surrounding
the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim
was filed thereon more than two years later,
naturally it was unable to detect the scheme. For
its negligence and inaction, the Court cannot
sympathize with its plight. Instead, its case
precisely provides the strong argument for
requiring insurers to diligently conduct
investigations on each policy they issue within the
two-year period mandated under Section 48, and
not after claims for insurance proceeds are filed
with them.
Besides, if insurers cannot vouch for the integrity
and honesty of their insurance agents/salesmen
and the insurance policies they issue, then they
should cease doing business. If they could not
properly screen their agents or salesmen before
taking them in to market their products, or if they
do not thoroughly investigate the insurance
contracts they enter into with their clients, then
they have only themselves to blame. Otherwise
said, insurers cannot be allowed to collect
premiums on insurance policies, use these
amounts collected and invest the same through
the years, generating profits and returns
therefrom for their own benefit, and thereafter
conveniently deny insurance claims by
questioning the authority or integrity of their own
agents or the insurance policies they issued to
their premium-paying clients. This is exactly one
of the schemes which Section 48 aims to prevent.
Insurers may not be allowed to delay the payment
of claims by filing frivolous cases in court, hoping
that the inevitable may be put off for years – or
even decades – by the pendency of these
unnecessary court cases. In the meantime, they
benefit from collecting the interest and/or returns
on both the premiums previously paid by the
insured and the insurance proceeds which should
otherwise go to their beneficiaries. The business
of insurance is a highly regulated commercial
activity in the country,29 and is imbued with public
interest.30 "An insurance contract is a contract of
adhesion which must be construed liberally in
favor of the insured and strictly against the
insurer in order to safeguard the former’s
interest."31
WHEREFORE, the Petition is DENIED. The assailed
September 28, 2005 Decision and the November 9,
2006 Resolution of the Court of Appeals in CA-G.R.
CV No. 62286 are AFFIRMED.
SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
77 |I N S U R A N C E
RIGHT TO RESCIND
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 48049 June 29, 1989
EMILIO TAN, JUANITO TAN, ALBERTO TAN and
ARTURO TAN, petitioners,
vs.
THE COURT OF APPEALS and THE PHILIPPINE
AMERICAN LIFE INSURANCE
COMPANY, respondents.
O.F. Santos & P.C. Nolasco for petitioners.
Ferry, De la Rosa and Associates for private
respondent.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the
Court of Appeals' decision affirming the decision
of the Insurance Commissioner which dismissed
the petitioners' complaint against respondent
Philippine American Life Insurance Company for
the recovery of the proceeds from their late
father's policy. The facts of the case as found by
the Court of Appeals are:
Petitioners appeal from the
Decision of the Insurance
Commissioner dismissing herein
petitioners' complaint against
respondent Philippine American
Life Insurance Company for the
recovery of the proceeds of
Policy No. 1082467 in the
amount of P 80,000.00.
On September 23,1973, Tan Lee
Siong, father of herein
petitioners, applied for life
insurance in the amount of P
80,000.00 with respondent
company. Said application was
approved and Policy No.
1082467 was issued effective
November 6,1973, with
petitioners the beneficiaries
thereof (Exhibit A).
On April 26,1975, Tan Lee Siong
died of hepatoma (Exhibit B).
Petitioners then filed with
respondent company their claim
for the proceeds of the life
insurance policy. However, in a
letter dated September 11, 1975,
respondent company denied
petitioners' claim and rescinded
the policy by reason of the
alleged misrepresentation and
concealment of material facts
made by the deceased Tan Lee
Siong in his application for
insurance (Exhibit 3). The
premiums paid on the policy
were thereupon refunded .
Alleging that respondent
company's refusal to pay them
the proceeds of the policy was
unjustified and unreasonable,
petitioners filed on November 27,
1975, a complaint against the
former with the Office of the
Insurance Commissioner,
docketed as I.C. Case No. 218.
After hearing the evidence of
both parties, the Insurance
Commissioner rendered
judgment on August 9, 1977,
dismissing petitioners'
complaint. (Rollo, pp. 91-92)
The Court of Appeals dismissed ' the petitioners'
appeal from the Insurance Commissioner's
decision for lack of merit
Hence, this petition.
The petitioners raise the following issues in their
assignment of errors, to wit:
A. The conclusion in law of
respondent Court that
respondent insurer has the right
to rescind the policy contract
when insured is already dead is
not in accordance with existing
law and applicable jurisprudence.
B. The conclusion in law of
respondent Court that
respondent insurer may be
allowed to avoid the policy on
grounds of concealment by the
deceased assured, is contrary to
the provisions of the policy
contract itself, as well as, of
applicable legal provisions and
established jurisprudence.
C. The inference of respondent
Court that respondent insurer
was misled in issuing the policy
are manifestly mistaken and
contrary to admitted evidence.
(Rollo, p. 7)
The petitioners contend that the respondent
company no longer had the right to rescind the
contract of insurance as rescission must allegedly
be done during the lifetime of the insured within
78 |I N S U R A N C E
RIGHT TO RESCIND
two years and prior to the commencement of
action.
The contention is without merit.
The pertinent section in the Insurance Code
provides:
Section 48. 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 rescindable by reason
of the fraudulent concealment or
misrepresentation of the insured
or his agent.
According to the petitioners, the Insurance Law
was amended and the second paragraph of Section
48 added to prevent the insurance company from
exercising a right to rescind after the death of the
insured.
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 noted by the Court of Appeals, to wit:
The policy was issued on
November 6,1973 and the
insured died on April 26,1975.
The policy was thus in force for a
period of only one year and five
months. Considering that the
insured died before the two-year
period had lapsed, respondent
company is not, therefore, barred
from proving that the policy is
void ab initio by reason of the
insured's fraudulent concealment
or misrepresentation. Moreover,
respondent company rescinded
the contract of insurance and
refunded the premiums paid on
September 11, 1975, previous to
the commencement of this action
on November 27,1975. (Rollo, pp.
99-100)
xxx xxx xxx
The petitioners contend that there could have
been no concealment or misrepresentation by
their late father because Tan Lee Siong did not
have to buy insurance. He was only pressured by
insistent salesmen to do so. The petitioners state:
Here then is a case of an assured
whose application was submitted
because of repeated visits and
solicitations by the insurer's
agent. Assured did not knock at
the door of the insurer to buy
insurance. He was the object of
solicitations and visits.
Assured was a man of means. He
could have obtained a bigger
insurance, not just P 80,000.00. If
his purpose were to
misrepresent and to conceal his
ailments in anticipation of death
during the two-year period, he
certainly could have gotten a
bigger insurance. He did not.
Insurer Philamlife could have
presented as witness its Medical
Examiner Dr. Urbano Guinto. It
was he who accomplished the
application, Part II, medical.
Philamlife did not.
Philamlife could have put to the
witness stand its Agent
Bienvenido S. Guinto, a relative to
Dr. Guinto, Again Philamlife did
not. (pp. 138139, Rollo)
xxx xxx xxx
This Honorable Supreme Court
has had occasion to denounce the
pressure and practice indulged in
by agents in selling insurance. At
one time or another most of us
have been subjected to that
pressure, that practice. This court
took judicial cognizance of the
whirlwind pressure of insurance
selling-especially of the agent's
practice of 'supplying the
information, preparing and answ
ering the
application, submitting the
application to their
companies, concluding the
transactions and
otherwise smoothing out all
difficulties.
79 |I N S U R A N C E
RIGHT TO RESCIND
We call attention to what this Honorable Court another could be counted by the conducted before its issuance otherwise the
said in Insular Life v. Feliciano, et al., 73 Phil. 201; fingers. (pp. 140-142, Rollo) insurer "waives whatever imperfection by
at page 205: ratification."
xxx xxx xxx
It is of common knowledge that We agree with the Court of Appeals which ruled:
the selling of insurance today is In the face of all the above, it
subjected to the would be unjust if, having been On the other hand, petitioners
whirlwind pressure of modern subjected to the whirlwind argue that no evidence was
salesmanship. pressure of insurance presented by respondent
salesmanship this Court itself has company to show that the
Insurance companies send long denounced, the assured who questions appearing in Part II of
detailed instructions to their dies within the two-year period, the application for insurance
agents to solicit and procure should stand charged of were asked, explained to and
applications. fraudulent concealment and understood by the deceased so as
misrepresentation." (p. 142, to prove concealment on his part.
These agents are to be found all Rollo) The same is not well taken. The
over the length and breadth of deceased, by affixing his
the land. They are stimulated to The legislative answer to the arguments posed by signature on the application
more active efforts by contests the petitioners is the "incontestability clause" form, affirmed the correctness of
and by the keen competition added by the second paragraph of Section 48. all the entries and answers
offered by the other rival appearing therein. It is but to be
insurance companies. The insurer has two years from the date of expected that he, a businessman,
issuance of the insurance contract or of its last would not have affixed his
They supply all the information, reinstatement within which to contest the policy, signature on the application form
prepare and answer the whether or not, the insured still lives within such unless he clearly understood its
applications, submit the period. After two years, the defenses of significance. For, the
applications to their companies, concealment or misrepresentation, no matter how presumption is that a person
conclude the transactions, and patent or well founded, no longer lie. Congress felt intends the ordinary
otherwise smooth out all this was a sufficient answer to the various tactics consequence of his voluntary act
difficulties. employed by insurance companies to avoid and takes ordinary care of his
liability. The petitioners' interpretation would concerns. [Sec. 5(c) and (d), Rule
give rise to the incongruous situation where the 131, Rules of Court].
The agents in short do what the
company set them out to do. beneficiaries of an insured who dies right after
taking out and paying for a life insurance policy, The evidence for respondent
would be allowed to collect on the policy even if company shows that on
The Insular Life case was decided
the insured fraudulently concealed material facts. September 19,1972, the deceased
some forty years ago when the was examined by Dr. Victoriano
pressure of insurance
The petitioners argue that no evidence was Lim and was found to be diabetic
salesmanship was not and hypertensive; that by
overwhelming as it is now; when presented to show that the medical terms were
explained in a layman's language to the insured. January, 1973, the deceased was
the population of this country
They state that the insurer should have presented complaining of progressive
was less than one-fourth of what
its two medical field examiners as witnesses. weight loss and abdominal pain
it is now; when the insurance
Moreover, the petitioners allege that the policy and was diagnosed to be
companies competing with one
intends that the medical examination must be suffering from hepatoma, (t.s.n.

80 |I N S U R A N C E
RIGHT TO RESCIND
August 23, 1976, pp. 8-10;
Exhibit 2). Another physician, Dr.
Wenceslao Vitug, testified that
the deceased came to see him on
December 14, 1973 for
consolation and claimed to have
been diabetic for five years.
(t.s.n., Aug. 23,1976, p. 5; Exhibit
6) Because of the concealment
made by the deceased of his
consultations and treatments for
hypertension, diabetes and liver
disorders, respondent company
was thus misled into accepting
the risk and approving his
application as medically standard
(Exhibit 5- C) and dispensing
with further medical
investigation and examination
(Exhibit 5-A). For as long as no
adverse medical history is
revealed in the application form,
an applicant for insurance is
presumed to be healthy and
physically fit and no further
medical investigation or
examination is conducted by
respondent company. (t.s.n., April
8,1976, pp. 6-8). (Rollo, pp. 96-
98)
There is no strong showing that we should apply
the "fine print" or "contract of adhesion" rule in
this case. (Sweet Lines, Inc. v. Teves, 83 SCRA 361
[1978]). The petitioners cite:
It is a matter of common
knowledge that large amounts of
money are collected from
ignorant persons by companies
and associations which adopt
high sounding titles and print the
amount of benefits they agree to
pay in large black-faced type,
following such undertakings by Feliciano, took no part.
fine print conditions which
destroy the substance of the
promise. All provisions,
conditions, or exceptions which
in any way tend to work a
forfeiture of the policy should be
construed most strongly against
those for whose benefit they are
inserted, and most favorably
toward those against whom they
are meant to operate. (Trinidad v.
Orient Protective Assurance
Assn., 67 Phil. 184)
There is no showing that the questions in the
application form for insurance regarding the
insured's medical history are in smaller print than
the rest of the printed form or that they are
designed in such a way as to conceal from the
applicant their importance. If a warning in bold
red letters or a boxed warning similar to that
required for cigarette advertisements by the
Surgeon General of the United States is necessary,
that is for Congress or the Insurance Commission
to provide as protection against high pressure
insurance salesmanship. We are limited in this
petition to ascertaining whether or not the
respondent Court of Appeals committed
reversible error. It is the petitioners' burden to
show that the factual findings of the respondent
court are not based on substantial evidence or
that its conclusions are contrary to applicable law
and jurisprudence. They have failed to discharge
that burden.
WHEREFORE, the petition is hereby DENIED for
lack of merit. The questioned decision of the Court
of Appeals is AFFIRMED.
SO ORDERED.
Fernan, (C.J., Chairman), Bidin and Cortes, JJ.,
concur.
81 |I N S U R A N C E
THE POLICY, ITS INTERPRETATION AND COVER NOTES
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-15774             November 29, 1920
PILAR C. DE LIM, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF
CANADA, defendant-appellee.
Sanz and Luzuriaga for appellant.
Cohn and Fisher for appellee.
MALCOLM, J.:
This is an appeal by plaintiff from an order of the
Court of First Instance of Zamboanga sustaining a
demurrer to plaintiff's complaint upon the ground
that it fails to state a cause of action.
As the demurrer had the effect of admitting the
material facts set forth in the complaint, the facts
are those alleged by the plaintiff. On July 6, 1917,
Luis Lim y Garcia of Zamboanga made application
to the Sun Life Assurance Company of Canada for
a policy of insurance on his life in the sum of
P5,000. In his application Lim designated his wife,
Pilar C. de Lim, the plaintiff herein, as the
beneficiary. The first premium of P433 was paid
by Lim, and upon such payment the company
issued what was called a "provisional policy." Luis
Lim y Garcia died on August 23, 1917, after the
issuance of the provisional policy but before
approval of the application by the home office of
the insurance company. The instant action is
brought by the beneficiary, Pilar C. de Lim, to
recover from the Sun Life Assurance Company of
Canada the sum of P5,000, the amount named in
the provisional policy.
The "provisional policy" upon which this action
rests reads as follows:
Received (subject to the following
stipulations and agreements) the
sum of four hundred and thirty-
three pesos, being the amount of
the first year's premium for a Life
Assurance Policy on the life of
Mr. Luis D. Lim y Garcia of
Zamboanga for P5,000, for which
an application dated the 6th day
of July, 1917, has been made to
the Sun Life Assurance Company
of Canada.
The above-mentioned life is to be
assured in accordance with the
terms and conditions contained
or inserted by the Company in
the policy which may be granted
by it in this particular case
for four months only from the
date of the application, provided
that the Company shall confirm
this agreement by issuing a
policy on said application when
the same shall be submitted to
the Head Office in Montreal.
Should the Company not issue
such a policy, then this
agreement shall be null and
void ab initio, and the Company
shall be held not to have been on
the risk at all, but in such case the
amount herein acknowledged
shall be returned.
[SEAL.]           (Sgd.) T. B.
MACAULAY, President.
(Sgd.) A. F. Peters, Agent.                
Our duty in this case is to ascertain the correct
meaning of the document above quoted. A perusal
of the same many times by the writer and by other
members of the court leaves a decided impression
of vagueness in the mind. Apparently it is to be a
provisional policy "for four months only from the
date of this application." We use the term
"apparently" advisedly, because immediately
following the words fixing the four months period
comes the word "provided" which has the
meaning of "if." Otherwise stated, the policy for
four months is expressly made subjected to the
affirmative condition that "the company shall
confirm this agreement by issuing a policy on said
application when the same shall be submitted to
the head office in Montreal." To reenforce the
same there follows the negative condition —
Should the company not issue such a policy, then
this agreement shall be null and void ab initio, and
the company shall be held not to have been on the
risk." Certainly, language could hardly be used
which would more clearly stipulate that the
agreement should not go into effect until the home
office of the company should confirm it by issuing
a policy. As we read and understand the so-called
provisional policy it amounts to nothing but an
acknowledgment on behalf of the company, that it
has received from the person named therein the
sum of money agreed upon as the first year's
premium upon a policy to be issued upon the
application, if the application is accepted by the
company.
It is of course a primary rule that a contract of
insurance, like other contracts, must be assented
to by both parties either in person or by their
agents. So long as an application for insurance has
not been either accepted or rejected, it is merely
an offer or proposal to make a contract. The
82 |I N S U R A N C E
THE POLICY, ITS INTERPRETATION AND COVER NOTES
contract, to be binding from the date of the
application, must have been a completed contract,
one that leaves nothing to be done, 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. Our view is,
that a contract of insurance was not here
consummated by the parties.lawph!l.net
Appellant relies on Joyce on Insurance. Beginning
at page 253, of Volume I, Joyce states the general
rule concerning the agent's receipt pending
approval or issuance of policy. The first rule which
Joyce lays down is this: If the act of acceptance of
the risk by the agent and the giving by him of a
receipt, is within the scope of the agent's
authority, and nothing remains but to issue a
policy, then the receipt will bind the company.
This rule does not apply, for while here nothing
remained but to issue the policy, this was made an
express condition to the contract. The second rule
laid down by Joyce is this: Where an agreement is
made between the applicant and the agent
whether by signing an application containing such
condition, or otherwise, that no liability shall
attach until the principal approves the risk and a
receipt is given buy the agent, such acceptance is
merely conditional, and it subordinated to the act
of the company in approving or rejecting; so in life
insurance a "binding slip" or "binding receipt"
does not insure of itself. This is the rule which we
believe applies to the instant case. The third rule
announced by Joyce is this: Where the acceptance
by the agent is within the scope of his authority a
receipt containing a contract for insurance for a
specific time which is not absolute but conditional,
upon acceptance or rejection by the principal,
covers the specified period unless the risk is
declined within that period. The case cited by
Joyce to substantiate the last principle is that a
Goodfellow vs. Times & Beacon Assurance Com.
(17 U. C. Q. B., 411), not available.
The two cases most nearly in point come from the
federal courts and the Supreme Court of Arkansas.
In the case of Steinle vs. New York Life Insurance
Co. ([1897], 81 Fed., 489} the facts were that the
amount of the first premium had been paid to an
insurance agent and a receipt given therefor. The
receipt, however, expressly declared that if the
application was accepted by the company, the
insurance shall take effect from the date of the
application but that if the application was not
accepted, the money shall be returned. The trite
decision of the circuit court of appeal was, "On the
conceded facts of this case, there was no contract
to life insurance perfected and the judgment of the
circuit court must be affirmed."
In the case of Cooksey vs. Mutual Life Insurance
Co. ([1904], 73 Ark., 117) the person applying for
the life insurance paid and amount equal to the
first premium, but the application and the receipt
for the money paid, stipulated that the insurance
was to become effective only when the application
was approved and the policy issued. The court
held that the transaction did not amount to an
agreement for preliminary or temporary
insurance. It was said:
It is not an unfamiliar custom among life
insurance companies in the operation of the
business, upon receipt of an application for
insurance, to enter into a contract with the
applicant in the shape of a so-called "binding
receipt" for temporary insurance pending the
consideration of the application, to last until the
policy be issued or the application rejected, and
such contracts are upheld and enforced when the
applicant dies before the issuance of a policy or
final rejection of the application. It is held, too,
that such contracts may rest in parol. Counsel for
appellant insists that such a preliminary contract
for temporary insurance was entered into in this
instance, but we do not think so. On the contrary,
the clause in the application and the receipt given
by the solicitor, which are to be read together,
stipulate expressly that the insurance shall
become effective only when the "application shall
be approved and the policy duly signed by the
secretary at the head office of the company and
issued." It constituted no agreement at all for
preliminary or temporary insurance; Mohrstadt
vs. Mutual Life Ins. Co., 115 Fed., 81, 52 C. C. A.,
675; Steinle vs. New York Life Ins. Co., 81 Fed.,
489, 26 C. C. A., 491." (See further Weinfeld vs.
Mutual Reserve Fund Life Ass'n. [1892], 53 Fed,
208' Mohrstadt vs. Mutual Life Insurance Co.
[1902], 115 Fed., 81; Insurance co. vs. Young's
Administrator [1875], 90 U. S., 85; Chamberlain vs.
Prudential Insurance Company of America [1901],
109 Wis., 4; Shawnee Mut. Fire Ins. Co. vs. McClure
[1913], 39 Okla., 509; Dorman vs. Connecticut Fire
Ins. Co. [1914], 51 contra, Starr vs. Mutual Life Ins.
Co. [1905], 41 Wash., 228.)
We are of the opinion that the trial court
committed no error in sustaining the demurrer
and dismissing the case. It is to be noted, however,
that counsel for appellee admits the liability of the
company for the return of the first premium to the
estate of the deceased. It is not to be doubted but
that the Sun Life Assurance Company of Canada
will immediately, on the promulgation of this
decision, pay to the estate of the late Luis Lim y
Garcia the of P433.
The order appealed from, in the nature of a final
judgment is affirmed, without special finding as to
costs in this instance. So ordered.
Mapa, C.J., Johnson, Araullo, Avanceña and
Villamor, JJ., concur.
83 |I N S U R A N C E
THE POLICY, ITS INTERPRETATION AND COVER NOTES
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-38613 February 25, 1982
PACIFIC TIMBER EXPORT
CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and
WORKMEN'S INSURANCE COMPANY,
INC., respondents.
DE CASTRO, ** J.:
This petition seeks the review of the decision of
the Court of Appeals reversing the decision of the
Court of First Instance of Manila in favor of
petitioner and against private respondent which
ordered the latter to pay the sum of Pll,042.04
with interest at the rate of 12% interest from
receipt of notice of loss on April 15, 1963 up to the
complete payment, the sum of P3,000.00 as
attorney's fees and the costs 1 thereby dismissing
petitioner s complaint with costs. 2
The findings of the of fact of the Court of Appeals,
which are generally binding upon this Court,
Except as shall be indicated in the discussion of
the opinion of this Court the substantial
correctness of still particular finding having been
disputed, thereby raising a question of law
reviewable by this Court 3 are as follows:
March 19, l963, the plaintiff
secured temporary insurance
from the defendant for its
exportation of 1,250,000 board
feet of Philippine Lauan and
Apitong logs to be shipped from
the Diapitan. Bay, Quezon
Province to Okinawa and Tokyo,
Japan. The defendant issued on
said date Cover Note No. 1010,
insuring the said cargo of the
plaintiff "Subject to the Terms
and Conditions of the
WORKMEN'S INSURANCE
COMPANY, INC. printed Marine
Policy form as filed with and
approved by the Office of the
Insurance Commissioner (Exhibit
A).
The regular marine cargo policies
were issued by the defendant in
favor of the plaintiff on April 2,
1963. The two marine policies
bore the numbers 53 HO 1032
and 53 HO 1033 (Exhibits B and
C, respectively). Policy No. 53 H0
1033 (Exhibit B) was for 542
pieces of logs equivalent to
499,950 board feet. Policy No. 53
H0 1033 was for 853 pieces of
logs equivalent to 695,548 board
feet (Exhibit C). The total cargo
insured under the two marine
policies accordingly consisted of
1,395 logs, or the equivalent of
1,195.498 bd. ft.
After the issuance of Cover Note
No. 1010 (Exhibit A), but before
the issuance of the two marine
policies Nos. 53 HO 1032 and 53
HO 1033, some of the logs
intended to be exported were
lost during loading operations in
the Diapitan Bay. The logs were
to be loaded on the 'SS Woodlock'
which docked about 500 meters
from the shoreline of the
Diapitan Bay. The logs were
taken from the log pond of the
plaintiff and from which they
were towed in rafts to the vessel.
At about 10:00 o'clock a. m. on
March 29, 1963, while the logs
were alongside the vessel, bad
weather developed resulting in
75 pieces of logs which were
rafted together co break loose
from each other. 45 pieces of logs
were salvaged, but 30 pieces
were verified to have been lost or
washed away as a result of the
accident.
In a letter dated April 4, 1963, the plaintiff
informed the defendant about the loss of
'appropriately 32 pieces of log's during loading of
the 'SS Woodlock'. The said letter (Exhibit F) reads
as follows:
April 4, 1963
Workmen's Insurance Company,
Inc. Manila, Philippines
Gentlemen:
This has reference to Insurance
Cover Note No. 1010 for
shipment of 1,250,000 bd. ft.
Philippine Lauan and Apitong
Logs. We would like to inform
you that we have received
advance preliminary report from
our Office in Diapitan, Quezon
that we have lost approximately
32 pieces of logs during loading
of the SS Woodlock.
We will send you an accurate
report all the details including
84 |I N S U R A N C E
THE POLICY, ITS INTERPRETATION AND COVER NOTES
values as soon as same will be
reported to us.
Thank you for your attention, we
wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT
CORPORATION
(Sgd.) EMMANUEL S. ATILANO
Asst. General Manager.
Although dated April 4, 1963, the
letter was received in the office of
the defendant only on April 15,
1963, as shown by the stamp
impression appearing on the left
bottom corner of said letter. The
plaintiff subsequently submitted
a 'Claim Statement demanding
payment of the loss under
Policies Nos. 53 HO 1032 and 53
HO 1033, in the total amount of
P19,286.79 (Exhibit G).
On July 17, 1963, the defendant
requested the First Philippine
Adjustment Corporation to
inspect the loss and assess the
damage. The adjustment
company submitted its 'Report
on August 23, 1963 (Exhibit H).
In said report, the adjuster found
that 'the loss of 30 pieces of logs
is not covered by Policies Nos. 53
HO 1032 and 1033 inasmuch as
said policies covered the actual
number of logs loaded on board
the 'SS Woodlock' However, the
loss of 30 pieces of logs is within
the 1,250,000 bd. ft. covered by
Cover Note 1010 insured for On June 26, 1964, the defendant
$70,000.00. informed the Insurance
Commissioner that, on advice of
On September 14, 1963, the their attorneys, the claim of the
adjustment company submitted a plaintiff is being denied on the
computation of the defendant's ground that the cover note is null
probable liability on the loss and void for lack of valuable
sustained by the shipment, in the consideration (Exhibit M). 4
total amount of Pl1,042.04
(Exhibit 4). Petitioner assigned as errors of the Court of
Appeals, the following:
On January 13, 1964, the
defendant wrote the plaintiff I
denying the latter's claim, on the
ground they defendant's THE COURT OF APPEALS ERRED
investigation revealed that the IN HOLDING THAT THE COVER
entire shipment of logs covered NOTE WAS NULL AND VOID FOR
by the two marines policies No. LACK OF VALUABLE
53 110 1032 and 713 HO 1033 CONSIDERATION BECAUSE THE
were received in good order at COURT DISREGARDED THE
their point of destination. It was PROVEN FACTS THAT
further stated that the said loss PREMIUMS FOR THE
may be considered as covered COMPREHENSIVE INSURANCE
under Cover Note No. 1010 COVERAGE THAT INCLUDED
because the said Note had THE COVER NOTE WAS PAID BY
become 'null and void by virtue PETITIONER AND THAT
of the issuance of Marine Policy INCLUDED THE COVER NOTE
Nos. 53 HO 1032 and WAS PAID BY PETITIONER AND
1033'(Exhibit J-1). The denial of THAT NO SEPARATE PREMIUMS
the claim by the defendant was ARE COLLECTED BY PRIVATE
brought by the plaintiff to the RESPONDENT ON ALL ITS
attention of the Insurance COVER NOTES.
Commissioner by means of a
letter dated March 21, 1964
II
(Exhibit K). In a reply letter dated
March 30, 1964, Insurance
THE COURT OF APPEALS ERRED
Commissioner Francisco Y.
IN HOLDING THAT PRIVATE
Mandanas observed that 'it is
RESPONDENT WAS RELEASED
only fair and equitable to
FROM LIABILITY UNDER THE
indemnify the insured under
COVER NOTE DUE TO
Cover Note No. 1010', and
UNREASONABLE DELAY IN
advised early settlement of the
GIVING NOTICE OF LOSS
said marine loss and salvage
BECAUSE THE COURT
claim (Exhibit L).
DISREGARDED THE PROVEN
85 |I N S U R A N C E
THE POLICY, ITS INTERPRETATION AND COVER NOTES
FACT THAT PRIVATE
RESPONDENT DID NOT
PROMPTLY AND SPECIFICALLY
OBJECT TO THE CLAIM ON THE
GROUND OF DELAY IN GIVING
NOTICE OF LOSS AND,
CONSEQUENTLY, OBJECTIONS
ON THAT GROUND ARE WAIVED
UNDER SECTION 84 OF THE
INSURANCE ACT. 5
1. Petitioner contends that the Cover Note was
issued with a consideration when, by express
stipulation, the cover note is made subject to the
terms and conditions of the marine policies, and
the payment of premiums is one of the terms of
the policies. From this undisputed fact, We uphold
petitioner's submission that the Cover Note was
not without consideration for which the
respondent court held the Cover Note as null and
void, and denied recovery therefrom. The fact that
no separate premium was paid on the Cover Note
before the loss insured against occurred, does not
militate against the validity of petitioner's
contention, for no such premium could have been
paid, since by the nature of the Cover Note, it did
not contain, as all Cover Notes do not contain
particulars of the shipment that would serve as
basis for the computation of the premiums. As a
logical consequence, no separate premiums are
intended or required to be paid on a Cover Note.
This is a fact admitted by an official of respondent
company, Juan Jose Camacho, in charge of issuing
cover notes of the respondent company (p. 33, tsn,
September 24, 1965).
At any rate, it is not disputed that petitioner paid
in full all the premiums as called for by the
statement issued by private respondent after the
issuance of the two regular marine insurance
policies, thereby leaving no account unpaid by
petitioner due on the insurance coverage, which
must be deemed to include the Cover Note. If the
Note is to be treated as a separate policy instead
of integrating it to the regular policies
subsequently issued, the purpose and function of
the Cover Note would be set at naught or rendered
meaningless, for it is in a real sense a contract, not
a mere application for insurance which is a mere
offer. 6
It may be true that the marine insurance policies
issued were for logs no longer including those
which had been lost during loading operations.
This had to be so because the risk insured against
is not for loss during operations anymore, but for
loss during transit, the logs having already been
safely placed aboard. This would make no
difference, however, insofar as the liability on the
cover note is concerned, for the number or volume
of logs lost can be determined independently as in
fact it had been so ascertained at the instance of
private respondent itself when it sent its own
adjuster to investigate and assess the loss, after
the issuance of the marine insurance policies.
The adjuster went as far as submitting his report
to respondent, as well as its computation of
respondent's liability on the insurance coverage.
This coverage could not have been no other than
what was stipulated in the Cover Note, for no loss
or damage had to be assessed on the coverage
arising from the marine insurance policies. For
obvious reasons, it was not necessary to ask
petitioner to pay premium on the Cover Note, for
the loss insured against having already occurred,
the more practical procedure is simply to deduct
the premium from the amount due the petitioner
on the Cover Note. The non-payment of premium
on the Cover Note is, therefore, no cause for the
petitioner to lose what is due it as if there had
been payment of premium, for non-payment by it
was not chargeable against its fault. Had all the
logs been lost during the loading operations, but
after the issuance of the Cover Note, liability on
the note would have already arisen even before
payment of premium. This is how the cover note
as a "binder" should legally operate otherwise, it
would serve no practical purpose in the realm of
commerce, and is supported by the doctrine that
where a policy is delivered without requiring
payment of the premium, the presumption is that
a credit was intended and policy is valid. 7
2. The defense of delay as raised by private
respondent in resisting the claim cannot be
sustained. The law requires this ground of delay to
be promptly and specifically asserted when a
claim on the insurance agreement is made. The
undisputed facts show that instead of invoking the
ground of delay in objecting to petitioner's claim
of recovery on the cover note, it took steps clearly
indicative that this particular ground for objection
to the claim was never in its mind. The nature of
this specific ground for resisting a claim places the
insurer on duty to inquire when the loss took
place, so that it could determine whether delay
would be a valid ground upon which to object to a
claim against it.
As already stated earlier, private respondent's
reaction upon receipt of the notice of loss, which
was on April 15, 1963, was to set in motion from
July 1963 what would be necessary to determine
the cause and extent of the loss, with a view to the
payment thereof on the insurance agreement.
Thus it sent its adjuster to investigate and assess
the loss in July, 1963. The adjuster submitted his
report on August 23, 1963 and its computation of
respondent's liability on September 14, 1963.
From April 1963 to July, 1963, enough time was
available for private respondent to determine if
petitioner was guilty of delay in communicating
the loss to respondent company. In the
proceedings that took place later in the Office of
the Insurance Commissioner, private respondent
should then have raised this ground of delay to
avoid liability. It did not do so. It must be because
it did not find any delay, as this Court fails to find a
real and substantial sign thereof. But even on the
assumption that there was delay, this Court is
satisfied and convinced that as expressly provided
86 |I N S U R A N C E
THE POLICY, ITS INTERPRETATION AND COVER NOTES
by law, waiver can successfully be raised against
private respondent. Thus Section 84 of the
Insurance Act provides:

Section 84.—Delay in the

presentation to an insurer of
notice or proof of loss is waived if
caused by any act of his or if he
omits to take objection promptly
and specifically upon that
ground.

From what has been said, We find duly

substantiated petitioner's assignments of error.

ACCORDINGLY, the appealed decision is set aside

and the decision of the Court of First Instance is
reinstated in toto with the affirmance of this
Court. No special pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez

Guerrero, Melencio-Herrera and Plana, JJ., concur.

87 |I N S U R A N C E
PRESCRIPTION OF ACTION; AGREEMENT TO FIX PERIOD OF PRESCRIPTION
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 152334               September 24, 2014
H.H. HOLLERO CONSTRUCTION, INC., Petitioner,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM
and POOL OF MACHINERY
INSURERS, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on
certiorari1 are the Decision2 dated March 13, 2001
and the Resolution3 dated February 21, 2002 of
the Court of Appeals (CA) in CA-G.R. CV No. 63175,
which set aside and reversed the Judgment 4 dated
February 3, 1999 of the Regional Trial Court of
Quezon City, Branch 220 (RTC) in Civil Case No.
91-10144, and dismissed petitioner H.H. Hollero
Construction, Inc.' s (petitioner) Complaint for
Sum of Money and Damages under the insurance
policies issued by public respondent, the
Government Service Insurance System (GSIS), on
the ground of prescription.
The Facts
On April 26, 1988, the GSIS and petitioner entered
into a Project Agreement (Agreement) whereby
the latter undertook the development of a GSIS
housing project known as Modesta Village Section
B (Project).5 Petitioner obligated itself to
insurethe Project, including all the improvements,
upon the execution of the Agreement under a
Contractors’ All Risks (CAR) Insurance with the
GSIS General Insurance Department for an amount
equal to its cost or sound value, which shall not be
subject to any automatic annual reduction.6
Pursuant to its undertaking, petitioner secured
CAR Policy No. 88/0857 in the amount of
₱1,000,000.00 for land development, which was
later increased to ₱10,000,000.00, 8 effective from
May 2, 1988 to May 2, 1989. 9 Petitioner likewise
secured CAR Policy No. 88/08610 in the amount of
₱1,000,000.00 for the construction of twenty (20)
housing units, which amount was later increased
to ₱17,750,000.0011 to cover the construction of
another 355 new units, effective from May 2, 1988
toJune 1, 1989.12 In turn, the GSIS reinsured CAR
Policy No. 88/085 with respondent Pool of
Machinery Insurers (Pool).13
Under both policies, it was provided that: (a) there
must be prior notice of claim for loss, damage or
liability within fourteen (14) days from the
occurrence of the loss or damage;14 (b) all benefits
thereunder shall be forfeited if no action is
instituted within twelve(12) months after the
rejection of the claim for loss, damage or
liability;15 and (c) if the sum insured is found to be
less than the amount required to be insured, the
amount recoverable shall be reduced tosuch
proportion before taking into account the
deductibles stated in the schedule (average clause
provision).16
During the construction, three (3) typhoons hit
the country, namely, Typhoon Biring from June 1
to June 4, 1988, Typhoon Huaning on July 29,
1988, and Typhoon Saling on October 11, 1989,
which caused considerable damage to the
Project.17 Accordingly, petitioner filed several
claims for indemnity with the GSIS on June 30,
1988,18 August 25, 1988,19 and October 18,
1989,20 respectively.
In a letter21 dated April 26, 1990, the GSIS rejected
petitioner’s indemnity claims for the damages
wrought by Typhoons Biring and Huaning, finding
that no amount is recoverable pursuant to the
average clause provision under the policies. 22 In a
letter23 dated June 21, 1990, the GSIS similarly
rejected petitioner’s indemnity claim for damages
wrought by Typhoon Saling on a "no loss" basis,
itappearing from its records that the policies were
not renewed before the onset of the said
typhoon.24
In a letter25 dated April 18, 1991, petitioner
impugned the rejection of its claims for
damages/loss on accountof Typhoon Saling, and
reiterated its demand for the settlement of its
claims.
On September 27, 1991, petitioner filed a
Complaint26 for Sum of Money and Damages
before the RTC, docketed as Civil Case No. 91-
10144,27 which was opposed by the GSIS through a
Motion to Dismiss28 dated October 25, 1991 on the
ground that the causes of action stated therein are
barred by the twelve-month limitation provided
under the policies, i.e., the complaint was filed
more than one(1) year from the rejection of the
indemnity claims. The RTC, in an Order29 dated
May 13, 1993, denied the said motion; hence, the
GSIS filed its answer30 with counterclaims for
litigation expenses, attorney’s fees, and exemplary
damages. Subsequently, the GSIS filed a Third
Party Complaint31 for indemnification against
Pool, the reinsurer.
The RTC Ruling
In a Judgment32 dated February 3, 1999, the RTC
granted petitioner’s indemnity claims. It held that:
(a) the average clauseprovision in the policies
which did not contain the assentor signature of
the petitioner cannot limit the GSIS’ liability, for
being inefficacious and contrary to public
policy;33 (b) petitioner has established that the
damages it sustained were due to the peril insured
against;34 and (c) CAR Policy No. 88/086 was
88 |I N S U R A N C E
PRESCRIPTION OF ACTION; AGREEMENT TO FIX PERIOD OF PRESCRIPTION
deemed renewed when the GSIS withheld the
amount of 35,855.00 corresponding to the
premium payable,35 from the retentions it released
to petitioner.36 The RTC thereby declared the GSIS
liable for petitioner’s indemnity claims for the
damages brought about by the said typhoons, less
the stipulated deductions under the policies,plus
6% legal interest from the dates of extrajudicial
demand, as well as for attorney’s fees and costs of
suit. It further dismissed for lack of merit GSIS’s
counterclaim and third party complaint.37
Dissatisfied, the GSIS elevated the matter to the
CA. The CA Ruling In a Decision38 dated March 13,
2001, the CAset aside and reversed the RTC
Judgment, thereby dismissing the complaint. It
ruled that the complaint filed on September 27,
1991 was barred by prescription, having been
commenced beyond the twelve-month limitation
provided under the policies, reckoned from the
final rejection of the indemnity claims on April 26,
1990 and June 21, 1990. The Issue Before the
Court
The essential issue for the Court’s resolution is
whether or not the CA committed reversible error
in dismissing the complaint onthe ground of
prescription.
The Court’s Ruling
The petition lacks merit.
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.39
Section 1040 of the General Conditions of the
subject CAR Policies commonly read:
10. If a claim is in any respect fraudulent, or if any
false declaration is 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 a
claim is made and rejected and no action or suit is
commenced within twelve months after such
rejectionor, in case of arbitration taking place as
provided herein, within twelve months after the
Arbitrator or Arbitrators or Umpire have made
their award, all benefit under this Policy shall be
forfeited. (Emphases supplied)
In this relation, case law illumines that the
prescriptive period for the insured’s action for
indemnity should bereckoned from the "final
rejection" of the claim.41
Here, petitioner insists that the GSIS’s letters
dated April 26, 1990 and June 21, 1990 did not
amount to a "final rejection" ofits claims, arguing
that they were mere tentative resolutions pending
further action on petitioner’s part or submission
of proof in refutation of the reasons for
rejection.42 Hence, its causes of action for
indemnity did not accrue on those dates.
The Court does not agree.
A perusal of the letter43 dated April 26, 1990
shows that the GSIS denied petitioner’s indemnity
claims wrought by Typhoons Biring and Huaning,
it appearing that no amount was recoverable
under the policies. While the GSIS gave petitioner
the opportunity to dispute its findings, neither of
the parties pursued any further action on the
matter; this logically shows that they deemed the
said letter as a rejection of the claims. Lest it cause
any confusion, the statement in that letter
pertaining to any queries petitioner may have on
the denial should be construed, at best, as a form
of notice to the former that it had the opportunity
to seek reconsideration of the GSIS’s rejection.
Surely, petitioner cannot construe the said letter
to be a mere "tentative resolution." In fact, despite
its disavowals, petitioner admitted in its
pleadings44 that the GSIS indeed denied its claim
through the aforementioned letter, buttarried in
commencing the necessary action in court.
The same conclusion obtains for the letter 45 dated
June 21, 1990 denying petitioner’s indemnity
claim caused by Typhoon Saling on a "no loss"
basis due to the non-renewal of the policies
therefor before the onset of the said typhoon. The
fact that petitioner filed a letter 46 of
reconsideration therefrom dated April 18, 1991,
considering too the inaction of the GSIS on the
same similarly shows that the June 21, 1990 letter
was also a final rejection of petitioner’s indemnity
claim.
As correctly observed by the CA, "final rejection"
simply means denial by the insurer of the claims
of the insured and not the rejection or denial by
the insurer of the insured’s motion or request for
reconsideration.47 The rejection referred to should
be construed as the rejection in the first
instance,48 as in the two instances above-
discussed.
Comparable to the foregoing is the Court’s action
in the case of Sun Insurance Office, Ltd. v.
CA49 wherein it debunked "[t]he contention of the
respondents [therein] that the one-year
prescriptive period does not start to run until the
petition for reconsideration had been resolved by
the insurer," holding that such view "runs counter
to the declared purpose for requiring that an
action or suit be filed in the Insurance Commission
or in a court of competent jurisdiction from the
denial of the claim."50 In this regard, the Court
rationalized that "uphold[ing]respondents'
contention would contradict and defeat the very
principle which this Court had laid down.
Moreover, it can easily be used by insured persons
as a scheme or device to waste time until any
evidence which may be considered against them is
89 |I N S U R A N C E
PRESCRIPTION OF ACTION; AGREEMENT TO FIX PERIOD OF PRESCRIPTION
destroyed."51 Expounding on the matter, the Court
had this to say:
The crucial issue in this case is: When does the
cause of action accrue?
In support of private respondent’s view, two
rulings of this Court have been cited, namely, the
case of Eagle Star Insurance Co.vs.Chia Yu ([supra
note 41]), where the Court held:
The right of the insured to the payment of his loss
accrues from the happening of the loss. However,
the cause of action in an insurance contract does
not accrue until the insured’s claim is finally
rejected by the insurer. This is because before
such final rejection there is no real necessity for
bringing suit.
and the case of ACCFA vs. Alpha Insurance &
Surety Co., Inc. (24 SCRA 151 [1968], holding that:
Since "cause of action" requires as essential
elements not only a legal right of the plaintiff and
a correlated obligation of the defendant in
violation of the said legal right, the cause of action
does not accrue until the party obligated (surety)
refuses, expressly or impliedly, to comply with its
duty (in this case to pay the amount of the bond)."
conveyed in a resolution of a yetition for
reconsideration, such should have been expressly
stipulated.52
In light of the foregoing, it is thus clear that
petitioner's causes of action for indemnity
respectively accrued from its receipt of the letters
dated April 26, 1990 and June 21, 1990, or the
date the GSIS rejected its claims in the first
instance. Consequently, given that it allowed more
than twelve (12) months to lapse before filing the
necessary complaint before the R TC on
September 27, 1991, its causes of action had
already prescribed.
WHEREFORE, the petition is DENIED. The
Decision dated March 13, 2001 and the Resolution
dated February 21, 2002 of the Court of Appeals
(CA) in CA-G.R. CV No. 63175 are hereby
AFFIRMED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice

Indisputably, the above-cited pronouncements of

this Court may be taken to mean that the insured'
s cause of action or his right to file a claim either
in the Insurance Commission or in a court of
competent jurisdiction [as in this case]
commences from the time of the denial of his
claim by the Insurer, either expressly or
impliedly.1âwphi1

But as pointed out by the petitioner insurance

company, the rejection referred to should be
construed as the rejection, in the first instance, for
if what is being referred to is a reiterated rejection

90 |I N S U R A N C E
PRESCRIPTION OF ACTION; AGREEMENT TO FIX PERIOD OF PRESCRIPTION
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5915             March 31, 1955
EAGLE STAR INSURANCE CO., LTD., KURR
STEAMSHIP CO., INC., ROOSEVELT STEAMSHIP
AGENCY, INC., and LEIF HOEGH & COMPANY,
A/S., petitioners,
vs.
CHIA YU, respondent.
Ross, Selph, Carrascoso and Janda and Delfin L.
Gonzales for petitioner.
Nabong and Sese for respondent.
REYES, A., J.:
On January 15, 1946, Atkin, Kroll & Co., loaded on
the S. S. Roeph Silverlight owned and operated by
Leigh Hoegh & Co., A/S, of San Francisco
California, 14 bales of assorted underwear valued
at P8,085.23 consigned to Chia Yu in the City of
Manila. The shipment was insured against all risks
by Eagle Star Ins. Co. of San Francisco, California,
under a policy issued to the shipper and by the
latter assigned to the consignee. The vessel
arrived in Manila on February 10, 1946, and on
March 4 started discharging its cargo into the
custody of the Manila Terminal Co., Inc., which
was then operating the arrastre service for the
Bureau of Customs. But the 14 bales consigned to
Chia Yu only 10 were delivered to him as the
remaining 3 could not be found. Three of those
delivered were also found damaged to the extent
of 50 per cent.
Chia Yu claimed indemnity for the missing and
damaged bales. But the claim was declined, first,
by the carrier and afterward by the insurer,
whereupon Chia Yu brought the present action
against both, including their respective agents in
the Philippines. Commenced in the Court of First
Instance of Manila on November 16, 1948, or
more than two years after delivery of the damaged
bales and the date when the missing bales should
have been delivered, the action was resisted by
the defendants principally on the ground of
prescription. But the trial court found for plaintiff
and rendered judgment in his favor for the sum
claimed plus legal interest and costs. The
judgment was affirmed by the Court of Appeals,
and the case is now before us on appeal
by certiorari.
Except for the controversy as to the amount for
which the carrier could be held liable under the
terms of the bill of lading, the only question
presented for determination is whether plaintiff's
action has prescribed.
On the part of the carrier the defense of
prescription is made to rest on the following
stipulation of the bill of lading:
In any event the carrier and the ship shall
be discharged from all liability in respect
of loss or damage unless suit is brought
within one year after the delivery of the
goods or the date when the goods should
have been delivered.
The stipulation is but a repetition of a provision
contained in section 3 (6) of the United States
Carriage of Goods by Sea, Act of 1936, which was
adopted and made applicable to the Philippines by
Commonwealth Act 65 and by express agreement
incorporated by reference in the bill of lading.
Following our decision in Chua Kuy vs. Everett
Steamship Corporation,1 G. R. No L-5554 (May 27,
1953) and in E. R. Elser, Inc., et al., vs. Court of
Appeals,. et al.,2 G. R. No. L-6517 (November 29,
1954) giving force and effect to this kind of
stipulation in bills of lading covering shipments
from the United States to the Philippines, we have
to hold that plaintiff's failure to bring his action
"within one year after the delivery of the goods or
the date when the goods should have been
delivered" discharged the carrier from all liability.
This dispenses with the necessity of deciding how
much could be recovered from the carrier under
the terms of the bill of lading.
The case for the insurer stands on a different
footing, for its claim of prescription is founded
upon the terms of the policy and not upon the bill
of lading. Under our law the time limit for bringing
a civil action upon a written contract is ten years
after the right of action accrues. (Sec. 43, Act 190;
Art. 1144, New Civil Code.) But counsel for the
insurer claim that this statutory in the policy:
No suit action on this Policy, for the
recovery of any claim, shall be sustainable
in any Court of law or equity unless the
insured shall have fully complied with all
the terms and conditions of this Policy
nor unless commenced with twelve (12)
months next after the happening of the
loss . . .
To this we cannot agree.
In the case of E. Macias & Co. vs. China Fire
Insurance & Co., Ltd., et al., 46 Phil. 345, relied
upon by the insurer, this Court held that a clause
in an insurance policy providing that an action
upon the policy by the insured must be brought
within a certain time is, if reasonable, valid and
will prevail over statutory limitations of the
action. That decision, however, was rendered
before the passage of Act 4101, which amended
the Insurance Act by inserting the following
section in chapter one thereof:
SEC. 61-A. — Any condition, stipulation or
agreement in any policy of insurance,
91 |I N S U R A N C E
PRESCRIPTION OF ACTION; AGREEMENT TO FIX PERIOD OF PRESCRIPTION
limiting the time for commencing an
action thereunder to a period of less than
one year from the time when the cause of
action accrues, is void.
As "matters respecting a remedy, such as the
bringing of suit, admissibility of evidence, and
statute of limitations, depend upon the law of the
place where the suit is brought" (Insular
Government vs. Frank, 13 Phil. 236), any policy
clause repugnant to this amendment to the
Insurance Act cannot be given effect in an action
in our courts.
Examining the policy sued upon in the present
case, we find that its prescriptive clause, if given
effect in accordance with the terms of the policy,
would reduce the period allowed the insured for
bringing his action to less than one year. This is so
because the said clause makes the prescriptive
period begin from the happening of the loss and at
the same time provides that the no suit on the
policy shall be sustainable in any court unless the
insured shall have first fully complied with all the
terms and conditions of the policy, among them
that which requires that, as so as the loss is
determined, written claim therefor be filed with
the carrier and that the letter to the carrier and
the latter's reply should be attached to the claim
papers to be sent to the insurer. It is obvious that
compliance with this condition precedent will
necessarily consume time and thus shorten the
period for bringing suit to less than one year if the
period is to begin, as stated in the policy, from
"the happening of the loss." Being contrary to the
law of the forum, such stipulation cannot be given
effect.
It may perhaps be suggested that the policy clause
relied on by the insurer for defeating plaintiff's
action should be given the construction that
would harmonize it with section 61-A of the
Insurance Act by taking it to mean that the time
given the insured for bringing his suit is twelve
months after the cause of action accrues. But the
question then would be: When did the cause of
action accrue? On that question we agree with the
court below that plaintiff's cause of action did not
accrue until his claim was finally rejected by the
insurance company. This is because, before such
final rejection, there was no real necessity for
bringing suit. As the policy provides that the
insured should file his claim, first, with the carrier
and then with the insurer, he had a right to wait
for his claim to be finally decided before going to
court. The law does not encourages unnecessary
litigation.
At this junction it should be explained that while
the decision of the Court of Appeals states that the
claim against the insurance company "was finally
rejected o April 22, 1947, as correctly concluded
by the court below," it is obvious from the context
and we find it to be a fact that the date meant
was April 22, 1948, for this was the date when,
according to the finding of the trial court, the
insurance company in London rejected the claim.
The trial court's decision says:
On September 21, 1946, after Roosevelt
Steamship Agency Inc., and Manila
Terminal Co., Inc., denied plaintiff's claim,
a formal insurance claim was filed with
Kerr & Co., Ltd., local agents of Eagle Star
Insurance Co., Ltd., (Exh. L.)Kerr & Co.,
Ltd., referred the insurance claim to Eagle
Star Insurance Co., Ltd. in London but the
latter, after insistent request of plaintiffs
for action, rejected the claim on April 22,
1948, giving as its reasons the lapse of the
expiry day of the risks covered by the
policy and returned the claim documents
only in August of 1948. (pp. 87-88, Record
on Appeal.)
Furthermore, there is nothing in the record to
show that the claim was rejected in the year 1947,
either by the insurance company in London or its
settling agents in the Philippines, while on the
other hand defendant's own Exhibit L-1 is
indisputable proof that it was on 22nd April 1948"
that the settling agents informed the claimant
"that after due and careful consideration, our
Principals confirm our declination of this claim." It
not appearing that the settling agents' decision on
claims against their principals were not subject to
reversal or modification by the latter, while on the
contrary the insurance policy expressly stipulates,
under the heading "Important Notice," that the
said agents "have authority to certify only as to
the nature, cause and extent of the damage," and it
furthermore appearing that a reiteration of
plaintiffs claim was made to the principals and the
latter gave it due course since only "after due and
careful consideration" did they confirm the action
taken by the agents, we conclude that, for the
purpose of the present action, we should consider
plaintiff's claim to have been finally rejected by
the insurer on April 22, 1948. Having been filed
within twelve months form that date, the action
cannot be deemed to have prescribed even on the
supposition that the period given the insured for
bringing suit under the prescriptive clause of the
policy is twelve months after the accrual of the
cause of action.
In concluding, we may state that contractual
limitations contained in insurance policies are
regarded with extreme jealousy by courts and will
be strictly construed against the insurer and
should not be permitted to prevent a recovery
when their just and honest application would not
produce that result. (46 C. J. S. 273.)
Wherefore, the judgment appealed from is
reversed with respect to the carrier and its agents
but affirmed with respect to the insurance
company and its agents, with costs against the
latter.
Pablo, Bengzon, Padilla, Jugo, Bautista Angelo,
Concepcion, and Reyes, J.B.L., concur.
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Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
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.
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PREMIUM
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
— be binding and effective notwithstanding the
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 policies because of the provisions of Sec. 77 of the
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 first
premium, and the plaintiff could
not have denied liability on the
ground that payment was not
made in full, for the reason that it
agreed to accept installment
payment. . . . 3
Petitioner now asserts that its payment by
installment of the premiums for the insurance
policies for 1982, 1983 and 1984 invalidated said
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.
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
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
94 |I N S U R A N C E
PREMIUM
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. In Arce, no payment was made by the insured
at all despite the grace period given. In the case
before Us, petitioner paid the initial installment
and thereafter made staggered payments resulting
in full payment of the 1982 and 1983 insurance
policies. For the 1984 policy, petitioner paid two
(2) installments although it refused to pay the
balance.
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.
Cruz, Padilla and Griño-Aquino, JJ., concur.
Medialdea, J., is on leave.
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PREMIUM
EN BANC
G.R. No. 137172            April 4, 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, plaintiffs 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."
(Record, p. 5)
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
96 |I N S U R A N C E
PREMIUM
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 (Exhibit "11", Record,
p. 254).
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.
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.
Respondent also asserts that the principle of
estoppel applies to Petitioner. Despite its
awareness of Section 77 Petitioner persuaded and
induced Respondent to believe that payment of
premium on the 60- to 90-day credit term was
perfectly alright; in fact it accepted payments
within 60 to 90 days after the due dates. By
extending credit and habitually accepting
payments 60 to 90 days from the effective dates of
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
97 |I N S U R A N C E
PREMIUM
the loss or damage in case the same occurred after
payment of the premium.
Petitioner filed an opposition to the Respondent's
motion for reconsideration. It argues that both the
trial 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 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 be
entitled to a renewal of a non-life policy, payment
of the premium due on the effective date of
renewal should first be made. Respondent's
argument that Section 77 is not a prohibitive
provision finds no authoritative support.
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.
2. Petitioner had been granting
Respondent a 60- to 90-day credit term
within which to pay the premiums on the
renewed policies.
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.
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:
SECTION 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:
SECTION 72. An insurer is entitled to
payment of premium as soon as the thing
insured is exposed to the peril insured
against, unless there is clear agreement to
grant the insured credit extension of the
premium due. No policy issued by an
insurance company is valid and binding
unless and until the premium thereof has
been paid. (Italic supplied)
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:
SECTION 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 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
98 |I N S U R A N C E
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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:
ARTICLE 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 hereby AFFIRMED in
toto.
No pronouncement as to cost.
SO ORDERED.
Bellosillo, Kapunan, Mendoza, Panganiban, Buena,
Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr. and
Sandoval-Gutierrez, JJ ., concur.
Melo, J., I join the dissents of Justice Vitug and
Pardo.
Vitug, J., Please see separate opinion.
Pardo, J., I dissent. See attached.
Separate Opinions
VITUG, J .:
An essential characteristic of an insurance is its
being synallagmatic, a highly reciprocal contract
where the rights and obligations of the parties
correlate and mutually correspond. The insurer
assumes the risk of loss which an insured might
suffer in consideration of premium payments
under a risk-distributing device. Such assumption
of risk is a component of a general scheme to
distribute actual losses among a group of persons,
bearing similar risks, who make ratable
contributions to a fund from which the losses
incurred due to exposures to the peril insured
against are assured and compensated.
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It is generally recognized that the business of
insurance is one imbued with public interest. 1 For
the general good and mutual protection of all the
parties, it is aptly subjected to regulation and
control by the State by virtue of an exercise of its
police power. 2 The State may regulate in various
respects the relations between the insurer and the
insured, including the internal affairs of an
insurance company, without being violative of due
process. 3
A requirement imposed by way of State regulation
upon insurers is the maintenance of an adequate
legal reserve in favor of those claiming under their
policies. 4 The law generally mandates that
insurance companies should retain an amount
sufficient to guarantee the security of its
policyholders in the remote future, as well as the
present, and to cover any contingencies that may
arise or may be fairly anticipated. The integrity of
this legal reserve is threatened and undermined if
a credit arrangement on the payment of premium
were to be sanctioned. Calculations and
estimations of liabilities under the risk insured
against are predicated on the basis of the payment
of premiums, the vital element that establishes the
juridical relation between the insured and the
insurer. By legislative fiat, any agreement to the
contrary notwithstanding, the payment of
premium is a condition precedent to, and essential
for, the efficaciousness of the insurance contract,
except (a) in case of life or industrial life insurance
where a grace period applies, or (b) in case of a
written acknowledgment by the insurer of the
receipt of premium, such as by a deposit receipt,
the written acknowledgment being conclusive
evidence of the premium payment so far as to
make the policy binding. 5
Section 77 of the Insurance Code provides:
"SECTION 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 provision amended Section 72 of the then
Insurance Act by deleting the phrase, "unless
there is a clear agreement to grant the insured
credit extension of the premium due," and adding
at the beginning of the second sentence the
phrase, "[n]otwithstanding any agreement to the
contrary." Commenting on the new provision,
Dean Hernando B. Perez states:
"Under the former rule, whenever the
insured was granted credit extension of
the premium due or given a period of
time to pay the premium on the policy
issued, such policy was binding although
premiums had not been paid (Section 72,
Insurance Act; 6 Couch 2d. 67). This rule
was changed when the present provision
eliminated the portion concerning credit
agreement, and added the phrase
'notwithstanding any agreement to the
contrary' which precludes the parties
from stipulating that the policy is valid
even if premiums are not paid. Hence,
under the present law, the policy is not
valid and binding unless and until the
premium is paid (Arce vs. Capital
Insurance & Surety Co., Inc., 117 SCRA
63). If the insurer wants to favor the
insured by making the policy binding
notwithstanding the non-payment of
premium, a mere credit agreement would
not be sufficient. The remedy would be
for the insurer to acknowledge in the
policy that premiums were paid although
they were not, in which case the policy
becomes binding because such
acknowledgment is a conclusive evidence
of payment of premium (Section 78).
Thus, the Supreme Court took note that
under the present law, Section 77 of the
Insurance Code of 1978 has deleted the
clause 'unless there is a clear agreement
to grant the insured credit extension of
the premium due' (Velasco vs. Apostol,
173 SCRA 228)." 6
By weight of authority, estoppel cannot create a
contract of insurance, 7 neither can it be
successfully invoked to create a primary
liability, 8 nor can it give validity to what the law
so proscribes as a matter of public policy. 9 So
essential is the premium payment to the creation
of the vinculum juris between the insured and the
insurer that it would be doubtful to have that
payment validly excused even for a fortuitous
event. 10
The law, however, neither requires for the
establishment of the juridical tie, nor measures
the strength of such tie by, any specific amount of
premium payment. A part payment of the
premium, if accepted by the insurer, can thus
perfect the contract and bring the parties into an
obligatory relation. 11 Such a payment puts the
contract into full binding force, not merely pro
tanto, thereby entitling and obligating the parties
by their agreement. Hence, in case of loss, full
recovery less the unpaid portion of the premium
(by the operative act of legal compensation), can
be had by the insured and, correlatively, if no loss
occurs the insurer can demand the payment of the
unpaid balance of the premium. 12
In the instant case, no juridical tie appears to have
been established under any of the situations
hereinabove discussed.
WHEREFORE, I vote to deny the motion for
reconsideration.
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PREMIUM
Melo, J ., concurs.
PARDO, J ., dissenting:
The majority resolved to grant respondent's
motion for reconsideration of the Court's decision
promulgated on June 15, 1999. By this somersault,
petitioner must now pay respondent's claim for
insurance proceeds amounting to P18,645,000.00,
exclusive of interests, plus 25% of the amount due
as attorney's fees, P25,000.00 as litigation
expenses, and costs of suit, covering its Pasay City
property razed by fire. What an undeserved
largess! Indeed, an unjust enrichment at the
expense of petitioner; even the award of
attorney's fees is bloated to 25% of the amount
due.
We cannot give our concurrence. We beg to
dissent. We find respondent's claim to be
fraudulent:
First: Respondent Masagana surreptitiously tried
to pay the overdue premiums before giving
written notice to petitioner of the occurrence of the
fire that razed the subject property. This failure to
give notice of the fire immediately upon its
occurrence blatantly showed the fraudulent
character of its claim. The fire totally destroyed
the property on June 13, 1992; the written notice
of loss was given only more than a month later,
on July 14, 1992, the
day after respondent surreptitiously paid the
overdue premiums. Respondent very well knew
that the policy was not renewed on time. Hence,
the surreptitious attempt to pay overdue
premiums. Such act revealed a reprehensible
disregard of the principle that insurance is a
contract uberrima fides, the most abundant good
faith. 1 Respondent is required by law and by
express terms of the policy to give immediate
written notice of loss. This must be complied with
in the utmost good faith.
Another badge of fraud is that respondent
deviated from its previous practice of coursing its
premium payments through its brokers. This time,
respondent Masagana went directly to petitioner
and paid through its cashier with manager's
checks. Naturally, the cashier routinely accepted
the premium payment because he had no written
notice of the occurrence of the fire. Such fact was
concealed by the insured and not revealed to
petitioner at the time of payment.
Indeed, if as contended by respondent, there was a
clear agreement regarding the grant of a credit
extension, respondent would have given
immediate written notice of the fire that razed the
property. This clearly showed respondent's
attempt to deceive petitioner into believing that
the subject property still existed and the risk
insured against had not happened.
Second: The claim for insurance benefits must fall
as well because the failure to give timely written
notice of the fire was a material misrepresentation
affecting the risk insured against.
Section 1 of the policy provides:
"All benefits under the policy shall be
forfeited if the claim be in any respect
fraudulent, or if any false declaration be
made or used in support thereof, or if any
false declaration be made or used in
support thereof, or if any fraudulent
means or devices are used by the insured
or any one acting on his behalf to obtain
any benefit under the policy." 2
In the factual milieu, the purported practice of
giving 60 to 90-day credit extension for payment
of premiums was a disputed fact. But it is a given
fact that the written notice of loss was not
immediately given. It was given only the day after
the attempt to pay the delayed premiums.
At any rate, the purported credit was a mere
verbal understanding of the respondent Masagana
of an agreement between the insurance company
(petitioner) and the insurance brokers of
respondent Masagana. The president of
respondent Masagana admitted that the
insurance policy did not contain
any proviso pertaining to the grant of credit within
which to pay the premiums. Respondent
Masagana merely deduced that a credit agreement
existed based on previous years' practice that they
had of delayed payments accepted by the insurer
as reflected on the face of the receipts issued by
UCPB evidencing the payment of premiums.
"Q:         You also claim that you have 60 to
90 days credit arrangement with UCPB; is
that correct?,
A:         Yes, ma'am.
Q:         I'm showing to you the policy
which had previously been marked in
evidence as Exhibit "A", "B", "C", "D", &
"E"' for the plaintiff and likewise, marked
as exhibits "1", "2", "3", "4", & "5" for the
defendant. Could you show us, Mr.
witness where in these policies does it
show that you are actually given 60 to 90
days credit arrangement with UCPB?
A:         Well, it's verbal with your
company, and Ansons Insurance
Brokerage. It is not written.
Q:         It is not written in the policy?
A:         Yes.
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Q:         You merely have verbal agreement
with Ansons Insurance Brokerage?
A:         Yes; as shown in our mode of
payment; in our vouchers and the
receipts issued by the insurance
company." 3
It must be stressed that a verbal understanding of
respondent Masagana cannot amend an insurance
policy. In insurance practice, amendments or even
corrections to a policy are done by written
endorsements or tickets appended to the policy.
However, the date on the face of the receipts does
not refer to the date of actual remittance by
respondent Masagana to UCPB of the premium
payments, but merely to the date of remittance to
UCPB of the premium payments by the insurance
brokers of respondent Masagana.
"Q: You also identified several receipts;
here; official receipts issued by UCPB
General Insurance Company, Inc., which
has been previously marked as Exhibits
"F", "G", "H", "I", and "J" for the plaintiff; is
that correct?
A:         Yes.
Q:         And, you would agree with me that
the dates indicated in these particular
Official Receipts (O. R.), merely indicated
the dates when UCPB General Insurance
Company issued these receipts? Do you
admit that, Mr. Witness?
A:         That was written in the receipts.
Q:         But, you would also agree that this
did not necessarily show the dates when
you actually forwarded the checks to your
broker, Anson Insurance Agency, for
payment to UCPB General Insurance Co.
Inc., isn't it?
A:         The actual support of this would be
the cash voucher of the company,
Masagana Telamart Inc., the date when
they picked up the check from the
company.
Q:         And are these cash voucher with
you?
A:         I don't know if it is in the folder or
in our folder, now.
Q:         So, you are not certain, whether or
not you actually delivered the checks
covered by these Official Receipts to UCPB
General Insurance, on the dates
indicated?
A:         I would suppose it is few days
earlier, when they picked up the payment
in our office." 4
Hence, what has been established was
the grant of credit to the insurance brokers, not to
the assured. The insurance company recognized
the payment to the insurance brokers as payment
to itself, though the actual remittance of the
premium payments to the principal might be
made later. Once payment of premiums is made to
the insurance broker, the assured would be
covered by a valid and binding insurance policy,
provided the loss occurred after payment to the
broker has been made.
Assuming arguendo that the 60 to 90 day-credit-
term has been agreed between the parties,
respondent could not still invoke estoppel to back
up its claim. "Estoppel is unavailing in this
case," 5 thus spoke the Supreme Court through the
pen of Justice Hilario G. Davide, Jr., now Chief
Justice. Mutatis mutandi, he may well be speaking
of this case. He added that "[E]stoppel can not give
validity to an act that is prohibited by law or
against public policy." 6 The actual payment of
premiums is a condition precedent to the validity
of an insurance contract other than life insurance
policy. 7 Any agreement to the contrary is void as
against the law and public policy. Section 77 of the
Insurance Code provides:
"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." [Emphasis supplied]
An incisive reading of the afore-cited provision
would show that the emphasis was on the
conclusiveness of the acknowledgment in the
policy of the receipt of premium, notwithstanding
the absence of actual payment of premium,
because of estoppel. Under the doctrine of
estoppel, an admission or representation is
rendered conclusive upon the person making it,
and cannot be denied or disproved as against the
person relying thereon. "A party may not go back
on his own acts and representations to the
prejudice of the other party who relied upon
them." 8
This is the only case of estoppel which the law
considers a valid exception to the mandatory
requirement of pre-payment of premium. The law
recognized that the contracting parties, in
entering a contract of insurance, are free to enter
into stipulations and make personal undertakings
so long as they are not contrary to law or public
policy. However, the law is clear in providing that
102 |I N S U R A N C E
PREMIUM
the acknowledgment must be contained in the
policy or contract of insurance. Anything short of
it would not fall under the exception so provided
in Section 78.
Hence, because of respondent's failure to pay the
premiums prior to the occurrence of the fire
insured against, no valid and binding insurance
policy was created to cover the loss and
destruction of the property. The fire took place on
June 13, 1992, twenty-two (22) days after the
expiration of the policy of fire insurance. The
tender of payment of premiums was made only
thirty (30) days after the occurrence of the fire, or
on July 13, 1992. Respondent Masagana did not
give immediate notice to petitioner of the fire as it
occurred as required in the insurance policy.
Respondent Masagana tried to tender payment of
the premiums overdue surreptitiously before
giving notice of the occurrence of the fire. More
importantly, the parties themselves expressly
stipulated that the insurance policy would not be
binding on the insurer unless the premiums
thereon had been paid in full. Section 2 of the
policy provides:
"2. This policy including any renewal
and/or endorsement thereon is not in force
until the premium has been fully paid and
duly receipted by the Company in the
manner provided therein.
"Any supplementary agreement seeking
to amend this condition prepared by
agent, broker or company official, shall be
deemed invalid and of no effect.
"No payment in respect of any premium
shall be deemed to be payment to the
Company unless a printed form of receipt
for the same signed by an Official or duly
appointed Agent of the Company shall
have been given to the Insured, except
when such printed receipt is not available
at the time of payment and the company
or its representative accepts the premium
in which case a temporary receipt other
than the printed form may be issued in
lieu thereof. "Except only on those
specific cases where corresponding rules
and regulations which now we are or may
hereafter be in force provide for the
payment of the stipulated premiums in
periodic installments at fixed
percentages, it is hereby declared, agreed
and warranted that this policy shall be
deemed effective valid and binding upon
the Company when the premiums thereof
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." 9 [emphasis supplied]
Thus, the insurance policy, including any renewal
thereof or any endorsements thereon shall not
come in force until the premiums have been fully
paid and duly received by the insurance Company.
No payment in respect of any premiums shall be
deemed to be payment to the Insurance Company
unless a printed form of receipt for the same
signed by an Official or duly appointed Agent of
the Company shall be given to the insured.
The case of Tibay v. Court of Appeals 10 is in point.
The issue raised therein was: "May a fire
insurance policy be valid, binding and enforceable
upon mere partial payment of premium?" In the
said case, Fortune Life and General Insurance Co.,
Inc. issued Fire Insurance Policy No. 136171 in
favor of Violeta R. Tibay and/or Nicolas Roraldo,
on a two-storey residential building located at
5855 Zobel Street, Makati City, together with all
the personal effects 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, Violeta Tibay only
paid P600.00, thus leaving a substantial balance
unpaid. On March 8, 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 for the proceeds of the fire
insurance policy.
In denying the claim of insurance, the Court ruled
that "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. 11 As
expressly stipulated in the contract, full payment
must be made before the risk occurs for the policy
to be considered effective and in force.
"No vinculum juris whereby the insurer bound
itself to indemnify the assured according to law
ever resulted from the fractional payment of
premium." 12
The majority cited the case of Makati Tuscany
Condominium Corp. vs. Court of Appeals 13 to
support the contention that the insurance policies
subject of the instant case were valid and effective.
However, the factual situation in that case was
different from the case at bar.
In Tuscany, the Court held that the insurance
policies were valid and binding because there was
partial payment of the premiums and a clear
understanding between the parties that they had
intended the insurance policies to be binding and
effective notwithstanding the staggered payment
of the premiums. On the basis of equity and
fairness, the Court ruled that there was a
perfected contract of insurance upon the partial
payment of the premiums, notwithstanding the
provisions of Section 77 to the contrary. The Court
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.
103 |I N S U R A N C E
PREMIUM
There is no dispute that like in any other contract,
the parties to a contract of insurance enjoy the
freedom to stipulate on the terms and conditions
that will govern their agreement so long as they
are not contrary to law, morals, good customs,
public order or public policy. However, the
agreement containing such terms and conditions
must be clear and definite.
In the case at bar, there was no clear and definite
agreement between petitioner and respondent on
the grant of a credit extension; neither was there
partial payment of premiums for petitioner to
invoke the exceptional doctrine in Tuscany.
Hence, the circumstances in the above cited case
are totally different from the case at bar, and
consequently, not applicable herein.
policy of insurance effective. If the premium is not
paid in the manner prescribed in the policy as
intended by the parties, the policy is void and
ineffective. 16
Basically a contract of indemnity, an insurance
contract is the law between the parties. Its terms
and conditions constitute the measure of the
insurer's liability and compliance therewith is a
condition precedent to the insured's right to
recovery from the insurer. 17
IN VIEW WHEREOF, I vote to DENY the
respondent's motion for reconsideration, for lack
of merit.
Melo, Puno and Quisumbing, JJ ., concur.

Insurance is an aleatory contract whereby one

undertakes for a consideration to indemnify
another against loss, damage or liability arising
from an unknown or contingent event. 14 The
consideration is the premium, which must be paid
at the time and in the manner specified in the
policy, and if not so paid, the policy will lapse and
be forfeited by its own terms. 15

With regard to the contention that the absence of

notice of non-renewal of the policy resulted to the
automatic renewal of the insurance policy, we find
the contention untenable. As above discussed, the
law provides that only upon payment of the
insurance premium will the insurance policy bind
the insurer to the peril insured against and hold it
liable under the policy in case of loss.

Even in the absence of notice of non-renewal, the

assured would be bound by the law that a non life
insurance policy takes effect only on the date
payment of the premium was made.

Verily, it is elemental law that the payment of

premium is a mandatory requisite to make the
104 |I N S U R A N C E
LOSS
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 92383 July 17, 1992
SUN INSURANCE OFFICE, LTD., petitioner,
vs.
THE HON. COURT OF APPEALS and NERISSA
LIM, respondents.
 
CRUZ, J.:
The petitioner issued Personal Accident Policy No.
05687 to Felix Lim, Jr. with a face value of
P200,000.00. Two months later, he was dead with
a bullet wound in his head. As beneficiary, his wife
Nerissa Lim sought payment on the policy but her
claim was rejected. The petitioner agreed that
there was no suicide. It argued, however that
there was no accident either.
Pilar Nalagon, Lim's secretary, was the only
eyewitness to his death. It happened on October 6,
1982, at about 10 o'clock in the evening, after his
mother's birthday party. According to Nalagon,
Lim was in a happy mood (but not drunk) and was
playing with his handgun, from which he had
previously removed the magazine. As she watched
television, he stood in front of her and pointed the
gun at her. She pushed it aside and said it might he
loaded. He assured her it was not and then
pointed it to his temple. The next moment there
was an explosion and Lim slumped to the floor. He
was dead before he fell. 1
The widow sued the petitioner in the Regional
Trial Court of Zamboanga City and was
sustained. 2 The petitioner was sentenced to pay
her P200,000.00, representing the face value of
the policy, with interest at the legal rate;
P10,000.00 as moral damages; P5,000.00 as
exemplary damages; P5,000.00 as actual and
compensatory damages; and P5,000.00 as
attorney's fees, plus the costs of the suit. This
decision was affirmed on appeal, and the motion
for reconsideration was denied. 3 The petitioner
then came to this Court to fault the Court of
Appeals for approving the payment of the claim
and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never
acquired any technical signification in law, and
when used in an insurance contract are to be
construed and considered according to the
ordinary understanding and common usage and
speech of people generally. In-substance, the
courts are practically agreed that the words
"accident" and "accidental" mean that which
happens by chance or fortuitously, without
intention or design, and which is unexpected,
unusual, and unforeseen. The definition that has
usually been adopted by the courts is that 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 case, and therefore not expected. 4
An accident is an event which happens without
any human agency or, if happening through
human agency, an event which, under the
circumstances, is unusual to and not expected by
the person to whom it happens. It has also been
defined as an injury which happens by reason of
some violence or casualty to the injured without
his design, consent, or voluntary co-operation. 5
In light of these definitions, the Court is convinced
that the incident that resulted in Lim's death was
indeed an accident. The petitioner, invoking the
case of De la Cruz v. Capital Insurance, 6 says that
"there is no accident when a deliberate act is
performed unless some additional, unexpected,
independent and unforeseen happening occurs
which produces or brings about their injury or
death." There was such a happening. This was the
firing of the gun, which was the additional
unexpected and independent and unforeseen
occurrence that led to the insured person's death.
The petitioner also cites one of the four exceptions
provided for in the insurance contract and
contends that the private petitioner's claim is
barred by such provision. It is there stated:
Exceptions —
The company shall not be liable in respect of
1. Bodily injury
xxx xxx xxx
b. consequent upon
i) The insured person attempting
to commit suicide or willfully
exposing himself to needless
peril except in an attempt to save
human life.
To repeat, the parties agree that Lim did not
commit suicide. Nevertheless, the petitioner
contends that the insured willfully exposed
himself to needless peril and thus removed
himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and
willful exposure to needless peril are in pari
materia because they both signify a disregard for
one's life. The only difference is in degree, as
suicide imports a positive act of ending such life
whereas the second act indicates a reckless
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risking of it that is almost suicidal in intent. To
illustrate, a person who walks a tightrope one
thousand meters above the ground and without
any safety device may not actually be intending to
commit suicide, but his act is nonetheless suicidal.
He would thus be considered as "willfully
exposing himself to needless peril" within the
meaning of the exception in question.
The petitioner maintains that by the mere act of
pointing the gun to hip temple, Lim had willfully
exposed himself to needless peril and so came
under the exception. The theory is that a gun
is per se dangerous and should therefore be
handled cautiously in every case.
That posture is arguable. But what is not is that, as
the secretary testified, Lim had removed the
magazine from the gun and believed it was no
longer dangerous. He expressly assured her that
the gun was not loaded. It is submitted that Lim
did not willfully expose himself to needless peril
when he pointed the gun to his temple because the
fact is that he thought it was not unsafe to do so.
The act was precisely intended to assure Nalagon
that the gun was indeed harmless.
The contrary view is expressed by the petitioner
thus:
Accident insurance policies were
never intended to reward the
insured for his tendency to show
off or for his miscalculations.
They were intended to provide
for contingencies. Hence, when I
miscalculate and jump from the
Quezon Bridge into the Pasig
River in the belief that I can
overcome the current, I have
wilfully exposed myself to peril
and must accept the
consequences of my act. If I
drown I cannot go to the
insurance company to ask them
to compensate me for my failure
to swim as well as I thought I
could. The insured in the case at
bar deliberately put the gun to
his head and pulled the trigger.
He wilfully exposed himself to
peril.
The Court certainly agrees that a drowned man
cannot go to the insurance company to ask for
compensation. That might frighten the insurance
people to death. We also agree that under the
circumstances narrated, his beneficiary would not
be able to collect on the insurance policy for it is
clear that when he braved the currents below,
he deliberately exposed himself to a known peril.
The private respondent maintains that Lim did
not. That is where she says the analogy fails. The
petitioner's hypothetical swimmer knew when he
dived off the Quezon Bridge that the currents
below were dangerous. By contrast, Lim did not
know that the gun he put to his head was loaded.
Lim was unquestionably negligent and that
negligence cost him his own life. But it should not
prevent his widow from recovering from the
insurance policy he obtained precisely against
accident. There is nothing in the policy that
relieves the insurer of the responsibility to pay the
indemnity agreed upon if the insured is shown to
have contributed to his own accident. Indeed,
most accidents are caused by negligence. There
are only four exceptions expressly made in the
contract to relieve the insurer from liability, and
none of these exceptions is applicable in the case
at bar. **
It bears noting that insurance contracts are as a
rule supposed to be interpreted liberally in favor
of the assured. There is no reason to deviate from
this rule, especially in view of the circumstances of
this case as above analyzed.
On the second assigned error, however, the Court
must rule in favor of the petitioner. The basic
issue raised in this case is, as the petitioner
correctly observed, one of first impression. It is
evident that the petitioner was acting in good faith
then it resisted the private respondent's claim on
the ground that the death of the insured was
covered by the exception. The issue was indeed
debatable and was clearly not raised only for the
purpose of evading a legitimate obligation. We
hold therefore that the award of moral and
exemplary damages and of attorney's fees is
unjust and so must be disapproved.
In order that a person may be
made liable to the payment of
moral damages, the law requires
that his act be wrongful. The
adverse result of an action does
not per se make the act wrongful
and subject the act or to the
payment of moral damages. The
law could not have meant to
impose a penalty on the right to
litigate; such right is so precious
that moral damages may not be
charged on those who may
exercise it erroneously. For these
the law taxes costs. 7
The fact that the results of the
trial were adverse to Barreto did
not alone make his act in bringing
the action wrongful because in
most cases one party will lose;
we would be imposing an unjust
condition or limitation on the
right to litigate. We hold that the
award of moral damages in the
case at bar is not justified by the
facts had circumstances as well
as the law.
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If a party wins, he cannot, as a
rule, recover attorney's fees and
litigation expenses, since it is not
the fact of winning alone that
entitles him to recover such
damages of the exceptional
circumstances enumerated in
Art. 2208. Otherwise, every time
a defendant wins, automatically
the plaintiff must pay attorney's
fees thereby putting a premium
on the right to litigate which
should not be so. For those
expenses, the law deems the
award of costs as sufficient. 8

WHEREFORE, the challenged decision of the Court

of Appeals is AFFIRMED in so far as it holds the
petitioner liable to the private respondent in the
sum of P200,000.00 representing the face value of
the insurance contract, with interest at the legal
rate from the date of the filing of the complaint
until the full amount is paid, but MODIFIED with
the deletion of all awards for damages, including
attorney's fees, except the costs of the suit.

SO ORDERED.

Griño-Aquino, Medialdea and Bellosillo, JJ., concur.

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Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 137775. March 31, 2005
FGU INSURANCE CORPORATION, Petitioners,
vs.
THE COURT OF APPEALS, SAN MIGUEL
CORPORATION, and ESTATE OF ANG GUI,
represented by LUCIO, JULIAN, and JAIME, all
surnamed ANG, and CO TO, Respondents.
G.R. No. 140704. March 31, 2005
ESTATE OF ANG GUI, Represented by LUCIO,
JULIAN and JAIME, all surnamed ANG, and CO
TO, Petitioners,
vs.
THE HONORABLE COURT OF APPEALS, SAN
MIGUEL CORP., and FGU INSURANCE
CORP., Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us are two separate Petitions for review
assailing the Decision1 of the Court of Appeals in
CA-G.R. CV No. 49624 entitled, "San Miguel
Corporation, Plaintiff-Appellee versus Estate of
Ang Gui, represented by Lucio, Julian and Jaime, all
surnamed Ang, and Co To, Defendants-Appellants,
Third–Party Plaintiffs versus FGU Insurance
Corporation, Third-Party Defendant-Appellant,"
which affirmed in toto the decision2 of the
Regional Trial Court of Cebu City, Branch 22. The
dispositive portion of the Court of Appeals
decision reads:
WHEREFORE, for all the foregoing, judgment is
hereby rendered as follows:
1) Ordering defendants to pay plaintiff the sum of
P1,346,197.00 and an interest of 6% per annum to
be reckoned from the filing of this case on October
2, 1990;
2) Ordering defendants to pay plaintiff the sum of
P25,000.00 for attorney’s fees and an additional
sum of P10,000.00 as litigation expenses;
3) With cost against defendants.
For the Third-Party Complaint:
1) Ordering third-party defendant FGU Insurance
Company to pay and reimburse defendants the
amount of P632,700.00.3
The Facts
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.
On 23 September 1979, San Miguel Corporation
(SMC) shipped from Mandaue City, Cebu, on board
the D/B Lucio, for towage by M/T ANCO, the
following cargoes:
Bill of Lading No. Shipment Destination
1 25,000 cases Pale Pilsen Estancia, Iloilo
350 cases Cerveza Negra Estancia, Iloilo
2 15,000 cases Pale Pilsen San Jose, Antique
200 cases Cerveza Negra San Jose, Antique
The consignee for the cargoes covered by Bill of
Lading No. 1 was SMC’s Beer Marketing Division
(BMD)-Estancia Beer Sales Office, Estancia, Iloilo,
while the consignee for the cargoes covered by Bill
of Lading No. 2 was SMC’s BMD-San Jose Beer
Sales Office, San Jose, Antique.
The D/B Lucio was towed by the M/T ANCO all the
way from Mandaue City to San Jose, Antique. The
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.
When the barge and tugboat arrived at San Jose,
Antique, in the afternoon of 30 September 1979,
the clouds over the area were dark and the waves
were already big. The arrastre workers unloading
the 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
transfer the barge to a safer place because the
vessel might not be able to withstand the big
waves.
ANCO’s representative did not heed the request
because he was confident that the barge could
withstand 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 bigger and bigger, only Ten
Thousand Seven Hundred Ninety (10,790) cases
of beer were discharged into the custody of the
arrastre operator.
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
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wharf was cut off by the big waves. At around
midnight, the barge run aground and was broken
and the cargoes of beer in the barge were swept
away.
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).
As a consequence of the incident, SMC filed a
complaint for Breach of Contract of Carriage and
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.
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 the original complaint
and the amended complaint are practically the
same."
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 that ANCO would not be
liable for any losses or damages resulting to the
cargoes by reason of fortuitous event. Since the
cases of beer Pale Pilsen and Cerveza Negra were
lost by reason of a storm, a fortuitous 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
order to recover indemnity in case of loss.
Pursuant to that agreement, the cargoes to the
extent of Twenty Thousand (20,000) cases was
insured with FGU Insurance Corporation (FGU) for
the total amount of Eight Hundred Fifty-Eight
Thousand Five Hundred Pesos (P858,500.00) per
Marine Insurance Policy No. 29591.
Subsequently, ANCO, with leave of court, filed a
Third-Party Complaint against FGU, alleging that
before the vessel of ANCO left for San Jose,
Antique with the cargoes owned by SMC, the
cargoes, to 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. 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, 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 went on to assert that in the remote
possibility that the court will order ANCO to pay
SMC’s claim, the third-party defendant
corporation should be held liable to indemnify or
reimburse ANCO whatever amounts, or damages,
it may be required to pay to SMC.
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 covered by the said insurance policy
cannot be attributed directly or indirectly to any
of the risks insured against in the said insurance
policy. According to FGU, it is only liable under the
policy to Third-party Plaintiff ANCO and/or
Plaintiff SMC in case of any of the following:
a) total loss of the entire shipment;
b) loss of any case as a result of the sinking of the
vessel; or
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
ordinary diligence or the diligence of a good father
of the family in the care and supervision of the
cargoes insured to prevent its loss and/or
destruction.
Third-Party defendant FGU prayed for the
dismissal of the Third-Party Complaint and asked
for actual, moral, and exemplary damages and
attorney’s fees.
The trial court found that while the cargoes were
indeed lost due to fortuitous event, there was
failure on ANCO’s part, through their
representatives, to observe the degree of diligence
required that would exonerate them from liability.
The trial court thus held the Estate of Ang Gui and
Co To liable to SMC for the amount of the lost
shipment. With respect to the Third-Party
complaint, the court a quo found FGU liable to
bear Fifty-Three Percent (53%) of the amount of
the lost cargoes. According to the trial court:
. . . Evidence is to the effect that the D/B Lucio, on
which the cargo insured, run-aground and was
broken and the beer cargoes on the said barge
were swept away. It is the sense of this Court that
the risk insured against was the cause of the loss.
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...
Since the total cargo was 40,550 cases which had a
total amount of P1,833,905.00 and the amount of
the policy was only for P858,500.00, defendants as
assured, therefore, were considered co-insurers of
third-party defendant FGU Insurance Corporation
to the extent of 975,405.00 value of the
cargo. Consequently, inasmuch as there was
partial loss of only P1,346,197.00, the assured
shall bear 53% of the loss…4 [Emphasis ours]
The appellate court affirmed in toto the decision of
the lower court and denied the motion for
reconsideration and the supplemental motion for
reconsideration.
Hence, the petitions.
The Issues
In G.R. No. 137775, the grounds for review raised
by petitioner FGU can be summarized into two: 1)
Whether or not respondent Court of Appeals
committed grave abuse of discretion in holding
FGU liable under the insurance contract
considering the circumstances surrounding the
loss of the cargoes; and 2) 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 G.R. No. 140704, petitioner Estate of Ang Gui
and Co To assail the decision of the appellate court
based on the following assignments of error: 1)
The Court of Appeals committed grave abuse of
discretion in affirming the findings of the lower
court that the negligence of the crewmembers of
the D/B 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 accepted the decision in Civil Case
No. R-19341, as affirmed by the Court of Appeals
and the Supreme Court, as res judicata.
Ruling of the Court
First, we shall endeavor to dispose of the common
issue raised by both petitioners in their respective
petitions for review, that is, whether or not the
doctrine of res judicata applies in the instant case.
It is ANCO’s contention that the decision in Civil
Case No. R-19341, 5 which was decided in its favor,
constitutes res judicata with respect to the issues
raised in the case at bar.
The contention is without merit. There can be
no res judicata as between Civil Case No. R-19341
and the case at bar. In order for res judicata to be
made applicable in a case, the following essential
requisites must be present: 1) the former
judgment must be final; 2) the former judgment
must have been rendered 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
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 of the last essential requisite of
identity of parties, subject matter and causes of
action.
The parties in Civil Case No. R-19341 were ANCO
as plaintiff and FGU as defendant while in the
instant case, SMC is the plaintiff and the Estate of
Ang Gui represented by Lucio, Julian and Jaime, all
surnamed Ang and Co To as defendants, with the
latter merely impleading FGU as third-party
defendant.
The subject matter of Civil Case No. R-19341 was
the insurance contract entered into by ANCO, the
owner of the vessel, with FGU covering the vessel
D/B Lucio, while in the instant case, the subject
matter of litigation is the loss of the cargoes of
SMC, as shipper, loaded in the D/B Lucio and the
resulting 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 case involves the rights
and liabilities of the shipper vis-à-vis that of the
shipowner. Specifically, Civil Case No. R-19341
was an action for Specific Performance and
Damages based on FGU Marine Hull 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 No. 1
and No. 2, with defendant ANCO seeking
reimbursement from FGU under Insurance Policy
No. MA-58486, should the former be held liable to
pay SMC.
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
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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.
Therefore, based on the foregoing discussion, we
are reversing the findings of the Court of Appeals
that there is res judicata.
Anent ANCO’s first assignment of error, i.e., the
appellate court committed error in concluding
that the 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 of the D/B Lucio. As a
rule, findings of fact of lower courts, particularly
when affirmed by the appellate court, are deemed
final and conclusive. The Supreme Court cannot
review such findings on appeal, 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 findings of
fact by the trial court are entitled to great weight
on appeal and should not be disturbed unless for
strong and cogent reasons because the trial court
is in a better position to examine real evidence, as
well as to observe the demeanor of the witnesses
while testifying in the case.11
It is not the function of this Court to analyze or
weigh evidence all over again, unless there is a
showing that the findings of the lower court are
totally devoid of support or are glaringly
erroneous as to constitute palpable error or grave
abuse of discretion.12
A careful study of the records shows no cogent
reason to fault the findings of the lower court, as
sustained by the appellate court, that ANCO’s
representatives failed to exercise the
extraordinary degree of diligence required by the
law to exculpate them from liability for the loss of
the cargoes.
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 respondents SMC and FGU that "the
crewmembers of D/B Lucio should have left port
at the onset of the typhoon is like advising the fish
to jump from the frying pan into the fire and an
advice that borders on madness."15
The argument does not persuade. The records
show that the D/B Lucio was the only vessel left at
San Jose, Antique, during the time in question. The
other vessels were transferred and temporarily
moved to Malandong, 5 kilometers from wharf
where the barge remained.16 Clearly, the
111 |I N S U R A N C E
LOSS
transferred vessels were definitely safer in
Malandong than at the port of San Jose, Antique, at
that particular time, a fact which petitioners failed
to dispute
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 fact, ANCO claims that their crewmembers
exercised due diligence to prevent or minimize the
loss of the cargoes but their efforts proved no
match to the forces unleashed by the typhoon
which, in petitioners’ own words was, by any
yardstick, a natural calamity, a fortuitous event, an
act of God, the consequences of which petitioners
could not be held liable for.17
The Civil Code provides:
Art. 1733. Common carriers, from the nature of
their business and for reasons of public policy are
bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of the
passengers transported by them, according to all
the circumstances of each case.
Such extraordinary diligence in vigilance over the
goods is further expressed in Articles 1734, 1735,
and 1745 Nos. 5, 6, and 7 . . .
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:
(1) Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
...
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)
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 likewise transferred, but to no avail.
The D/B Lucio had no engine and could not
maneuver by itself. Even if ANCO’s representatives
wanted to transfer it, they no longer had any
means to do so as the tugboat M/T ANCO had
already departed, leaving the barge to its own
devices. The captain of the tugboat should have
had the foresight not to leave the barge alone
considering the pending storm.
While the loss of the cargoes was admittedly
caused by the typhoon Sisang, a natural disaster,
ANCO could not escape liability to respondent
SMC. The records clearly show the failure of
petitioners’ representatives to exercise the
extraordinary degree of diligence mandated by
law. To be exempted from responsibility, the
natural disaster should have been the proximate
and only cause of the loss.20 There 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
. . . To be exempt from liability because of an act of
God, the tug must be free from any previous
negligence or misconduct by which that loss or
damage may have been occasioned. For, although
the immediate or proximate cause of the loss in
any given instance may have been what is termed
an act of God, yet, if the tug unnecessarily exposed
the two to such accident by any culpable act or
omission of its own, it is not excused.22
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 without the assistance of the
tugboat, and again in failing to heed the request of
SMC’s representatives to have the barge
transferred to a safer place, as was done by the
other vessels in the port; thus, making said blatant
negligence the proximate cause of the loss of the
cargoes.
We now come to the issue of whether or not FGU
can be held liable under the insurance policy to
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.
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 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.
112 |I N S U R A N C E
LOSS
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.
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]
...
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
hereby AFFIRMED with MODIFICATION
dismissing the third-party complaint.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr.,
and Tinga, JJ., concur.
113 |I N S U R A N C E
NOTICE OF LOSS
On September 10, 2000, 5,065.47 wet metric tons
Republic of the Philippines (WMT) of copper concentrates were loaded in
SUPREME COURT Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine
Manila vessel owned by Loadstar International Shipping
Co., Inc. (Loadstar International) and operated by
THIRD DIVISION Loadstar Shipping under a charter party
agreement. The shipper and consignee under the
Bill of Lading are Philex Mining Corporation
G.R. No. 185565               November 26, 2014 (Philex) and PASAR, respectively. The cargo was
insured with Malayan Insurance Company, Inc.
LOADSTAR SHIPPING COMPANY, (Malayan) under Open Policy No.
INCORPORATED and LOADSTAR M/OP/2000/001-582. P & I Association is the
INTERNATIONAL SHIPPING COMPANY, third party liability insurer of Loadstar Shipping.
INCORPORATED, Petitioners,
vs. On said date (September 10, 2000), MV "Bobcat"
MALAYAN INSURANCE COMPANY, sailed from Poro Point, San Fernando, La Union
INCORPORATED, Respondent. bound for Isabel, Leyte. On September 12, 2000,
while in the vicinity of Cresta de Gallo, the vessel’s
DECISION chief officer on routine inspection found a crack
on starboard sideof the main deck which caused
REYES, J.: seawater to enter and wet the cargo inside Cargo
Hold No. 2 forward/aft. The cracks at the top deck
This is a Petition for Review on Certiorari 1 filed by starboard side of Cargo Hold No. 2, measuring
Loadstai Shipping Company, Incorporated and 1.21 meters long x 0.39 meters wide, and at top
Loadstar International Shipping Company, deck aft section starboard side on other point,
Incorporated (petitioners) against Malayan measuring 0.82 meters long x 0.32 meters wide,
Insurance Company, Incorporated (Malayan) were welded.
seeking to set aside the Decision2 dated April 14,
2008 and Resolution3 dated December 11, 2008 of Immediately after the vessel arrived at Isabel,
the Court of Appeals (CA) in CA-G.R. CV No. 82758, Leyte anchorage area, on September 13, 2000,
which reversed and set aside the Decision4 dated PASAR and Philex’s representatives boarded and
March 31, 2004 of the Regional Trial Court of inspected the vessel and undertook sampling of
Manila, Branch 34, in Civil Case No. 01-101885. the copper concentrates. In its preliminary report
dated September 15, 2000, the Elite Adjusters and
The facts as found by the CA, are as follows: Surveyor, Inc. (Elite Surveyor) confirmed that
samples of copper concentrates from Cargo Hold
Loadstar International Shipping, Inc.(Loadstar No. 2 were contaminated by seawater.
Shipping) and Philippine Associated Smelting and Consequently, PASAR rejected 750 MT of the
Refining Corporation (PASAR) entered into a 2,300 MT cargo discharged from Cargo Hold No. 2.
Contract of Affreightment for domestic bulk
transport of the latter’s copper concentrates for a On November 6, 2000, PASAR sent a formal notice
period of one year from November 1, 1998 to of claim in the amount of [P]37,477,361.31 to
October 31, 1999. The contract was extended up Loadstar Shipping. In its final report dated
to the end of October 2000. November 16, 2000, Elite Surveyor recommended
payment to the assured the amount of
[P]32,351,102.32 as adjusted. On the basis of such
recommendation, Malayan paid PASAR the
amount of [P]32,351,102.32.
Meanwhile, on November 24, 2000, Malayan
wrote Loadstar Shipping informing the latter of a
prospective buyer for the damaged copper
concentrates and the opportunity to
nominate/refer other salvage buyers to PASAR.
On November 29, 2000, Malayan wrote Loadstar
Shipping informing the latter of the acceptance of
PASAR’s proposal to take the damaged copper
concentrates at a residual value of US$90,000.00.
On December 9, 2000, Loadstar Shipping wrote
Malayan requesting for the reversal of its decision
to accept PASAR’s proposal and the conduct of a
public bidding to allow Loadstar Shipping to
match or top PASAR’s bid by 10%.
On January 23, 2001, PASAR signed a subrogation
receipt in favor of Malayan. To recover the amount
paid and in the exercise of its right of subrogation,
Malayan demanded reimbursement from Loadstar
Shipping, which refused to comply. Consequently,
on September 19, 2001, Malayan instituted with
the RTC a complaint for damages. The complaint
was later amended to include Loadstar
International as party defendant.
In its amended complaint, Malayan mainly alleged
that as a direct and natural consequence of the
unseaworthiness of the vessel, PASAR suffered
loss of the cargo. It prayed for the amount of
[P]33,934,948.75, representing actual damages
plus legal interest fromdate of filing of the
complaint until fully paid, and attorney’s fees in
the amount of not less than [P]500,000.00. It also
sought to declare the bill of lading as void since it
violates the provisions of Articles 1734 and 1745
of the Civil Code.
On October 30, 2002, Loadstar Shipping and
Loadstar International filed their answer with
114 |I N S U R A N C E
NOTICE OF LOSS
counterclaim, denying plaintiff appellant’s
allegations and averring as follows: that they are
not engaged in the business as common carriers
but as private carriers; that the vessel was
seaworthy and defendants-appellees exercised the
required diligence under the law; that the entry of
water into Cargo Hold No. 2 must have been
caused by force majeureor heavy weather; that
due to the inherent nature of the cargo and the use
of water in its production process, the same
cannot be considered damaged or contaminated;
that defendants-appellees were denied reasonable
opportunity to participate in the salvage sale; that
the claim had prescribed in accordance with the
bill of lading provisions and the Code of
Commerce; that plaintiff-appellant’s claim is
excessive, grossly overstated, unreasonable and
unsubstantiated; that their liability, if any, should
not exceed the CIFvalue of the lost/damaged cargo
as set forth in the bill of lading, charter party or
customary rules of trade; and that the arbitration
clause in the contract of affreightment should be
followed.
After trial, and considering that the billof lading,
which was marked as Exhibit "B", is unreadable,
the RTC issued on February 17, 2004 an order
directing the counsel for Malayan to furnish it
with a clearer copy of the same within three (3)
days from receipt of the order. On February 23,
2004, Malayan filed a compliance attaching
thereto copy of the bill of lading.
On March 31, 2004, the RTC rendered a judgment
dismissing the complaint as well as the
counterclaim. The RTC was convinced that the
vessel was seaworthy at the time of loading and
that the damage was attributable to the perils of
the sea (natural disaster) and not due to the fault
or negligence of Loadstar Shipping.
The RTC found that although contaminated by
seawater, the copper concentrates can still be
used. Itgave credence to the testimony of
Francisco Esguerra, defendants-appellees’ expert
witness, that despite high chlorine content, the
copper concentrates remain intact and will not
lose their value. The gold and silver remain with
the grains/concentrates even if soaked with
seawater and does not melt. The RTC observed
that the purchase agreement between PASAR and
Philex contains a penalty clause and has no
rejection clause. Despite this agreement, the
parties failed to sit down and assess the penalty.
The RTC also found that defendants-appellees
were not afforded the opportunity to object or
participate or nominate a participant in the sale of
the contaminated copper concentrates to lessen
the damages to be paid. No record was presented
to show that a public bidding was conducted.
Malayan sold the contaminated copper
concentrates to PASAR at a low price then paid
PASAR the total value of the damaged concentrate
without deducting anything from the claim.
Finally, the RTC denied the prayer to declare the
Bill of Lading null and void for lack of basis
because what was attached to Malayan’s
compliance was still an unreadable machine copy
thereof.5 (Citations omitted)
Ruling of the CA
On April 14, 2008, the CA rendered its
Decision,6 the dispositive portion of which reads:
WHEREFORE, the appeal is GRANTED. The
Decision dated March 31, 2004 of the RTC, Branch
34, Manila in Civil Case No. 01-101885, is
REVERSED and SET ASIDE. In lieu thereof, a new
judgment is entered, ORDERING defendants-
appellees to pay plaintiff-appellant
₱33,934,948.75 as actual damages, plus legal
interest at 6% annually from the date of the trial
court’s decision. Upon the finality of the decision,
the total amount of the judgment shall earn annual
interest at 12% until full payment.
SO ORDERED.7
On December 11, 2008, the CA modified the above
decision through a Resolution,8 the fallo thereof
states:
WHEREFORE, the Motion for Reconsiderationis
PARTLY GRANTED. The decision of this Court
dated April 14, 2008 is PARTIALLY
RECONSIDERED and MODIFIED. Defendants-
appellees are ORDERED to pay to plaintiff-
appellant ₱33,934,948.74 as actual damages, less
US$90,000.00, computed at the exchange rate
prevailing on November 29, 2000, plus legal
interest at 6% annually from the date of the trial
court’s decision. Upon the finality of the decision,
the total amount of the judgment shall earn annual
interest at 12% until full payment.
SO ORDERED.9
The CA discussed that the amount of
US$90,000.00 should have been deducted from
Malayan’s claim against the petitioners in order to
prevent undue enrichment on the part of Malayan.
Otherwise, Malayan would recover from the
petitioners not merely the entire amount of
33,934,948.74 as actual damages, but would also
end up unjustly enriching itself in the amount of
US$90,000.00 – the residual value of the subject
copper concentrates it sold to Philippine
Associated Smelting and Refining Corporation
(PASAR) on November 29, 2000.10 Issues
In sum, the grounds presented by the petitioners
for the Court’s consideration are the following:
I.
THE [CA] HAS NO BASIS IN REVERSING THE
DECISION OF THE TRIAL COURT. THERE IS
NOTHING IN THE DECISION OF THE HONORABLE
COURT THAT REVERSED THE FACTUAL
115 |I N S U R A N C E
NOTICE OF LOSS
FINDINGS AND CONCLUSIONS OF THE TRIAL
COURT, THAT THERE WAS NO ACTUAL LOSS OR
DAMAGE TO THE CARGO OF COPPER
CONCENTRATES WHICH WOULD MAKE
LOADSTAR AS THE SHIPOWNER LIABLE FOR A
CARGO CLAIM. CONSEQUENTLY, THERE IS NO
BASIS FOR THE COURT TO ORDER LOADSTAR TO
PAY ACTUAL DAMAGES IN THE AMOUNT OF
PH₱33 MILLION.11
II.
M/V BOBCAT IS A PRIVATE CARRIER, THE
HONORABLE COURT HAD NO BASIS IN RULING
THAT IT IS A COMMON CARRIER. THE DECISION
OF THE TRIAL COURT IS BEREFT OF ANY
CATEGORICAL FINDING THAT M/V BOBCAT IS A
COMMON CARRIER.12
III.
THE HONORABLE COURT OFAPPEALS
COMMITTED A REVERSIBLE ERROR IN RULING
THAT RESPONDENT’S PAYMENT TO PASAR, ON
THE BASIS OF THE LATTER’S FRAUDULENT
CLAIM, ENTITLED RESPONDENT AUTOMATIC
RIGHT OF RECOVERY BY VIRTUE OF
SUBROGATION.13
Ruling of the Court
I. Proof of actual damages
It is not disputed that the copper concentrates
carried by M/V Bobcat from Poro Point, La Union
to Isabel, Leyte were indeed contaminated with
seawater. The issue lies on whether such
contamination resulted to damage, and the costs
thereof, if any,incurred by the insured PASAR.
The petitioners argued that the copper
concentrates, despite being dampened with
seawater, is neither subject to penalty nor
rejection. Under the Philex Mining Corporation
(Philex)-PASAR Purchase Contract Agreement,
there is no rejection clause. Instead, there is a pre-
agreed formula for the imposition of penalty in
case other elements exceeding the provided
minimum level would be found on the
concentrates.14 Since the chlorine content on the
copper concentrates is still below the minimum
level provided under the Philex-PASAR purchase
contract, no penalty may be imposed against the
petitioners.15
Malayan opposed the petitioners’ invocation of the
Philex-PASAR purchase agreement, stating that
the contract involved in this case is a contract of
affreightment between the petitioners and PASAR,
not the agreement between Philex and PASAR,
which was a contract for the sale of copper
concentrates.16
On this score, the Court agrees withMalayan that
contrary to the trial court’s disquisition, the
petitioners cannot validly invoke the penalty
clause under the Philex-PASAR purchase
agreement, where penalties are to be imposed by
the buyer PASAR against the seller Philex if some
elements exceeding the agreed limitations are
found on the copper concentrates upon delivery.
The petitioners are not privy tothe contract of sale
of the copper concentrates. The contract between
PASAR and the petitioners is a contract of carriage
of goods and not a contract of sale. Therefore, the
petitioners and PASAR are bound by the laws on
transportation of goods and their contract of
affreightment. Since the Contract of
Affreightment17 between the petitioners and
PASAR is silent as regards the computation of
damages, whereas the bill of lading presented
before the trial court is undecipherable, the New
Civil Code and the Code ofCommerce shall govern
the contract between the parties.
Malayan paid PASAR the amount of 32,351,102.32
covering the latter’s claim of damage to the
cargo.18 This is based on the recommendation of
Elite Adjustors and Surveyors, Inc. (Elite) which
both Malayan and PASAR agreed to. The
computation of Elite is presented as follows:
Computation of Loss Payable.We computed for the
insured value of the loss and loss payable, based
on the following pertinent data:
1) Total quantity shipped - 5,065.47 wet
metric tons and at risk or (Risk Note and
B/L) 4,568.907 dry metric tons
2) Total sum insured - [P]212,032,203.77
(Risk Note and Endorsement)
3) Quantity damaged: 777.290 wet metric
tons or (Pasar Laboratory Cert. & 696.336
dry metric tons discharge & sampling
Cert.dated September 21, 2000)
Computation:
Total sum insured x Qty.
damaged= Insured value of
damage
Total Qty. in DMT (DMT) (DMT)
[P] 212,032,203.77 x 696.336
DMT = [P]32,315,312.32
4,568.907 DMT
Insured value of damage = [P]
32,315,312.3219
Based on the preceding computation, the sum of
₱32,315,312.32 represents damages for the total
loss ofthat portion of the cargo which were
contaminated with seawater and not merely the
depreciation in its value. Strangely though, after
claiming damages for the total loss of that portion,
116 |I N S U R A N C E
NOTICE OF LOSS
PASAR bought back the contaminated copper
concentrates from Malayan at the price of
US$90,000.00. The fact of repurchase is enough to
conclude that the contamination of the copper
concentrates cannot be considered as total loss on
the part of PASAR.
The following provisions of the Code of Commerce
state how damages on goods delivered by the
carrier should be appraised:
Article 361. The merchandise shall be transported
at the risk and venture of the shipper, if the
contrary has not been expressly stipulated. As a
consequence, all the losses and deteriorations
which the goods may suffer during the
transportation by reason of fortuitous event, force
majeure, or the inherent nature and defect of the
goods, shall be for the account and risk of the
shipper. Proof of these accidents is incumbent
upon the carrier.
Article 362. Nevertheless, the carrier shall be
liable for the losses and damages resulting from
the causes mentioned in the preceding article if it
is proved, as against him, that they arose through
his negligence or by reason of his having failed to
take the precautions which usage has established
among careful persons, unless the shipper has
committed fraud in the bill of lading, representing
the goods to be of a kind or quality different from
what they really were.
If, notwithstanding the precautions referred to in
this article, the goods transported run the risk of
being lost, on account of their nature or by reason
of unavoidable accident, there being no time for
their owners to dispose of them, the carrier may
proceed to sell them, placing them for this
purpose at the disposal of the judicial authority or
of the officials designated by special provisions.
xxxx
Article 364. If the effect of the damage referred to
in Article 361 is merely a diminution in the value
of the goods, the obligation of the carrier shall be
reduced to the payment of the amount which, in
the judgment of experts, constitutes such
difference in value.
Article 365. If, in consequence of the damage, the
goods are rendered useless for sale and
consumption for the purposes for which they are
properly destined, the consignee shall not be
bound to receive them, and he may have them in
the hands of the carrier, demanding of the latter
their value at the current price on that day.
If among the damaged goods there should be some
pieces in good condition and without any defect,
the foregoing provision shall be applicable with
respect to those damaged and the consignee shall
receive those which are sound, this segregation to
be made by distinct and separate pieces and
without dividing a single object, unless the
consignee proves the impossibility of conveniently
making use of them in this form.
The same rule shall be applied to merchandise in
bales or packages, separating those parcels which
appear sound.
From the above-cited provisions, if the goods are
delivered but arrived at the destination in
damaged condition, the remedies to be pursued by
the consignee depend on the extent of damage on
the goods.
If the goods are rendered useless for sale,
consumption or for the intended purpose, the
consignee may reject the goods and demand the
payment of such goods at their marketprice on
that day pursuant to Article 365. In case the
damaged portion of the goods can be segregated
from those delivered in good condition, the
consignee may reject those in damaged condition
and accept merely those which are in good
condition. But if the consignee is able to prove that
it is impossible to use those goods which were
delivered in good condition without the others,
then the entire shipment may be rejected. To
reiterate, under Article 365, the nature of damage
must be such that the goods are rendered useless
for sale, consumption or intended purpose for the
consignee to be able to validly reject them.
If the effect of damage on the goods consisted
merely of diminution in value, the carrier is bound
to pay only the difference between its price on
that day and its depreciated value as provided
under Article 364.
Malayan, as the insurer of PASAR, neither stated
nor proved that the goods are rendered useless or
unfit for the purpose intended by PASAR due to
contamination with seawater. Hence, there is no
basis for the goods’ rejection under Article 365 of
the Code of Commerce. Clearly, it is erroneous for
Malayan to reimburse PASAR as though the latter
suffered from total loss of goods in the absence of
proof that PASAR sustained such kind of loss.
Otherwise, there will be no difference inthe
indemnification of goods which were not
delivered at all; or delivered but rendered useless,
compared against those which were delivered
albeit, there is diminution in value.
Malayan also failed to establish the legal basis of
its decision to sell back the rejected copper
concentrates to PASAR. It cannot be ascertained
how and when Malayan deemed itself asthe owner
of the rejected copper concentrates to have these
validly disposed of. If the goods were rejected, it
only means there was no acceptance on the part of
PASAR from the carrier. Furthermore, PASAR and
Malayan simply agreed on the purchase price of
US$90,000.00 without any allegation or proof that
the said price was the depreciated value based on
the appraisal of experts as provided under Article
364 of the Code of Commerce.
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NOTICE OF LOSS
II. Subrogation of Malayan to the rights of PASAR
Malayan’s claim against the petitioners is based on
subrogation to the rights possessed by PASAR as
consignee of the allegedly damaged goods. The
right of subrogation stems from Article 2207 of
the New Civil Code which states:
Art. 2207. If the plaintiff’s property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrong doer or
the person who has violated the contract. If the
amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the
person causing the loss or injury.
"The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues
simply upon payment of the insurance claim by
the insurer."20 The right of subrogation is
however, not absolute. "There are a few
recognized exceptions to this rule. For instance, if
the assured by his own act releases the wrongdoer
or third party liable for the loss or damage, from
liability, the insurer’s right of subrogation is
defeated. x x x Similarly, where the insurer pays
the assured the value of the lostgoods without
notifying the carrier who has in good faith settled
the assured’s claim for loss, the settlement is
binding on both the assured and the insurer, and
the latter cannot bring an action against the
carrier on his right of subrogation. x x x And
where the insurer pays the assured for a loss
which is not a risk covered by the policy, thereby
effecting ‘voluntary payment,’ the former has no
right of subrogation against the third party liable
for the loss x x x."21
The rights of a subrogee cannot be superior to the
rights possessed by a subrogor. "Subrogation is
the substitution of one person in the place of
another with reference to a lawful claim or right,
so that he who is substituted succeeds to the
rights of the other in relation to a debt or claim,
including its remedies or securities. The rights to
which the subrogee succeeds are the same as, but
not greaterthan, those of the person for whom he
is substituted, that is, he cannot acquire any claim,
security or remedy the subrogor did not have. In
other words, a subrogee cannot succeed to a right
not possessed by the subrogor. A subrogee in
effect steps into the shoes of the insured and can
recover only ifthe insured likewise could have
recovered."22 Consequently, an insurer
indemnifies the insured based on the loss or
injury the latter actually suffered from. If there is
no loss or injury, then there is no obligation on the
part of the insurer to indemnify the insured.
Should the insurer pay the insured and it turns out
that indemnification is not due, or if due, the
amount paid is excessive, the insurer takes the
risk of not being able to seek recompense from the
alleged wrongdoer. This is because the supposed
subrogor did not possessthe right to be
indemnified and therefore, no right to collect is
passed on to the subrogee. As regards the
determination of actual damages, "[i]t is axiomatic
that actual damages must be proved with
reasonable degree of certainty and a party is
entitled only to such compensation for the
pecuniary loss that was duly proven."23 Article
2199 of the New Civil Code speaks of how actual
damages are awarded:
Art. 2199. Except as provided by law or by
stipulation, one is entitled to an adequate
compensation only for such pecuniary loss
suffered by him as he has duly proved. Such
compensation is referred to as actual or
compensatory damages.
Whereas the CA modified its Decision dated April
14, 2008 by deducting the amount of
US$90,000.00 fromthe award, the same is still
iniquitous for the petitioners because PASAR and
Malayan never proved the actual damages
sustained by PASAR. It is a flawed notion to
merely accept that the salvage value of the goods
is US$90,000.00, since the price was arbitrarily
fixed between PASAR and Malayan. Actual
damages to PASAR, for example, could include the
diminution in value as appraised by experts or the
expenses which PASAR incurred for the
restoration of the copper concentrates to its
former condition, ifthere is damage and
rectification is still possible.
It is also note worthy that when the expert
witness for the petitioners, Engineer Francisco
Esguerra (Esguerra), testified as regards the lack
of any adverse effect of seawater on copper
concentrates, Malayan never presented evidence
of its own in refutation to Esguerra’s testimony.
And, even if the Court will disregard the entirety
of his testimony, the effect on Malayan’s cause of
action is nil. As Malayan is claiming for actual
damages, it bears the burden of proof to
substantiate its claim.
"The burden of proof is on the party who would be
defeated if no evidence would be presented on
either side. The burden is to establish one’s case
by a preponderance of evidence which means that
the evidence, as a whole, adduced by one side, is
superior tothat of the other. Actual damages are
not presumed. The claimant must prove the actual
amount of loss with a reasonable degree of
certainty premised upon competent proof and on
the best evidence obtainable. Specific facts that
could afford a basis for measuring whatever
compensatory or actual damages are borne must
be pointed out. Actual damages cannot be
anchored on mere surmises, speculations or
conjectures."24
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NOTICE OF LOSS
Having ruled that Malayan did not adduce proof of
pecuniary loss to PASAR for which the latter was
questionably indemnified, there is no necessity to
expound further on the other issues raised by the
petitioners and Malayan in this case.

WHEREFORE, the petition is GRANTED. The

Decision dated April 14, 2008 and Resolution
dated December 11, 2008 of the Court of Appeals
in CA-G.R. CV No. 82758 are hereby REVERSED
and SET ASIDE. The Decision dated March 31,
2004 of the Regional Trial Comi of Manila, Branch
34 in Civil Case No·. 01-101885 is REINSTATED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

119 |I N S U R A N C E
NOTICE OF LOSS
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 185964               June 16, 2014
ASIAN TERMINALS, INC., Petitioner,
vs.
FIRST LEPANTO-TAISHO INSURANCE
CORPORATION, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari 1 under
Rule 45 of the Rules of Court seeking to annul and
set aside the Decision2 dated October 10, 2008 of
the Court of Appeals (CA) in CA-G.R. SP No. 99021
which adjudged petitioner Asian Terminals, Inc.
(ATI) liable to pay the money claims of
respondent First Lepanto-Taisho Insurance
Corporation (FIRST LEPANTO).
The Undisputed Facts
On July 6, 1996, 3 3,000 bags of sodium
tripolyphosphate contained in 100 plain jumbo
bags complete and in good condition were loaded
and received on board M/V "Da Feng" owned by
China Ocean Shipping Co. (COSCO) in favor of
consignee, Grand Asian Sales, Inc. (GASI). Based
on a Certificate of Insurance4 dated August 24,
1995, it appears that the shipment was insured
against all risks by GASI with FIRST LEPANTO for
₱7,959,550.50 under Marine Open Policy No.
0123.
The shipment arrived in Manila on July 18, 1996
and was discharged into the possession and
custody of ATI, a domestic corporation engaged in
arrastre business. The shipment remained for
quite some time at ATI’s storage area until it was
withdrawn by broker, Proven Customs Brokerage
Corporation (PROVEN), on August 8 and 9, 1996
for delivery to the consignee. Upon receipt of the
shipment,5 GASI subjected the same to inspection
and found that the delivered goods incurred
shortages of 8,600 kilograms and spillage of 3,315
kg for a total of11,915 kg of loss/damage valued at
₱166,772.41.
GASI sought recompense from COSCO, thru its
Philippine agent Smith Bell Shipping Lines, Inc.
(SMITH BELL),6 ATI7 and PROVEN8 but was
denied. Hence, it pursued indemnification from
the shipment’s insurer.9
After the requisite investigation and adjustment,
FIRST LEPANTO paid GASI the amount of
₱165,772.40 as insurance indemnity.10
Thereafter, GASI executed a Release of
Claim11 discharging FIRST LEPANTO from any and
all liabilities pertaining to the lost/damaged
shipment and subrogating it to all the rights of
recovery and claims the former may have against
any person or corporation in relation to the
lost/damaged shipment.
As such subrogee, FIRST LEPANTO demanded
from COSCO, its shipping agency in the
Philippines, SMITH BELL, PROVEN and ATI,
reimbursement of the amount it paid to GASI.
When FIRST LEPANTO’s demands were not
heeded, it filed on May 29, 1997 a Complaint 12 for
sum of money before the Metropolitan Trial Court
(MeTC) of Manila, Branch 3. FIRST LEPANTO
sought that it be reimbursed the amount of
166,772.41, twenty-five percent (25%) thereof as
attorney’s fees, and costs of suit.
ATI denied liability for the lost/damaged
shipment and claimed that it exercised due
diligence and care in handling the same. 13 ATI
averred that upon arrival of the shipment, SMITH
BELL requested for its inspection 14 and it was
discovered that one jumbo bag thereof sustained
loss/damage while in the custody of COSCO as
evidenced by Turn Over Survey of Bad Order
Cargo No. 47890 dated August 6, 199615 jointly
executed by the respective representatives of ATI
and COSCO. During the withdrawal of the
shipment by PROVEN from ATI’s warehouse, the
entire shipment was re-examined and it was
found to be exactly in the same condition as when
it was turned over to ATI such that one jumbo bag
was damaged. To bolster this claim, ATI submitted
Request for Bad Order Survey No. 40622 dated
August 9, 199616 jointly executed by the respective
representatives of ATI and PROVEN. ATI also
submitted various Cargo Gate Passes17 showing
that PROVEN was able to completely withdraw all
the shipment from ATI’s warehouse in good order
condition except for that one damaged jumbo bag.
In the alternative, ATI asserted that even if it is
found liable for the lost/damaged portion of the
shipment, its contract for cargo handling services
limits its liability to not more than ₱5,000.00 per
package. ATI interposed a counterclaim of
₱20,000.00 against FIRST LEPANTO as and for
attorney’s fees. It also filed a cross-claim against
its co-defendants COSCO and SMITH BELL in the
event that it is made liable to FIRST LEPANTO. 18
PROVEN denied any liability for the lost/damaged
shipment and averred that the complaint alleged
no specific acts or omissions that makes it liable
for damages. PROVEN claimed that the damages in
the shipment were sustained before they were
withdrawn from ATI’s custody under which the
shipment was left in an open area exposed to the
elements, thieves and vandals. PROVEN contended
that it exercised due diligence and prudence in
handling the shipment. PROVEN also filed a
counterclaim for attorney’s fees and damages.19
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NOTICE OF LOSS
Despite receipt of summons on December 4,
1996,20 COSCO and SMITH BELL failed to file an
answer to the complaint. FIRST LEPANTO thus
moved that they be declared in default 21 but the
motion was denied by the MeTC on the ground
that under Rule 9, Section 3 of the Rules of Civil
Procedure, "when a pleading asserting a claim
states a common cause of action against several
defending parties, some of whom answer and the
other fail to do so, the Court shall try the case
against all upon the answers thus filed, and render
judgment upon the evidence presented."22
Ruling of the MeTC
In a Judgment23 dated May 30, 2006, the MeTC
absolved ATI and PROVEN from any liability and
instead found COSCO to be the party at fault and
hence liable for the loss/damage sustained by the
subject shipment. However, the MeTC ruled it has
no jurisdiction over COSCO because it is a foreign
corporation. Also, it cannot enforce judgment
upon SMITH BELL because no evidence was
presented establishing that it is indeed the
Philippine agent of COSCO. There is also no
evidence attributing any fault to SMITH BELL.
Consequently, the complaint was dismissed in this
wise:
WHEREFORE, in light of the foregoing, judgment is
hereby rendered DISMISSING the instant case for
failure of [FIRST LEPANTO] to sufficiently
establish its cause o faction against [ATI, COSCO,
SMITH BELL, and PROVEN].
The counterclaims of [ATI and PROVEN] are
likewise dismissed for lack of legal basis.
No pronouncement as to cost.
SO ORDERED.24
Ruling of the Regional Trial Court
On appeal, the Regional Trial Court (RTC) The complaint against [COSCO/SMITH BELL and
reversed the MeTC’s findings. In its PROVEN] are DISMISSED for lack of evidence
Decision25 dated January 26, 2007, the RTC of against them. The counterclaim and cross[-]claim
Manila, Branch 21, in Civil Case No. 06-116237, of [ATI] are likewise DISMISSED for lack of merit.
rejected the contentions of ATI upon its
observation that the same is belied by its very SO ORDERED.26
own documentary evidence. The RTC remarked
that, if, as alleged by ATI, one jumbo bag was Ruling of the CA
already in bad order condition upon its receipt of
the shipment from COSCO on July 18, 1996, then
ATI sought recourse with the CA challenging the
how come that the Request for Bad Order Survey
RTC’s finding that FIRST LEPANTO was validly
and the Turn Over Survey of Bad Order Cargo
subrogated to the rights of GASI with respect to
were prepared only weeks thereafter or on August
the lost/damaged shipment. ATI argued that there
9, 1996 and August 6, 1996, respectively. ATI was
was no valid subrogation because FIRSTLEPANTO
adjudged unable to prove that it exercised due
failed to present a valid, existing and enforceable
diligence while in custody of the shipment and
Marine Open Policy or insurance contract. ATI
hence, negligent and should be held liable for the
reasoned that the Certificate of Insurance or
damages caused to GASI which, in turn, is
Marine Cover Note submitted by FIRST LEPANTO
subrogated by FIRST LEPANTO.
as evidence is not the same as an actual insurance
contract.
The RTC rejected ATI’s contention that its liability
is limited only to ₱5,000.00 per package because
In its Decision27 dated October 10, 2008, the CA
its Management Contract with the Philippine Ports
dismissed the appeal and held that the Release of
Authority (PPA) purportedly containing the same
Claim and the Certificate of Insurance presented
was not presented as evidence. More importantly,
by FIRST LEPANTO sufficiently established its
FIRST LEPANTO or GASI cannot be deemed bound
relationship with the consignee and that upon
thereby because they were not parties thereto.
proof of payment of the latter’s claim for damages,
Lastly, the RTC did not give merit to ATI’s defense
FIRST LEPANTO was subrogated to its rights
that any claim against it has already prescribed
against those liable for the lost/damaged
because GASI failed to file any claim within the 15-
shipment.
day period stated in the gate pass issued by ATI to
GASI’s broker, PROVEN. Accordingly, the RTC
disposed thus: The CA also affirmed the ruling of the RTC that the
subject shipment was damaged while in the
custody of ATI. Thus, the CA disposed as follows:
WHEREFORE, in light of the foregoing, the
judgment on appeal is hereby REVERSED.
WHEREFORE, premises considered, the assailed
Decision is hereby AFFIRMED and the instant
[ATI] is hereby ordered to reimburse [FIRST
LEPANTO] the amount of [P]165,772.40 with legal petition is DENIED for lack of merit.
interest until fully paid, to pay [FIRST LEPANTO]
10% of the amount due the latter as and for SO ORDERED.28
attorney’s fees plus the costs of suit.
121 |I N S U R A N C E
NOTICE OF LOSS
ATI moved for reconsideration but the motion was
denied in the CA Resolution29 dated January 12,
2009. Hence, this petition arguing that:
(a) The presentation of the insurance policy is
indispensable in proving the right of FIRST
LEPANTO to be subrogated to the right of the
consignee pursuant to the ruling in Wallem
Philippines Shipping, Inc. v. Prudential Guarantee
and Assurance Inc.;30
(b) ATI cannot be barred from invoking the
defense of prescription as provided for in the gate
passes in consonance with the ruling in
International Container Terminal Services, Inc. v.
Prudential Guarantee and Assurance Co, Inc.31
Ruling of the Court
The Court denies the petition.
ATI failed to prove that it exercised
due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.
It must be emphasized that factual questions
pertaining to ATI’s liability for the loss/damage
sustained by GASI has already been settled in the
uniform factual findings of the RTC and the CA
that: ATI failed to prove by preponderance of
evidence that it exercised due diligence in
handling the shipment.
Such findings are binding and conclusive upon this
Court since a review thereof is proscribed by the
nature of the present petition. Only questions of
law are allowed in petitions for review on
certiorari under Rule 45 of the Rules of Court. It is
not the Court’s duty to review, examine, and
evaluate or weigh all over again the probative
value of the evidence presented, especially where
the findings of the RTC are affirmed by the CA, as
in this case.32
There are only specific instances when the Court
deviates from the rule and conducts a review of
the courts a quo’s factual findings, such as when:
(1) the inference made is manifestly mistaken,
absurd or impossible; (2) there is grave abuse of
discretion;(3) the findings are grounded entirely
on speculations, surmises or conjectures; (4) the
judgment of the CA is based on misapprehension
of facts; (5) the CA, in making its findings, went
beyond the issues of the case and the same is
contrary to the admissions of both appellant and
appellee; (6) the findings of fact are conclusions
without citation of specific evidence on which they
are based; (7) the CA manifestly overlooked
certain relevant facts not disputed by the parties
and which, if properly considered, would justify a
different conclusion; and (8) the findings of fact of
the CA are premised on the absence of evidence
and are contradicted by the evidence on record. 33
None of these instances, however, are present in
this case. Moreover, it is unmistakable that ATI
has already conceded to the factual findings of
RTC and CA adjudging it liable for the shipment’s
loss/damage considering the absence of
arguments pertaining to such issue in the petition
at bar.
These notwithstanding, the Court scrutinized the
records of the case and found that indeed, ATI is
liable as the arrastre operator for the
lost/damaged portion of the shipment.
The relationship between the consignee and the
arrastre operator is akin to that existing between
the consignee and/or the owner of the shipped
goods and the common carrier, or that between a
depositor and a warehouseman. Hence, in the
performance of its obligations, an arrastre
operator should observe the same degree of
diligence as that required of a common carrier and
a warehouseman. Being the custodian of the goods
discharged from a vessel, an arrastre operator’s
duty is to take good care of the goods and to turn
them over to the party entitled to their
possession.34
In a claim for loss filed by the consignee (or the
insurer), the burden of proof to show compliance
with the obligation to deliver the goods to the
appropriate party devolves upon the arrastre
operator. Since the safekeeping of the goods is its
responsibility, it must prove that the losses were
not due to its negligence or to that of its
employees. To avoid liability, the arrastre
operator must prove that it exercised diligence
and due care in handling the shipment.35
ATI failed to discharge its burden of proof.
Instead, it insisted on shifting the blame to COSCO
on the basis of the Request for Bad Order Survey
dated August 9, 1996 purportedly showing that
when ATI received the shipment, one jumbo bag
thereof was already in damaged condition.
The RTC and CA were both correct in concluding
that ATI’s contention was improbable and
illogical. As judiciously discerned by the courts a
quo, the date of the document was too distant
from the date when the shipment was actually
received by ATI from COSCO on July 18, 1996. In
fact, what the document established is that when
the loss/damage was discovered, the shipment
has been in ATI’s custody for at least two weeks.
This circumstance, coupled with the undisputed
declaration of PROVEN’s witnesses that while the
shipment was in ATI’s custody, it was left in an
open area exposed to the elements, thieves and
vandals,36 all generate the conclusion that ATI
failed to exercise due care and diligence while the
subject shipment was under its custody, control
and possession as arrastre operator.
To prove the exercise of diligence in handling the
subject cargoes, an arrastre operator must do
122 |I N S U R A N C E
NOTICE OF LOSS
more than merely show the possibility that some
other party could be responsible for the loss or the
damage.37 It must prove that it used all reasonable
means to handle and store the shipment with due
care and diligence including safeguarding it from
weather elements, thieves or vandals.
Non-presentation of the insurance
contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.
It is conspicuous from the records that ATI put in
issue the submission of the insurance contract for
the first time before the CA. Despite opportunity
to study FIRST LEPANTO’s complaint before the
MeTC, ATI failed to allege in its answer the
necessity of the insurance contract. Neither was
the same considered during pre-trial as one of the
decisive matters in the case. Further, ATI never
challenged the relevancy or materiality of the
Certificate of Insurance presented by FIRST
LEPANTO as evidence during trial as proof of its
right to be subrogated in the consignee’s stead.
Since it was not agreed during the pre-trial
proceedings that FIRST LEPANTO will have to
prove its subrogation rights by presenting a copy
of the insurance contract, ATI is barred from
pleading the absence of such contract in its appeal.
It is imperative for the parties to disclose during
pre-trial all issues they intend to raise during the
trial because, they are bound by the delimitation
of such issues. The determination of issues during
the pre-trial conference bars the consideration of
other questions, whether during trial or on
appeal.38
A faithful adherence to the rule by litigants is
ensured by the equally settled principle that a
party cannot change his theory on appeal as such
act violates the basic rudiments of fair play and
due process. As stressed in Jose v. Alfuerto:39
[A] party cannot change his theory ofthe case or
his cause of action on appeal. Points of law,
theories, issues and arguments not brought to the
attention of the lower court will not be considered
by the reviewing court. The defenses not pleaded
in the answer cannot, on appeal, change
fundamentally the nature of the issue in the case.
To do so would be unfair to the adverse party,
who had no opportunity to present evidence in
connection with the new theory; this would offend
the basic rules of due process and fair
play.40 (Citation omitted)
While the Court may adopt a liberal stance and
relax the rule, no reasonable explanation,
however, was introduced to justify ATI’s failure to
timely question the basis of FIRST LEPANTO’s
rights as a subrogee.
The fact that the CA took cognizance of and
resolved the said issue did not cure or ratify ATI’s
faux pas. "[A] judgment that goes beyond the
issues and purports to adjudicate something on
which the court did not hear the parties, is not
only irregular but also extrajudicial and
invalid."41 Thus, for resolving an issue not framed
during the pre-trial and on which the parties were
not heard during the trial, that portion of the CA’s
judgment discussing the necessity of presenting
an insurance contract was erroneous.
At any rate, the non-presentation of the insurance
contract is not fatal to FIRST LEPANTO’s right to
collect reimbursement as the subrogee of GASI.
"Subrogation is the substitution of one person in
the place of another with reference to a lawful
claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a
debt or claim, including its remedies or
securities."42 The right of subrogation springs
from Article 2207 of the Civil Code which states:
Art. 2207. If the plaintiff’s property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrong-doer
or the person who has violated the contract. If the
amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the
person causing the loss or injury.
As a general rule, the marine insurance policy
needs to be presented in evidence before the
insurer may recover the insured value of the
lost/damaged cargo in the exercise of its
subrogatory right. In Malayan Insurance Co., Inc.
v.Regis Brokerage Corp.,43 the Court stated that
the presentation of the contract constitutive of the
insurance relationship between the consignee and
insurer is critical because it is the legal basis of the
latter’s right to subrogation.44
In Home Insurance Corporation v. CA, 45 the Court
also held that the insurance contract was
necessary to prove that it covered the hauling
portion of the shipment and was not limited to the
transport of the cargo while at sea. The shipment
in that case passed through six stages with
different parties involved in each stage until it
reached the consignee. The insurance contract,
which was not presented in evidence, was
necessary to determine the scope of the insurer’s
liability, if any, since no evidence was adduced
indicating at what stage in the handling process
the damage to the cargo was sustained.46
An analogous disposition was arrived at in the
Wallem47 case cited by ATI wherein the Court held
that the insurance contract must be presented in
evidence in order to determine the extent of its
coverage. It was further ruled therein that the
liability of the carrier from whom reimbursement
was demanded was not established with certainty
123 |I N S U R A N C E
NOTICE OF LOSS
because the alleged shortage incurred by the
cargoes was not definitively determined.48
Nevertheless, the rule is not inflexible. In certain
instances, the Court has admitted exceptions by
declaring that a marine insurance policy is
dispensable evidence in reimbursement claims
instituted by the insurer.
In Delsan Transport Lines, Inc. v. CA, 49 the Court
ruled that the right of subrogation accrues simply
upon payment by the insurance company of the
insurance claim. Hence, presentation in evidence
of the marine insurance policy is not
indispensable before the insurer may recover
from the common carrier the insured value of the
lost cargo in the exercise of its subrogatory right.
The subrogation receipt, by itself, was held
sufficient to establish not only the relationship
between the insurer and consignee, but also the
amount paid to settle the insurance claim. The
presentation of the insurance contract was
deemed not fatal to the insurer’s cause of action
because the loss of the cargo undoubtedly
occurred while on board the petitioner’s vessel.50
The same rationale was the basis of the judgment
in International Container Terminal Services, Inc.
v. FGU Insurance Corporation,51 wherein the
arrastre operator was found liable for the lost
shipment despite the failure of the insurance
company to offer in evidence the insurance
contract or policy. As in Delsan, it was certain that
the loss of the cargo occurred while in the
petitioner’s custody.52
Based on the attendant facts of the instant case,
the application of the exception is
warranted.1âwphi1 As discussed above, it is
already settled that the loss/damage to the GASI’s
shipment occurred while they were in ATI’s
custody, possession and control as arrastre
operator. Verily, the Certificate of Insurance 53 and
the Release of Claim54 presented as evidence
sufficiently established FIRST LEPANTO’s right to
collect reimbursement as the subrogee of the
consignee, GASI.
With ATI’s liability having been positively
established, to strictly require the presentation of
the insurance contract will run counter to the
principle of equity upon which the doctrine of
subrogation is premised. Subrogation is designed
to promote and to accomplish justice and is the
mode which equity adopts to compel the ultimate
payment of a debt by one who in justice, equity
and good conscience ought to pay.55
The payment by the insurer to the insured
operates as an equitable assignment to the insurer
of all the remedies which the insured may have
against the third party whose negligence or
wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it
grow out of any privity of contract or upon
payment by the insurance company of the
insurance claim. It accrues simply upon payment
by the insurance company of the insurance
claim.56
ATI cannot invoke prescription
ATI argued that the consignee, thru its insurer,
FIRST LEPANTO is barred from seeking payment
for the lost/damaged shipment because the claim
letter of GASI to ATI was served only on
September 27, 1996 or more than one month from
the date the shipment was delivered to the
consignee’s warehouse on August 9, 1996. The
claim of GASI was thus filed beyond the 15-day
period stated in ATI’s Management Contract with
PPA which in turn was reproduced in the gate
passes issued to the consignee’s broker, PROVEN,
as follows:
Issuance of this Gate Pass Constitutes delivery to
and receipt by consignee of the goods as described
above in good order and condition unless an
accompanying x x x certificates duly issued and
noted on the face of this Gate Pass appeals. [sic]
This Gate pass is subject to all terms and
conditions defined in the Management Contract
between the Philippine Port[s] Authority and
Asian Terminals, Inc. and amendment thereto and
alterations thereof particularly but not limited to
the [A]rticle VI thereof, limiting the contractor’s
liability to [P]5,000.00 per package unless the
importation is otherwise specified or manifested
or communicated in writing together with the
invoice value and supported by a certified packing
list to the contractor by the interested party or
parties before the discharge of the goods and
corresponding arrastre charges have been paid
providing exception or restrictions from liability
releasing the contractor from liability among
others unless a formal claim with the required
annexes shall have been filed with the contractor
within fifteen (15) days from date of issuance by
the contractors or certificate of loss, damages,
injury, or Certificate of non-delivery. 57
The contention is bereft of merit. As clarified in
Insurance Company of North America v. Asian
Terminals, Inc.,58 substantial compliance with the
15-day time limitation is allowed provided that
the consignee has made a provisional claim thru a
request for bad order survey or examination
report, viz:
Although the formal claim was filed beyond the
15-day period from the issuance of the
examination report on the request for bad order
survey, the purpose of the time limitations for the
filing of claims had already been fully satisfied by
the request of the consignee’s broker for a bad
order survey and by the examination report of the
arrastre operator on the result thereof, as the
arrastre operator had become aware of and had
verified the facts giving rise to its liability. Hence,
the arrastre operator suffered no prejudice by the
lack of strict compliance with the 15-day
124 |I N S U R A N C E
NOTICE OF LOSS
limitation to file the formal complaint. 59 (Citations liable and ordered Asian Terminals, Inc., to pay
omitted) First Lepanto-Taisho Insurance Corp., the amount
of ₱165,772.40, ten percent (10%) thereof as and
In the present case, ATI was notified of the for attorney's fees, plus costs of suit. The said
loss/damage to the subject shipment as early as amount shall earn legal interest at the rate of six
August 9, 1996 thru a Request for Bad Order percent ( 6%) per annum from the date of finality
Survey60 jointly prepared by the consignee’s of this judgment until its full satisfaction.
broker, PROVEN, and the representatives of ATI.
For having submitted a provisional claim, GASI is SO ORDERED.
thus deemed to have substantially complied with
the notice requirement to the arrastre operator BIENVENIDO L. REYES
notwithstanding that a formal claim was sent to Associate Justice
the latter only on September 27, 1996. ATI was
not deprived the best opportunity to probe
immediately the veracity of such claims. Verily
then, GASI, thru its subrogee FIRST LEPANTO, is
not barred by filing the herein action in court.

ATI cannot rely on the ruling in

Prudentiat61 because the consignee therein made
no provisional claim thru request for bad order
survey and instead filed a claim for the first time
after four months from receipt of the shipment.

Attorney's fees and interests

All told, ATI is liable to pay FIRST LEPANTO the

amount of the Pl 65, 772.40 representing the
insurance indemnity paid by the latter to GASI.
Pursuant to Nacar v. Gallery Frames,62 the said
amount shall earn a legal interest at the rate of six
percent (6%) per annum from the date of finality
of this judgment until its full satisfaction.

As correctly imposed by the RTC and the CA, ten

percent (10%) of the judgment award is
reasonable as and for attorney's fees considering
the length of time that has passed in prosecuting
the claim.63

WHEREFORE, premises considered, the petition is

hereby DENIED. The Decision dated October 10,
2008 of the Court of Appeals in CA-G.R. SP No.
99021 is hereby AFFIRMED insofar as it adjudged
125 |I N S U R A N C E
NOTICE OF LOSS
SECOND DIVISION
G.R. No. 147724             June 8, 2004
LORENZO SHIPPING CORP., petitioner,
vs.
CHUBB and SONS, Inc., GEARBULK, Ltd. and
PHILIPPINE TRANSMARINE CARRIERS,
INC., respondents.
DECISION
PUNO, J.:
On appeal is the Court of Appeals’ August 14, 2000
Decision1 in CA-G.R. CV No. 61334 and March 28,
2001 Resolution2 affirming the March 19, 1998
Decision3 of the Regional Trial Court of Manila
which found petitioner liable to pay respondent
Chubb and Sons, Inc. attorney's fees and costs of
suit.
Petitioner Lorenzo Shipping Corporation (Lorenzo
Shipping, for short), a domestic corporation
engaged in coastwise shipping, was the carrier of
581 bundles of black steel pipes, the subject
shipment, from Manila to Davao City. From Davao
City, respondent Gearbulk, Ltd., a foreign
corporation licensed as a common carrier under
the laws of Norway and doing business in the
Philippines through its agent, respondent
Philippine Transmarine Carriers, Inc.
(Transmarine Carriers, for short), a domestic
corporation, carried the goods on board its vessel
M/V San Mateo Victory to the United States, for
the account of Sumitomo Corporation. The latter,
the consignee, is a foreign corporation organized
under the laws of the United States of America. It
insured the shipment with respondent Chubb and
Sons, Inc., a foreign corporation organized and
licensed to engage in insurance business under
the laws of the United States of America.
The facts are as follows:
On November 21, 1987, Mayer Steel Pipe
Corporation of Binondo, Manila, loaded
581 bundles of ERW black steel pipes
worth US$137,912.844 on board the
vessel M/V Lorcon IV, owned by
petitioner Lorenzo Shipping, for shipment
to Davao City. Petitioner Lorenzo
Shipping issued a clean bill of lading
designated as Bill of Lading No. T-3 5 for
the account of the consignee, Sumitomo
Corporation of San Francisco, California,
USA, which in turn, insured the goods
with respondent Chubb and Sons, Inc.6
The M/V Lorcon IV arrived at the Sasa Wharf in
Davao City on December 2, 1987. Respondent
Transmarine Carriers received the subject
shipment which was discharged on December 4,
1987, evidenced by Delivery Cargo Receipt No.
115090.7 It discovered seawater in the hatch of
M/V Lorcon IV, and found the steel pipes
submerged in it. The consignee Sumitomo then
hired the services of R.J. Del Pan Surveyors to
inspect the shipment prior to and subsequent to
discharge. Del Pan’s Survey Report 8 dated
December 4, 1987 showed that the subject
shipment was no longer in good condition, as in
fact, the pipes were found with rust formation on
top and/or at the sides. Moreover, the surveyor
noted that the cargo hold of the M/V Lorcon IV
was flooded with seawater, and the tank top was
"rusty, thinning, and with several holes at
different places." The rusty condition of the cargo
was noted on the mate’s receipts and the checker
of M/V Lorcon IV signed his conforme thereon.9
After the survey, respondent Gearbulk loaded the
shipment on board its vessel M/V San Mateo
Victory, for carriage to the United States. It issued
Bills of Lading Nos. DAV/OAK 1 to 7,10 covering
364 bundles of steel pipes to be discharged at
Oakland, U.S.A., and Bills of Lading Nos. DAV/SEA
1 to 6,11 covering 217 bundles of steel pipes to be
discharged at Vancouver, Washington, U.S.A. All
bills of lading were marked "ALL UNITS HEAVILY
RUSTED."
While the cargo was in transit from Davao City to
the U.S.A., consignee Sumitomo sent a letter 12 of
intent dated December 7, 1987, to petitioner
Lorenzo Shipping, which the latter received on
December 9, 1987. Sumitomo informed petitioner
Lorenzo Shipping that it will be filing a claim
based on the damaged cargo once such damage
had been ascertained. The letter reads:
Please be advised that the merchandise
herein below noted has been landed in
bad order ex-Manila voyage No. 87-19
under B/L No. T-3 which arrived at the
port of Davao City on December 2, 1987.
The extent of the loss and/or damage has not yet
been determined but apparently all bundles are
corroded. We reserve the right to claim as soon as
the amount of claim is determined and the
necessary supporting documents are available.
Please find herewith a copy of the survey report
which we had arranged for after unloading of our
cargo from your vessel in Davao.
We trust that you shall make everything in order.
On January 17, 1988, M/V San Mateo Victory
arrived at Oakland, California, U.S.A., where it
unloaded 364 bundles of the subject steel pipes. It
then sailed to Vancouver, Washington on January
23, 1988 where it unloaded the remaining 217
bundles. Toplis and Harding, Inc. of San Franciso,
California, surveyed the steel pipes, and also
discovered the latter heavily rusted. When the
steel pipes were tested with a silver nitrate
solution, Toplis and Harding found that they had
come in contact with salt water. The survey
report,13 dated January 28, 1988 states:
126 |I N S U R A N C E
NOTICE OF LOSS
xxx
We entered the hold for a close
examination of the pipe, which revealed
moderate to heavy amounts of patchy and
streaked dark red/orange rust on all lifts
which were visible. Samples of the
shipment were tested with a solution of
silver nitrate revealing both positive and
occasional negative chloride reactions,
indicating pipe had come in contact with
salt water. In addition, all tension applied
metal straps were very heavily rusted,
and also exhibited chloride reactions on
testing with silver nitrate.
xxx
It should be noted that subject bills of
lading bore the following remarks as to
conditions of goods: "ALL UNITS HEAVILY
RUSTED." Attached herein is a copy of a
survey report issued by Del Pan
Surveyors of Davao City, Philippines
dated, December 4, 1987 at Davao City,
Philippines, which describes conditions of
the cargo as sighted aboard the vessel
"LORCON IV," prior to and subsequent to
discharge at Davao City. Evidently, the
aforementioned rust damages were
apparently sustained while the shipment
was in the custody of the vessel "LORCON
IV," prior to being laden on board the
vessel "SAN MATEO VICTORY" in Davao.
Due to its heavily rusted condition, the
consignee Sumitomo rejected the
damaged steel pipes and declared them
unfit for the purpose they were
intended.14 It then filed a marine
insurance claim with respondent Chubb
and Sons, Inc. which the latter settled in
the amount of US$104,151.00.15
On December 2, 1988, respondent Chubb and
Sons, Inc. filed a complaint16 for collection of a sum
of money, docketed as Civil Case No. 88-47096,
against respondents Lorenzo Shipping, Gearbulk,
and Transmarine. Respondent Chubb and Sons,
Inc. alleged that it is not doing business in the
Philippines, and that it is suing under an isolated
transaction.
On February 21, 1989, respondents Gearbulk and
Transmarine filed their answer17 with
counterclaim and cross-claim against petitioner
Lorenzo Shipping denying liability on the
following grounds: (a) respondent Chubb and
Sons, Inc. has no capacity to sue before Philippine
courts; (b) the action should be dismissed on the
ground of forum non conveniens; (c) damage to the
steel pipes was due to the inherent nature of the
goods or to the insufficiency of packing thereof;
(d) damage to the steel pipes was not due to their
fault or negligence; and, (e) the law of the country
of destination, U.S.A., governs the contract of
carriage.
Petitioner Lorenzo Shipping filed its answer with
counterclaim on February 28, 1989, and amended
it on May 24, 1989. It denied liability, alleging,
among others: (a) that rust easily forms on steel
by mere exposure to air, moisture and other
marine elements; (b) that it made a disclaimer in
the bill of lading; (c) that the goods were
improperly packed; and, (d) prescription, laches,
and extinguishment of obligations and actions had
set in.
The Regional Trial Court ruled in favor of the
respondent Chubb and Sons, Inc., finding that: (1)
respondent Chubb and Sons, Inc. has the right to
institute this action; and, (2) petitioner Lorenzo
Shipping was negligent in the performance of its
obligations as a carrier. The dispositive portion of
its Decision states:
WHEREFORE, the judgment is hereby
rendered ordering Defendant Lorenzo
Shipping Corporation to pay the plaintiff
the sum of US$104,151.00 or its
equivalent in Philippine peso at the
current rate of exchange with interest
thereon at the legal rate from the date of
the institution of this case until fully paid,
the attorney’s fees in the sum of
₱50,000.00, plus the costs of the suit, and
dismissing the plaintiff’s complaint
against defendants Gearbulk, Ltd. and
Philippine Transmarine Carriers, Inc., for
lack of merit, and the two defendants’
counterclaim, there being no showing
that the plaintiff had filed this case
against said defendants in bad faith, as
well as the two defendants’ cross-claim
against Defendant Lorenzo Shipping
Corporation, for lack of factual basis.18
Petitioner Lorenzo Shipping appealed to the Court
of Appeals insisting that: (a) respondent Chubb
and Sons does not have capacity to sue before
Philippine courts; and, (b) petitioner Lorenzo
Shipping was not negligent in the performance of
its obligations as carrier of the goods. The
appellate court denied the petition and affirmed
the decision of the trial court.
The Court of Appeals likewise denied petitioner
Lorenzo Shipping’s Motion for
Reconsideration19 dated September 3, 2000, in a
Resolution20 promulgated on March 28, 2001.
Hence, this petition. Petitioner Lorenzo Shipping
submits the following issues for resolution:
(1) Whether or not the prohibition
provided under Art. 133 of the
Corporation Code applies to respondent
Chubb, it being a mere subrogee or
assignee of the rights of Sumitomo
Corporation, likewise a foreign
127 |I N S U R A N C E
NOTICE OF LOSS
corporation admittedly doing business in
the Philippines without a license;
(2) Whether or not Sumitomo, Chubb’s
predecessor-in-interest, validly made a
claim for damages against Lorenzo
Shipping within the period prescribed by
the Code of Commerce;
(3) Whether or not a delivery cargo
receipt without a notation on it of
damages or defects in the shipment,
which created a prima facie presumption
that the carrier received the shipment in
good condition, has been overcome by
convincing evidence;
(4) Assuming that Lorenzo Shipping was
guilty of some lapses in transporting the
steel pipes, whether or not Gearbulk and
Transmarine, as common carriers, are to
share liability for their separate
negligence in handling the cargo.21
In brief, we resolve the following issues:
(1) whether respondent Chubb and Sons
has capacity to sue before the Philippine
courts; and,
(2) whether petitioner Lorenzo Shipping
is negligent in carrying the subject cargo.
Petitioner argues that respondent Chubb and Sons
is a foreign corporation not licensed to do
business in the Philippines, and is not suing on an
isolated transaction. It contends that because the
respondent Chubb and Sons is an insurance
company, it was merely subrogated to the rights
of its insured, the consignee Sumitomo, after
paying the latter’s policy claim. Sumitomo,
however, is a foreign corporation doing business
in the Philippines without a license and does not
have capacity to sue before Philippine courts.
Since Sumitomo does not have capacity to sue,
petitioner then concludes that, neither the
subrogee-respondent Chubb and Sons could sue
before Philippine courts.
We disagree with petitioner.
In the first place, petitioner failed to raise the
defense that Sumitomo is a foreign corporation
doing business in the Philippines without a
license. It is therefore estopped from litigating the
issue on appeal especially because it involves a
question of fact which this Court cannot resolve.
Secondly, assuming arguendo that Sumitomo
cannot sue in the Philippines, it does not follow
that respondent, as subrogee, has also no capacity
to sue in our jurisdiction.
Subrogation is the substitution of one person in
the place of another with reference to a lawful
claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a
debt or claim, including its remedies or
securities.22 The principle covers the situation
under which an insurer that 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.23 It contemplates full substitution such that
it places the party subrogated in the shoes of the
creditor, and he may use all means which the
creditor could employ to enforce payment.24
The rights to which the subrogee succeeds are the
same as, but not greater than, those of the person
for whom he is substituted – he cannot acquire
any claim, security, or remedy the subrogor did
not have.25 In other words, a subrogee cannot
succeed to a right not possessed by the
subrogor.26 A subrogee in effect steps into the
shoes of the insured and can recover only if
insured likewise could have recovered.
However, when the insurer succeeds to the rights
of the insured, he does so only in relation to the
debt. The person substituted (the insurer) will
succeed to all the rights of the creditor (the
insured), having reference to the debt due the
latter.27 In the instant case, the rights inherited by
the insurer, respondent Chubb and Sons, pertain
only to the payment it made to the insured
Sumitomo as stipulated in the insurance contract
between them, and which amount it now seeks to
recover from petitioner Lorenzo Shipping which
caused the loss sustained by the insured
Sumitomo. The capacity to sue of respondent
Chubb and Sons could not perchance belong to the
group of rights, remedies or securities pertaining
to the payment respondent insurer made for the
loss which was sustained by the insured
Sumitomo and covered by the contract of
insurance. Capacity to sue is a right personal to its
holder. It is conferred by law and not by the
parties. Lack of legal capacity to sue means that
the plaintiff is not in the exercise of his civil rights,
or does not have the necessary qualification to
appear in the case, or does not have the character
or representation he claims. It refers to a
plaintiff’s general disability to sue, such as on
account of minority, insanity, incompetence, lack
of juridical personality, or any other
disqualifications of a party.28 Respondent Chubb
and Sons who was plaintiff in the trial court does
not possess any of these disabilities. On the
contrary, respondent Chubb and Sons has
satisfactorily proven its capacity to sue, after
having shown that it is not doing business in the
Philippines, but is suing only under an isolated
transaction, i.e., under the one (1) marine
insurance policy issued in favor of the consignee
Sumitomo covering the damaged steel pipes.
The law on corporations is clear in depriving
foreign corporations which are doing business in
the Philippines without a license from bringing or
maintaining actions before, or intervening in
Philippine courts. Art. 133 of the Corporation
Code states:
128 |I N S U R A N C E
NOTICE OF LOSS
Doing business without a license. – No
foreign corporation transacting business
in the Philippines without a license, or its
successors or assigns, shall be permitted
to maintain or intervene in any action,
suit or proceeding in any court or
administrative agency of the Philippines;
but such corporation may be sued or
proceeded against before Philippine
courts or administrative tribunals on any
valid cause of action recognized under
Philippine laws.
The law does not prohibit foreign corporations
from performing single acts of business. A foreign
corporation needs no license to sue before
Philippine courts on an isolated transaction. 29 As
held by this Court in the case of Marshall-Wells
Company vs. Elser & Company:30
The object of the statute (Secs. 68 and 69,
Corporation Law) was not to prevent the
foreign corporation from performing
single acts, but to prevent it from
acquiring a domicile for the purpose of
business without taking the steps
necessary to render it amenable to suit in
the local courts . . . the implication of the
law (being) that it was never the purpose
of the legislature to exclude a foreign
corporation which happens to obtain an
isolated order for business for the
Philippines, from seeking redress in the
Philippine courts.
Likewise, this Court ruled in Universal Shipping
Lines, Inc. vs. Intermediate Appellate
Court31 that:
. . . The private respondent may sue in the
Philippine courts upon the marine
insurance policies issued by it abroad to
cover international-bound cargoes
shipped by a Philippine carrier, even if it
has no license to do business in this
country, for it is not the lack of the
prescribed license (to do business in the
Philippines) but doing business without
such license, which bars a foreign
corporation from access to our courts.
We reject the claim of petitioner Lorenzo Shipping
that respondent Chubb and Sons is not suing
under an isolated transaction because the steel
pipes, subject of this case, are covered by two (2)
bills of lading; hence, two transactions. The
stubborn fact remains that these two (2) bills of
lading spawned from the single marine insurance
policy that respondent Chubb and Sons issued in
favor of the consignee Sumitomo, covering the
damaged steel pipes. The execution of the policy is
a single act, an isolated transaction. This Court has
not construed the term "isolated transaction" to
literally mean "one" or a mere single act. In Eriks
Pte. Ltd. vs. Court of Appeals, this Court held
that:32
. . . What is determinative of "doing
business" is not really the number or the
quantity of the transactions, but more
importantly, the intention of an entity to
continue the body of its business in the
country. The number and quantity are
merely evidence of such intention. The
phrase "isolated transaction" has a suffered, the insurer-subrogee is the only real
definite and fixed meaning, i.e. a
transaction or series of transactions set
apart from the common business of a
foreign enterprise in the sense that there
is no intention to engage in a progressive
pursuit of the purpose and object of the
business organization. Whether a foreign
corporation is "doing business" does not
necessarily depend upon the frequency of
its transactions, but more upon the nature
and character of the transactions.
[Emphasis supplied.]
In the case of Gonzales vs. Raquiza, et al.,33 three
contracts, hence three transactions were
challenged as void on the ground that the three
American corporations which are parties to the
contracts are not licensed to do business in the
Philippines. This Court held that "one single or
isolated business transaction does not
constitute doing business within the meaning of
the law. Transactions which are occasional,
incidental, and casual — not of a character to
indicate a purpose to engage in business — do not
constitute the doing or engaging in business as
contemplated by law. Where the three
transactions indicate no intent by the foreign
corporation to engage in a continuity of
transactions, they do not constitute doing
business in the Philippines."
Furthermore, respondent insurer Chubb and Sons,
by virtue of the right of subrogation provided for
in the policy of insurance, 34 is the real party in
interest in the action for damages before the
court a quo against the carrier Lorenzo Shipping
to recover for the loss sustained by its insured.
Rule 3, Section 2 of the 1997 Rules of Civil
Procedure defines a real party in interest as one
who is entitled to the avails of any judgment
rendered in a suit, or who stands to be benefited
or injured by it. Where an insurance company as
subrogee pays the insured of the entire loss it
party in interest and must sue in its own name 35 to
enforce its right of subrogation against the third
party which caused the loss. This is because the
insurer in such case having fully compensated its
insured, which payment covers the loss in full, is
subrogated to the insured’s claims arising from
such loss. The subrogated insurer becomes the
owner of the claim and, thus entitled to the entire
fruits of the action.36 It then, thus possesses the
right to enforce the claim and the significant
interest in the litigation. 37 In the case at bar, it is
clear that respondent insurer was suing on its
own behalf in order to enforce its right of
subrogation.
129 |I N S U R A N C E
NOTICE OF LOSS
On the second issue, we affirm the findings of the
lower courts that petitioner Lorenzo Shipping was
negligent in its care and custody of the consignee’s
goods.
The steel pipes, subject of this case, were in good
condition when they were loaded at the port of
origin (Manila) on board petitioner Lorenzo
Shipping’s M/V Lorcon IV en route to Davao City.
Petitioner Lorenzo Shipping issued clean bills of
lading covering the subject shipment. A bill of
lading, aside from being a contract 38 and a
receipt,39 is also a symbol40 of the goods covered
by it. A bill of lading which has no notation of any
defect or damage in the goods is called a "clean bill
of lading."41 A clean bill of lading constitutes prima
facie evidence of the receipt by the carrier of the
goods as therein described.42
The case law teaches us that mere proof of
delivery of goods in good order to a carrier and
the subsequent arrival in damaged condition at
the place of destination raises a prima facie case
against the carrier.43 In the case at bar, M/V
Lorcon IV of petitioner Lorenzo Shipping received
the steel pipes in good order and condition,
evidenced by the clean bills of lading it issued.
When the cargo was unloaded from petitioner
Lorenzo Shipping’s vessel at the Sasa Wharf in
Davao City, the steel pipes were rusted all over.
M/V San Mateo Victory of respondent Gearbulk,
Ltd, which received the cargo, issued Bills of
Lading Nos. DAV/OAK 1 to 7 and Nos. DAV/SEA 1
to 6 covering the entire shipment, all of which
were marked "ALL UNITS HEAVILY RUSTED." R.J.
Del Pan Surveyors found that the cargo hold of the
M/V Lorcon IV was flooded with seawater, and the
tank top was rusty, thinning and perforated,
thereby exposing the cargo to sea water. There
can be no other conclusion than that the cargo was
damaged while on board the vessel of petitioner
Lorenzo Shipping, and that the damage was due to
the latter’s negligence. In the case at bar, not only
did the legal presumption of negligence attach to
petitioner Lorenzo Shipping upon the occurrence
of damage to the cargo.44 More so, the negligence
of petitioner was sufficiently established.
Petitioner Lorenzo Shipping failed to keep its
vessel in seaworthy condition. R.J. Del Pan
Surveyors found the tank top of M/V Lorcon IV to
be "rusty, thinning, and with several holes at
different places." Witness Captain Pablo Fernan,
Operations Manager of respondent Transmarine
Carriers, likewise observed the presence of holes
at the deck of M/V Lorcon IV. 45 The unpatched
holes allowed seawater, reaching up to three (3)
inches deep, to enter the flooring of the hatch of
the vessel where the steel pipes were stowed,
submerging the latter in sea water.46 The contact
with sea water caused the steel pipes to rust. The
silver nitrate test, which Toplis and Harding
employed, further verified this
conclusion.47 Significantly, petitioner Lorenzo
Shipping did not even attempt to present any
contrary evidence. Neither did it offer any proof to
establish any of the causes that would exempt it
from liability for such damage.48 It merely alleged
that the: (1) packaging of the goods was defective;
and (2) claim for damages has prescribed.
To be sure, there is evidence that the goods were
packed in a superior condition. John M. Graff,
marine surveyor of Toplis and Harding, examined
the condition of the cargo on board the vessel San
Mateo Victory. He testified that the shipment had
superior packing "because the ends were covered
with plastic, woven plastic. Whereas typically they
would not go to that bother ... Typically, they come
in with no plastic on the ends. They might just be
banded, no plastic on the ends ..."49
On the issue of prescription of respondent Chubb
and Sons’ claim for damages, we rule that it has
not yet prescribed at the time it was made.
Art. 366 of the Code of Commerce states:
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 the
opening of 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 such package, in which
case the claim shall be admitted only at
the time of the receipt.
After the periods mentioned have
elapsed, or 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.
A somewhat similar provision is embodied in the
Bill of Lading No. T-3 which reads:50
NOTE: No claim for damage or loss shall
be honored twenty-four (24) hours after
delivery.
(Ref. Art. 366 C Com.)
The twenty-four-hour period prescribed by Art.
366 of the Code of Commerce within which claims
must be presented does not begin to run until the
consignee has received such possession of the
merchandise that he may exercise over it the
ordinary control pertinent to ownership.51 In
other words, there must be delivery of the cargo
by the carrier to the consignee at the place of
destination.52 In the case at bar, consignee
Sumitomo has not received possession of the
cargo, and has not physically inspected the same
at the time the shipment was discharged from
M/V Lorcon IV in Davao City. Petitioner Lorenzo
Shipping failed to establish that an authorized
agent of the consignee Sumitomo received the
cargo at Sasa Wharf in Davao City. Respondent
130 |I N S U R A N C E
NOTICE OF LOSS
Transmarine Carriers as agent of respondent
Gearbulk, Ltd., which carried the goods from
Davao City to the United States, and the principal,
respondent Gearbulk, Ltd. itself, are not the
authorized agents as contemplated by law. What is
clear from the evidence is that the consignee
received and took possession of the entire
shipment only when the latter reached the United
States’ shore. Only then was delivery made and
completed. And only then did the 24-hour
prescriptive period start to run.

Finally, we find no merit to the contention of

respondents Gearbulk and Transmarine that
American law governs the contract of carriage
because the U.S.A. is the country of destination.
Petitioner Lorenzo Shipping, through its M/V
Lorcon IV, carried the goods from Manila to Davao
City. Thus, as against petitioner Lorenzo Shipping,
the place of destination is Davao City. Hence,
Philippine law applies.

IN VIEW THEREOF, the petition is DENIED. The

Decision of the Court of Appeals in CA-G.R. CV No.
61334 dated August 14, 2000 and its Resolution
dated March 28, 2001 are hereby AFFIRMED.
Costs against petitioner.

SO ORDERED.

Quisumbing, Austria-Martinez, Callejo,

Sr., and Tinga, JJ., concur.

131 |I N S U R A N C E
NOTICE OF LOSS
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING
CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE
CORPORATION, respondents.
PADILLA, J:
Petition to review the decision * of the Court of
Appeals, in CA-G.R. No. SP-08642, dated 21 March
1979, ordering petitioner Manila Mahogany
Manufacturing Corporation to pay private
respondent Zenith Insurance Corporation the sum
of Five Thousand Pesos (P5,000.00) with 6%
annual interest from 18 January 1973, attorney's
fees in the sum of five hundred pesos (P500.00),
and costs of suit, and the resolution of the same
Court, dated 8 February 1980, denying
petitioner's motion for reconsideration of it's
decision.
From 6 March 1970 to 6 March 1971, petitioner
insured its Mercedes Benz 4-door sedan with
respondent insurance company. On 4 May 1970
the insured vehicle was bumped and damaged by
a truck owned by San Miguel Corporation. For the
damage caused, respondent company paid
petitioner five thousand pesos (P5,000.00) in
amicable settlement. Petitioner's general manager
executed a Release of Claim, subrogating
respondent company to all its right to action
against San Miguel Corporation.
On 11 December 1972, respondent company
wrote Insurance Adjusters, Inc. to demand
reimbursement from San Miguel Corporation of
the amount it had paid petitioner. Insurance
Adjusters, Inc. refused reimbursement, alleging
that San Miguel Corporation had already paid
petitioner P4,500.00 for the damages to
petitioner's motor vehicle, as evidenced by a cash
voucher and a Release of Claim executed by the
General Manager of petitioner discharging San
Miguel Corporation from "all actions, claims,
demands the rights of action that now exist or
hereafter [sic] develop arising out of or as a
consequence of the accident."
Respondent insurance company thus demanded
from petitioner reimbursement of the sum of
P4,500.00 paid by San Miguel Corporation.
Petitioner refused; hence, respondent company
filed suit in the City Court of Manila for the
recovery of P4,500.00. The City Court ordered
petitioner to pay respondent P4,500.00. On appeal
the Court of First Instance of Manila affirmed the
City Court's decision in toto, which CFI decision
was affirmed by the Court of Appeals, with the
modification that petitioner was to pay
respondent the total amount of P5,000.00 that it
had earlier received from the respondent
insurance company.
Petitioner now contends it is not bound to pay
P4,500.00, and much more, P5,000.00 to
respondent company as the subrogation in the
Release of Claim it executed in favor of respondent
was conditioned on recovery of the total amount
of damages petitioner had sustained. Since total
damages were valued by petitioner at P9,486.43
and only P5,000.00 was received by petitioner
from respondent, petitioner argues that it was
entitled to go after San Miguel Corporation to
claim the additional P4,500.00 eventually paid to
it by the latter, without having to turn over said
amount to respondent. Respondent of course
disputes this allegation and states that there was
no qualification to its right of subrogation under
the Release of Claim executed by petitioner, the
contents of said deed having expressed all the
intents and purposes of the parties.
To support its alleged right not to return the
P4,500.00 paid by San Miguel Corporation,
petitioner cites Art. 2207 of the Civil Code, which
states:
If the plaintiff's property has
been insured, and he has
received indemnity from the
insurance company for the injury
or loss arising out of the wrong
or breach of contract complained
of the insurance company shall
be subrogated to the rights of the
insured against the wrongdoer or
the person who has violated the
contract. If the amount paid by
the insurance company does not
fully cover the injury or loss the
aggrieved party shall be entitled
to recover the deficiency from
the person causing the loss or
injury.
Petitioner also invokes Art. 1304 of the Civil Code,
stating.
A creditor, to whom partial
payment has been made, may
exercise his right for the
remainder, and he shall be
preferred to the person who has
been subrogated in his place in
virtue of the partial payment of
the same credit.
We find petitioners arguments to be untenable
and without merit. In the absence of any other
evidence to support its allegation that a
gentlemen's agreement existed between it and
132 |I N S U R A N C E
NOTICE OF LOSS
respondent, not embodied in the Release of Claim,
such ease of Claim must be taken as the best
evidence of the intent and purpose of the parties.
Thus, the Court of Appeals rightly stated:
Petitioner argues that the release
claim it executed subrogating
Private respondent to any right
of action it had against San
Miguel Corporation did not
preclude Manila Mahogany from
filing a deficiency claim against
the wrongdoer. Citing Article
2207, New Civil Code, to the
effect that if the amount paid by
an insurance company does not
fully cover the loss, the aggrieved
party shall be entitled to recover
the deficiency from the person
causing the loss, petitioner claims
a preferred right to retain the
amount coming from San Miguel
Corporation, despite the
subrogation in favor of Private
respondent.
Although petitioners right to file
a deficiency claim against San
Miguel Corporation is with legal
basis, without prejudice to the
insurer's right of subrogation,
nevertheless when Manila
Mahogany executed another
release claim (Exhibit K)
discharging San Miguel
Corporation from "all actions,
claims, demands and rights of
action that now exist or hereafter
arising out of or as a consequence
of the accident" after the insurer
had paid the proceeds of the
policy- the compromise
agreement of P5,000.00 being
based on the insurance policy-the
insurer is entitled to recover
from the insured the amount of
insurance money paid
(Metropolitan Casualty Insurance
Company of New York vs. Badler,
229 N.Y.S. 61, 132 Misc. 132 cited
in Insurance Code and Insolvency
Law with comments and
annotations, H.B. Perez 1976, p.
151). Since petitioner by its own
acts released San Miguel
Corporation, thereby defeating
private respondents, the right of
subrogation, the right of action of
petitioner against the insurer
was also nullified. (Sy Keng & Co.
vs. Queensland Insurance Co.,
Ltd., 54 O.G. 391) Otherwise
stated: private respondent may
recover the sum of P5,000.00 it
had earlier paid to petitioner. 1
As held in Phil. Air Lines v. Heald Lumber Co., 2
If a property is insured and the
owner receives the indemnity
from the insurer, it is provided in
[Article 2207 of the New Civil
Code] that the insurer is deemed
subrogated to the rights of the
insured against the wrongdoer
and if the amount paid by the
insurer does not fully cover the
loss, then the aggrieved party is
the one entitled to recover the
deficiency. ... Under this legal
provision, the real party in
interest with regard to the portion
of the indemnity paid is the
insurer and not the
insured  3 (Emphasis supplied)
The decision of the respondent court ordering
petitioner to pay respondent company, not the
P4,500.00 as originally asked for, but P5,000.00,
the amount respondent company paid petitioner
as insurance, is also in accord with law and
jurisprudence. In disposing of this issue, the Court
of Appeals held:
... petitioner is entitled to keep
the sum of P4,500.00 paid by San
Miguel Corporation under its
clear right to file a deficiency
claim for damages incurred,
against the wrongdoer, should
the insurance company not fully
pay for the injury caused (Article
2207, New Civil Code). However,
when petitioner released San
Miguel Corporation from any
liability, petitioner's right to
retain the sum of P5,000.00 no
longer existed, thereby entitling
private respondent to recover the
same. (Emphasis supplied)
As has been observed:
... The right of subrogation can
only exist after the insurer has
paid the otherwise the insured
will be deprived of his right to
full indemnity. If the insurance
proceeds are not sufficient to
cover the damages suffered by
the insured, then he may sue the
party responsible for the damage
for the the [sic] remainder. To the
extent of the amount he has
already received from the insurer
enjoy's [sic] the right of
subrogation.
Since the insurer can be
subrogated to only such rights as
the insured may have, should the
insured, after receiving payment
133 |I N S U R A N C E
NOTICE OF LOSS
from the insurer, release the WHEREFORE, premises considered, the petition is
wrongdoer who caused the loss, DENIED. The judgment appealed from is hereby
the insurer loses his rights against AFFIRMED with costs against petitioner.
the latter. But in such a case, the
insurer will be entitled to recover SO ORDERED.
from the insured whatever it has
paid to the latter, unless the Yap (Chairman), Melencio-Herrera, Paras and
release was made with the Sarmiento, JJ., concur.
consent of the
insurer. 4 (Emphasis supplied.)

And even if the specific amount asked for in the

complaint is P4,500.00 only and not P5,000.00,
still, the respondent Court acted well within its
discretion in awarding P5,000.00, the total
amount paid by the insurer. The Court of Appeals
rightly reasoned as follows:

It is to be noted that private

respondent, in its companies,
prays for the recovery, not of
P5,000.00 it had paid under the
insurance policy but P4,500.00
San Miguel Corporation had paid
to petitioner. On this score, We
believe the City Court and Court
of First Instance erred in not
awarding the proper relief.
Although private respondent
prays for the reimbursement of
P4,500.00 paid by San Miguel
Corporation, instead of P5,000.00
paid under the insurance policy,
the trial court should have
awarded the latter, although not
prayed for, under the general
prayer in the complaint "for such
further or other relief as may be
deemed just or equitable, (Rule 6,
Sec. 3, Revised Rules of Court;
Rosales vs. Reyes Ordoveza, 25
Phil. 495 ; Cabigao vs. Lim, 50
Phil. 844; Baguiro vs. Barrios
Tupas, 77 Phil 120).

134 |I N S U R A N C E
NOTICE OF LOSS
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 194328               July 1, 2015
STRONGHOLD INSURANCE COMPANY,
INCORPORATED, Petitioner,
vs.
INTERPACIFIC CONTAINER SERVICES and
GLORIA DEE CHONG, Respondents.
DECISION
PEREZ, J.:
This is a Petition for Review
Certiorari1 assailing the 30 July 2010 Decision 2 of
the Court of Appeals in CA-G.R. CV No. 80557,
which affirmed the 7 October 2003 Decision of the
Regional Trial Court (RTC) of Caloocan City
directing the petitioner Stronghold Insurance
Company Incorporated to pay respondents
Interpacific Container Services and Gloria Dee
Chong the sum of ₱550,000.00 representing their
insurance claim. The dispositive portion of the
assailed decision reads:
WHEREFORE, premises considered, the appeal is
PARTLY GRANTED.· The assailed decision dated
October 7, 2003 of the Regional Trial Court of
Caloocan City, Branch 130 is AFFIRMED with the
MODIFICATION that the PS0,000.00 exemplary
damages is hereby DELETED.
The Facts
Respondent Gloria Dee Chong is the owner of the
Fuso truck with Plate No. PWH 512. The vehicle
was insured by petitioner Stronghold Insurance
Company under Commercial Vehicle Policy No.
279675.3 The comprehensive motor car insurance
policy for Pl5,306.45 undertook to indemnify the
insured against loss or damage to the car and
death or injury caused to third persons by reason
of accident.
While the policy was in effect, the vehicle figured
in an accident along National Highway in Brgy.
Palihan, Hermosa, Bataan resulting in the death of
four (4) persons while seriously injuring three (3)
others. Two (2) vehicles were also heavily
damaged as a result of the accident. Pursuant to
the provisions of the insurance contract,
respondent Chong filed a claim for the recovery of
the proceeds of her policy in the amount of
₱550,000.00, broken down as follows:
Comprehensive Third Party Liability
(CTPL) ----- ₱50,000.00
on
Own Damage (OD)
------------------------------------- ₱300,000.00
Excess I Bodily Injury
(BI)------------------------------ ₱100,000.00
Third Party Liability (TPL)
------------------------------ ₱100,000.00
Total
------------------------------------------------------
--- ₱550,000.004
The claim was, however, denied by the insurance
company on the ground that at the time the
accident took place the driver of the insured
vehicle was heavily drunk as shown in the
Pagpapatunay issued by Bararigay Chairman
Rafael Torres and the Medico Legal Certificate
which was signed by a certain Dr. Ferdinand
Bautista.
The denial of the claim prompted respondents to
initiate an action for the recovery of sum of money
against petitioner before the RTC of Caloocan City,
Branch 130. In their Complaint docketed as Civil
Case No. C-18278, respondents alleged that their
claim was unjustly denied by the insurance
company. They argued that there was no sufficient
proof to support the claim of the petitioner that
the driver was drunk at the time of the incident
underscoring the lack of mention of such crucial
fact in the police blotter report documenting the
incident. For lack of justifiable reasons to avoid
the policy, respondents insisted that petitioner is
liable to deliver their claim pursuant to the terms
of the insurance contract.5
In refuting the allegations in the complaint,
petitioner averred that the intoxication of the
driver of the insured vehicle legally avoided the
liability of the insurance company under the
policy. Petitioner further claimed that the insured
violated Section 53 of Republic Act No. 4136 (Land
Transportation and Traffic Code) which prohibits
driving of motor vehicles · under the influence of
alcohol. Since the driver of the insured vehicle was
found drunk at the time of the accident, the denial
of the insurance claim of by the respondents is
therefore justified under provisions of the
insurance contract and the existing statutes. 6
After the pre-trial conference, trial on the merits
ensued. During the hearing, both parties adduced
testimonial and documentary evidence to support
their respective positions.
On 7 October 2003, the RTC rendered a
Decision7 in favor of the respondents thereby
ordering the petitioner to deliver the amount of
₱550,000.00 representing the proceeds of the
insurance contract. According to the court a quo,
petitioner failed to prove by prima facie evidence
that the driver of the insured vehicle was indeed
under the influence of alcohol at the time of the
accident thereby making the avoidance of the
135 |I N S U R A N C E
NOTICE OF LOSS
policy unjustified under the circumstances. The
decretal portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered in
favor of the [respondents] Interpacific Container
Services and Gloria Dee Chong and against the
[petitioner] Stronghold Insurance, Co. Inc. as
follows:
(1) Ordering the [petitioner] to pay [respondents]
the (insurance claim) under the Third Party
Liability Insurance Policy and the Commercial
Vehicle Policy Number 279675, in the total
amount of FIVE HUNDRED FIFTY THOUSAND
PESOS (₱550,000.00) broken down as follows:
Comprehensive Third Party Liability
(CTPL) ----- ₱50,000.00
Own Damage (OD)
------------------------------------- ₱300,000.00
Excess I Bodily Injury (BI)
---------------------------- ₱100,000.00
TPL/ PD
---------------------------------------------------
₱100, 000.00
Total
------------------------------------------------------
-- ₱550,000.00
plus interest of 12% per annum on the said
amount, from February 12, 1997 the date of the
accident until fully paid.
(2) Ordering the [petitioner] to pay the amount of
₱50,000.00 as exemplary damages.
(3) Ordering the [petitioner] to pay the amount of
₱100,000.00 as and for attorney's fees.
(4) Ordering the [petitioner] to pay the costs of
suit.
The counterclaim of the [petitioner] is dismissed
for lack of merit.8
On appeal, the Court of Appeals affirmed the
findings of the R TC that there was no violation of
the contract of insurance but deleted the award
for exemplary damages. Resonating the ruling of
the trial court, the appellate court dismissed the
pieces of evidence presented by the petitioner as
mere hearsay without evidentiary value. It
underscored the absence of any statement in the
police blotter report about the crucial fact of
intoxication. On the finding that there was a
failure to prove that it is exempted from liability
under the contract of insurance, petitioner was
adjudged as under obligation to pay respondents
their insurance claim in accordance with the
provisions of the policy.9
Arguing that the Court of Appeals erred in
rendering the assailed Decision, petitioner filed
this instant Petition for Certiorari seeking the
reversal of the appellate court's decision on the
following grounds:
I.
THE HONORABLE COURT OF APPEALS
COMMITTED A REVERSIBLE ERROR IN NOT
APPRECIATING THE CLEAR EVIDENCE OF
RESPONDENT'S DRIVER'S INTO XI CATION AND
DRUNKENNESS;
II.
THE HONORABLE COURT OF APPEALS
COMMITTED A REVERSIBLE ERROR IN FINDING
THE PETITIONER LIABLE FOR THE CLAIMS OF
THE RESPONDENTS IN THE ABSENCE OF PROOF;
III.
THE HONORABLE COURT OF APPEALS
COMMITTED A REVERSIBLE ERROR IN
AFFIRMING THE IMPOSITION OF INTEREST
WHICH IS CONTRARY TO LAW AND
JURISPRUDENCE.10
The Court's Ruling
The issue nestled in the contentions of parties is
whether or not it was proven during the trial that
the driver of the insured vehicle was intoxicated at
the time of the accident thereby precluding the
respondents from claiming the proceeds of the
insurance policy.
In insisting that the factual findings reached by the
lower courts were fallible, petitioner, in turn, is
urging this Court to calibrate the probative value
of the evidence adduced during the trial, a task
which we do not routinely do, without running
afoul to the basic tenet that this Court is not a trier
of facts. As a rule, the factual conclusion of the
court a quo is for that reason recognized by this
Court. However, upon a submission that the ·
finding of fact is not supported by the evidence on
record, a review of the facts may be taken. Upon
proof of the submission, the findings of fact are
accordingly corrected.
We reiterate, and follow, the established rule that
factual findings of the trial court are entitled to
respect and are not to be disturbed on appeal,
unless of some facts and circumstances of weight
and substance, having been overlooked or
misinterpreted, might materially affect the
disposition of the case. 11 We apply the rule in the
case. The exception has not been shown.
Contrary to the claim of the petitioner; it
miserably failed to prove the fact of intoxication
during the trial. Aside from the Medico Legal
Certificate and the Pagpapatunay, which were
136 |I N S U R A N C E
NOTICE OF LOSS
stripped of evidentiary value because of the
dubious circumstances under which they were
obtained, the petitioner did not adduce other
proof to justify the avoidance of the policy. It must
be emphasized that the RTC doubted the
authenticity of the Medico Legal Certificate
because of the attendant alteration and tampering
on the face of the document. In adopting the
findings of the trial court, the appellate court
reiterated the evidentiary rule that the party
alleging violation of the provision of the contract
bears the burden of proof to prove the same.
The evident tampering of the medico legal
certificate necessitated the presentation by the
petitioner of additional evidence to buttress his
claim.1âwphi1 For instance, petitioner could have
adduced affidavits of witnesses who were present
at the scene of the accident to attest to the fact
that the driver was intoxicated. It did not. Upon
the other hand, respondents duly established their
right to claim the proceeds of a validly subsisting
contract of insurance. Such contract was never
denied.
Simply put, he who alleges the affim1ative of the
issue has the burden of proof, and upon the
plaintiff in a civil case rested the burden of proof.
Notably, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor,
the duty or the burden of evidence shifts to
defendant to controvert plaintiff's prima facie
case, otherwise, a verdict must be returned in
favor of plaintiff. Moreover, in civil cases, the party
having the burden of proof must produce a
preponderance of evidence thereon, with plaintiff
having to rely on the strength of his own evidence
and not upon the weakness of the defendant's. The
concept of "preponderance of evidence" refers to
evidence which is of greater weight or more
convincing, than that which is offered in
opposition to it; at bottom, it means probability of
truth.12
What further dampens petitioner's position is the
absence of the crucial fact of intoxication in the
blotter report which officially documented the
incident. Entries in police records made by a
police officer in the performance of the duty
especially enjoined by law are prima facie
evidence of the fact therein stated, and their
probative value may be substantiated or nullified
by other competent evidence.13 In this case, the
lack of statement to the effect that the driver was
under the influence of alcohol in the said report is
too significant to escape the attention of this
Court.
This case involves a contract of insurance, the
authenticity and validity of which was
uncontested. In exempting insurers from liability
under the contract, proof thereof must be clear,
credible and convincing. Fundamental is the rule
that the contract is the law between the parties
and, that absent any showing that its provisions
are wholly or in part contrary to law, morals, good
customs, public order, or public policy, it shall be
enforced to the letter by the courts.14
WHEREFORE, premises considered, the instant
petition is hereby DENIED. The assailed Decision
of the Court of Appeals in CA-G.R. CV No. 80557 is
hereby AFFIRMED.
SO ORDERED.
JOSE PORTUGAL PEREZ
Associate Justice
137 |I N S U R A N C E
MARINE INSURANCE, LOSS, AND ABANDONMENT
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 94052               August 9, 1991
ORIENTAL ASSURANCE
CORPORATION, petitioner,
vs.
COURT OF APPEALS AND PANAMA SAW MILL
CO., INC., respondents.
Alejandro P. Ruiz, Jr. for petitioner.
Federico R. Reyes for private respondent.
MELENCIO-HERRERA, J:
An action to recover on a marine insurance policy,
issued by petitioner in favor of private
respondent, arising from the loss of a shipment of
apitong logs from Palawan to Manila.
The facts relevant to the present review disclose
that sometime in January 1986, private
respondent Panama Sawmill Co., Inc. (Panama)
bought, in Palawan, 1,208 pieces of apitong logs,
with a total volume of 2,000 cubic meters. It hired
Transpacific Towage, Inc., to transport the logs by
sea to Manila and insured it against loss for P1-M
with petitioner Oriental Assurance Corporation
(Oriental Assurance). There is a claim by Panama,
however, that the insurance coverage should have
been for P3-M were it not for the fraudulent act of
one Benito Sy Yee Long to whom it had entrusted
the amount of P6,000.00 for the payment of the
premium for a P3-M policy.
Oriental Assurance issued Marine Insurance Warranted that this Insurance is against TOTAL
Policy No. OACM 86/002, which stipulated, among LOSS ONLY. Subject to the following clauses:
others:
— Civil Code Article 1250 Waiver clause
Name of Insured:
Panama Sawmill, Inc. — Typhoon warranty clause
Karuhatan, Valenzuela
Metro Manila — Omnibus clause.
Vessel: The logs were loaded on two (2) barges: (1) on
barge PCT-7000,610 pieces of logs with a volume
MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter of 1,000 cubicmeters; and (2) on Barge TPAC-
apitong Logs 1000, 598 pieces of logs, also with a volume of
Barge Transpac 1,000-1,000 cubic meter apitong 1,000 cubic meters.
Logs
Voyage or Period of Insurance: On 28 January 1986, the two barges were towed
by one tug-boat, the MT 'Seminole' But, as fate
From Palawan-ETD January 16, 1986 would have it, during the voyage, rough seas and
To: Manila strong winds caused damage to Barge TPAC-1000
resulting in the loss of 497 pieces of logs out of the
Subject matter Insured: 598 pieces loaded thereon.
2,000 cubic meters apitong Logs Panama demanded payment for the loss but
Agreed Value Oriental Assurance refuse on the ground that its
contracted liability was for "TOTAL LOSS ONLY."
Amount Insured Hereunder: The rejection was upon the recommendation of
the Tan Gatue Adjustment Company.
Pesos: One Million Only (P1,000,000.00)
Philippine Currency Unable to convince Oriental Assurance to pay its
claim, Panama filed a Complaint for Damages
Premium — P2,500.00 rate — 0.250% against Ever Insurance Agency (allegedly, also
liable), Benito Sy Lee Yong and Oriental
Assurance, before the Regional Trial Court,
Doc. stamps 187.60 Invoice No. 157862 Kalookan, Branch 123, docketed as Civil Case No.
C-12601.
l % P/tax 25.00
After trial on the merit, the RTC 1 rendered its
TOTAL P2,712.50 Decision, with the following dispositive portion:
CLAUSES, ENDORSEMENTS, SPECIAL WHEREFORE, upon all the foregoing
CONDITIONS and WARRANTIES premises, judgment is hereby rendered:
138 |I N S U R A N C E
MARINE INSURANCE, LOSS, AND ABANDONMENT
1. Ordering the defendant Oriental
Assurance Corporation to pay plaintiff
Panama Saw Mill Inc. the amount of
P415,000.00 as insurance indemnity with
interest at the rate of 12% per annum
computed from the date of the filing of the
complaint;
2. Ordering Panama Saw Mill to pay
defendant Ever Insurance Agency or
Antonio Sy Lee Yong, owner thereof,
(Ever being a single proprietorship) for
the amount of P20,000.00 as attorney's
fee and another amount of P20,000.00 as
moral damages.
3. Dismissing the complaint against
defendant Benito Sy Lee Yong.
SO ORDERED.
On appeal by both parties, respondent Appellate
Court2 affirmed the lower Court judgment in all
respects except for the rate of interest, which was
reduce from twelve (12%) to six (6%) per annum.
Both Courts shared the view that the insurance
contract should be liberally construed in order to
avoid a denial of substantial justice; and that the
logs loaded in the two barges should be treated
separately such that the loss sustained by the
shipment in one of them may be considered as
"constructive total loss" and correspondingly
compensable.
In this Petition for Review on Certiorari, Oriental
Assurance challenges the aforesaid dispositions.
In its Comment, Panama, in turn, maintains that
the constructive total loss should be based on a
policy value of P3-M and not P1-M, and prays that
the award to Ever Insurance Agency or Antonio Sy
Lee Yong of damages and attorney's fees be set
aside.
The question for determination is whether or not
Oriental Assurance can be held liable under its
marine insurance policy based on the theory of a
divisible contract of insurance and, consequently,
a constructive total loss.
Our considered opinion is that no liability
attaches.
The terms of the contract constitute the measure
of the insurer liability and compliance therewith is
a condition precedent to the insured's right to
recovery from the insurer (Perla Compania de
Seguros, Inc. v. Court of Appeals, G.R. No. 78860,
May 28, 1990, 185 SCRA 741). Whether a contract
is entire or severable is a question of intention to
be determined by the language employed by the
parties. The policy in question shows that the
subject matter insured was the entire shipment of
2,000 cubic meters of apitong logs. The fact that
the logs were loaded on two different barges did
not make the contract several and divisible as to
the items insured. The logs on the two barges
were not separately valued or separately insured.
Only one premium was paid for the entire
shipment, making for only one cause or
consideration. The insurance contract must,
therefore, be considered indivisible.
More importantly, the insurer's liability was for
"total loss only." A total loss may be either actual
or constructive (Sec. 129, Insurance Code). An
actual total loss is caused by:
(a) A total destruction of the thing
insured;
(b) The irretrievable loss of the thing by
sinking, or by being broken up;
(c) Any damage to the thing which
renders it valueless to the owner for the
purpose for which he held it; or
(d) Any other event which effectively
deprives the owner of the possession, at
the port of destination, of the thing
insured. (Section 130, Insurance Code).
A constructive total loss is one which gives to a
person insured a right to abandon, under Section
139 of the Insurance Code. This provision reads:
SECTION 139. A person insured by a
contract of marine insurance may
abandon the thing insured, or any
particular portion thereof 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 injured against,
(a) If more than three-fourths thereof in
value is actually lost, or would have to be
expended to recover it from the peril;
(b) If it is injured to such an extent as to
reduce its value more than three-fourths;
x x x           x x x          x x x
(Emphasis supplied)
Respondent Appellate Court treated the loss as a
constructive total loss, and for the purpose of
computing the more than three-fourths value of
the logs actually lost, considered the cargo in one
barge as separate from the logs in the other. Thus,
it concluded that the loss of 497 pieces of logs
from barge TPAC-1000, mathematically speaking,
is more than three-fourths (¾) of the 598 pieces
of logs loaded in that barge and may, therefore, be
considered as constructive total loss.
The basis thus used is, in our opinion, reversible
error.1âwphi1 The requirements for the
application of Section 139 of the Insurance Code,
139 |I N S U R A N C E
MARINE INSURANCE, LOSS, AND ABANDONMENT
quoted above, have not been met. The logs
involved, although placed in two barges, were not
separately valued by the policy, nor separately
insured. Resultantly, the logs lost in barge TPAC-
1000 in relation to the total number of logs loaded
on the same barge can not be made the basis for
determining constructive total loss. The logs
having been insured as one inseparable unit, the
correct basis for determining the existence of
constructive total loss is the totality of the
shipment of logs. Of the entirety of 1,208, pieces of
logs, only 497 pieces thereof were lost or 41.45%
of the entire shipment. Since the cost of those 497
pieces does not exceed 75% of the value of all
1,208 pieces of logs, the shipment can not be said
to have sustained a constructive total loss under
Section 139(a) of the Insurance Code.

In the absence of either actual or constructive

total loss, there can be no recovery by the insured
Panama against the insurer, Oriental Assurance.

By reason of the conclusions arrived at, Panama's

asseverations in its Comment need no longer be
passed upon, besides the fact that no review, in
proper form, has been sought by it.

WHEREFORE, the judgment under review is

hereby SET ASIDE and petitioner, Oriental
Assurance Corporation, is hereby ABSOLVED from
liability under its marine insurance policy No.
OAC-M-86/002. No costs.

SO ORDERED.

Paras, Padilla, Sarmiento and Regalado, JJ., concur.

140 |I N S U R A N C E
LIFE INSURANCE
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-8151        December 16, 1955
VIRGINIA CALANOC, petitioner,
vs.
COURT OF APPEALS and THE PHILIPPINE
AMERICAN LIFE INSURANCE CO., respondents.
Lucio Javillonar for petitioner.
J. A. Wolfson, Manuel Y. Mecias, Emilio Abello and
Anselmo A. Reyes for respondents.
BAUTISTA ANGELO, J.:
This suit involves the collection of P2,000
representing the value of a supplemental policy
covering accidental death which was secured by
one Melencio Basilio from the Philippine
American Life Insurance Company. The case
originated in the Municipal Court of Manila and
judgment being favorable to the plaintiff it was
appealed to the court of first instance. The latter
court affirmed the judgment but on appeal to the
Court of Appeals the judgment was reversed and
the case is now before us on a petition for review.
Melencio Basilio was a watchman of the Manila
Auto Supply located at the corner of Avenida Rizal
and Zurbaran. He secured a life insurance policy
from the Philippine American Life Insurance
Company in the amount of P2,000 to which was
attached a supplementary contract covering death
by accident. On January 25, 1951, he died of a
gunshot wound on the occasion of a robbery
committed in the house of Atty. Ojeda at the
corner of Oroquieta and Zurbaan streets. Virginia
Calanoc, the widow, was paid the sum of P2,000,
face value of the policy, but when she demanded
the payment of the additional sum of P2,000
representing the value of the supplemental policy,
the company refused alleging, as main defense,
that the deceased died because he was murdered
by a person who took part in the commission of
the robbery and while making an arrest as an
officer of the law which contingencies were
expressly excluded in the contract and have the
effect of exempting the company from liability.
The pertinent facts which need to be considered
for the determination of the questions raised are
those reproduced in the decision of the Court of
Appeals as follows:
The circumstances surrounding the death
of Melencio Basilio show that when he
was killed at about seven o'clock in the
night of January 25, 1951, he was on duty
as watchman of the Manila Auto Supply at
the corner of Avenida Rizal and Zurbaran;
that it turned out that Atty. Antonio Ojeda
who had his residence at the corner of
Zurbaran and Oroquieta, a block away
from Basilio's station, had come home
that night and found that his house was
well-lighted, but with the windows
closed; that getting suspicious that there
were culprits in his house, Atty. Ojeda
retreated to look for a policeman and
finding Basilio in khaki uniform, asked
him to accompany him to the house with
the latter refusing on the ground that he
was not a policeman, but suggesting that
Atty. Ojeda should ask the traffic
policeman on duty at the corner of Rizal
Avenue and Zurbaran; that Atty. Ojeda
went to the traffic policeman at said
corner and reported the matter, asking
the policeman to come along with him, to
which the policeman agreed; that on the
way to the Ojeda residence, the policeman
and Atty. Ojeda passed by Basilio and
somehow or other invited the latter to
come along; that as the tree approached
the Ojeda residence and stood in front of
the main gate which was covered with
galvanized iron, the fence itself being
partly concrete and partly adobe stone, a
shot was fired; that immediately after the
shot, Atty. Ojeda and the policeman
sought cover; that the policeman, at the
request of Atty. Ojeda, left the premises to
look for reinforcement; that it turned out
afterwards that the special watchman
Melencio Basilio was hit in the abdomen,
the wound causing his instantaneous
death; that the shot must have come from
inside the yard of Atty. Ojeda, the bullet
passing through a hole waist-high in the
galvanized iron gate; that upon inquiry
Atty. Ojeda found out that the savings of
his children in the amount of P30 in coins
kept in his aparador contained in
stockings were taken away, the aparador
having been ransacked; that a month
thereafter the corresponding
investigation conducted by the police
authorities led to the arrest and
prosecution of four persons in Criminal
Case No. 15104 of the Court of First
Instance of Manila for 'Robbery in an
Inhabited House and in Band with
Murder'.
It is contended in behalf of the company that
Basilio was killed which "making an arrest as an
officer of the law" or as a result of an "assault or
murder" committed in the place and therefore his
death was caused by one of the risks excluded by
the supplementary contract which exempts the
company from liability. This contention was
upheld by the Court of Appeals and, in reaching
this conclusion, made the following comment:
141 |I N S U R A N C E
LIFE INSURANCE
From the foregoing testimonies, we find
that the deceased was a watchman of the
Manila Auto Supply, and, as such, he was
not boud to leave his place and go with
Atty. Ojeda and Policeman Magsanoc to
see the trouble, or robbery, that occurred
in the house of Atty. Ojeda. In fact,
according to the finding of the lower
court, Atty. Ojeda finding Basilio in
uniform asked him to accompany him to
his house, but the latter refused on the
ground that he was not a policeman and
suggested to Atty. Ojeda to ask help from
the traffic policeman on duty at the
corner of Rizal Avenue and Zurbaran, but
after Atty. Ojeda secured the help of the
traffic policeman, the deceased went with
Ojeda and said traffic policeman to the
residence of Ojeda, and while the
deceased was standing in front of the
main gate of said residence, he was shot
and thus died. The death, therefore, of
Basilio, although unexpected, was not
caused by an accident, being a voluntary
and intentional act on the part of the one
wh robbed, or one of those who robbed,
the house of Atty. Ojeda. Hence, it is out
considered opinion that the death of
Basilio, though unexpected, cannot be
considered accidental, for his death
occurred because he left his post and
joined policeman Magsanoc and Atty.
Ojeda to repair to the latter's residence to
see what happened thereat. Certainly,
when Basilio joined Patrolman Magsanoc
and Atty. Ojeda, he should have realized
the danger to which he was exposing
himself, yet, instead of remaining in his
place, he went with Atty. Ojeda and
Patrolman Magsanoc to see what was the
trouble in Atty. Ojeda's house and thus he
was fatally shot.
We dissent from the above findings of the Court of
Appeals. For one thing, Basilio was a watchman of
the Manila Auto Supply which was a block away
from the house of Atty. Ojeda where something
suspicious was happening which caused the latter
to ask for help. While at first he declied the
invitation of Atty. Ojeda to go with him to his
residence to inquire into what was going on
because he was not a regular policeman, he later
agreed to come along when prompted by the
traffic policeman, and upon approaching the gate
of the residence he was shot and died. The
circumstance that he was a mere watchman and
had no duty to heed the call of Atty. Ojeda should
not be taken as a capricious desire on his part to
expose his life to danger considering the fact that
the place he was in duty-bound to guard was only
a block away. In volunteering to extend help under
the situation, he might have thought, rightly or
wrongly, that to know the truth was in the interest
of his employer it being a matter that affects the
security of the neighborhood. No doubt there was
some risk coming to him in pursuing that errand,
but that risk always existed it being inherent in
the position he was holding. He cannot therefore
be blamed solely for doing what he believed was
in keeping with his duty as a watchman and as a
citizen. And he cannot be considered as making an
arrest as an officer of the law, as contended,
simply because he went with the traffic policeman,
for certainly he did not go there for that purpose
nor was he asked to do so by the policeman.
Much less can it be pretended that Basilio died in
the course of an assault or murder considering the
very nature of these crimes. In the first place,
there is no proof that the death of Basilio is the
result of either crime for the record is barren of
any circumstance showing how the fatal shot was
fired. Perhaps this may be clarified in the criminal
case now pending in court as regards the incident
but before that is done anything that might be said
on the point would be a mere conjecture. Nor can
it be said that the killing was intentional for there
is the possibility that the malefactor had fired the
shot merely to scare away the people around for
his own protection and not necessarily to kill or
hit the victim. In any event, while the act may not
excempt the triggerman from liability for the
damage done, the fact remains that the happening
was a pure accident on the part of the victim. The
victim could have been either the policeman or
Atty. Ojeda for it cannot be pretended that the
malefactor aimed at the deceased precisely
because he wanted to take his life.
We take note that these defenses are included
among the risks exluded in the supplementary
contract which enumerates the cases which may
exempt the company from liability. While as a
general rule "the parties may limit the coverage of
the policy to certain particular accidents and risks
or causes of loss, and may expressly except other
risks or causes of loss therefrom" (45 C. J. S. 781-
782), however, it is to be desired that the terms
and phraseology of the exception clause be clearly
expressed so as to be within the easy grasp and
understanding of the insured, for if the terms are
doubtful or obscure the same must of necessity be
interpreted or resolved aganst the one who has
caused the obscurity. (Article 1377, new Civil
Code) And so it has bene generally held that the
"terms in an insurance policy, which are
ambiguous, equivacal, or uncertain . . . are to be
construed strictly and most strongly against the
insurer, and liberally in favor of the insured so as to
effect the dominant purpose of indemnity or
payment to the insured, especially where a
forfeiture is involved" (29 Am. Jur., 181), and the
reason for this rule is that he "insured usually has
no voice in the selection or arrangement of the
words employed and that the language of the
contract is selected with great care and
deliberation by experts and legal advisers
employed by, and acting exclusively in the interest
of, the insurance company." (44 C. J. S., p. 1174.)
Insurance is, in its nature, complex and
difficult for the layman to understand.
Policies are prepared by experts who
know and can anticipate the bearings and
142 |I N S U R A N C E
LIFE INSURANCE
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.)lawphi1.net

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 are therefore persuaded to conclude that the

circumstances unfolded in the present case do not
warrant the finding that the death of the
unfortunate victim comes within the purview of
the exception clause of the supplementary policy
and, hence, do not exempt the company from
liability.

Wherefore, reversing the decision appealed from,

we hereby order the company to pay petitioner-
appellant the amount of P2,000, with legal interest
from January 26, 1951 until fully paid, with costs.

Paras, C. J., Bengzon, Padilla, Montemayor, Reyes,

A., Jugo, Labrador, Concepcion, and Reyes, J. B. L., JJ.,
concur.

143 |I N S U R A N C E
LIFE INSURANCE
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
 
G.R. No. L-25579 March 29, 1972
EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR.,
MIGUEL T. BIAGTAN, GIL T. BIAGTAN and
GRACIA T. BIAGTAN, plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY,
LTD., defendant-appellant.
Tanopo, Millora, Serafica, and Sañez for plaintiff-
appellees.
Araneta, Mendoza and Papa for defendant-
appellant.
MAKALINTAL, J.:p
This is an appeal from the decision of the Court of
First Instance of Pangasinan in its Civil Case No. D-
1700.
The facts are stipulated. Juan S. Biagtan was
insured with defendant InsularLife Assurance
Company under Policy No. 398075 for the sum of
P5,000.00 and, under a supplementary contract
denominated "Accidental Death Benefit Clause, for
an additional sum of P5,000.00 if "the death of the
Insured resulted directly from bodily injury
effected solely through external and violent means
sustained in an accident ... and independently of
all other causes." The clause, however,expressly
provided that it would not apply where death
resulted from an injury"intentionally inflicted by
another party."
On the night of May 20, 1964, or during the first
hours of the following day a band of robbers
entered the house of the insured Juan S. Biagtan.
What happened then is related in the decision of
the trial court as follows:
...; that on the night of May 20,
1964 or the first hours of May 21,
1964, while the said life policy
and supplementary contract
were in full force and effect, the
house of insured Juan S. Biagtan
was robbed by a band of robbers
who were charged in and
convicted by the Court of First
Instance of Pangasinan for
robbery with homicide; that in
committing the robbery, the
robbers, on reaching the
staircase landing on the second
floor, rushed towards the door of
the second floor room, where
they suddenly met a person near
the door of oneof the rooms who
turned out to be the insured Juan
S. Biagtan who received thrusts
from their sharp-pointed
instruments, causing wounds on
the body of said Juan S. Biagtan
resulting in his death at about 7
a.m. on the same day, May 21,
1964;
Plaintiffs, as beneficiaries of the insured, filed a
claim under the policy. The insurance company
paid the basic amount of P5,000.00 but refused to
pay the additional sum of P5,000.00 under the
accidental death benefit clause, on the ground that
the insured's death resulted from injuries
intentionally inflicted by third parties and
therefore was not covered. Plaintiffs filed suit to
recover, and after due hearing the court a
quo rendered judgment in their favor. Hence the
present appeal by the insurer.
The only issue here is whether under the facts are
stipulated and found by the trial court the wounds
received by the insured at the hands of the
robbers — nine in all, five of them mortal and four
non-mortal — were inflicted intentionally. The
court, in ruling negatively on the issue, stated that
since the parties presented no evidence and
submitted the case upon stipulation, there was no
"proof that the act of receiving thrust (sic) from
the sharp-pointed instrument of the robbers was
intended to inflict injuries upon the person of the
insured or any other person or merely to scare
away any person so as to ward off any resistance
or obstacle that might be offered in the pursuit of
their main objective which was robbery."
The trial court committed a plain error in drawing
the conclusion it did from the admitted facts. Nine
wounds were inflicted upon the deceased, all by
means of thrusts with sharp-pointed instruments
wielded by the robbers. This is a physical fact as to
which there is no dispute. So is the fact that five of
those wounds caused the death of the insured.
Whether the robbers had the intent to kill or
merely to scare the victim or to ward off any
defense he might offer, it cannot be denied that
the act itself of inflicting the injuries was
intentional. It should be noted that the exception
in the accidental benefit clause invoked by the
appellant does not speak of the purpose —
whether homicidal or not — of a third party in
causing the injuries, but only of the fact that such
injuries have been "intentionally" inflicted — this
obviously to distinguish them from injuries which,
although received at the hands of a third party, are
purely accidental. This construction is the basic
idea expressed in the coverage of the clause itself,
namely, that "the death of the insured resulted
directly from bodily injury effected solely through
external and violent means sustained in
144 |I N S U R A N C E
LIFE INSURANCE
an accident ... and independently of all other
causes." A gun which discharges while being
cleaned and kills a bystander; a hunter who shoots
at his prey and hits a person instead; an athlete in
a competitive game involving physical effort who
collides with an opponent and fatally injures him
as a result: these are instances where the infliction
of the injury is unintentional and therefore would
be within the coverage of an accidental death
benefit clause such as thatin question in this case.
But where a gang of robbers enter a house and
coming face to face with the owner, even if
unexpectedly, stab him repeatedly, it is contrary
to all reason and logic to say that his injuries are
not intentionally inflicted, regardless of whether
they prove fatal or not. As it was, in the present
case they did prove fatal, and the robbers have
been accused and convicted of the crime of
robbery with homicide.
The case of Calanoc vs. Court of Appeals, 98 Phil.
79, is relied upon by the trial court in support of
its decision. The facts in that case, however, are
different from those obtaining here. The insured
there was a watchman in a certain company, who
happened to be invited by a policeman to come
along as the latter was on his way to investigate a
reported robbery going on in a private house. As
the two of them, together with the owner of the
house, approached and stood in front of the main
gate, a shot was fired and it turned out afterwards
that the watchman was hit in the abdomen, the
wound causing his death. Under those
circumstances this Court held that it could not be
said that the killing was intentional for there was
the possibility that the malefactor had fired the
shot to scare people around for his own protection
and not necessarrily to kill or hit the victim. A
similar possibility is clearly ruled out by the facts
in the case now before Us. For while a single shot
fired from a distance, and by a person who was
not even seen aiming at the victim, could indeed
have been fired without intent to kill or injure,
nine wounds inflicted with bladed weapons at
close range cannot conceivably be considered as
innocent insofar as such intent is concerned. The by the insured or any other person." The inquiry
manner of execution of the crime permits no other was as to the question whether the shooting that
conclusion. caused the insured's death was accidental or
intentional; and the Court found that under the
Court decisions in the American jurisdiction, facts, showing that the murderer knew his victim
where similar provisions in accidental death and that he fired with intent to kill, there could be
benefit clauses in insurance policies have been no recovery under the policy which excepted
construed, may shed light on the issue before Us. death from intentional injuries inflicted by any
Thus, it has been held that "intentional" as used in person.
an accident policy excepting intentional injuries
inflicted by the insured or any other person, etc., WHEREFORE, the decision appealed from is
implies the exercise of the reasoning faculties, reversed and the complaint dismissed, without
consciousness and volition.1 Where a provision of pronouncement as to costs.
the policy excludes intentional injury, it is the
intention of the person inflicting the injury that is Zaldivar, Castro, Fernando and Villamor, JJ., concur.
controlling.2 If the injuries suffered by the insured
clearly resulted from the intentional act of a third Makasiar, J., reserves his vote.
person the insurer is relieved from liability as
stipulated.3
In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co.,
 
87 Ky. 300, 8 S.W. 570, 12 Am. St. Rep. 484, the
insured was waylaid and assassinated for the
purpose of robbery. Two (2) defenses were  
interposed to the action to recover indemnity,
namely: (1) that the insured having been killed by Separate Opinions
intentional means, his death was not accidental,
and (2) that the proviso in the policy expressly  
exempted the insurer from liability in case the
insured died from injuries intentionally inflicted BARREDO, J., concurring —
by another person. In rendering judgment for the
insurance company the Court held that while the
During the deliberations in this case, I entertained
assassination of the insured was as to him an
some doubts as to the correctness and validity of
unforeseen event and therefore accidental, "the
the view upheld in the main opinion penned by
clause of the proviso that excludes the (insurer's)
Justice Makalintal. Further reflection has
liability, in case death or injury is intentionally
convinced me, however, that there are good
inflicted by another person, applies to this case."
reasons to support it.
In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65
At first blush, one would feel that every death not
Am. St. Rep. 61, 71 S.W. 811, the insured was shot
suicidal should be considered accidental, for the
three times by a person unknown late on a dark
purposes of an accident insurance policy or a life
and stormy night, while working in the coal shed
insurance policy with a double indemnity clause in
of a railroad company. The policy did not cover
case death results from accident. Indeed, it is quite
death resulting from "intentional injuries inflicted
logical to think that any event whether caused by
145 |I N S U R A N C E
LIFE INSURANCE
fault, negligence, intent of a third party or any
unavoidable circumstance, normally unforeseen
by the insured and free from any possible
connivance on his part, is an accident in the
generally accepted sense of the term. And if I were
convinced that in including in the policy the
provision in question, both the insurer and the
insured had in mind to exclude thereby from the
coverage of the policy only suicide whether
unhelped or helped somehow by a third party, I
would disregard the American decisions cited and
quoted in the main opinion as not even persuasive
authorities. But examining the unequivocal
language of the provision in controversy and
considering that the insured accepted the policy
without asking that it be made clear that the
phrase "injury intentionally inflicted by a third
party" should be understood to refer only to
injuries inflicted by a third party without any
wilful intervention on his part (of the insured) or,
in other words, without any connivance with him
(the insured) in order to augment the proceeds of
the policy for his benificiaries, I am inclined to
agree that death caused by criminal assault is not
covered by the policies of the kind here in
question, specially if the assault, as a matter of
fact, could have been more or less anticipated, as
when the insured happens to have violent
enemies or is found in circumstances that would
make his life fair game of third parties.
As to the rest, I have no doubt that the killing of
the insured in this case is as intentional as any
intentional act can be, hence this concurrence.
TEEHANKEE, J., dissenting:
The sole issue at bar is the correctness in law  of
the lower court's appealed decision adjudging
defendant insurance company liable, under its
supplementary contract denominated "Accidental
Death Benefit Clause" with the deceased insured,
to plaintiffs-beneficiaries (excluding plaintiff
Emilia T. Biagtan) in an additional amount of
P5,000.00 (with corresponding legal interest) and
ruling that defendant company had failed to
present any evidence to substantiate its defense
that the insured's death came within the
stipulated exceptions.
Defendant's accidental death benefit clause
expressly provides:
ACCIDENTAL DEATH BENEFIT.
(hereinafter called the benefit).
Upon receipt and approval of due
proof that the death of the
Insured resulted directly from
bodily injury effected solely
through external and violent
means sustained in an accident,
within ninety days after the date
of sustaining such injury, and
independently of all other causes,
this Company shall pay, in
addition to the sum insured
specified on the first page of this
Policy, a further sum equal to
said sum insured payable at the
same time and in the same
manner as said sum insured,
provided, that such death
occurred during the continuance
of this Clause and of this Policy
and before the sixtieth birthday
of the Insured."1
A long list of exceptions and an Automatic
Discontinuance clause immediately follow
thereafter, thus:
EXCEPTIONS. The Benefit shall
not apply if the Insured's death
shall result, either directly or
indirectly, from any one of the
following causes:
(1) Self-destruction or self-
inflicted injuries, whether the
Insured be sane or insane;
(2) Bodily or mental infirmity or
disease of any kind;
(3) Poisoning or infection, other
than infection occurring
simultaneously with and in
consequence of a cut or wound
sustained in an accident;
(4) Injuries of which there is no
visible contusions or wound on the
exterior of the body, drowning
and internal injuries revealed by
autopsy excepted;
(5) Any injuries received (a)
while on police duty in any
military, naval or police
organization; (b) in any riot, civil
commotion, insurrection or war or
any act incident thereto; (c)
while travelling as a passenger or
otherwise in any form of
submarine transportation, or
while engaging in submarine
operations; (d) in any violation of
the law by the Insured or assault
provoked by the Insured; (e) that
has been inflicted intentionally by
a third party, either with or
without provocation on the part
of the Insured, and whether or
not the attack or the defense by
the third party was caused by a
violation of the law by the
Insured;
(6) Operating or riding in or
descending from any kind of
aircraft if the Insured is a pilot,
146 |I N S U R A N C E
LIFE INSURANCE
officer or member of the crew of
the aircraft or is giving or
receiving any kind of training or
instruction or has any duties
aboard the aircraft or requiring
descent therefrom; and
(7) Atomic energy explosion of
any nature whatsoever.
The Company, before making any
payment under this Clause, shall
have the right and opportunity to
examine the body and make an
autopsy thereof.
AUTOMATIC DISCONTINUANCE.
This Benefit shall automatically
terminate and the additional
premium therefor shall cease to
be payable when and if:
(1) This Policy is surrendered for
cash, paid-up insurance or
extended term insurance; or
(2) The benefit under the Total
and Permanent Disability Waiver
of Premium Certificate is granted
to the insured; or
(3) The Insured engages
in military, naval or aeronautic
service in time of war; or
(4) The policy anniversary
immediately preceding the
sixtieth birthday of the Insured is
reached.2
It is undisputed that, as recited in the lower
court's decision, the insured met his death, as
follows: "that on the night of May 20, 1964 or the
first hours of May 21, 1964, while the said life The lower court thereafter rendered judgment
policy and supplementary contract were in full against defendant, as follows:
force and effect, the house of insured Juan S.
Biagtan was robbed by a band of robbers who There is no doubt that the
were charged in and convicted by the Court of insured, Juan S. Biagtan, met his
First Instance of Pangasinan for robbery with death as a result of the wounds
homicide; that in committing the robbery, the inflicted upon him by the
robbers, on reaching the staircase landing of the malefactors on the early morning
second floor, rushed towards the doors of the of May 21, 1964 by means of
second floor room, where they suddenly met a thrusts from sharp-pointed
person near the door of one of the rooms who instruments delivered upon his
turned out to be the insured Juan S. Biagtan who person, and there is likewise no
received thrust from their sharp-pointed question that the thrusts were
instruments, causing wounds on the body of said made on the occasion of the
Juan S. Biagtan resulting in his death at about 7 robbery. However, it is
a.m. on the same day, May 21, 1964." 3 defendants' position that the
killing of the insured was
Defendant company, while admitting the above- intentionally done by the
recited circumstances under which the insured malefactors, who were charged
met his death, disclaimed liability under its with and convicted of the crime
accidental death benefit clause under paragraph 5 of robbery with homicide by the
of its stipulated "Exceptions" on its theory that the Court of First Instance of
insured's death resulted from injuries Pangasinan.
"intentionally inflicted by a third party," i.e. the
robbers who broke into the insured's house and It must be noted here that no
inflicted fatal injuries on him. evidence whatsoever was
presented by the parties who
The case was submitted for decision upon the submitted the case for resolution
parties' stipulation of facts that (1) insurance upon the stipulation of
companies such as the Lincoln National Life facts presented by them.
Insurance Co. and Sun Life Assurance Co. of Thus, the court does not have
Canada with which the deceased insured Juan S. before it proof that the act of
Biagtan was also insured for much larger sums receiving thrust(s) from the
under similar contracts with accidental death sharp-pointed instrument of the
benefit provisions have promptly paid the benefits robbers was intended to inflict
thereunder to plaintiffs-beneficiaries; (2) the injuries upon the person of the
robbers who caused the insured's death were insured or any other person
charged in and convicted by the Court of First or merely to scare away any
Instance of Pangasinan for the crime of robbery person so as to ward off any
with homicide; and (3) the injuries inflicted on the resistance or obstacle that might
insured by the robbers consisted of five mortal be offered in the pursuit of their
and four non-mortal wounds.4 main objective which was
robbery. It was held that where a
provision of the policy excludes
147 |I N S U R A N C E
LIFE INSURANCE
intentional injury, it is the
intention of the person inflicting
the injury that is controlling ... and
to come within the exception, the
act which causes the injury must
be wholly intentional, not merely
partly.
The case at bar has some
similarity with the case
of Virginia Calanoc vs. Court of
Appeals, et al., L-8151,
promulgated December 16, 1965,
where the Supreme Court ruled
that "the shot (which killed the
insured) was merely to scare
away the people around for his
own protection and not
necessarily to kill or hit the
victim."
In the Calanoc case, one Melencio
Basilio, a watchman of a certain
company, took out life insurance
from the Philippine American
Life Insurance Company in the
amount of P2,000.00 to which
was attached a supplementary
contract covering death by
accident. Calanoc died of gunshot
wounds on the occasion of a
robbery committed in the house
of a certain Atty. Ojeda in Manila.
The insured's widow was paid
P2,000.00, the face value of the
policy, but when she demanded
payment of the additional sum of
P2,000.00 representing the value
of the supplemental policy, the
company refused alleging, as
main defense, that the deceased
died because he was murdered
by a person who took part in the
commission of the robbery and
while making an arrest as an
officer of the law which
contingencies were (as in this
case) expressly excluded in the
contract and have the effect of
exempting the company from
liability.
The facts in the Calanoc case
insofar as pertinent to this case
are, as found by the Court of
Appeals in its decision which
findings of fact were adopted by
the Supreme Court, as follows:
"...that on the way to the
Ojeda residence (which
was then being robbed by
armed men), the
policeman and Atty. Ojeda
passed by Basilio (the
insured) and somehow or
other invited the latter to
come along; that as the
three approached the
Ojeda residence and stood
in front of the main gate
which was covered by
galvanized iron, the fence
itself being partly concrete
and partly adobe stone, a
shot was fired; ... that it
turned out afterwards that
the special watchman
Melencio Basilio was hit in
the abdomen, the wound
causing his instantaneous
death ..."
The Court of Appeals arrived at
the conclusion that the death of
Basilio, although unexpected, was
not caused by an accident, being
a voluntary and intentional act on
the part of the one who robbed,
or one of those who robbed, the
house of Atty. Ojeda.
In reversing this conclusion of
the Court of Appeals, the
Supreme Court said in part:
"... Nor can it be said that
the killing was intentional
for there is the possibility
that the malefactors had
fired the shot merely to
scare away the people
around for his own
protection and not
necessarily to kill or hit
the victim. In any
event, while the act may
not exempt the
triggerman from ability
for the damage done, the
fact remains that the
happening was a pure
accidentt on the part of
the victim."
With this ruling of the Supreme
Court, and the utter absence of
evidence in this case as to the real
intention of the malefactors in
making a thrust with their sharp-
pointed instrument on any
person, the victim in particular,
the case falls squarely within the
ruling in the Calanoc vs. Court of
Appeals case.
It is the considered view of this
Court that the insured died
because of an accident which
happened on the occasion of the
robbery being committed in his
house. His death was not sought
148 |I N S U R A N C E
LIFE INSURANCE
(at least no evidence was
presented to show it was), and
therefore was fortuitous.
"Accident" was defined as that
which happens by chance or
fortuitously, without intention or
design, and which is unexpected,
unusual and unforeseen, or that
which 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. (29 Am.
Jur. 706).
There is no question that the
defense set up by the defendant
company is one of those included
among the risks excluded in the
supplementary
contract. However, there is no
evidence here that the thrusts
with sharp-pointed
instrument (which led to the
death of the insured) was
"intentional," (sic) so as to exempt
the company from liability. It
could safely be assumed that it
was purely accidental considering
that the principal motive of the
culprits was robbery, the thrusts
being merely intended to scare
away persons who might offer
resistance or might obstruct
them from pursuing their main
objective which was robbery.5
It is respectfully submitted that the lower court
committed no error in law in holding defendant
insurance company liable to plaintiffs-
beneficiaries under its accidental death benefit
clause, by virtue of the following considerations:
1. The case of Calanoc cited by the lower court is
indeed controlling here.6 This Court, there
construing a similar clause, squarely ruled that
fatal injuries inflicted upon an insured by a
malefactor(s) during the latter's commission of a
crime are deemed accidental and within the
coverage of such accidental death benefit clauses
and the burden of proving that the killing was
intentional so as to have it fall within the
stipulated exception of having resulted from
injuries "intentionally inflicted by a third party"
must be discharged by the insurance company.
This Court there clearly held that in such cases
where the killing does not amount to murder, it
must be held to be a "pure accident" on the part of
the victim, compensable with double-indemnity,
even though the malefactor is criminally liable for
his act. This Court rejected the insurance-
company's contrary claim, thus:
Much less can it be pretended
that Basilio died in the course of
an assault or murder considering
the very nature of these crimes.
In the first place, there is no
proof that the death of Basilio is
the result of either crime for the
record is barren of any
circumstance showing how the
fatal shot was fired. Perhaps this
may be clarified in the criminal
case now pending in court a
regards the incident but before
that is done anything that might
be said on the point would be a
mere conjecture. Nor can it be
said that the killing was
intentional for there is the
possibility that the malefactor had
fired the shot merely to scare
away the people around for his
own protection and not
necessarily to kill or hit the
victim. In any event, while the act
may not exempt the triggerman
from liability for the damage
done, the fact remains that the
happening was a pure accident on
the part of the victim. The victim
could have been either the
policeman or Atty. Ojeda for it
cannot be pretended that the
malefactor aimed at the deceased
precisely because he wanted to
take his life. 7
2. Defendant company patently failed to discharge
its burden of proving that the fatal injuries were
inflicted upon the deceased intentionally,
i.e. deliberately. The lower court correctly held
that since the case was submitted upon the
parties' stipulation of facts which did not cover
the malefactors' intent at all, there was an "utter
absence of evidence in this case as to the real
intention of the malefactors in making a thrust
with their sharp-pointed instrument(s) on any
person, the victim in particular." From the
undisputed facts, supra,8 the robbers had "rushed
towards the doors of the second floor room,
where they suddenly met a person ... who turned
out to be the insured Juan S. Biagtan who received
thrusts from their pointed instruments." The
thrusts were indeed properly termed "purely
accidental" since they seemed to be a reflex action
on the robbers' part upon their being surprised by
the deceased. To argue, as defendant does, that the
robbers' intent to kill must necessarily be deduced
from the four mortal wounds inflicted upon the
deceased is to beg the question. Defendant must
suffer the consequences of its failure to discharge
its burden of proving by competent evidence, e.g.
the robbers' or eyewitnesses' testimony, that the
fatal injuries were intentionally inflicted upon the
insured so as to exempt itself from liability.
3. Furthermore, plaintiffs-appellees properly
assert in their brief that the sole error assigned by
defendant company, to wit, that the fatal injuries
were not accidental as held by the lower court but
149 |I N S U R A N C E
LIFE INSURANCE
should be held to have been intentionally inflicted,
raises a question of fact — which defendant is
now barred from raising, since it expressly limited
its appeal to this Court purely "on questions of
law", per its noitice of appeal,9 Defendant is
therefore confined to "raising only questions of
law" and "no other questions" under Rule 42,
section 2 of the Rules of Court 10 and is deemed to
have conceded the findings of fact of the trial
court, since he thereby waived all questions of
facts. 11
4. It has long been an established rule of
construction of so-called contracts of adhesion
such as insurance contracts, where the insured is
handed a printed insurance policy whose fine-
print language has long been selected with great
care and deliberation by specialists and legal
advisers employed by and acting exclusively in the
interest of the insurance company, that the terms
and phraseology of the policy, particularly of any
exception clauses, must be clearly expressed so as
to be easily understood by the insured and any
"ambiguous, equivocal or uncertain terms" are to
be "construed strictly and most strongly against
the insurer and liberally in favor of the insured so
as to effect the dominant purpose of indemnity or
payment to the insured, especially where a
forfeiture is involved.
The Court so expressly held in Calanoc  that:
... While as a general rule "the
parties may limit the coverage of
the policy to certain particular
accidents and risks or causes of
loss, and may expressly except
other risks or causes of loss
therefrom" (45 C.J.S. 781-782),
however, it is to be desired that
the terms and phraseology of the
exception clause be clearly
expressed so as to be within the
easy grasp and understanding of
the insured, for if the terms are
doubtful or obscure the same
must of necessity be interpreted
or resolved against the one who
has caused the obscurity. (Article
1377, new Civil Code) And so it
has been generally held that the
"terms in an insurance policy,
which are ambiguous, equivocal,
or uncertain ... are to be
construed strictly and most
strongly against the insurer, and
liberally in favor of the insured so
as to effect the dominant purpose
of indemnity or payment to the
insured, especially where a
forfeiture is involved" (29 AM.
Jur., 181), and the reason for this
rule is that the "insured usually
has no voice in the selection or
arrangement of the words
employed and that the language
of the contract is selected with
great care and deliberation by
experts and legal advisers
employed by, and acting
exclusively in the interest of, the
insurance company." (44 C.J.S., p.
1174)
Insurance is, in its nature,
complex and difficult for the
layman to understand. Policies
are prepared by experts who
know and can anticipate the
bearing 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, 164). 12
The Court has but recently reiterated this doctrine
in Landicho vs. GSIS  13 and again applied the
provisions of Article 1377 of our Civil Code that
"The interpretation of obscure words or
stipulations in a contract shall not favor the party
who caused the obscurity."
5. The accidental death benefit clause assuring the
insured's beneficiaries of double indemnity, upon
payment of an extra premium, in the event that
the insured meets violent accidental death is
contractually stipulated as follows in the policy:
"that the death of the insured resulted directly
from bodily injury effected solely through external
and violent means sustained in an accident," supra.
The policy then lists numerous exceptions, which
may be classified as follows:
— Injuries effected through non-external
means which are excepted: self-destruction, bodily
or mental infirmity or disease, poisoning or
infection, injuries with no visible contusions or
exterior wounds (exceptions 1 to 4 of policy
clause);
— Injuries caused by some act of the insured which
is proscribed by the policy, and are therefore
similarly exepted: injuries received while on
police duty, while travelling in any form of
submarine transportation, or in any violation of
law by the insured or assault provoked by the
150 |I N S U R A N C E
LIFE INSURANCE
insured, or in any aircraft if the insured is a pilot or
crew member; [exceptions 5 (a), (c) and (d), and 6
of the policy clause]; and
— Accidents expressly excluded: where death
resulted in any riot, civil commotion, insurrection
or war or atomic energy explosion. (Exceptions
5[b] and 7 of policy clause).
The only exception which is not susceptible of
classification is that provided in paragraph 5 (e),
the very exception herein involved, which would
also except injuries "inflicted intentionally by a
third party, either with or without provocation on
the part of the insured, and whether or not the
attack or the defense by the third party
was caused by a violation of the law by the
insured."
This ambiguous clause conflicts with all the other
four exceptions in the same paragraph 5
particularly that immediately preceding it in item
(d) which excepts injuries received where the
insured has violated the law or provoked the
injury, while this clause, construed as the
insurance company now claims, would seemingly
except also all other injuries, intentionally inflicted
by a third party, regardless of any violation of law
or provocation by the insured, and defeat the very
purpose of the policy of giving the insured double
indemnity in case of accidental death by "external
and violent means" — in the very language of the
policy."
It is obvious from the very classification of the
exceptions and applying the rule of noscitus a
sociis that the double-indemnity policy covers the
insured against accidental death, whether caused
by fault, negligence or intent of a third party
which is unforeseen and unexpected by the
insured. All the associated words and concepts in
the policy plainly exclude the accidental death
from the coverage of the policy only where the
injuries are self-inflicted or attended by some
proscribed act of the insured or are incurred in
some expressly excluded calamity such as riot,
war or atomic explosion.
Finally, the untenability of herein defendant
insurer's claim that the insured's death fell within
the exception is further heightened by the
stipulated fact that two other insurance
companies which likewise covered the insured for
which larger sums under similar accidental death
benefit clauses promptly paid the benefits thereof
to plaintiffs-beneficiaries.
I vote accordingly for the affirmance in toto of the
appealed decision, with costs against defendant-
appellant.
Concepcion, C.J. and Reyes, J.B.L., J., concur.
 
 
Separate Opinions
BARREDO, J., concurring —
During the deliberations in this case, I entertained
some doubts as to the correctness and validity of
the view upheld in the main opinion penned by
Justice Makalintal. Further reflection has
convinced me, however, that there are good
reasons to support it.
At first blush, one would feel that every death not
suicidal should be considered accidental, for the
purposes of an accident insurance policy or a life
insurance policy with a double indemnity clause in
case death results from accident. Indeed, it is quite
logical to think that any event whether caused by
fault, negligence, intent of a third party or any
unavoidable circumstance, normally unforeseen
by the insured and free from any possible
connivance on his part, is an accident in the
generally accepted sense of the term. And if I were
convinced that in including in the policy the
provision in question, both the insurer and the
insured had in mind to exclude thereby from the
coverage of the policy only suicide whether
unhelped or helped somehow by a third party, I
would disregard the American decisions cited and
quoted in the main opinion as not even persuasive
authorities. But examining the unequivocal
language of the provision in controversy and
considering that the insured accepted the policy
without asking that it be made clear that the
phrase "injury intentionally inflicted by a third
party" should be understood to refer only to
injuries inflicted by a third party without any
wilful intervention on his part (of the insured) or,
in other words, without any connivance with him
(the insured) in order to augment the proceeds of
the policy for his benificiaries, I am inclined to
agree that death caused by criminal assault is not
covered by the policies of the kind here in
question, specially if the assault, as a matter of
fact, could have been more or less anticipated, as
when the insured happens to have violent
enemies or is found in circumstances that would
make his life fair game of third parties.
As to the rest, I have no doubt that the killing of
the insured in this case is as intentional as any
intentional act can be, hence this concurrence.
TEEHANKEE, J., dissenting:
The sole issue at bar is the correctness in law of
the lower court's appealed decision adjudging
defendant insurance company liable, under its
supplementary contract denominated "Accidental
Death Benefit Clause" with the deceased insured,
to plaintiffs-beneficiaries (excluding plaintiff
Emilia T. Biagtan) in an additional amount of
P5,000.00 (with corresponding legal interest) and
ruling that defendant company had failed to
present any evidence to substantiate its defense
151 |I N S U R A N C E
LIFE INSURANCE
that the insured's death came within the
stipulated exceptions.
Defendant's accidental death benefit clause
expressly provides:
ACCIDENTAL DEATH BENEFIT.
(hereinafter called the benefit).
Upon receipt and approval of due
proof that the death of the
Insured resulted directly from
bodily injury effected solely
through external and violent
means sustained in an accident,
within ninety days after the date
of sustaining such injury, and
independently of all other causes,
this Company shall pay, in
addition to the sum insured
specified on the first page of this
Policy, a further sum equal to
said sum insured payable at the
same time and in the same
manner as said sum insured,
provided, that such death
occurred during the continuance
of this Clause and of this Policy
and before the sixtieth birthday
of the Insured."1
A long list of exceptions and an Automatic
Discontinuance clause immediately follow
thereafter, thus:
EXCEPTIONS. The Benefit shall
not apply if the Insured's death
shall result, either directly or
indirectly, from any one of the
following causes:
(1) Self-destruction or self-
inflicted injuries, whether the
Insured be sane or insane;
(2) Bodily or mental infirmity or
disease of any kind;
(3) Poisoning or infection, other
than infection occurring
simultaneously with and in
consequence of a cut or wound
sustained in an accident;
(4) Injuries of which there is no
visible contusions or wound on the
exterior of the body, drowning
and internal injuries revealed by
autopsy excepted;
(5) Any injuries received (a)
while on police duty in any
military, naval or police
organization; (b) in any riot, civil
commotion, insurrection or war or
any act incident thereto; (c)
while travelling as a passenger or
otherwise in any form of
submarine transportation, or
while engaging in submarine
operations; (d) in any violation of
the law by the Insured or assault
provoked by the Insured; (e) that
has been inflicted intentionally by
a third party, either with or
without provocation on the part
of the Insured, and whether or
not the attack or the defense by
the third party was caused by a
violation of the law by the
Insured;
(6) Operating or riding in or
descending from any kind of
aircraft if the Insured is a pilot,
officer or member of the crew of
the aircraft or is giving or
receiving any kind of training or
instruction or has any duties
aboard the aircraft or requiring
descent therefrom; and
(7) Atomic energy explosion of
any nature whatsoever.
The Company, before making any
payment under this Clause, shall
have the right and opportunity to
examine the body and make an
autopsy thereof.
AUTOMATIC DISCONTINUANCE.
This Benefit shall automatically
terminate and the additional
premium therefor shall cease to
be payable when and if:
(1) This Policy is surrendered for
cash, paid-up insurance or
extended term insurance; or
(2) The benefit under the Total
and Permanent Disability Waiver
of Premium Certificate is granted
to the insured; or
(3) The Insured engages
in military, naval or aeronautic
service in time of war; or
(4) The policy anniversary
immediately preceding the
sixtieth birthday of the Insured is
reached.2
It is undisputed that, as recited in the lower
court's decision, the insured met his death, as
follows: "that on the night of May 20, 1964 or the
first hours of May 21, 1964, while the said life
policy and supplementary contract were in full
force and effect, the house of insured Juan S.
Biagtan was robbed by a band of robbers who
152 |I N S U R A N C E
LIFE INSURANCE
were charged in and convicted by the Court of
First Instance of Pangasinan for robbery with
homicide; that in committing the robbery, the
robbers, on reaching the staircase landing of the
second floor, rushed towards the doors of the
second floor room, where they suddenly met a
person near the door of one of the rooms who
turned out to be the insured Juan S. Biagtan who
received thrust from their sharp-pointed
instruments, causing wounds on the body of said
Juan S. Biagtan resulting in his death at about 7
a.m. on the same day, May 21, 1964." 3
Defendant company, while admitting the above-
recited circumstances under which the insured
met his death, disclaimed liability under its
accidental death benefit clause under paragraph 5
of its stipulated "Exceptions" on its theory that the
insured's death resulted from injuries
"intentionally inflicted by a third party," i.e. the
robbers who broke into the insured's house and
inflicted fatal injuries on him.
The case was submitted for decision upon the
parties' stipulation of facts that (1) insurance
companies such as the Lincoln National Life
Insurance Co. and Sun Life Assurance Co. of
Canada with which the deceased insured Juan S.
Biagtan was also insured for much larger sums
under similar contracts with accidental death
benefit provisions have promptly paid the benefits
thereunder to plaintiffs-beneficiaries; (2) the
robbers who caused the insured's death were
charged in and convicted by the Court of First
Instance of Pangasinan for the crime of robbery
with homicide; and (3) the injuries inflicted on the
insured by the robbers consisted of five mortal
and four non-mortal wounds.4
The lower court thereafter rendered judgment
against defendant, as follows:
There is no doubt that the
insured, Juan S. Biagtan, met his
death as a result of the wounds
inflicted upon him by the
malefactors on the early morning
of May 21, 1964 by means of
thrusts from sharp-pointed
instruments delivered upon his
person, and there is likewise no
question that the thrusts were
made on the occasion of the
robbery. However, it is
defendants' position that the
killing of the insured was
intentionally done by the
malefactors, who were charged
with and convicted of the crime
of robbery with homicide by the
Court of First Instance of
Pangasinan.
It must be noted here that no
evidence whatsoever was
presented by the parties who
submitted the case for resolution
upon the stipulation of
facts  presented by them.
Thus, the court does not have
before it proof that the act of
receiving thrust(s) from the
sharp-pointed instrument of the
robbers was intended to inflict
injuries upon the person of the
insured or any other person
or merely to scare away any
person so as to ward off any
resistance or obstacle that might
be offered in the pursuit of their
main objective which was
robbery. It was held that where a
provision of the policy excludes
intentional injury, it is the
intention of the person inflicting
the injury that is controlling ... and
to come within the exception, the
act which causes the injury must
be wholly intentional, not merely
partly.
The case at bar has some
similarity with the case
of Virginia Calanoc vs. Court of
Appeals, et al., L-8151,
promulgated December 16, 1965,
where the Supreme Court ruled
that "the shot (which killed the
insured) was merely to scare
away the people around for his
own protection and not
necessarily to kill or hit the
victim."
In the Calanoc case, one Melencio
Basilio, a watchman of a certain
company, took out life insurance
from the Philippine American
Life Insurance Company in the
amount of P2,000.00 to which
was attached a supplementary
contract covering death by
accident. Calanoc died of gunshot
wounds on the occasion of a
robbery committed in the house
of a certain Atty. Ojeda in Manila.
The insured's widow was paid
P2,000.00, the face value of the
policy, but when she demanded
payment of the additional sum of
P2,000.00 representing the value
of the supplemental policy, the
company refused alleging, as
main defense, that the deceased
died because he was murdered
by a person who took part in the
commission of the robbery and
while making an arrest as an
officer of the law which
contingencies were (as in this
case) expressly excluded in the
contract and have the effect of
153 |I N S U R A N C E
LIFE INSURANCE
exempting the company from was hit in the happening was a
liability. abdomen, the pure accidentt
wound causing on the part of
The facts in the Calanoc case his the victim."
insofar as pertinent to this case instantaneous
are, as found by the Court of death ..." With this ruling of the Supreme
Appeals in its decision which Court, and the utter absence of
findings of fact were adopted by The Court of Appeals arrived at evidence in this case as to the real
the Supreme Court, as follows: the conclusion that the death of intention of the malefactors in
Basilio, although unexpected, was making a thrust with their sharp-
"...that on the not caused by an accident, being pointed instrument on any
way to the Ojeda a voluntary and intentional act on person, the victim in particular,
residence the part of the one who robbed, the case falls squarely within the
(which was then or one of those who robbed, the ruling in the Calanoc vs. Court of
being robbed by house of Atty. Ojeda. Appeals case.
armed men), the
policeman and In reversing this conclusion of It is the considered view of this
Atty. Ojeda the Court of Appeals, the Court that the insured died
passed by Supreme Court said in part: because of an accident which
Basilio (the happened on the occasion of the
insured) and "... Nor can it be robbery being committed in his
somehow or said that the house. His death was not sought
other invited the killing was (at least no evidence was
latter to come intentional for presented to show it was), and
along; that as there is the therefore was fortuitous.
the three possibility that "Accident" was defined as that
approached the the malefactors which happens by chance or
Ojeda residence had fired the fortuitously, without intention or
and stood in shot merely to design, and which is unexpected,
front of the main scare away the unusual and unforeseen, or that
gate which was people around which takes place without one's
covered by for his own foresight or expectation — an
galvanized iron, protection and event that proceeds from an
the fence itself not necessarily unknown cause, or is an unusual
being partly to kill or hit the effect of a known cause, and
concrete and victim. In any therefore not expected. (29 Am.
partly adobe event, while the Jur. 706).
stone, a shot act may not
was fired; ... that exempt the There is no question that the
it turned out triggerman from defense set up by the defendant
afterwards that ability for the company is one of those included
the special damage done, among the risks excluded in the
watchman the fact remains supplementary
Melencio Basilio that the contract. However, there is no

154 |I N S U R A N C E
LIFE INSURANCE
evidence here that the thrusts
with sharp-pointed
instrument (which led to the
death of the insured) was
"intentional," (sic) so as to exempt
the company from liability. It
could safely be assumed that it
was purely accidental considering
that the principal motive of the
culprits was robbery, the thrusts
being merely intended to scare
away persons who might offer
resistance or might obstruct
them from pursuing their main
objective which was robbery.5
It is respectfully submitted that the lower court
committed no error in law in holding defendant
insurance company liable to plaintiffs-
beneficiaries under its accidental death benefit
clause, by virtue of the following considerations:
1. The case of Calanoc cited by the lower court is
indeed controlling here.6 This Court, there
construing a similar clause, squarely ruled that
fatal injuries inflicted upon an insured by a
malefactor(s) during the latter's commission of a
crime are deemed accidental and within the
coverage of such accidental death benefit clauses
and the burden of proving that the killing was
intentional so as to have it fall within the
stipulated exception of having resulted from
injuries "intentionally inflicted by a third party"
must be discharged by the insurance company.
This Court there clearly held that in such cases
where the killing does not amount to murder, it
must be held to be a "pure accident" on the part of
the victim, compensable with double-indemnity,
even though the malefactor is criminally liable for
his act. This Court rejected the insurance-
company's contrary claim, thus:
Much less can it be pretended
that Basilio died in the course of
an assault or murder considering
the very nature of these crimes.
In the first place, there is no
proof that the death of Basilio is
the result of either crime for the
record is barren of any
circumstance showing how the
fatal shot was fired. Perhaps this
may be clarified in the criminal
case now pending in court a
regards the incident but before
that is done anything that might
be said on the point would be a
mere conjecture. Nor can it be
said that the killing was
intentional for there is the
possibility that the malefactor had
fired the shot merely to scare
away the people around for his
own protection and not
necessarily to kill or hit the
victim. In any event, while the act
may not exempt the triggerman
from liability for the damage
done, the fact remains that the
happening was a pure accident on
the part of the victim. The victim
could have been either the
policeman or Atty. Ojeda for it
cannot be pretended that the
malefactor aimed at the deceased
precisely because he wanted to
take his life. 7
2. Defendant company patently failed to discharge
its burden of proving that the fatal injuries were
inflicted upon the deceased intentionally,
i.e. deliberately. The lower court correctly held
that since the case was submitted upon the
parties' stipulation of facts which did not cover
the malefactors' intent at all, there was an "utter
absence of evidence in this case as to the real
intention of the malefactors in making a thrust
with their sharp-pointed instrument(s) on any
person, the victim in particular." From the
undisputed facts, supra,8 the robbers had "rushed
towards the doors of the second floor room,
where they suddenly met a person ... who turned
out to be the insured Juan S. Biagtan who received
thrusts from their pointed instruments." The
thrusts were indeed properly termed "purely
accidental" since they seemed to be a reflex action
on the robbers' part upon their being surprised by
the deceased. To argue, as defendant does, that the
robbers' intent to kill must necessarily be deduced
from the four mortal wounds inflicted upon the
deceased is to beg the question. Defendant must
suffer the consequences of its failure to discharge
its burden of proving by competent evidence, e.g.
the robbers' or eyewitnesses' testimony, that the
fatal injuries were intentionally inflicted upon the
insured so as to exempt itself from liability.
3. Furthermore, plaintiffs-appellees properly
assert in their brief that the sole error assigned by
defendant company, to wit, that the fatal injuries
were not accidental as held by the lower court but
should be held to have been intentionally inflicted,
raises a question of fact — which defendant is
now barred from raising, since it expressly limited
its appeal to this Court purely "on questions of
law", per its noitice of appeal,9 Defendant is
therefore confined to "raising only questions of
law" and "no other questions" under Rule 42,
section 2 of the Rules of Court 10 and is deemed to
have conceded the findings of fact of the trial
court, since he thereby waived all questions of
facts. 11
4. It has long been an established rule of
construction of so-called contracts of adhesion
such as insurance contracts, where the insured is
handed a printed insurance policy whose fine-
print language has long been selected with great
care and deliberation by specialists and legal
advisers employed by and acting exclusively in the
interest of the insurance company, that the terms
and phraseology of the policy, particularly of any
exception clauses, must be clearly expressed so as
155 |I N S U R A N C E
LIFE INSURANCE
to be easily understood by the insured and any
"ambiguous, equivocal or uncertain terms" are to
be "construed strictly and most strongly against
the insurer and liberally in favor of the insured so
as to effect the dominant purpose of indemnity or
payment to the insured, especially where a
forfeiture is involved.
The Court so expressly held in Calanoc  that:
... While as a general rule "the
parties may limit the coverage of
the policy to certain particular
accidents and risks or causes of
loss, and may expressly except
other risks or causes of loss
therefrom" (45 C.J.S. 781-782),
however, it is to be desired that
the terms and phraseology of the
exception clause be clearly
expressed so as to be within the
easy grasp and understanding of
the insured, for if the terms are
doubtful or obscure the same
must of necessity be interpreted
or resolved against the one who
has caused the obscurity. (Article
1377, new Civil Code) And so it
has been generally held that the
"terms in an insurance policy,
which are ambiguous, equivocal,
or uncertain ... are to be
construed strictly and most
strongly against the insurer, and
liberally in favor of the insured so
as to effect the dominant purpose
of indemnity or payment to the
insured, especially where a
forfeiture is involved" (29 AM.
Jur., 181), and the reason for this
rule is that the "insured usually
has no voice in the selection or
arrangement of the words
employed and that the language
of the contract is selected with
great care and deliberation by
experts and legal advisers
employed by, and acting
exclusively in the interest of, the
insurance company." (44 C.J.S., p.
1174)
Insurance is, in its nature,
complex and difficult for the
layman to understand. Policies
are prepared by experts who
know and can anticipate the
bearing 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, 164). 12
The Court has but recently reiterated this doctrine
in Landicho vs. GSIS  13 and again applied the
provisions of Article 1377 of our Civil Code that
"The interpretation of obscure words or
stipulations in a contract shall not favor the party
who caused the obscurity."
5. The accidental death benefit clause assuring the
insured's beneficiaries of double indemnity, upon
payment of an extra premium, in the event that
the insured meets violent accidental death is
contractually stipulated as follows in the policy:
"that the death of the insured resulted directly
from bodily injury effected solely through external
and violent means sustained in an accident," supra.
The policy then lists numerous exceptions, which
may be classified as follows:
— Injuries effected through non-external
means which are excepted: self-destruction, bodily
or mental infirmity or disease, poisoning or
infection, injuries with no visible contusions or
exterior wounds (exceptions 1 to 4 of policy
clause);
— Injuries caused by some act of the insured which
is proscribed by the policy, and are therefore
similarly exepted: injuries received while on
police duty, while travelling in any form of
submarine transportation, or in any violation of
law by the insured or assault provoked by the
insured, or in any aircraft if the insured is a pilot or
crew member; [exceptions 5 (a), (c) and (d), and 6
of the policy clause]; and
— Accidents expressly excluded: where death
resulted in any riot, civil commotion, insurrection
or war or atomic energy explosion. (Exceptions
5[b] and 7 of policy clause).
The only exception which is not susceptible of
classification is that provided in paragraph 5 (e),
the very exception herein involved, which would
also except injuries "inflicted intentionally by a
third party, either with or without provocation on
the part of the insured, and whether or not the
attack or the defense by the third party
was caused by a violation of the law by the
insured."
156 |I N S U R A N C E
LIFE INSURANCE
This ambiguous clause conflicts with all the other
four exceptions in the same paragraph 5
particularly that immediately preceding it in item
(d) which excepts injuries received where the
insured has violated the law or provoked the
injury, while this clause, construed as the
insurance company now claims, would seemingly
except also all other injuries, intentionally inflicted
by a third party, regardless of any violation of law
or provocation by the insured, and defeat the very
purpose of the policy of giving the insured double
indemnity in case of accidental death by "external
and violent means" — in the very language of the
policy."

It is obvious from the very classification of the

exceptions and applying the rule of noscitus a
sociis that the double-indemnity policy covers the
insured against accidental death, whether caused
by fault, negligence or intent of a third party
which is unforeseen and unexpected by the
insured. All the associated words and concepts in
the policy plainly exclude the accidental death
from the coverage of the policy only where the
injuries are self-inflicted or attended by some
proscribed act of the insured or are incurred in
some expressly excluded calamity such as riot,
war or atomic explosion.

Finally, the untenability of herein defendant

insurer's claim that the insured's death fell within
the exception is further heightened by the
stipulated fact that two other insurance
companies which likewise covered the insured for
which larger sums under similar accidental death
benefit clauses promptly paid the benefits thereof
to plaintiffs-beneficiaries.

I vote accordingly for the affirmance in toto of the

appealed decision, with costs against defendant-
appellant.

Concepcion, C.J. and Reyes, J.B.L., J., concur.

157 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 60506 August 6, 1992
FIGURACION VDA. DE MAGLANA, EDITHA M.
CRUZ, ERLINDA M. MASESAR, LEONILA M.
MALLARI, GILDA ANTONIO and the minors
LEAH, LOPE, JR., and ELVIRA, all surnamed
MAGLANA, herein represented by their
mother, FIGURACION VDA. DE
MAGLANA, petitioners,
vs.
HONORABLE FRANCISCO Z. CONSOLACION,
Presiding Judge of Davao City, Branch II, and
AFISCO INSURANCE
CORPORATION, respondents.
Jose B. Guyo for petitioners.
Angel E. Fernandez for private respondent.
ROMERO, J.:
The nature of the liability of an insurer sued
together with the insured/operator-owner of a
common carrier which figured in an accident
causing the death of a third person is sought to be
defined in this petition for certiorari.
The facts as found by the trial court are as follows:
. . . Lope Maglana was an
employee of the Bureau of
Customs whose work station was
at Lasa, here in Davao City. On
December 20, 1978, early
morning, Lope Maglana was on
his way to his work station,
driving a motorcycle owned by
the Bureau of Customs. At Km. 7,
Lanang, he met an accident that
resulted in his death. He died on
the spot. The PUJ jeep that
bumped the deceased was driven
by Pepito Into, operated and
owned by defendant Destrajo.
From the investigation conducted
by the traffic investigator, the PUJ
jeep was overtaking another
passenger jeep that was going
towards the city poblacion. While
overtaking, the PUJ jeep of
defendant Destrajo running
abreast with the overtaken jeep,
bumped the motorcycle driven
by the deceased who was going
towards the direction of Lasa,
Davao City. The point of impact
was on the lane of the motorcycle
and the deceased was thrown
from the road and met his
untimely death. 1
Consequently, the heirs of Lope Maglana, Sr., here
petitioners, filed an action for damages and
attorney's fees against operator Patricio Destrajo
and the Afisco Insurance Corporation (AFISCO for
brevity) before the then Court of First Instance of
Davao, Branch II. An information for homicide
thru reckless imprudence was also filed against
Pepito Into.
During the pendency of the civil case, Into was
sentenced to suffer an indeterminate penalty of
one (1) year, eight (8) months and one (1) day
of prision correccional, as minimum, to four (4)
years, nine (9) months and eleven (11) days
of prision correccional, as maximum, with all the
accessory penalties provided by law, and to
indemnify the heirs of Lope Maglana, Sr. in the
amount of twelve thousand pesos (P12,000.00)
with subsidiary imprisonment in case of
insolvency, plus five thousand pesos (P5,000.00)
in the concept of moral and exemplary damages
with costs. No appeal was interposed by accused
who later applied for probation. 2
On December 14, 1981, the lower court rendered
a decision finding that Destrajo had not exercised
sufficient diligence as the operator of the jeepney.
The dispositive portion of the decision reads:
WHEREFORE, the Court finds
judgment in favor of the plaintiffs
against defendant Destrajo,
ordering him to pay plaintiffs the
sum of P28,000.00 for loss of
income; to pay plaintiffs the sum
of P12,000.00 which amount
shall be deducted in the event
judgment in Criminal Case No.
3527-D against the driver,
accused Into, shall have been
enforced; to pay plaintiffs the
sum of P5,901.70 representing
funeral and burial expenses of
the deceased; to pay plaintiffs the
sum of P5,000.00 as moral
damages which shall be deducted
in the event judgment (sic) in
Criminal Case No. 3527-D against
the driver, accused Into; to pay
plaintiffs the sum of P3,000.00 as
attorney's fees and to pay the
costs of suit.
The defendant insurance
company is ordered to reimburse
defendant Destrajo whatever
amounts the latter shall have
paid only up to the extent of its
insurance coverage.
SO ORDERED. 3
158 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
Petitioners filed a motion for the reconsideration
of the second paragraph of the dispositive portion
of the decision contending that AFISCO should not
merely be held secondarily liable because the
Insurance Code provides that the insurer's
liability is "direct and primary and/or jointly and
severally with the operator of the vehicle,
although only up to the extent of the insurance
coverage." 4 Hence, they argued that the
P20,000.00 coverage of the insurance policy
issued by AFISCO, should have been awarded in
their favor.
In its comment on the motion for reconsideration,
AFISCO argued that since the Insurance Code does
not expressly provide for a solidary obligation, the
presumption is that the obligation is joint.
In its Order of February 9, 1982, the lower court
denied the motion for reconsideration ruling that
since the insurance contract "is in the nature of
suretyship, then the liability of the insurer is
secondary only up to the extent of the insurance
coverage." 5
Petitioners filed a second motion for
reconsideration reiterating that the liability of the
insurer is direct, primary and solidary with the
jeepney operator because the petitioners became
direct beneficiaries under the provision of the
policy which, in effect, is a stipulation pour
autrui.  6 This motion was likewise denied for lack
of merit.
Hence, petitioners filed the instant petition
for certiorari which, although it does not seek the
reversal of the lower court's decision in its
entirety, prays for the setting aside or
modification of the second paragraph of the
dispositive portion of said decision. Petitioners
reassert their position that the insurance company
is directly and solidarily liable with the negligent
operator up to the extent of its insurance
coverage.
We grant the petition.
The particular provision of the insurance policy on
which petitioners base their claim is as follows:
 
Sec. 1 — LIABILITY TO THE
PUBLIC
1. The Company will, subject to
the Limits of Liability, pay all
sums necessary to discharge
liability of the insured in respect
of
(a) death of or bodily injury to
any THIRD PARTY
(b) . . . .
2. . . . .
3. In the event of the death of any
person entitled to indemnity
under this Policy, the Company
will, in respect of the liability
incurred to such person
indemnify his personal
representatives in terms of, and
subject to the terms and
conditions hereof. 7
The above-quoted provision leads to no other
conclusion but that AFISCO can be held directly
liable by petitioners. As this Court ruled in Shafer
vs. Judge, RTC of Olongapo City, Br. 75, "[w]here an
insurance policy insures directly against liability,
the insurer's liability accrues immediately upon
the occurrence of the injury or even upon which
the liability depends, and does not depend on the
recovery of judgment by the injured party against
the insured." 8 The underlying reason behind the
third party liability (TPL) of the Compulsory
Motor Vehicle Liability Insurance is "to protect
injured persons against the insolvency of the
insured who causes such injury, and to give such
injured person a certain beneficial interest in the
proceeds of the policy . . ." 9 Since petitioners had
received from AFISCO the sum of P5,000.00 under
the no-fault clause, AFISCO's liability is now
limited to P15,000.00.
However, we cannot agree that AFISCO is likewise
solidarily liable with Destrajo. In Malayan
Insurance Co., Inc. v. Court of Appeals, 10 this Court
had the opportunity to resolve the issue as to the
nature of the liability of the insurer and the
insured vis-a-vis the third party injured in an
accident. We categorically ruled thus:
While it is true that where the
insurance contract provides for
indemnity against liability to
third persons, such third persons
can directly sue the insurer,
however, the direct liability of the
insurer under indemnity contracts
against third party liability does
not mean that the insurer can be
held solidarily liable with the
insured and/or the other parties
found at fault. The liability of the
insurer is based on contract; that
of the insured is based on tort.
In the case at bar, petitioner as
insurer of Sio Choy, is liable to
respondent Vallejos (the injured
third party), but it cannot, as
incorrectly held by the trial court,
be made "solidarily" liable with
the two principal tortfeasors,
namely respondents Sio Choy
and San Leon Rice Mill, Inc. For if
petitioner-insurer were solidarily
liable with said, two (2)
159 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
respondents by reason of the solidary with that of Destrajo which is based on
indemnity contract against third Article 2180 of the Civil Code. 12 As such,
party liability — under which an petitioners have the option either to claim the
insurer can be directly sued by a P15,000 from AFISCO and the balance from
third party — this will result in a Destrajo or enforce the entire judgment from
violation of the principles Destrajo subject to reimbursement from AFISCO
underlying solidary obligation to the extent of the insurance coverage.
and insurance contracts.
(emphasis supplied) While the petition seeks a definitive ruling only on
the nature of AFISCO's liability, we noticed that
The Court then proceeded to distinguish the the lower court erred in the computation of the
extent of the liability and manner of enforcing the probable loss of income. Using the formula: 2/3 of
same in ordinary contracts from that of insurance (80-56) x P12,000.00, it awarded
contracts. While in solidary obligations, the P28,800.00. 13 Upon recomputation, the correct
creditor may enforce the entire obligation against amount is P192,000.00. Being a "plain error," we
one of the solidary debtors, in an insurance opt to correct the same. 14 Furthermore, in
contract, the insurer undertakes for a accordance with prevailing jurisprudence, the
consideration to indemnify the insured against death indemnity is hereby increased to
loss, damage or liability arising from an unknown P50,000.00. 15
or contingent event. 11 Thus, petitioner therein,
which, under the insurance contract is liable only WHEREFORE, premises considered, the present
up to P20,000.00, can not be made solidarily liable petition is hereby GRANTED. The award of
with the insured for the entire obligation of P28,800.00 representing loss of income is
P29,013.00 otherwise there would result "an INCREASED to P192,000.00 and the death
evident breach of the concept of solidary indemnity of P12,000.00 to P50,000.00.
obligation."
SO ORDERED.
Similarly, petitioners herein cannot validly claim
that AFISCO, whose liability under the insurance Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.
policy is also P20,000.00, can be held solidarily
liable with Destrajo for the total amount of
P53,901.70 in accordance with the decision of the
lower court. Since under both the law and the
insurance policy, AFISCO's liability is only up to
P20,000.00, the second paragraph of the
dispositive portion of the decision in question may
have unwittingly sown confusion among the
petitioners and their counsel. What should have
been clearly stressed as to leave no room for
doubt was the liability of AFISCO under the
explicit terms of the insurance contract.

In fine, we conclude that the liability of AFISCO

based on the insurance contract is direct, but not

160 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-49699 August 8, 1988
PERLA COMPANIA de SEGUROS, INC., petitioner,
vs.
HON. CONSTANTE A. ANCHETA, Presiding
Judge of the Court of First instance of
Camarines Norte, Branch III, ERNESTO A.
RAMOS and GOYENA ZENAROSA-RAMOS, for
themselves and as Guardian Ad Litem for
Minors JOBET, BANJO, DAVID and GRACE all
surnamed RAMOS, FERNANDO M. ABCEDE, SR.,
for himself and Guardian Ad Litem for minor
FERNANDO G. ABCEDE, JR., MIGUEL JEREZ
MAGO as Guardian Ad Litem for minors
ARLEEN R. MAGO, and ANACLETA J.
ZENAROSA., respondents.
Jose B. Sanez for petitioner.
James B. Pajares for private respondents.
CORTES, J.:
The instant petition for certiorari and prohibition
with preliminary injunction concerns the ability of
insurers under the "no fault indemnity" provision
of the Insurance Code. *
On December 27, 1977, in a collision between the
IH Scout in which private respondents were riding
and a Superlines bus along the national highway
in Sta. Elena, Camarines Norte, private
respondents sustained physics injuries in varying
degrees of gravity. Thus, they filed with the Court
of First Instance of Camarines Norte on February
23,1978 a complaint for damages against
Superlines, the bus driver and petitioner, the
insurer of the bus [Rollo, pp. 27-39.] The bus was
insured with petitioner for the amount of
P50,000.00 as and for passenger liability and
P50,000.00 as and for third party liability. The
vehicle in which private respondents were riding
was insured with Malayan Insurance Co.
Even before summons could be served,
respondent judge issued an order dated March 1,
1978 [Rollo, pp. 40-41], the pertinent portion of
which stated:
The second incident is the prayer
for an order of this court for the
Insurance Company, Perla
Compania de Seguros, Inc., to pay
immediately the P5,000.00 under
the "no fault clause" as provided
for under Section 378 of the
Insurance Code, and finding that
the requisite documents to be
attached in the record, the said
Insurance Company is therefore
directed to pay the plaintiffs
(private respondents herein)
within five (5) days from receipt
of this order.
Petitioner denied in its Answer its alleged liability
under the "no fault indemnity" provision [Rollo, p.
44] and likewise moved for the reconsideration of
the order. Petitioner held the position that under
Sec. 378 of the Insurance Code, the insurer liable
to pay the P5,000.00 is the insurer of the vehicle in
which private respondents were riding, not
petitioner, as the provision states that "[i]n the
case of an occupant of a vehicle, claim shall lie
against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting
from." Respondent judge, however, denied
reconsideration. A second motion for
reconsideration was filed by petitioner. However,
in an order dated January 3, 1979, respondent
judge denied the second motion for
reconsideration and ordered the issuance of a writ
of execution [Rollo, p. 69.] Hence, the instant
petition praying principally for the annulment and
setting aside of respondent judge's orders dated
March 1, 1978 and January 3, 1979.
The Court issued a temporary restraining order on
January 24,1979 [Rollo pp. 73-74.]
The sole issue raised in this petition is whether or
not petitioner is the insurer liable to indemnify
private respondents under Sec. 378 of the
Insurance Code.
The key to the resolution of the issue is of courts e
Sec. 378, which provides:
Sec. 378. Any claim for death or
injury to any passenger or third
party pursuant to the provision
of this chapter shall be paid
without the necessity of proving
fault or negligence of any kind.
Provided, That for purposes of
this section —
(i) The indemnity in respect of
any one person shall not exceed
five thousand pesos;
(ii) The following proofs of loss,
when submitted under oath, shall
be sufficient evidence to
substantiate the claim:
(a) Police report of accident,
and
(b) Death certificate and
evidence sufficient to
161 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
establish the proper payee,
or
(c) Medical report and
evidence of medical or
hospital disbursement in
respect of which refund is
claimed;
(iii) Claim may be made against
one motor vehicle only. In the case
of an occupant of a vehicle, claim
shall lie against the insurer of the
vehicle in which the occupant is
riding, mounting or dismounting
from. In any other case, claim
shall lie against the insurer of the
directly offending vehicle. In all
cases, the right of the party
paying the claim to recover
against the owner of the vehicle
responsible for the accident shall
be maintained. [Emphasis
supplied.]
From a reading of the provision, which is couched
in straight-forward and unambiguous language,
the following rules on claims under the "no fault
indemnity" provision, where proof of fault or
negligence is not necessary for payment of any
claim for death Or injury to a passenger or a third
party, are established:
1. A claim may be made against one motor vehicle
only.
2. If the victim is an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle. in
which he is riding, mounting or dismounting from.
3. In any other case (i.e. if the victim is not an
occupant of a vehicle), the claim shall lie against
the insurer of the directly offending vehicle.
4. In all cases, the right of the party paying the
claim to recover against the owner of the vehicle
responsible for the accident shall be maintained.
The law is very clear — the claim shall lie against
the insurer of the vehicle in which the
"occupant" ** is riding, and no other. The claimant
is not free to choose from which insurer he will
claim the "no fault indemnity," as the law, by using
the word "shall, makes it mandatory that the claim
be made against the insurer of the vehicle in
which the occupant is riding, mounting or
dismounting from.
That said vehicle might not be the one that caused
the accident is of no moment since the law itself
provides that the party paying the claim under
Sec. 378 may recover against the owner of the
vehicle responsible for the accident. This is
precisely the essence of "no fault indemnity"
insurance which was introduced to and made part
of our laws in order to provide victims of
vehicular accidents or their heirs immediate
compensation, although in a limited amount,
pending final determination of who is responsible
for the accident and liable for the victims'injuries
or death. In turn, the "no fault indemnity"
provision is part and parcel of the Insurance Code
provisions on compulsory motor vehicle ability
insurance [Sec. 373-389] and should be read
together with the requirement for compulsory
passenger and/or third party liability insurance
[Sec. 377] which was mandated in order to ensure
ready compensation for victims of vehicular
accidents.
Irrespective of whether or not fault or negligence
lies with the driver of the Superlines bus, as
private respondents were not occupants of the
bus, they cannot claim the "no fault indemnity"
provided in Sec. 378 from petitioner. The claim
should be made against the insurer of the vehicle
they were riding. This is very clear from the law.
Undoubtedly, in ordering petitioner to pay private
respondents the 'no fault indemnity,' respondent
judge gravely abused his discretion in a manner
that amounts to lack of jurisdiction. The issuance
of the corrective writ of certiorari is therefore
warranted.
WHEREFORE, the petition is GRANTED and
respondent judge's order dated March 1, 1978,
requiring petitioner to pay private respondents
the amount of P5,000.00 as "no fault indemnity'
under Sec. 378 of the Insurance Code, and that of
January 3, 1979, denying the second motion for
reconsideration and issuing a writ of execution,
are ANNULLED and SET ASIDE. The temporary
restraining order issued by the Court on January
24, 1979 is made permanent.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ.,
concur.
 
Footnotes
* P.D. No. 612, as amended by
P.D. Nos. 1141,1280 and 1455. In
1978, all insurance laws were
consolidated and codified by P.D.
No. 1460 into a single code
known as the Insurance Code of
1978. Basically, P.D. No. 1460
reenacted P.D. 612, as amended.
P.D. No. 1460 was later amended
by P.D. No. 1814 and B.P. Blg.
874.
** The Insurance Code uses the
General term "occupant" to
distinguish from a "passenger,"
who is "any fare paying person
being transported and conveyed
162 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
in and by a motor vehicle for
transportation of passengers for
compensation, including persons
expressly authorized by law or by
the vehicle's operator or his
agents to ride without fare," and
a 'third party," who is "any
person other than a passenger as
defined in this section" [See. 373]
Thus, as used in Sec. 378,
"occupant" includes both a
"passenger" and a "third party,"
so long as they are riding in or
mounting of dismounting from a
motor vehicle.

163 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE
FIRST DIVISION
[G.R. No. L-34768. February 24, 1984.]
JAMES STOKES, as Attorney-in-Fact of Daniel
Stephen Adolfson and DANIEL STEPHEN
ADOLFSON, Plaintiffs-Appellees, v. MALAYAN
INSURANCE CO., INC., Defendant-Appellant.
Rodrigo M. Nera for Plaintiffs-Appellees.
Pio B. Salomon, Jr., for Defendant-Appellant.
SYLLABUS
1. MERCANTILE LAW; INSURANCE CONTRACT;
COMPLIANCE WITH TERMS THEREOF, A
CONDITION PRECEDENT TO RECOVERY. — A
contract of insurance is a contract of indemnity
upon the terms and conditions specified therein.
When the insurer is called upon to pay in case of
loss or damage, he has the right to insist upon
compliance with the terms of the contract. If the
insured cannot bring himself within the terms and
conditions of the contract, he is not entitled as a
rule to recover for the loss or damage suffered.
For the terms of the contract constitute the
measure of the insurer’s liability, and compliance
therewith is a condition precedent to the right of
recovery. (Young v. Midland Textile Insurance Co.,
30 Phil. 617.)
2. ID.; ID.; ID.; "AUTHORIZED DRIVER" CLAUSE,
MEANING. — Under the "authorized driver"
clause, an authorized driver must not only be
permitted to drive by the insured. It is also
essential that he is permitted under the law and
regulations to drive the motor vehicle and is not
disqualified from so doing under any enactment
or regulation. At the time of the accident, Stokes
had been in the Philippines for more than 90 days.
Hence, under the law, he could not drive a motor
vehicle without a Philippine driver’s license. He
was therefore not an "authorized driver" under
the terms of the insurance policy in question, and
MALAYAN was right in denying the claim of the
insured.
3. ID.; ID.; ACCEPTANCE OF PREMIUM WITHIN
THE STIPULATED PERIOD FOR PAYMENT DOES
NOT ESTOP INSURER FROM INTERPOSING ANY
VALID DEFENSE. — Acceptance of premium
within the stipulated period for payment thereof,
including the agreed period of grace, merely
assures continued effectivity of the insurance
policy in accordance with its terms. Such
acceptance does not estop the insurer from
interposing any valid defense under the terms of
the insurance policy.
4. CIVIL LAW; PRINCIPLE OF ESTOPPEL,
DEFINED; NOT APPLICABLE TO CASE AT BAR. —
The principle of estoppel is an equitable principle
rooted upon natural justice which prevents a
person from going back on his own acts and
representations to the prejudice of another whom
he has led to rely upon them. The principle does
not apply to the instant case. In accepting the
premium payment of the insured, MALAYAN was
not guilty of any inequitable act or representation.
There is nothing inconsistent between acceptance
of premium due under an insurance policy and the
enforcement of its terms.
PLANA, J.:
This is an appeal by Malayan Insurance Company,
Inc. (MALAYAN) from a decision of Court of First
Instance of Manila ordering it to pay the insured
under a car insurance policy issued by MALAYAN
to Daniel Stephen Adolfson against own damage
as well as third party liability.
The facts are not in dispute. Adolfson had a
subsisting MALAYAN car insurance policy with the
above coverage on November 23, 1969 when his
car collided with a car owned by Cesar Poblete,
resulting in damage to both vehicles. At the time of
the accident, Adolfson's car was being driven by
James Stokes, who was authorized to do so by
Adolfson. Stokes, an Irish citizen who had been in
the Philippines as a tourist for more than ninety
days, had a valid and subsisting Irish driver's
License but without a Philippine driver's license.
After the collision, Adolfson filed a claim with
MALAYAN but the latter refused to pay,
contending that Stokes was not an authorized
driver under the "Authorized Driver" clause of the
insurance policy in relation to Section 21 of the
Land Transportation and Traffic Code.
Under the insurance policy, "authorized driver"
refers to
"(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 motor vehicle and is not
disqualified from driving such motor vehicle by
order of a court of law or by reason of any
enactment or regulation in that behalf."
The cited Section 21 of the Land Transportation
and Traffic Code provides:
"Operation of motor vehicles by tourists. - Bona fide
tourists and similar transients who are duly
licensed to operate motor vehicles in their
respective countries may be allowed to operate
motor vehicles during but not after ninety days of
then sojourn in the Philippines.
xxxx
"After ninety days, any tourist or transient
desiring to operate motor vehicles shall pay fees
and obtain and carry a license as hereinafter pro-
vided." (Italics supplied.)
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COMPULSORY MOTOR VEHICLE INSURANCE
Unable to convince MALAYAN to pay, Stokes and
Adolfson brought suit before the Court of First
Instance of Manila and succeeded in getting a
favorable judgment, although Stokes had ceased to
be authorized to drive a motor vehicle in the
Philippines at the time of the accident, he having
stayed therein as a tourist for over 90 days
without having obtained a Philippine driver's
license. The Court held that Stokes' lack of a
Philippine driver's license was not fatal to the
enforcement of the insurance policy; and that
MALAYAN was estopped from denying liability
under the insurance policy because it accepted
premium payment made by the insured one day
after the accident. It said:
"Defendant cannot evade liability under the policy
by virtue of the above provision of the Land
Transportation and Traffic Code. This is an
insurance case. The basis of insurance contracts is
good faith and trust between the insurer and the
insured. The matter of the failure on the part of
Stokes to have a Philippine driver's license is not
such a defect that can be considered as fatal to the
contract of insurance, because the fact is that
Stokes still had a valid and unexpired Irish license.
As a matter of fact, the traffic officer who
investigated the incident gave Stokes a traffic
violation receipt and not a ticket for driving
without license.
"Then the Court believes that defendant is in
estoppel in this case because it allowed the
plaintiff to pay the insurance premium even after
the accident occurred. Admitting for the sake of
argument that there was a violation of the terms
of the policy before the incident, the admission or
acceptance by the insurance company of the
premium should be considered as a waiver on its
part to contest the claim of the plaintiffs."
In this appeal, the two issues resolved by the court
a quo are raised anew. We find the appeal
meritorious.
1. A contract of insurance is a contract of There is nothing inconsistent between acceptance
indemnity upon the terms and conditions of premium due under an insurance policy and the
specified therein. When the insurer is called upon enforcement of its terms.
to pay in case of loss or damage, he has the right to
insist upon compliance with the terms of the WHEREFORE, the appealed judgment is reversed.
contract. If the insured cannot bring himself The complaint is dismissed. Costs against the
within the terms and conditions of the contract, he appellees.
is not entitled as a rule to recover for the loss or SO ORDERED.
damage suffered. For the terms of the contract
constitute the measure of the insurer's liability, Teehankee, (Chairman), Melencio-Herrera,
and compliance therewith is a condition Relova, and Gutierrez, Jr., JJ., concur.
precedent to the right of recovery. (Young vs.
Midland Textile Insurance Co., 30 Phil. 617.)
Under the "authorized driver" clause, an
authorized driver must not only be permitted to
drive by the insured. It is also essential that he is
permitted under the law and regulations to drive
the motor vehicle and is not disqualified from so
doing under any enactment or regulation.
At the time of the accident, Stokes had been in the
Philippines for more than 90 days. Hence, under
the law, he could not drive a motor vehicle
without a Philippine driver's license. He was
therefore not an "authorized driver" under the
terms of the insurance policy in question, and
MALAYAN was right in denying the claim of the
insured.
2. Acceptance of premium within the stipulated
period for payment thereof, including the agreed
period of grace, merely assures continued
effectivity of the insurance policy in accordance
with its terms. Such acceptance does not estop the
insurer from interposing any valid defense under
the terms of the insurance policy.
The principle of estoppel is an equitable principle
rooted upon natural justice which prevents a
person from going back on his own acts and
representations to the prejudice of another whom
he has led to rely upon them. The principle does
not apply to the instant case. In accepting the
premium payment of the insured, MALAYAN was
not guilty of any inequitable act or representation.
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