MERC REV: INSURANCE LAW
INSURANCE LAW
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL
SHIPPING COMPANY, INCORPORATED vs. MALAYAN INSURANCE COMPANY,
INCORPORATED
G.R. No. 185565, November 26, 2014, THIRD DIVISION, REYES, J.
 
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 possess the right to be indemnified and therefore, no right to
collect is passed on to the subrogee.
FACTS:
On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper
concentrates were loaded in Cargo Hold Nos. 1 and 2 of MV “Bobcat”, a marine vessel
owned by Loadstar International Shipping Co., Inc. (Loadstar International) and operated
by Loadstar Shipping under a charter party agreement. The shipper and consignee under
the Bill of Lading are Philex Mining Corporation (Philex) and PASAR, respectively. The
cargo was insured with Malayan Insurance Company, Inc. (Malayan).
 
On said date, MV “Bobcat” sailed from Poro Point, San Fernando, La Union
bound for Isabel, Leyte. On September 12, 2000, the vessel’s chief officer on routine
inspection found a crack on starboard side of the main deck which caused seawater to
enter and wet the cargo inside Cargo Hold No. 2 forward/aft. The cracks at the top deck
starboard side of Cargo Hold No. 2, were welded.
 
Immediately after the vessel arrived at Isabel, Leyte anchorage area, on
September 13, 2000, PASAR and Philex’s representatives boarded and inspected the
vessel and undertook sampling of the copper concentrates. In its preliminary report
dated September 15, 2000, the Elite Adjusters and Surveyor, Inc. (Elite Surveyor)
confirmed that samples of copper concentrates from Cargo Hold No. 2 were
contaminated by seawater. Consequently, PASAR rejected 750 MT of the 2,300 MT cargo
discharged from Cargo Hold No. 2.
On November 6, 2000, PASAR sent a formal notice of claim in the amount of
[P]37,477,361.31 to Loadstar Shipping. In its final report dated November 16, 2000, Elite
Surveyor recommended payment to the assured 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.
 
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.  received indemnity from the insurance company for the injury or loss
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Herein Respondent’s Contention
 
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 from date 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.
 
Herein Petitioner’s Contention
 
Loadstar Shipping and Loadstar International filed their answer with
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
majeure or 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; x x x
 
Ruling of the RTC
 
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. It
gave 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.
 
Ruling of the CA
 
It reversed and set aside the ruling of the RTC.
 
ISSUE:
Whether or not the respondent insurer, on the basis of PASAR’s claim, is
entitled to the right of recovery by virtue of subrogation. (NO)
 
RULING:
 
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
arising out of the wrong or breach of contract complained of, the
MERC REV: INSURANCE LAW
insurance company shall be subrogated to the rights of the insured WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and
against the wrong doer or the person who has violated the contract. If Resolution dated December 11, 2008 of the Court of Appeals in CA-G.R. CV No. 82758 are
the amount paid by the insurance company does not fully cover the hereby REVERSED and SET ASIDE. The Decision dated March 31, 2004 of the Regional
injury or loss, the aggrieved party shall be entitled to recover the Trial Court of Manila, Branch 34 in Civil Case No·. 01-101885 is REINSTATED.
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.” 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 lost goods 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.” 
 
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 greater than, 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 if the insured likewise could have recovered.” 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 possess the 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.”
 
It is also noteworthy 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.
 
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.
 
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MERC REV: INSURANCE LAW
FIRST LEPANTO-TAISHO INSURANCE CORPORATION (now known as FLT PRIME
INSURANCE CORPORATION),  petitioner, vs. CHEVRON PHILIPPINES, INC. (formerly
known as CALTEX [PHILIPPINES], INC.),  respondent.
G.R. No. 177839, FIRST DIVISION, January 18, 2012, VILLARAMA, JR.,  J.
FACTS:
Fumetechniks had an oral distributorship agreement with Chevron. To secure
payment of purchases on credit, it applied for a surety bond with FLT insurance. In the
attached rider, the FLT insurance guaranteed payment/remittance of the cost of fuel
products withdrawn accordance with the terms and conditions of the agreement.”
Fumitechniks defaulted on its obligation. Because the check it issued to Chevron was
dishonored for reason of “Account Closed.” Chevron notified FLT Insurance of
Fumitechniks’ unpaid purchases. FLT insurence then requested that all necesary
documents be presented including the principal agreement.
Fumitechniks informed FLT Insurance that it cannot submit the requested
agreement since no written agreement executed between Fumitechniks and Chevron.
Due to non-existence and non submission of the principal agreement, it would render the
bond ineffective. FLT submits the intention was to secure only those terms and conditions
of the written agreement.
Chevron points out that the surety contract shows that there is no such requirement of
submission of the written credit agreement for the bond’s effectivity. They said that the
delivery of the bond and acceptance of premium payment binds the The FLT as surety,
notwithstanding the non-submission of the oral distributorship and credit agreement
cannot be attached to the bond.
Fumitechniks had applied for and was issued Surety Bond FLTICG (16) No.
01012 by FLT Insurance for the amount of P15,700,000.00. In the attached rider, the
bond was in compliance with the requirement for the grant of a credit line with the
respondent “to guarantee payment/remittance of the cost of fuel products withdrawn
within the stipulated time in accordance with the terms and conditions of the agreement.”
Fumitechniks defaulted on its obligation. The check it issued to Chevron was
dishonored for reason of “Account Closed.” Chevron notified FLT Insurance of
Fumitechniks’ unpaid purchases in the total amount of P15,084,030.30. In its letter-
reply, FLT Insurance requested that it be furnished copies of the documents such as
delivery receipts, which was complied with.
Simultaneously, a letter was sent to Fumitechniks demanding that the latter
submit to FLT Insurance a copy of the agreement secured by the Bond. Fumitechniks
informed FLT Insurance that it cannot submit the requested agreement since no such
agreement was executed between Fumitechniks and Chevron. Consequently, petitioner
advised Chevron of the non-existence of the principal agreement as confirmed by
Fumitechniks. FLT Insurance explained that being an accessory contract, the bond
cannot exist without a principal agreement as it is essential that the copy of the basic
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contract be submitted to the proposed surety for the appreciation of the extent of the
obligation to be covered by the bond applied for.
Hence, Chevron formally demanded from petitioner the payment of its claim
under the surety bond.
The Ruling of the RTC
The RTC dismissed the complaint as well as petitioner’s counterclaim. It held
that petitioner FLT cannot be held liable under the bond it issued to Fumitechniks as the
terms and conditions of the oral credit line agreement between Chevron and
Fumitechniks have not been relayed to FLT Insurance and neither were the same
conveyed even during trial. Since the surety bond is a mere accessory contract, the RTC
concluded that the bond cannot stand in the absence of the written agreement secured
thereby.
The Ruling of the CA
The CA ruled in favor of Chevron. FLT Insurance cannot insist on the
submission of a written agreement to be attached to the surety bond considering that
respondent was not aware of such requirement and unwritten company policy. Also, FLT
Insurance is estopped from assailing the oral credit line agreement, having consented to
the same upon presentation by Fumitechniks of the surety bond it issued. Considering
that such oral contract between Fumitechniks and respondent has been partially
executed, the CA ruled that the provisions of the Statute of Frauds do not apply.
Petitioner’s Arguments
FLT Insurance asserted that the Surety Bond was issued for the purpose of
securing the performance of the obligations embodied in the Principal Agreement stated
therein, which contract should have been attached and made part thereof. Non-
compliance with the submission of the written agreement rendered the bond ineffective.
Since all stipulations and provisions of the surety contract should be taken and
interpreted together, in this case, the unmistakable intention of the parties was to secure
only those terms and conditions of the written agreement.
Respondent’s Arguments
Chevron points out that a careful reading of the surety contract shows that
there is no such requirement of submission of the written credit agreement for the
bond’s effectivity. Moreover, respondent’s witnesses had already explained that
distributorship accounts are not covered by written distribution agreements.
Respondent maintains that the delivery of the bond and acceptance of premium payment
by petitioner binds the latter as surety, notwithstanding the non-submission of the oral
distributorship and credit agreement which understandably cannot be attached to the
bond. Chevron avers that such attaching of the copy of the principal agreement, was for
evidentiary purposes only. The real intention of the bond was to secure the payment of
all the purchases of Fumitechniks from respondent up to the maximum amount allowed
under the bond.
MERC REV: INSURANCE LAW
ISSUE:
Whether a surety is liable to the creditor in the absence of a written contract
with the principal.
RULING:
NO. The extent of a surety’s liability is determined by the language of the
suretyship contract or bond itself. It cannot be extended by implication, beyond
the terms of the contract. Thus, to determine whether petitioner is liable to respondent
under the surety bond, it becomes necessary to examine the terms of the contract itself.
A reading of Surety Bond FLTICG (16) No. 01012 shows that it secures the
payment of purchases on credit by Fumitechniks in accordance with the terms and
conditions of the “agreement” it entered into with respondent. The word “agreement”
has reference to the distributorship agreement, the principal contract and by implication
included the credit agreement mentioned in the rider. However, it turned out that
Chevron has executed written agreements only with its direct customers but not
distributors like Fumitechniks and it also never relayed the terms and conditions of its
distributorship agreement to the FLT Insurance after the delivery of the bond.
creditor is generally held bound to a faithful observance of the rights of the surety and to
the performance of every duty necessary for the protection of those rights. 
In this case, Chevron is charged with notice of the specified form of the
agreement or at least the disclosure of basic terms and conditions of its distributorship
and credit agreements with its client Fumitechniks after its acceptance of the bond
delivered by the latter. However, it never made any effort to relay those terms and
conditions of its contract with Fumitechniks upon the commencement of its transactions
with said client, which obligations are covered by the surety bond issued by petitioner.
Contrary to Chevron’s assertion, there is no indication in the records that petitioner had
actual knowledge of its alleged business practice of not having written contracts with
distributors; and even assuming petitioner was aware of such practice, the bond issued
to Fumitechniks and accepted by respondent specifically referred to a “written
agreement.” 

The law is clear that a surety contract should be read and interpreted
together with the contract entered into between the creditor and the principal.
Section 176 of the Insurance Code states:
Sec. 176. The liability of the surety or sureties shall be joint
and several with the obligor and shall be limited to the amount of the
bond. It is determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the obligor
and the obligee. (Emphasis supplied.)

A surety contract is merely a collateral one, its basis is the principal

contract or undertaking which it secures. Necessarily, the stipulations in such
principal agreement must at least be communicated or made known to the surety
particularly in this case where the bond expressly guarantees the payment of
respondent’s fuel products withdrawn by Fumitechniks in accordance with the terms
and conditions of their agreement. The bond specifically makes reference to a written
agreement. It is basic that if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall control.
Moreover, being an onerous undertaking, a surety agreement is strictly construed
against the creditor, and every doubt is resolved in favor of the solidary debtor.
Having accepted the bond, Chevron as creditor must be held bound by the recital in the
surety bond that the terms and conditions of its distributorship contract be reduced in
writing or at the very least communicated in writing to the surety. Such non-compliance
by the creditor (Chevron) impacts not on the validity or legality of the surety
contract but on the creditor’s right to demand performance. SEHDIC

It bears stressing that the contract of suretyship imports entire good faith and
confidence between the parties in regard to the whole transaction, although it has been
said that the creditor does not stand as a fiduciary in his relation to the surety. The

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MERC REV: INSURANCE LAW
MANILA BANKERS LIFE INSURANCE CORPORATION vs. CRESENCIA P. ABAN
G.R. No. 175666, July 29, 2013
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.
FACTS:
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, as her beneficiary. Petitioner issued Insurance Policy
in Sotero’s favor on August 30, 1993. On April 10, 1996, 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, and came out with the following findings; (1) Sotero did not personally
apply for insurance coverage, as she was illiterate; and Respondent was the one who
filed the insurance application, and x x x designated herself as the beneficiary, among
others.
For the above reasons, petitioner denied respondent’s claim and refunded the
premiums paid on the policy. Petitioner filed a civil case for rescission and/or
annulment of the policy. The main thesis of the Complaint was that the policy was
obtained by fraud, concealment and/or misrepresentation under the Insurance Code,
which thus renders it voidable under Article 1390 of the Civil Code.
Respondent filed a Motion to Dismiss claiming that petitioner’s cause of action
was barred by prescription pursuant to Section 48 of the Insurance Code.
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, and that it was the
respondent who paid the annual premiums on the policy. 
Ruling of the RTC: 
The trial court granted respondent’s motion to dismiss as it 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 interposed an appeal with the CA, arguing that the trial court erred in
applying Section 48 and declaring that prescription has set in. It contended that since it
5
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 CA:
The CA dismissed the appeal for lack of merit. 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. 
Hence, the present Petition.
Petitioner’s Arguments:
Petition argues that Section 48 cannot apply to a case where the beneficiary
under the insurance contract posed as the insured and obtained the policy under
fraudulent circumstances. It adds that respondent, who was merely Sotero’s niece, had
no insurable interest in the life of her aunt. Petitioner adds that Insurance Policy was
void ab initio and could not have given rise to rights and obligations; as such, the action
for the declaration of its nullity or inexistence does not prescribe. 
Respondent’s Arguments:
Respondent, on the other hand, essentially argues that the CA is correct in
applying Section 48. She adds that petitioner’s new allegation in its Petition that the
policy is void ab initio merits no attention, having failed to raise the same below, as it had
claimed originally that the policy was merely voidable. On the issue of insurable interest,
respondent echoes the CA’s pronouncement that since it was Sotero who obtained the
insurance, insurable interest was present. Under Section 10 of the Insurance Code,
Sotero had insurable interest in her own life, and could validly designate anyone as her
beneficiary. 
ISSUE:
Whether Section 48 (the incontestability provision) of the Insurance Code is
applicable in the instant case.
RULING:
YES. 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. 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.
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.
MERC REV: INSURANCE LAW
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.

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.

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MERC REV: INSURANCE LAW
SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, vs. SANDRA TAN KIT and The
Estate of the Deceased NORBERTO TAN KIT, Respondents.
G.R. No. 183272, October 15, 2014, DEL CASTILLO, J.
FACTS:
Norberto tan kit, applied for life insurance policy designating his wife, Sandra tan Kit as his
beneficiary. Befoee the lapse of 2 years, Noberto died of stomach cancer. An so the
respondent as beneficiary filed a claim under the policy. HOWEVER, petitioner denied the
claim stating that the policy was null and void on the claim that Norberto failed to fully
disclose in his applicatiom all material and relevant information about hia health. Norberto
specifially answere no, to the inquiry whether he is smoking cigarettes within the year prior
filling of the insurance application. SUN LIFE INSURANCE said that medical report reveals that
norberto had previously consulted a doctor for his illness and that he was a smoker who just
recently stopped. the insurance company said that due to the nullity of the policy, it is only
liable to refund the premiums paid. TAN KIT, refuses tp accept the refund of premiums paid.
So the petitioner filed a complaint for rexission of insurance Contract.
Respondent Tan Kit is the widow and designated beneficiary of Norberto
Tan Kit (Norberto), whose application for a life insurance policy, with face value of
₱300,000.00, was granted by petitioner.  from the time of the death of the insured until fully paid.
Within the two-year contestability period, Norberto died of disseminated
gastric carcinoma. Consequently, respondent Tan Kit filed a claim under the subject
policy.
Petitioner denied respondent Tan Kit’s claim on account of Norberto’s
failure to fully and faithfully disclose in his insurance application certain material
and relevant information about his health and smoking history.  YES. but not liable in interest
Specifically, Norberto answered “No” to the question inquiring whether he
had smoked cigarettes or cigars within the last 12 months prior to filling out said
application. However, the medical report of Dr. Anna Chua (Dr. Chua), one of the several
physicians that Norberto consulted for his illness, reveals that he was a smoker and
had only stopped smoking in August 1999. According to petitioner, its underwriters
would not have approved Norberto’s application for life insurance had they been given
the correct information. Believing that the policy is null and void, petitioner opined that
its liability is limited to the refund of all the premiums paid. Accordingly, it enclosed
in the said letter a check for ₱13,080.93 representing the premium refund.
Tan Kit refused to accept the check and insisted on the payment of the
insurance proceeds. Petitioner filed a Complaint for Rescission of Insurance Contract
before the Regional Trial Court (RTC) of Makati City.
Ruling of the Regional Trial Court - IN FAVOR OF Tan Kit
RTC noted that petitioner’s physician, Dr. Charity Salvador (Dr. Salvador),
conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy E.
Javelosa (Javelosa), answered “NO” to the question “Are you aware of anything about
7
the life to be insured’s lifestyle, hazardous sports, habits, medical history, or any
risk factor that would have an adverse effect on insurability?” in her Agent’s Report.
Javelosa also already knew Norberto two years prior to the approval of the latter’s
application for insurance. The RTC concluded that petitioner, through the above-
mentioned circumstances, had already cleared Norberto of any misrepresentation
that he may have committed. 
Ruling of the Court of Appeals - CA reversed and set aside the RTC’s ruling 
From the records, the CA found that prior to his death, Norberto had consulted
two physicians, Dr. Chua and Dr. John Ledesma (Dr. Ledesma) to whom he confided that
he had stopped smoking only in 1999. At the time therefore that he applied for insurance
policy there is no truth to his claim that he did not smoke cigarettes within 12
months prior to the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the risks of the
insurance policy. This gave petitioner the right to rescind the insurance contract
which it properly exercised in this case.
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93
representing the [premium] paid by the insured with interest at the rate of 12% per annum
ISSUE:
Whether petitioner is liable to pay interest on the premium to be refunded to
respondents.
RULING:
Petitioner argues that no interest should have been imposed on the premium
to be refunded because the CA Decision does not provide any legal or factual basis
therefor; 
Respondents, on the other hand, contend that the reimbursement of premium
is clearly a money obligation or one that arises from forbearance of money, hence, the
imposition of 12% interest per annum is just, proper and supported by jurisprudence. 
SC HELD:
Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is
instructive on the issue of payment of interest.1âwphi1 There, the Court pointed to
Sections 243 and 244 of the Insurance Code which explicitly provide for payment of
interest when there is unjustified refusal or withholding of payment of the claim by the
insurer, and to Article 2209 of the New Civil Code which likewise provides for payment
of interest when the debtor is in delay.
The Court finds, however, that Tio Khe Chio is not applicable here as it deals
with payment of interest on the insurance proceeds in which the claim therefor was
MERC REV: INSURANCE LAW
either unreasonably denied or withheld or the insurer incurred delay in the payment
thereof. In this case, what is involved is an order for petitioner to refund to respondents
the insurance premium paid by Norberto as a consequence of the rescission of the
insurance contract on account of the latter’s concealment of material information in his
insurance application. Moreover, petitioner did not unreasonably deny or withhold the
insurance proceeds as it was satisfactorily established that Norberto was guilty of
concealment.
Nature of interest imposed by the CA
There are two kinds of interest – monetary and compensatory.
be deemed equivalent to a forbearance of credit. In such a case, the rate of interest
shall be 6% per annum. 
WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in
CA-G.R. CV No. 86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines),
Inc. is ordered to reimburse to respondents Sandra Tan Kit and the Estate of the
Deceased Norberto Tan Kit the sum of ~13,080.93 representing the premium paid by the
insured within fifteen (15) days from date of finality of this Decision. If the amount is not
reimbursed within said period, the same shall earn interest of 6% per annum until fully
paid.

“Monetary interest refers to the compensation set by the parties for the use or
forbearance of money.” No such interest shall be due unless it has been expressly
stipulated in writing. “On the other hand, compensatory interest refers to the penalty
or indemnity for damages imposed by law or by the courts.” The interest mentioned in
Articles 2209 and 2212of the Civil Code applies to compensatory interest. 

Clearly and contrary to respondents’ assertion, the interest imposed by the CA

is not monetary interest because aside from the fact that there is no use or forbearance
of money involved in this case, the subject interest was not one which was agreed upon
by the parties in writing. there can be no other conclusion than that the interest
imposed by the appellate court is in the nature of compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund

reckoned from the time of death of the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven

to have failed to comply with his obligation. 

In this case, it is undisputed that simultaneous to its giving of notice to

respondents that it was rescinding the policy due to concealment, petitioner tendered
the refund of premium by attaching to the said notice a check representing the amount of
refund. However, respondents refused to accept the same since they were seeking for the
release of the proceeds of the policy. Because of this discord, petitioner filed for judicial
rescission of the contract. Petitioner, after receiving an adverse judgment from the RTC,
appealed to the CA. And as may be recalled, the appellate court found Norberto guilty of
concealment and thus upheld the rescission of the insurance contract and consequently
decreed the obligation of petitioner to return to respondents the premium paid by
Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the
claim.

Based on the foregoing, we find that petitioner properly complied with its
obligation under the law and contract. Hence, it should not be made liable to pay
compensatory interest.

Considering the prevailing circumstances of the case, we hereby direct

petitioner to reimburse the premium paid within 15 days from date of finality of
this Decision. If petitioner fails to pay within the said period, then the amount shall

8
MERC REV: INSURANCE LAW
THE INSULAR LIFE ASSURANCE COMPANY, LTD. vs.
PAZ Y. KHU, FELIPE Y. KHU, JR., and FREDERICK Y. KHU
G.R. No. 195176, April 18, 2016, DEL CASTILLO, J.
FACTS:
Felipe N. Khu Sr. applied for life insurance policy with Insular Life under its
Diamond Jubilee Insurance Plan on March 6, 1997. He accomplished the required
medical questionnaire where he did not declare any illness or adverse medical condition.
An insurance policy, which took effect on June 22, 1997, was issued with a face value of 1
million pesos.
The policy lapsed due to non-payment of the premium covering the period from
June 22, 1999 to June 23, 2000. On September 7, 1999, he applied for the reinstatement
of the policy and paid a premium of 25,020,00 pesos. All the information in his
application for statement was virtualy identical to the original policy, save for the change
in his occupation from being self-employed to being the Municipal Mayor of Binuangan,
Misamis Oriental.  have been in force during the lifetime of the insured for a period of two years from the
Upon the advice of Insular Life for the reinstatement of his application, Felipe
agreed to certain conditions such as payment of additional premium and the cancellation
of the riders pertaining to premium waiver and accidental death benefits. He paid
additional premium of 3,054.50 pesos. The reinstatement of his new policy was
approved with the following changes made on the policy effective June 22, 1999:
1) Extra premium is imposed; and
2) The accidental death benefit and waiver of premium disability rider originally
attached to and forming parts of the policy were deleted.
The premium rates were adjusted to P28,000.00 annually, P14,843.00 semi-
annually and P7,557.00 quarterly, Philippine currency. On June 23, 2000, Felipe paid the
annual premium in the amount of P28,000.00 covering the period from June 22, 2000 to
June 22, 2001. And on July 2, 2001, he also paid the same amount as annual premium
covering the period from June 22, 2001 to June 21, 2002. On September 22, 2001, Felipe
died. On his Certificate of Death, the following were enumerated as the causes:
a) End stage renal failure, Hepatic failure. (Immediate cause)
b) Congestive heart failure. (Antecedent cause)
c) Diabetes Neuropathy, Alcoholism and Pneumonia. (Underlying cause)
The beneficiaries-respondents filed with Insular Life a claim for benefit under
the reinstated policy. The claim was denied, contending that it had decided to rescind the
reinstated policy on the grounds of concealment and misrepresentation by Felipe. The
respondents instituted a complaint for specific performance with damages, praying that
the reinstated life insurance be declared valid, enforceable and binding on Insular Life.
The RTC ruled in favor of the beneficiaries-respondents holding that the reinstated
insurance policy had already become incontestable by the time of Felipe’s death on
September 22, 2001 since more than two years had already lapsed from the date of the
policy’s reinstatement on June 22, 1999. he RTC noted that since it was Insular Life itself
that supplied all the pertinent forms relative to the reinstated policy, then it is barred
from taking advantage of any ambiguity/obscurity perceived therein particularly as
9
regards the date when the reinstated insurance policy became effective. The CA affirmed
the RTC’s decision. 
ISSUE:
Whether or not Felipe’s reinstated life insurance policy is already incontestable
at the time of his death. 
RULING:
YES, the insurance policy is already incontestable at the time of his death. The
Insurance Code pertinently provides that:
Sec. 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
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.
The rationale for this provision was discussed by the Court in Manila Bankers
Life Insurance Corporation v. Aban,
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.
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’. The reinstatement of an
insurance policy should be reckoned from the date when the same was approved by the
insurer. 
MERC REV: INSURANCE LAW
The parties differ as to when the reinstatement was actually approved. Insular
Life claims that it approved the reinstatement only on December 27, 1999. On the other
hand, respondents contend that it was on June 22, 1999 that the reinstatement took
effect. 

The Letter of Acceptance wherein Felipe affixed his signature was drafted and
prepared by the Insular Life. On the Letter of Acceptance and Endorsement, it say that
changes are made on the policy effective June 22, 1999. Thus, the said date is the date
when the reinstatement of the policy was approved. It must be upheld not only because
it accords with the evidence, but also because this is favorable to the insured who was
not responsible for causing the ambiguity or obscurity in the insurance contract 

It is true that the phrase as used in this particular paragraph does not refer
explicitly to the effectivity of the reinstatement. But the Court notes that the
reinstatement was conditioned upon the payment of additional premium not only
prospectively, that is, to cover the remainder of the annual period of coverage, but also
retroactively, that is for the period starting June 22, 1999. Hence, by paying the amount
of P3,054.50 on December 27, 1999 in addition to the P25,020.00 he had earlier paid on
September 7, 1999, Khu had paid for the insurance coverage starting June 22, 1999.

Accordingly, the subject policy is deemed reinstated as of June 22, 1999. Thus,
the period of contestability has lapsed.

10
MERC REV: INSURANCE LAW
SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, vs. MA. DAISY’S. SIBYA, JESUS
MANUEL S. SIBYA III, JAIME LUIS S. SIBYA, AND THE ESTATE OF THE DECEASED
ATTY. JESUS SIBYA, JR., Respondents
G.R. No. 211212, June 8, 2016
FACTS:
In his Application for Insurance with Sun Life on January 10, 2001, Atty. Jesus
Sibya indicated that in “1987, he had undergone surgery due to kidney stone under Dr.
Jesus Benjamin Mendoza at National Kidney Institute (NKI), discharged after 3 days, no
recurrence as claimed.”
On February 5, 2001, Sun Life approved Atty. Jesus Jr.’s application and issued
Insurance Policy No. 031097335, which indicated the respondents as beneficiaries of
death benefit of P1,000,000.00 should Atty. Jesus Jr. die on or before February 5, 2021, or
a sum of money if Atty. Jesus Jr. is still living on the endowment date.  however, on May 11, 2001, or a mere three months from the issuance of the policy, Sun
On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound. Sun Life
denied the insurance claim by the wife, on grounds that Atty. Jesus Jr. did not disclose his
previous medical treatment at the NKI in May and August of 1994, which suggested that
the insured was in “renal failure” and at a high risk medical condition, a fact which had it
known, it would not have issued the insurance policy. Respondents averred that Atty.
Jesus Jr. was in good faith and even authorized Sun Life to inquire further into his
medical history. Sun Life filed a Complaint for Rescission before the RTC and prayed for
judicial confirmation of the rescission of Atty. Jesus Jr.’s insurance policy.
The RTC dismissed the complaint, observing 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. It held
that Sun Life violated Sections 241, paragraph 1(b), (d), and (e) and 242 of the Insurance
Code, and awarded 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.
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.[23] (Emphasis ours)
In the present case, Sun Life issued Atty. Jesus Jr.’s policy on February 5, 2001.
Thus, it has two years from its issuance, to investigate and verify whether the policy was
obtained by fraud, concealment, or misrepresentation. Upon the death of Atty. Jesus Jr.,
Life loses its right to rescind the policy. As discussed in Manila Bankers, the death of the
insured within the two-year period will render the right of the insurer to rescind the
policy nugatory. As such, the incontestability period will now set in. 
Assuming, however, for the sake of argument, that the incontestability period
has not yet set in, the Court agrees, nonetheless, with the CA when it held that Sun Life
failed to show that Atty. Jesus Jr. committed concealment and misrepresentation. As
correctly observed by the CA, Atty. Jesus Jr. admitted in his application his medical
treatment for kidney ailment. Moreover, he executed an authorization in favor of Sun Life
to conduct investigation in reference with his medical history. Thus, it cannot be said that
[Atty. Jesus Jr.] concealed his medical history since [Sun Life] had the means of
ascertaining [Atty. Jesus Jr.’s] medical record.

The CA affirmed the RTC but modified the decision by absolving Sun Life from
the charges of violation of Sections 241 and 242 of the Insurance Code.
 
ISSUE:

Whether or not there was no concealment or misrepresentation when Atty.

Jesus Jr. submitted his insurance application with Sun Life.
 
RULING:

YES, there was no concealment. In Manila Bankers Life Insurance Corporation v.

Aban, the Court held that:
 
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
11
MERC REV: INSURANCE LAW
ALPHA INSURANCE AND SURETY CO. vs. ARSENIA CASTOR failure to keep possession, while the word “damage” means deterioration or injury to
G.R. No. 198174, September 2, 2013, PERALTA, J. property.

FACTS:
Respondent Arsenia Castor insured her motor vehicle, a Toyota Revo DLX DSL,
with petitioner Alpha Insurance. Under the insurance contract, petitioner shall pay
respondent P630,000.00 in case of loss or damage to said vehicle during the period
covered.
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.
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.
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.

Petitioner denied the insurance claim of respondent on the ground of the

provision of the Policy which provides that: “1.) The Company shall not be liable for: x x x
x (4) Any malicious damage caused by the Insured, any member of his family or by “A
PERSON IN THE INSURED’S SERVICE.”

Accordingly, respondent filed a Complaint for Sum of Money with Damages

against petitioner before the RTC. The RTC ruled in favor of respondent. It ruled that
“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.” The CA
affirmed in toto the RTC decision.

ISSUE:

Whether the loss of respondent’s vehicle is excluded under the provision in

insurance policy cited by petitioner.

RULING:

(SC did not agree with the ruling of RTC and CA but still ruled in favor
respondent) NO. 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. 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.

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

12
MERC REV: INSURANCE LAW
Erlinda V. Alvarez II, attorney-in-fact for Rachel V. Alvarez, et. Al. v. Sun Life of
Canada [Philippines], Inc.
G.R. No. 206674, THIRD DIVISION, September 29, 2014
Section 27 of the Insurance Code provides that a concealment, whether
intentional or unintentional, entitles the injured party to rescind a contract of insurance.
Concealment, according to the same Code, is a neglect to communicate that which a party
knows and ought to communicate. A party to an insurance contract, therefore, is obliged to
communicate all facts within his knowledge which are material to the same, to be
determined by the probable and reasonable influence of the facts upon the party to whom
the communication is due, in forming his estimate of the disadvantages of the proposed
contract, or in making his inquiries. 
FACTS:
On December 1, 2003, respondent Sun Life of Canada (Philippines), Inc. issued
Participating Life Insurance Policy No. 031376350 to petitioner Erlinda V. Alvarez II
covering the life of her mother Erlinda V. Alvarez, the insured, with a face value of
P500,000.00 payable upon the death of said insured. Since the insured was found to
have been suffering from high blood pressure, she was classified as high-risk, which
required petitioner to pay a higher premium.  Section 27 of the Insurance Code provides that a concealment, whether
On April 27, 2005, the insured passed away. Thereafter, respondent sent
petitioner a letter dated April 29, 2005 requiring the submission of documents to
facilitate her claim under the policy, one of which was an authorization of any physician,
medical practitioner, hospital, other medical or medically-related facility who has
attended to the insured to give the respondent details on the prior medical history
thereof.  proposed contract, or in making his inquiries.
Discovering several medical conditions which pre-dated the application for the
policy, respondent sent petitioner another letter dated September 13, 2005, declaring
the policy void and denying petitioner’s claim therefrom. Specifically, it discovered that
in 2003, the insured sought consultations with the following: (1) University of Santo
Tomas (USD Hospital, which found her to be suffering from stable angina,
atherosclerosis, and lateral wall ischemia; and (2) AIM Imaging Medical Services, which
likewise found her to be suffering from lateral wall ischemia. Respondent explained
that had it been informed of the foregoing medical history in the insured’s
application for insurance at the time of the application for the policy, it would have
issued the same with a higher rating. It stated, however, that the premiums paid by
petitioner will be refunded.
CASE FILED: breach of contract and damages (RTC-Makati)
RTC Ruling: no concealment or misrepresentation (ruled in favor of petitioner)
It held that the insured was able to disclose to respondent her general
condition when she gave affirmative answers to the questions given to her. These
negated the existence of concealment and should have prompted respondent· to further
examine the health of the insured. 
13
CA Ruling: reversed the lower court’s Decision
It ruled that the insured’s concealment of her chest pain, lateral wall ischemia,
and stable angina entitled respondent to rescind the contract of insurance, especially
because the information that the insured failed to disclose were material and relevant to
the approval and issuance of the insurance policy. Respondent’s acceptance of the
premiums paid by petitioner, according to the CA, cannot be deemed as a waiver of
its right to rescind the contract. Furthermore, it took into consideration the two-year
incontestability clause in the contract of insurance and held that since the insured
died on April 27, 2005, the incontestability period of two years from the issuance
of the policy on December 1, 2003 had not yet set in. Thus, respondent was not
barred from rescinding the contract on the ground of concealment or misrepresentation. 
ISSUE:
Whether there is concealment on the part of the petitioner and the insured
SC RULING:
YES.
intentional or unintentional, entitles the injured party to rescind a contract of insurance.
Concealment, according to the same Code, is a neglect to communicate that which a party
knows and ought to communicate. A party to an insurance contract, therefore, is obliged
to communicate all facts within his knowledge which are material to the same, to be
determined by the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the disadvantages of the
 
In the case at hand, it is undisputed that prior to the approval of the
insured’s insurance policy and during the stage of her application, she did not
disclose the fact that she consulted with the UST Hospital and the AIM Imaging
Medical Services which diagnosed her to be suffering from stable angina,
atherosclerosis, and lateral wall ischemia. Such fact, as the CA aptly noted, is
material to the contract in view of its effect on the respondent in forming its
estimate of whether to deny or approve the application as well as in prescribing
the amount of premium thereon. 
The fact that the insured gave affirmative answers in the application form does not
relieve her from the obligation to disclose the diagnoses of the UST Hospital and AIM. It must
be noted that while she admitted in her application form that she had consulted with a
doctor within the past 5 years, she only disclosed her general check-up in Makati Medical
Center in 2003 which showed normal results except for a slight increase in her cholesterol
and nothing more.
MERC REV: INSURANCE LAW
This concealment, therefore, by insured effectively entitled respondent to
rescind the contract of insurance. 

Furthermore, we agree with the CA in holding that respondent was not barred
from rescinding the contract on the ground of concealment, in light of the two-year
incontestability clause in the contract of insurance, which is in accordance with Section
48 of the Insurance Code. The insured herein died on April 27, 2005 while the insurance
policy was issued on December 1, 2003. Hence, since the incontestability period of
two years had not yet set in, respondent was not barred from rescinding the
contract on the ground of concealment or misrepresentation, receipt of premium
payments from petitioner, notwithstanding. 

14
MERC REV: INSURANCE LAW
H.H. HOLLERO CONSTRUCTION, INC. v. GOVERNMENT SERVICE INSURANCE SYSTEM
and POOL OF MACHINERY INSURERS
G.R. No. 152334, September 24, 2014, PERLAS-BERNABE, J.
The prescriptive period for the insured’s action for indemnity should be reckoned
from the final rejection of the claim. The 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. The rejection referred to should be construed as the
rejection in the first instance.
FACTS:
Case Filed: Complaint for Sum of Money and Damages under GSIS insurance
policies
The GSIS and H.H. Hollero Construction entered into a Project Agreement
whereby the latter undertook the development of a GSIS housing project. HH Hollero
Construction obligated itself to insure the Project, including all the improvements, upon
the execution of the Agreement under a Contractors’ All Risks Insurance with the GSIS
General Insurance Department.
The following are the policies secured:
CAR Policy for land development- P10, 000, 000 effective May 02, 1988 to  petitioner filed a letter of reconsideration therefrom dated April 18, 1991, considering
May 02, 1989; CAR Policy for the housing units- P17, 750, 000 effective May
02, 1988 to June 01, 1989
Under the policies, it was provided that, among others, 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. During the construction, three typhoons, i.e
Typhoon Biring (June 01-04, 1988), Typhoon Huaning (July 29, 1988), Typhoon Saling
(October 11, 1989) hit the country which caused considerable damage to the Project.
Accordingly, petitioner filed several claims for indemnity with the GSIS.
However, GSIS rejected petitioner’s indemnity claims for the damages on two
separate letters dated April 26, 1990 (for claims of Typhoon Biring and Huaning) and
June 21, 1990 (Typhoon Saling). Consequently, the petitioner filed a Complaint for Sum
of Money and Damages before the RTC on September 27, 1991. 
Respondents Contentions: Motion to dismiss on the ground that the cause of action is
barred by the 12 month limitation provided under the policies
MTC/RTC Ruling: The RTC denied the said motion and granted petitioner’s indemnity
claims
CA Ruling: Set aside and reversed RTC Ruling. The complaint filed by H Hollero
Construction barred by prescription.
ISSUE:
15
Whether or not the claim for indemnity of H.H. Hollero Construction has
prescribed.
RULING:
YES. 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. In this relation, the
prescriptive period for the insured’s action for indemnity should be reckoned from the
final rejection of the claim. The 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. The rejection referred to should be construed as
the rejection in the first instance.
A perusal of the letter 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. The same conclusion obtains for the letter 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
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.
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 RTC on September 27, 1991, its causes of action had already
prescribed.
MERC REV: INSURANCE LAW
ETERNAL GARDENS MEMORIAL PARK CORPORATION vs. THE PHILIPPINE
AMERICAN LIFE INSURANCE COMPANY
G.R. No. 166245, April 9, 2008
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.  by the Insured/Assured, prior to his death, for our approval but was submitted instead
FACTS:
Philippine American Life Insurance Company (Philamlife) entered into an
agreement denominated as Creditor Group Life Policy with petitioner Eternal Gardens
Memorial Park Corporation. 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.
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. 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 to Philamlife, which served as an insurance claim for
Chuang’s death. 
Philamlife wrote Eternal a letter requiring Eternal to submit the following
documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant
(with form attached); (2) Assured’s Certificate (with form attached); (3) Application for
Insurance accomplished and signed by the insured, Chuang, while still living; and (4)
Statement of Account showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents. 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.
PETITIONER’S CONTENTION:
Eternal claims that it submitted a copy of the insurance application of Chuang
before his death.
RESPONDENTS’ CONTENTION:
Philamlife denied Eternal’s insurance claim, 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.
16
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
on November 15, 1984, after his death, Mr. John Uy Chuang was not covered under the
Policy. 
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.
CASE FILED: Eternal filed a case for a sum of money.
RTC’s RULING: Decided in favor of Eternal.
CA’s RULING: Reversed the decision of the RTC.
It 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.
ISSUE:
Whether or not Philamlife is liable to pay Eternal the amount of PhP 100,000
representing the proceeds of the Life Insurance Policy of Chuang.
RULING:
YES. The evidence on record supports Eternal’s position.
The fact of the matter is, the letter, 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.
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.
In the policy, it is provided that:
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.
MERC REV: INSURANCE LAW
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.  

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-
1920, must be construed in favor of the insured and in favor of the effectivity of the
insurance contract.

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.

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. 

17
MERC REV: INSURANCE LAW
PHILAMCARE HEALTH SYSTEMS, INC. v. COURT OF APPEALS and JULITA TRINOS
G.R. No. 125678, March 18, 2002
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. 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.
FACTS:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner. 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?”
The application was approved for a period of one year which was extended for
another year. 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.”
During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month. Respondent tried to claim
the benefits under the health care agreement. However, petitioner denied her claim
saying that the Health Care Agreement was void.  own health. The health care agreement was in the nature of non-life insurance,
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. Subsequently, Ernani
died.  2)
Respondent instituted with the RTC, an Action For Damages against petitioner
and its president, Dr. Benito Reverente. She asked for reimbursement of her expenses
plus moral damages and attorney’s fees.  history of the applicant. This largely depends on opinion rather than fact, especially
PETITIONER’S CONTENTIONS
(1) Petitioner 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. (2) Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts which
last longer, petitioner argues that the incontestability clause does not apply, as the same
requires an effectivity period of at least two years. (3) Petitioner further argues that it is
not an insurance company, which is governed by the Insurance Commission, but a Health
Maintenance Organization under the authority of the Department of Health.
18
RTC RULING: The court rendered judgment in favor of the Julita Trinos ordering
Philamcare to reimburse her the hospital expenses she had incurred and to pay moral
damages, exemplary damages, and attorney’s fees. 
CA RULING: On appeal, the CA affirmed the decision of the trial court but deleted all
awards for damages. Hence, petitioner brought the instant petition for review. 
ISSUES: 
1) Whether or not a health care agreement is an insurance contract; 
2) Whether or not there is concealment on the part of the deceased; 
3)  Whether or not the “incontestability clause” under the Insurance Code applies.
SC RULING:
1) YES. A health care agreement is an insurance contract.
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 xxx In the case at bar, the insurable
interest of respondent’s husband in obtaining the health care agreement was his
which is primarily a contract of indemnity. 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.
NONE. There is no concealment on the part of the deceased. 
Petitioner cannot rely on the stipulation regarding “Invalidation of agreement.”
The answer assailed by petitioner was in response to the question relating to the medical
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. Thus, although 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
MERC REV: INSURANCE LAW
intent to deceive the insurer is obvious and amounts to actual fraud xxx The fraudulent
intent on the part of the insured must be established to warrant rescission of the
insurance contract. 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.

3) YES. The agreement is already incontestable.

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

quote with approval the following findings of the trial court: Under 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.

in such case the insurer is not justified in relying upon such statement, but is obligated to
make further inquiry.

WHEREFORE, in view of the foregoing, the petition is DENIED. 

19
MERC REV: INSURANCE LAW
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC. vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION
G.R. No. 124520, August 18, 1997
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. 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.
FACTS:
Spouses Nila and Stella Uy-Cha (Spouses Cha) entered into a lease agreement
with CKS Development Corporation (CKS). The lease contract that was executed between
the parties contained a provision that the former (spouses cha) 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 latter (CKS); and should lessees 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. However, the spouses entered into a fire insurance contract with United
Insurance Co., Inc. (United) for P500,000.00. On the day that the lease contract was about
to expire, a fire broke out inside the leased premises. 
When CKS learned that a fire insurance were earlier procured by Spouses Cha,
it demanded that the insurance proceeds be paid directly to CKS pursuant to the lease
contract. United refused to pay CKS. Hence, the latter filed a complaint against the
Spouses Cha and CKS.
Case Filed: Not specified in the case. 
Petitioner’s Contentions:
1. The stipulation in the lease contract is null and void for being contrary to law,
morals, and public policy;
2. The awarding of the insurance proceeds to CKS which is not a privy to the
insurance contract is in contravention of the Insurance Law;  public policy. The proceeds of the fire insurance policy thus rightfully belong to the
Respondent’s Contentions:
1. The stipulation in the lease contract must be upheld.
MTC/RTC RULING:
The RTC ruled in favor of CKS; ordered United to pay the amount of
P335,063.11 and the Spouses Cha the amount of P50,000.00 as exemplary damages and
P20,000.00 as attorney’s fees in favor of CKS.
CA RULING:
20
Affirmed the ruling of the RTC but deleted the award of exemplary damages
and attorney’s fees.
ISSUE:
Whether or not CKS has the right over the insurance proceeds.
SC DECISION:
None. 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. The basis of such requirement of insurable interest in property
insured is based on sound public policy: to prevent a person from taking out an
insurance policy on property upon which he has no insurable interest and collecting the
proceeds of said policy in case of loss of the property. In such a case, the contract of
insurance is a mere wager which is void under Section 25 of the Insurance Code, which
provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss,
whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the
goods and merchandise inside the leased premises under the provisions of Section 17 of
the Insurance Code which provide:
Sec. 17. The measure of an insurable interest in property is the extent to
which the insured might be damnified by loss of injury thereof.
Therefore, respondent CKS cannot, under the Insurance Code — a special law
— be validly a beneficiary of the fire insurance policy taken by the petitioner-spouses
over their merchandise. This insurable interest over said merchandise remains with the
insured, the Cha spouses. The automatic assignment of the policy to CKS under the
provision of the lease contract previously quoted is void for being contrary to law and/or
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.
MERC REV: INSURANCE LAW
GAISANO CAGAYAN, INC., Petitioner, vs. INSURANCE COMPANY OF NORTH
AMERICA, Respondent.
G.R. No. 147839, June 8, 2006
Indeed, a vendor or seller retains an insurable interest in the property sold so long
as he has any interest therein, in other words, so long as he would suffer by its destruction,
as where he has a vendor’s lien. xxx…
An obligation to pay money is generic; therefore, it is not excused by fortuitous
loss of any specific property of the debtor.  has outstanding accounts with IMC and LSPI?
FACTS:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans.
Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on “book debts in connection with ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in the
Philippines.”2 The policies defined book debts as the “unpaid account still appearing in
the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy.”  and dealers of the Insured anywhere in the Philippines.” ; and defined book debts as the
Petitioner is a customer and dealer of the products of IMC and LSPI. On
February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by
petitioner, was consumed by fire. Included in the items lost or destroyed in the fire were
stocks of ready-made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against
petitioner. It alleges that IMC and LSPI filed with respondent their claims under their
respective fire insurance policies with book debt endorsements; that as of February 25,
1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing
materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was
subrogated to their rights against petitioner; that respondent made several demands for
payment upon petitioner but these went unheeded.  The Court ruled that the present case clearly falls under paragraph (1), Article
RTC: the RTC rendered its decision dismissing respondent’s complaint. It held that the
cause of the fire was not attributable to the negligence of the petitioner and that since the
sales invoices state that “it is further agreed that merely for purpose of securing the
payment of purchase price, the above-described merchandise remains the property of
the vendor until the purchase price is fully paid”, IMC and LSPI retained ownership of the
delivered goods and must bear the loss.
CA: the CA rendered its decision setting aside the decision of the RTC. It held that loss of
the goods in the fire must be borne by petitioner since the proviso contained in the sales
invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule that if
the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the
time the loss under the principle of res perit domino and that petitioner’s obligation to
IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid account
21
and as such the obligation to pay is not extinguished, even if the fire is considered a
fortuitous event. 
ISSUES: 
1) Whether the fire insurance policy was one over credit or one over loss of goods
due to fire? 
2) Who bears the loss, Petitioner or IMC and LSPI? 
3) Assuming petitioner is liable, whether it has been established that petitioner
RULING: 
1) Petitioner contends that the insurance in the present case cannot be deemed to
be over credit since an insurance “on credit” belies not only the nature of fire
insurance but the express terms of the policies.
The Court ruled that it is well-settled that when the words of a contract are
plain and readily understood, there is no room for construction. In this case, the
questioned insurance policies provide coverage for “book debts in connection with
ready-made clothing materials which have been sold or delivered to various customers
“unpaid account still appearing in the Book of Account of the Insured 45 days after the
time of the loss covered under this Policy.” Nowhere is it provided in the questioned
insurance policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.
Thus, what were insured against were the accounts of IMC and LSPI with
petitioner which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.
2) Petitioner avers that despite delivery of the goods, petitioner-buyer IMC and
LSPI assumed the risk of loss when they secured fire insurance policies over the
goods.
1504 of the Civil Code:
ART. 1504…
(1) Where delivery of the goods has been made to the buyer or to a
bailee for the buyer, in pursuance of the contract and the ownership in
the goods has been retained by the seller merely to secure performance
by the buyer of his obligations under the contract, the goods are at the
buyer’s risk from the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to ensure that the buyer will pay
its debt, the risk of loss is borne by the buyer.  Accordingly, petitioner bears the risk of
loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods.
MERC REV: INSURANCE LAW
Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction. Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other
words, so long as he would suffer by its destruction, as where he has a vendor’s lien.  In
this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing
in their Books of Account 45 days after the time of the loss covered by the policies.
 
3) Only petitioner’s outstanding account with IMC was established.

With respect to IMC, the respondent has adequately established its claim.
Exhibits “C” to “C-22” show that petitioner has an outstanding account with IMC in the
amount of P2,119,205.00. Exhibit “E” is the check voucher evidencing payment to IMC.
Exhibit “F” is the subrogation receipt executed by IMC in favor of respondent upon
receipt of the insurance proceeds. All these documents have been properly identified,
presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient
to establish not only the relationship of respondent as insurer and IMC as the insured,
but also the amount paid to settle the insurance claim.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of

action. There is no proof of full settlement of the insurance claim of LSPI; no subrogation
receipt was offered in evidence. Thus, there is no evidence that respondent has been
subrogated to any right which LSPI may have against petitioner.

DISPOSITIVE PORTION:

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated

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

22
MERC REV: INSURANCE LAW
ISABELA ROQUE, doing business under the name and style of Isabela Roque
Timber Enterprises and ONG CHIONG v. HON. INTERMEDIATE APPELATE COURT
and PIONEER INSURANCE AND SURETY CORPORATION.
G.R. No. L-66935, November 11, 1985, FIRST DIVISION, GUTIERREZ, JR., J.
FACTS:
Manila Bay Lighterage Corporation, a common carrier, entered into a contract
with the petitioners whereby the former would load and carry on board its barge Mable
10 about 422.18 cubic meters of logs from Malampaya Sound, Palawan to North Harbor,
Manila. The petitioners insured the logs against loss for P100,000.00 with respondent
Pioneer Insurance and Surety Corporation. The petitioners loaded on the barge, but the
shipment never reached its destination because Mable 10 sank with the 811 pieces of
logs somewhere off Cabuli Point in Palawan on its way to Manila.
implied warranty of seaworthiness immediately attaches to whoever is insuring the
cargo whether he be the shipowner or not. The fact that the unseaworthiness of the ship
was unknown to the insured is immaterial in ordinary marine insurance and may not be
used by him as a defense in order to recover on the marine insurance policy. Since the
law provides for an implied warranty of seaworthiness in every contract of ordinary
marine insurance, it becomes the obligation of a cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy condition. The shipper of cargo may have no
control over the vessel but he has full control in the choice of the common carrier that will
transport his goods. Or the cargo owner may enter into a contract of insurance which
specifically provides that the insurer answers not only for the perils of the sea but also
provides for coverage of perils of the ship.

The petitioners wrote a letter to Manila Bay demanding payment of

P150,000.00 for the loss of the shipment plus P100,000.00 as unrealized profits
but the latter ignored the demand. Another letter was sent to respondent Pioneer
claiming the full amount of P100,000.00 under the insurance policy but
respondent refused to pay. Hence, petitioners commenced Civil Case No. 86599
against Manila Bay and respondent Pioneer.

The Trial Court ruled in favor of the petitioners. Respondent Pioneer appealed,
Manila Bay did not; for as according to the petitioners, the transportation company is no
longer doing business and is without funds. The appellate court modified the trial court’s
decision and absolved Pioneer from liability after finding that there was a breach of
implied warranty of seaworthiness on the part of the petitioners and that the loss of the
insured cargo was caused by the “perils of the ship” and not by the “perils of the sea”. It
ruled that the loss is not covered by the marine insurance policy. 

ISSUE:

Whether or not the loss is covered by the marine insurance policy. 

RULING:

The court ruled in the negative. 

The petitioners state that a mere shipper of cargo, having no control over the
ship, has nothing to do with its seaworthiness. This argument has no merit.

The liability of the insurance company is governed by law. Section 113 of the
Insurance Code provides: In every marine insurance upon a ship or freight, or freightage,
or upon any thing which is the subject of marine insurance, a warranty is implied that the
ship is seaworthy. Section 99 of the same Code also provides in part. Marine insurance
includes: (1) Insurance against loss of or damage to: (a) Vessels, craft, aircraft, vehicles,
goods, freights, cargoes, merchandise, ...

From the above-quoted provisions, there can be no mistaking the fact that the
term “cargo” can be the subject of marine insurance and that once it is so made, the
23
MERC REV: INSURANCE LAW
MALAYAN INSURANCE vs. LIN
G.R. No. 207277, January 16, 2017, DEL CASTILLO, J.
The findings of the trial court will not necessarily foreclose the administrative
case before the [IC], or [vice versa].  True, the parties are the same, and both actions are
predicated on the same set of facts, and will require identical evidence. But the issues to be
resolved, the quantum of evidence, the procedure to be followed[,] and the reliefs to be
adjudged by these two bodies are different.  license to operate as a non-life insurance company should be revoked or suspended, until
FACTS:  to the BFP’s findings.
CASES FILED:  Petitioner’s Contention
1. Collection of Sum of Money (Civil)
2. Unfair Claim Settlement Practice under Section 241 in relation to Section
247 of the Insurance Code (Administrative)
Emma Concepcion L. Lin (Lin) filed a Complaint for Collection of Sum of Money
with Damages against Malayan Insurance Co., Inc. (Malayan), Yvonne Yuchengco
(Yvonne), Atty. Emmanuel Villanueva, Sonny Rubin, Engr. Francisco Mondelo, Michael
Angelo Requijo (collectively, the petitioners), and the Rizal Commercial and Banking
Corporation (RCBC).
Lin alleged that she obtained various loans from RCBC secured by six clustered
warehouses located at Plaridel, Bulacan; that the five warehouses were insured with
Malayan against fire for ₱56 million while the remaining warehouse was insured for ₱2
million; that on February 24, 2008, the five warehouses were gutted by fire; that on April
8, 2008 the Bureau of Fire Protection (BFP) issued a Fire Clearance Certification to her
(April 8, 2008 FCC) after having determined that the cause of fire was accidental; that
despite the foregoing, her demand for payment of her insurance claim was denied since
the forensic investigators hired by Malayan claimed that the cause of the fire was arson
and not accidental; that she sought assistance from the Insurance Commission (IC)
which, after a meeting among the parties and a conduct of reinvestigation into the
cause/s of the fire, recommended that Malayan pay Lin’s insurance claim and/or accord
great weight to the BFP’s findings; that in defiance thereof, Malayan still denied or
refused to pay her insurance claim; and that for these reasons, Malayan’s corporate
officers should also be held liable for acquiescing to Malayan’s unjustified refusal to pay
her insurance claim.
As against RCBC, Lin averred that notwithstanding the loss of the mortgaged
properties, the bank refused to go after Malayan and instead insisted that she herself
must pay the loans to RCBC, otherwise, foreclosure proceedings would ensue; and that to
add insult to injury, RCBC has been compounding the interest on her loans, despite
RCBC’s failure or refusal to go after Malayan.
Lin thus prayed in Civil Case that judgment be rendered ordering petitioners to
pay her insurance claim plus interest on the amounts due or owing her; that her loans
and mortgage to RCBC be deemed extinguished; that RCBC be enjoined from foreclosing
the mortgage on the properties put up as collaterals; and that petitioners he ordered to
pay her ₱l,217,928.88 in the concept of filing foes, costs of suit, ₱l million as exemplary
damages, and ₱500,000.00 as attorney’s fees.
24
Some five months later, Lin filed before the IC an administrative case against
Malayan, represented this time by Yvonne. Lin claimed that since it had been
conclusively found that the cause of the fire was “accidental,” the only issue left to be
resolved is whether Malayan should be held liable for unfair claim settlement practice
under Section 241 in relation to Section 247 of the Insurance Code due to its unjustified
refusal to settle her claim; and that in consequence of the foregoing failings, Malayan’s
such time that it fully complies with the IC Resolution ordering it to accord more weight
Malayan filed a motion to dismiss Civil Case No. 10-122738 based on forum
shopping. It argued that the administrative case was instituted to prompt or incite IC into
ordering Malayan to pay her insurance claim; that the elements of forum shopping are
present in these two cases because there exists identity of parties since Malayan’s
individual officers who were impleaded in the civil case are also involved in the
administrative case; that the same interests are shared and represented in both the civil
and administrative cases; that there is identity of causes of action and reliefs sought in
the two cases since the administrative case is merely disguised as an unfair claim
settlement charge, although its real purpose is to allow Lin to recover her insurance
claim from Malayan; that Lin sought to obtain the same reliefs in the administrative case
as in the civil case; that Lin did not comply with her sworn undertaking in the
Certification on Non-Forum Shopping which she attached to the civil case, because she
deliberately failed to notify the RTC about the pending administrative case within five
days from the filing thereof.
 
Respondent’s Contention
Lin counters that as stressed in Go v. Office of the Ombudsman,  24 an
administrative case for unfair claim settlement practice may proceed simultaneously
with, or independently of, the civil case for collection of the insurance proceeds filed by
the same claimant since a judgment in one will not amount to res judicata to the other,
and vice versa,  due to the variance or differences in the issues, in the quantum of
evidence, and in the procedure to be followed in prosecuting the cases
RTC Ruling - Denied the Motion to Dismiss.
The RTC held that in the administrative case, Lin was seeking a relief clearly
distinct from that sought in the civil case; that while in the administrative case Lin
prayed for the suspension or revocation of Malayan’s license to operate as a non-life
insurance company, in the civil case Lin prayed for the collection of a sum of money with
damages; that it is abundantly clear that any judgment that would be obtained in either
case would not be res judicata  to the other, hence, there is no forum shopping to speak
of.
Court of Appeals Ruling – Dismissed the Petition
The CA, as did the RTC, found that Lin did not commit forum shopping chiefly
for the reason that the issues raised and the reliefs prayed for in the civil case were
MERC REV: INSURANCE LAW
essentially different from those in the administrative case, hence Lin had no duty at all to
inform the RTC about the institution or pendency of the administrative case.

ISSUE: 

Whether there is forum shopping due to the fact that the civil case and the
administrative case both seek the payment of the same fire insurance claim. (No)

RULING: 

NO, the settled rule is that criminal and civil cases are
altogether different from administrative matters, such that the disposition in the first
two will not inevitably govern the third and vice versa.” In the context of the case at bar,
matters handled by the IC are delineated as either regulatory or adjudicatory, both of
which have distinct characteristics, as postulated in Almendras Mining Corporation v.
Office of the Insurance Commission.

Petitioner’s causes of action in the Civil Case are predicated on the insurers’
refusal to pay her fire insurance claims despite notice, proofs of losses and other
supporting documents. Thus, petitioner prays in her complaint that the insurers be
ordered to pay the full-insured value of the losses, as embodied in their respective
policies. Petitioner also sought payment of interests and damages in her favor caused by
the alleged delay and refusal of the insurers to pay her claims. The principal issue then
that must be resolved by the trial court is whether or not petitioner is entitled to the
payment of her insurance claims and damages. The matter of whether or not there is
unreasonable delay or denial of the claims is merely an incident to be resolved by the
trial court, necessary to ascertain petitioner’s right to claim damages, as prescribed by
Section 244 of the Insurance Code.

On the other hand, the core, if not the sole bone of contention in Administrative
Case, is the issue of whether or not there was unreasonable delay or denial of the claims
of petitioner, and if in the affirmative, whether or not that would justify the suspension
or revocation of the insurers’ licenses.

While the possibility that these two bodies will come up with conflicting
resolutions on the same issue is not far-fetched, the finding or conclusion of one would
not necessarily be binding on the other given the difference in the issues involved, the
quantum of evidence required and the procedure to be followed.

Moreover, public interest and public policy demand the speedy and inexpensive
disposition of administrative cases.

Hence, Administrative Cases may proceed alongside Civil Cases.

 
 

25
MERC REV: INSURANCE LAW
THE INSULAR ASSURANCE CO., LTD., Petitioner, v. THE HEIRS OF JOSE H.
ALVAREZ, Respondents.
UNION BANK OF THE PHILIPPINES, Petitioner, v. HEIRS OF JOSE H.
ALVAREZ, Respondents.
G.R. No. 207526 & 210156, October 03, 2018, LEONEN, J.
The Insurance Code dispenses with proof of fraudulent intent in cases of rescission
due to concealment, but not so in cases of rescission due to false representations. When an
abundance of available documentary evidence can be referenced to demonstrate a design
to defraud, presenting a singular document with an erroneous entry does not qualify as
clear and convincing proof of fraudulent intent. Neither does belatedly invoking just one
other document, which was not even authored by the alleged miscreant.
FACTS:
Alvarez and his wife, Adelina, owned a residential lot with improvements
covered by Transfer Certificate of Title (TCT) No. C-315023 and registered in the
Caloocan City Registry of Deeds 
Alvarez applied for and was granted a housing loan by Union Bank in the
amount of P648,000.00. This loan was secured by a promissory note, a real estate
mortgage over the lot, and a mortgage redemption insurance taken on the life of Alvarez
with Union Bank as beneficiary. Alvarez was among the mortgagors included in the list of
qualified debtors covered by the Group Mortgage Redemption Insurance that Union Bank
had with Insular Life.
Alvarez passed away on April 17, 1998. In May 1998, Union Bank filed with
Insular Life a death claim under Alvarez’s name pursuant to the Group Mortgage
Redemption Insurance. In line with Insular Life’s standard procedures, UnionBank was
required to submit documents to support the claim. These included: (1) Alvarez’s birth,
marriage, and death certificates; (2) the attending physician’s statement; (3) the
claimant’s statement; and (4) Alvarez’s statement of account.  It explained that fraud is never presumed and fraudulent misrepresentation as
Insular Life denied the claim after determining that Alvarez was not eligible for
coverage as he was supposedly more than 60 years old at the time of his loan’s approval.
With the claim’s denial, the monthly amortizations of the loan stood unpaid.
Union Bank sent the Heirs of Alvarez a demand letter, giving them 10 days to vacate the
lot. Subsequently, on October 4, 1999, the lot was foreclosed and sold at a public auction
with Union Bank as the highest bidder.  consistently wrote “1942” in all the documents that he had submitted to Union Bank.
CASE FILED: 
Complaint for Declaration of Nullity of Contract and Damages against
Union Bank. The Complaint was later amended and converted into one for specific
performance to include a demand against Insular Life to fulfill its obligation as an
insurer under the Group Mortgage Redemption Insurance.  (1) prior notice of cancellation to [the] insured; (2) notice must be based on the
RESPONDENTS CONTENTION:
26
Union Bank asserted that the Heirs of Alvarez could not feign ignorance over
the existence of the loan and mortgage considering the Special Power of Attorney
executed by Adelina in favor of her late husband, which authorized him to apply for a
housing loan with Union Bank.
Insular Life maintained that based on the documents submitted by Union
Bank, Alvarez was no longer eligible under the Group Mortgage Redemption Insurance
since he was more than 60 years old when his loan was approved. 
RTC’s Ruling:
Regional Trial Court ruled in favor of the Heirs of Alvarez. It found no indication
that Alvarez had any fraudulent intent when he gave Union Bank information about his
age and date of birth. It explained that Union Bank initiated and negotiated the Group
Mortgage Redemption Insurance with Insular Life, and that “ordinary customers will not
know about [insurance policies such as this] unless it is brought to their knowledge by
the bank. 
It noted that if Union Bank’s personnel were mindful of their duties and if
Alvarez appeared to be disqualified for the insurance, they should have immediately
informed him of his disqualification. 
CA’s Ruling:
Court of Appeals affirmed the Regional Trial Court’s ruling.
It noted that the errors assigned by Insular Life and Union Bank to the Regional
Trial Court boiled down to the issue of whether or not Alvarez was guilty of fraudulent
misrepresentation as to warrant the rescission of the Group Mortgage Redemption
Insurance obtained by Union Bank on Alvarez’s life. 
a defense of the insurer to avoid liability must be established by convincing evidence. 
Insular Life, in this case, failed to establish this defense. It only relied on
Alvarez’s Health Statement Form where he wrote “1942” as his birth year. However, this
form alone was insufficient to prove that he fraudulently intended to misrepresent his
age. It noted that aside from the Health Statement Form, Alvarez had to fill out an
application for insurance. This application would have supported the conclusion that he
However, the records made no reference to this document. 
The Court of Appeals added that assuming that fraudulent misrepresentation
entitled Insular Life to rescind the contract, it should have first complied with certain
conditions before it could exercise its right to rescind. The conditions were: 
occurrence after effective date of the policy of one or more grounds mentioned;
(3) must be in writing, mailed or delivered to the insured at the address shown
in the policy; and (4) must state the grounds relied upon provided in Section 64
MERC REV: INSURANCE LAW
of the Insurance Code and upon [the] request of [the] insured, to furnish facts
on which cancellation is based.  Insurance Code:
None of these conditions were fulfilled.
ISSUES:
I. Whether this case is one of concealment or fraudulent misrepresentation for
recission of insurance contract under the Insurance Code (SC: FRAUDULENT
MISREPRESENTATION)
II. Whether Union Bank is correct in proceeding to foreclosure following Insular
Life’s refusal to pay.
RULING:
As to issue (I.):
Fraud is not to be presumed, for “otherwise, courts would be indulging in
speculations and surmises.”
Moreover, it is not to be established lightly. Rather, it must be established by
clear and convincing evidence a mere preponderance of evidence is not even adequate to
prove fraud.
Citing Section 27 of the Insurance Code, however, Insular Life asserts that in
cases of rescission due to: “A concealment whether intentional or unintentional entitles
the injured party to rescind a contract of insurance”.
The statutory text is unequivocal. Insular Life correctly notes that proof of
fraudulent intent is unnecessary for the rescission of an insurance contract on account of
concealment. 
Ratio for Section 27: It is because in insurance contracts, concealing material
facts is inherently fraudulent: “if a material fact is actually known to the [insured], its
concealment must of itself necessarily be a fraud.  the Insurance Code.
This Court has long settled this equivalence. Argente v. West Coast Life
Insurance, quoting heavily from Joyce’s The Law of Insurance, explained how
concealment of material facts in insurance contracts is tantamount to causal fraud,[56]
deceptively inducing an insurer into “accepting the risk, or accepting it at the rate of
premium agreed upon.”  What this case involves, instead, is an allegedly false representation. Section 44
In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found
the following:  such that his assertion fails to correspond with his factual age, he made a false
“Concealment exists where the assured has knowledge of a fact material to the
risk, and honesty, good faith, and fair dealing requires that he should communicate it to
the assured, but he designedly and intentionally withholds the same.
27
“However, the SC in this case emphasized in relation to Section 27 of the
“It does not seem to be necessary . . . that the . . . suppression of the truth should
have been willful.” If it were but an inadvertent omission, yet if it were material to the risk
and such as the plaintiff should have known to be so, it would render the policy void. 
Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to
“any concealment” without regard to whether such concealment is intentional or
unintentional. The phrase “whether intentional or unintentional” was in fact superfluous.
The deletion of the phrase “whether intentional or unintentional” could not have had the
effect of imposing an affirmative requirement that a concealment must be intentional if it is
to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by
B.P. Blg. 874 of the phrase “whether intentional or unintentional” merely underscored the
fact that all throughout (from 1914 to 1985), the statute did not require proof that
concealment must be “intentional” in order to authorize rescission by the injured party. 
It does not escape this Court’s attention that there have been decisions that
maintained that in cases of concealment, “fraudulent intent on the part of the insured
must be established to entitle the insurer to rescind the contract.” However, these
decisions proceed from an inordinately segregated reading of Argente and have not been
heedful of plain statutory text. While focusing on the equivalence between concealment
and false representation, they fail to account for the manifest textual peculiarity whereby
the negation of distinctions between intentional and unintentional acts is found only in
Section 27, the provision concerning rescission due to concealment, but not in the
counterpart provision concerning false representations. 
While Insular Life correctly reads Section 27 as making no distinction between
intentional and unintentional concealment, it erroneously pleads Section 27 as the
proper statutory anchor of this case. 
The Insurance Code distinguishes representations from concealments. Chapter
1, Title 4 is on concealments. It spans Sections 26 to 35 of the Insurance Code; it is where
Section 27 is found. Chapter 1, Title 5 is on representations. It spans Sections 36 to 48 of
Section 26 defines concealment as “[a] neglect to communicate that which a
party knows and ought to communicate.” However, Alvarez did not withhold information
on or neglect to state his age. He made an actual declaration and assertion about it.
of the Insurance Code states, “A representation is to be deemed false when the facts fail
to correspond with its assertions or stipulations.” If indeed Alvarez mis-declared his age
representation, not a concealment. 
Not being similarly qualified as rescission under Section 27, rescission under
Section 45 remains subject to the basic precept of fraud having to be proven by clear and
convincing evidence. 
MERC REV: INSURANCE LAW
Concealment applies only with respect to material facts. That is, those facts Pleading just one (1) additional document still fails to establish the consistent
which by their nature would clearly, unequivocally, and logically be known by the fraudulent design that was Insular Life’s burden to prove by clear and convincing
insured as necessary for the insurer to calculate the proper risks.  evidence. 

Even with their tremendous resources, a material fact concealed by the insured As to issue (II.):
cannot simply be considered by the insurance company. The insurance company may
have huge resources, but the law does not require it to be omniscient.  While the mortgagee’s right to proceed with foreclosure is settled, this Court
finds the debacle at the heart of this case to have been borne in large, if not equal
On the other hand, when the insured makes a representation, it is incumbent on measure, by Union Bank’s oversight. Union Bank contributed to setting in motion a
them to assure themselves that a representation on a material fact is not false; and if it is course of events that culminated in the unjust foreclosure of Alvarez’s mortgaged lot. As
false, that it is not a fraudulent misrepresentation of a material fact. This returns the such a contributor, its profiting from the wrongful foreclosure cannot be condoned.
burden to insurance companies, which, in general, have more resources than the insured
to check the veracity of the insured’s beliefs as to a statement of fact. Consciousness in The Regional Trial Court was correct in emphasizing that Alvarez entered into
defraudation is imperative and it is for the insurer to show this.  the Group Mortgage Redemption Insurance entirely upon Union Bank’s prodding. Bank
clients are generally unaware of insurance policies such as a mortgage redemption
If there is fraudulent misrepresentation, then a clear and convincing evidence is insurance unless brought to their knowledge by a bank. The processing of a mortgage
needed to prove the same. redemption insurance was within Union Bank’s regular course of business. It knew the
import of truthfully and carefully accomplished applications. To facilitate the principal
At bar, Insular Life basically relied on the Health Statement form personally contract of the loan and its accessory obligations such as the real estate mortgage and the
accomplished by Jose Alvarez wherein he wrote that his birth year was 1942.  mortgage redemption insurance, Union Bank completed credit appraisals and
background checks. Thus, the Regional Trial Court was correct in noting that Union Bank
However, such form alone is not sufficient absent any other indications that he had been in possession of materials sufficient to inform itself of Alvarez’s personal
purposely wrote 1942 as his birth year.  circumstances. 

It should be pointed out that, apart from a health statement form, an This is not to say that Union Bank was the consummate guardian of the veracity
application for insurance is required first and foremost to be answered and filled-up. and accuracy of Alvarez’s representations. It is merely to say that given the
However, the records are deficient of this application which would eventually depict to circumstances, considering Insular Life’s protestation over supposedly false declarations,
Us Jose Alvarez’s fraudulent intent to misrepresent his age. For, if he continually written Union Bank was in a position to facilitate the inquiry on whether or not a fraudulent
(sic) 1942 in all the documents he submitted with UBP and Insular Life then there is design had been effected. However, rather than actively engaging in an effort to verify, it
really a clear precursor of his fraudulent intent. Otherwise, a mere Health Statement appears that Union Bank stood idly by, hardly bothering to ascertain if other pieces of
form bearing a wrong birth year should not be relied at.  evidence in its custody would attest to or belie a fraudulent scheme. 

A single piece of evidence hardly qualifies as clear and convincing. Its contents The foreclosure here may well be a completed intervening occurrence, but
could just as easily have been an isolated mistake.  Great Pacific Life’s leaning to an irremediable supervening event cannot avail. What is
involved here is not the mortgagor’s medical history, as in Great Pacific Life, which the
Insular Life was well in a position to verify information, whether through mortgagee bank was otherwise incapable of perfectly ascertaining. Rather, it is merely
simple cross referencing or through concerted queries with Union Bank.  the mortgagor’s age. This information was easily available from and verifiable on several
documents. Union Bank’s passivity and indifference, even when it was in a prime
Rather than demonstrate Alvarez’s consistent fraudulent design, Insular Life position to enable a more conscientious consideration, were not just a cause of Insular
comes before this Court pleading nothing but just one other instance when Alvarez Life’s rescission bereft of clear and convincing proof of a design to defraud, but also,
supposedly declared himself to have been 55 years old. It claims that it did not rely solely ultimately, of the unjust seizure of Alvarez’s property. By this complicity, Union Bank
on Alvarez’s Health Statement Form but also on his Background Checking Report.  cannot be allowed to profit. Its foreclosure must be annulled. 

Reliance on this report is problematic. It was not prepared by Alvarez himself. WHEREFORE, the Petitions are DENIED. The assailed Court of Appeals May 21,
Rather, it was accomplished by a Union Bank employee following the conduct of credit 2013 Decision and November 6, 2013 Resolution in CA G.R. CV No. 91820 are
investigation.  AFFIRMED. 

But this is a self-serving statement, wholly reliant on the assumption of that Petitioners Union Bank of the Philippines and The Insular Life Assurance Co.,
employee’s flawless performance of her duty to record findings. Precisely, it is a claim Ltd. are ordered to comply with the insurance undertaking under Mortgage Redemption
that needed to be vetted.  Insurance Policy No. G-098496 by applying its proceeds as payment of the outstanding
28
MERC REV: INSURANCE LAW
loan obligation of deceased Jose H. Alvarez with respondent Union Bank of the
Philippines; 
The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez’s
TCT No. C-315023 is declared null and without legal force and effect; 

29
MERC REV: INSURANCE LAW
ICON DEVELOPMENT CORPORATION vs. NATIONAL LIFE INSURANCE COMPANY OF
THE PHILIPPINES
G.R. No. 220686, March 9, 2020, INTING, J.
FACTS:
On various dates Icon Development Corporation (IDC) obtained several loans
from National Life Insurance Company (NLIC). As security, several properties located in
Makati and Tayabas, Quezon were mortgaged. Upon default, NLIC filed a petition for
extrajudicial foreclosure of the mortgaged properties to settle IDC’s outstanding balance
of P274, 497, 565. 60. The provincial sheriff issued a notice of extra-judicial sale setting
the auction of the mortgaged properties
IDC instituted a complaint for the discharge of obligation with TRO/WPI. It
insisted that collecting an exorbitant and unconscionable interest; that it paid 550
membership shares to the respondent valued at ₱100,000.00 per share, but the latter
declared its cost at ₱250,000.00 per share; that despite the payment of these shares, the
respondent stated that the amount was not credited to the petitioner; that due to the
amounts paid, the petitioner made an overpayment to the respondent; that it could
constitute an unjust enrichment on the part of the respondent if it will be able to acquire
Pl Billion worth of properties to pay a loan of P31,513,152.69;14 that the officers who
secured the loans had no authority from the petitioner; and that the respondent is
under conservatorship; thus, the directors who initiated the foreclosure had no
authority to do so. 
NLIC opposed the application of TRO and cited AM No. 99-10-05-0 which
prohibits injunctive reliefs in extrajudicial foreclosure of REM.  to preserve the assets of the respondent and restore its previous financial status.
The RTC granted the TRO. It ruled that respondent is under conservatorship;
thus, the filing of foreclosure petition by its directors is invalid. Thereafter, the RTC
suspended the proceedings and referred to case to the Insurance Commission because
the issued are allegedly within its jurisdiction under the Doctrine of Primary Jurisdiction.
NLIC filed a petition for certiorari under Rule 65.  not in any way diminish the function of the board of directors during rehabilitation
The CA partially granted the petition for certiorari. It held that the RTC
misapplied the doctrine on primary jurisdiction as the issues before the latter do not
involve technical matters that require the specialized skills and expertise of the
Insurance Commissioner. It found that the issues are purely legal questions which are
within the competence and jurisdiction of the RTC and not with the Insurance
Commissioner.
ISSUE:
Whether NLIC’s directors can initiate foreclosure even without the authority of
the conservator
RULING:
YES. Conservatorship, under Section 248 of the Insurance Code, is in the nature
of a rehabilitation proceeding. Rehabilitation signifies a continuance of corporate life and
30
activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency. Clearly, a conservatorship proceeding means a
conservation of company assets and business during the period of financial difficulties or
inability to maintain a condition of solvency. Hence, it can be deduced that the purpose of
conservatorship is for the continuance of corporate life and activities, and reinstatement
of the corporation to its former status of successful operation.
The Insurance Code does not provide that the power of the conservator to
preserve the assets of a distressed company includes the total replacement or
substitution of the existing board of directors and corporate officers to the extent of
making the latter ineffective during rehabilitation. There is nothing in the law which
provides that a conservator supplants the board of directors and management of the
company.
Although, under the law, the appointed conservator has the power to
overrule or revoke the actions of the previous management and board of directors
of the distressed company, this should not be construed as to totally undress the
present and existing board of directors and corporate officers of their functions
during rehabilitation proceeding. Consequently, the board of directors and
corporate officers continue to exercise their powers as such, including the
collection of debts via foreclosure of mortgaged properties. Their actions, however,
can be revoked by the conservator if they are prejudicial to the corporation and worsen
the financial difficulty that the company is facing.
Apparently, the foreclosure proceeding in this case was initiated to collect the
petitioner’s debts. Such action is in accordance with the purpose of conservatorship, i.e.,
Evidently, the trial court judge’s order of issuing the TRO and WPI, and stopping the
foreclosure of the mortgaged properties defeated the purpose of the respondent’s
rehabilitation.
Having been established that the conservatorship of an insurance company does
proceedings, this Court affirms that the respondent’s juridical personality continued even if
it was placed under conservatorship. There is no doubt that the respondent’s board of
directors could validly authorize the foreclosure even without prior approval of the
conservator.
Consequently, the demands made by the respondent’s board of directors, even
without the authority of the conservator, were sufficient to put the petitioner in default.
Their power to demand payment is part of the efforts to rehabilitate the respondent and
restore it to its former status as a financially fluid corporation. Not a single rule prohibits
them from cooperating with the conservator in restoring the financial status of the
company subject of rehabilitation. To prevent the respondent’s board of directors from
collecting debts through foreclosure of the subject properties will surely frustrate the
restoration of the respondent’s previous financial standing.
Moreover, during conservatorship, it is the appointed conservator who can
question the authority of the respondent’s board of directors to initiate foreclosure
proceedings, and not the petitioner. Here, it was Atty. Chua who had the personality to
MERC REV: INSURANCE LAW
object to any actions of the respondent’s directors or officers. He can even countermand
any of the latter’s decision, if he found it prejudicial to the respondent’s rehabilitation.
For this reason, the petitioner was mistaken when they inquired into the authority of the
respondent’s directors in filing the petition for foreclosure of real estate mortgage during
conservatorship.

Finally, a careful review of the records and the factual circumstances

surrounding the instant case, reveals that the appointed conservator, Atty. Chua, filed a
Manifestation stating that he authorized the filing of the foreclosure proceedings. This
circumstance should have cautioned the trial judge in enjoining the foreclosure of the
mortgaged properties.

31
MERC REV: INSURANCE LAW
CELLPAGE INTERNATIONAL CORPORATION vs. THE SOLID GUARANTY, INC.
G.R. No. 226731, June 17, 2020, FIRST DIVISION, REYES, J. JR., J.
 
Does the phrase “in relation to the principal contract between the obligor and
obligee” means that a written principal agreement is required in order for the surety to be
liable? The Court answers in the negative. Article 1356 of the Civil Code provides that
contracts shall be obligatory in whatever form they may have been entered into, provided
all the essential requisites for their validity are present. Thus, an oral agreement which has
all the essential requisites for validity may be guaranteed by a surety contract. To rule
otherwise contravenes the clear import of Article 1356 of the Civil Code.
FACTS:
Cellpage International Corp. (Cellpage) approved Jomar Powerhouse Marketing
Corporation’s (JPMC) application for credit line for the purchase of cellcards, with a
condition that JPMC will provide a good and sufficient bond to guaranty the payment of
the purchases. In compliance with this condition, JPMC secured from The Solid Guaranty,
Inc. (Solid Guaranty) 3 surety bonds amounting to P7,500,000.00. 
JPMC then purchased cellcards amounting to P7,002,600.00. In partial payment
for its purchases, JPMC issued to Cellpage several postdated checks. When Cellpage
presented these checks to the bank for payment, the same were all dishonored for being
drawn against insufficient funds. Thus, Cellpage demanded from JPMC the full payment
of its outstanding obligation, in the amount of P7,002,600.00, but the latter failed to pay.
Cellpage also demanded from Solid Guaranty the payment of JPMC’s obligation pursuant
to the surety bonds issued by Solid Guaranty. Solid Guaranty, however, refused to accede
to Cellpage’s demand.
Thus, Cellpage filed a complaint for sum of money against JPMC and Solid
Guaranty before the Regional Trial Court (RTC).
RTC’S RULING
RTC ruled in favor of Cellpage and declared JPMC and Solid Guaranty jointly and
solidarily liable to the former.
SOLID GUARANTY’S CONTENTIONS
Aggrieved, Solid Guaranty filed its appeal before the CA, arguing that since a
surety bond is a mere collateral or accessory agreement, the extent of the liability of
Solid Guaranty is determined by the terms of the principal contract between JPMC and
Cellpage. Since neither JPMC nor Cellpage submitted copies of said written agreement
before or after the issuance of the surety bonds, Solid Guaranty argued that there can be
no valid surety claim against it.
CA’S RULING
The CA found Solid Guaranty’s appeal to be impressed with merit and granted
the same. The CA ruled that Cellpage cannot demand from Solid Guaranty the
performance of the latter’s obligation under the surety contract. In so ruling, this Court
32
invoked the pronouncement in First Lepanto-Taisho Insurance Corporation v. Chevron
Philippines, Inc., where we applied strictly the terms and conditions of the surety
contract which expressly states that a copy of the principal agreement must be attached
and made an integral part of the surety contract.
The CA found that the surety bonds issued by Solid Guaranty insured the
payment/remittance of the cost of products on credit by JPMC in accordance with the
terms and conditions of the agreement it entered into with Cellpage. According to the CA,
the word agreement pertains to the credit line agreement between JPMC and Cellpage.
Applying the ruling in First Lepanto, the CA ruled that JPMC’s failure to submit the
written credit line agreement to Solid Guaranty, affected not the validity and effectivity of
the surety bonds, but rather the right of the creditor, Cellpage, to demand from Solid
Guaranty the performance of its obligation under the surety contract. 
Cellpage appealed the case to the Supreme Court.
CELLPAGE’S CONTENTIONS
Cellpage maintains that the mere issuance by a surety company of a bond
makes it liable under the same even if the applicant failed to comply with the
requirement set by a surety company. Cellpage argues that an accessory surety
agreement is valid even if the principal contract is not in writing. 
Cellpage further avers that Solid Guaranty knew from the very start the
obligation it bound itself to be liable for and did not require that the purchases on credit
or the credit line agreement be in writing and attached to the surety agreements in order
for the latter to be valid or have binding effect. 
Lastly, Cellpage argues that the reliance in the case of First Lepanto v.
Chevron was misplaced because, unlike the surety in said case, Solid Guaranty did not
require the submission of a written principal contract. 
ISSUE:
Whether Solid Guaranty is liable to Cellpage in the absence of a written
principal contract
RULING:
YES, Solid Guaranty is liable to Cellpage even in the absence of a written
principal contract.
Under Section 176 of the Insurance Code, the nature and extent of a surety’s
liability are as follows:
SEC. 176. The liability of the surety or sureties shall be joint and several
with the obligor and shall be limited to the amount of the bond. It is
determined strictly by the terms of the contract of suretyship in
relation to the principal contract between the obligor and the obligee.
MERC REV: INSURANCE LAW
Thus, the surety’s liability is joint and several with the obligor, limited to the prepared by the surety or insurance company. Therefore, its provisions are interpreted
amount of the bond, and determined strictly by the terms of the contract of suretyship in liberally in favor of the insured and strictly against the insurer who, as the drafter of the
relation to the principal contract between the obligor and the obligee. bond, had the opportunity to state plainly the terms of its obligation.

The phrase “in relation to the principal contract between the obligor and oblige
does not mean that the agreement is required in order for the surety to be liable. Article
1356 of the Civil Code provides that contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites for their validity are
present. Thus, an oral agreement which has all the essential requisites for validity may
be guaranteed by a surety contract. To rule otherwise contravenes the clear import of
Article 1356 of the Civil Code.
The oft-repeated rule in suretyship is that a surety’s liability is joint and
solidary with that of the principal debtor.13 This makes a surety agreement an ancillary
contract as it presupposes the existence of a principal agreement.14 Although the
surety’s obligation is merely secondary or collateral to the obligation contracted by the
principal, this Court has nevertheless characterized the surety’s liability to the creditor of
the principal as “direct, primary, and absolute; in other words, the surety is directly and
equally bound with the principal.

CA’s reliance on the ruling in First Lepanto-Taisho Insurance Corporation v.

Chevron Philippines, Inc. is misplaced. It bears pointing out that the ruling in First
Lepanto was anchored on Section 176 of the Insurance Code which emphasizes the strict
application of the terms of the surety contract in relation to the principal contract
between the obligor and obligee. First Lepanto’s pronouncement that a written principal
agreement is required in order for the creditor to demand performance was arrived at by
applying strictly the terms of the surety bond which required the submission and
attachment of the principal agreement to the surety contract.

Thus, following the provision of Section 176 of the Insurance Code, the ruling
in First Lepanto cannot be applied to this case. Since the liability of a surety is
determined strictly by the terms of the surety contract, each case then must be assessed
independently in light of the agreement of the parties as embodied in the terms of the
contract of suretyship.

Upon perusal of the surety bonds issued by Solid Guaranty, it was found out
that the surety bonds do not expressly require the submission of a written principal
agreement. Nowhere in the said surety bonds did Solid Guaranty and Cellpage stipulate
that Solid Guaranty’s performance of its obligations under the surety bonds is
preconditioned upon Cellpage’s submission of a written principal agreement. It is clear
that Solid Guaranty bound itself solidarity with JPMC for the payment of the amount
stated in the surety bonds in case of the latter’s failure to perform its obligations to
Cellpage, with knowledge of the following: 1) the principal, JPMC, has applied for a credit
line with Cellpage for the purchase of cell cards and accessories; 2) Cellpage required
JPMC to post a good and sufficient bond in the amount specified in the surety bonds in
order to guarantee payment/remittance of cost of products within the stipulated time in
accordance with the terms and conditions of the agreement; and 3) the contract between
JPMC and Cellpage requires the former to give a sufficient bond to secure its full and
faithful performance of its obligation in the principal contract. The CA misconstrued the
phrase “in accordance with the terms and conditions of the agreement” in the second
whereas clause as a condition imposed upon Cellpage to attach the principal agreement
to the surety bonds. At the risk of being repetitive, the second condition merely states
that JPMC is required to post a bond that will guarantee its payment of the cost of the
products within the stipulated time in accordance with the terms and conditions of the
agreement. If Solid Guaranty’s intention was to impose a condition upon its solidary
liability, then it should have clearly and unequivocally specified in the surety bonds that
it requires the written principal agreement to be attached thereto. Its failure to do so
must be construed against it. A suretyship agreement is a contract of adhesion ordinarily
33
MERC REV: INSURANCE LAW
VICENTE G. HENSON JR. vs. UCPB GENERAL INSURANCE CO.
G.R. No. 22314, August 14, 2019
The Court abandoned the ruling in Vector that an insurer may file an action
against the tortfeasor within ten (10) years from the time the insurer indemnifies the
insured.  Following the principles of subrogation, the insurer only steps into the shoes
of the insured and therefore, for purposes of prescription,  inherits only the
remaining period  within which the insured may file an action against the
wrongdoer.
FACTS:
National Arts Studio and Color Lab (NASCL) leased the front portion of the
ground floor of a two-storey building located in Angeles City, then owned by Petitioner,
Vicente Henson Jr. (Petitioner). NASCL gave up its lease on the said portion and instead
leased the right front portion of the ground floor and the entire second floor. Copylandia
Office Systems Corp. (Copylandia) moved into the ground floor.
On Mayw 2, 2006, a water leak occurred in the building and damaged
Copylandia’s equipment. The injury amounted to Php2, 062,640. As the equipment was
insured with UCPB, Copylandia filed a claim.  against the wrongdoer begins at the time that the tort was committed and the loss/injury
On November 2, 2006, both Copylandia and UCPB settled for the amount of
Php1, 326,342.76. Consequently, UCPB was subrogated to Copylandia’s rights. On May
20, 2010, UCPB demanded from NASCL the payment of the said claim, but to no avail. It
filed a case for damages before the RTC.
In 2010, vicente henson transferred the ownership of the building to Citrinne
Holdings Inc. (CHI), where he is a stockholder and President.
On October 6, 2011, respondent filed an Amendment Complaint where CHI
was impleaded as defendant. A third Amendment was submitted, where UCPB prayed
that NASCL be impleaded as party-defendant since it was the owner at the time of the
incident.
Respondent’s contention:
1. NASCL was negligent in not properly maintaining in good order the comfort room
facilities where the building’s piping assembly was utilized; and
2. CHI/Petitioner, as owner, neglected the maintenance of the drainage system in good
order.
Petitioner’s contention:
The action has prescribed. Since the cause of action is based on quasi-delict, it
should have been filed within four years from its accrual on May 9, 2006.
RTC Ruling:
34
Since respondent was merely enforcing its right of subrogation, the prescriptive
period is ten (10) years based on an obligation created by law reckoned from the date of
Copylandia’s indemnification, or on November 2, 2006.
CA Ruling:
Affirmed the RTC. The cause of action is not based on quasi-delict.
ISSUE:
Whether the action has prescribed.
RULING:
NO. The Court abandoned the ruling in Vector (Vector Shipping Corp. vs.
American Homes Assurance Company) that an insurer may file an action against the
tortfeasor within ten (10) years from the time the insurer indemnifies the
insured. Following the principles of subrogation, the insurer only steps into the
shoes of the insured and therefore, for purposes of prescription, inherits only the
remaining period within which the insured may file an action against the
wrongdoer. To be sure, the prescriptive period of the action that the insured may file
occurred against the insured. The indemnification of the insured by the insurer only
allows it to be subrogated to the former’s rights, and does not create a new reckoning
point for the cause of action that the insured originally has against the wrongdoer.
Guidelines in the application of the Vector Ruling vis-à-vis the prescriptive period
in cases where the insurer is subrogated to the rights of the insured against the
wrongdoer  based on a  quasi-delict:
1. For actions of such nature that have already been filed and are currently
pending before the courts at the time of the finality of this Decision, the rules on
prescription prevailing at the time the action is filed would apply. Particularly:
(a) For cases that were filed by the subrogee-insurer during the applicability of
the Vector ruling (i.e., from Vector’s finality on August 15, 201360 up until the finality of
this Decision), the prescriptive period is ten (10) years from the time of payment by the
insurer to the insured, which gave rise to an obligation created by law.
Rationale: Since the Vector doctrine was the prevailing rule at this time, issues of
prescription must be resolved under Vector’s parameters.
(b) For cases that were filed by the subrogee-insurer prior to the applicability of
the Vector ruling (i.e., before August 15, 2013), the prescriptive period is four (4) years
from the time the tort is committed against the insured by the wrongdoer.
Rationale: The Vector doctrine, which espoused unique rules on legal subrogation and
prescription as aforedescribed, was not yet a binding precedent at this time; hence,
issues of prescription must be resolved under the rules prevailing before Vector, which,
MERC REV: INSURANCE LAW
incidentally, are the basic principles of legal subrogation vis-a-vis prescription of actions
based on quasi-delicts.
2. For actions of such nature that have not yet been filed at the time of the finality
of this Decision:
(a) For cases where the tort was committed and the consequent loss/injury against the
insured occurred prior to the finality of this Decision, the subrogee-insurer is given a
period not exceeding four (4) years from the time of the finality of this Decision to file the
action against the wrongdoer; provided, that in all instances, the total period to file such
case shall not exceed ten (10) years from the time the insurer is subrogated to the rights
of the insured.
moved to further amend the complaint in order to implead petitioner as party-defendant
in lieu of CHI, prescription - if adjudged under the present parameters of legal
subrogation under this Decision - should have already set in.
However, it must be recognized that the prevailing rule applicable to the
pertinent events of this case is Vector. Pursuant to the guidelines stated above,
specifically under guideline 1 (a), the Vector doctrine - which was even relied upon by
the courts a quo - would then apply. Hence, as the amended complaint 63 impleading
petitioner was filed on April 21, 2014, which is within ten (10) years from the time
respondent indemnified Copylandia for its injury/loss, i.e., on November 2, 2006, the
case cannot be said to have prescribed under Vector. As such, the Court is constrained to
deny the instant petition.

Rationale: The erroneous reckoning and running of the period of prescription

pursuant to the Vector doctrine should not be taken against any and all persons relying
thereon because the same were based on the then-prevailing interpretation and
construction of the Court. Hence, subrogees-insurers, who are, effectively, only now
notified of the abandonment of Vector, must be given the benefit of the present doctrine
on subrogation as ruled in this Decision.

However, the benefit of the additional period (i.e., not exceeding four [4] years)
under this Decision must not result in the insured being given a total of more than ten
(10) years from the time the insurer is subrogated to the rights of the insured (i.e., the
old prescriptive period in Vector); otherwise, the insurer would be able to unduly
propagate its right to file the case beyond the ten (10)-year period accorded by Vector to
the prejudice of the wrongdoer.

(b) For cases where the tort was committed and the consequent loss/injury against the
insured occurred only upon or after the finality of this Decision, the Vector doctrine
would hold no application. The prescriptive period is four (4) years from the time the
tort is committed against the insured by the wrongdoer.

Rationale: Since the cause of action for quasi-delict and the consequent

subrogation of the insurer would arise after due notice of Vector’s abandonment, all
persons would now be bound by the present doctrine on subrogation as ruled in this
Decision.

Application to the Case at Bar

In this case, it is undisputed that the water leak damage incident, which gave
rise to Copylandia’s cause of action against any possible defendants, including NASCL
and petitioner, happened on May 9, 2006. As this incident gave rise to an obligation
classified as a quasi-delict, Copylandia would have only had four (4) years, or until May 9,
2010, within which to file a suit to recover damages. 61 When Copylandia’s rights were
transferred to respondent by virtue of the latter’s payment of the former’s insurance
claim on November 2, 2006, as evidenced by the Loss and Subrogation
Receipt,62 respondent was likewise bound by the same prescriptive period. Since it was
only on: (a) May 20, 2010 when respondent made an extrajudicial demand to NASCL,
and thereafter, filed its complaint; (b) October 6, 2011 when respondent amended its
complaint to implead CHI as party-defendant; and (c) April 21, 2014 when respondent
35
MERC REV: INSURANCE LAW
PHILAM INSURANCE CO., INC., NOW CHARTIS PHILIPPINES INSURANCE, INC.,
Petitioner, VS. PARC CHATEAU CONDOMINIUM UNIT OWNERS ASSOCIATION, INC.,
AND/OR EDUARDO B. COLET, Respondents.
G.R. NO. 201116, March 4, 2019, REYES, J. JR., J.
The CA correctly determined that the Jumbo Risk Provision clearly indicates that
failure to pay in full any of the scheduled installments on or before the due date shall
render the insurance policy void and ineffective as of 4 p.m. of such date. Parc Association’s
failure to pay on the first due date (November 30, 2003), resulted in a void and ineffective
policy as of 4 p.m. of November 30, 2003. Hence, there is no credit extension to consider as
the Jumbo Risk Provision itself expressly cuts off the inception of the insurance policy in
case of default
FACTS:
Petitioner Philam Insurance Co., Inc. (Philam), appraised the condominium, it
issued Fire and Lightning Insurance Policy for P900 million and Comprehensive General
Liability Insurance Policy for P1 million, both covering from November 30, 2003 to
November 30, 2004.  payment of premiums.
The payment term was embodied in a Jumbo Risk Provision. The Jumbo Risk
Provision also stated that if any of the scheduled payments are not received in full on or
before said dates, the insurance shall be deemed to have ceased at 4 p.m. of such date,
and the policy shall automatically become void and ineffective. Parc Association’s board
of directors found the terms unacceptable and did not pursue the transaction. Parc
Association verbally informed Philam, through its insurance agent, of the board’s
decision. Since no premiums were paid, Philam made oral and written demands upon
Parc Association, who refused to do so alleging that the insurance agent had been
informed of its decision not to take up the insurance coverage. Philam sent demand
letters with statement of account claiming P363,215.21 unpaid premium. Philam also
cancelled the policies.
Case Filed
Philam filed a complaint against Parc Association and Colet for recovery of
P363,215.21 unpaid premium, plus attorney’s fees and costs of suit in the Metropolitan
Trial Court (MeTC) of Makati.
Petitioners’ Contentions
Philam insisted that there was a perfected insurance contract, and Parc
Association’s request for terms of payment indicate its intention to be bound by the
insurance contract.
Respondent’s Contentions
Parc Association averred that Philam’s proposal was accepted for consideration
of the board of directors, who later disapproved the terms and conditions. As such, there
was no meeting of the minds of the parties, and there was no insurance contract
initiated.
36
Parc Association further argued that non-payment of premium means no
juridical tie was created between the insured and the insurer, and the insured was not
exposed to the insurable risk for lack of consideration. Parc Association asserted that it
would be unjust to allow Philam to recover premiums on an insurance contract that was
never effective and despite not having been exposed to any risk at all.
MeTC Ruling
MeTC dismissed the case. It determined that Parc Association did not pay its
premium. The MeTC explained that payment of premium is a condition precedent for the
effectivity of an insurance contract. With one of the elements missing, there is no
insurance contract to speak of and Philam has no right to recover from defendant Parc
Association.
RTC Ruling
RTC pronounced that there was no valid insurance contract between the
parties because of non-payment of premium, and there was no express waiver of full
The RTC elucidated that the Jumbo Risk Provision specifically requires full
payment of premium within the given period, and in case of default, the policy
automatically becomes void and ineffective. The RTC held that Parc Association’s
newsletter and treasurer’s report, informing the condominium unit owners that the
building was insured, is not proof of a perfected insurance contract. 
Philam moved for reconsideration, which the RTC denied.
CA Ruling
CA rendered a decision denying Philam’s petition and affirming the RTC
decision and Resolution. The general rule is that no insurance contract issued by an
insurance company is valid and binding unless and until the premium has been paid.
Although there are exceptions laid down in UCPB General Insurance Co., Inc. v. Masagana
Telamart, Inc., the CA determined that none of these exceptions were applicable to the
case at hand.
CA pointed out that the Jumbo Risk Provision clearly stated that failure to pay
in full any of the scheduled installments on or before the due date, shall render the
insurance policy void and ineffective as of 4 p.m. of such date. Parc Association’s failure
to pay on the first due date, November 30, 2003, resulted in a void and ineffective policy
as of 4 p.m. of November 30, 2003.
ISSUE:
Whether or not the CA committed a reversible error in affirming the RTC
decision and ruling that Philam has no right to recover the unpaid premium based on
void and ineffective insurance policies. 
RULING:
MERC REV: INSURANCE LAW
NO.

Philam avers that this case falls under the fourth exception as explained in the
Makati Tuscany case. The Makati Tuscany case provides that if the insurer has granted
the insured a credit term for the payment of the premium, it is an exception to the
general rule that premium must first be paid before the effectivity of an insurance
contract. Philam argues that the 90-day payment term is a credit extension and should be
considered as an exception to the general rule.

However, the CA correctly determined that the Jumbo Risk Provision clearly
indicates that failure to pay in full any of the scheduled installments on or before the due
date shall render the insurance policy void and ineffective as of 4 p.m. of such date. Parc
Association’s failure to pay on the first due date (November 30, 2003), resulted in a void
and ineffective policy as of 4 p.m. of November 30, 2003. Hence, there is no credit
extension to consider as the Jumbo Risk Provision itself expressly cuts off the inception
of the insurance policy in case of default.

The Court resolves to deny the petition after finding that the CA did not commit
any reversible error in the assailed decision and resolution. The CA had exhaustively
explained the law and jurisprudence, which are the bases of its decision and resolution.
Both trial courts and the appellate court are consistent in its findings of fact that there is
no perfected insurance contract, because of the absence of one of the elements, that is,
payment of premium. As a consequence, Philam cannot collect P363,215.21 unpaid
premiums of void insurance policies.

37
MERC REV: INSURANCE LAW
KEIHIN-EVERETT FORWARDING CO., INC., Petitioner, vs. TOKIO MARINE MALAYAN
INSURANCE CO., INC.* AND SUNFREIGHT FORWARDERS & CUSTOMS BROKERAGE,
INC., Respondents
G.R. No. 212107, January 28, 2019, SECOND DIVISION, REYES, J. JR., J.
The right of subrogation accrues simply upon payment by the insurance company
of the insurance claim
FACTS:
In 2005, Honda Trading Phils. Ecozone Corporation (Honda Trading) ordered
80 bundles of Aluminum Alloy Ingots. The goods were loaded in two container vans
which were, in turn, received in Jakarta, Indonesia by Nippon Express Co., Ltd. for
shipment to Manila.
Aside from insuring the entire shipment with Tokio Marine & Nichido Fire
Insurance Co., Inc. (TMNFIC), Honda Trading also engaged the services of petitioner
Keihin-Everett to clear and withdraw the cargo from the pier and to transport and
deliver the same to its warehouse at Laguna Meanwhile, petitioner Keihin-Everett had an
Accreditation Agreement with respondent Sunfreight Forwarders whereby the latter
undertook to render common carrier services for the former and to transport inland
goods within the Philippines. The shipment was caused to be released from the pier by
petitioner Keihin-Everett and turned over to respondent Sunfreight Forwarders for
delivery to Honda Trading.  Policy shows in its face that Honda Trading procured the insurance from TMNFIC and
En route to the latter’s warehouse, the truck carrying the containers was
hijacked and the container van with Serial No. TEXU 389360-5 was reportedly taken
away.9 Although said container van was subsequently found in the vicinity of the Manila
North Cemetery and later towed to the compound of the Metro Manila Development
Authority (MMDA), it appears that the contents thereof were no longer retrieved. Honda
Trading suffered losses in the total amount of ₱2,121,917.04, representing the value of
the lost 40 bundles of Aluminum Alloy Ingots.
Claiming to have paid Honda Trading’s insurance claim for the loss it suffered,
respondent Tokio Marine complaint for damages against petitioner Keihin-Everett.
CASE FILED: complaint for damages
RESPONDENT’S CONTENTIONS
Keihin-Everett denied liability for the lost shipment on the ground that the loss
thereof occurred while the same was in the possession of respondent Sunfreight
Forwarders.12 Hence, petitioner Keihin-Everett filed a third-party complaint against the
latter, who, in turn, denied liability on the ground that it was not privy to the contract
between Keihin-Everett and Honda Trading. If at all, respondent Sunfreight Forwarders
claimed that its liability cannot exceed the ₱500,000.00 fixed in its Accreditation
Agreement with petitioner Keihin-Everett.
RTC RULING
38
The RTC rendered a Decision finding petitioner Keihin-Everett and respondent
Sunfreight Forwarders jointly and severally liable to pay respondent Tokio Marine’s
claim in the sum of ₱1,589,556.60
CA RULING
The CA affirmed with modifications. It went to rule that solidarity is never
presumed. There is solidary liability when the obligation so states, or when the law or
the nature of the obligation requires the same. Thus, because of the lack of privity
between Honda Trading and Sunfreight Forwarders, the latter cannot simply be held
jointly and severally liable with Keihin-Everett for Tokio Marine’s claim as subrogee. In
view of the Accreditation Agreement between Keihin-Everett and Sunfreight Forwarders,
the former possesses a right of reimbursement against the latter for so much of what
Keihin-Everett has paid to Tokio Marine.
RESPONDENT’S CONTENTIONS
Keihin-Everett argued that the case should have been dismissed for failure of
Tokio Marine to attach or state in the Complaint the actionable document or the
insurance policy between the insurer and the insured. 
 
Keihin-Everett insisted that Tokio Marine is not the insurer but TMNFIC, hence,
it argued that Tokio Marine has no right to institute the present action. The Insurance
not from Tokio Marine.
ISSUES:
a) Whether the case should have been dismissed for failure of Tokio Marine to
attach the insurance policy.
b) Whether Tokio Marine has the right to institute the action
c) Whether there is solidary liability between Tokio Marine and Sunfreight
Forwarders
 
SC DECISION
1) NO.
In the Malayan case cited by Keihin-Everett, Malayan not only failed to attach or
set forth in the complaint the insurance policy, it likewise did not present the same as
evidence before the trial court or even in the CA. As the Court metaphorically described,
the very insurance contract emerges as the white elephant in the room — an obdurate
presence which everybody reacts to, yet legally invisible as a matter of evidence since no
attempt had been made to prove its corporeal existence in the court of law. 20 Hence,
there was sufficient reason for the Court to dismiss the case for it has no legal basis from
which to consider the pre-existence of an insurance contract between Malayan and ABB
Koppel and the former’s right of subrogation.
 
MERC REV: INSURANCE LAW
Unlike in the Malayan case, Tokio Marine presented as evidence, not only the There is solidary liability only when the obligation expressly so states, when the
Honda Trading Insurance Policy, but also the Subrogation Receipt evidencing that it paid law so provides, or when the nature of the obligation so requires. 32 Thus, under Article
Honda Trading the sum of US$38,855.83 in full settlement of the latter’s claim under 2194 of the Civil Code, liability of two or more persons is solidary in  quasi-delicts. But in
Policy No. 83-00143689. During the trial, Keihin-Everett even had the opportunity to this case, Keihin-Everett’s liability to Honda Trading (to which Tokio Marine had been
examine the said documents and conducted a cross-examination of the said Contract of subrogated as an insurer) stemmed not from quasi-delict, but from its breach of contract
Insurance.21 By presenting the insurance policy constitutive of the insurance relationship of carriage. Sunfreight Forwarders was only impleaded in the case when Keihin-Everett
of the parties, Tokio Marine was able to confirm its legal right to recover as subrogee of filed a third-party complaint against it.
Honda Trading  
  No direct contractual relationship between Sunfreight Forwarders and Honda
2) YES. Trading. Accordingly, there was no basis to directly hold Sunfreight Forwarders liable to
  Honda Trading for breach of contract. If at all, Honda Trading can hold Sunfreight
The Agency Agreement shows that TMNFIC had subsequently changed its name Forwarders for quasi-delict,33 which is not the action filed in the instant case.
to that of Tokio Marine. 22 By agreeing to this stipulation in the Insurance Policy, Honda  
Trading binds itself to file its claim from Tokio Marine and thereafter to accept payment It is not expected however that Keihin-Everett must shoulder the entire loss.
from it. Keihin-Everett has a right to be reimbursed based on its Accreditation Agreement with
  Sunfreight Forwarders. By accrediting Sunfreight Forwarders to render common carrier
Even if we consider Tokio Marine as a third person who voluntarily paid the services to it, Keihin-Everett in effect entered into a contract of carriage with a fellow
insurance claims of Honda Trading, it is still entitled to be reimbursed of what it had common carrier, Sunfreight Forwarders.
paid. the insurer who may have no rights of subrogation due to “voluntary” payment may  
nevertheless recover from the third party responsible for the damage to the insured
property under Article 123624 of the Civil Code.
 
Article 2207 of the Civil Code as follows:
 
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
 
The Subrogation Receipt only proves the fact of payment. The right of
subrogation accrues simply upon payment by the insurance company of the insurance
claim.
 
Notwithstanding that the cargoes were in the possession of Sunfreight
Forwarders when they were hijacked, Keihin-Everett is not absolved from its liability as
a common carrier. Keihin-Everett seems to have overlooked that it was the one whose
services were engaged by Honda Trading to clear and withdraw the cargoes from the
pier and to transport and deliver the same to its warehouse. In turn, Keihin-Everett
accredited Sunfreight Forwarders to render common carrier service for it by
transporting inland goods.
 
There was no privity of contract between Honda Trading (to whose rights
Tokio Marine was subrogated) and Sunfreight Forwarders. Hence, Keihin-Everett, as the
common carrier, remained responsible to Honda Trading for the lost cargoes.
 
3) NO.
39
MERC REV: INSURANCE LAW
INDUSTRIAL PERSONNEL AND MANAGEMENT SERVICES, INC., Petitioner, vs.
COUNTRY BANKERS INSURANCE CORPORATION, Respondent.
G.R. No. 194126, October 17, 2018
Under the Insurance Code, all defects in the proof of loss, which the insured might
remedy, are waived as grounds for objection when the insurer omits to specify to him
without unnecessary delay.  be paid promptly.
FACTS:
In 2000, Industrial Personnel and Management Services, Inc. (IPAMS) began
recruiting registered nurses for work deployment in the United States of America (U.S.).
It takes eighteen (18) to twenty four (24) months for the entire immigration process to
complete. As the process requires huge amounts of money, such amounts are advanced
[to] the nurse applicants.
 
By reason of the advances made to the nurse applicants, the latter were
required to post surety bond. The purpose of the bond is to guarantee the following
during its validity period:  Due to the unwillingness of Country Bankers to settle the claims of IPAMS, the
a) that they will comply with the entire immigration process,  complaint.
b) that they will complete the documents required, and 
c) that they will pass all the qualifying examinations for the issuance of
immigration visa. 
The Country Bankers Insurance Corporation (Country Bankers for brevity) and
IPAMS agreed to provide bonds for the said nurses. Under the agreement of IPAMS and
Country Bankers, the latter will provide surety bonds and the premiums therefor were
paid by IPAMS on behalf of the nurse applicants.
The surety bonds issued specifically state that the liability of the surety
company, i.e., respondent Country Bankers, “shall be limited only to actual damages
arising from Breach of Contract by the applicant.”
A Memorandum of Agreement (MOA) was executed by the said parties on
February 1, 2002 [which stipulated the various requirements for collecting claims from
Country Bankers.
On the basis of the MOA, IPAMS submitted its claims under the surety bonds
issued by Country Bankers. For its part, Country Bankers, upon receipt of the documents
enumerated under the MOA, paid the claims to IPAMS. According to IPAMS, starting
2004, some of its claims were not anymore settled by Country Bankers.
In 2004, Country Bankers was not able to pay six (6) claims of IPAMS. The
claims were not denied by Country Bankers, which instead asked for time within which
to pay the claims, as it alleged to be cash strapped at that time. Thereafter, the number of
unpaid claims increased.
IPAMS took the matter up with the General Manager of Country Bankers, Mr.
Ignacio Ong (Ong). In response, Country Bankers, through its letter acknowledged the
40
obligations of Country Bankers, apologized for the delay in the payment of claims, and
proposed to amortize the settlement of claims by paying a semi-monthly amount of
P850,000.00. In addition, Country Bankers promised to pay future claims within a ninety
(90)-day period. That commitment made by Country Bankers was not fulfilled and
IPAMS had to deal with Country Bankers’ new General Manager, Ms. Tess Valeriano
(Valeriano). Ms. Valeriano assured IPAMS that the obligations of Country Bankers would
However, the counsel of Country Bankers, Atty. Marisol Caleja, started to
oppose the payment of claims and insisted on the production of official receipts of IPAMS
on the expenses it incurred for the application of nurses.
IPAMS opposed this, saying that the Country Bankers’ insistence on the
production of official receipts was contrary to, and not contemplated in, the MOA and
was an impossible condition considering that the U.S. authorities did not issue official
receipts. In lieu of official receipts, IPAMS submitted statements of accounts, as provided
in the MOA.
latter sought the intervention of the Insurance Commission (IC) through a letter-
INSURANCE COMMISSION
“IN VIEW OF THE FOREGOING, this Commission believes and so holds that
there is no ground for the refusal of CBIC to pay the claims of IPAMS. Its failure to settle
the claim after having entered into an Agreement with the complainant, IPAMS,
demonstrates respondent’s Insurance bad faith in the fulfillment of their obligation, to the
prejudice of the complainant.
Accordingly, we find the insurance company liable to settle the subject claim
otherwise, this Commission shall be constrained to take disciplinary action pursuant to
Sections 241 and 247 of the Insurance Code, as amended.”
Country Bankers made an appeal before the [DOF].
DOF
The [DOF] decided to affirm the assailed orders of the [IC].
OP
On appeal to the [OP], the ruling of the [DOF] was affirmed.
CA
The CA held that respondent Country Bankers was justified in delaying the
payment of the claims to petitioner IPAMS because of the purported lack of submission
by petitioner IPAMS of official receipts and other “competent proof on the expenses
incurred by petitioner IPAMS in its recruitment of nurse applicants. 
MERC REV: INSURANCE LAW
ISSUE:
W/N Country Bankers has a ground to refuse the payment of petitioner IPAMS’
claims and shall accordingly be subjected to disciplinary action pursuant to Sections 241
(now Section 247) and 247 (now Section 254) of the Insurance Code if the latter does not
settle the subject claims of petitioner IPAMS.
RULING:
The appeal is partly meritorious.
 
The submission of official receipts and other pieces of evidence as a
prerequisite for the payment of claims is excused by stipulation of the parties; and
in lieu thereof, the presentation of statement of accounts with detailed expenses,
demand letters, and affidavits is, by express stipulation, sufficient evidence for the
payment of claims.
To reiterate, Article 2199 of the Civil Code explicitly provides that the
prerequisite of proof for the recovery of actual damages is not absolute.
In the instant case, it is not disputed by any party that in the MOA entered into
by the petitioner IPAMS and respondent Country Bankers, the parties expressly agreed
upon a list of requirements to be fulfilled by the petitioner in order to claim from
respondent Country Bankers under the surety bond.
 
Hence, it is crystal clear that the petitioner IPAMS and respondent Country
Bankers, by express stipulation, agreed that in order for the former to have a valid
claim under the surety bond, the only requirements that need to be submitted are the
two demand letters, an Affidavit stating reason of any violation to be executed by
responsible officer of the Recruitment Agency, a Statement of Account detailing the
expenses incurred, and the Transmittal Claim Letter. Evidently, the parties did not
include as preconditions for the payment of claims the submission of official
receipts or any other more direct or concrete piece of evidence to substantiate the
expenditures of petitioner IPAMS.
Under the Insurance Code, all defects in the proof of loss, which the insured
might remedy, are waived as grounds for objection when the insurer omits to specify
to him without unnecessary delay.  While not denying the existence of the said letter, respondent Country Bankers
The subject agreement of the parties indubitably contemplates a surety
agreement, which is governed mainly by the Insurance Code, considering that a contract
of suretyship shall be deemed an insurance contract within the contemplation of the
Insurance Code if made by a surety which is doing an insurance business.
In this case, the surety, i.e., respondent Country Bankers, is admittedly an
insurance company engaged in the business of insurance. In fact, the CA itself in its
assailed Decision mentioned that a contract of suretyship is defined and covered by the
Insurance Code.
41
Moreover, the Insurance Code specifically provides applicable provisions on
suretyship, stating that pertinent provisions of the Civil Code shall only
apply suppletorily whenever necessary in interpreting the provisions of a contract of
suretyship.
Hence, in the resolution of the instant case, the CA erred in not considering the
applicable provisions under the Insurance Code on the required proof of loss and when
such requirement is waivable.
Therefore, Section 92 of the Insurance Code must be taken into consideration.
The said provision states that all defects in the proof of loss, which the insured might
remedy, are waived as grounds for objection when the insurer omits to specify to him
without unnecessary delay. It is the duty of the insurer to indicate the defects on the
proofs of loss given, so that the deficiencies may be supplied by the insured. When the
insurer recognizes his liability to pay the claim, there is waiver by the insurer of any
defect in the proof of loss.
In the instant case, it must be emphasized that respondent Country Bankers,
through its General Manager, Mr. Ong, issued a letter dated November 14, 2005 which
readily acknowledged the obligations of Country Bankers under the surety agreement,
apologized for the delay in the payment of claims, and proposed to amortize the
settlement of claims by paying a semi-monthly amount of P850,000.00. In addition,
Country Bankers promised to pay future claims within a 90-day period.
It bears stressing that respondent Country Bankers, after undergoing an
evaluation of the total number of claims of petitioner IPAMS, undertook the settlement of
such claims even WITHOUT the submission of official receipts.
 
In fact, respondent Country Bankers raised up the issue on the missing official
receipts and other evidence to prove the expenses incurred by petitioner IPAMS only
when the latter requested the intervention of the IC in 2007. If respondent Country
Bankers truly believed that the submission of official receipts was critical in providing
proof as to petitioner IPAMS’ claims, then it would have raised the issue on the lack of
official receipts at the earliest possible opportunity. This only shows that the argument of
respondent Country Bankers on the lack of official receipts was a mere afterthought to
evade its obligation to pay the claims presented by petitioner IPAMS.
 
attempts to downplay it by arguing that the claims covered by the letter and the claims
raised by petitioner IPAMS before the IC are different and distinct from each other. Such
argument deserves scant consideration.
 
For the foregoing reasons, the ruling of the CA, which sets aside the rulings of
the IC, DOF, and OP, which found that respondent Country Bankers has no ground to
refuse the payment of petitioner IPAMS’ claims and shall accordingly be subjected to
disciplinary action pursuant to Sections 241 (now Section 247) and 247 (now Section
254) of the Insurance Code if the latter does not settle the subject claims of petitioner
IPAMS, should be reversed.
MERC REV: INSURANCE LAW
Be that as it may, despite the reversal of the CA’s assailed Decision, petitioner
IPAMS’ prayers for (1) the suspension/revocation of the license of respondent Country
Bankers due to its commission of an unfair claim settlement practice for unreasonable
delay in paying petitioner IPAMS’ claim for the total amount of P21,230,643.19; (2)
awarding of a total amount of P21,230,643.19 and 20% thereof; and (3) awarding of
moral and exemplary damages, as well as attorney’s fees and judicial costs, are denied.
 
It must be stressed that the instant case resolved by the Court is not a claims
adjudication case. The subject Resolution and Order of the IC that was concurred in by
the DOF and OP, which the Court now reinstates, were issued in the IC’s capacity as a
regulator and not as an adjudicator of claims, as admitted by the IC itself. Hence, while
the Court herein reinstates the IC’s Resolution finding that disciplinary action is
warranted in the eventuality that respondent Country Bankers continues to delay
settling the claims of petitioner IPAMS, the matter should be referred back to the IC so
that it could determine the remaining amount and extent of the liability that should be
settled by respondent Country Bankers in order to avoid the IC’s disciplinary action.

42
MERC REV: INSURANCE LAW
MILAGROS ENRIQUEZ vs. THE MERCANTILE INSURANCE CO.
G.R. No. 210950, August 15, 2018, LEONEN, J.
FACTS:
Enriquez filed a replevin case against Asuten for the recovery of the Toyota Hi-
Ace van valued at P300,000.00. She applied for an Indemnity Agreement in the amount of
P600,000.00 with Mercantile Insurance in Asuten’s favor until February 24, 2004. The
Regional Trial Court approved the bond and ordered the sheriff to recover the van from
Asuten and to deliver it to petitioner. While the van was in Enriquez’ custody, the
Regional Trial Court dismissed the case without prejudice for failure to prosecute. Thus,
it ordered the sheriff to restore the van to Asuten. When Enriquez failed to produce the
van, the RTC directed respondent to pay Asuten the amount of the bond. 
On July 2004, the RTC ordered Mercantile Insurance to pay Asuten the amount
of the bond despite the expiry of the bond. After paying Asuten on September 2004,
Mercantile Insurance requested Enriquez to remit the 600k but she failed to do so.
Hence, Mercantile Insurance filed a collection suit against Enriquez in the RTC of Manila.
whom a writ of replevin was issued and such judgment includes the return of the
property to him. 
A contract of insurance is, by default, a contract of adhesion. It is prepared by the
insurance company and might contain terms and conditions too vague for a layperson to
understand; hence, they are construed liberally in favor of the insured.
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. As it is also a contract of adhesion, an insurance contract should be liberally
construed in favor of the insured and strictly against the insurer company which usually
prepares it.
Respondent, however, does not seek to recover an amount which exceeds the
amount of the bond or any damages, payments, advances, losses, costs, taxes, penalties,
charges, attorney’s fees and expenses of whatever kind and nature, all of which it could
have sought under the Indemnity Agreement. It only seeks to recover from petitioner the
amount of the bond, or P600,000.00. 

Enriquez’ Defense
In her defense, she argued she cannot be liable since the bond had already
expired. Furthermore, she argued that the Indemnity Agreement was a contract of
adhesion since respondent made the extent of liability “so comprehensive and all-
encompassing to the point of being ambiguous.”  It is clear from the antecedents that any losses which petitioner has suffered
RTC and CA’s Ruling
The RTC ruled in favor of Mercantile Insurance after finding that Enriquez had
not yet paid the premiums hence causing the replevin bond not to expire. Thus, Enriquez
was still liable for reimbursement made by the surety on the bond. 
Respondent paid P600,000.00 to Asuten pursuant to a lawful order of the RTC.
If there were any errors in the judgment, Enriquez could have appealed this. However,
she chose to let the civil case lapse into finality. This case cannot now be used as a
substitute for her lost appeal. 
were due to the consequences of her actions, or more accurately, her inactions. The civil
case which she filed was dismissed due to her failure to prosecute. The RTC forfeited the
replevin bond which she had filed because she refused to return the property. She is now
made liable for the replevin bond because she failed to appeal its forfeiture.

On appeal, she reiterated her defense that the bond had already expired. Also,
even assuming that she is liable under the indemnity agreement, she should not pay the
full amount considering the value of the van is only 300k. The CA affirmed the decision of
the RTC.

ISSUE:

Whether or not Enriquez should be made liable for the full amount of the bond
paid by The Mercantile Insurance Co., Inc. as surety, in relation to a previous case for
replevin filed by petitioner. 

RULING:

YES. A replevin bond is intended to indemnify the defendant against any loss
that he may suffer by reason of its being compelled to surrender the possession of the
disputed property pending trial of the action. The same may also be answerable for
damages if any when judgment is rendered in favor of the defendant or the party against

43
MERC REV: INSURANCE LAW
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LIMITED,
Petitioner, vs. SULPICIO LINES, INC. Respondent.
GR. No. 196072, September 20, 2017, LEONEN, J.
An insured member may be compelled to arbitration pursuant to the Rules of the
Protection and Indemnity Club, which were incorporated in the insurance policy by
reference. Where there are multiple parties, the court must refer to arbitration the parties
covered by the agreement while proceeding with the civil action against those who were
not bound by the arbitration agreement.
FACTS:
Steamship was a Bermuda-based Protection and Indemnity Club, managed
outside London, England. It insures its members-shipowners against “third party risks
and liabilities” for claims arising from (a) death or injury to passengers; (b) loss or
damage to cargoes; and (c) loss or damage from collisions.
Sulpicio insured its fleet of inter-island vessels with Steamship for Protection &
Indemnity risks through local insurance Pioneer Insurance. One (1) of these vessels was
the M/V Princess of the World, evidenced by a Certificate of Entry and Acceptance issued
by Steamship.
M/V Princess of the World was gutted by fire while on voyage from Iloilo to
Zamboanga City, resulting in total loss of its cargoes. The fire incident was found by the
Department of Interior and Local Government to be “accidental” in nature.
Sulpicio claimed indemnity from Steamship under the Protection & Indemnity insurance
policy. Steamship denied the claim and subsequently rescinded the insurance coverage
of Sulpicio’s other vessels on the ground that “Sulpicio was grossly negligent in
conducting its business regarding safety, maintaining the seaworthiness of its vessels as
well as proper training of its crew.”
Sulpicio thus filed a Complaint with the Regional Trial Court of Makati City
against Steamship and its local insurance agents Pioneer Insurance for specific
performance and damages.
Steamship filed its Motion to Dismiss and/or to Refer Case to
Arbitration pursuant to the Alternative Dispute Resolution Act of 2004 (ADR Law), and
to Rule 47 of the 2005/2006 Club Rules, which supposedly provided for arbitration in
London of disputes between Steamship and its members.
Regional Trial Court, Makati City denied the motions to dismiss holding that
“arbitration did not appear to be the most prudent action, considering that the other
defendants had already filed their respective answers.” Steamship filed its Motion for
Reconsideration, but it was likewise denied.
Steamship assailed trial court orders before the Court of Appeals through a
Rule 65 Petition. The Court of Appeals dismissed the petition.
44
Steamship filed before this Court this Petition for Review, docketed as G.R. No.
196072. On the other hand, Sulpicio filed with this Court a Petition for Indirect
Contempt under Rule 71 of the Rules of Court against Steamship. This Petition was
docketed as GR. No. 208603.
SULPICIO ALLEGES that sometime in September 2012, it settled its judgment
liability of P4,121,600.00 in Civil Case No. CEB-24783, entitled Verna Unabia v. Sulpicio
Lines, Inc.[34] However, the actual amount reimbursed by Steamship was only
US$27,387.48. Steamship deducted US$69,570.99, which allegedly represented Sulpicio’s
share in the arbitration costs for the arbitration in London of the dispute.
SULPICIO ACCUSES Steamship of indirect contempt for its “improper conduct
tending directly, or indirectly, to impede, obstruct, or degrade the administration of
justice”. Sulpicio averred that without Sulpicio’s knowledge or consent, and more
importantly, without the prior approval of this Honorable Court, Steamship initiated and
“concluded” said London “arbitration” during the pendency of this G.R. No. 196072
and before this Honorable Court could render its ruling or decision.
STEAMSHIP ARGUES that a referral of the case to arbitration is imperative
pursuant to the mandates of Republic Act No. 9285 or the ADR Law. Steamship further
submits that “a Philippine court is an inconvenient forum to thresh out the issues
involved in Sulpicio’s claim.” Thus, on the basis of the doctrine of forum non
conveniens alone, Steamship contends that the claim against it should be referred to
arbitration in London.
SULPICIO COUNTERS that the Court of Appeals was correct in ruling that there
was no arbitration agreement between the parties. The arbitration clause in the
2005/2006 Club Rules is not valid and binding for failure to comply with Section 4 of the
ADR Law, which requires that an arbitration agreement be in writing and subscribed by
the parties or their lawful agent. Sulpicio further contends that the Certificate of Entry
and Acceptance did not provide for arbitration as a mode of dispute resolution, that the
rules referred to was not particularly identified or described, and that it never received a
copy of the Club Rules.
ISSUES:
1) Whether or not there is a valid and binding arbitration agreement between
Steamship Mutual Underwriting (Bermuda) Limited and Sulpicio Lines, Inc. (YES)
2) Whether or not Sulpicio Lines, Inc.’s complaint should be referred to arbitration in
London in accordance with the 2005/2006 Club Rules. (YES)
RULING:
1) The contract between Sulpicio and Steamship is more than a contract of
insurance between a marine insurer and a shipowner. By entering its vessels in
Steamship, Sulpicio not only obtains insurance coverage for its vessels but also
becomes a member of Steamship.
A protection and indemnity club, like Steamship, is an association composed of
shipowners generally formed for the specific purpose of providing insurance cover
against third-party liabilities of its members. A protection and indemnity club is a mutual
MERC REV: INSURANCE LAW
insurance association, described in White Gold Marine Services, Inc. v. Pioneer Insurance
and Surety Corp. as follows:
A mutual insurance company is a cooperative enterprise
where the members are both the insurer and insured. In it, the
members all contribute, by a system of premiums or assessments, to
the creation of a fund from which all losses and liabilities are paid, and
where the profits are divided among themselves, in proportion to their
interest. Additionally, mutual insurance associations, or clubs, provide
three types of coverage, namely, protection and indemnity, war risks,
and defense costs.
Thus, a contract of insurance is perfected between the parties upon Steamship’s
issuance of the Certificate of Entry and Acceptance.
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
contract, to be binding from the date of 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.
Sulpicio’s acceptance of the Certificate of Entry and Acceptance manifests its
acquiescence to all its provisions. There is no showing in the records or in Sulpicio’s
contentions that it objected to any of the terms in this Certificate. Its acceptance,
likewise, operated as an acceptance of the entire provisions of the Club Rules.
When a contract is embodied in two (2) or more writings, the writings of the
parties should be read and interpreted together in such a way as to render their
intention effective.
The Club Rules contain the terms and conditions of the relationship between
the Steamship and its members including the scope, nature, and extent of insurance
coverage of its members’ vessels.
Under Rule 47, any dispute concerning the insurance afforded by Steamship
must first be brought by a claiming member to the Directors for adjudication. If this
member disagrees with the decision of the Director, the dispute must be referred to
arbitration in London. Despite the member’s disagreement, the Managers of Steamship
may refer the dispute to arbitration without adjudication of the Directors. This
procedure must be complied with before the member can pursue legal proceedings
against Steamship.
There is no ambiguity in the terms and clauses of the Certificate of Entry
Acceptance. “[W]hen the text of a contract is explicit and leaves no doubt as to its
intention, the court may not read into it any other intention that would contradict its
plain import.”
45
The incorporation of the Club Rules in the insurance policy is without any
qualification. This includes the arbitration clause even if not particularly stipulated. A
basic rule in construction is that the entire contract, and each and all of its parts, must be
read together and given effect, with all its clauses and provisions harmomonized with
one another.
2) The Court of Appeals ruled that the arbitration agreement in the 2005/2006
Club Rules is not valid because it was not signed by the parties.
In domestic arbitration, the formal requirements of an arbitration agreement
are that it must “be in writing and subscribed by the party sought to be charged, or by his
lawful agent.” In international commercial arbitration, [152] it is likewise required that the
arbitration agreement must be in writing.
In BF Corp. v. Court of Appeals, this Court held a contract need not be contained
in a single writing. It may be collected from several different writings which do not
conflict with each other and which, when connected, show the parties, subject matter,
terms and consideration, as in contracts entered into by correspondence. A contract
may be encompassed in several instruments even though every instrument is not
signed by the parties, since it is sufficient if the unsigned instruments are clearly
identified or referred to and made part of the signed instrument or instruments. 
Thus, an arbitration agreement that was not embodied in the main agreement
but set forth in another document is binding upon the parties, where the document was
incorporated by reference to the main agreement. The arbitration agreement contained
in the Club Rules, which in turn was referred to in the Certificate of Entry and
Acceptance, is binding upon Sulpicio even though there was no specific stipulation on
dispute resolution in this Certificate.
Furthermore, as stated earlier, Sulpicio became a member of Steamship by the
very act of making a contract of insurance with it. The Certificate of Entry and
Acceptance issued by Steamship states that “its name has been entered in the Register of
Members of the Club as a Member.” Sulpicio admits its membership and the entry of its
vessels to Steamship.
The Regional Trial Court should suspend proceedings to give way to
arbitration. Even if there are other defendants who are not parties to the arbitration
agreement, arbitration is still proper.
Section 25 of Republic Act No. 9285 is explicit that: Where action is commenced
by or against multiple parties, one or more of whom are parties to an arbitration
agreement, the court shall refer to arbitration those parties who are bound by the
arbitration agreement although the civil action may continue as to those who are not
bound by such arbitration agreement.
WHEREFORE, the Petition for Review in G.R. No. 196072 is GRANTED. The
Decision dated November 26, 2010 of the Court of Appeals in CA-G.R. SP No. 106103 and
the Order dated July 11, 2008 of the Regional Trial Court, Branch 149, Makati City in Civil
Case No. 07-577 are SET ASIDE. The dispute between Sulpicio Lines, Inc. and Steamship
MERC REV: INSURANCE LAW
Mutual Underwriting (Bermuda) Limited is referred to arbitration in London in
accordance with Rule 47 of the 2005/2006 Club Rules.

46
MERC REV: INSURANCE LAW
EQUITABLE INSURANCE CORPORATION, Petitioner, v. TRANSMODAL
INTERNATIONAL, INC., Respondent.
G.R. No. 223592, SECOND DIVISION, August 07, 2017, PERALTA, J.
FACTS:
Sytengco Enterprises Corporation (Sytengco) hired respondent Transmodal
International, Inc. (Transmodal) to clear from the customs authorities and withdraw,
transport, and deliver to its warehouse, cargoes consisting of 200 cartons of gum Arabic
with a total weight of 5,000 kilograms.
When, respondent Transmodal withdrew the same cargoes and delivered them
to Sytengco’s warehouse. It was noted in the delivery receipt that all the containers were
wet.
In a preliminary survey conducted by Elite Adjusters and Surveyors, Inc. (Elite
Surveyors), it was found that 187 cartons had water marks and the contents of the 13
wet cartons were partly hardened.  note.
Thus, Sytengco demanded from respondent Transmodal compensation for total
loss of shipment. Petitioner Equitable Insurance, as insurer of the cargoes per Marine
Open Policy No. paid Sytengco’s claim. Sytengco then signed a subrogation receipt and
loss receipt in favor of petitioner Equitable Insurance. As such, petitioner Equitable
Insurance demanded from respondent Transmodal reimbursement of the payment given
to Sytengco.
Thereafter, petitioner Equitable Insurance filed a complaint for damages
invoking its right as subrogee after paying Sytengco’s insurance claim and averred that
respondent Transmodal’s fault and gross negligence were the causes of the damages
sustained by Sytengco’s shipment.  that petitioner has the right to step into the shoes of the insured who has a direct cause
Respondent Transmodal denied knowledge of an insurance policy and claimed that
petitioner Equitable Insurance has no cause of action against it because the damages to
the cargoes were not due to its fault or gross negligence. According to the same
respondent, the cargoes were not immediately receive and as a result, the cargoes got
wet due to the rain that occurred on the night. Respondent Transmodal also questioned
the timeliness of Sytengco’s formal claim for payment which was allegedly made more
than 14 days from the time the cargoes were placed at its disposal in contravention of
the stipulations in the delivery receipts.
The RTC, found in favor of petitioner Equitable Insurance.
The CA reversed the RTC’s decision. Accordingly, Equitable Insurance Corp.’s
complaint is DISMISSED for failure to prove cause of action.
According to the CA, there was no proof of insurance of the cargoes at the time
of the loss and that the subrogation was improper. Also, insurance contract was neither
attached in the complaint nor offered in evidence for the perusal and appreciation of the
RTC, and what was presented was just the marine risk note.
47
Hence, the present petition
ISSUE:
Whether petitioners subrogation right is improper.
RULING.
NO. In ruling that petitioner’s subrogation right is improper, the CA stated that
it found no proof of insurance of the cargoes at the time of their loss. It also found that
what was presented in court was the marine risk note and not the insurance contract or
policy, 
Other documentary evidence submitted by Equitable Insurance such as the
preliminary and final report clearly shows that the claims for damages and subrogation
were based on Policy No. MN-MRN-HO-0005479. However, said insurance contract was
neither attached in the complaint nor offered in evidence for the perusal and
appreciation of the court a quo. Instead, Equitable Insurance presented the marine risk
As such, according to the CA, the case of Eastern Shipping Lines, Inc. v.
Prudential Guarantee and Assurance, Inc.10 is applicable, wherein this Court held that a
marine risk note is not an insurance policy. The CA also found applicable this Court’s
ruling in Malayan Insurance Co., Inc. v. Regis Brokerage Corp.,11 stating that a marine
policy is constitutive of the insurer-insured relationship, thus, such document should
have been attached to the complaint as mandated by Section 7,12 Rule 8 of the Rules of
Court.
The supreme court held that, records show that respondent was able to cross-
examine petitioner’s witness regarding the said documents. Thus, it was well established
of action against herein respondent on account of the damages sustained by the cargoes.
“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.”
If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract.
Here 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.
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
MERC REV: INSURANCE LAW
Corp., 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.

In Delsan Transport Lines, Inc. v. CA, 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 

In view thereof, the RTC did not err in its ruling, in the instant case, plaintiff
submitted the copy of the insurance contract. In fact, the non-presentation of the
insurance contract is not fatal to its cause of action.

To reiterate, in this case, petitioner was able to present as evidence the marine
open policy that vested upon it, its rights as a subrogee. 

WHEREFORE, the Petition for Review on Certiorari under Rule 45 of the Rules
of Court, dated May 11, 2016, of petitioner Equitable Insurance Corporation is
GRANTED. 

48
MERC REV: INSURANCE LAW
MEDICARD PHILIPPINES, INC. v. CIR
G.R. No. 222743, April 5, 2017
The main difference between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical services through participating
physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit.
FACTS:
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid
health and medical insurance coverage to its clients. Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by duly licensed physicians, specialists
and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and
October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007.
Upon finding some discrepancies between MEDICARD’s Income Tax Returns
(ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No.
122-VT-06-00-00020 dated September 20, 2007. Subsequently, the CIR also issued a
Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum dated December 10, 2007 was likewise issued recommending the
issuance of a Formal Assessment Notice (FAN) against MEDICARD.
On January 4, 2008, MEDICARD received CIR’s FAN dated December 10, 2007
for alleged deficiency VAT for taxable year 2006 in the total amount of
P196,614,476.69, inclusive of penalties.
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No.
16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.,
the CIR argued that since MEDICARD does not actually provide medical and/or hospital
services, but merely arranges for the same, its services are not VAT exempt.
PETITIONER’S ARGUMENT
MEDICARD argues that the CIR erred in stating that the gross receipts of an
HMO for VAT purposes shall be the total amount of money or its equivalent actually
received from members undiminished by any amount paid or payable to the
owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD
explains that its business as an HMO involves two different although interrelated
contracts. One is between a corporate client and MEDICARD, with the corporate client’s
employees being considered as MEDICARD members; and the other is between the
healthcare institutions/healthcare professionals and MEDICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members under
49
specific health related services for a specified period of time in exchange for payment of a
more or less fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per individual,
regardless of the amount involved, already includes the VAT of 10%/20% excluding the
remaining 80% because MEDICARD would earmark this latter portion for medical
utilization of its members
CTA- affirmed the CIR’s deficiency VAT assessment
CTA en banc- partially granted the petition only insofar as the 10% VAT rate for January
2006 is concerned but sustained the findings of the CTA Division in all other matters
ISSUE:
Whether or not MEDICARD is engaged in the business of insurance and
therefore its services are not VAT exempt.
RULING:
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, the
Court adopted the principal object and purpose object in determining whether the
MEDICARD therein is engaged in the business of insurance and therefore liable for
documentary stamp tax. The Court held therein that an HMO engaged in preventive,
diagnostic and curative medical services is not engaged in the business of an insurance,
thus:
To summarize, the distinctive features of the cooperative are the
rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of
service as well as payment, the substantial reduction in cost by
quantity purchasing in short, getting the medical job done and
paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the
last, these are not distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a substantial difference
between contracting in this way for the rendering of service, even on
the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.
In sum, the Court said that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit.
As an HMO, MEDICARD primarily acts as an intermediary between the
purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MEDICARD, its
members will be able to avail of the pre-arranged medical services from its accredited
MERC REV: INSURANCE LAW
healthcare providers without the necessary protocol of posting cash bonds or deposits
prior to being attended to or admitted to hospitals or clinics, especially during
emergencies, at any given time. Apart from this, MEDICARD may also directly provide
medical, hospital and laboratory services, which depends upon its member’s choice.

Thus, in the course of its business as such, MEDICARD members can either avail
of medical services from MEDICARD’s accredited healthcare providers or directly from
MEDICARD. In the former, MEDICARD members obviously knew that beyond the
agreement to pre-arrange the healthcare needs of its members, MEDICARD would not
actually be providing the actual healthcare service. Thus, based on industry practice,
MEDICARD informs its would-be member beforehand that 80% of the amount would be
earmarked for medical utilization and only the remaining 20% comprises its service
fee.It is, thus, this service and the value charged thereof by the taxpayer that is taxable
under the NIRC.

In the latter case, MEDICARD’s sale of its services is exempt from VAT under
Section 109(G).

50
MERC REV: INSURANCE LAW
JAIME T. GAISANO vs. DEVELOPMENT INSURANCE AND SURETY CORPORATION
G.R. No. 190702. February 27, 2017. THIRD DIVISION. JARDELEZA, J.
 
The general rule in insurance laws is that unless the premium is paid, the
insurance policy is not valid and binding. The notice of the availability of the check, by
itself, does not produce the effect of payment of the premium.
FACTS:
On September 27, 1996, respondent development insurance issued a
comprehensive commercial vehicle policy to petitioner in the amount of ₱1,500,000.00
over his 1992 Mitsubishi Montero vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997.  loss on September 27, but only a day after or on September 28, 1996, when the check
 
To collect the premiums and other charges on the policies, respondent’s agent,
Trans-Pacific Underwriters Agency (Trans-Pacific), issued a statement of account to
petitioner’s company, Noah’s Ark Merchandising (Noah’s Ark). Noah’s Ark immediately
processed the payments and issued a Far East Bank check dated September 27, 1996
payable to Trans-Pacific on the same day. The check bearing the amount of ₱140,893.50
represents payment for the three insurance policies, with ₱55,620.60 for the premium
and other charges over the vehicle. However, nobody from Trans-Pacific picked up the
check that day (September 27) because its president and general manager, Rolando
Herradura, was celebrating his birthday. Trans-Pacific informed Noah’s Ark that its
messenger would get the check the next day, September 28.  contract of insurance to be immediately effective upon issuance, despite non-payment of
 
In the evening of September 27, 1996, while under the official custody of Noah’s
Ark marketing manager Achilles Pacquing (Pacquing) as a service company vehicle, the
vehicle was stolen in the vicinity of SM Megamall at Ortigas, Mandaluyong City.  ISSUE:
Oblivious of the incident, Trans-Pacific picked up the check the next day,
September 28. It issued an official receipt numbered 124713 dated September 28, 1996,
acknowledging the receipt of ₱55,620.60 for the premium and other charges over the
vehicle. The check issued to Trans-Pacific for ₱140,893.50 was deposited with
Metrobank for encashment on October 1, 1996. 
 
On October 1, 1996, Pacquing informed petitioner of the vehicle’s loss.
Thereafter, petitioner reported the loss and filed a claim with respondent for the
insurance proceeds of ₱1,500,000.00. After investigation, respondent denied petitioner’s
claim on the ground that there was no insurance contract. Petitioner, through counsel,
sent a final demand on July 7, 1997. Respondent, however, refused to pay the insurance
proceeds or return the premium paid on the vehicle.
 
On October 9, 1997, petitioner filed a complaint for collection of sum of
money and damages with the RTC where it sought . to collect the insurance proceeds
from respondent. In its Answer, respondent asserted that the non-payment of the
premium rendered the policy ineffective. The premium was received by the respondent
only on October 2, 1996, and there was no known loss covered by the policy to which the
payment could be applied.  soon as the thing insured is exposed to the peril insured against.
 
Ruling of the RTC
51
RTC ruled in favor of petitioner. It considered the premium paid as of
September 27, even if the check was received only on September 28 because (1)
respondent’s agent, Trans-Pacific, acknowledged payment of the premium on that date,
September 27, and (2) the check that petitioner issued was honored by respondent in
acknowledgment of the authority of the agent to receive it.
Ruling of the CA
The CA granted respondent’s appeal.   The CA upheld respondent’s position
that an insurance contract becomes valid and binding only after the premium is paid
pursuant to Section 77 of the Insurance Code (Presidential Decree No. 612, as amended
by Republic Act No. 10607). It found that the premium was not yet paid at the time of the
was picked up by Trans-Pacific. It also found that none of the exceptions to Section 77
obtains in this case. 
Petitioner’s Contention
He argues that there was a valid and binding insurance contract between him
and respondent. He submits that it comes within the exceptions to the rule in Section 77
of the Insurance Code that no contract of insurance becomes binding unless and until the
premium thereof has been paid. The prohibitive tenor of Section 77 does not apply
because the parties stipulated for the payment of premiums. The parties intended the
the premium, because respondent trusted petitioner. He adds that respondent waived its
right to a pre-payment in full of the terms of the policy, and is in estoppel.
Whether or not there was a binding insurance contract between petitioner and
respondent. (NO)
 
RULING:
Insurance is a contract whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or
contingent event. Just like any other contract, it requires a cause or consideration. The
consideration is the premium, which must be paid at the time and in the way and manner
specified in the policy. If not so paid, the policy will lapse and be forfeited by its own
terms. 
 
The law, however, limits the parties’ autonomy as to when payment of premium
may be made for the contract to take effect. The general rule in insurance laws is that
unless the premium is paid, the insurance policy is not valid and binding. Section 77 of
the Insurance Code, applicable at the time of the issuance of the policy, provides:
 
Sec. 77. An insurer is entitled to payment of the premium as
Notwithstanding any agreement to the contrary, no policy or contract
of insurance issued by an insurance company is valid and binding
MERC REV: INSURANCE LAW
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.
 
Here, there is no dispute that the check was delivered to and was accepted
by respondent’s agent, Trans-Pacific, only on September 28, 1996. No payment of
premium had thus been made at the time of the loss of the vehicle on September 27,
1996. While petitioner claims that Trans-Pacific was informed that the check was
ready for pick-up on September 27, 1996, the notice of the availability of the check,
by itself, does not produce the effect of payment of the premium. Trans-Pacific could
not be considered in delay in accepting the check because when it informed petitioner
that it will only be able to pick-up the check the next day, petitioner did not protest to
this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there was no
payment of premium yet to make the insurance policy effective.
 
In UCPB General Insurance Co., Inc.,  we summarized the exceptions as follows:
(1) in case of life or industrial life policy, whenever the grace period provision applies, as
expressly provided by Section 77 itself; (2) where the insurer acknowledged in the policy
or contract of insurance itself the receipt of premium, even if premium has not been
actually paid, as expressly provided by Section 78 itself; (3) where the parties agreed
that premium payment shall be in installments and partial payment has been made at the
time of loss, as held in Makati Tuscany Condominium Corp. v. Court of Appeals; (4) where
the insurer granted the insured a credit term for the payment of the premium, and loss
occurs before the expiration of the term, as held in Makati Tuscany Condominium
Corp.; and (5) where the insurer is in estoppel  as when it has consistently granted a 60 to
90-day credit term for the payment of premiums.
 
Petitioner argues that his case falls under the fourth and fifth exceptions
because the parties intended the contract of insurance to be immediately effective upon
issuance, despite non-payment of the premium. This waiver to a pre-payment in full of
the premium places respondent in estoppel.
 
We do not agree with petitioner.
 
The fourth and fifth exceptions to Section 77 operate under the facts obtaining
in Makati Tuscany Condominium Corp. and UCPB General Insurance Co., Inc. Both
contemplate situations where the insurers have consistently granted the insured a credit
extension or term for the payment of the premium. Here, however, petitioner failed to
establish the fact of a grant by respondent of a credit term in his favor, or that the
grant has been consistent. While there was mention of a credit agreement between
Trans-Pacific and respondent, such arrangement was not proven and was internal
between agent and principal. Under the principle of relativity of contracts, contracts
bind the parties who entered into it. It cannot favor or prejudice a third person, even if he
is aware of the contract and has acted with knowledge.  The RTC granted CISC’s application for issuance of a writ of preliminary
WHEREFORE, the petition is DENIED.  on the part of the defendant MSAPL in their performance of their obligation to the
 
52
COMMUNICATION AND INFORMATION SYSTEMS CORPORATION,
Petitioner,  vs. MARK SENSING AUSTRALIA PTY. LTD., MARK SENSING PHILIPPINES,
INC. and OFELIA B. CAJIGAL, Respondents.
G.R. No. 192159, THIRD DIVISION, January 25, 2017, JARDELEZA,  J.
A contract of reinsurance is one by which an insurer (the “direct insurer” or
“cedant”) procures a third person (the “reinsurer”) to insure him against loss or liability by
reason of such original insurance.  It is a separate and distinct arrangement from the
original contract of insurance, whose contracted risk is insured in the reinsurance
agreement. The reinsurer’s contractual relationship is with the direct insurer, not the
original insured, and the latter has no interest in and is generally not privy to the contract
of reinsurance.
The requirement under Section 4, Rule 57 of the Rules of Court  that the
applicant’s bond be executed to the adverse party necessarily pertains only to the
attachment bond itself and not to any underlying reinsurance contract. With or without
reinsurance, the obligation of the surety to the party against whom the writ of attachment
is issued remains the same.
FACTS:
Petitioner Communication and Information Systems Corporation (CISC) and
respondent Mark Sensing Australia Pty. Ltd. (MSAPL) entered into a Memorandum of
Agreement (MOA) whereby MSAPL appointed CISC as “the exclusive AGENT of MSAPL to
PCSO during the lifetime of the recently concluded Memorandum of Agreement (i.e.,
thermal paper and bet slip supply contract) entered into between [MSAPL], PCSO and
other parties.” As consideration thereof, MSAPL agreed to pay CISC a commission of
24.5% of future gross sales to PCSO, exclusive of duties and taxes, for six years.
After initially complying with its obligation under the MOA, MSAPL stopped
remitting commissions to CISC during the second quarter of 2004. MSAPL justified its
action by claiming that Carolina de Jesus, President of CISC, violated her authority when
she negotiated the Supply Contract with PCSO and three of MSAPL’s competitors
resulting to an alleged loss of almost one-half of MSAPL’s business with PCSO. Ultimately,
litigation between the parties resulted but was eventually settled when the parties
entered into the Supply Contract. However, MSAPL felt shortchanged by CISC’s efforts
and thus decided to withhold payment of commissions.
As a result of MSAPL’s refusal to pay, CISC filed a complaint before the RTC for
specific performance against MSAPL, Mark Sensing Philippines, Inc. (MSPI), Atty.
Ofelia Cajigal, and PCSO. CISC prayed that private respondents be ordered to comply
with its obligations under the MOA. It also asked the RTC to issue a writ of preliminary
mandatory injunction and/or writ of attachment.
attachment, stating that “the non-payment of the agreed commission constitutes fraud
plaintiff.” But the RTC limited the attachment to P4,861,312.00, which is the amount
stated in the complaint, instead of the amount sought to be attached by CISC,  i.e.,
P113,197,309.10.
MERC REV: INSURANCE LAW
Subsequently, CISC moved to amend the order of attachment to include unpaid
commissions in excess of the amount stated in the complaint. The RTC modified the
amount covered by the writ to reflect the correct amount prayed for by CISC in its
previous motion to amend the attachment order conditioned upon the latter’s payment
of additional docket fees.
CISC posted a bond in the amount of P113,197,309.10 through Plaridel
Surety and Insurance Company (Plaridel) in favor of MSAPL, which the RTC approved
on the same date. Two days later, MSAPL filed a motion to determine the sufficiency of
the bond because of questions regarding the financial capacity of Plaridel. But before
the RTC could act on this motion, MSAPL, apparently getting hold of Plaridel’s latest
financial statements, moved to recall and set aside the approval of the attachment bond
on the ground that Plaridel had no capacity to underwrite the bond pursuant to Section
215 of the old Insurance Code  because its net worth was only P214,820,566.00 and
could therefore only underwrite up to P42,964,113.20. The RTC denied MSAPL’s motion,
finding that although Plaridel cannot underwrite the bond by itself, the amount covered
by the attachment bond “was likewise re-insured to sixteen other insurance companies.”
However, “for the best interest of both parties,” the RTC ordered Plaridel to submit proof
that the amount of P95,819,770.91 was reinsured.
Dissatisfied, MSAPL, MSPI and Atty. Ofelia Cajigal filed a petition for certiorari
before the CA assailing the Orders of the RTC.
The Ruling of the CA
The CA granted the petition. It held that the RTC exceeded its authority when it
“ordered the issuance of the writ of preliminary attachment despite a dearth of evidence
to clearly establish [CISC’s] entitlement thereto, let alone the latter’s failure to comply
with all requirements therefor.” Noting that the posting of the attachment bond is a
jurisdictional requirement, the CA concluded that since Plaridel’s capacity for single risk
coverage is limited to 20% of its net worth, or P57,866,599.80, the RTC “should have set
aside the second writ outright for non-compliance with Sections 3 and 4 of Rule 57.”
ISSUE:
Whether the RTC committed grave abuse of discretion when it approved the
attachment bond whose face amount exceeded the retention limit of the surety.
RULING:
NO. Section 215 of the old Insurance Code, the law in force at the time
Plaridel issued the attachment bond, limits the amount of risk that insurance companies
can retain to a maximum of 20% of its net worth. However, in computing the retention
limit, risks that have been ceded to authorized reinsurers are ipso jure deducted. In
mathematical terms, the amount of retained risk is computed by deducting
ceded/reinsured risk from insurable risk. If the resulting amount is below 20% of the
insurer’s net worth, then the retention limit is not breached.
In this case, both the RTC and CA determined that, based on Plaridel’s financial
statement that was attached to its certificate of authority issued by the Insurance
53
Commission, its net worth is P289,332,999.00. Plaridel’s retention limit is therefore
P57,866,599.80, which is below the P113,197,309.10 face value of the attachment bond.
However, it only retained an insurable risk of P17,377,938.19 because the remaining
amount of P98,819,770.91 was ceded to 16 other insurance companies. Thus, the risk
retained by Plaridel is actually P40 Million below its maximum retention limit. Therefore,
the approval of the attachment bond by the RTC was in order. Contrary to MSAPL’s
contention that the RTC acted with grave abuse of discretion, we find that the RTC not
only correctly applied the law but also acted judiciously when it required Plaridel to
submit proof of its reinsurance contracts after MSAPL questioned Plaridel’s capacity to
underwrite the attachment bond. Apparently, MSAPL failed to appreciate that by
dividing the risk through reinsurance, Plaridel’s attachment bond actually became
more reliable — as it is no longer dependent on the financial stability of one
company — and, therefore, more beneficial to MSAPL.
In cancelling Plaridel’s insurance bond, the CA also found that because the
reinsurance contracts were issued in favor of Plaridel, and not MSAPL, these failed to
comply with the requirement of Section 4, Rule 57 of the Rules of Court requiring the
bond to be executed to the adverse party. This led the CA to conclude that “the bond has
been improperly and insufficiently posted.” We reverse the CA and so hold that the
reinsurance contracts were correctly issued in favor of Plaridel. A contract of
reinsurance is one by which an insurer (the “direct insurer” or “cedant”) procures a
third person (the “reinsurer”) to insure him against loss or liability by reason of such
original insurance. It is a separate and distinct arrangement from the original contract of
insurance, whose contracted risk is insured in the reinsurance agreement. The
reinsurer’s contractual relationship is with the direct insurer, not the original
insured, and the latter has no interest in and is generally not privy to the contract
of reinsurance. Put simply, reinsurance is the “insurance of an insurance.”
By its nature, reinsurance contracts are issued in favor of the direct insurer
because the subject of such contracts is the direct insurer’s risk — in this case, Plaridel’s
contingent liability to MSAPL — and not the risk assumed under the original policy. The
requirement under Section 4, Rule 57 of the Rules of Court that the applicant’s
bond be executed to the adverse party necessarily pertains only to the attachment
bond itself and not to any underlying reinsurance contract. With or without
reinsurance, the obligation of the surety to the party against whom the writ of
attachment is issued remains the same.
WHEREFORE, the petition is GRANTED.
MERC REV: INSURANCE LAW
BANK OF THE PHILIPPINE ISLANDS AND FGU INSURANCE CORPORATION
(PRESENTLY KNOWN AS BPI/MS INSURANCE CORPORATION) v. YOLANDA LAINGO
G.R. No. 205206, March 16, 2016
BPI, as agent of FGU Insurance, had the primary responsibility to ensure that the
2-in-1 account be reasonably carried out with full disclosure to the parties concerned,
particularly the beneficiaries. Thus, it was incumbent upon BPI to give proper notice of the
existence of the insurance coverage and the stipulation in the insurance contract for filing a
claim to Laingo, as Rheozel’s beneficiary, upon the latter’s death.
FACTS:
On 20 July 1999, Rheozel Laingo (Rheozel), the son of respondent Yolanda
Laingo (Laingo), opened a “Platinum 2-in-1 Savings and Insurance” account with
petitioner Bank of the Philippine Islands (BPI). The Platinum 2-in-1 Savings and
Insurance account is a savings account where depositors are automatically covered by an
insurance policy against disability or death issued by petitioner FGU Insurance
Corporation (FGU Insurance). BPI issued Passbook to Rheozel and a Personal Accident
Insurance Coverage Certificate was also issued by FGU Insurance in the name of Rheozel
with Laingo as his named beneficiary.
On 25 September 2000, Rheozel died due to a vehicular accident. On 27
September 2000, Laingo instructed the family’s personal secretary, Alice Torbanos
(Alice) to go to BPI and inquire about the savings account of Rheozel. Laingo wanted to
use the money in the savings account for Rheozel’s burial and funeral expenses. BPI
accommodated Laingo who was allowed to withdraw P995,000 from the account of
Rheozel.  son’s death, when she was allowed to withdraw funds from his savings account in the
More than two years later or on 21 January 2003, Rheozel’s sister, Rhealyn
Laingo-Concepcion, while arranging Rheozel’s personal things in his room, found the
Personal Accident Insurance Coverage Certificate issued by FGU Insurance. Rhealyn
immediately conveyed the information to Laingo.
Laingo sent two letters to BPI and FGU Insurance requesting them to process
her claim as beneficiary of Rheozel’s insurance policy. FGU Insurance denied her claim
and stated that Laingo should have filed the claim within three calendar months from the
death of Rheozel as required under Paragraph 15 of the Personal Accident Certificate of
Insurance which states:
15. Written notice of claim shall be given to and filed at FGU Insurance
Corporation within three calendar months of death or disability.
Laingo filed a Complaint for Specific Performance with Damages and
Attorney’s Fees with the Regional Trial Court of Davao City, against BPI and FGU
Insurance.
Ruling of RTC:
The trial court ruled that the prescriptive period of 90 days shall commence
from the time of death of the insured and not from the knowledge of the beneficiary.
54
Since the insurance claim was filed more than 90 days from the death of the insured, the
case must be dismissed. 
Laingo filed an appeal with the Court of Appeals.
The Ruling of the CA:
Court of Appeals REVERSED the ruling of the trial court. The CA ruled that Laingo could
not be expected to do an obligation which she did not know existed. The appellate court
added that Laingo was not a party to the insurance contract entered into between
Rheozel and petitioners. Thus, she could not be bound by the 90-day stipulation. 
Hence, the instant petition.
Petitioners’ Argument:
Petitioners maintain that ignorance about the insurance policy does not exempt
respondent from abiding by the deadline and petitioners cannot be faulted for
respondent’s failure to comply.
Respondent’s Arguments:
Respondent, on the other hand, insists that since petitioners did not notify her
of the insurance coverage of her son where she was named as beneficiary in case of his
death, then her lack of knowledge made it impossible for her to fulfill the condition set
forth in the insurance contract. Respondent also argues that she dealt with BPI after her
amount of P995,000. However, BPI did not notify her of the attached insurance policy.
Thus, Laingo attributes responsibility to BPI and FGU Insurance for her failure to file the
notice of insurance claim within three months from her son’s death.
ISSUE:
Whether or not Laingo, as named beneficiary who had no knowledge of the
existence of the insurance contract, is bound by the three calendar month deadline for
filing a written notice of claim upon the death of the insured.
RULING:
NO. BPI offered a deposit savings account with life and disability insurance
coverage to its customers called the Platinum 2-in-1 Savings and Insurance account. This
was a marketing strategy promoted by BPI in order to entice customers to invest their
money with the added benefit of an insurance policy. As the main proponent of the 2-in-1
deposit account, BPI tied up with its affiliate, FGU Insurance, as its partner. Any customer
interested to open a deposit account under this 2-in-1 product, after submitting all the
required documents to BPI and obtaining BPI’s approval, will automatically be given
insurance coverage. Thus, BPI acted as agent of FGU Insurance with respect to the
insurance feature of its own marketed product.
MERC REV: INSURANCE LAW
Under the law, an agent is one who binds himself to render some service or to
do something in representation of another. In this case, since the Platinum 2-in-1 Savings
and Insurance account was BPI’s commercial product, offering the insurance coverage
for free for every deposit account opened, Rheozel directly communicated with BPI, the
agent of FGU Insurance. BPI not only facilitated the processing of the deposit account and
the collection of necessary documents but also the necessary endorsement for the
prompt approval of the insurance coverage without any other action on Rheozel’s part.
Rheozel did not interact with FGU Insurance directly and every transaction was coursed
through BPI.

BPI, as agent of FGU Insurance, had the primary responsibility to ensure that
the 2-in-1 account be reasonably carried out with full disclosure to the parties
concerned, particularly the beneficiaries. Thus, it was incumbent upon BPI to give proper
notice of the existence of the insurance coverage and the stipulation in the insurance
contract for filing a claim to Laingo, as Rheozel’s beneficiary, upon the latter’s death.

The relationship existing between principal and agent is a fiduciary one,

demanding conditions of trust and confidence. It is the duty of the agent to act in good
faith for the advancement of the interests of the principal. In this case, BPI had the
obligation to carry out the agency by informing the beneficiary, who appeared before BPI
to withdraw funds of the insured who was BPI’s depositor, not only of the existence of
the insurance contract but also the accompanying terms and conditions of the insurance
policy in order for the beneficiary to be able to properly and timely claim the benefit.

Upon Rheozel’s death, which was properly communicated to BPI by his mother
Laingo, BPI, in turn, should have fulfilled its duty, as agent of FGU Insurance, of advising
Laingo that there was an added benefit of insurance coverage in Rheozel’s savings
account.

An insurance company has the duty to communicate with the beneficiary upon
receipt of notice of the death of the insured. This notification is how a good father of a
family should have acted within the scope of its business dealings with its clients. 

There is a rationale in the contract of agency, which flows from the “doctrine of
representation,” that notice to the agent is notice to the principal, Here, BPI had been
informed of Rheozel’s death by the latter’s family. Since BPI is the agent of FGU
Insurance, then such notice of death to BPI is considered as notice to FGU Insurance as
well. FGU Insurance cannot now justify the denial of a beneficiary’s insurance claim for
being filed out of time when notice of death had been communicated to its agent within a
few days after the death of the depositor-insured. In short, there was timely notice of
Rheozel’s death given to FGU Insurance within three months from Rheozel’s death as
required by the insurance company.

Since BPI, as agent of FGU Insurance, fell short in notifying Laingo of the
existence of the insurance policy, Laingo had no means to ascertain that she was entitled
to the insurance claim. It would be unfair for Laingo to shoulder the burden of loss when
BPI was remiss in its duty to properly notify her that she was a beneficiary.

55
MERC REV: INSURANCE LAW
PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, Petitioner, vs. CHERRY
T. CASTRO and GLENN ANTHONY T. CASTRO, Respondents.
G.R. No. 195728, April 19, 2016, SERENO, CJ.
FACTS:
PPSBI applied for and obtained insurance from Paramount, which accordingly
issued Group Master Policy No. G-086 . Under Section 20, Article IV of the said policy, “all
death benefits shall be payable to the creditor, PPSBI, as its interest may appeal.”
Virgilio J. Castro (Virgilio) - Cherry’s husband and Glenn’s father -
obtained a housing loan from the PPSBI in the amount of Pl .5 million.  February 2011.
PPSBI required Virgilio to apply for a mortgage redemption insurance (MRI)
from Paramount to cover the loan. In his application for the said insurance policy,
Virgilio named Cherry and Glenn as beneficiaries. Paramount issued Certificate No.
041913 effective 12 March 2008 in his favor, subject to the terms and conditions of
Group Master Policy No. G-086. 
Virgilio died of septic shock. Consequently, a claim was filed for death
benefits under the individual insurance coverage issued under the group policy.
Paramount however denied the claim, on the ground of the failure of Virgilio to
disclose material information, or material concealment or misrepresentation.
It said that when Virgilio submitted his insurance application on 12 March
2008, he made some material misrepresentations by answering “no” to questions
on whether he had any adverse health history and whether he had sought medical
advice or consultation concerning it. Paramount learned that in 2005, Virgilio had
sought consultation in a private hospital after complaining of a dull pain in his
lumbosacral area. Because of the alleged material concealment or
misrepresentation, it declared Virgilio’s individual insurance certificate (No.
041913) rescinded, null, and absolutely void from the very beginning. 
Paramount filed a Complaint with the RTC and prayed that Application and
Insurance Certificate No. 041913 covering the individual insurance of Virgilio be
declared null and void by reason of material concealment and misrepresentation.  concludes that the nullification action it filed has nothing to do with the PPSBI.
In their Answer with Counterclaim, the Castro’s argued that Virgilio had not
made any material misrepresentation. They contended that he had submitted the
necessary evidence of insurability to the satisfaction of Paramount.  Should Paramount succeed in having the individual insurance certificate
G.R. No. 195728
Castros filed a motion to include the PPSBI as an indispensible party-defendant.
The RTC thereafter denied the motion, reasoning that Paramount’s Complaint
could be fully resolved without the PPSBI’s participation.
Consequently, the Castro’s filed a Motion for Leave to File a Third Party-
Complaint and to Admit Attached Third-Party Complaint. They argued that due to the
death of Virgilio, and by virtue of Group Policy No. G-086 in· relation to Certificate No.
041913, PPSBI stepped into the shoes of Cherry and Glen under the principle of
56
“indemnity, subrogation, or any other reliefs” found in Section 22, Rule 6 of the
Rules of Court. This motion was likewise denied, on the ground that “what the
defendants herein want is the introduction of a controversy that is entirely foreign and
distinct from the main cause.”
Castro’s assailed the RTC Resolutions through a Petition for Certiorari filed with
the CA. CA partially granted the Petition by allowing a third-party complaint to be
filed against the PPSBI. It ruled that the Castro’s were freed from the obligation to
pay the bank by virtue of subrogation, as the latter would collect the loan amount
pursuant to the MRI issued by Paramount in Virgilio’s favor. Paramount moved for
reconsideration, but the CA denied the motion through a Resolution dated 21
ISSUE:
Whether the CA erred in remanding the case to the R TC for the admission of
the Third-Party Complaint against PPSBI
RULING:
NO, CA DID NOT ERR.
G.R. No. 195728
In this case, the PPSBI, as the mortgagee-bank, required Virgilio to obtain an
MRI from Paramount to cover his housing loan. The issuance of the MRI, as evidenced by
the Individual Insurance Certificate in Virgilio’s favor, was derived from the group
insurance policy issued by Paramount in favor of the PPSBI. Paramount undertook to pay
the PPSBI “the benefits in accordance with the Insurance Schedule, upon receipt and
approval of due proof that the member has incurred a loss for which benefits are
payable. 
Paramount, in opposing the PPSBI’s inclusion as a third-party defendant,
reasons that it is only seeking the nullification of Virgilio’s individual insurance
certificate, and not the group insurance policy forged between it and the PPSBI. It
We disagree.
nullified, the PPSBI shall then proceed against the Castro’s. This would contradict the
provisions of the group insurance policy that ensure the direct payment by the insurer to
the bank:
Notwithstanding the provision on Section 22 “No Assignment” of Article IV
Benefit Provisions, and in accordance with provisions of Section 6 “Amendment of this
Policy” under Article II General Provisions of the Group Policy, it is hereby agreed that all
death benefits shall be payable to the Creditor, Philippine Postal Savings Bank as
its interest may appeal. (Emphasis supplied.)
MERC REV: INSURANCE LAW
In allowing the inclusion of the PPSBI as a third-party defendant, the Court
recognizes the inseparable interest of the bank (as policyholder of the group policy) in
the validity of the individual insurance certificates issued by Paramount. The PPSBI
need not institute a separate case, considering that its cause of action is intimately
related to that of Paramount as against the Castro’s. The soundness of admitting a
third-party complaint hinges on causal connection between the claim of the
plaintiff in his complaint and a claim for contribution, indemnity or other relief of
the defendant against the third-party defendant. In this case, the Castro’s stand to
incur a bad debt to the PPSBI - the exact event that is insured against by Group Master
Policy No. G-086 - in the event that Paramount succeeds in nullifying Virgilio’s Individual
Insurance Certificate.

The CA correctly ruled that to admit the Castro’s Third-Party Complaint,

in which they can assert against the PPSBI an independent claim they would
otherwise assert in another action, would prevent multiplicity of suits. Considering
also that the original case from which these. Present Petitions arose has not yet been
resolved, the Court deems it proper to have all the parties air all their possible grievances
in the original case still pending with the RTC.

WHEREFORE, premises considered, the Petitions in G.R. Nos. 195728 and

211329 are DENIED.

57
MERC REV: INSURANCE LAW
CAPITAL INSURANCE and SURETY CO., INC. vs. DEL MONTE MOTOR WORKS INC.,,
G.R. No. 159979, December 9, 2015, BERSAMIN, J.
FACTS:  ₱11,835,375.50 to be paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice of
Del Monte Motor Works sued Vilfran Liner Inc., Hilaria F. Villegas and Maura F.
Villegas in the RTC in QC to recover the unpaid billings related to the fabrication and
construction of 35 passenger bus bodies. It applied for the issuance of the writ of
preliminary attachment, which was subsequently issued by the RTC and served by the
sheriff resulting in the levy of 10 buses and three parcels of land belonging to defendants.
A notice of garnishment of the defendants’ funds in the QC branches of BPI, China Bank,
Asia Trust Bank, City Trust Bank, and BPI Family Bank. This prompted defendant Maura
F. Villegas to file an Extremely Urgent Motion to Discharge Upon Filing of a Counterbond,
attaching thereto CISCO Bond No. 00011-00005/JCL(3) dated June 10, 1997 and its
supporting documents purportedly issued by the petitioner. On July 2, 1997, the RTC
approved the counterbond and discharged the writ of preliminary attachment  the petition for certiorari holding that he security deposit could answer for the
On January 2002, the RTC rendered its decision in favor of the respondents,
ordering the defendants Vilfran Liner, Hilaria Villegas and Maura Villegas jointly and
solidarily liable to pay Del Monte Motor Works.  ISSUE:
To enforce the decision against the counterbond, the respondent moved for
execution. The RTC granted the motion, over the petitioner’s opposition. The writ of
execution was served. The petitioner’s personal properties were levied. A notice of
auction sale was issued. The sheriff also served a notice of garnishment against the
security deposit of the petitioner in the Insurance Commission. The respondent moved to
direct the release by the depositary banks of funds subject to the notice of garnishment
from the accounts of the petitioner, and to transfer or release the amount of
P14,864,219.37 from the petitioner’s security deposit in the Insurance Commission. The
petitioner opposed the motion and presented evidence in the RTC in the form of the
affidavits of its witnesses: Shiela Padilla, the Manager of the Surety Service Office of the
Capital Insurance Co (CISCO) and Nelia Lax, a member of the Audit Department of CISCO.
Both witnesses disputed the issuance of CISCO Bond in favor of Maura Villegas. In their
affidavit, they allege that under CISCO’s rules, any coverage exceeding P5,000,000.00
required the approval of its President and Chief Operating Officer. Given that the amount
involved was ₱10,715,380.54, but the counterbond was signed only by Pio C. Ancheta,
the Vice President for Surety, and Carlito D. Alub, the Assistant Branch Manager of the
Manila Surety Service Office, whose authority to issue surety bonds was restricted to
only ₱5,000,000.00; hence, the counterbond was invalid for being issued without proper
authority; (2) an audit of the records and accountable forms of the petitioner revealed
that the counterbond was among the missing and unaccounted for; (3) a photocopy of
the missing counterbond showed that Nelia Laxa’s signature appearing above her name
as witness was a forgery; and (4) no evidence was presented to prove that the premiums
for the counterbond were paid.
The RTC, nevertheless, granted the motion of the respondent. . As prayed for,
the Manager or any authorized officer of the following banks are ordered to release the
funds under the account of CISCO Inc., subject of Notice of Garnishment of Deputy Sheriff.
The Office of the Insurance Commissioner is likewise ordered to comply with its
obligations under the Insurance Code by upholding the integrity and efficacy of bonds
validly issued by duly accredited Bonding and Insurance Companies; and to safeguard
58
the public interest by insuring the faithful performance to enforce contractual
obligations under existing bonds. Accordingly said office is ordered to withdraw from
security deposit of Capital Insurance & Surety Company, Inc. the amount of
Garnishment served on August 16, 2002. 
The sheriff served a copy of the RTC resolution to then Insurance
Commissioner Malinis, with the request for him to release the security deposit. However,
Commissioner Malinis turned down the request to release, citing Section 203 of the
Insurance Code, which expressly provided that the security deposit was exempt from
execution. Commissioner Malinis is cited in contempt for refusing to comply with the
RTC Resolution. 
CISCO filed a Motion for Reconsideration which was denied. The CA dismissed
depositor’s liability, and be the subject of levy in accordance with Section 203 of the
Insurance Code. 
 
Whether or not the securities deposited by CISCO may be subject of levy in
contravention of Section 203 of the Insurance Code. (NO)
RULING:
a) On the validity of the CISCO Bond
The petitioner cannot evade liability under the counterbond by hiding behind
its own internal rules. Although a prospective applicant seeking insurance coverage is
expected to exercise prudence and diligence in selecting the insurance provider, such
responsibility does not require the prospective applicant to know and be aware of the
insurer’s internal rules, policies and procedure adopted for the conduct of its business.
Considering that the petitioner has been a duly accredited bonding company, the officers
who signed the bonds were presumed to be acting within the scope of their authority in
behalf of the company, and the courts were not expected to verify the limits of the
authority of the signatories of the bonds submitted in the regular course of judicial
business, in the same manner that the applicants for the bonds were not expected to
know the limits of the authority of the signatories.
b) The security deposit was immune from levy or execution
The last paragraph of Section 203 of the Insurance Code provides: “Except as
otherwise provided in this Code, no judgment creditor or other claimant shall have the
right to levy upon any securities of the insurer held on deposit under this section or held
on deposit pursuant to the requirement of the Commissioner.”
The law expressly and clearly states that the security deposit shall be (1) answerable for
all the obligations of the depositing insurer under its insurance contracts; (2) at all times
free from any liens or encumbrance; and (3) exempt from levy by any claimant. 
MERC REV: INSURANCE LAW
To be sure, CISCO, though presently under conservatorship, has valid
outstanding policies. Its policy holders have a right under the law to be equally protected
by its security deposit. To allow the garnishment of that deposit would impair the
fund,by decreasing it to less than the percentage of paid-up capital that the law requires
to be maintained. Further, this move would create, in favor of respondent, a preference
of credit over the other policy holders and beneficiaries.

The SC cannot uphold the CA’s interpretation, therefore, because the holders or
beneficiaries of the policies of an insolvent company would thereby likely end up
becoming unpaid claimants. Besides, denying the exemption would potentially pave the
way for a single claimant, like the respondent, to short-circuit the procedure normally
undertaken in adjudicating the claims against an insolvent company under the rules on
concurrence and preference of credits in order to ensure that none could obtain an
advantage or preference over another by virtue of an attachment or execution. To allow
the respondent to proceed independently against the security deposit of the petitioner
would not only prejudice the policy holders and their beneficiaries, but would also annul
the very reason for which the law required the security deposit.

The right to claim against the security deposit is dependent on the solvency of
the insurance company, and is subject to all other obligations of the insurance company
arising from its insurance contracts. Accordingly, the respondent’s interest in the
security deposit could only be inchoate or a mere expectancy, and thus had no attribute
as property.

Likewise, the Insurance Commissioner’s refusal to release the security deposit

despite the garnishment is legally justified. Under Section 191 and Section 203 of the
Insurance Code, the Insurance Commissioner had the specific legal duty to hold the
security deposits for the benefit of all policy holders.

DISPOSITIVE PORTION: 

Under the circumstances, the Insurance Commissioner properly refused the

request to release issued by the sheriff under the notice of garnishment, and was not
guilty of contempt of court for disobedience to the assailed order of December 18, 2002
of the RTC.

WHEREFORE, the Court PARTIALLY GRANTS the petition for review on

certiorari; REVERSES the decision of the Court of Appeals in so far as it allowed the
withdrawal of ₱11,835,375.50 from petitioner Capital Insurance & Surety Company’s
security deposit in the Insurance Commission to comply with the notice of garnishment
served on August 16, 2002; AFFIRMS the decision promulgated on September 15, 2003
in all other respects; and MAKES NO PRONOUNCEMENT on costs of suit. SO ORDERED.

59
MERC REV: INSURANCE LAW
FORTUNE MEDICARE, INC. vs. DAVID ROBERT AMORIN
G.R. No195872, March 12, 2014, REYES, J.
For purposes of determining the liability of a health care provider to its members,
a health care agreement is in the nature of non-life insurance, which is primarily a contract
of indemnity. 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. Limitations as to liability must be
distinctly specified and clearly reflected in the extent of coverage which the company
voluntary assume, otherwise, any ambiguity arising therein shall be construed in favor of
the member.
FACTS:
David Robert Amorin was a cardholder/member of Fortune Medicare, Inc.
(Fortune Care). While on vacation in Hawaii, Amorin underwent an emergency surgery,
specifically appendectomy, at St. Francis Medical Center, causing him to incur
professional and hospitalization expenses of $7,242.35 and $1,777.79, respectively. He
attempted to recover from Fortune Care the full amount thereof upon his return to
Manila, but the company merely approved a reimbursement of P12, 151, an amount that
was based on the average cost of appendectomy if the procedure were performed in an
accredited hospital in Metro Manila. Amorin received the said amount under protest, but
asked for its adjustment to cover the total amount of professional fees which he had paid,
and 80% of the approved standard charges based on “American standard” considering
that the emergency procedure occurred in the US. To support his claim, Amorin cited
Section 3, Art. V on Benefits and Coverages of the Health Care Contract.
Fortune Care denied the request thereby prompting Amorin to file a complaint
for breach of contract with damages. For its part, Fortune Care argued that the Health
Care Contract did not cover hospitalization costs and professional fees incurred in
foreign countries, as the contract’s operation was confined to Philippine territory. The
RTC dismissed Amorin’s complaint. Dissatisfied, Amorin appealed the RTC decision to
the CA. Subsequently, the CA rendered its decision granting the appeal, thereby reversing
and setting aside the trial court decision. Hence, the appeal. Fortune Care argues that the
phase “approved standard charges” did not automatically mean “Philippine Standard”
ISSUE:
Whether Fortune Care is liable to the member for the amount demanded by the
latter.
RULING:
For purposes of determining the liability of a health care provider to its
members, jurisprudence holds that a health care agreement is in the nature of non-life
insurance, which is primarily a contract of indemnity. 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.
60
In the instant case, the extent of Fortune Care’s liability to Amorin under the
attendant circumstances was governed by Section 3(B), Article V of the subject Health
Care Contract, considering that the appendectomy which the member had to undergo
qualified as an emergency care, but the treatment was performed at St. Francis Medical
Center in Honolulu, Hawaii, U.S.A., a non-accredited hospital. We restate the pertinent
portions of Section 3(B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL 1. Whether as an in-
patient or out-patient, FortuneCare shall reimburse the total hospitalization
cost including the professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited hospital. The above
coverage applies only to Emergency confinement within Philippine Territory.
However, if the emergency confinement occurs in foreign territory, Fortune
Care will be obligated to reimburse or pay eighty (80%) percent of the
approved standard charges which shall cover the hospitalization costs and
professional fees.
The point of dispute now concerns the proper interpretation of the phrase
“approved standard charges”, which shall be the base for the allowable 80% benefit. The
trial court ruled that the phrase should be interpreted in light of the provisions of Section
3(A), i.e., to the extent that may be allowed for treatments performed by accredited
physicians in accredited hospitals. As the appellate court however held, this must be
interpreted in its literal sense, guided by the rule that any ambiguity shall be strictly
construed against Fortune Care, and liberally in favor of Amorin.
As may be gleaned from the Health Care Contract, the parties thereto
contemplated the possibility of emergency care in a foreign country. As the contract
recognized Fortune Care’s liability for emergency treatments even in foreign territories,
it expressly limited its liability only insofar as the percentage of hospitalization and
professional fees that must be paid or reimbursed was concerned, pegged at a mere 80%
of the approved standard charges.
In the absence of any qualifying word that clearly limited Fortune Care’s
liability to costs that are applicable in the Philippines, the amount payable by Fortune
Care should not be limited to the cost of treatment in the Philippines, as to do so would
result in the clear disadvantage of its member. If, as Fortune Care argued, the premium
and other charges in the Health Care Contract were merely computed on assumption and
risk under Philippine cost and, that the American cost standard or any foreign country’s
cost was never considered, such limitations should have been distinctly specified and
clearly reflected in the extent of coverage which the company voluntarily assumed.
MERC REV: INSURANCE LAW
MITSUBISHI MOTORS PHILIPPINES SALARIED EMPLOYEES UNION (MMPSEU) vs.
MITSUBISHI MOTORS PHILIPPINES CORPORATION
G.R. No. 175773, June 17, 2013, DEL CASTILLO, J.
FACTS:
CBA of MMPSEU and MMPC provides for the hospitalization insurance benefits
for covered dependents.
Three members of MMPSEU, namely, Ernesto Calida (Calida), Hermie Juan
Oabel (Oabel) and Jocelyn Martin (Martin), filed claims for reimbursement of
hospitalization expenses of their dependents. MMPC only paid the amount after
deducting from the total medical expenses the amount paid by the employee’s own
personal health insurance (Medicard and Prosper).
Claiming that under the CBA, they are entitled to hospital benefits which should
not be reduced by the amounts paid by their own personal health insurance, Calida,
Oabel and Martin asked for reimbursement from MMPC. However, MMPC denied the
claims contending that double insurance would result if the said employees would
receive from the company the full amount of hospitalization expenses despite having
already received payment of portions thereof from other health insurance providers.
MMPSEU referred the dispute to the National Conciliation and Mediation Board
and requested for preventive mediation. Also, the parties separately sought for a legal
opinion from the Insurance Commission relative to the issue at hand
MMPSEU alleged that there is nothing in the CBA which prohibits an employee
from obtaining other insurance or declares that medical expenses can be reimbursed
only upon presentation of original official receipts. It stressed that the hospitalization
benefits should be computed based on the formula indicated in the CBA without
deducting the benefits derived from other insurance providers. Besides, if reduction is
permitted, MMPC would be unjustly benefitted from the monthly premium contributed
by the employees through salary deduction.
On the other hand, MMPC argued that the reimbursement of the entire amounts
being claimed by the covered employees, including those already paid by other insurance
companies, would constitute double indemnity or double insurance, which is
circumscribed under the Insurance Code. Moreover, a contract of insurance is a contract
of indemnity and the employees cannot be allowed to profit from their dependents’ loss.
Legal Opinion of IC (Atty. Richard Funk): An insured is entitled to receive the
insurance benefits without regard to the amount of total benefits provided by other
insurance. The result is consistent with the public policy underlying the collateral source
rule – that is, x x x the courts have usually concluded that the liability of a health or
accident insurer is not reduced by other possible sources of indemnification or
compensation.
Decision of VA (VA Rolando Capocyan): The Voluntary Arbitrator rendered a Decision
finding MMPC liable to pay or reimburse the amount of hospitalization expenses already
paid by other health insurance companies. The Voluntary Arbitrator held that the
61
employees may demand simultaneous payment from both the CBA and their dependents’
separate health insurance without resulting to double insurance, since separate
premiums were paid for each contract. He also noted that the CBA does not prohibit
reimbursement in case there are other health insurers.
Decision of CA: Despite the lack of a provision which bars recovery in case of payment
by other insurers, the wordings of the subject provision of the CBA showed that the
parties intended to make MMPC liable only for expenses actually incurred by an
employee’s qualified dependent. In particular, the provision stipulates that payment
should be made directly to the hospital and that the claim should be supported by actual
hospital and doctor’s bills. These mean that the employees shall only be paid amounts
not covered by other health insurance and is more in keeping with the principle of
indemnity in insurance contracts. Besides, a contrary interpretation would “allow
unscrupulous employees to unduly profit from the x x x benefits” and shall “open the
floodgates to questionable claims x x x.”
ISSUE & RULING:
Whether the collateral source rule applies
NO. Atty. Funk erred in applying the collateral source rule. Under this rule, if an
injured person receives compensation for his injuries from a source wholly independent
of the tortfeasor, the payment should not be deducted from the damages which he would
otherwise collect from the tortfeasor.
As part of American personal injury law, the collateral source rule was
originally applied to tort cases wherein the defendant is prevented from benefitting from
the plaintiff’s receipt of money from other sources. It finds no application to cases
involving no-fault insurances under which the insured is indemnified for losses by
insurance companies, regardless of who was at fault in the incident generating the
losses.45 Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to
pay the hospitalization expenses of the dependents of its employees which had already
been paid by separate health insurance providers of said dependents.
Whether the CBA limits the liability to actual expenses (excluding amount paid by other
health insurance providers)
YES. The conditions set forth in the CBA provision indicate an intention to limit
MMPC’s liability only to actual expenses incurred by the employees’ dependents, that is,
excluding the amounts paid by dependents’ other health insurance providers.
The condition that payment should be direct to the hospital and doctor implies
that MMPC is only liable to pay medical expenses actually shouldered by the employees’
dependents. It follows that MMPC’s liability is limited, that is, it does not include the
amounts paid by other health insurance providers. This condition is obviously intended
to thwart not only fraudulent claims but also double claims for the same loss of the
dependents of covered employees.
It is well to note at this point that the CBA constitutes a contract between the
parties and as such, it should be strictly construed for the purpose of limiting the amount
MERC REV: INSURANCE LAW
of the employer’s liability. The terms of the subject provision are clear and provide no
room for any other interpretation. As there is no ambiguity, the terms must be taken in
their plain, ordinary and popular sense. Consequently, MMPSEU cannot rely on the rule
that a contract of insurance is to be liberally construed in favor of the insured. Neither
can it rely on the theory that any doubt must be resolved in favor of labor.

Whether reimbursement of amount paid by other insurance policies will amount to double
recovery prohibited by law

YES. The subject CBA provision is an insurance contract, the rights and
obligations of the parties must be determined in accordance with the general principles
of insurance law. Being in the nature of a non-life insurance contract and essentially a
contract of indemnity, the CBA provision obligates MMPC to indemnify the covered
employees’ medical expenses incurred by their dependents but only up to the extent of
the expenses actually incurred. This is consistent with the principle of indemnity which
proscribes the insured from recovering greater than the loss. Indeed, to profit from a loss
will lead to unjust enrichment and therefore should not be countenanced. As aptly ruled
by the CA, to grant the claims of MMPSEU will permit possible abuse by employees.

62
MERC REV: INSURANCE LAW
VECTOR SHIPPING CORPORATION and FRANCISCO SORIANO, vs.
AMERICAN HOME ASSURANCE COMPANY and SULPICIO LINES, INC.
G.R. No. 159213, 2013-07-03, BERSAMIN, J.
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.
FACTS:
Vector was the operator of the motor tanker M/T Vector, while Francisco
Soriano (Soriano) was the registered owner of the M/T Vector. American Home
Assurance is a domestic insurance corporation.
In 1987, Caltex entered into a contract of affreightment with to transport its
petroleum cargo through the M/V Vector. The cargo was insured with American Home
Assurance under a Marine Open Policy. While carrying the petroleum cargo, M/T Vector
collided in the open sea near Dumali Point in Tablas Strait, with M/V Doñ a Paz which
was owned by Sulpicio Lines. As a result, both vessels sank. The entire petroleum cargo
of Caltex perished. December 20, 1987
American Home Assurance indemnified Caltex the full amount of P7,455,
421.08 then it filed a complaint against Vector, Soriano, and Sulpicio Lines to recover the
amount it paid. On March 5, 1992,
The RTC dismissed the case since the claim was already barred by
prescription.This action is upon a quasi-delict and as such must be commenced within four 4
years from the day they may be brought. letter of demand upon defendant Sulpicio Lines
allegedly on 6 November 1991 did not interrupt the [tolling] of the prescriptive period
On appeal, CA reversed RTC’s ruling which held Vector and Soriano jointly
and severally liable. Hence, this petition. After a careful perusal of the factual milieu and
the evidence adduced by the parties, We are constrained to rule that the relationship that
existed between Caltex and M/V Dona Paz is that of a quasi-delict while that between Caltex
and M/T Vector is culpa contractual based on a Contract of Affreightment or a charter
party.Under Article 1144 of the New Civil Code, actions based on written contract must be
brought within 10 years from the time the right of action accrued.
ISSUE:
Whether American Home Assurance has a right of subrogation
RULING:
63
We concur with the CA’s ruling that respondent’s action did not yet prescribe.
Article 1144. The following actions must be brought within ten years from the time the cause
of action accrues:cralavvonlinelawlibrary
(1) Upon a written contract;chanroblesvirtualawlibrary
(2) Upon an obligation created by law;chanroblesvirtualawlibrary
(3) Upon a judgment
YES. It is undeniable that respondent preponderantly established its right of
subrogation. Its Exhibit C was Marine Open Policy No. 34-5093-6 that it had issued to
Caltex to insure the petroleum cargo against marine peril.22 Its Exhibit D was the formal
written claim of Caltex for the payment of the insurance coverage of P7,455,421.08
coursed through respondent’s adjuster. Its Exhibits E to H were marine documents
relating to the perished cargo on board the M/V Vector that were processed for the
purpose of verifying the insurance claim of Caltex.24 Its Exhibit I was the subrogation
receipt dated July 12, 1988 showing that respondent paid Caltex P7,455,421.00 as the
full settlement of Caltex’s claim under Marine Open Policy No. 34-5093-6.25 All these
exhibits were unquestionably duly presented, marked, and admitted during the trial.26
Specifically, Exhibit C was admitted as an authentic copy of Marine Open Policy No. 34-
5093-6, while Exhibits D, E, F, G, H and I, inclusive, were admitted as parts of the
testimony of respondent’s witness Efren Villanueva, the manager for the adjustment
service of the Manila Adjusters and Surveyors Company.
Consistent with the pertinent law and jurisprudence, therefore, Exhibit I was
already enough by itself to prove the payment of P7,455,421.00 as the full settlement of
Caltex’s claim. The payment made to Caltex as the insured being thereby duly
documented, respondent became subrogated as a matter of course pursuant to Article
2207 of the Civil Code. In legal contemplation, subrogation is the “substitution of another
person in the place of the creditor, to whose rights he succeeds in relation to the debt;”
and is “independent of any mere contractual relations between the parties to be affected
by it, and is broad enough to cover every instance in which one party is required to pay a
debt for which another is primarily answerable, and which in equity and conscience
ought to be discharged by the latter. 
xxx
The argument of Vector and Soriano would have substance and merit had Civil
Case No. 18735 and this case involved the same parties and litigated the same rights and
obligations. But the two actions were separate from and independent of each other. Civil
Case No. 18735 was instituted by Sulpicio Lines, Inc. to recover damages for the loss of
its M/V Dona Paz. In contrast, this action was brought by respondent to recover from
Vector and Soriano whatever it had paid to Caltex under its marine insurance policy on
the basis of its right of subrogation. With the clear variance between the two actions, the
failure to set up the cross-claim against them in Civil Case No. 18735 is no reason to bar
this action.
MERC REV: INSURANCE LAW
Considering that the cause of action accrued as of the time respondent actually indemnified
Caltex in the amount of P7,455,421.08 on July 12, 1988,19 the action was not yet barred by
the time of the filing of its complaint on March 5, 1992,20 which was well within the 10-year
period prescribed by Article 1144 of the Civil Cod
WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS
the decision promulgated on July 22, 2003; and ORDERS petitioners to pay the costs of
suit.

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MERC REV: INSURANCE LAW
ASIAN TERMINALS, INC. (ATI), Petitioner, VS. PHILAM INSURANCE CO., INC. (NOW
CHARTIS PHILIPPINES INSURANCE, INC.), Respondent.
PHILAM INSURANCE CO., INC. (NOW CHARTIS PHILIPPINES INSURANCE, INC.),
Petitioner, VS. WESTWIND SHIPPING CORPORATION AND ASIAN TERMINALS, INC.,
Respondents.
WESTWIND SHIPPING CORPORATION, Petitioner, VS. PHILAM INSURANCE CO., INC.
(NOW CHARTIS PHILIPPINES INSURANCE, INC.) AND ASIAN TERMINALS, INC.,
Respondents.
G.R. No. 181163/ G.R. No. 181163/ G.R. NO. 181319, 2013-07-24
The right of subrogation accrues simply upon payment by the insurance company
of the insurance claim. Art. 2207 provides that, 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.
FACTS:
In 1995, Nichimen Corporation shipped to Universal Motors Corporation 219
packages containing 120 units of brand new Nissan Pickup Truck on board the vessel S/S
Calayan Iris from Japan to Manila. The shipment, which had a declared value of
P29,400,000, was insured with Philam against all risks under the Marine Policy no. 708-
8006717-4.
The shipment was unloaded by the staff of ATI at the Port of Manila and were
stored for temporary safekeeping inside CFS Warehouse in Pier No. 5. Thereafter, the
shipment was withdrawn by R.F. Revilla Customs Brokerage, Inc., the authorized broker
of Universal Motors, and delivered to the latter’s warehouse in Mandaluyong City. Upon
the request of Universal Motors, a bad order survey was conducted on the cargoes and it
was found that one Frame Axle Sub was deeply dented on the buffle plate while six Frame
Assembly with Bush were deformed and misaligned. Owing to the extent of the damage to
said cargoes, Universal Motors declared them a total loss.
Universal Motors filed a formal claim for damages in the amount of
P643,963.84 against Westwind, ATI and R.F. Revilla Customs Brokerage, Inc. When
Universal Motors’ demands remained unheeded, it sought reparation from and was
compensated in the sum of P633,957.15 by PhilAm. Accordingly, Universal Motors issued
a Subrogation Receipt dated November 15, 1995 in favor of PhilAm. Then, PhilAm, as
subrogee of Universal Motors, filed a Complaint for damages against Westwind, ATI and
R.F. Revilla Customs Brokerage, Inc.  of a person who saw the document executed or written.
RTC Ruling
Ruled in favor of PhilAm, and ordered WestWind and ATI to pay PhilAm, jointly
and severally the sum of P633,975.15. It held WestWind vicariously liable for failing to
prove extra ordinary diligence in the supervision of the ATI stevedores who unloaded
the cargoes from the vessel. While, RF Revilla Customs Brokerage was absolved in view
of the finding that the cargoes had been damaged before delivered to consignee. It
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acknowledged the subrogation between PhilAm and Universal Motors on the strength of
the Subrogation Receipt.
CA Ruling: Affirmed RTC Ruling.
ISSUE:
Whether or not PhilAm may claim against Westwind and ATI as a subrogee.
RULING:
YES. The Court holds that petitioner PhilAm has adequately established the
basis of its claim against petitioners ATI and Westwind. PhilAm, as insurer, was
subrogated to the rights of the consignee, Universal Motors Corporation, pursuant to the
Subrogation receipt executed by the latter in favour of the former. The right of
subrogation accrues simply upon payment by the insurance company of the insurance
claim.
 
Petitioner Philam’s action finds support in Article 2207 of the Civil Code
which provides that 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.
In Malayan Insurance Co., Inc. vs. Alberto, the Court explained the effect of
payment by the insurer of the insurance claim in this wise: We have held that payment
by the insurer to the insured operates as an equitable assignment to the insurer of all the
remedies that the insured may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it
grow out of, any privity of contract. It accrues simply upon payment by the insurance
company of the insurance claim. The doctrine of subrogation has its roots in equity. It is
designed to promote and accomplish justice; and is the mode that equity adopts to
compel the ultimate payment of a debt by one who, in justice, equity, and good
conscience, ought to pay.
Furthermore, the admissibility of the Subrogation Receipt was upheld by the
Supreme Court. The Subrogation Receipt being a private document requires
authentication before admitted as evidence in Court. Thus, PhilAm presented its claims
officer, Ricardo Ongchangco, Jr. to testify on the execution of the Subrogation Receipt.
Indeed, all the Rules require to establish the authenticity of a document is the testimony
MERC REV: INSURANCE LAW
MALAYAN INSURANCE COMPANY, INC., Petitioner, vs. PAP CO., LTD. (PHIL. BRANCH),
Respondent.
G.R. No. 200784, August 7, 2013
Section 26 of the Insurance Code provides: “A neglect to communicate that which a
party knows and ought to communicate, is called a concealment.”
Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a
contract of insurance.”
FACTS:
Malayan Insurance Co. issued Fire Insurance Policy to PAP Co., Ltd. for the
latter’s machineries and equipment located in PEZA, Rosario, Cavite (Sanyo Building).
The insurance, which was for Fifteen Million Pesos and effective for a period of one (1)
year, was procured by PAP Co. for Rizal Commercial Banking Corporation (RCBC), the
mortgagee of the insured machineries and equipment.
After the passage of almost a year but prior to the expiration of the insurance
coverage, PAP Co. renewed the policy on an “as is” basis. Pursuant thereto, a renewal
policy, Fire Insurance Policy No. F-00227-000079, was issued by Malayan to PAP Co. for
the period May 13, 1997 to May 13, 1998.
During the subsistence of the renewal policy, the insured machineries and
equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim with
Malayan in the amount insured.
Petitioner’s Contention
Malayan denied the claim upon the ground that, at the time of the loss, the
insured machineries and equipment were transferred by PAP Co. to a location different
from that indicated in the policy. Specifically, that the insured machineries were
transferred in September 1996 from the Sanyo Building to the Pace Pacific Bldg., Lot 14,
Block 14, Phase III, PEZA, Rosario, Cavite (Pace Pacific).
Respondents’ Contention
Contesting the denial, PAP Co. argued that Malayan cannot avoid liability as it
was informed of the transfer by RCBC, the party duty-bound to relay such information.   were totally burned at the Pace Factory. Although it was also located in PEZA, Pace
RTC’s RULING:
Malayan is liable to indemnify PAP for the loss under the subject fire insurance
policy because, although there was a change in the condition of the thing insured as a
result of the transfer of the subject machineries to another location, said insurance
company failed to show proof that such transfer resulted in the increase of the risk
insured against.
CA’s RULING:
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Affirmed. even if there was such a provision on transfer restrictions of the
insured properties, still Malayan could not escape liability because the transfer was
made during the subsistence of the original policy, not the renewal policy.
ISSUE:
Whether or not Malayan is liable for the loss of the insured properties under
the fire insurance policy.
SC’s DECISION:
NO. The Court agrees with the position of Malayan that it cannot be held
liable for the loss of the insured properties under the fire insurance policy.
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to
attach as regards the property affected unless the insured, before the
occurrence of any loss or damage, obtains the sanction of the company
signified by endorsement upon the policy, by or on behalf of the Company:
(c) If property insured be removed to any building or place other than in
that which is herein stated to be insured.
Evidently, by the clear and express condition in the renewal policy, the removal
of the insured property to any building or place required the consent of Malayan. Any
transfer effected by the insured, without the insurer’s consent, would free the latter from
any liability. The respondent failed to notify, and to obtain the consent of, Malayan
regarding the removal.
The Court agrees with Malayan that the transfer to the Pace Factory exposed
the properties to a hazardous environment and negatively affected the fire rating stated
in the renewal policy. 
Considering that the original policy was renewed on an “as is basis,” it follows
that the renewal policy carried with it the same stipulations and limitations. The terms
and conditions in the renewal policy provided, among others, that the location of the risk
insured against is at the Sanyo factory in PEZA. The subject insured properties, however,
Factory was not the location stipulated in the renewal policy.  
There being an unconsented removal, the transfer was at PAP’s own risk.
Consequently, it must suffer the consequences of the fire. 
It can also be said that with the transfer of the location of the subject
properties, without notice and without Malayan’s consent, after the renewal of the policy,
PAP clearly committed concealment, misrepresentation and a breach of a material
warranty. 
MERC REV: INSURANCE LAW
Section 26 of the Insurance Code provides:
A neglect to communicate that which a party knows and ought to
communicate, is called a concealment.

Under Section 27 of the Insurance Code, “a concealment entitles the injured

party to rescind a contract of insurance.”

Section 68. An alteration in the use or condition of a thing insured from

that to which it is limited by the policy made without the consent of the
insurer, by means within the control of the insured, and increasing the
risks, entitles an insurer to rescind a contract of fire insurance.

Accordingly, an insurer can exercise its right to rescind an

insurance contract when the following conditions are present, to wit:

1) the policy limits the use or condition of the thing insured;

2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insured’s control; and
5) the alteration increases the risk of loss.

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

67
MERC REV: INSURANCE LAW
MA. LOURDES S. FLORENDO v. PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE
ABCEDE
G.R. No. 186983, February 22, 2012
It may be true that insured persons may accept policies without reading them,
and that this is not negligence per se. But, this is not without any exception. Manuel, a civil
engineer and manager of a construction company could be expected to know that one must
read every document, especially if it creates rights and obligations affecting him, before
signing the same.
FACTS:
This case is about an insured’s alleged concealment in his pension plan
application of his true state of health and its effect on the life insurance portion of that
plan in case of death.
Manuel Florendo filed an application for comprehensive pension plan with
respondent Philam Plans after some convincing by respondent Perla Abcede. Manuel
signed the application and left to Perla the task of supplying the information needed in
the application. Respondent Ma. Celeste Abcede, Perla’s daughter, signed the application
as sales counselor.
Aside from pension benefits, the comprehensive pension plan also provided life
insurance coverage to Florendo. This was covered by a Group Master Policy that Philam
Life issued to Philam Plans. Under the master policy, Philam Life was to automatically
provide life insurance coverage, including accidental death, to all who signed up for
Philam Plans’ comprehensive pension plan. If the plan holder died before the maturity of
the plan, his beneficiary was to instead receive the proceeds of the life insurance,
equivalent to the pre-need price.  application; and
Subsequently, Philam Plans issued Pension Plan Agreement to Manuel, with
petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary.  SC RULING:
After eleven months, Manuel died of blood poisoning. As a consequence,
Lourdes filed a claim with Philam Plans for the payment of the benefits under her
husband’s plan. Because Manuel died before his pension plan matured and his wife was
to get only the benefits of his life insurance, Philam Plans forwarded her claim to Philam
Life.
Philam Plans denied Lourdes’s claim. It found that Manuel was on maintenance
medicine for his heart and had an implanted pacemaker. Further, he suffered from
diabetes mellitus and was taking insulin. Lourdes renewed her demand for payment
under the plan but Philam Plans rejected it, prompting her to file the present action
against the pension plan company before the RTC.  that he concealed his chronic heart ailment and diabetes from Philam Plans xxx Since
PETITIONER’S CONTENTIONS:
(1) Lourdes points out that, seeing the unfilled spaces in Manuel’s pension plan
application relating to his medical history, Philam Plans should have returned it to him
for completion. Since Philam Plans chose to approve the application just as it was, it
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cannot cry concealment on Manuel’s part. Further, Lourdes adds that Philam Plans never
queried Manuel directly regarding the state of his health. Consequently, it could not
blame him for not mentioning it. (2) Lourdes contends that the mere fact that Manuel
signed the application in blank and let Perla fill in the required details did not make her
his agent and bind him to her concealment of his true state of health. Since there is no
evidence of collusion between them, Perla’s fault must be considered solely her own and
cannot prejudice Manuel. (3) In a final attempt to defend her claim for benefits under
Manuel’s pension plan, Lourdes points out that any defect or insufficiency in the
information provided by his pension plan application should be deemed waived after the
same has been approved, the policy has been issued, and the premiums have been
collected.
RTC RULING: It ordered Philam Plans, Perla and Ma. Celeste, solidarily, to pay Lourdes
all the benefits from her husband’s pension plan on the ground that Manuel was not
guilty of concealing the state of his health from his pension plan application.
CA RULING: It reversed the RTC decision holding that insurance policies are traditionally
contracts uberrimae fidae or contracts of utmost good faith. As such, it required Manuel
to disclose to Philam Plans conditions affecting the risk of which he was aware or
material facts that he knew or ought to know.
ISSUES:
1)  Whether or not Manuel is guilty of concealing his illness when he kept blank
and did not answer questions in his pension plan application regarding the
ailments he suffered from;
2)  Whether or not Manuel was bound by the failure of respondents Perla and Ma.
Celeste to declare the condition of Manuel’s health in the pension plan
3) Whether or not the life insurance is already incontestable.
 
1) YES. Manuel is guilty of concealing his illness. 
Lourdes is shifting to Philam Plans the burden of putting on the pension plan
application the true state of Manuel’s health. She forgets that since Philam Plans waived
medical examination for Manuel, it had to rely largely on his stating the truth regarding
his health in his application. For, after all, he knew more than anyone that he had been
under treatment for heart condition and diabetes for more than five years preceding his
submission of that application. But he kept those crucial facts from Philam Plans. Besides,
when Manuel signed the pension plan application, he adopted as his own the written
representations and declarations embodied in it. It is clear from these representations
Manuel signed the application without filling in the details regarding his continuing
treatments for heart condition and diabetes, the assumption is that he has never been
treated for the said illnesses in the last five years preceding his application. This is
implicit from the phrase “If your answer to any of the statements above (specifically, the
statement: I have never been treated for heart condition or diabetes) reveal otherwise,
please give details in the space provided for.” But this is untrue since he had been on
MERC REV: INSURANCE LAW
“Coumadin,” a treatment for venous thrombosis, and insulin, a drug used in the WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of
treatment of diabetes mellitus, at that time. Appeals in CA-G.R. CV 87085 dated December 18, 2007. SO ORDERED.

Lourdes insists that Manuel had concealed nothing since Perla, the soliciting
agent, knew that Manuel had a pacemaker implanted on his chest in the 70s or about 20
years before he signed up for the pension plan. But by its tenor, the responsibility for
preparing the application belonged to Manuel. Nothing in it implies that someone else
may provide the information that Philam Plans needed. Manuel cannot sign the
application and disown the responsibility for having it filled up. If he furnished Perla
the needed information and delegated to her the filling up of the application, then
she acted on his instruction, not on Philam Plans’ instruction xxx More, even if
Perla’s knowledge of Manuel’s pacemaker may be applied to Philam Plans under the
theory of imputed knowledge, it is not claimed that Perla was aware of his two other
afflictions that needed medical treatments. Pursuant to Section 2727 of the Insurance
Code, Manuel’s concealment entitles Philam Plans to rescind its contract of insurance
with him.

2) YES. Manuel was bound by the failure of respondents Perla and Ma. Celeste to
declare his health condition. In signing the pension plan application, Manuel
certified that he wrote all the information stated in it or had someone do it
under his direction.

As the Court said in New Life Enterprises v. Court of Appeals: It may be true that
x x x insured persons may accept policies without reading them, and that this is
not negligence per se. But, this is not without any exception. It is and was incumbent
upon petitioner Sy to read the insurance contracts, and this can be reasonably expected
of him considering that he has been a businessman since 1965 and the contract concerns
indemnity in case of loss in his money-making trade of which important consideration he
could not have been unaware as it was precisely the reason for his procuring the same.

The same may be said of Manuel, a civil engineer and manager of a construction
company. He could be expected to know that one must read every document, especially if
it creates rights and obligations affecting him, before signing the same. Manuel is not
unschooled that the Court must come to his succor. It could reasonably be expected that
he would not trifle with something that would provide additional financial security to
him and to his wife in his twilight years.

3) NO. The life insurance is not yet incontestable.

The above incontestability clause precludes the insurer from disowning liability
under the policy it issued on the ground of concealment or misrepresentation regarding
the health of the insured after a year of its issuance. Since Manuel died on the eleventh
month following the issuance of his plan, the one year incontestability period has
not yet set in. Consequently, Philam Plans was not barred from questioning Lourdes’
entitlement to the benefits of her husband’s pension plan.

69