GENERAL PROVISIONS
Republic of the Philippines Recibi la suma de seis mil pesos de Don Joaquin letter notifying Mr. Herrer of this acceptance. The
SUPREME COURT Herrer de Manila como prima dela Renta Vitalicia
Manila solicitada por dicho Don Joaquin Herrer hoy,
sujeta al examen medico y aprobacion de la
EN BANC Oficina Central de la Compañ ia.
G.R. No. L-15895             November 29, 1920 The application was immediately forwarded to the
head office of the company at Montreal, Canada.
On November 26, 1917, the head office gave notice
RAFAEL ENRIQUEZ, as administrator of the
of acceptance by cable to Manila. (Whether on the
estate of the late Joaquin Ma. Herrer, plaintiff-
same day the cable was received notice was sent
appellant,
by the Manila office of Herrer that the application
vs.
had been accepted, is a disputed point, which will
SUN LIFE ASSURANCE COMPANY OF
be discussed later.) On December 4, 1917, the
CANADA, defendant-appellee.
policy was issued at Montreal. On December 18,
1917, attorney Aurelio A. Torres wrote to the
Jose A. Espiritu for appellant.
Manila office of the company stating that Herrer
Cohn, Fisher and DeWitt for appellee.
desired to withdraw his application. The following
day the local office replied to Mr. Torres, stating
that the policy had been issued, and called
attention to the notification of November 26,
1917. This letter was received by Mr. Torres on
MALCOLM, J.: the morning of December 21, 1917. Mr. Herrer
died on December 20, 1917.
This is an action brought by the plaintiff ad
administrator of the estate of the late Joaquin Ma. As above suggested, the issue of fact raised by the
Herrer to recover from the defendant life evidence is whether Herrer received notice of
insurance company the sum of pesos 6,000 paid acceptance of his application. To resolve this
by the deceased for a life annuity. The trial court question, we propose to go directly to the
gave judgment for the defendant. Plaintiff appeals. evidence of record.
The undisputed facts are these: On September 24, The chief clerk of the Manila office of the Sun Life
1917, Joaquin Herrer made application to the Sun Assurance Company of Canada at the time of the
Life Assurance Company of Canada through its trial testified that he prepared the letter
office in Manila for a life annuity. Two days later introduced in evidence as Exhibit 3, of date
he paid the sum of P6,000 to the manager of the November 26, 1917, and handed it to the local
company's Manila office and was given a receipt manager, Mr. E. E. White, for signature. The
reading as follows: witness admitted on cross-examination that after
preparing the letter and giving it to he manager,
MANILA, I. F., 26 de septiembre, 1917. he new nothing of what became of it. The local
manager, Mr. White, testified to having received
the cablegram accepting the application of Mr.
PROVISIONAL RECEIPT Pesos 6,000
Herrer from the home office on November 26,
1917. He said that on the same day he signed a
witness further said that letters, after being
signed, were sent to the chief clerk and placed on
the mailing desk for transmission. The witness
could not tell if the letter had every actually been
placed in the mails. Mr. Tuason, who was the chief
clerk, on November 26, 1917, was not called as a
witness. For the defense, attorney Manuel Torres
testified to having prepared the will of Joaquin Ma.
Herrer, that on this occasion, Mr. Herrer
mentioned his application for a life annuity, and
that he said that the only document relating to the
transaction in his possession was the provisional
receipt. Rafael Enriquez, the administrator of the
estate, testified that he had gone through the
effects of the deceased and had found no letter of
notification from the insurance company to Mr.
Herrer.
Our deduction from the evidence on this issue
must be that the letter of November 26, 1917,
notifying Mr. Herrer that his application had been
accepted, was prepared and signed in the local
office of the insurance company, was placed in the
ordinary channels for transmission, but as far as
we know, was never actually mailed and thus was
never received by the applicant.
Not forgetting our conclusion of fact, it next
becomes necessary to determine the law which
should be applied to the facts. In order to reach
our legal goal, the obvious signposts along the way
must be noticed.
Until quite recently, all of the provisions
concerning life insurance in the Philippines were
found in the Code of Commerce and the Civil Code.
In the Code of the Commerce, there formerly
existed Title VIII of Book III and Section III of Title
III of Book III, which dealt with insurance
contracts. In the Civil Code there formerly existed
and presumably still exist, Chapters II and IV,
entitled insurance contracts and life annuities,
respectively, of Title XII of Book IV. On the after
1 |I N S U R A N C E
GENERAL PROVISIONS
July 1, 1915, there was, however, in force the
Insurance Act. No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act
expressly repealed Title VIII of Book II and Section
III of Title III of Book III of the code of Commerce.
The law of insurance is consequently now found in
the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals
with life insurance, it is silent as to the methods
to be followed in order that there may be a
contract of insurance. On the other hand, the
Civil Code, in article 1802, not only describes a
contact of life annuity markedly similar to the one
we are considering, but in two other articles, gives
strong clues as to the proper disposition of the
case. For instance, article 16 of the Civil Code
provides that "In matters which are governed by
special laws, any deficiency of the latter shall be
supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that
the special law on the subject of insurance is
deficient in enunciating the principles governing
acceptance, the subject-matter of the Civil code, if
there be any, would be controlling. In the Civil
Code is found article 1262 providing that "Consent
is shown by the concurrence of offer and
acceptance with respect to the thing and the
consideration which are to constitute the contract.
An acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge. The contract, in such case,
is presumed to have been entered into at the place
where the offer was made." This latter article is in
opposition to the provisions of article 54 of the
Code of Commerce.
If no mistake has been made in announcing the
successive steps by which we reach a conclusion,
then the only duty remaining is for the court to
apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance,
and expressly repealed the provisions in the Code
of Commerce on the same subject, and having thus
left a void in the commercial law, it would seem
logical to make use of the only pertinent provision
of law found in the Civil code, closely related to
the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by
letter shall bind the person making the offer only
from the date it came to his knowledge, may not
be the best expression of modern commercial
usage. Still it must be admitted that its
enforcement avoids uncertainty and tends to
security. Not only this, but in order that the
principle may not be taken too lightly, let it be
noticed that it is identical with the principles
announced by a considerable number of
respectable courts in the United States. The courts
who take this view have expressly held that an
acceptance of an offer of insurance not actually or
constructively communicated to the proposer
does not make a contract. Only the mailing of
acceptance, it has been said, completes the
contract of insurance, as the locus poenitentiae is
ended when the acceptance has passed beyond
the control of the party. (I Joyce, The Law of
Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case
is found to be the second paragraph of article
1262 of the Civil Code providing that an
acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge. The pertinent fact is, that
according to the provisional receipt, three things
had to be accomplished by the insurance company
before there was a contract: (1) There had to be a
medical examination of the applicant; (2) there
had to be approval of the application by the head
office of the company; and (3) this approval had in
some way to be communicated by the company to
the applicant. The further admitted facts are that
the head office in Montreal did accept the
application, did cable the Manila office to that
effect, did actually issue the policy and did,
through its agent in Manila, actually write the
letter of notification and place it in the usual
channels for transmission to the addressee. The
fact as to the letter of notification thus fails to
concur with the essential elements of the general
rule pertaining to the mailing and delivery of mail
matter as announced by the American courts,
namely, when a letter or other mail matter is
addressed and mailed with postage prepaid there
is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have
been transmitted to him in the ordinary course of
the mails. But if any one of these elemental facts
fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have
been received by the addressee unless it is shown
that it was deposited in the post-office, properly
addressed and stamped. (See 22 C.J., 96, and 49 L.
R. A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the
case at bar was not perfected because it has not
been proved satisfactorily that the acceptance of
the application ever came to the knowledge of the
applicant.lawph!l.net
Judgment is reversed, and the plaintiff shall have
and recover from the defendant the sum of P6,000
with legal interest from November 20, 1918, until
paid, without special finding as to costs in either
instance. So ordered.
Mapa, C.J., Araullo, Avanceña and Villamor, JJ.,
concur.
Johnson, J., dissents.
2 |I N S U R A N C E
GENERAL PROVISIONS
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-44059 October 28, 1977
THE INSULAR LIFE ASSURANCE COMPANY,
LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE
EBRADO, defendants-appellants.
MARTIN, J.:
This is a novel question in insurance law: Can a
common-law wife named as beneficiary in the life
insurance policy of a legally married man claim
the proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor
Ebrado was issued by The Life Assurance Co., Ltd.,
Policy No. 009929 on a whole-life for P5,882.00
with a, rider for Accidental Death for the same
amount Buenaventura C. Ebrado designated T.
Ebrado as the revocable beneficiary in his policy.
He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado
died as a result of an t when he was hit by a failing
branch of a tree. As the policy was in force, The
Insular Life Assurance Co., Ltd. liable to pay the
coverage in the total amount of P11,745.73,
representing the face value of the policy in the
amount of P5,882.00 plus the additional benefits
for accidental death also in the amount of
P5,882.00 and the refund of P18.00 paid for the
premium due November, 1969, minus the unpaid
premiums and interest thereon due for January
and February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim
for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she
and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the
benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the
widow of the deceased insured. She asserts that
she is the one entitled to the insurance proceeds,
not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall
be paid, the insurer, The Insular Life Assurance
Co., Ltd. commenced an action for Interpleader
before the Court of First Instance of Rizal on April
29, 1970.
After the issues have been joined, a pre-trial
conference was held on July 8, 1972, after which, a
pre-trial order was entered reading as
follows: ñé+.£ªwph!1
During the pre-trial conference,
the parties manifested to the
court. that there is no possibility
of amicable settlement. Hence,
the Court proceeded to have the
parties submit their evidence for
the purpose of the pre-trial and
make admissions for the purpose
of pretrial. During this
conference, parties Carponia T.
Ebrado and Pascuala Ebrado
agreed and stipulated: 1) that the
deceased Buenaventura Ebrado
was married to Pascuala Ebrado
with whom she has six —
(legitimate) namely; Hernando,
Cresencio, Elsa, Erlinda, Felizardo
and Helen, all surnamed Ebrado;
2) that during the lifetime of the
deceased, he was insured with
Insular Life Assurance Co. Under
Policy No. 009929 whole life
plan, dated September 1, 1968
for the sum of P5,882.00 with the
rider for accidental death benefit
as evidenced by Exhibits A for
plaintiffs and Exhibit 1 for the
defendant Pascuala and Exhibit 7
for Carponia Ebrado; 3) that
during the lifetime of
Buenaventura Ebrado, he was
living with his common-wife,
Carponia Ebrado, with whom she
had 2 children although he was
not legally separated from his
legal wife; 4) that Buenaventura
in accident on October 21, 1969
as evidenced by the death Exhibit
3 and affidavit of the police
report of his death Exhibit 5; 5)
that complainant Carponia
Ebrado filed claim with the
Insular Life Assurance Co. which
was contested by Pascuala
Ebrado who also filed claim for
the proceeds of said policy 6)
that in view ofthe adverse claims
the insurance company filed this
action against the two herein
claimants Carponia and Pascuala
Ebrado; 7) that there is now due
from the Insular Life Assurance
Co. as proceeds of the policy
P11,745.73; 8) that the
beneficiary designated by the
insured in the policy is Carponia
Ebrado and the insured made
reservation to change the
beneficiary but although the
insured made the option to
change the beneficiary, same was
3 |I N S U R A N C E
GENERAL PROVISIONS
never changed up to the time of
his death and the wife did not
have any opportunity to write the
company that there was
reservation to change the
designation of the parties agreed
that a decision be rendered based
on and stipulation of facts as to
who among the two claimants is
entitled to the policy.
Upon motion of the parties, they
are given ten (10) days to file
their simultaneous memoranda
from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered
judgment declaring among others, Carponia T.
Ebrado disqualified from becoming beneficiary of
the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds
to the estate of the deceased insured. The trial
court held: ñé+.£ªwph!1
It is patent from the last
paragraph of Art. 739 of the Civil
Code that a criminal conviction
for adultery or concubinage is
not essential in order to establish
the disqualification mentioned
therein. Neither is it also
necessary that a finding of such
guilt or commission of those acts
be made in a separate
independent action brought for
the purpose. The guilt of the
donee (beneficiary) may be
proved by preponderance of
evidence in the same proceeding
(the action brought to declare the
nullity of the donation).
It is, however, essential that such
adultery or concubinage exists at
the time defendant Carponia T.
Ebrado was made beneficiary in
the policy in question for the
disqualification and incapacity to
exist and that it is only necessary
that such fact be established by
preponderance of evidence in the
trial. Since it is agreed in their
stipulation above-quoted that the
deceased insured and defendant
Carponia T. Ebrado were living
together as husband and wife
without being legally married
and that the marriage of the
insured with the other defendant
Pascuala Vda. de Ebrado was
valid and still existing at the time
the insurance in question was
purchased there is no question
that defendant Carponia T.
Ebrado is disqualified from
becoming the beneficiary of the
policy in question and as such
she is not entitled to the proceeds
of the insurance upon the death
of the insured.
From this judgment, Carponia T. Ebrado appealed
to the Court of Appeals, but on July 11, 1976, the
Appellate Court certified the case to Us as
involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act
(RA 2327, as amended) or even the new Insurance
Code (PD No. 612, as amended) does not contain
any specific provision grossly resolutory of the
prime question at hand. Section 50 of the
Insurance Act which provides that "(t)he
insurance shag be applied exclusively to the
proper interest of the person in whose name it is
made" 1 cannot be validly seized upon to hold that
the mm includes the beneficiary. The word
"interest" highly suggests that the provision refers
only to the "insured" and not to the beneficiary,
since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws
against illicit relationships especially on property
and descent will be rendered nugatory, as the
same could easily be circumvented by modes of
insurance. Rather, the general rules of civil law
should be applied to resolve this void in the
Insurance Law. Article 2011 of the New Civil Code
states: "The contract of insurance is governed by
special laws. Matters not expressly provided for in
such special laws shall be regulated by this Code."
When not otherwise specifically provided for by
the Insurance Law, the contract of life insurance is
governed by the general rules of the civil law
regulating contracts. 3 And under Article 2012 of
the same Code, "any person who is forbidden from
receiving any donation under Article 739 cannot
be named beneficiary of a fife insurance policy by
the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred
from receiving donations from each other. Article
739 of the new Civil Code provides: ñé+.£ªwph!1
The following donations shall be
void:
1. Those made between persons
who were guilty of adultery or
concubinage at the time of
donation;
Those made between persons
found guilty of the same criminal
offense, in consideration thereof;
3. Those made to a public officer
or his wife, descendants or
ascendants by reason of his
office.
4 |I N S U R A N C E
GENERAL PROVISIONS
In the case referred to in No. 1,
the action for declaration of
nullity may be brought by the
spouse of the donor or
donee; and the guilt of the donee
may be proved by preponderance
of evidence in the same action.
2. In essence, a life insurance policy is no different
from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same
consideration: liberality. A beneficiary is like a
donee, because from the premiums of the policy
which the insured pays out of liberality, the
beneficiary will receive the proceeds or profits of
said insurance. As a consequence, the proscription
in Article 739 of the new Civil Code should equally
operate in life insurance contracts. The mandate
of Article 2012 cannot be laid aside: any person
who cannot receive a donation cannot be named
as beneficiary in the life insurance policy of the
person who cannot make the donation. 5 Under
American law, a policy of life insurance is
considered as a testament and in construing it, the
courts will, so far as possible treat it as a will and
determine the effect of a clause designating the
beneficiary by rules under which wins are
interpreted. 6
3. Policy considerations and dictates of morality
rightly justify the institution of a barrier between
common law spouses in record to Property
relations since such hip ultimately encroaches
upon the nuptial and filial rights of the legitimate
family There is every reason to hold that the bar in
donations between legitimate spouses and those
between illegitimate ones should be enforced in
life insurance policies since the same are based on
similar consideration As above pointed out, a
beneficiary in a fife insurance policy is no different
from a donee. Both are recipients of pure
beneficence. So long as manage remains the
threshold of family laws, reason and morality
dictate that the impediments imposed upon
married couple should likewise be imposed upon
extra-marital relationship. If legitimate
relationship is circumscribed by these legal
disabilities, with more reason should an illicit
relationship be restricted by these disabilities.
Thus, in Matabuena v. Cervantes, 7 this Court,
through Justice Fernando, said: ñé+.£ªwph!1
If the policy of the law is, in the
language of the opinion of the
then Justice J.B.L. Reyes of that
court (Court of Appeals), 'to
prohibit donations in favor of the
other consort and his
descendants because of and
undue and improper pressure
and influence upon the donor, a
prejudice deeply rooted in our
ancient law;" por-que no se
enganen desponjandose el uno al
otro por amor que han de
consuno' (According to) the
Partidas (Part IV, Tit. XI, LAW IV),
reiterating the rationale 'No
Mutuato amore invicem
spoliarentur' the Pandects (Bk,
24, Titl. 1, De donat, inter virum
et uxorem); then there is very
reason to apply the same
prohibitive policy to persons
living together as husband and
wife without the benefit of
nuptials. For it is not to be
doubted that assent to such
irregular connection for thirty
years bespeaks greater influence
of one party over the other, so
that the danger that the law seeks
to avoid is correspondingly
increased. Moreover, as already
pointed out by Ulpian (in his lib.
32 ad Sabinum, fr. 1), 'it would
not be just that such donations
should subsist, lest the condition
6f those who incurred guilt
should turn out to be better.' So
long as marriage remains the
cornerstone of our family law,
reason and morality alike
demand that the disabilities
attached to marriage should
likewise attach to concubinage.
It is hardly necessary to add that
even in the absence of the above
pronouncement, any other
conclusion cannot stand the test
of scrutiny. It would be to indict
the frame of the Civil Code for a
failure to apply a laudable rule to
a situation which in its essentials
cannot be distinguished.
Moreover, if it is at all to be
differentiated the policy of the
law which embodies a deeply
rooted notion of what is just and
what is right would be nullified if
such irregular relationship
instead of being visited with
disabilities would be attended
with benefits. Certainly a legal
norm should not be susceptible
to such a reproach. If there is
every any occasion where the
principle of statutory
construction that what is within
the spirit of the law is as much a
part of it as what is written, this
is it. Otherwise the basic purpose
discernible in such codal
provision would not be attained.
Whatever omission may be
apparent in an interpretation
purely literal of the language
used must be remedied by an
adherence to its avowed
objective.
5 |I N S U R A N C E
GENERAL PROVISIONS
4. We do not think that a conviction for adultery or
concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More
specifically, with record to the disability on
"persons who were guilty of adultery or
concubinage at the time of the donation," Article
739 itself provides: ñé+.£ªwph!1
without going through the rigors of a trial for the
sole purpose of proving the illicit liaison between
the insured and the beneficiary. In fact, in that
pretrial, the parties even agreed "that a decision
be rendered based on this agreement and
stipulation of facts as to who among the two
claimants is entitled to the policy."

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

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

In the caw before Us, the requisite proof of

common-law relationship between the insured
and the beneficiary has been conveniently
supplied by the stipulations between the parties in
the pre-trial conference of the case. It case agreed
upon and stipulated therein that the deceased
insured Buenaventura C. Ebrado was married to
Pascuala Ebrado with whom she has six legitimate
children; that during his lifetime, the deceased
insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children.
These stipulations are nothing less than judicial
admissions which, as a consequence, no longer
require proof and cannot be
contradicted. 8 A fortiori, on the basis of these
admissions, a judgment may be validly rendered

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

In keeping with such legislative policy, we feel no

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

For all the foregoing, the lower court's decision

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

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

Tuason, and Reyes, JJ., concur.

11 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
FIRST DIVISION
G.R. No. 112329           January 28, 2000
VIRGINIA A. PEREZ, petitioner,
vs.
COURT OF APPEALS and BF LIFEMAN
INSURANCE CORPORATION, respondents.
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts,
must be assented to by both parties, either in
person or through their agents and so long as an
application for insurance has not been either
accepted or rejected, it is merely a proposal or an
offer to make a contract.
Petitioner Virginia A. Perez assails the decision of
respondent Court of Appeals dated July 9, 1993 in
CA-G.R. CV 35529 entitled, "BF Lifeman Insurance
Corporations; Plaintiff-Appellant versus Virginia
A. Perez. Defendant-Appellee," which declared
Insurance Policy 056300 for P50,000.00 issued by
private respondent corporation in favor of the
deceased Primitivo B. Perez, null and void and
rescinded, thereby reversing the decision
rendered by the Regional Trial Court of Manila,
Branch XVI.
The facts of the case as summarized by
respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF
Lifeman Insurance Corporation since 1980 for
P20,000.00. Sometime in October 1987, an agent
of the insurance corporation, Rodolfo Lalog,
visited Perez in Guinayangan, Quezon and
convinced him to apply for additional insurance
coverage of P50,000.00, to avail of the ongoing
promotional discount of P400.00 if the premium
were paid annually.1âwphi1.nêt
On October 20, 1987, Primitivo B. Perez
accomplished an application form for the
additional insurance coverage of P50,000.00. On
the same day, petitioner Virginia A. Perez,
Primitivo's wife, paid P2,075.00 to Lalog. The
receipt issued by Lalog indicated the amount
received was a "deposit."1 Unfortunately, Lalog
lost the application form accomplished by Perez
and so on October 28, 1987, he asked the latter to
fill up another application form. 2 On November 1,
1987, Perez was made to undergo the required
medical examination, which he passed.3
Pursuant to the established procedure of the
company, Lalog forwarded the application for
additional insurance of Perez, together with all its
supporting papers, to the office of BF Lifeman
Insurance Corporation at Gumaca, Quezon which
office was supposed to forward the papers to the
Manila office.
On November 25, 1987, Perez died in an accident.
He was riding in a banca which capsized during a
storm. At the time of his death, his application
papers for the additional insurance of P50,000.00
were still with the Gumaca office. Lalog testified
that when he went to follow up the papers, he
found them still in the Gumaca office and so he
personally brought the papers to the Manila office
of BF Lifeman Insurance Corporation. It was only
on November 27, 1987 that said papers were
received in Manila.
Without knowing that Perez died on November
25, 1987, BF Lifeman Insurance Corporation
approved the application and issued the
corresponding policy for the P50,000.00 on
December 2, 1987.4
Petitioner Virginia Perez went to Manila to claim
the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first
insurance policy for P20,000.00 (double
indemnity in case of accident) but the insurance
company refused to pay the claim under the
additional policy coverage of P50,000.00, the
proceeds of which amount to P150,000.00 in view
of a triple indemnity rider on the insurance policy.
In its letter' of January 29, 1988 to Virginia A.
Perez, the insurance company maintained that the
insurance for P50,000.00 had not been perfected
at the time of the death of Primitivo Perez.
Consequently, the insurance company refunded
the amount of P2,075.00 which Virginia Perez had
paid.
On September 21, 1990, private respondent BF
Lifeman Insurance Corporation filed a complaint
against Virginia A. Perez seeking the rescission
and declaration of nullity of the insurance contract
in question.
Petitioner Virginia A. Perez, on the other hand,
averred that the deceased had fulfilled all his
prestations under the contract and all the
elements of a valid contract are present. She then
filed a counterclaim against private respondent
for the collection of P150,000.00 as actual
damages, P100,000.00 as exemplary damages,
P30,000.00 as attorney's fees and P10,000.00 as
expenses for litigation.
On October 25, 1991, the trial court rendered a
decision in favor of petitioner, the dispositive
portion of which reads as follows:
WHEREFORE PREMISES CONSIDERED,
judgment is hereby rendered in favor of
defendant Virginia A. Perez, ordering the
plaintiff BF Lifeman Insurance
Corporation to pay to her the face value of
BF Lifeman Insurance Policy No. 056300,
plus double indemnity under the SARDI
or in the total amount of P150,000.00
(any refund made and/or premium
deficiency to be deducted therefrom).
SO ORDERED.5
12 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
The trial court, in ruling for petitioner, held that
the premium for the additional insurance of
P50,000.00 had been fully paid and even if the
sum of P2,075.00 were to be considered merely as
partial payment, the same does not affect the
validity of the policy. The trial court further stated
that the deceased had fully complied with the
requirements of the insurance company. He paid,
signed the application form and passed the
medical examination. He should not be made to
suffer the subsequent delay in the transmittal of
his application form to private respondent's head
office since these were no longer within his
control.
The Court of Appeals, however, reversed the
decision of the trial court saying that the
insurance contract for P50,000.00 could not have
been perfected since at the time that the policy
was issued, Primitivo was already dead. 6 Citing the
provision in the application form signed by
Primitivo which states that:
. . . there shall be no contract of insurance
unless and until a policy is issued on this
application and that the policy shall not
take effect until the first premium has
been paid and the policy has been
delivered to and accepted by me/us in
person while I/we, am/are in good health
the Court of Appeals held that the contract of
insurance had to be assented to by both parties
and so long as the application for insurance has
not been either accepted or rejected, it is merely
an offer or proposal to make a contract.
Petitioner's motion for reconsideration having
been denied by respondent court, the instant
petition for certiorari was filed on the ground that
there was a consummated contract of insurance
between the deceased and BF Lifeman Insurance
Corporation and that the condition that the policy
issued by the corporation be delivered and
received by the applicant in good health, is
potestative, being dependent upon the will of the
insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated
consideration, one party undertakes to
compensate the other for loss on a specified
subject by specified perils. 7 A contract, on the
other hand, is a meeting of the minds between two
persons whereby one binds himself, with respect
to the other to give something or to render some
service.8 Under Article 1318 of the Civil Code,
there is no contract unless the following requisites
concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject
matter of the contract;
(3) Cause of the obligation which is
established.
Consent must be manifested by the meeting of the
offer and the acceptance upon the thing and the
cause which are to constitute the contract. The
offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance,
paid P2,075.00 and submitted the results of his
medical examination, his application was subject
to the acceptance of private respondent BF
Lifeman Insurance Corporation. The perfection of
the contract of insurance between the deceased
and respondent corporation was further
conditioned upon compliance with the following
requisites stated in the application form:
there shall be no contract of insurance
unless and until a policy is issued on this
application and that the said policy shall
not take effect until the premium has
been paid and the policy delivered to and
accepted by me/us in person while I/We,
am/are in good health.9
The assent of private respondent BF Lifeman
Insurance Corporation therefore was not given
when it merely received the application form and
all the requisite supporting papers of the
applicant. Its assent was given when it issues a
corresponding policy to the applicant. Under the
abovementioned provision, it is only when the
applicant pays the premium and receives and
accepts the policy while he is in good health that
the contract of insurance is deemed to have been
perfected.
It is not disputed, however, that when Primitivo
died on November 25, 1987, his application
papers for additional insurance coverage were
still with the branch office of respondent
corporation in Gumaca and it was only two days
later, or on November 27, 1987, when Lalog
personally delivered the application papers to the
head office in Manila. Consequently, there was
absolutely no way the acceptance of the
application could have been communicated to the
applicant for the latter to accept inasmuch as the
applicant at the time was already dead. In the case
of Enriquez vs. Sun Life Assurance Co. of
Canada,10 recovery on the life insurance of the
deceased was disallowed on the ground that the
contract for annuity was not perfected since it had
not been proved satisfactorily that the acceptance
of the application ever reached the knowledge of
the applicant.
Petitioner insists that the condition imposed by
respondent corporation that a policy must have
been delivered to and accepted by the proposed
insured in good health is potestative being
dependent upon the will of the corporation and is
therefore null and void.
13 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
We do not agree.
A potestative condition depends upon the
exclusive will of one of the parties. For this reason,
it is considered void. Article 1182 of the New Civil
Code states: When the fulfillment of the condition
depends upon the sole will the debtor, the
conditional obligation shall be void.
In the case at bar, the following conditions were
imposed by the respondent company for the
perfection of the contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to
and accepted by the applicant while he is
in good health.
The condition imposed by the corporation that the
policy must have been delivered to and accepted
by the applicant while he is in good health can
hardly be considered as a potestative or
facultative condition. On the contrary, the health
of the applicant at the time of the delivery of the
policy is beyond the control or will of the
insurance company. Rather, the condition is a
suspensive one whereby the acquisition of rights
depends upon the happening of an event which
constitutes the condition. In this case, the
suspensive condition was the policy must have
been delivered and accepted by the applicant
while he is in good health. There was non-
fulfillment of the condition, however, inasmuch as
the applicant was already dead at the time the
policy was issued. Hence, the non-fulfillment of
the condition resulted in the non-perfection of the
contract.
As stated above, a contract of insurance, like other
contracts, must be assented to by both parties
either in person or by their agents. So long as an Anent the appearance of the word
application for insurance has not been either "rescinded" in the dispositive portion of
accepted or rejected, it is merely an offer or the decision, to which defendant-appellee
proposal to make a contract. The contract, to be attaches undue significance and makes
binding from the date of application, must have capital of, it is clear that the use of the
been a completed contract, one that leaves words "and rescinded" is, as it is hereby
nothing to be done, nothing to be completed, declared, a superfluity. It is apparent from
nothing to be passed upon, or determined, before the context of the decision that the
it shall take effect. There can be no contract of insurance policy in question was found
insurance unless the minds of the parties have null and void, and did not have to be
met in agreement.11 "rescinded".13
Prescinding from the foregoing, respondent True, rescission presupposes the existence of a
corporation cannot be held liable for gross valid contract. A contract which is null and void is
negligence. It should be noted that an application no contract at all and hence could not be the
is a mere offer which requires the overt act of the subject of rescission.
insurer for it to ripen into a contract. Delay in
acting on the application does not constitute WHEREFORE, the decision rendered by the Court
acceptance even though the insured has of Appeals in CA-G.R. CV No. 35529 is AFFIRMED
forwarded his first premium with his application. insofar as it declared Insurance Policy No. 056300
The corporation may not be penalized for the for P50,000.00 issued by BF Lifeman Insurance
delay in the processing of the application papers. Corporation of no force and effect and hence null
Moreover, while it may have taken some time for and void. No costs.1âwphi1.nêt
the application papers to reach the main office, in
the case at bar, the same was acted upon less than SO ORDERED.
a week after it was received. The processing of
applications by respondent corporation normally
Davide, Jr., C.J., Puno, Kapunan and Pardo,
takes two to three weeks, the longest being a
JJ., concur.
month.12 In this case, however, the requisite
medical examination was undergone by the
deceased on November 1, 1987; the application
papers were forwarded to the head office on
November 27, 1987; and the policy was issued on
December 2, 1987. Under these circumstances, we
hold that the delay could not be deemed
unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the
Court of Appeals declared Insurance Policy
056300 for P50,000.00 null and void and
rescinded. The Court of Appeals corrected this in
its Resolution of the motion for reconsideration
filed by petitioner, thus:
14 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 198174               September 2, 2013
ALPHA INSURANCE AND SURETY
CO., PETITIONER,
vs.
ARSENIA SONIA CASTOR, RESPONDENT.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari
under Rule 45 of the Rules of Court assailing the
Decision1 dated May 31, 2011 and
Resolution2 dated August 10, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 93027.
The facts follow.
On February 21, 2007, respondent entered into a
contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her
motor vehicle, a Toyota Revo DLX DSL. The
contract of insurance obligates the petitioner to
pay the respondent the amount of Six Hundred
Thirty Thousand Pesos (₱630,000.00) in case of
loss or damage to said vehicle during the period
covered, which is from February 26, 2007 to
February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent
instructed her driver, Jose Joel Salazar Lanuza
(Lanuza), to bring the above-described vehicle to a
nearby auto-shop for a tune-up. However, Lanuza
no longer returned the motor vehicle to
respondent and despite diligent efforts to locate
the same, said efforts proved futile. Resultantly,
respondent promptly reported the incident to the
police and concomitantly notified petitioner of the
said loss and demanded payment of the insurance
proceeds in the total sum of ₱630,000.00.
In a letter dated July 5, 2007, petitioner denied the
insurance claim of respondent, stating among
others, thus:
Upon verification of the documents submitted,
particularly the Police Report and your Affidavit,
which states that the culprit, who stole the
Insure[d] unit, is employed with you. We would
like to invite you on the provision of the Policy
under Exceptions to Section-III, which we quote:
1.) The Company shall not be liable for:
xxxx
(4) Any malicious damage caused by the Insured,
any member of his family or by "A PERSON IN THE
INSURED’S SERVICE."
In view [of] the foregoing, we regret that we
cannot act favorably on your claim.
In letters dated July 12, 2007 and August 3, 2007,
respondent reiterated her claim and argued that
the exception refers to damage of the motor
vehicle and not to its loss. However, petitioner’s
denial of respondent’s insured claim remains firm.
Accordingly, respondent filed a Complaint for Sum
of Money with Damages against petitioner before
the Regional Trial Court (RTC) of Quezon City on
September 10, 2007.
In a Decision dated December 19, 2008, the RTC of
Quezon City ruled in favor of respondent in this
wise:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the plaintiff and
against the defendant ordering the latter as
follows:
To pay plaintiff the amount of ₱466,000.00 plus
legal interest of 6% per annum from the time of
demand up to the time the amount is fully settled;
To pay attorney’s fees in the sum of ₱65,000.00;
and
To pay the costs of suit.
All other claims not granted are hereby denied for
lack of legal and factual basis.3
Aggrieved, petitioner filed an appeal with the CA.
On May 31, 2011, the CA rendered a Decision
affirming in toto the RTC of Quezon City’s decision.
The fallo reads:
WHEREFORE, in view of all the foregoing, the
appeal is DENIED. Accordingly, the Decision, dated
December 19, 2008, of Branch 215 of the Regional
Trial Court of Quezon City, in Civil Case No. Q-07-
61099, is hereby AFFIRMED in toto.
SO ORDERED.4
Petitioner filed a Motion for Reconsideration
against said decision, but the same was denied in a
Resolution dated August 10, 2011.
Hence, the present petition wherein petitioner
raises the following grounds for the allowance of
its petition:
WITH DUE RESPECT TO THE HONORABLE COURT
OF APPEALS, IT ERRED AND GROSSLY OR
GRAVELY ABUSED ITS DISCRETION WHEN IT
ADJUDGED IN FAVOR OF THE PRIVATE
15 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
RESPONDENT AND AGAINST THE PETITIONER
AND RULED THAT EXCEPTION DOES NOT COVER
LOSS BUT ONLY DAMAGE BECAUSE THE TERMS
OF THE INSURANCE POLICY ARE [AMBIGUOUS]
EQUIVOCAL OR UNCERTAIN, SUCH THAT THE
PARTIES THEMSELVES DISAGREE ABOUT THE
MEANING OF PARTICULAR PROVISIONS, THE
POLICY WILL BE CONSTRUED BY THE COURTS
LIBERALLY IN FAVOR OF THE ASSURED AND
STRICTLY AGAINST THE INSURER.
WITH DUE RESPECT TO THE HONORABLE COURT
OF APPEALS, IT ERRED AND COMMITTED GRAVE
ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN
TOTO THE JUDGMENT OF THE TRIAL COURT.5
Simply, the core issue boils down to whether or
not the loss of respondent’s vehicle is excluded
under the insurance policy.
We rule in the negative.
Significant portions of Section III of the Insurance
Policy states:
SECTION III – LOSS OR DAMAGE
The Company will, subject to the Limits of
Liability, indemnify the Insured against loss of or
damage to the Schedule Vehicle and its accessories
and spare parts whilst thereon:
(a)
by accidental collision or overturning, or collision
or overturning consequent upon mechanical
breakdown or consequent upon wear and tear;
(b)
by fire, external explosion, self-ignition or
lightning or burglary, housebreaking or theft;
(c)
by malicious act;
(d)
whilst in transit (including the processes of
loading and unloading) incidental to such transit
by road, rail, inland waterway, lift or elevator.
xxxx
EXCEPTIONS TO SECTION III
The Company shall not be liable to pay for:
Loss or Damage in respect of any claim or series of
claims arising out of one event, the first amount of
each and every loss for each and every vehicle
insured by this Policy, such amount being equal to
one percent (1.00%) of the Insured’s estimate of
Fair Market Value as shown in the Policy Schedule
with a minimum deductible amount of
Php3,000.00;
Consequential loss, depreciation, wear and tear,
mechanical or electrical breakdowns, failures or
breakages;
Damage to tires, unless the Schedule Vehicle is
damaged at the same time;
Any malicious damage caused by the Insured, any
member of his family or by a person in the
Insured’s service.6
In denying respondent’s claim, petitioner takes
exception by arguing that the word "damage,"
under paragraph 4 of "Exceptions to Section III,"
means loss due to injury or harm to person,
property or reputation, and should be construed
to cover malicious "loss" as in "theft." Thus, it
asserts that the loss of respondent’s vehicle as a
result of it being stolen by the latter’s driver is
excluded from the policy.
We do not agree.
Ruling in favor of respondent, the RTC of Quezon
City scrupulously elaborated that theft
perpetrated by the driver of the insured is not an
exception to the coverage from the insurance
policy, since Section III thereof did not qualify as
to who would commit the theft. Thus:
Theft perpetrated by a driver of the insured is not
an exception to the coverage from the insurance
policy subject of this case. This is evident from the
very provision of Section III – "Loss or Damage."
The insurance company, subject to the limits of
liability, is obligated to indemnify the insured
against theft. Said provision does not qualify as to
who would commit the theft. Thus, even if the
same is committed by the driver of the insured,
there being no categorical declaration of
exception, the same must be covered. As correctly
pointed out by the plaintiff, "(A)n insurance
contract should be interpreted as to carry out the
purpose for which the parties entered into the
contract which is to insure against risks of loss or
damage to the goods. Such interpretation should
result from the natural and reasonable meaning of
language in the policy. Where restrictive
provisions are open to two interpretations, that
which is most favorable to the insured is adopted."
The defendant would argue that if the person
employed by the insured would commit the theft
and the insurer would be held liable, then this
would result to an absurd situation where the
insurer would also be held liable if the insured
would commit the theft. This argument is certainly
flawed. Of course, if the theft would be committed
by the insured himself, the same would be an
exception to the coverage since in that case there
would be fraud on the part of the insured or
breach of material warranty under Section 69 of
the Insurance Code.7
16 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Moreover, contracts of insurance, like other
contracts, are to be construed according to the
sense and meaning of the terms which the parties
themselves have used. If such terms are clear and
unambiguous, they must be taken and understood
in their plain, ordinary and popular
sense.8 Accordingly, in interpreting the exclusions
in an insurance contract, the terms used
specifying the excluded classes therein are to be
given their meaning as understood in common
speech.9
Adverse to petitioner’s claim, the words "loss" and
"damage" mean different things in common
ordinary usage. The word "loss" refers to the act
or fact of losing, or failure to keep possession,
while the word "damage" means deterioration or
injury to property.1âwphi1
Therefore, petitioner cannot exclude the loss of
respondent’s vehicle under the insurance policy
under paragraph 4 of "Exceptions to Section III,"
since the same refers only to "malicious damage,"
or more specifically, "injury" to the motor vehicle
caused by a person under the insured’s service.
Paragraph 4 clearly does not contemplate "loss of
property," as what happened in the instant case.
Further, the CA aptly ruled that "malicious
damage," as provided for in the subject policy as
one of the exceptions from coverage, is the
damage that is the direct result from the
deliberate or willful act of the insured, members of
his family, and any person in the insured’s service,
whose clear plan or purpose was to cause damage
to the insured vehicle for purposes of defrauding
the insurer, viz.:
This interpretation by the Court is bolstered by
the observation that the subject policy appears to
clearly delineate between the terms "loss" and
"damage" by using both terms throughout the said
policy. x x x
xxxx
If the intention of the defendant-appellant was to
include the term "loss" within the term "damage"
then logic dictates that it should have used the
term "damage" alone in the entire policy or
otherwise included a clear definition of the said
term as part of the provisions of the said
insurance contract. Which is why the Court finds it
puzzling that in the said policy’s provision
detailing the exceptions to the policy’s coverage in
Section III thereof, which is one of the crucial parts
in the insurance contract, the insurer, after
liberally using the words "loss" and "damage" in
the entire policy, suddenly went specific by using
the word "damage" only in the policy’s exception
regarding "malicious damage." Now, the
defendant-appellant would like this Court to
believe that it really intended the word "damage"
in the term "malicious damage" to include the
theft of the insured vehicle.
The Court does not find the particular contention
to be well taken.
True, it is a basic rule in the interpretation of
contracts that the terms of a contract are to be
construed according to the sense and meaning of
the terms which the parties thereto have used. In
the case of property insurance policies, the
evident intention of the contracting parties, i.e.,
the insurer and the assured, determine the import
of the various terms and provisions embodied in
the policy. However, when the terms of the
insurance policy are ambiguous, equivocal or
uncertain, such that the parties themselves
disagree about the meaning of particular
provisions, the policy will be construed by the
courts liberally in favor of the assured and strictly
against the insurer.10
Lastly, a contract of insurance is a contract of
adhesion. So, when the terms of the insurance
contract contain limitations on liability, courts
should construe them in such a way as to preclude
the insurer from non-compliance with his
obligation. Thus, in Eternal Gardens Memorial
Park Corporation v. Philippine American Life
Insurance Company,11 this Court ruled –
It must be remembered that an insurance contract
is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against
the insurer in order to safeguard the latter’s
interest. Thus, in Malayan Insurance Corporation
v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are
construed in accordance with the general rule of
resolving any ambiguity therein in favor of the
insured, where the contract or policy is prepared
by the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any
ambiguity therein should be resolved against the
insurer; in other words, it should be construed
liberally in favor of the insured and strictly against
the insurer. Limitations of liability should be
regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer
from non-compliance with its obligations.
In the more recent case of Philamcare Health
Systems, Inc. v. Court of Appeals, we reiterated the
above ruling, stating that:
When the terms of insurance contract contain
limitations on liability, courts should construe
them in such a way as to preclude the insurer
from non-compliance with his obligation. Being a
contract of adhesion, the terms of an insurance
contract are to be construed strictly against the
party which prepared the contract, the insurer. By
reason of the exclusive control of the insurance
company over the terms and phraseology of the
insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in
favor of the insured, especially to avoid
forfeiture.12
17 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
WHEREFORE, premises considered, the instant
Petition for Review on Certiorari is DENIED.
Accordingly, the Decision dated May 31, 2011 and
Resolution dated August 10, 2011 of the Court of
Appeals are hereby AFFIRMED.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

18 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21574             June 30, 1966
SIMON DE LA CRUZ, plaintiff and appellee,
vs.
THE CAPITAL INSURANCE and SURETY CO.,
INC., defendant and appellant.
Achacoso, Nera and Ocampo for defendant and
appellant.
Agustin M. Gramata for plaintiff and appellee.
BARRERA, J.:
This is an appeal by the Capital Insurance & Surety
Company, Inc., from the decision of the Court of
First Instance of Pangasinan (in Civ Case No. U-
265), ordering it to indemnify therein plaintiff
Simon de la Cruz for the death of the latter's son,
to pay the burial expenses, and attorney's fees.
Eduardo de la Cruz, employed as a mucker in the
Itogon-Suyoc Mines, Inc. in Baguio, was the holder
of an accident insurance policy (No. ITO-BFE-170)
underwritten by the Capital Insurance & Surety
Co., Inc., for the period beginning November 13,
1956 to November 12, 1957. On January 1, 1957,
in connection with the celebration of the New
Year, the Itogon-Suyoc Mines, Inc. sponsored a
boxing contest for general entertainment wherein
the insured Eduardo de la Cruz, a non-professional
boxer participated. In the course of his bout with
another person, likewise a non-professional, of the
same height, weight, and size, Eduardo slipped
and was hit by his opponent on the left part of the
back of the head, causing Eduardo to fall, with his
head hitting the rope of the ring. He was brought
to the Baguio General Hospital the following day.
The cause of death was reported as hemorrhage,
intracranial, left.
Simon de la Cruz, the father of the insured and
who was named beneficiary under the policy,
thereupon filed a claim with the insurance
company for payment of the indemnity under the
insurance policy. As the claim was denied, De la
Cruz instituted the action in the Court of First
Instance of Pangasinan for specific performance.
Defendant insurer set up the defense that the
death of the insured, caused by his participation in
a boxing contest, was not accidental and,
therefore, not covered by insurance. After due
hearing the court rendered the decision in favor of
the plaintiff which is the subject of the present
appeal.
It is not disputed that during the ring fight with
another non-professional boxer, Eduardo slipped,
which was unintentional. At this opportunity, his
opponent landed on Eduardo's head a blow, which
sent the latter to the ropes. That must have caused
the cranial injury that led to his death. Eduardo
was insured "against death or disability caused by
accidental means". Appellant insurer now
contends that while the death of the insured was
due to head injury, said injury was sustained
because of his voluntary participation in the
contest. It is claimed that the participation in the
boxing contest was the "means" that produced the
injury which, in turn, caused the death of the
insured. And, since his inclusion in the boxing card
was voluntary on the part of the insured, he
cannot be considered to have met his death by
"accidental means".1äwphï1.ñët
The terms "accident" and "accidental", as used in
insurance contracts, have not acquired any
technical meaning, and are construed by the
courts in their ordinary and common acceptation.
Thus, the terms have been taken to mean that
which happen by chance or fortuitously, without
intention and design, and which is unexpected,
unusual, and unforeseen. An accident is an event
that takes place without one's foresight or
expectation — an event that proceeds from an
unknown cause, or is an unusual effect of a known
cause and, therefore, not expected.1
Appellant however, would like to make a
distinction between "accident or accidental" and
"accidental means", which is the term used in the
insurance policy involved here. It is argued that to
be considered within the protection of the policy,
what is required to be accidental is the means that
caused or brought the death and not the death
itself. It may be mentioned in this connection, that
the tendency of court decisions in the United
States in recent years is to eliminate the fine
distinction between the terms "accidental" and
"accidental means" and to consider them as legally
synonymous.2 But, even if we take appellant's
theory, the death of the insured in the case at bar
would still be entitled to indemnification under
the policy. The generally accepted rule is that,
death or injury does not result from accident or
accidental means within the terms of an
accident-policy if it is the natural result of the
insured's voluntary act, unaccompanied by
anything unforeseen except the death or
injury.3 There is no accident when a deliberate act
is performed unless some additional, unexpected,
independent, and unforeseen happening occurs
which produces or brings about the result of
injury or death.4 In other words, where the death
or injury is not the natural or probable result of
the insured's voluntary act, or if something
unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within
the protection of policies insuring against death or
injury from accident.
In the present case, while the participation of the
insured in the boxing contest is voluntary, the
injury was sustained when he slid, giving occasion
to the infliction by his opponent of the blow that
19 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
threw him to the ropes of the ring. Without this
unfortunate incident, that is, the unintentional
slipping of the deceased, perhaps he could not
have received that blow in the head and would not
have died. The fact that boxing is attended with
some risks of external injuries does not make any
injuries received in the course of the game not
accidental. In boxing as in other equally physically
rigorous sports, such as basketball or baseball,
death is not ordinarily anticipated to result. If,
therefore, it ever does, the injury or death can only
be accidental or produced by some unforeseen
happening or event as what occurred in this case.

Furthermore, the policy involved herein

specifically excluded from its coverage —

(e) Death or disablement consequent

upon the Insured engaging in football,
hunting, pigsticking, steeplechasing, polo-
playing, racing of any kind,
mountaineering, or motorcycling.

Death or disablement resulting from engagement

in boxing contests was not declared outside of the
protection of the insurance contract. Failure of the
defendant insurance company to include death
resulting from a boxing match or other sports
among the prohibitive risks leads inevitably to the
conclusion that it did not intend to limit or exempt
itself from liability for such death.5

Wherefore, in view of the foregoing

considerations, the decision appealed from is
hereby affirmed, with costs against appellant. so
ordered.

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

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

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

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

21 |I N S U R A N C E
PERFECTION OF INSURANCE CONTRACT; INTERPRETATION OF INSURANCE CONTRACTS
4. Fracture, simple, middle phalanx,
middle finger, left;
5. Lacerated wound, sutured, volar aspect,
small finger, left;
6. Fracture, simple, chip, head, 1st
phalanx, 5th digit, left. He underwent
medical treatment in the Orthopedic
Hospital from December 26, 1953 to
February 8, 1954. The above-described
physical injuries have caused temporary
total disability of plaintiff's left hand.
Plaintiff filed the corresponding notice of
accident and notice of claim with all of the
abovenamed defendants to recover
indemnity under Part II of the policy,
which is similarly worded in all of the
policies, and which reads pertinently as
follows:
INDEMNITY FOR TOTAL OR PARTIAL
DISABILITY
If the Insured sustains any Bodily Injury
which is effected solely through violent,
external, visible and accidental means,
and which shall not prove fatal but shall
result, independently of all other causes
and within sixty (60) days from the
occurrence thereof, in Total or Partial
Disability of the Insured, the Company
shall pay, subject to the exceptions as
provided for hereinafter, the amount set
opposite such injury:
PARTIAL DISABILITY
LOSS OF:
xxx     xxx     xxx
Either While we sympathize with the plaintiff or his
hand ............................................................................ employer, for whose benefit the policies were
P650.00 issued, we can not go beyond the clear and
express conditions of the insurance policies, all of
xxx     xxx     xxx which define partial disability as loss of either
hand by amputation through the bones of the
... The loss of a hand shall mean the loss wrist." There was no such amputation in the case
by amputation through the bones of the at bar. All that was found by the trial court, which
wrist.... is not disputed on appeal, was that the physical
injuries "caused temporary total disability of
plaintiff's left hand." Note that the disability of
Defendants rejected plaintiff's claim for
plaintiff's hand was merely temporary, having
indemnity for the reason that there being
been caused by fracture of the index, the middle
no severance of amputation of the left
and the fourth fingers of the left hand.
hand, the disability suffered by him was
not covered by his policy. Hence, plaintiff
sued the defendants in the Municipal We might add that the agreement contained in the
Court of this City, and from the decision of insurance policies is the law between the parties.
said Court dismissing his complaints, As the terms of the policies are clear, express and
plaintiff appealed to this Court. (Decision specific that only amputation of the left hand
of the Court of First Instance of Manila, should be considered as a loss thereof, an
pp. 223-226, Records). interpretation that would include the mere
fracture or other temporary disability not covered
by the policies would certainly be unwarranted.
In view of its finding, the court absolved the
defendants from the complaints. Hence this
appeal. WHEREFORE, the decision appealed from is
hereby affirmed, with costs against the plaintiff-
appellant.
The main contention of appellant in these cases is
that in order that he may recover on the insurance
policies issued him for the loss of his left hand, it is Bengzon, C.J., Padilla, Bautista Angelo, Concepcion,
not necessary that there should be an amputation Reyes, J.B.L., Barrera, Paredes and Dizon, JJ., concur.
thereof, but that it is sufficient if the injuries
prevent him from performing his work or labor
necessary in the pursuance of his occupation or
business. Authorities are cited to the effect that
"total disability" in relation to one's occupation
means that the condition of the insurance is such
that common prudence requires him to desist
from transacting his business or renders him
incapable of working. (46 C.J.S., 970). It is also
argued that obscure words or stipulations should
be interpreted against the person who caused the
obscurity, and the ones which caused the
obscurity in the cases at bar are the defendant
insurance companies.
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PANATON VS. MALAYAN INSURANCE CO.

2 COURT OF APPEALS REPORT 78

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

We find no reversible error in the judgment

appealed from, wherefore the smae is hereby
affirmed. Costs against the appellant. So ordered.

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

Labrador, and Concepcion, JJ., concur.

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

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

It results that the petitioner is entitled to recover

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

43 |I N S U R A N C E
COMPULSORY MOTOR VEHICLE INSURANCE

44 |I N S U R A N C E