Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No.

91666 July 20, 1990 WESTERN GUARANTY CORPORATION, petitioner, vs. HONORABLE COURT OF APPEALS, PRISCILLA E. RODRIGUEZ, and DE DIOS TRANSPORTATION CO., INC.,respondents. Narciso E. Ramirez for petitioner. Alejandro Z. Barin and Carlos C. Fernando for private respondent.

FELICIANO, J.: At around 4:30 in the afternoon of 27 March 1982, while crossing Airport Road on a pedestrian lane on her way to work, respondent Priscilla E. Rodriguez was struck by a De Dios passenger bus owned by respondent De Dios Transportation Co., Inc., then driven by one Walter Saga y Aspero The bus driver disregarded the stop signal given by a traffic policeman to allow pedestrians to cross the road. Priscilla was thrown to the ground, hitting her forehead. She was treated at the Protacio Emergency Hospital and later on hospitalized at the San Juan De Dios Hospital. Her face was permanently disfigured, causing her serious anxiety and moral distress. Respondent bus company was insured with petitioner Western Guaranty Corporation ("Western") under its Master Policy which provided, among other things, for protection against third party liability, the relevant section reading as follows: Section 1. Liability to the Public Company will, subject to the Limits of Liability, pay all sums necessary to discharge liability of the insured in respect of (a) death of or bodily injury to or damage to property of any passenger as defined herein. (b) death of or bodily injury or damage to property of any THIRD PARTY as defined herein in any accident caused by or arising out of the use of the Schedule Vehicle, provided that the liability shall have first been determined. In no case, however, shall the Company's total payment under both Section I and Section 11 combined exceed the Limits of Liability set forth herein. With respect to death of or bodily injury to any third party or passenger, the company's payment per victim in any one accident shall not exceed the limits indicated in the Schedule of indemnities provided for in this policy excluding the cost of additional medicines, and such other burial and funeral expenses that might have been incurred. (Emphasis supplied) Respondent Priscilla Rodriguez filed a complaint for damages before the Regional Trial Court of Makati against De Dios Transportation Co. and Walter A. Saga Respondent De Dios Transportation Co., in turn, filed a third-party complaint against its insurance carrier, petitioner Western. On 6 August 1985, the trial court rendered a decision in favor of respondent Priscilla E. Rodriguez, the dispositive portion of which read: WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendants, ordering the latter to pay the former, jointly and severally, and for the third-party defendant to pay to the plaintiff, by way of contribution, indemnity or subrogation whatever amount may be left unpaid by the defendant De Dios Transportation Company, Inc. to the extent of not more than P50,000.00, as follows: a) The sum of P2,776.00 as actual damages representing doctor's fees, hospitalization and medicines; b) the sum of P1,500.00 by way of compensation for loss of earning during plaintiffs incapacity to work; c) the sum of P10,000.00 as and by way of moral damages ; d) the sum of P10,000.00 as and by way of attorney's fees ;and e) the cost of suit.

On appeal, the Court of Appeals affirmed in toto the decision of the trial court. Petitioner moved for the reconsideration of the appellate court's decision. In a Resolution dated 10 January 1990, the Court of Appeals denied the motion for reconsideration petition for lack of merit. Petitioner Western is now before us on a Petition for Review alleging that the Court of Appeals erred in holding petitioner liable to pay beyond the limits set forth in the Schedule of Indemnities and in finding Western liable for loss of earnings, moral damages and attorney's fees. Succinctly stated, it is petitioner Western's position that it cannot be held liable for loss of earnings, moral damages and attorney's fees because these items are not among those included in the Schedule of Indemnities set forth in the insurance policy. Deliberating on the instant Petition for Review, we consider that petitioner Western has failed to show any reversible error on the part of the Court of Appeals in rendering its Decision dated 26 April 1989 and its Resolution dated 10 January 1990. An examination of Section 1 entitled "Liability to the Public", quoted above, of the Master Policy issued by petitioner Western shows that that Section defines the scope of the liability of insurer Western as well as theevents which generate such liability. The scope of liability of Western is marked out in comprehensive terms: "all sums necessary to discharge liability of the insured in respect of [the precipitating events]" The precipitating events which generate liability on the part of the insurer, either in favor of a passenger or a third party, are specified in the following terms: (1) death of, or (2) bodily injury to, or (3) damage to property of, the passenger or the third party. Where no death, no bodily injury and no damage to property resulted from the casualty ("any accident caused by or arising out of the use of the Schedule Vehicle"), no liability is created so far as concerns the insurer, petitioner Western. The "Schedule of Indemnities for Death and/or Bodily Injury" attached to the Master Policy, which petitioner Western invokes, needs to be quoted in full: Schedule of Indemnities for Death and/or Bodily Injury: The following schedule of indemnities should be observed in the settlement of claims for death, bodily injuries of, professional fees and hospital charges, for services rendered to traffic accident victims under CMVLI coverage:
DEATH INDEMNITY

P12,000.00

PERMANENT DISABLEMENT DESCRIPTION OF DISABLEMENT Loss of two limbs Loss of both hands, or all fingers and both thumbs Loss of both feet Loss of one hand and one foot Loss of sight of both eyes Injuries resulting in being permanently bedridden Any other injury causing permanent total disablement 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 Amount P6,000.00

Loss of arm or above elbow Loss of arm between elbow and wrist Loss of hand Loss of four fingers and thumb of one hand Loss of four fingers Loss of leg at or above knee Loss of leg below knee Loss of one foot Loss of toes-all of one foot Loss of thumb Loss of index finger Loss of sight of one eye Loss of hearing both ears Loss of hearingone ear Total of Accommodation of Professional Attendance
Extended

4,200.00 3,000.00

P2,550.00 2,550.00

2,100.00 3,600.00 2,400.00 2,400.00 900.00 900.00 600.00 1,800.00 3,000.00 450.00

Services Rendered Maximum of 45 days/yearLaboratory fees, drugs x-rays, etc. 300.0 0

Fees or Charges P 36.00/day

HOSPITAL ROOM

SURGICAL EXPENSES

Major Operation Medium Operation Minor Operation

1,000.00 500.00 100.00

ANAESTHESIOLOGIST

Major Operation

300.00 LOGISTS' FEES Medium Operation 150.00 Minor Operation 50.00 OPERATING ROOM Major Operation Medium Operation Minor Operation MEDICAL EXPENSES For daily visits of Practitioner or Specialist
Total amount of medical

150.00 100.00 40.00

20.00 /day

expenses must not exceed (for single period of confinement)

400.00
1

It will be seen that the above quoted Schedule of Indemnities establishes monetary limits which Western may invoke in case of occurrence of the particular kinds of physical injury there listed, e.g.:
loss of both feet

P6,000.00; P2,400.00;

loss of one foot loss of sight of one eye

P1,800.00;

It must be stressed, however, that the Schedule of Indemnities does not purport to limit, or to enumerate exhaustively, the species of bodily injury occurrence of which generate liability for petitioner Western. A car accident may, for instance, result in injury to internal organs of a passenger or third party, without any accompanying amputation or loss of an external member (e.g., a foot or an arm or an eye). But such internal injuries are surely covered by Section I of the Master Policy, since they certainly constitute bodily injuries. Petitioner Western in effect contends before this Court, as it did before the Court of Appeals, that because the Schedule of Indemnities limits the amount payable for certain kinds of expenses "hospital room", "surgical expenses", "anaesthesiologists' fee", "operating room" and "medical expenses" that Schedule should be read as excluding liability for any other type of expense or damage or loss even though actually sustained or incurred by the third party victim. We are not persuaded by Western's contention.

Firstly, the Schedule of Indemnities does not purport to restrict the kinds of damages that may be awarded against Western once liability has arisen. Section 1, quoted above, does refer to certain "Limits of Liability" which in the case of the third party liability section of the Master Policy, is apparently P50,000.00 per person per accident. Within this over-all quantitative limit, all kinds of damages allowable by law" actual or compensatory damages"; "moral damages'; "nominal damages"; "temperate or moderate damages"; "liquidated damages"; and "exemplary damages" 2 may be awarded by a competent court against the insurer once liability is shown to have arisen, and the essential requisites or conditions for grant of each species of damages are present. It appears to us self-evident that the Schedule of Indemnities was not intended to be an enumeration, much less a closed enumeration, of the specific kinds of damages which may be awarded under the Master Policy Western has issued. Accordingly, we agree with the Court of Appeals that: ... we cannot agree with the movant that the schedule was meant to be an exclusive enumeration of the nature of the damages for which it would be liable under its policy. As we see it, the schedule was merely meant to set limits to the amounts the movant would be liable for in cases of claims for death, bodily injuries of, professional services and hospital charges, for services rendered to traffic accident victims,' and not necessarily exclude claims against the insurance policy for other kinds of damages, such as those in question. Secondly, the reading urged by Western of the Schedule of Indemnities comes too close to working fraud upon both the insured and the third party beneficiary of Section 1, quoted above. For Western's reading would drastically and without warning limit the otherwise unlimited (save for the over-all quantitative limit of liability of P50,000.00 per person per accident) and comprehensive scope of liability assumed by the insurer Western under Section 1: "all sums necessary to discharge liability of the insured in respect of [bodily injury to a third party]". This result- which is not essentially different from taking away with the left hand what had been given with the right hand we must avoid as obviously repugnant to public policy. If what Western now urges is what Western intended to achieve by its Schedule of Indemnities, it was incumbent upon Western to use language far more specific and precise than that used in fact by Western, so that the insured, and potential purchasers of its Master Policy, and the Office of the Insurance Commissioner, may be properly informed and act accordingly. Petitioner Western would have us construe the Schedule of Indemnities as comprising contractual limitations of liability which, as already noted, is comprehensively defined in Section 1 Liability to the Public" of the Master Policy. It is wellsettled, however, that contractual limitations of liability found in insurance contracts should be regarded by courts with a jaundiced eye and extreme care and should be so construed as to preclude the insurer from evading compliance with its just obligations. 3 Finally, an insurance contract is a contract of adhesion. The rule is well entrenched in our jurisprudence that the terms of such contract are to be construed strictly against the party which prepared the contract, which in this case happens to be petitioner Western. 4 ACCORDINGLY, the Court Resolved to DENY the Petition for Review for lack of merit Costs against petitioner. Fernan (Chairman), Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Footnotes 1 Rollo, pp. 5-6. 2 Article 2197, Civil Code. Fernan, C.J., (Chairman, Gutierrez, Jr., Bidin and Cortes, JJ., concur. 3 Taurus Taxi v. Capital Insurance, 24 SCRA 454 (1968); Eagle Star v. Chia Yu, 96 Phils. 696 (1955). 4 Landicho v. Government Service Insurance System, 44 SCRA 7 (1972); Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 98 Phil. (1955).

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 119599 March 20, 1997 MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS and TKC MARKETING CORPORATION, respondents.

ROMERO, J.: Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G. R. No. 43023 1which affirmed, with slight modification, the decision of the Regional Trial Court of Cebu, Branch 15. Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of soya bean meal which was loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the port of Manila. Said cargo was insured against the risk of loss by petitioner Malayan Insurance Corporation for which it issued two (2) Marine Cargo policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both dated September 1989. While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila, the civil authorities arrested and detained it because of a lawsuit on a question of ownership and possession. As a result, private respondent notified petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for the amount of US$916,886.66, representing the dollar equivalent on the policies, for non-delivery of the cargo. Private respondent likewise sought the assistance of petitioner on what to do with the cargo. Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies. Private respondent, accordingly, advised petitioner that it might tranship the cargo and requested an extension of the insurance coverage until actual transhipment, which extension was approved upon payment of additional premium. The insurance coverage was extended under the same terms and conditions embodied in the original policies while in the process of making arrangements for the transhipment of the cargo from Durban to Manila, covering the period October 4 - December 19, 1989. However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature which could no longer stand a voyage of twenty days to Manila and another twenty days for the discharge thereof. On January 5, 1990, private respondent forthwith reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private respondent's loss after the proceeds of the sale were deducted from the original claim of $916,886.66 or P20,184,159.55. Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of ownership was an excepted risk under the marine insurance policies. This prompted private respondent to file a complaint for damages praying that aside from its claim, it be reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for the loan it obtained to finance the shipment totalling P942,269.30. In addition, private respondent asked for moral damages amounting to P200,000.00, exemplary damages amounting to P200,000.00 and attorney's fees equivalent to 30% of what will be awarded by the court. The lower court decided in favor of private respondent and required petitioner to pay, aside from the insurance claim, consequential and liquidated damages amounting to P1,024,233.88, exemplary damages amounting to P100,000.00, reimbursement in the amount equivalent to 10% of whatever is recovered as attorney's fees as well as the costs of the suit. On private respondent's motion for reconsideration, petitioner was also required to further pay interest at the rate of 12% per annum on all amounts due and owing to the private respondent by virtue of the lower court decision counted from the inception of this case until the same is paid. On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of Clause 12 of the policies issued to private respondent, the same became automatically covered under subsection 1.1 of Section 1 of the

Institute War Clauses. The arrests, restraints or detainments contemplated in the former clause were those effected by political or executive acts. Losses occasioned by riot or ordinary judicial processes were not covered therein. In other words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by ordinary legal processes. Hence, arrests by civil authorities, such as what happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the Institute Cargo Clause and the consequent adoption or institution of the Institute War Clauses (Cargo), the arrest and seizure by judicial processes which were excluded under the former policy became one of the covered risks. The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss compensable, not only under the Institute War Clause but also under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read in relation to Section 130 of the Insurance Code and as held inWilliams v. Cole. 2 Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port from completing the voyage due to its seizure by civil authorities, a peril insured against, the liability of petitioner continued until the goods could have been transhipped. But due to the perishable nature of the goods, it had to be promptly sold to minimize loss. Accordingly, the sale of the goods being reasonable and justified, it should not operate to discharge petitioner from its contractual liability. Hence this petition, claiming that the Court of Appeals erred: 1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies. 2. In ruling that there was constructive total loss over the cargo. 3. In ruling that petitioner was in bad faith in declining private respondent's claim. 4. In giving undue reliance to the doctrine that insurance policies are strictly construed against the insurer. In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not compensable since the term "arrest" refers to "political or executive acts" and does not include a loss caused by riot or by ordinary judicial process as in this case; (b) the deletion of the Free from capture or Seizure Clause would leave the assured covered solely for the perils specified by the wording of the policy itself; (c) the rationale for the exclusion of an arrest pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and civil authorities. As to the second assigned error, petitioner submits that any loss which private respondent may have incurred was in the nature and form of unrecovered acquisition value brought about by a voluntary sacrifice sale and not by arrest, detention or seizure of the ship. As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief that the arrest of the vessel was not a compensable risk under the policies issued. In fact, petitioner supported private respondent by accommodating the latter's request for an extension of the insurance coverage, notwithstanding that it was then under no legal obligation to do so. Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals, petitioner did not raise as an issue the award of exemplary damages. It cannot now, for the first time, raise the same before this Court. Likewise, petitioner cannot submit for the first time on appeal its argument that it was wrong for the Court of Appeals to have ruled the way it did based on facts that would need inquiry into the evidence. Even if inquiry into the facts were possible, such was not necessary because the coverage as ruled upon by the Court of Appeals is evident from the very terms of the policies. It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted against it because the rule is that any ambiguity is to be taken contra proferentum. Risk policies should be construed reasonably and in a manner as to make effective the intentions and expectations of the parties. It added that the policies clearly stipulate that they cover the risks of non-delivery of an entire package and that it was petitioner itself that invited and granted the extensions and collected premiums thereon. The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject policies in relation to the excluded risks or warranty specifically stated therein. By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase "perils of the sea" to encompass the wide and varied range of risks that were covered. 3 The subject policies contain the "Perils" clause which is a standard form in any marine insurance policy. Said clause reads:

Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, Condition, or quality soever, Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and merchandise or any part thereof . AND in case of any loss or misfortune it shall be lawful to the ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said COMPANY, will contribute according to the rate and quantity of the sum herein INSURED. AND it is expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or preserving the Property insured shall be considered as a Waiver, or Acceptance of Abandonment. And it is agreed by the said COMPANY, that this writing or Policy of INSURANCE shall be of as much Force and Effect as the surest Writing or policy of INSURANCE made in LONDON. And so the said MALAYAN INSURANCE COMPANY., INC., are contented, and do hereby promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for the true Performance of the Premises; confessing themselves paid the Consideration due unto them for this INSURANCE at and after the rate arranged. (Emphasis supplied) The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject policies is specifically referred to as Clause 12 called the "Free from Capture & Seizure Clause" or the F.C. & S. Clause which reads, thus: Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat; also from the consequences of hostilities and warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent power and for the purpose of this warranty "power" includes any authorities maintaining naval, military or air forces in association with power. Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising therefrom or piracy. Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of this insurance. (Emphasis supplied) However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides: 1. This insurance covers: 1.1 The risks excluded from the standard form of English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature on voyage or service which the vessel concerned or, in the case of a collision any other vessel involved therein is performing) by a hostile act by or against a belligerent power; and for the purpose of this warranty "power" includes any authority maintaining naval, military or air forces in association with a power. Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy. According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute War Clauses (Cargo), among others, means that any "capture, arrest, detention, etc." pertained exclusively to warlike operations if this Court strictly construes the heading of the said clauses. However, it also claims that the parties intended to include arrests, etc. even if it were not the result of hostilities or warlike operations. It further claims that on the strength of jurisprudence on the matter, the term "arrests" would only cover those arising from political or executive acts, concluding that whether private respondent's claim is anchored on subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by judicial authorities is an excluded risk. 4 This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils" Clause, it assumed the risk of arrest caused solely by executive or political acts of the government of the seizing state and thereby excludes "arrests" caused by ordinary legal processes, such as in the instant case.

With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees with the Court of Appeals and the private respondent that "arrest" caused by ordinary judicial process is deemed included among the covered risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses provided that "this insurance covers the risks excluded from the Standard Form of English Marine Policy by the clause "Warranted free of capture, seizure, arrest, etc. . . ." or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the Standard Form of English Marine Policy by the F.C. & S. Clause. Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included in the covered risk simply because the F.C. & S. Clause under the Institute War Clauses can only be operative in case of hostilities or warlike operations on account of its heading "Institute War Clauses." This Court agrees with the Court of Appeals when it held that ". . . . Although the F.C. & S. Clause may have originally been inserted in marine policies to protect against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the clause, . . . ." 5 In fact, petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included "arrest" even if it were not a result of hostilities or warlike operations. 6 In this regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process, logically, such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of the Institute War Clauses, regardless of whether or not said "arrest" by civil authorities occurred in a state of war. Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike operations . . . ." 7 In the same vein, it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if were not a result of hostilities or warlike operations. 8 This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions of the policy in order to avoid being liable for private respondent's claim. This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest" occasioned by executive or political acts of government which is interpreted as not referring to those caused by ordinary legal processes as contained in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political acts of the government and naturally, also those caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now includes in the coverage risks of arrest due to executive or political acts of a government but then still excludes "arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said Clauses should also have included "arrests" previously excluded from the coverage of the F.C. & S. Clause. It has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd conclusion or to render the policy nonsensical, should, by all means, be avoided. 9 Likewise, it must be borne in mind that such contracts are invariably prepared by the companies and must be accepted by the insured in the form in which they are written. 10 Any construction of a marine policy rendering it void should be avoided. 11 Such policies will, therefore, be construed strictly against the company in order to avoid a forfeiture, unless no other result is possible from the language used. 12 If a marine insurance company desires to limit or restrict the operation of the general provisions of its contract by special proviso, exception, or exemption, it should express such limitation in clear and unmistakable language. 13Obviously, the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the subject policies, there would have been no controversy with respect to the interpretation of the subject clauses. Be that as it may, exceptions to the general coverage are construed most strongly against the company. 14 Even an express exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose benefit the exception is introduced. 15 An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract which is, to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of language in the policy. 16 Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted. 17 Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. 18 A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed

liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations. 19 In view of the foregoing, this Court sees no need to discuss the other issues presented. WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED. SO ORDERED. Regalado, Puno, Mendoza, and Torres, Jr., JJ., concur. Footnotes 1 Penned by Justice Godardo A. Jacinto and concurred in by Justices Ricardo J. Francisco and Hector L. Hofilena. 2 16 Me. 207. 3 R. Keeton & A. Widiss, Insurance Law, 467 (1988). 4 Petition, pp. 13-14, Rollo. 5 Blaine Richards & Co. v. Marine Indem., Ins., Co., 653 F. 2nd 1051 (1980). 6 Petition, p. 13, Rollo. 7 p. 13, supra. 8 Supra. 9 Importers' & Exporters' Ins. Co. v. Jones, 1924, 266 S.W. 286, 166 Ark. 370. 10 General Accident, Fire & Life Ass. Corp. v. Louisville Home Telephone Co., 1917, 193 S.W. 1031. 11 The J.L. Luckenbach, C.C. A.N.Y. (1933), 65 F. 2d 570. 12 Wheeler v. Aetna Ins. Co., D.C.N.Y. (1933), F. Supp. 820. 13 Rosen Reichardt Brokerage Co. v. London Assur. Corp. (1924), 264 S.W. 433. 14 Quinlinan v. Northwestern Fire & Marine Ins. Co., D.C.N.Y. (1929), 31 F. 2d 149. 15 Dole v. New England Mut. Marine Ins. Co. (1863) 88 Mass. 373. 16 Cherokee Brick Co. v. Ocean Accident & Guaranty Corp., Limited, (1918), 94 S.E. 1032, Ga. App. 702. 17 Rosen-Reichardt Brokerage Co. v. London Assur. Corporation, (1924), 264 S.W. 433. 18 Vol. II, G. Couch, Cyclopedia of Insurance Law, pp. 524-525, (1963). 19 Fortune Insurance and Surety Co., Inc. v. Court of Appeals, 244 SCRA 308 (1995).

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Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 137172 April 4, 2001

UCPB GENERAL INSURANCE CO., INC., petitioner, vs. MASAGANA TELAMART, INC., respondent. RESOLUTION DAVIDE, JR., C.J.: In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the Court of Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum of P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondent's properties; (b) declaring the replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewal-replacement policies. The modification consisted in the (1) deletion of the trial court's declaration that three of the policies were in force from August 1991 to August 1992; and (2) reduction of the award of the attorney's fees from 25% to 10% of the total amount due the Respondent. The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals in its assailed decision as follows: Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila] . . . . All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's Checks in the total amount of P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana made its formal demand for indemnification for the burned insured properties. On the same day, defendant returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's claim on the following grounds: "a) Said policies expired last May 22, 1992 and were not renewed for another term; b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and c) The properties covered by the said policies were burned in a fire that took place last June 13, 1992, or before tender of premium payment." (Record, p. 5) Hence Masagana filed this case. The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the premiums on 13 July 1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as provided under Policy Condition No. 26, which states: 26. Renewal Clause. Unless the company at least forty five days in advance of the end of the policy period mails or delivers to the assured at the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the assured shall be entitled to renew the policy upon payment of the premium due on the effective date of renewal.

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Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the renewal of the policies. Such a practice had existed up to the time the claims were filed. Thus: Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X-1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December 10, 1988 but premium therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on November 22, 1988 but premium therefor was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1"). Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof that no timely notice of non-renewal was made by Petitioner: (1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not earlier than said date, or within 45 days from the expiry dates of the policies as provided under Policy Condition No. 26; (2) Defendant insurer unconditionally accepted, and issued an official receipt for, the premium payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban Adjusters and Valuers to investigate plaintiff's claim as shown by the letter dated July 17, 1992 (Exhibit "11", Record, p. 254). In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 . . . had been extended or renewed by an implied credit arrangement though actual payment of premium was tendered on a later date and after the occurrence of the (fire) risk insured against." We resolved this issue in the negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the Court of Appeals. Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we had made in the decision our own findings of facts, which are not in accord with those of the trial court and the Court of Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22 May 1992, or before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by operation of law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within the 60- to 90-day credit term. Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension of credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take judicial notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit terms in premium payment has been the prevalent practice in the insurance industry. Most insurance companies, including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely designed for the protection of the parties to an insurance contract. The Code itself, in Section 78, authorizes the validity of a policy notwithstanding nonpayment of premiums. Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and habitually accepting

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payments 60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify the tenor of the insurance policy and in effect waived the provision therein that it would pay only for the loss or damage in case the same occurred after payment of the premium. Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the Insurance Code readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on the effective date of renewal should first be made. Respondent's argument that Section 77 is not a prohibitive provision finds no authoritative support. Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts, as found by the trial court and the Court of Appeals, are indeed duly established: 1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually renewed. 2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on the renewed policies. 3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the notice sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent to Zuellig was ever transmitted to Respondent. 4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by Respondent within the 60- to 90-day credit term and were duly accepted and received by Petitioner's cashier. The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for the payment of premiums. Section 77 of the Insurance Code of 1978 provides: SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read: SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril insured against, unless there is clear agreement to grant the insured credit extension of the premium due. No policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid. (Italic supplied) It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement to extend the period to pay the premium. But are there exceptions to Section 77? The answer is in the affirmative. The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace period provision applies. The second is that covered by Section 78 of the Insurance Code, which provides: SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until premium is actually paid.

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A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of loss. We said therein, thus: We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that the petitioners and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full. Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its Resolution denying the motion for reconsideration of its decision: While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments not so prescribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted. By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term. Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term within which to pay the premiums. That agreement is not against the law, morals, good customs, public order or public policy. The agreement binds the parties. Article 1306 of the Civil Code provides: ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section 77. WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new one is hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a reversible error was committed by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in toto. No pronouncement as to cost. SO ORDERED. Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr. and Sandoval-Gutierrez, JJ ., concur. Melo, J., I join the dissents of Justice Vitug and Pardo. Vitug, J., Please see separate opinion. Pardo, J., I dissent. See attached.

Separate Opinions

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VITUG, J .: An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract where the rights and obligations of the parties correlate and mutually correspond. The insurer assumes the risk of loss which an insured might suffer in consideration of premium payments under a risk-distributing device. Such assumption of risk is a component of a general scheme to distribute actual losses among a group of persons, bearing similar risks, who make ratable contributions to a fund from which the losses incurred due to exposures to the peril insured against are assured and compensated. It is generally recognized that the business of insurance is one imbued with public interest. 1 For the general good and mutual protection of all the parties, it is aptly subjected to regulation and control by the State by virtue of an exercise of its police power. 2 The State may regulate in various respects the relations between the insurer and the insured, including the internal affairs of an insurance company, without being violative of due process. 3 A requirement imposed by way of State regulation upon insurers is the maintenance of an adequate legal reserve in favor of those claiming under their policies. 4 The law generally mandates that insurance companies should retain an amount sufficient to guarantee the security of its policyholders in the remote future, as well as the present, and to cover any contingencies that may arise or may be fairly anticipated. The integrity of this legal reserve is threatened and undermined if a credit arrangement on the payment of premium were to be sanctioned. Calculations and estimations of liabilities under the risk insured against are predicated on the basis of the payment of premiums, the vital element that establishes the juridical relation between the insured and the insurer. By legislative fiat, any agreement to the contrary notwithstanding, the payment of premium is a condition precedent to, and essential for, the efficaciousness of the insurance contract, except (a) in case of life or industrial life insurance where a grace period applies, or (b) in case of a written acknowledgment by the insurer of the receipt of premium, such as by a deposit receipt, the written acknowledgment being conclusive evidence of the premium payment so far as to make the policy binding. 5 Section 77 of the Insurance Code provides: "SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies." This provision amended Section 72 of the then Insurance Act by deleting the phrase, "unless there is a clear agreement to grant the insured credit extension of the premium due," and adding at the beginning of the second sentence the phrase, "[n]otwithstanding any agreement to the contrary." Commenting on the new provision, Dean Hernando B. Perez states: "Under the former rule, whenever the insured was granted credit extension of the premium due or given a period of time to pay the premium on the policy issued, such policy was binding although premiums had not been paid (Section 72, Insurance Act; 6 Couch 2d. 67). This rule was changed when the present provision eliminated the portion concerning credit agreement, and added the phrase 'notwithstanding any agreement to the contrary' which precludes the parties from stipulating that the policy is valid even if premiums are not paid. Hence, under the present law, the policy is not valid and binding unless and until the premium is paid (Arce vs. Capital Insurance & Surety Co., Inc., 117 SCRA 63). If the insurer wants to favor the insured by making the policy binding notwithstanding the non-payment of premium, a mere credit agreement would not be sufficient. The remedy would be for the insurer to acknowledge in the policy that premiums were paid although they were not, in which case the policy becomes binding because such acknowledgment is a conclusive evidence of payment of premium (Section 78). Thus, the Supreme Court took note that under the present law, Section 77 of the Insurance Code of 1978 has deleted the clause 'unless there is a clear agreement to grant the insured credit extension of the premium due' (Velasco vs. Apostol, 173 SCRA 228)."6 By weight of authority, estoppel cannot create a contract of insurance, 7 neither can it be successfully invoked to create a primary liability, 8 nor can it give validity to what the law so proscribes as a matter of public policy. 9 So essential is the premium payment to the creation of the vinculum juris between the insured and the insurer that it would be doubtful to have that payment validly excused even for a fortuitous event. 10 The law, however, neither requires for the establishment of the juridical tie, nor measures the strength of such tie by, any specific amount of premium payment. A part payment of the premium, if accepted by the insurer, can thus perfect the contract and bring the parties into an obligatory relation. 11 Such a payment puts the contract into full binding force, not merely pro tanto, thereby entitling and obligating the parties by their agreement. Hence, in case of loss, full recovery less the unpaid portion of the premium (by the operative act of legal compensation), can be had by the insured and, correlatively, if no loss occurs the insurer can demand the payment of the unpaid balance of the premium. 12 In the instant case, no juridical tie appears to have been established under any of the situations hereinabove discussed. WHEREFORE, I vote to deny the motion for reconsideration.

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Melo, J ., concurs.

PARDO, J ., dissenting: The majority resolved to grant respondent's motion for reconsideration of the Court's decision promulgated on June 15, 1999. By this somersault, petitioner must now pay respondent's claim for insurance proceeds amounting to P18,645,000.00, exclusive of interests, plus 25% of the amount due as attorney's fees, P25,000.00 as litigation expenses, and costs of suit, covering its Pasay City property razed by fire. What an undeserved largess! Indeed, an unjust enrichment at the expense of petitioner; even the award of attorney's fees is bloated to 25% of the amount due. We cannot give our concurrence. We beg to dissent. We find respondent's claim to be fraudulent: First: Respondent Masagana surreptitiously tried to pay the overdue premiums before giving written notice to petitioner of the occurrence of the fire that razed the subject property. This failure to give notice of the fire immediately upon its occurrence blatantly showed the fraudulent character of its claim. The fire totally destroyed the property on June 13, 1992; the written notice of loss was given only more than a month later, on July 14, 1992, the day after respondent surreptitiously paid the overdue premiums. Respondent very well knew that the policy was not renewed on time. Hence, the surreptitious attempt to pay overdue premiums. Such act revealed a reprehensible disregard of the principle that insurance is a contract uberrima fides, the most abundant good faith.1 Respondent is required by law and by express terms of the policy to give immediate written notice of loss. This must be complied with in the utmost good faith. Another badge of fraud is that respondent deviated from its previous practice of coursing its premium payments through its brokers. This time, respondent Masagana went directly to petitioner and paid through its cashier with manager's checks. Naturally, the cashier routinely accepted the premium payment because he had no written notice of the occurrence of the fire. Such fact was concealed by the insured and not revealed to petitioner at the time of payment. Indeed, if as contended by respondent, there was a clear agreement regarding the grant of a credit extension, respondent would have given immediate written notice of the fire that razed the property. This clearly showed respondent's attempt to deceive petitioner into believing that the subject property still existed and the risk insured against had not happened. Second: The claim for insurance benefits must fall as well because the failure to give timely written notice of the fire was a material misrepresentation affecting the risk insured against. Section 1 of the policy provides: "All benefits under the policy shall be forfeited if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the insured or any one acting on his behalf to obtain any benefit under the policy." 2 In the factual milieu, the purported practice of giving 60 to 90-day credit extension for payment of premiums was a disputed fact. But it is a given fact that the written notice of loss was not immediately given. It was given only the day after the attempt to pay the delayed premiums. At any rate, the purported credit was a mere verbal understanding of the respondent Masagana of an agreement between the insurance company (petitioner) and the insurance brokers of respondent Masagana. The president of respondent Masagana admitted that the insurance policy did not contain any proviso pertaining to the grant of credit within which to pay the premiums. Respondent Masagana merely deduced that a credit agreement existed based on previous years' practice that they had of delayed payments accepted by the insurer as reflected on the face of the receipts issued by UCPB evidencing the payment of premiums. "Q: A: You also claim that you have 60 to 90 days credit arrangement with UCPB; is that correct?, Yes, ma'am.

Q: I'm showing to you the policy which had previously been marked in evidence as Exhibit "A", "B", "C", "D", & "E"' for the plaintiff and likewise, marked as exhibits "1", "2", "3", "4", & "5" for the defendant. Could you show us, Mr. witness where in these policies does it show that you are actually given 60 to 90 days credit arrangement with UCPB? A: Well, it's verbal with your company, and Ansons Insurance Brokerage. It is not written.

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Q: A: Q: A:

It is not written in the policy? Yes. You merely have verbal agreement with Ansons Insurance Brokerage? Yes; as shown in our mode of payment; in our vouchers and the receipts issued by the insurance company." 3

It must be stressed that a verbal understanding of respondent Masagana cannot amend an insurance policy. In insurance practice, amendments or even corrections to a policy are done by written endorsements or tickets appended to the policy. However, the date on the face of the receipts does not refer to the date of actual remittance by respondent Masagana to UCPB of the premium payments, but merely to the date of remittance to UCPB of the premium payments by the insurance brokers of respondent Masagana. "Q: You also identified several receipts; here; official receipts issued by UCPB General Insurance Company, Inc., which has been previously marked as Exhibits "F", "G", "H", "I", and "J" for the plaintiff; is that correct? A: Yes.

Q: And, you would agree with me that the dates indicated in these particular Official Receipts (O. R.), merely indicated the dates when UCPB General Insurance Company issued these receipts? Do you admit that, Mr. Witness? A: That was written in the receipts.

Q: But, you would also agree that this did not necessarily show the dates when you actually forwarded the checks to your broker, Anson Insurance Agency, for payment to UCPB General Insurance Co. Inc., isn't it? A: The actual support of this would be the cash voucher of the company, Masagana Telamart Inc., the date when they picked up the check from the company. Q: A: And are these cash voucher with you? I don't know if it is in the folder or in our folder, now.

Q: So, you are not certain, whether or not you actually delivered the checks covered by these Official Receipts to UCPB General Insurance, on the dates indicated? A: I would suppose it is few days earlier, when they picked up the payment in our office." 4

Hence, what has been established was the grant of credit to the insurance brokers, not to the assured. The insurance company recognized the payment to the insurance brokers as payment to itself, though the actual remittance of the premium payments to the principal might be made later. Once payment of premiums is made to the insurance broker, the assured would be covered by a valid and binding insurance policy, provided the loss occurred after payment to the broker has been made. Assuming arguendo that the 60 to 90 day-credit-term has been agreed between the parties, respondent could not still invoke estoppel to back up its claim. "Estoppel is unavailing in this case," 5 thus spoke the Supreme Court through the pen of Justice Hilario G. Davide, Jr., now Chief Justice. Mutatis mutandi, he may well be speaking of this case. He added that "[E]stoppel can not give validity to an act that is prohibited by law or against public policy." 6 The actual payment of premiums is a condition precedent to the validity of an insurance contract other than life insurance policy. 7 Any agreement to the contrary is void as against the law and public policy. Section 77 of the Insurance Code provides: "An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies." [Emphasis supplied] An incisive reading of the afore-cited provision would show that the emphasis was on the conclusiveness of the acknowledgment in the policy of the receipt of premium, notwithstanding the absence of actual payment of premium, because of estoppel. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. "A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them." 8

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This is the only case of estoppel which the law considers a valid exception to the mandatory requirement of pre-payment of premium. The law recognized that the contracting parties, in entering a contract of insurance, are free to enter into stipulations and make personal undertakings so long as they are not contrary to law or public policy. However, the law is clear in providing that the acknowledgment must be contained in the policy or contract of insurance. Anything short of it would not fall under the exception so provided in Section 78. Hence, because of respondent's failure to pay the premiums prior to the occurrence of the fire insured against, no valid and binding insurance policy was created to cover the loss and destruction of the property. The fire took place on June 13, 1992, twenty-two (22) days after the expiration of the policy of fire insurance. The tender of payment of premiums was made only thirty (30) days after the occurrence of the fire, or on July 13, 1992. Respondent Masagana did not give immediate notice to petitioner of the fire as it occurred as required in the insurance policy. Respondent Masagana tried to tender payment of the premiums overdue surreptitiously before giving notice of the occurrence of the fire. More importantly, the parties themselves expressly stipulated that the insurance policy would not be binding on the insurer unless the premiums thereon had been paid in full. Section 2 of the policy provides: "2. This policy including any renewal and/or endorsement thereon is not in force until the premium has been fully paid and duly receipted by the Company in the manner provided therein. "Any supplementary agreement seeking to amend this condition prepared by agent, broker or company official, shall be deemed invalid and of no effect. "No payment in respect of any premium shall be deemed to be payment to the Company unless a printed form of receipt for the same signed by an Official or duly appointed Agent of the Company shall have been given to the Insured, except when such printed receipt is not available at the time of payment and the company or its representative accepts the premium in which case a temporary receipt other than the printed form may be issued in lieu thereof. "Except only on those specific cases where corresponding rules and regulations which now we are or may hereafter be in force provide for the payment of the stipulated premiums in periodic installments at fixed percentages, it is hereby declared, agreed and warranted that this policy shall be deemed effective valid and binding upon the Company when the premiums thereof have actually been paid in full and duly acknowledged in a receipt signed by any authorized official or representative/agent of the Company in such manner as provided herein." 9 [emphasis supplied] Thus, the insurance policy, including any renewal thereof or any endorsements thereon shall not come in force until the premiums have been fully paid and duly received by the insurance Company. No payment in respect of any premiums shall be deemed to be payment to the Insurance Company unless a printed form of receipt for the same signed by an Official or duly appointed Agent of the Company shall be given to the insured. The case of Tibay v. Court of Appeals 10 is in point. The issue raised therein was: "May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?" In the said case, Fortune Life and General Insurance Co., Inc. issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo, on a two-storey residential building located at 5855 Zobel Street, Makati City, together with all the personal effects therein, The insurance was for P600,000.00, covering the period from 23 January 1987 to 23 January 1988. On 23 January 1987, of the total premium of P2,983.50, Violeta Tibay only paid P600.00, thus leaving a substantial balance unpaid. On March 8, 1987, the insured building was completely destroyed by fire. Two days later, or on 10 March 1987, Violeta Tibay paid the balance of the premium. On the same day, she filed with Fortune a claim for the proceeds of the fire insurance policy. In denying the claim of insurance, the Court ruled that "by express agreement of the parties, no vinculum juris or bond of law was to be established until full payment was effected prior to the occurrence of the risk insured against. 11 As expressly stipulated in the contract, full payment must be made before the risk occurs for the policy to be considered effective and in force. "No vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever resulted from the fractional payment of premium." 12 The majority cited the case of Makati Tuscany Condominium Corp. vs. Court of Appeals 13 to support the contention that the insurance policies subject of the instant case were valid and effective. However, the factual situation in that case was different from the case at bar. In Tuscany, the Court held that the insurance policies were valid and binding because there was partial payment of the premiums and a clear understanding between the parties that they had intended the insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. On the basis of equity and fairness, the Court ruled that there was a perfected contract of insurance upon the partial payment of the premiums, notwithstanding the provisions of Section 77 to the contrary. The Court would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full.

18

There is no dispute that like in any other contract, the parties to a contract of insurance enjoy the freedom to stipulate on the terms and conditions that will govern their agreement so long as they are not contrary to law, morals, good customs, public order or public policy. However, the agreement containing such terms and conditions must be clear and definite. In the case at bar, there was no clear and definite agreement between petitioner and respondent on the grant of a credit extension; neither was there partial payment of premiums for petitioner to invoke the exceptional doctrine inTuscany. Hence, the circumstances in the above cited case are totally different from the case at bar, and consequently, not applicable herein. Insurance is an aleatory contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. 14 The consideration is the premium, which must be paid at the time and in the manner specified in the policy, and if not so paid, the policy will lapse and be forfeited by its own terms. 15 With regard to the contention that the absence of notice of non-renewal of the policy resulted to the automatic renewal of the insurance policy, we find the contention untenable. As above discussed, the law provides that only upon payment of the insurance premium will the insurance policy bind the insurer to the peril insured against and hold it liable under the policy in case of loss. Even in the absence of notice of non-renewal, the assured would be bound by the law that a non life insurance policy takes effect only on the date payment of the premium was made. Verily, it is elemental law that the payment of premium is a mandatory requisite to make the policy of insurance effective. If the premium is not paid in the manner prescribed in the policy as intended by the parties, the policy is void and ineffective. 16 Basically a contract of indemnity, an insurance contract is the law between the parties. Its terms and conditions constitute the measure of the insurer's liability and compliance therewith is a condition precedent to the insured's right to recovery from the insurer. 17 IN VIEW WHEREOF, I vote to DENY the respondent's motion for reconsideration, for lack of merit. Melo, Puno and Quisumbing, JJ ., concur.

Footnotes
1

Rollo, 38. 191 SCRA 1 [1990]. 244 SCRA 744 [1995]. 257 SCRA 126 [1996] (erroneously stated in the decision as 275 SCRA 126). 215 SCRA 463 [1992].

VITUG, J.:
1

Hartford Acci. & Indem. Co. vs. N.O. Leson Mfg. Co., 291 US 352, 78 L Ed, 840, 54 S Ct. 392.

United States vs. South-Eastern Underwriters Asso., 322 US 533, 88 L Ed 1440, 64 S Ct 1162, reh den 323 US 811, 89 L Ed 646, 65 S Ct, 26; Hinckley vs. Bechtel Corp. (1st Dist.), 41 Cal App 3d 206, 116 Cal Rptr 33.
3

43 Am Jur 2d; Merchants Mut. Auto Liability Ins. Co. vs. Smart, 267 US 126, 69 L Ed 538, 45 S Ct 320; California State Auto Asso. Inter-Ins. Bureau vs. Maloney 341 US 105, 95 L Ed 788, 71 S Ct 601; State Farm Mut. Auto. Ins. Co. vs. Duel, 324 US 154, 89 L Ed 812 65 S Ct 573 reh den 324 US 887.
4

Tibay vs. Court of Appeals, 257 SCRA 126.

Secs. 77-78, Insurance Code; Acme vs. Court of Appeals, 134 SCRA 155; South Sea Surety and Insurance Company, Inc. vs. Court of Appeals, 244 SCRA 744.

19

Insurance Code and Insolvency Law by Hernando B. Perez, 1999 Rev. Ed. Ames. vs. Auto Owners' Ins. Co.; 195 N.W. 686, 225 Mich. 44; 45 C.J.S. 674.

C.E. Carnes & Co. vs. Employers' Liability Assur. Corp., Limited of London, England, C.C.A. La, 101 F2d 739; 45 CJS 674.
9

Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14. See Constantino vs. Asia Life Insurance Co., 87 Phil. 248. See Philippine Phoenix Surety and Insurance, Inc. vs. Woodworks, Inc., 20 SCRA 1271. See Makati Tuscany Condominium vs. Court of Appeals, 215 SCRA 463.

10

11

12

PARDO, J., dissenting:

1

Velasco v. Apostol, 173 SCRA 228, 236 [1989]. Section 15, Policy Conditions, RTC Record, p. 25. TSN, December 8, 1992, pp. 24-25. TSN, December 8, 1992, pp. 14-17. Development Bank of the Philippines v. Court of Appeals, 348 Phil. 15, 32 [1998]. Ibid. American Home Assurance Co. v. Chua, 309 SCRA 250, 259 [1999]. Ayala Corporation v. Ray Burton Development Corp., 355 Phil. 475, 496 [1998]. Section 2, Policy Conditions, RTC Record, p. 16. 326 Phil. 931 [1996]. Tibay v. Court of Appeals, supra, Note 10, p. 136. Ibid., p. 138. 215 SCRA 462 [1992]. Article 2010, Civil Code. Tibay v. Court of Appeals, supra, Note 10, p. 133. Tibay v. Court of Appeals, supra, Note 10, pp. 138-139. Verendia v. Court of Appeals, 217 SCRA 417, 422-243 [1993].

10

11

12

13

14

15

16

17

20

THIRD DIVISION
[G.R. No. 112360. July 18, 2000]

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents. DECISION
PURISIMA, J.: At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to annul and set aside the July 15, 1993 Decision and October 22, 1993 Resolution of the Court of Appeals in CA-G.R. CV NO. 28779, which modified the Ruling of the Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106.
[1] [2] [3] [4]

The antecedent facts that matter are as follows: On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for One Million (P1,000,000.00) Pesos and eventually increased to One Million Five Hundred Thousand (P1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13, 1981. Pertinent portions of subject policy on the buildings insured, and location thereof, read: "On stocks of finished and/or unfinished products, raw materials and supplies of every kind and description, the properties of the Insureds and/or held by them in trust, on commission or on joint account with others and/or for which they (sic) responsible in case of loss whilst contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings situate (sic) within own Compound at MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601. xxx...............xxx...............xxx Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant, offices, warehouse and caretaker's quarters. 'Bounds in front partly by one-storey concrete building under galvanized iron roof occupied as canteen and guardhouse, partly by building of two and partly one storey constructed of concrete below, timber above undergalvanized iron roof occupied as garage and quarters and partly by open space and/or tracking/ packing, beyond which is the aforementioned Magdalo Street; on its right and left by driveway, thence open spaces, and at the rear by open spaces.'"
[5]

The same pieces of property insured with the petitioner were also insured with New India Assurance Company, Ltd., (New India). On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of its four-span building and partly gutting the left and right sections thereof. A two-storey building (behind said four-span building) where fun and amusement machines and spare parts were stored, was also destroyed by the fire. Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India Assurance Company but to no avail. On May 26, 1982, private respondent brought against the said insurance companies an action for collection of sum of money and damages, docketed as Civil Case No. 46106 before Branch 161 of the then Court of First Instance of Rizal; praying for judgment ordering Rizal Insurance and New India to pay the amount of P2,747, 867.00 plus legal interest, P400,000.00 as attorney's fees, exemplary damages, expenses of litigation of P50,000.00 and costs of suit.
[6]

Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the contents of the four-span building, which was partly burned, and not the damage caused by the fire on the two-storey annex building.
[7]

On January 4, 1990, the trial court rendered its decision; disposing as follows: "ACCORDINGLY, judgment is hereby rendered as follows: (1)Dismissing the case as against The New India Assurance Co., Ltd.;

21

(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00 representing the actual value of the losses suffered by it; and (3) Cost against defendant Rizal Surety and Insurance Company. SO ORDERED."
[8]

Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting Mills, Inc., went to the Court of Appeals, which came out with its decision of July 15, 1993 under attack, the decretal portion of which reads: "WHEREFORE, and upon all the foregoing, the decision of the court below is MODIFIED in that defendant New India Assurance Company has and is hereby required to pay plaintiff-appellant the amount of P1,818,604.19 while the other Rizal Surety has to pay the plaintiff-appellant P470,328.67, based on the actual losses sustained by plaintiff Transworld in the fire, totalling P2,790,376.00 as against the amounts of fire insurance coverages respectively extended by New India in the amount of P5,800,000.00 and Rizal Surety and Insurance Company in the amount of P1,500,000.00. No costs. SO ORDERED."
[9]

On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India appealed to this Court theorizing inter alia that the private respondent could not be compensated for the loss of the fun and amusement machines and spare parts stored at the two-storey building because it (Transworld) had no insurable interest in said goods or items. On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New India Assurance Company Ltd. vs. Court of Appeals). Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for Reconsideration before the Court of Appeals, and on October 22, 1993, the Court of Appeals reconsidered its decision of July 15, 1993, as regards the imposition of interest, ruling thus: "WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the imposition of legal interest is concerned, that, on the assessment against New India Assurance Company on the amount of P1,818,604.19 and that against Rizal Surety & Insurance Company on the amount of P470,328.67, from May 26, 1982 when the complaint was filed until payment is made. The rest of the said decision is retained in all other respects. SO ORDERED."
[10]

Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the present Petition, contending that: I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING WHERE THE BULK OF THE BURNED PROPERTIES WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD. II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY. III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL CODE).
[11]

The Petition is not impressed with merit. It is petitioner's submission that the fire insurance policy litigated upon protected only the contents of the main building (four-span), and did not include those stored in the two-storey annex building. On the other hand, the private respondent theorized that the so called "annex" was not an annex but was actually an integral part of the four-span building and therefore, the goods and items stored therein were covered by the same fire insurance policy.
[12] [13]

Resolution of the issues posited here hinges on the proper interpretation of the stipulation in subject fire insurance policy regarding its coverage, which reads:

22

"xxx contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings situate (sic) within own Compound xxx" Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit its coverage to what were stored in the four-span building. As opined by the trial court of origin, two requirements must concur in order that the said fun and amusement machines and spare parts would be deemed protected by the fire insurance policy under scrutiny, to wit: "First, said properties must be contained and/or stored in the areas occupied by Transworld and second, said areas must form part of the building described in the policy xxx"
[14]

'Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant, offices, ware house and caretaker's quarter.' The Court is mindful of the well-entrenched doctrine that factual findings by the Court of Appeals are conclusive on the parties and not reviewable by this Court, and the same carry even more weight when the Court of Appeals has affirmed the findings of fact arrived at by the lower court.
[15]

In the case under consideration, both the trial court and the Court of Appeals found that the so called "annex " was not an annex building but an integral and inseparable part of the four-span building described in the policy and consequently, the machines and spare parts stored therein were covered by the fire insurance in dispute. The letter-report of the Manila Adjusters and Surveyor's Company, which petitioner itself cited and invoked, describes the "annex" building as follows: "Two-storey building constructed of partly timber and partly concrete hollow blocks under g.i. roof which is adjoining and intercommunicating with the repair of the first right span of the lofty storey building and thence by property fence wall."
[16]

Verily, the two-storey building involved, a permanent structure which adjoins and intercommunicates with the "first right span of the lofty storey building", formed part thereof, and meets the requisites for compensability under the fire insurance policy sued upon.
[17]

So also, considering that the two-storey building aforementioned was already existing when subject fire insurance policy contract was entered into on January 12, 1981, having been constructed sometime in 1978, petitioner should have specifically excluded the said two-storey building from the coverage of the fire insurance if minded to exclude the same but if did not, and instead, went on to provide that such fire insurance policy covers the products, raw materials and supplies stored within the premises of respondent Transworld which was an integral part of the four-span building occupied by Transworld, knowing fully well the existence of such building adjoining and intercommunicating with the right section of the four-span building.
[18]

After a careful study, the Court does not find any basis for disturbing what the lower courts found and arrived at. Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt regarding the portions of the building insured thereby. Article 1377 of the New Civil Code provides: "Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity" Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy contract under scrutiny. Citing the aforecited provision of law in point, the Court in Landicho vs. Government Service Insurance System, ruled:
[19]

"This is particularly true as regards insurance policies, in respect of which it is settled that the 'terms in an insurance policy, which are ambiguous, equivocal, or uncertain x x x are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved' (29 Am. Jur., 181), and the reason for this is that the 'insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of, the insurance company.' (44 C.J.S., p. 1174).""
[20]

Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company, Inc. vs. Vda. De Songco, to wit:
[21]

"'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 concentration of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared 'agreements' that the

23

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 Saleilles 'contracts by adherence' (contrats [sic] 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 example) 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 unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'"
[22]

The issue of whether or not Transworld has an insurable interest in the fun and amusement machines and spare parts, which entitles it to be indemnified for the loss thereof, had been settled in G.R. No. L-111118, entitled New India Assurance Company, Ltd., vs. Court of Appeals, where the appeal of New India from the decision of the Court of Appeals under review, was denied with finality by this Court on February 2, 1994. The rule on conclusiveness of judgment, which obtains under the premises, precludes the relitigation of a particular fact or issue in another action between the same parties based on a different claim or cause of action. "xxx the judgment in the prior action operates as estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or judgment was rendered. In fine, the previous judgment is conclusive in the second case, only as those matters actually and directly controverted and determined and not as to matters merely involved therein."
[23]

Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, held that the issue of negligence of the shipping line, which issue had already been passed upon in a case filed by one of the insurers, is conclusive and can no longer be relitigated in a similar case filed by another insurer against the same shipping line on the basis of the same factual circumstances. Ratiocinating further, the Court opined:
[24]

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been negligent, or so negligent as to have proximately caused the collision between them, was an issue that was actually, directly and expressly raised, controverted and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the 'Don Carlos' to have been negligent rather than the 'Yotai Maru' and, as already noted, that Decision was affirmed by this Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The Reyes Decision thus became final and executory approximately two (2) years before the Sison Decision, which is assailed in the case at bar, was promulgated. Applying the rule of conclusiveness of judgment, the question of which vessel had been negligent in the collision between the two (2) vessels, had long been settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206-R. Private respondent Go Thong was certainly bound by the ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals fell into clear and reversible error when it disregarded the Decision of this Court affirming the Reyes Decision."
[25]

The controversy at bar is on all fours with the aforecited case. Considering that private respondent's insurable interest in, and compensability for the loss of subject fun and amusement machines and spare parts, had been adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994, the same can no longer be relitigated and passed upon in the present case. Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the ruling of the Court of Appeals and of this Court that the private respondent has an insurable interest in the aforesaid fun and amusement machines and spare parts; and should be indemnified for the loss of the same. So also, the Court of Appeals correctly adjudged petitioner liable for the amount of P470,328.67, it being the total loss and damage suffered by Transworld for which petitioner Rizal Insurance is liable.
[26]

All things studiedly considered and viewed in proper perspective, the Court is of the irresistible conclusion, and so finds, that the Court of Appeals erred not in holding the petitioner, Rizal Surety Insurance Company, liable for the destruction and loss of the insured buildings and articles of the private respondent. WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993, of the Court of Appeals in CAG.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement as to costs. SO ORDERED. Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

[1] [2]

Annex "A"; Rollo, pp. 27-49. Annex "B"; Rollo, pp. 51- 52. [3] Special Tenth Division; composed of Associate Justices: Cezar D. Francisco (Ponente), Gloria C. Paras (Chairman), and Ricardo P. Galvez (Member)

24

[4] [5]

Penned by Judge Efren D. Villanueva. Decision, Annex "A"; Rollo, pp. 28-29. [6] Rollo, p. 59. [7] Rollo, p. 62. [8] Decision, Rollo, pp. 78-79. [9] Decision, Rollo, p. 49. [10] Resolution, Rollo, p. 52. [11] Petition, Rollo, pp. 12-13. [12] Answer, Rollo, p. 62. [13] Rollo, p. 76. [14] Rollo, p. 77. [15] Borromeo vs. Court of Appeals, G.R. No. 75908, October 22, 1999; citing: Meneses vs. Court of Appeals, 246 SCRA 162, p.171; Coca Cola Bottlers Phil., Inc vs. Court of Appeals, 229 SCRA 533; and Binalay vs. Manalo, 195 SCRA 374. [16] Petitioner, Rollo, p. 17. [17] Rollo, p. 17. [18] Decision, Rollo, p. 69. [19] 44 SCRA 7. [20] Ibid., pp. 12-13, citing: Calanoc vs. Court of Appeals, 98 Phil. 79, 84. See, also, H.E. Heacock Co. vs. Macondray, 42, Phil. 205; Rivero vs. Robe, 54 Phil. 982; Asturias Sugar Central vs. The Pure Cane Molasses Co., 57 Phil. 519; Gonzales vs. La Previsora Filipina, 74 Phil. 165; Del Rosario vs. The Equitable Insurance, 620 O.G. 5400, 5403-04. [21] 25 SCRA 70. [22] Ibid., p. 75. [23] Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 197 SCRA 201, p. 209; citing: Tingson vs. Court of Appeals, 49 SCRA 429. [24] Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, supra. [25] Ibid., pp. 210-211. [26] Rollo, p. 43.

25

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-14300 January 19, 1920

SAN MIGUEL BREWERY, ETC., plaintiff-appellee, vs. LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees. HENRY HARDING, defendant-appellant. Crossfield and O'Brien for appellant Harding. Lawrence and Ross for appellee Law Union etc. Ins. Co. Sanz and Luzuriaga for appellee "Filipinas, Compaia de Seguros." No appearance for the other appellee. STREET, J.: This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff, the San Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten respectively by Law Union and Rock Insurance Company (Ltd.), and the "Filipinas" Compania de Seguros, for the sum of P7,500 each, insuring certain property which has been destroyed by fire. The plaintiff, the San Miguel Brewery, is named as the party assured in the two policies referred to, but it is alleged in the complaint that said company was in reality interested in the property which was the subject of insurance in the character of a mortgage creditor only, and that the owner of said property upon the date the policies were issued was one D. P. Dunn who was later succeeded as owner by one Henry Harding. Accordingly said Harding was made a defendant, as a person interested in the subject of the litigation. The prayer of the complaint is that judgment be entered in favor of the plaintiff against the two companies named for the sum of P15,000, with interest and costs, and further that upon satisfaction of the balance of P4,505.30 due to the plaintiff upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff be absolved from liability to the defendants or any of them. The peculiar form of the latter part of the prayer is evidently due to the design of the plaintiff to lay a foundation for Harding to recover the difference between the plaintiff's credit and the amount for which the property was insured. Accordingly, as was to be expected, Harding answered, admitting the material allegations of the complaint and claiming for himself the right to recover the difference between the plaintiff's mortgage credit and the face value of the policies. The two insurance companies also answered, admitting in effect their liability to the San Miguel Brewery to the extent of its mortgage credit, but denying liability to Harding on the ground that under the contracts of insurance the liability of the insurance companies was limited to the insurable interest of the plaintiff therein. Soon after the action was begun the insurance companies effected a settlement with the San Miguel Brewery by paying the full amount of the credit claimed by it, with the result that the litigation as between the original plaintiff and the two insurance companies came to an end, leaving the action to be prosecuted to final judgement by the defendant Harding with respect to the balance claimed to be due to him upon the policies. Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action whatever against the companies and absolved them from liability without special finding as to costs. From this decision the said Henry Harding has appealed. The two insurance companies who are named as defendants do not dispute their liability to the San Miguel Brewery, to the extent already stated, and the only question here under discussion is that of the liability of the insurance companies to Harding. It is therefore necessary to take account of such facts only as bear upon this aspect of the case. In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which the insurance relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10,000. In the contract of mortgage Dunn agreed to keep the property insured at his expense to the full amount of its value in companies to be selected by the Brewery Company and authorized the latter in case of loss to receive the proceeds of the insurance and to retain such part as might be necessary to cover the mortgage debt. At the same time, in order more conveniently to accomplish the end in view, Dunn authorized and requested the Brewery Company to effect said insurance itself. Accordingly on the same date Antonio Brias, general manager of the Brewery, made a verbal application to the Law Union and Rock Insurance Company for insurance to the extent of P15,000 upon said property. In reply to a question of the company's agent as to whether the Brewery was the owner of the property, he stated that the company was interested only as a mortgagee. No information was asked as to who was the owner of the property, and no information upon this point was given.

26

It seems that the insurance company to whom this application was directed did not want to carry more than one-half the risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount to be issued by the "Filipinas" Compania de Seguros. Both policies were issued in the name of the San Miguel Brewery as the assured, and contained no reference to any other interest in the property. Both policies contain the usual clause requiring assignments to be approved and noted on the policy. The premiums were paid by the Brewery and charged to Dunn. A year later the policies were renewed, without change, the renewal premiums being paid by the Brewery, supposedly for the account of the owner. In the month of March of the year 1917 Dunn sold the insured property to the defendant Henry Harding, but not assignment of the insurance, or of the insurance policies, was at any time made to him. We agree with the trial court that no cause of action in Henry Harding against the insurance companies is show. He is not a party to the contracts of insurance and cannot directly maintain an action thereon. (Uy Tam and Uy Yetvs. Leonard, 30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be made effective, if at all, through the San Miguel Brewery in whose name the contracts are written. Now the Brewery, as mortgagee of the insured property, undoubtedly had an insurable interest therein; but it could not, in any event, recover upon these policies an amount in excess of its mortgage credit. In this connection it will be remembered that Antonio Brias, upon making application for the insurance, informed the company with which the insurance was placed that the Brewery was interested only as a mortgagee. It would, therefore, be impossible for the Brewery mortgage on the insured property. This conclusion is not only deducible from the principles governing the operation and effect of insurance contracts in general but the point is clearly covered by the express provisions of sections 16 and 50 of the Insurance Act (Act No. 2427). In the first of the sections cited, it is declared that "the measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof" (sec. 16); while in the other it is stated that "the insurance shall be applied exclusively to the proper interest of the person in whose name it is made unless otherwise specified in the policy" (sec. 50). These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership of the property had continued in him up to the time of the loss; and as regards Harding, an additional insuperable obstacle is found in the fact that the ownership of the property had been charged, prior to the loss, without any corresponding change having been effected in the policy of insurance. In section 19 of the Insurance Act we find it stated that "a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person." Again in section 55 it is declared that "the mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured." Undoubtedly these policies of insurance might have been so framed as to have been "payable to the Sane Miguel Brewery, mortgagee, as its interest may appear, remainder to whomsoever, during the continuance of the risk, may become the owner of the interest insured." (Sec 54, Act No. 2427.) Such a clause would have proved an intention to insure the entire interest in the property, not merely the insurable interest of the San Miguel Brewery, and would have shown exactly to whom the money, in case of loss, should be paid. But the policies are not so written. It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony of Brias, the manager of the San Miguel Brewery, that, as the insurance was written up, the obligation of the insurance companies was different from that contemplated by Dunn, at whose request the insurance was written, and Brias. In the contract of mortgage Dunn had agreed, at his own expense, to insure the mortgaged property for its full value and to indorse the policies in such manner as to authorize the Brewery Company to receive the proceeds in case of loss and to retain such part thereof as might be necessary to satisfy the remainder then due upon the mortgage debt. Instead, however, of effecting the insurance himself Dunn authorized and requested the Brewery Company to procure insurance on the property in the amount of P15,000 at Dunn's expense. The Brewery Company undertook to carry this mandate into effect, and it of course became its duty to procure insurance of the character contemplated, that is, to have the policies so written as to protect not only the insurable interest of the Brewery, but also the owner. Brias seems to have supposed that the policies as written had this effect, but in this he was mistaken. It was certainly a hardship on the owner to be required to pay the premiums upon P15,000 of insurance when he was receiving no benefit whatever except in protection to the extent of his indebtedness to the Brewery. The blame for the situation thus created rests, however, with the Brewery rather than with the insurance companies, and there is nothing in the record to indicate that the insurance companies were requested to write insurance upon the insurable interest of the owner or intended to make themselves liable to that extent. If during the negotiations which resulted in the writing of this insurance, it had been agreed between the contracting parties that the insurance should be so written as to protect not only the interest of the mortgagee but also the residuary interest of the owner, and the policies had been, by inadvertence, ignorance, or mistake written in the form in which they were issued, a court would have the power to reform the contracts and give effect to them in the sense in which the parties intended to be bound. But in order to justify this, it must be made clearly to appear that the minds of the contracting parties did actually meet in agreement and that they labored under some mutual error or mistake in respect to the expression of their purpose. Thus, in Bailey vs. American Central Insurance Co. (13 Fed., 250), it appeared that a mortgage desiring to insure his own insurable interest only, correctly stated his interest, and asked that the same be insured. The insurance company agreed to accept the risk, but the policy was issued in the name of the owner, because of the mistaken belief of the company's agent

27

that the law required it to be so drawn. It was held that a court of equity had the power, at the suit of the mortgage, to reform the instrument and give judgment in his favor for the loss thereunder, although it had been exactly as it was. Said the court: "If the applicant correctly states his interest and distinctly asks for an insurance thereon, and the agent of the insurer agrees to comply with his request, and assumes to decide upon the form of the policy to be written for that purpose, and by mistake of law adopts the wrong form, a court of equity will reform the instrument so as to make it insurance upon the interest named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318; Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings etc., Co., vs.Charter Oak Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire Insurance Co., 67 Mich., 179.) Similarly, in cases where the mortgage is by mistake described as owner, the court may grant reformation and permit a recovery by the mortgage in his character as such. (Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare vs. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co. (136 U.S., 287; 34 L. 3d., 408), it appeared that one Kearney made application to an insurance company for insurance on certain property in his hands as receiver and it was understood between him and the company's agent that, in case of loss, the proceeds of the policy should accrue to him and his successors as receiver and to others whom it might concern. However, the policy, as issued, was so worded as to be payable only to him as receiver. In an action brought on the policy by a successor of Kearney, it was alleged that the making of the contract in this form was due to inadvertence, accident, and mistake upon the part of both Kearney and the company. Said the court: If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the policy, the plaintiff is entitled to have it reformed. In another case the same court said: We have before us a contract from which by mistake, material stipulations have been omitted, whereby the true intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded agreement as to insurance, which, in point of time, preceded the preparation and delivery of the policy, and this is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the agreement there has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the insurance to an interest in the property less than that agreed to be insured. The written agreement did not effect that which the parties intended. That a court of equity can afford relief in such a case, is, we think, well settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.) But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly appear that the contract failed to express the real agreement between the parties. (Philippine Sugar Estates Development Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government of Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.) In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state in the foregoing cases, for it is by means clear from the testimony of Brias and none other was offered that the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results that the defendant Harding is not entitled to relief in any aspect of the case. The judgment is therefore affirmed, with costs against the appellant. So ordered. Arellano, C.J., Johnson, Araullo, Malcolm and Avancea, JJ., concur.

28

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-2294 May 25, 1951

FILIPINAS COMPAIA 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 also by long term loans and other factual situations. For that

29

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. 53525353.) 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 from December 11, 1941, should be returned by the petitioner. The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether the policy in question became null and void upon the declaration of war between the United States and Germany on December 10, 1941, and its judgment in favor of the respondent corporation was predicated on its conclusion that the policy did not cease to be in force. The Court of Appeals necessarily assumed that, even if the payment by the petitioner to the respondent was involuntary, its action is not tenable in view of the ruling on the validity of the policy. As a matter of 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

30

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 P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale. Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine currency, that should be returned by the petitioner for the unexpired term of the policy in question, beginning December 11, 1941. Without costs. So ordered. Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.

Footnotes
*

80 Phil., 604.

31

Republic of the Philippines SUPREME COURT Manila

EN BANC

G.R. No. L-14088

September 30, 1961

CONCEPCION PELLOSA VDA. DE IMPERIAL, in her own behalf and as Guardian Ad Litem of her minor child, REX IMPERIAL, JR., plaintiffs-appellants, vs. HEALD LUMBER COMPANY, defendant-appellee.

--------------------------------

G.R. No. L-14089

September 30, 1961

LOURDES FERRER VDA. DE HERNANDEZ, in her own behalf and as Guardian Ad Litem of her minor children, JULIO HERNANDEZ, GABRIEL HERNANDEZ, JR., and ROSARIO HERNANDEZ, plaintiffs-appellants, vs. HEALD LUMBER COMPANY, defendant-appellee.

--------------------------------

G.R. No. L-14112

September 30, 1961

PHILIPPINE AIR LINES, INC., plaintiff-appellant, vs. HEALD LUMBER COMPANY, defendant-appellee.

Ponce Enrile, Siguion Reyna, Montecillo and Belo for plaintiffs-appellants. Ross, Selph and Carrascoso for defendant-appellee.

32

CONCEPCION, J.:

Appeal from a decision of the Court of First Instance of Baguio dismissing the complaints in the above entitled three (3) cases, with costs against the plaintiffs.

On June 4, 1954, at about 6:50 a.m., a helicopter (PIC361) of the Philippine Air Lines, Inc. (PAL), which had been chartered by the Lepanto Consolidated Mining Co., took off from Nichols Fields, in Makati, Rizal, headed for Mankayan, Mt. Province, via Rosales, Pangasinan. On board the helicopter were Capt. Gabriel Hernandez and Lt. Rex Imperial. The helicopter reached Rosales at 8:22 a.m., and, fifty-three (53) minutes later, or at 9:15 a.m., it undertook the last leg of its flight to Mankayan. However, the helicopter did not reach this place for it crashed on the way. A search party composed of, among others, Capts. Willis Rohlings and Jaime Manzano, both of the PAL organized to track down the missing helicopter, found it in a ravine located in the barrio of Ampusungan, Benguet, Mt. Province within the lumber concession of defendant-appellee, Heald Lumber Co. which is several kilometers before reaching Mankayan. The helicopter was a total wreck and both Capt. Hernandez and Lt. Imperial were dead. The body of the former was strapped to his seat, but that of the latter was several feet away from the wreckage. At the time of the flight, Capt. Hernandez was a duly licensed helicopter pilot, whereas Lt. Imperial, although a licensed plane pilot, was then under training as helicopter pilot.

Owing to this accident, three (3) actions were instituted in the court aforementioned, against said defendant, namely: (1) case No. 580 (G.R. No. L-14112), filed by PAL on March 2, 1956; (2) case No. 591 (G.R. No. L-14088), filed by Concepcion Pellosa de Imperial, widow of the deceased Lt. Imperial, on April 13, 1956; and 3) case No. 592 (G.R. No. L14089), filed by Lourdes Ferrer de Hernandez, widow of Capt. Hernandez, on the date last mentioned.

In the first case, the PAL sought to recover the following:Value of the helicopter

P80,000.00

Compensation for the death of Capt. Hernandez & Lt. Imperial at P20,000 each 40,000.00 Consequential damages due to the loss of the helicopter53,400.00 Funeral expenses for Capt. Hernandez and Lt. Imperial 2,542.00 Expenses incurred in the training of Capt. Hernandez in the U.S. and Lt. Imperial for operation of helicopter 17,405.82 Moral damages resulting from harmful publicity of the crash TOTAL P223,347.82 30,000.00

upon the ground that the mishap was due to the fact that the helicopter had collided "with defendant's tramway steel cables strung in parallel of approximately 3,000 yards in length between two mountains approximately 3,000 to 5,000 feet high in the vicinity of defendant's logging area in Ampusungan, Mountain Province." In each of the other cases, the respective plaintiffs therein prayed for judgment as follows:Actual and compensatory damages P150,000.00 Exemplary damages 50,000.00

Moral damages 50,000.00 Expenses of litigation 10,000.00 33

Attorney's fees 20,000.00 TOTAL P280,000.00

upon the theory that the death of Lt. Imperial and Capt. Hernandez was due to defendant's alleged "gross negligence" and "flagrant violation of applicable laws and regulations." Being interrelated, the three (3) cases were jointly heard, and, in due course, thereafter, the lower court, presided by Hon. Jesus de Veyra, rendered the decision appealed from, finding that plaintiffs had "failed to make out a case of negligence on the part of the defendant" and, accordingly, dismissing the three (3) complaints. Hence, this appeal by the plaintiffs. The three (3) cases are before us the amount of the demand in each being in excess of P200,000, exclusive of costs and interest. Appellants maintain that the accident is imputable to the defendant, because the helicopter, particularly its main rotor blades, had hit or collided with defendant's aforementioned steel cables. In this connection, Capt. Rohlings, who, at the time of the occurrence, was Assistant Superintendent of the Flight Control of the PAL, testified that, during the investigation conducted by him at the site of the crash, he found on the rotor blades of the helicopter. several long marks which contained small indentations which were parallel to each other, parallel lines, if you would put it that way, these marks were covered by blackish substance of some kind which I took to be of grease of some kind. (t.s.n, p. 95.) Capt. Manzano, the Superintendent of Helicopter Operations of the PAL, tried to corroborate this testimony of Capt. Rohlings. Both opined that the marks were due to the contact of said rotor blades with the steel cables of defendant herein. Photographs (Exhibits E-21, E-22 and E-24) allegedly taken by Capt. Rohlings of the rotor blades, purporting to show the aforementioned markings, were introduced in evidence in lieu of said rotor blades. It is admitted, however, that the helicopter had hit a tree before falling into a ravine. Moreover, commenting on appellants' evidence, His Honor, the trial Judge, had the following to say: The evidence for the plaintiffs as to the cause of the crash is not conclusive. The main rotor blade was not preserved, so this Court was not able to satisfy itself as to the nature of the two long seriated streaks on the main rotor blade. The composition of these streaks was not determined whether they were grease from the steel cable or marks from hitting a pine tree for it can be equally argued that these seriated streaks could have been caused by the strands of a greasy steel cable or the rough bark of a pine tree. (Decision, Record on Appeal, pp. 19-20.) Upon the other hand, defendant endeavored to prove that the mishap had been due to two (2) causes, namely: (1) exhaustion of the fuel; and (2) negligence of the pilot. The record shows that the helicopter had a main tank and an auxiliary tank with a capacity of twenty-seven (27) and fifteen (15) gallons of fuel, respectively. The main tank was connected to the engine, but the auxiliary tank was not. In order to transfer gasoline from the latter to the former, it was necessary to land the helicopter, as the process could not be undertaken during flight. This was, in all probability, the reason why the aircraft had to land in Rosales, Pangasinan, before proceeding to Mankayan. Having left Rosales at 9:15 a.m., after its flight from Nichols Field, of one (1) hour and thirty-two (32) minutes (from 6:50 to 8:22), the helicopter was supposed to reach Mankayan at 10:44 a.m., the estimated flying time between Rosales and Mankayan being one (1) hour and twenty-nine (29) minutes. Upon the other hand, the time of the crash was placed at around 11:30 a.m., or between 11:00 and 11:30 a.m. By that time the helicopter had already flown from one (1) hour and forty-five (45) minutes to two (2) hours and fifteen (15) minutes, since it took off from Rosales, thus exceeding by sixteen (16) to forty-six (46) minutes the aforementioned estimated flying time. Considering that, with twenty-seven (27) gallons of gasoline, the helicopter had to refuel after a flight of one (1) hour and thirty-two (32) minutes (from Nichols Field to Rosales), it is apparent that, after flying for a longer period of one (1) hour and forty-five (45) minutes to two (2) hours and fifteen (15) minutes, with a little over fifteen (15) gallons or at most twenty-seven (27) gallons of gasoline, the provision of fuel must have already been exhausted. 34

Col. Arnaiz, aircraft dispatcher of PAL, testified that the "maximum flight endurance" of the helicopter was "two hours and fifty minutes including the auxiliary tank." The Flight Plan (Exhibit B-1), as explained by Col. Arnaiz, shows that the estimated flying time from Nichols Field to Rosales was one (1) hour and forty-two (42) minutes, and from Rosales to Mankayan, one (1) hour and twenty-nine (29) minutes, or an aggregate estimated flying time of three (3) hours and eleven (11) minutes, or twenty-one (21) minutes longer than the estimated "maximum flight endurance" of the helicopter. Even if we deduct from said total estimated flying time, from Nichols Field to Mankayan, the ten (10) minutes saved in the flight from Nichols Field to Rosales, Pangasinan, the result would still be eleven (11) minutes beyond the said "maximum flight endurance" of the helicopter. In fact, the crash site (Ampusungan) is only about sixteen (16) kilometers, or ten (10) minutes flying time, to Mankayan. In other words, the accident took place in the area in which the helicopter was to have fully consumed its entire supply of gasoline, thus justifying the belief that it was forced to land in Ampusungan due to lack of gasoline, and that, as the engine ceased to function, its maneuverability must have become impaired, in view of which it crashed, thus causing it to fall into a ravine in defendant's concession.1awphl.nt Several factors indicate strongly that this was in all likelihood what happened for: (1) the site of the crash was more than a mile (over three [3] miles, according to the defendant) off the plotted course, altho, under normal conditions, no reasonably prudent pilot according to appellants witness, Capt. Manzano would have attempted to land in the vicinity of the scene of the occurrence; (2) the wrecked helicopter emitted no smell of gasoline and there was no sign of fire resulting from the crash, despite the fact that the helicopter was using high octane gasoline, which, admittedly, is highly inflammable and would have probably set the craft aflame upon hitting the pine tree above referred to, had there been some gasoline in the tank at that time; and (3) the helicopter was a total wreck, thus showing that the impact must have been strong. The foregoing considerations suggest, also, that Capt. Hernandez and Lt. Imperial had acted recklessly in undertaking the flight with a supply of fuel hardly sufficient to enable them to reach their destination. Besides, the landing report (Exhibit 9) shows that the portions thereof pertaining to the pilot were accomplished or filled in by Lt. Imperial upon landing at the Rosales airport. In fact, he signed said report as pilot of the helicopter. Again, it appears that during the flight from Rosales to Mankayan, the helicopter had deviated from one to three miles from the course plotted by Capt. Hernandez, in which Col. Arnaiz concurred "because that was the most logical route to follow." Had Capt. Hernandez been piloting the machine from Rosales to Mankayan, he would have had no reason to deviate from the course planned by him, for the "visibility and ceiling were unlimited in the area and vicinity where the helicopter fell." All indications are, therefore, to the effect that, at the time of the accident, the helicopter was being piloted, not by Capt. Hernandez but by Lt. Imperial, in violation of Aeronautics Bulletin No. 1, Civil Aviation Regulations, of the Bureau of Aeronautics (CAA)1 as well as of Republic Act No. 776, Section 42 (H),2 for Lt. Imperial was not a lincesed helicopter pilot and was merely in the initial stage of his training as such pilot. It is next urged that defendant was negligent in failing to give notice to the Civil Aeronautics Administration of the presence of the aforementioned tram cables, which, appellants maintain, constituted a hazard to aerial navigation. However, this pretense is not borne out by the record. Appellants' witness, Capt. Manzano, testified that although, in searching for the missing helicopter, his plane flew so low that there was danger of collision with the mountains, he did not notice said cables. The same were not, therefore, within the navigable air space. Similarly, Capt. Rohlings described the area over which the cables were strung as "a congested area full of pine trees" and a "mountainous terrain slopping valley," thereby implying that the space from the cables down was not suitable for air navigation. In short, it has not been satisfactorily shown that the cables were a hazard to aerial navigation, or that the defendant should have or could have reasonably foreseen that aircrafts would fly so low over the place as to get entangled with said cables, for the area is dangerous to navigation owing to its mountainous terrain "full of pine trees." In short plaintiffs-appellants have failed to establish their pretense by a preponderance of evidence, in view of which the decision appealed from must be, as it is hereby affirmed, with costs against them. It is so ordered. Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Paredes and De Leon, JJ., concur. Bautista Angelo, J., is on leave. Footnotes 35

1"CHAPTER VII OPERATIONS OF LICENSED AIRCRAFT.

xxx

xxx

xxx

"Sec. 5. Aircraft to be Flown by Appropriately Licensed Pilot.

"The registered owner or the operator of a licensed aircraft shall not permit it to be flown by any person other than one possessed with a pilot's license valid for the type of aircraft and operation involved, and shall not allow such aircraft to engage in air commerce in a schedule or non-schedule operation unless such aircraft is operating on their permit in accordance with the provisions of Section 6(h) of Commonwealth Act No. 168, as amended by Section 2, paragraph (h) of Commonwealth Act No. 529.

xxx

xxx

xxx

"CHAPTER IX LICENSED PILOTS

"Sec. 1. Licensing Pilots, Regulations of.

"It shall be unlawful for any person to operate any aircraft in the Philippines, unless such person is the holder of an appropriate effective pilot's license issued by the Bureau of Aeronautics. Provided, however, that this restriction shall not apply to licensed pilots of the United States or to foreign pilots operating aircraft of foreign countries with which the United States or the Philippines has a reciprocal or other agreement covering commercial pilot privileges in the Philippines.

"The term 'airman' shall be taken to mean and include any individual (including the person in command, and any pilot, mechanic, or member of the crew) who engages or assists in the navigation or operation of aircraft while on their way, and any individual who is in charge of the inspection, overhauling, or repairing of aircraft or of parachutes." (Emphasis supplied.)

2"Any person serving in any capacity as an airman in connection with any civil aircraft without an airman's certificate, or in violation of the terms of any such certificate or in excess of the rating of such certificate shall be punished by a fine not exceeding five thousand pesos. The repetition of this offense shall be sufficient cause for the revocation of the airman's certificate."

36

Republic of the Philippines SUPREME COURT Manila

FIRST DIVISION

G.R. No. 116940 June 11, 1997 THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and FELMAN SHIPPING LINES, respondents. BELLOSILLO, J.: This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to be subrogated to the rights of the insured upon payment of the insurance claim. On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board "MV Asilda," a vessel owned and operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles to be transported from Zamboanga City to Cebu City for consignee Coca-Cola Bottlers Philippines, Inc., Cebu. 1 The shipment was insured with petitioner Philippine American General Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG. "MV Asilda" left the port of Zamboanga in fine weather at eight o'clock in the evening of the same day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of 1-liter Coca-Cola softdrink bottles. On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles that sank with "MV Asilda." Respondent denied the claim thus prompting the consignee to file an insurance claim with PHILAMGEN which paid its claim of P755,250.00. Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the shipowner for sum of money and damages. In its complaint PHILAMGEN alleged that the sinking and total loss of "MV Asilda" and its cargo were due to the vessel's unseaworthiness as she was put to sea in an unstable condition. It further alleged that the vessel was improperly manned and that its officers were grossly negligent in failing to take appropriate measures to proceed to a nearby port or beach after the vessel started to list. On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event, FELMAN had abandoned all its rights, interests and ownership over "MV Asilda" together with her freight and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587 of the Code of Commerce. 2 On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of Appeals set aside the dismissal and remanded the case to the lower court for trial on the merits. FELMAN filed a petition for certiorari with this Court but it was subsequently denied on 13 February 1989. On 28 February 1992 the trial court rendered judgment in favor of FELMAN. 3 It ruled that "MV Asilda" was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the Philippine Coast Guard and the shipowner's surveyor attesting to its seaworthiness. Thus the loss of the vessel and its entire shipment could only be 37

attributed to either a fortuitous event, in which case, no liability should attach unless there was a stipulation to the contrary, or to the negligence of the captain and his crew, in which case, Art. 587 of the Code of Commerce should apply. The lower court further ruled that assuming "MV Asilda" was unseaworthy, still PHILAMGEN could not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its implied warranty on the vessel's seaworthiness. Resultantly, the payment made by PHILAMGEN to the assured was an undue, wrong and mistaken payment. Since it was not legally owing, it did not give PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee. On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994 respondent appellate court rendered judgment finding "MV Asilda" unseaworthy for being top-heavy as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other words, while the vessel possessed the necessary Coast Guard certification indicating its seaworthiness with respect to the structure of the ship itself, it was not seaworthy with respect to the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that the assured's implied warranty of seaworthiness was not complied with. Perfunctorily, PHILAMGEN was not properly subrogated to the rights and interests of the shipper. Furthermore, respondent court held that the filing of notice of abandonment had absolved the shipowner/agent from liability under the limited liability rule. The issues for resolution in this petition are: (a) whether "MV Asilda" was seaworthy when it left the port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce should apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions which the shipper had against FELMAN, the shipowner. "MV Asilda" was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain as well as the chief mate of the vessel confirmed that the weather was fine when they left the port of Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles on deck. 4 The ship captain stated that around four o'clock in the morning of 7 July 1983 he was awakened by the officer on duty to inform him that the vessel had hit a floating log. At that time he noticed that the weather had deteriorated with strong southeast winds inducing big waves. After thirty minutes he observed that the vessel was listing slightly to starboard and would not correct itself despite the heavy rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside until the vessel was balanced. At about seven o'clock in the morning, the master of the vessel stopped the engine because the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to starboard. The shifting of cargo took about an hour afterwhich he rang the engine room to resume full speed. At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide on his next move, some of the cargo on deck were thrown overboard and seawater entered the engine room and cargo holds of the vessel. At that instance, the master of the vessel ordered his crew to abandon ship. Shortly thereafter, "MV Asilda" capsized and sank. He ascribed the sinking to the entry of seawater through a hole in the hull caused by the vessel's collision with a partially submerged log. 5 The Elite Adjusters, Inc., submitted a report regarding the sinking of "MV Asilda." The report, which was adopted by the Court of Appeals, reads We found in the course of our investigation that a reasonable explanation for the series of lists experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel was top-heavy which is to say that while the vessel may not have been overloaded, yet the distribution or stowage of the cargo on board was done in such a manner that the vessel was in top-heavy condition at the time of her departure and which condition rendered her unstable and unseaworthy for that particular voyage. In this connection, we wish to call attention to the fact that this vessel was designed as a fishing vessel . . . and it was not designed to carry a substantial amount or quantity of cargo on deck. Therefore, we believe strongly that had her cargo been confined to those that could have been accommodated under deck, her stability would not have been affected and the vessel would not have been in any danger of capsizing, even given the prevailing weather conditions at that time of sinking. 38

But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was rendered unseaworthy for the purpose of carrying the type of cargo because the weight of the deck cargo so decreased the vessel's metacentric height as to cause it to become unstable. Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out that ships are precisely designed to be able to navigate safely even during heavy weather and frequently we hear of ships safely and successfully weathering encounters with typhoons and although they may sustain some amount of damage, the sinking of ship during heavy weather is not a frequent occurrence and is not likely to occur unless they are inherently unstable and unseaworthy . . . . We believe, therefore, and so hold that the proximate cause of the sinking of the M/V "Asilda" was her condition of unseaworthiness arising from her having been top-heavy when she departed from the Port of Zamboanga. Her having capsized and eventually sunk was bound to happen and was therefore in the category of an inevitable occurrence (emphasis supplied). 6 We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate cause of the sinking of "MV Asilda" was its being top-heavy. Contrary to the ship captain's allegations, evidence shows that approximately 2,500 cases of softdrink bottles were stowed on deck. Several days after "MV Asilda" sank, an estimated 2,500 empty Coca-Cola plastic cases were recovered near the vicinity of the sinking. Considering that the ship's hatches were properly secured, the empty Coca-Cola cases recovered could have come only from the vessel's deck cargo. It is settled that carrying a deck cargo raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship. However, in this case it was established that "MV Asilda" was not designed to carry substantial amount of cargo on deck. The inordinate loading of cargo deck resulted in the decrease of the vessel's metacentric height 7 thus making it unstable. The strong winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage and as such merely contributed to its already unstable and unseaworthy condition. On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. 8 Simply put, the ship agent is liable for the negligent acts of the captain in the care of goods loaded on the vessel. This liability however can be limited through abandonment of the vessel, its equipment and freightage as provided in Art. 587. Nonetheless, there are exceptional circumstances wherein the ship agent could still be held answerable despite the abandonment, as where the loss or injury was due to the fault of the shipowner and the captain. 9 The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner's liability, does not apply to cases where the injury or average was occasioned by the shipowner's own fault. 10 It must be stressed at this point that Art. 587 speaks only of situations where the fault or negligence is committed solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such situation will be covered by the provisions of the Civil Code on common carrier. 11 It was already established at the outset that the sinking of "MV Asilda" was due to its unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy as an excessive amount of cargo was loaded on deck. Closer supervision on the part of the shipowner could have prevented this fatal miscalculation. As such, FELMAN was equally negligent. It cannot therefore escape liability through the expedient of filing a notice of abandonment of the vessel by virtue of Art. 587 of the Code of Commerce. Under Art 1733 of the Civil Code, "(c)ommon carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case . . ." In the event of loss of goods, common carriers are presumed to have acted negligently. FELMAN, the shipowner, was not able to rebut this presumption. In relation to the question of subrogation, respondent appellate court found "MV Asilda" unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of seaworthiness that rendered the assured not entitled to the payment of is claim under the policy. Hence, when PHILAMGEN paid the claim of the bottling firm there was in effect a "voluntary payment" and no right of subrogation accrued in its favor. In other words, when PHILAMGEN paid it did so at its own risk. 39

It is generally held that in every marine insurance policy the assured impliedly warrants to the assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the policy. 12 Thus Sec. 113 of the Insurance Code provides that "(i)n every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy." Under Sec. 114, a ship is "seaworthy when reasonably fit to perform the service, and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy." Thus it becomes the obligation of the cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. He may have no control over the vessel but he has full control in the selection of the common carrier that will transport his goods. He also has full discretion in the choice of assurer that will underwrite a particular venture. We need not belabor the alleged breach of warranty of seaworthiness by the assured as painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In policies where the law will generally imply a warranty of seaworthiness, it can only be excluded by terms in writing in the policy in the clearest language. 13 And where the policy stipulates that the seaworthiness of the vessel as between the assured and the assurer is admitted, the question of seaworthiness cannot be raised by the assurer without showing concealment or misrepresentation by the assured. 14 The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2) instances has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No. 100367-PAG reads "(t)he liberties as per Contract of Affreightment the presence of the Negligence Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of Affreightment as between the Assured and the Company shall not prejudice the insurance. The seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted." 15 The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states "(t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted . . . ." 16 The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed by the insurance company. 17 The insertion of such waiver clauses in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. Thus it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of unseaworthiness so that if the ship should sink by unseaworthiness, as what occurred in this case, PHILAMGEN is liable. Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN's action against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides: Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. In Pan Malayan Insurance Corporation v. Court of Appeals, 18 we said that payment by the assurer to the assured operates as an equitable assignment to the assurer of all the remedies which the assured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of contract or upon payment by the insurance company of the insurance claim. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay. 19 Therefore, the payment made by PHILAMGEN to Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee against FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.

40

WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29 November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code. 20 SO ORDERED. Vitug, Kapunan and Hermosisima, Jr., JJ., concur. Padilla, J., is on leave. Footnotes 1 Bill of Lading No. CCBPI-1 dated 7 July 1983, Exh. "B," Plaintiff's Formal Offer of Exhibits. 2 Art. 587 states: he ship agent shall also be civilly liable for the indemnities in favor of third parties which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight it may have earned during the voyage. 3 Civil Case No. 5812; Decision penned by Judge Salvador S. Abad Santos, RTC-Br. 65, Makati; Records, pp. 239-241. 4 Exhs. "A-6" to "A-17," Plaintiff's Formal Offer of Exhibits. 5 Ibid. 6 Exh. "M," Plaintiff's Formal Offer of Exhibits. 7 Metacentric height refers to the distance of the metacenter above the center of gravity of a floating body. See Webster's Third New International Dictionary, 1986 Ed., p. 1419. 8 See Note 2. 9 Chua Yek Hong v. Intermediate Appellate Court, G.R. No. 74811, 30 September 1988, 166 SCRA 189. 10 Manila Steamship Co., Inc. v. Insa Abdulhanan and Lim Hong To, 100 Phil. 38, 39 (1956). 11 Heirs of Amparo de los Santos v. Court of Appeals, G.R. No. 51165, 21 June 1990, 186 SCRA 658. 12 Vance, Handbook on the Law of Insurance, 3rd Ed., 1930, pp. 920-921. 13 New Orleans Ry. Co. v. Union Marine Ins. Co., 286 F. 32, cited in Vance, op. cit., p. 920. 14 Clinchfield Fuel Co. v. Aetna Ins. Co., 114 S. E. 543, 548. 15 Exh. "C-1," Plaintiff's Formal Offer of Exhibits. 16 Ibid. 17 See Note 15. 18 G.R. No. 81026, 3 April 1990, 184 SCRA 54, citing Compania Maritima v. Insurance Company of North America, No. L18965, 30 October 1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamila and Company, Inc., No. L-27427, 7 April 1976, 70 SCRA 323. 19 Boney, Insurance Commissioner v. Central Mutual Ins. Co. of Chicago, 197 S.E. 122. 20 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty. (See Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 94712, 12 July 1994, 234 SCRA 78, 95). 41

Republic of the Philippines SUPREME COURT Manila

FIRST DIVISION G.R. No. 106999 June 20, 1996 PHILIPPINE HOME ASSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and EASTERN SHIPPING LINES, INC., respondents. KAPUNAN, J.:p Eastern Shipping Lines, Inc. (ESLI) loaded on board SS Eastern Explorer in Kobe, Japan, the following shipment for carriage to Manila and Cebu, freight pre-paid and in good order and condition, viz: (a) two (2) boxes internal combustion engine parts, consigned to William Lines, Inc. under Bill of Lading No. 042283; (b) ten (l0) metric ton. (334 bags) ammonium chloride, consigned to Orca's Company under Bill of Lading No. KCE-I2; (c) two hundred (200) bags Glue 300, consigned to Pan Oriental Match Company under Bill of Lading No. KCE-8; and (d) garments, consigned to Ding Velayo under Bills of Lading Nos. KMA-73 and KMA-74. While the vessel was off Okinawa, Japan, a small flame was detected on the acetylene cylinder located in the accommodation area near the engine room on the main deck level. As the crew was trying to extinguish the fire, the acetylene cylinder suddenly exploded sending a flash of flame throughout the accommodation area, thus causing death and severe injuries to the crew and instantly setting fire to the whole superstructure of the vessel. The incident forced the master and the crew to abandon the ship. Thereafter, SS Eastern Explorer was found to be a constructive total loss and its voyage was declared abandoned. Several hours later, a tugboat under the control of Fukuda Salvage Co. arrived near the vessel and commenced to tow the vessel for the port of Naha, Japan. Fire fighting operations were again conducted at the said port. After the fire was extinguished, the cargoes which were saved were loaded to another vessel for delivery to their original ports of destination. ESLI charged the consignees several amounts corresponding to additional freight and salvage charges, as follows: (a) for the goods covered by Bill of Lading No. 042283, ESLI charged the consignee the sum of P1,927.65, representing salvage charges assessed against the goods; (b) for the goods covered by Bill of Lading No. KCE-12, ESLI charged the consignee the sum of P2,980.64 for additional freight and P826.14 for salvage charges against the goods; (c) for the goods covered by Bill of Lading No. KCE8, ESLI charged the consignee the sum of P3,292.26 for additional freight and P4,130.68 for salvage charges against the goods; and (d) for the goods under Bills of Lading Nos. KMA-73 and KMA-74, ESLI charged the consignee the sum of P8,337.06 for salvage charges against the goods. The charges were all paid by Philippine Home Assurance Corporation (PHAC) under protest for and in behalf of the consignees. PHAC, as subrogee of the consignees, thereafter filed a complaint before the Regional Trial Court of Manila, Branch 39, against ESLI to recover the sum paid under protest on the ground that the same were actually damages directly brought about by the fault, negligence, illegal act and/or breach of contract of ESLI. In its answer, ESLI contended that it exercised the diligence required by law in the handling, custody and carriage of the shipment; that the fire was caused by an unforeseen event; that the additional freight charges are due and demandable

42

pursuant to the Bill of Lading; 1 and that salvage charges are properly collectible under Act No. 2616, known as the Salvage Law. The trial court dismissed PHAC's complaint and ruled in favor of ESLI ratiocinating thus: The question to be resolved is whether or not the fire on the vessel which was caused by the explosion of an acetylene cylinder loaded on the same was the fault or negligence of the defendant. Evidence has been presented that the SS "Eastern Explorer" was a seaworthy vessel (Deposition of Jumpei Maeda, October 23, 1980, p. 3) and before the ship loaded the Acetylene Cylinder No. NCW 875, the same has been tested, checked and examined and was certified to have complied with the required safety measures and standards (Deposition of Senjei Hayashi, October 23, 1980, pp. 2-3). When the fire was detected by the crew, fire fighting operations was immediately conducted but due to the explosion of the acetylene cylinder, the crew were unable to contain the fire and had to abandon the ship to save their lives and were saved from drowning by passing vessels in the vicinity. The burning of the vessel rendering it a constructive total loss and incapable of pursuing its voyage to the Philippines was, therefore, not the fault or negligence of defendant but a natural disaster or calamity which nobody would like to happen. The salvage operations conducted by Fukuda Salvage Company (Exhibits "4-A" and "6-A") was perfectly a legal operation and charges made on the goods recovered were legitimate charges. Act No. 2616, otherwise known as the Salvage Law, is thus applicable to the case at bar. Section 1 of Act No. 2616 states: Sec 1. When in case of shipwreck, the vessel or its cargo shall be beyond the control of the crew, or shall have been abandoned by them, and picked up and conveyed to a safe place by other persons, the latter shall be entitled to a reward for the salvage.

Those who, not being included in the above paragraph, assist in saving a vessel or its cargo from shipwreck, shall be entitled to like reward. In relation to the above provision, the Supreme Court has ruled in Erlanger & Galinger v. Swedish East Asiatic Co., Ltd., 34 Phil. 178, that three elements are necessary to a valid salvage claim, namely (a)a marine peril (b) service voluntarily rendered when not required as an existing duty or from a special contract and (c) success in whole or in part, or that the service rendered contributed to such success. The above elements are all present in the instant case. Salvage charges may thus be assessed on the cargoes saved from the vessel. As provided for in Section 13 of the Salvage Law, "The expenses of salvage, as well as the reward for salvage or assistance, shall be a charge on the things salvaged or their value." In Manila Railroad Co. v. Macondray Co., 37 Phil. 583, it was also held that "when a ship and its cargo are saved together, the salvage allowance should be charged against the ship and cargo in the proportion of their respective values, the same as in a case of general average . . ." Thus, the "compensation to be paid by the owner of the cargo is in proportion to the value of the vessel and the value of the cargo saved." (Atlantic Gulf and Pacific Co. v. Uchida Kisen Kaisha, 42 Phil. 321). (Memorandum for Defendant, Records, pp. 212-213). With respect to the additional freight charged by defendant from the consignees of the goods, the same are also validly demandable. As provided by the Civil Code: Art. 1174. Except in cases expressly specified by law, or when it is otherwise declared by stipulation, or when the nature of the obligation require the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though foreseen, were inevitable. Art 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor." The burning of "EASTERN EXPLORER" while off Okinawa rendered it physically impossible for defendant to comply with its obligation of delivering the goods to their port of destination pursuant to the contract of carriage. Under Article 1266 of the Civil Code, the physical impossibility of the prestation extinguished defendant's obligation.. 43

It is but legal and equitable for the defendant therefore, to demand additional freight from the consignees for forwarding the goods from Naha, Japan to Manila and Cebu City on board another vessel, the "EASTERN MARS." This finds support under Article 844 of the Code of Commerce which provides as follows: Art. 844. A captain who may have taken on board the goods saved from the wreck shall continue his course to the port of destination; and on arrival should deposit the same, with judicial intervention at the disposal of their legitimate owners. . . . The owners of the cargo shall defray all the expenses of this arrival as well as the payment of the freight which, after taking into consideration the circumstances of the case, may be fixed by agreement or by a judicial decision. Furthermore, the terms and conditions of the Bill of Lading authorize the imposition of additional freight charges in case of forced interruption or abandonment of the voyage. At the dorsal portion of the Bills of Lading issued to the consignees is this stipulation: 12. All storage, transshipment, forwarding or other disposition of cargo at or from a port of distress or other place where there has been a forced interruption or abandonment of the voyage shall be at the expense of the owner, shipper, consignee of the goods or the holder of this bill of lading who shall be jointly and severally liable for all freight charges and expenses of every kind whatsoever, whether payable in advance or not that may be incurred by the cargo in addition to the ordinary freight, whether the service be performed by the named carrying vessel or by carrier's other vessels or by strangers. All such expenses and charges shall be due and payable day by day immediately when they are incurred. The bill of lading is a contract and the parties are bound by its terms (Gov't of the Philippine Islands vs. Ynchausti and Co., 40 Phil. 219). The provision quoted is binding upon the consignee. Defendant therefore, can validly require payment of additional freight from the consignee. Plaintiff can not thus recover the additional freight paid by the consignee to defendant. (Memorandum for Defendant, Record, pp. 215-216). 2 On appeal to the Court of Appeals, respondent court affirmed the trial court's findings and conclusions, 3 hence, the present petition for review before this Court on the following errors: I. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL THE TRIAL COURT'S FINDINGS THAT THE BURNING OF THE SS "EASTERN EXPLORER", RENDERING ET A CONSTRUCTIVE TOTAL LOSS, IS A NATURAL DISASTER OR CALAMITY WHICH NOBODY WOULD LIKE TO HAPPEN, DESPITE EXISTING JURISPRUDENCE TO THE CONTRARY. II. THE RESPONDENT COURT ARBITRARILY RULED THAT THE BURNING OF THE SS "EASTERN EXPLORER" WAS NOT THE FAULT AND NEGLIGENCE OF RESPONDENT EASTERN SHIPPING LINES. III. THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION IN RULING THAT DEFENDANT HAD EXERCISED THE EXTRAORDINARY DILIGENCE IN THE VIGILANCE OVER THE GOODS AS REQUIRED BY LAW. IV. THE RESPONDENT COURT ARBITRARILY RULED THAT THE MARINE NOTE OF PROTEST AND STATEMENT OF FACTS ISSUED BY THE VESSEL'S MASTER ARE NOT HEARSAY DESPITE THE FACT THAT THE VESSEL'S MASTER, CAPT. LICAYLICAY WAS NOT PRESENTED COURT, WITHOUT EXPLANATION WHATSOEVER FOR HIS NON-PRESENTATION, THUS, PETITIONER WAS DEPRIVED OF ITS RIGHT TO CROSS- EXAMINE THE AUTHOR THEREOF. V. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL THE TRIAL COURT'S CONCLUSION THAT THE EXPENSES OR AVERAGES INCURRED IN SAVING THE CARGO CONSTITUTE GENERAL AVERAGE. VI. THE RESPONDENT COURT ERRONEOUSLY ADOPTED THE TRIAL COURT'S RULING THAT PETITIONER WAS LIABLE TO RESPONDENT CARRIER FOR ADDITIONAL FREIGHT AND SALVAGE CHARGES. 4 It is quite evident that the foregoing assignment of errors challenges the findings of fact and the appreciation of evidence made by the trial court and later affirmed by respondent court. While it is a well-settled rule that only questions of law may be raised in a petition for review under Rule 45 of the Rules of Court, it is equally well-settled that the same admits of the following exceptions, namely: (a) when the conclusion is a finding grounded entirely on 44

speculation, surmises or conjectures; (b) when the inference made is manifestly mistaken, absurd or impossible; (c) where there is a grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of fact are conflicting; (f) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (g) when the findings of the Court of Appeals are contrary to those of the trial court; (h) when the findings of fact are conclusions without citation of specific evidence on which they are based; (i) when the facts set forth in the petition as well as in the petitioners' main and reply briefs are not disputed by the respondents; and (j) when the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by the evidence on record. 5 Thus, if there is a showing, as in the instant case, that the findings complained of are totally devoid of support in the records, or that they are so glaringly erroneous as to constitute grave abuse of discretion, the same may be properly reviewed and evaluated by this Court. It is worthy to note at the outset that the goods subject of the present controversy were neither lost nor damaged in transit by the fire that razed the carrier. In fact, the said goods were all delivered to the consignees, even if the transshipment took longer than necessary. What is at issue therefore is not whether or not the carrier is liable for the loss, damage, or deterioration of the goods transported by them but who, among the carrier, consignee or insurer of the goods, is liable for the additional charges or expenses incurred by the owner of the ship in the salvage operations and in the transshipment of the goods via a different carrier. In absolving respondent carrier of any liability, respondent Court of Appeals sustained the trial court's finding that the fire that gutted the ship was a natural disaster or calamity. Petitioner takes exception to this conclusion and we agree. In our jurisprudence, fire may not be considered a natural disaster or calamity since it almost always arises from some act of man or by human means. It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency. 6 In the case at bar, it is not disputed that a small flame was detected on the acetylene cylinder and that by reason thereof, the same exploded despite efforts to extinguish the fire. Neither is there any doubt that the acetylene cylinder, obviously fully loaded, was stored in the accommodation area near the engine room and not in a storage area considerably far, and in a safe distance, from the engine room. Moreover, there was no showing, and none was alleged by the parties, that the fire was caused by a natural disaster or calamity not attributable to human agency. On the contrary, there is strong evidence indicating that the acetylene cylinder caught fire because of the fault and negligence of respondent ESLI, its captain and its crew. First, the acetylene cylinder which was fully loaded should not have been stored in the accommodation area near the engine room where the heat generated therefrom could cause the acetylene cylinder to explode by reason of spontaneous combustion. Respondent ESLI should have easily foreseen that the acetylene cylinder, containing highly inflammable material was in real danger of exploding because it was stored in close proximity to the engine room. Second, respondent ESLI should have known that by storing the acetylene cylinder in the accommodation area supposed to be reserved for passengers, it unnecessarily exposed its passengers to grave danger and injury. Curious passengers, ignorant of the danger the tank might have on humans and property, could have handled the same or could have lighted and smoked cigarettes while repairing in the accommodation area. Third, the fact that the acetylene cylinder was checked, tested and examined and subsequently certified as having complied with the safety measures and standards by qualified experts 7 before it was loaded in the vessel only shows to a great extent that negligence was present in the handling of the acetylene cylinder after it was loaded and while it was on board the ship. Indeed, had the respondent and its agents not been negligent in storing the acetylene cylinder near the engine room, then the same would not have leaked and exploded during the voyage. Verily, there is no merit in the finding of the trial court to which respondent court erroneously agreed that the fire was not the fault or negligence of respondent but a natural disaster or calamity. The records are simply wanting in this regard.

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Anent petitioner's objection to the admissibility of Exhibits "4'' and ''5", the Statement of Facts and the Marine Note of Protest issued by Captain Tiburcio A. Licaylicay, we find the same impressed with merit because said documents are hearsay evidence. Capt. Licaylicay, Master of S.S. Eastern Explorer who issued the said documents, was not presented in court to testify to the truth of the facts he stated therein; instead, respondent ESLI presented Junpei Maeda, its Branch Manager in Tokyo and Yokohama, Japan, who evidently had no personal knowledge of the facts stated in the documents at issue. It is clear from Section 36, Rule 130 of the Rules of Court that any evidence, whether oral or documentary, is hearsay if its probative value is not based on the personal knowledge of the witness but on the knowledge of some other person not on the witness stand. Consequently, hearsay evidence, whether objected to or not, has no probative value unless the proponent can show that the evidence falls within the exceptions to the hearsay evidence rule. 8 It is excluded because the party against whom it is presented is deprived of his right and opportunity to cross-examine the persons to whom the statements or writings are attributed. On the issue of whether or not respondent court committed an error in concluding that the expenses incurred in saving the cargo are considered general average, we rule in the affirmative. As a rule, general or gross averages include all damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from a real and known risk 9 While the instant case may technically fall within the purview of the said provision, the formalities prescribed under Articles 813 10 and 814 11 of the Code of Commerce in order to incur the expenses and cause the damage corresponding to gross average were not complied with. Consequently, respondent ESLI's claim for contribution from the consignees of the cargo at the time of the occurrence of the average turns to naught. Prescinding from the foregoing premises, it indubitably follows that the cargo consignees cannot be made liable to respondent carrier for additional freight and salvage charges. Consequently, respondent carrier must refund to herein petitioner the amount it paid under protest for additional freight and salvage charges in behalf of the consignees. WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. Respondent Eastern Shipping Lines, Inc. is ORDERED to return to petitioner Philippine Home Assurance Corporation the amount it paid under protest in behalf of the consignees herein. SO ORDERED. Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur. Footnotes 1 Sec 12. All storage, transshipment forwarding or other disposition of cargo at or from port of distress or other place where there has been a forced interruption or abandonment of the voyage shall be at the expense of the owner, shipper, consignee of the goods or the holder of this bill of lading who shall be jointly and severally liable for all freight charges and expenses of every kind whatsoever, whether payable in advance or not that may be incurred by the cargo in addition to the ordinary freight, whether payable in advance or not that may be incurred by the cargo in addition to the ordinary freight, whether the service be performed by the named carrying vessel or by carrier's other vessels or by strangers such expenses and charges shall be due and payable day by day immediately when they are incurred. 2 Original Records, pp. 240-243. 3 Rollo, pp. 29-39. 4 Id., at 12-13. 5 Geronimo v. Court of Appeals, 224 SCRA 494, 498-499 (1993]; BPI Credit Corporation v. Court of Appeals, 204 SCRA 601, 608-609 [1991]; Medina v. Asistio, Jr., 191 SCRA 218, 223-224 [1990]. 6 Eastern Shipping Lines, Inc. v. Intermediate Appellate Court 150 SCRA 463 [1987]; Africa v. Caltex, 16 SCRA 448 [1966]; See also 4 Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1993 Edition, p. 44. 7 Original Records, p. 171. 8 Baguio v. Court of Appeals, 226 SCRA 366, 370 [1993].

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9 Art 811, Code of Commerce. 10 Art 813. In order to incur the expenses and cause the damages corresponding to gross average, there must be a resolution of the captain, adopted after deliberation with the sailing mate and other officers of the vessel, and after hearing the persons interested in the cargo who may be present. If the latter shall object, and the captain and officers or a majority of them, or the captain, if opposed to the majority, should consider certain measures necessary they may be executed under his responsibility, without prejudice to the right of the shippers to proceed against the captain before the competent judge or court, if they can prove that he acted with malice, lack of skill, or negligence. If the persons interested in the cargo, being on board the vessel, have not been heard, they shall not contribute to the gross average, their share being chargeable against the captain, unless the urgency of the case should be such that the time necessary for previous deliberations was wanting. 11 Art 814. The resolution adopted to cause the damages which constitute general average must necessarily be entered in the log book, stating the motives and reasons for the dissent, should there be any, and the irresistible and urgent causes which impelled the captain if he acted of his own accord. In the first case the minutes shall be signed by all the persons present who could do so before taking action, if possible; and if not, at the first opportunity. In the second case, it shall be signed by the captain and by the officers of the vessel. In the minutes, and after the resolution, shall be stated in detail all the goods jettisoned, and mention shall be made of the injuries caused to those kept on board. The captain shall be obliged to deliver one copy of these minutes to the maritime judicial authority of the first port he may make, within twenty-four hours after his arrival, and to ratify it immediately under oath.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 124520 August 18, 1997 Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners, vs. COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents. PADILLA, J.: This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of respondent Court of Appeals. The undisputed facts of the case are as follows: 1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988. 2. One of the stipulations of the one (1) year lease contract states: 18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects placed at any stall or store or space in the leased premises without first obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then the policy is deemed assigned and transferred to the LESSOR for its own benefit; . . . 1 3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by fire the merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written consent of private respondent CKS. 4. On the day that the lease contract was to expire, fire broke out inside the leased premises. 5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract (between the Cha spouses and United) be paid directly to CKS, based on its lease contract with the Cha spouses. 6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United. 7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit. 8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision ** dated 11 January 1996, affirming the trial court decision, deleting however the awards for exemplary damages and attorney's fees. A motion for reconsideration by United was denied on 29 March 1996. In the present petition, the following errors are assigned by petitioners to the Court of Appeals: I THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY II 48

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER III THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN CONTRAVENTION OF THE INSURANCE LAW IV THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE RESPONDENT CORPORATION. 2 The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that any fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the prior written consent of the latter. It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be contrary to law, morals, good customs, public order or public policy. 3 Sec. 18 of the Insurance Code provides: Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist at the time the insurance takes effect and at the time the loss occurs. 4 The basis of such requirement of insurable interest in property insured is based on sound public policy: to prevent a person from taking out an insurance policy on property upon which he has no insurable interest and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager which is void under Section 25 of the Insurance Code, which provides: Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void. In the present case, it cannot be denied that CKS has no insurable interest in the goods and merchandise inside the leased premises under the provisions of Section 17 of the Insurance Code which provide: Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss of injury thereof. Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest over said merchandise remains with the insured, the Cha spouses. The automatic assignment of the policy to CKS under the provision of the lease contract previously quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in the property insured. The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a separate and distinct issue which we do not resolve in this case.

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WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and Stella Uy-Cha. SO ORDERED. Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ., concur. Footnotes 1 Rollo, p. 50. * Penned by Judge Roberto M. Lagman. ** Penned by Justice Conchita Carpio-Morales with Justices Fidel P. Purisima and Fermin A. Matin, Jr., concurring. 2 Rollo, p. 18. 3 Article 1409(i), Civil Code. 4 Section 19, Insurance Code.

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Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-11497 August 16, 1957

PHILIPPINE AIR LINES, INC., plaintiff-appellant, vs. HEALD LUMBER COMPANY, defendant-appellee. Daniel Me. Gomez and Juan T. Chuidian Law Office for appellant. Ross, Selph, Cararascoso and Janda for appellee.p BAUTISTA ANGELO J.: Sometime prior to June 4, 1954, the Lepanto Consolidated Mines chartered a helicopter belonging to plaintiff to make a flight on said date from its base at Nichols Filed Airport to the former's camp located at Mankayan, Mountain Province. The helicopter took off on said date with Capt. Gabriel G. Hernandez as pilot and Lt. Rex M. Imperial as first officer. No other person was on board. The helicopter failed to reach its destination for the reason that while on flight within the logging area of defendant, it collided with defendant's tramway steel cables somewhere in Ampusungan, Mankayan, Mt. Province, resulting in its destruction and the death of Capt. Hernandez and Lt. Imperial. Plaintiff insured at its expense the helicopter for P80,000 and the two officers who piloted the same for P20,000 each with various insurance companies in London. As a result of the crash, the insurance companies paid to plaintiff a total indemnity of P120,000. Nevertheless, plaintiff sustained additional damages totalling P103,347.82 which were not recovered by insurance. On March 2, 1956, plaintiff commenced the present action to recover from defendant (a) the sum of P120,000 paid to the plaintiff by the insurance companies as indemnity for the loss of the helicopter and the death of Capt. Hernandez and Lt. Imperial; and (b) the sum of P103,347.82 representing consequential and moral damages which plaintiff claims it had incurred as a result of the loss of the helicopter and the death of the officers above-mentioned. With regard to the claim of P120,000.00, the complaint alleges that said helicopter and officers having been duly insured with numerous insurance companies, and having been paid the aforesaid amount as value of the helicopter and reimbursement for the compensation paid to the heirs of the deceased officers, plaintiff is now asserting this claim "on behalf and for the benefit of said insurers," and in the prayer it claims that said amount of P120,000 "shall be held by plaintiff in trust for the insurer." As regards the other claim for P103,347.82, plaintiff states that the same represents additional damages sustained by it "upon its own account." On March 20, 1956, defendant filed a motion to dismiss invoking, among other grounds, the following: Plaintiff seeks to recover, among other items, the sum of P120,000 representing the proceeds of various insurance policies which have already been paid to it by "numerous insurance companies." It is evident that plaintiff has no cause of action against defendant for if anyone should sue defendant for its recovery, it will only be the insurance companies. Plaintiff, opposing this motion, contends that "inasmuch as the loss sustained exceeded the amount of insurance the right of action against defendant which allegedly negligently caused the loss remained with the insured (plaintiff) for the entire loss and the action must be brought by it in its own name as the real party in interest, it merely holding in trust for the insurers so much of the recovery as corresponds to the amount received as indemnity from the insurers." The court, acting on the motion, issued an order on April 16, 1956 the pertinent portion of which reads: "As to the first allegation that insurance companies have paid a portion of Plaintiff's damages, this Court believes that the real parties in interest are the insurance companies concerned so that Plaintiff should either delete this allegation or bring in the insurance companies as parties plaintiff." Accordingly, the court ordered plaintiff to amend its complaint as above indicated, within a period of ten (10) days from receipt of the order. Plaintiff filed a motion for reconsideration which was denied. And having manifested its decision not to amend the complaint as above indicated, the lower court, in a subsequent order, made it clear that such move of plaintiff amounts to a deletion of

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the portion objected to and so the complaint should be deemed limited to the additional damages covered by paragraph 9 thereof. Plaintiff appealed from both orders. The only question to be determined is whether "The lower court erred in ruling that plaintiff is not the real party in interest respecting the claim for P120,000.00 and in ordering deleted that claim from the complaint." It is appellant's theory that, inasmuch as the loss it has sustained exceeds the amount of insurance paid to it by the insurers, the right of action to recover the entire loss from the wrongdoer remains with the insured so the action must be brought in its own name as real party in interest. To the extent of the amount received by it as indemnity from the insurers, plaintiff would then be acting as trustee for them. In support of this contention, appellant cites American authorities the most representative of which we quote: Sec. 1358. Under Statute, where Loss Exceeds Insurance Paid. Under statutes providing that every action must be prosecuted in the name of the real party in interest, it is generally held that if the insurance paid by an insurer covers only a portion of the loss, the insurer is not the real party in interest, but rather, the right of action against the wrongdoer who caused the loss remains in the insured for the entire loss, and the action must be brought by him in his own name. This rule has been said to rest upon the theory that the insured sustains toward the insurer the relation of trustee, and also upon the right of the wrongdoer not to have the cause of action against him split up so that he is compelled to defend two actions for the same wrong. (29 Am. Jur., p. 1016) (Emphasis supplied) While the above is the rule under American Statutes, the rule on the matter is different in the Philippines. In this jurisdiction, we have our own legal provision which in substance differs from the American law. We refer to Article 2207 of the New Civil Code which provides: ART. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. The reason is obvious. The payment of the indemnity by the insurer to the insured does not make the latter a trustee of the former as in the American law. This matter being statutory, the same must be governed by our own law in this jurisdiction. This interpretation finds support in the explanatory note given by the Code Commission in proposing the adoption of the article under consideration. Thus, said Commission, in its report on the proposed Civil Code of the Philippines, referring to the article in question, says: The rule in article 2227 (Art. 22207 of the Code as enacted) about insurance indemnity is different from the American law. Said article provides: ART. 2227. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who was violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss the aggrieved party shall be entitled to recover the deficiency from the person causing the loss of injury. According to American jurisprudence, the fact that the plaintiff has been indemnified by an insurance company cannot lessen the damages to be paid by the defendant. Such rules give more damages than those actually suffered by the plaintiff, and the defendant, if also sued by the insurance company for imbursement, would have to pay in many cases twice the damages he has caused. The proposed article would seem to be a better adjustment of the rights of the three parties concerned. (Report of Code Commission on the Proposed Civil Code of the Philippines, p. 73) (Emphasis supplied)

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It is insisted that despite the subrogation of the insurer to the rights of the insured, the latter can still bring the action in its name because the subrogation vests in the latter the character of a trustee charged with the duty to pay to the insurer so much of the recovery as corresponds to the amount it had received as a partial indemnity. This cannot be true in this for before a person can sue for the benefit of another under a trusteeship, he must be "a trustee of an express trust" (Section 3, Rule 3, Rules of Court). Thus, under this provision, "in order that a trustee may sue or be sued alone, it is essential that his trust should be express, that is, a trust created by the direct and positive acts of the parties, by some writing, deed, or will or by proceedings in court. The provision does not apply in cases of implied trust, that is, a trust which may be inferred merely from the acts of the parties or from other circumstances" (Moran, Comments on the Rules of Court, Vol. I, 1952 Ed., p. 35). It also contended that to adopt a contrary rule to what is authorized by the American statutes would be splitting a cause of action or promoting multiplicity of suits which should be avoided. This contention cannot also hold water considering that under our rules both the insurer and the insured may join as plaintiffs to press their claims against the wrongdoer when the same arise out of the same transaction or event. This is authorized by Section 6, Rule 3, of the Rules of Court. Former Chief Justice Moran gives a number of instances where this joinder may be effected, some of which are quoting hereunder for purposes of illustration: 1. For instance, A, B, C, and D are owners, respectively, of four houses destroyed by fire caused by sparks coming from a defective chimney of a passing locomotive owned by the Manila Railroad Company. Under the old procedure, the four owners cannot join in a single complaint for damages against the Manila Railroad Company, for the reason that they do not have a community of interest in the same subject of the litigation, each of them being interested in recovering the value of his house alone. Under the new procedure, they may join in a single complaint, for a right to relief is alleged to east in their favor severally arising out of the same cause, namely, the single negligent act of the defendant by which the four houses were destroyed by fire, and which is also a common question of fact to all of the four plaintiffs. 2. Again, several farmers, depending upon a system for the irrigation of their crops, have sustained damages by reason of the diversion of the water from said system by the defendant company. Under the old procedure, those several farmers cannot unite in a single action, they having no community of interest in the same subject, for each of them is interested in the damages to his own farm and not in those of the others. But, under the new procedure, they may join in a single action, for their right to relief arises from the same occurrence, namely, the diversion of the water from the aforesaid system, which is also a question of fact common to all of them. 3. If, in a collision of motor cars, a chauffeur sustained personal injuries and damages are caused to the car he was driving, two causes of action arise: one, in favor of the chauffeur for the injuries caused to his person, and another, in favor of the owner of the car for the damages caused thereto. Under the procedure, it is doubtful whether the owner and the chauffeur may join in a single complaint, because they are not interested in the same subject, each of them claiming a different and separate kind of damages, but under the new procedure, they may join, because a right of relief exists in their favor arising out of the same transaction or occurrence, namely, the collision, and a question of fact will arise at the trial common to both of them. (Moran, Comments on the Rules of Court, Vol. 1, 1952 Ed., pp. 4243) . Wherefore, the orders appealed from are affirmed, with costs against appellant. Paras, C.J., Padilla, Montemayor, Reyes, A., Labrador, Concepcion, Endencia and Felix , JJ., concur.

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