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Prudential Guarantee Assurance Inc. vs.

Trans Asia Shipping Lines

G.R. No. 151890
June 20, 2006
Trans Asia is the owner of the vessel M/V Asia Korea. Prudential Guarantee and Assurance Inc.
insured said vessel for loss/damage of the hull and machinery arising from perils of fire and
explosion beginning from the period of July 1, 1993 until July 1, 1994. While the policy was in
force, a fire broke out. Trans Asia file its notice of claim for damages sustained by the vessel. It
also reserved its right to subsequently notify Prudential as to the full amount of the claim upon
final survey and determination by the average adjuster Richard Hogg International of the damage
sustained by the reason of fire. Trans Asia executed a document denominated "Loan and Trust
Receipt" amounting to Php 3,000,000. Prudential Guarantee and Assurance Inc. denied the
former's claim and requested for the return of the said amount. The insurance company contends
that there was a breach in the policy conditions, specifically, "Warranted Vessel Classed and
Class Maintained".
The trial court held that Trans Asia failed to prove its compliance with the terms of the warranty.
It further explained that the concealment made by Trans Asia is sufficient to avoid the policy.
Prudential, as the injured party, is entitled to rescind to rescind the contract. The trial court
dismissed the complaint and directed Trans Asia to return the "loan" extended by Prudential.
The Court of Appeals reversed the decision of the trial court. It contends that Prudential had the
burden to show that there was a breach in the warranty and which it failed to do so. The Court
considered Prudential's admission that, at the time the insurance contract was entered into, the
vessel was properly classed by the Bureau Veritas, a classification recignized by the industry. It
further contends that then subject warranty was in a form of a rider, hence, such contract should
be counstrued against Prudential. Finally, it interpreted the transaction between the parties as one
of subrogation, instead of a loan. Thus, the amount given to Trans Asia was considered to be a
partial payment to its claim under the policy.
1.) WON there was a breach in the warranty of the contract.
2.) WON such contract partakes the nature of a loan.
The Supreme Court held that:
1.) Prudential failed to establish that Trans Asia had violated and breached the policy condition
provided in the insurance contract. The latter was able to establish proof of loss and coverage of

the loss. Prudential also made a categorical admission at the time of the procurement of the
insurance contract that the vessel was properly classified by the Bureau Veritas.
Assuming that there was a breach in the policy, the renewal of the insurance policy for two
consecutive years after the loss is deemed as a waiver on the part of Prudential. Breach of a
warranty or of a condition renders the contract defeasible at the option of the insurer; but if he so
elects, he may waive his privilege and power to rescind by the mere expression of an intention so
to do.
2.) the amount granted by Prudential to Trans Asia, evidenced by a document denominated as a
"Loan and Trust Receipt", constitued partial payment on the policy. Under said agreement,
Prudential is obligated to hand over to Trans Asia "whatever recovery the latter may make" and
the latter to deliver to the former "all document necessary to prove its interest in the said
property." Prudential was given the right of subrogation to whatever net recovery Trans Asia may
obtain from third parties resulting from the fire.