Insurance Part IV Provisions and Cases

INSU Part IV Provisions and Cases
Atty. Reyes
IV. Devices for ascertaining and controlling risk and control
A.
Concealment
1.
Concept
(b) Those which, in the exercise of ordinary care, the other ought to know,
and of which the former has no reason to suppose him ignorant;
(c) Those of which the other waives communication;
3.
Duty to Communicate
(e) Those which relate to a risk excepted from the policy and which are not
otherwise material.
SEC. 28. Each party to a contract of insurance must communicate

to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and
which the other has not the means of ascertaining.
SEC. 32. Each party to a contract of insurance is bound to know all the
general causes which are open to his inquiry, equally with that of the other,
and which may affect the political or material perils contemplated; and all
general usages of trade.
Test of Materiality
SEC. 34. Information of the nature or amount of the interest of one insured
need not be communicated unless in answer to an inquiry, except as
prescribed by Section 51.
SEC. 31. Materiality is to be determined not by the event, but

solely by the probable and reasonable influence of the facts upon
the party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract, or in
making his inquiries.
4.
Effect of Concealment
SEC. 27. A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance.
SEC. 29. An intentional and fraudulent omission, on the part of one
insured, to communicate information of matters proving or tending
to prove the falsity of a warranty, entitles the insurer to rescind.
5.
Matters which need not be communicated
SEC. 30. Neither party to a contract of insurance is bound to communicate

information of the matters following, except in answer to the inquiries of the
other:
(a) Those which the other knows;
SEC. 35. Neither party to a contract of insurance is bound to communicate,

even upon inquiry, information of his own judgment upon the matters in
question.
6.
Waiver of Information
SEC. 33. The right to information of material facts may be waived, either by
the terms of insurance or by neglect to make inquiry as to such facts, where
they are distinctly implied in other facts of which information is
communicated.
B.
Representation
1. Concept
SEC. 36. A representation may be oral or written
2.
(d) Those which prove or tend to prove the existence of a risk excluded by a
warranty, and which are not otherwise material; and
Page
SEC. 26. A neglect to communicate that which a party knows and

ought to communicate, is called a concealment.

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Kinds of representation
7.
SEC. 36. A representation may be oral or written
SEC. 44. A representation is to be deemed false when the facts

fail to correspond with its assertions or stipulations.
SEC. 37. A representation may be made at the time of, or before,

issuance of the policy.
SEC. 39. A representation as to the future is to be deemed a
promise, unless it appears that it was merely a statement of belief
or expectation.
SEC. 45. If a representation is false in a material point, whether

affirmative or promissory, the injured party is entitled to rescind the
contract from the time when the representation becomes false.
C.
SEC. 42. A representation must be presumed to refer to the date

on which the contract goes into effect.
3.
Remedies available in case of concealment or false

representation
1.
Test of materiality
After a policy of life insurance made payable on the death of

the insured shall have been in force during the lifetime of the
insured for a period of two (2) years from the date of its issue
or of its last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason of the
fraudulent concealment or misrepresentation of the insured or
his agent.
Effect of alteration or withdrawal
SEC. 41. A representation may be altered or withdrawn before the

insurance is effected, but not afterwards.
Time to which representation refers
SEC. 42. A representation must be presumed to refer to the date

on which the contract goes into effect.
6.
2.
Effect when representation is obtained from third persons
SEC. 43. When a person insured has no personal knowledge of a

fact, he may nevertheless repeat information which he has upon
the subject, and which he believes to be true, with the explanation
that he does so on the information of others; or he may submit the
information, in its whole extent, to the insurer; and in neither case is
he responsible for its truth, unless it proceeds from an agent of the
insured, whose duty it is to give the information.
D.
When life insurance policy becomes incontestable

a. Requirements for incontestability
b. Theory and object of incontestability
c. Defenses not barred by incontestability
Warranties
1. Concept; distinguished from representation
2. Kinds of warranties (express implied affirmative
promissory)
3. Time to which warranty refers
5.
When rescission by the insurer may be exercised
SEC. 48. Whenever a right to rescind a contract of insurance is

given to the insurer by any provision of this chapter, such right must
be exercised previous to the commencement of an action on the
contract.
SEC. 46. The materiality of a representation is determined by the

same rules as the materiality of a concealment.
4.
When presumed false; effect of falsity
SEC. 68. A warranty may relate to the past, the present, the future,
or to any or all of these.
Page
2.

Atty. Reyes
4.
Effect of breach
SEC. 74. The violation of a material warranty, or other material

provision of a policy, on the part of either party thereto, entitles the
other to rescind.
SEC. 75. A policy may declare that a violation of specified
provisions thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid the policy.
Page
SEC. 76. A breach of warranty without fraud merely exonerates an

insurer from the time that it occurs, or where it is broken in its
inception, prevents the policy from attaching to the risk.

Atty. Reyes
[G.R. No. 113899. October 13, 1999]
Answer: No. If so give details ___________.

8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the
Decision[1] dated May 17, 1993, of the Court of Appeals and its
Resolution[2] dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate
court affirmed in toto the judgment of the Misamis Oriental Regional Trial
Court, Branch 18, in an insurance claim filed by private respondent against
Great Pacific Life Assurance Co. The dispositive portion of the trial courts
decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT
PACIFIC LIFE ASSURANCE CORPORATION as insurer under its Group
policy No. G-1907, in relation to Certification B-18558 liable and ordered to
pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX THOUSAND TWO
HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorneys fees and litigation expenses in the complaint and counterclaim,
with costs against the defendant and dismissing the complaint in respect to
the plaintiffs, other than the widow-beneficiary, for lack of cause of action.[3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner
Great Pacific Life Assurance Corporation (hereinafter Grepalife) and
Development Bank of the Philippines (hereinafter DBP). Grepalife agreed to
insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a
housing debtor of DBP applied for membership in the group life insurance
plan. In an application form, Dr. Leuterio answered questions concerning his
health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition,
high blood pressure, cancer, diabetes, lung, kidney or stomach
disorder or any other physical impairment?
On November 15, 1983, Grepalife issued Certificate No. B-18558, as

insurance coverage of Dr. Leuterio, to the extent of his DBP mortgage
indebtedness amounting to eighty-six thousand, two hundred (P86,200.00)
pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral
hemorrhage. Consequently, DBP submitted a death claim to
Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November
15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he had been
suffering from hypertension, which caused his death. Allegedly, such nondisclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent
Medarda V. Leuterio, filed a complaint with the Regional Trial Court of
Misamis Oriental, Branch 18, against Grepalife for Specific Performance
with Damages.[5] During the trial, Dr. Hernando Mejia, who issued the death
certificate, was called to testify. Dr. Mejias findings, based partly from the
information given by the respondent widow, stated that Dr. Leuterio
complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied,
hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of
respondent widow and against Grepalife. On May 17, 1993, the Court of
Appeals sustained the trial courts decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANTAPPELLANT LIABLE TO THE DEVELOPMENT BANK OF
THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE
CASE FOR PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE ON THE LIFE OF
PLAINTIFFS HUSBAND WILFREDO LEUTERIO ONE OF
ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE
CASE AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE
CASE FOR WANT OF JURISDICTION OVER THE SUBJECT
DECISION
] No.[4]
Page
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF

APPEALS AND MEDARDA V. LEUTERIO, respondents.

Atty. Reyes
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE

WAS NO CONCEALMENT OF MATERIAL INFORMATION
ON THE PART OF WILFREDO LEUTERIO IN HIS
APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT
OF THE INSURANCE CLAIM ARISING FROM THE DEATH
OF WILFREDO LEUTERIO.[6]
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable
to DBP as beneficiary in a group life insurance contract from a
complaint filed by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr.
Leuterio concealed that he had hypertension, which would
vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable
in the amount of eighty six thousand, two hundred
(P86,200.00) pesos without proof of the actual outstanding
mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr.
Leuterio, not the real party in interest, hence the trial court acquired no
jurisdiction over the case. It argues that when the Court of Appeals affirmed
the trial courts judgment, Grepalife was held liable to pay the proceeds of
insurance contract in favor of DBP, the indispensable party who was not
joined in the suit.
To resolve the issue, we must consider the insurable interest in
mortgaged properties and the parties to this type of contract. The rationale
of a group insurance policy of mortgagors, otherwise known as the
mortgage redemption insurance, is a device for the protection of both the
mortgagee and the mortgagor. On the part of the mortgagee, it has to enter
into such form of contract so that in the event of the unexpected demise of
the mortgagor during the subsistence of the mortgage contract, the proceeds
Section 8 of the Insurance Code provides:

Unless the policy provides, where a mortgagor of property effects insurance
in his own name providing that the loss shall be payable to the mortgagee,
or assigns a policy of insurance to a mortgagee, the insurance is deemed to
be upon the interest of the mortgagor, who does not cease to be a party to
the original contract, and any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same effect, although the
property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the same effect as if it had
been performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his
rights or interests in the insurance, the policy stating that: In the event of
the debtors death before his indebtedness with the Creditor [DBP] shall
have been fully paid, an amount to pay the outstanding indebtedness shall
first be paid to the creditor and the balance of sum assured, if there is any,
shall then be paid to the beneficiary/ies designated by the debtor. [10] When
DBP submitted the insurance claim against petitioner, the latter denied
payment thereof, interposing the defense of concealment committed by the
insured. Thereafter, DBP collected the debt from the mortgagor and took
the necessary action of foreclosure on the residential lot of private
respondent.[11] In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins.
Co.[12] we held:
Insured, being the person with whom the contract was made, is primarily
the proper person to bring suit thereon. * * * Subject to some exceptions,
insured may thus sue, although the policy is taken wholly or in part for the
benefit of another person named or unnamed, and although it is expressly
made payable to another as his interest may appear or otherwise. * *
* Although a policy issued to a mortgagor is taken out for the benefit of the
3. THE LOWER COURT ERRED IN ORDERING DEFENDANTAPPELLANT TO PAY TO DBP THE AMOUNT OF
P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO
SHOW HOW MUCH WAS THE ACTUAL AMOUNT
PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP
INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
from such insurance will be applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from paying the obligation. [7] In a
similar vein, ample protection is given to the mortgagor under such a
concept so that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage
indebtedness.[8] Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor
continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such loss-payable
clause does not make the mortgagee a party to the contract.[9]
Page
OR NATURE OF THE ACTION AND OVER THE PERSON

OF THE DEFENDANT.

Atty. Reyes
Insured may be regarded as the real party in interest, although he has

assigned the policy for the purpose of collection, or has assigned as
collateral security any judgment he may obtain. [13]
And since a policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has an insurable
interest or not, and such person may recover it whatever the insured might
have recovered,[14] the widow of the decedent Dr. Leuterio may file the suit
against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the
petitioner interposed as its defense to annul the insurance
contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists
where the assured had knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should communicate it to the
assured, but he designedly and intentionally withholds the same. [15]
Petitioner merely relied on the testimony of the attending physician, Dr.
Hernando Mejia, as supported by the information given by the widow of the
decedent. Grepalife asserts that Dr. Mejias technical diagnosis of the cause
of death of Dr. Leuterio was a duly documented hospital record, and that the
widows declaration that her husband had possible hypertension several
years ago should not be considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr.
Mejia did not conduct an autopsy on the body of the decedent. As the
attending physician, Dr. Mejia stated that he had no knowledge of Dr.
Leuterios any previous hospital confinement. [16] Dr. Leuterios death
certificate stated that hypertension was only the possible cause of death.
The private respondents statement, as to the medical history of her
husband, was due to her unreliable recollection of events. Hence, the
statement of the physician was properly considered by the trial court as
hearsay.
The question of whether there was concealment was aptly answered
by the appellate court, thus:
Contrary to appellants allegations, there was no sufficient proof that the

insured had suffered from hypertension. Aside from the statement of the
insureds widow who was not even sure if the medicines taken by Dr.
Leuterio were for hypertension, the appellant had not proven nor produced
any witness who could attest to Dr. Leuterios medical history...
xxx
Appellant insurance company had failed to establish that there was
concealment made by the insured, hence, it cannot refuse payment of the
claim.[17]
The fraudulent intent on the part of the insured must be established to
entitle the insurer to rescind the contract.[18] Misrepresentation as a defense
of the insurer to avoid liability is an affirmative defense and the duty to
establish such defense by satisfactory and convincing evidence rests upon
the insurer.[19] In the case at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is therefore liable to pay the
proceeds of the insurance.
And that brings us to the last point in the review of the case at
bar. Petitioner claims that there was no evidence as to the amount of Dr.
Leuterios outstanding indebtedness to DBP at the time of the mortgagors
death. Hence, for private respondents failure to establish the same, the
action for specific performance should be dismissed. Petitioners claim is
without merit. A life insurance policy is a valued policy. [20] Unless the interest
of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the
sum fixed in the policy.[21] The mortgagor paid the premium according to the
coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtors death during
the terms of this insurance, a death benefit in the amount of P86,200.00
shall be paid.
And in volume 33, page 82, of the same work, we read the following:
The insured, Dr. Leuterio, had answered in his insurance application that he
was in good health and that he had not consulted a doctor or any of the
enumerated ailments, including hypertension; when he died the attending
physician had certified in the death certificate that the former died of cerebral
hemorrhage, probably secondary to hypertension. From this report, the
appellant insurance company refused to pay the insurance claim. Appellant
alleged that the insured had concealed the fact that he had hypertension.
Page
mortgagee and is made payable to him, yet the mortgagor may sue thereon
in his own name, especially where the mortgagees interest is less than the
full amount recoverable under the policy, * * *.

Atty. Reyes
In the event of the debtors death before his indebtedness with the creditor
shall have been fully paid, an amount to pay the outstanding indebtedness
shall first be paid to the Creditor and the balance of the Sum Assured, if
there is any shall then be paid to the beneficiary/ies designated by the
debtor.[22] (Emphasis omitted)
However, we noted that the Court of Appeals decision was
promulgated on May 17, 1993. In private respondents memorandum, she
states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagors outstanding loan. Considering this supervening event, the
insurance proceeds shall inure to the benefit of the heirs of the deceased
person or his beneficiaries. Equity dictates that DBP should not unjustly
enrich itself at the expense of another (Nemo cum alterius detrimenio
protest). Hence, it cannot collect the insurance proceeds, after it already
foreclosed on the mortgage. The proceeds now rightly belong to Dr.
Leuterios heirs represented by his widow, herein private respondent
Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with
MODIFICATION that the petitioner is ORDERED to pay the insurance
proceeds amounting to Eighty-six thousand, two hundred (P86,200.00)
pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon
presentation of proof of prior settlement of mortgagors indebtedness to
Development Bank of the Philippines. Costs against petitioner.
Page
SO ORDERED.

Atty. Reyes
[G.R. No. 105135. June 22, 1995.]
a) consulted any doctor or other health practitioner?

b) submitted to:nadchanroblesvirtualawlibrary
SUNLIFE ASSURANCE COMPANY OF CANADA, Petitioner, v. The Hon.

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

Atty. Reyes
concealment/misrepresentation by the decedent of his health condition"
(Rollo, p. 62).cralaw
the judgment is based on a misappreciation of the facts (Geronimo v. Court

of Appeals, 224 SCRA 494 [1993]).cralaw
Petitioner filed its Request for Admissions relative to the authenticity and due
execution of several documents as well as allegations regarding the health
of the insured. Private respondents failed to oppose said request or reply
thereto, thereby rendering an admission of the matters alleged.
In weighing the evidence presented, the trial court concluded that indeed
there was concealment and misrepresentation, however, the same was
made in "good faith" and the facts concealed or misrepresented were
irrelevant since the policy was "non-medical." We disagree.
Petitioner then moved for a summary judgment and the trial court decided in
favor of private respondents. The dispositive portion of the decision is
reproduced as follows:nadchanroblesvirtualawlibrary
Section 26 of the Insurance Code is explicit in requiring a party to a contract

of insurance to communicate to the other, in good faith, all facts within his
knowledge which are material to the contract and as to which he makes no
warranty, and which the other has no means of ascertaining. Said Section
provides:nadchanroblesvirtualawlibrary
In the ruling of private respondents, the trial court concluded that the facts
concealed by the insured were made in good faith and under the belief that
they need not be disclosed. Moreover, it held that the health history of the
insured was immaterial since the insurance policy was "non-medical."
Petitioner appealed to the Court of Appeals, which affirmed the decision of
the trial court. The appellate court ruled that petitioner cannot avoid its
obligation by claiming concealment because the cause of death was
unrelated to the facts concealed by the insured. It also sustained the finding
of the trial court that the matters relating to the health history of the insured
were irrelevant since the petitioner waived the medical examination prior to
the approval and issuance of the insurance policy. Moreover, the appellate
court agreed with the trial court that the policy was "non-medical" (Rollo, pp.
4-5).cralaw
Petitioner's motion for reconsideration was denied, hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are
binding on this Court is not absolute and admits of exceptions, such as when
Materiality is to be determined not by the event, but solely by the probable

and reasonable influence of the facts upon the party to whom
communication is due, in forming his estimate of the disadvantages of the
proposed contract or in making his inquiries (The Insurance Code, Sec
31).cralaw
The terms of the contract are clear. The insured is specifically required to
disclose to the insurer matters relating to his health.
The information which the insured failed to disclose were material and
relevant to the approval and the issuance of the insurance policy. The
matters concealed would have definitely affected petitioner's action on his
application, either by approving it with the corresponding adjustment for a
higher premium or rejecting the same. Moreover, a disclosure may have
warranted a medical examination of the insured by petitioner in order for it to
reasonably assess the risk involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that
materiality of the information withheld does not depend on the state of mind
of the insured. Neither does it depend on the actual or physical events which
ensue.
Thus, "good faith" is no defense in concealment. The insured's failure to
disclose the fact that he was hospitalized for two weeks prior to filing his
application for insurance, raises grave doubts about his bonafides. It
appears that such concealment was deliberate on his part.
The argument, that petitioner's waiver of the medical examination of the
"Defendant's counterclaim is hereby Dismissed" (Rollo, pp. 43-44).cralaw
"A neglect to communicate that which a party knows and ought to

communicate, is called concealment."
Page
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and

against the defendants, condemning the latter to pay the former the amount
of One Hundred Thousand Pesos (P100,000.00) the face value of insured's
Insurance Policy No. 3903766, and the Accidental Death Benefit in the
amount of One Hundred Thousand Pesos (P100,000.00) and further sum of
P5,000.00 in the concept of reasonable attorney's fees and the costs of the
suit.

Atty. Reyes
insured debunks the materiality of the facts concealed, is untenable. We
reiterate our ruling in Saturnino v. Philippine American Life Insurance
Company, 7 SCRA 316 (1963), that ". . . the waiver of a medical examination
[in a non-medical insurance contract] renders even more material the
information required of the applicant concerning previous condition of health
and diseases suffered, for such information necessarily constitutes an
important factor which the insurer takes into consideration in deciding
whether to issue the policy or not . . . ."
Moreover, such argument of private respondents would make Section 27 of
the Insurance Code, which allows the injured party to rescind a contract of
insurance where there is concealment, ineffective (See Vda de Canilang v.
Court of Appeals, supra).cralaw
Anent the finding that the facts concealed had no bearing to the cause of
death of the insured, it is well settled that the insured need not die of the
disease he had failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries (Henson v. The Philippine
American Life Insurance Co., 56 O.G. No. 48 [1960]).cralaw
We, therefore, rule that petitioner properly exercised its right to rescind the
contract of insurance by reason of the concealment employed by the
insured. It must be emphasized that rescission was exercised within the twoyear contestability period as recognized in Section 48 of The Insurance
Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of
Appeals is REVERSED and SET ASIDE.
SO ORDERED.
Page
10
Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

Atty. Reyes
[G.R. No. 125678. March 18, 2002.]
PHILAMCARE HEALTH SYSTEMS, INC., Petitioner, v. COURT OF
APPEALS and JULITA TRINOS,Respondents.
physical therapist at home. Later, he was admitted at the Chinese General

Hospital. Due to financial difficulties, however, respondent brought her
husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.cralaw : red
DECISION
WHEREFORE, in view of the forgoing, the Court renders judgment in favor

of the plaintiff Julita Trinos, ordering:chanrob1es virtual 1aw library
Have you or any of your family members ever consulted or been treated for
high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or
peptic ulcer? (If Yes, give details). 1
1. Defendants to pay and reimburse the medical and hospital coverage of

the late Ernani Trinos in the amount of P76,000.00 plus interest, until the
amount is fully paid to plaintiff who paid the same;
The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondents husband was entitled to avail
of hospitalization benefits, whether ordinary or emergency, listed therein. He
was also entitled to avail of "out-patient benefits" such as annual physical
examinations, preventive health care and other out-patient
services.chanrob1es virtua1 1aw 1ibrary
2. Defendants to pay the reduced amount of moral damages of P10,000.00

to plaintiff;
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June
1, 1990. The amount of coverage was increased to a maximum sum of
P75,000.00 per disability. 2
SO ORDERED 3
During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning
March 9, 1990. While her husband was in the hospital, respondent tried to
claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void.
According to petitioner, there was a concealment regarding Ernanis medical
history. Doctors at the MMC allegedly discovered at the time of Ernanis
confinement that he was hypertensive, diabetic and asthmatic, contrary to
his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a
3. Defendants to pay the reduced amount of P10,000.00 as exemplary

damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner Reverente. 4
Petitioners motion for reconsideration was denied. 5 Hence, petitioner
brought the instant petition for review, raising the primary argument that a
health care agreement is not an insurance contract; hence the
"incontestability clause" under the Insurance Code 6 does not apply.
Petitioner argues that the agreement grants "living benefits," such as
medical check-ups and hospitalization which a member may immediately
enjoy so long as he is alive upon effectivity of the agreement until its
expiration one-year thereafter. Petitioner also points out that only medical
and hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is
indemnified for his loss. Moreover, since Health Care Agreements are only
for a period of one year, as compared to insurance contracts which last
11
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a

health care coverage with petitioner Philamcare Health Systems, Inc. In the
standard application form, he answered no to the following
question:chanrob1es virtual 1aw library
Page
YNARES-SANTIAGO, J.:
On July 24, 1990, respondent instituted with the Regional Trial Court of
Manila, Branch 44, an action for damages against petitioner and its
president, Dr. Benito Reverente, which was docketed as Civil Case No. 90
53795. She asked for reimbursement of her expenses plus moral damages
and attorneys fees. After trial, the lower court ruled against petitioners,
viz:chanrob1es virtual 1aw library

Atty. Reyes
longer, 7 petitioner argues that the incontestability clause does not apply, as
the same requires an effectivity period of at least two years. Petitioner
further argues that it is not an insurance company, which is governed by the
Insurance Commission, but a Health Maintenance Organization under the
authority of the Department of Health.chanrob1es virtua1 1aw 1ibrary
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent
event. An insurance contract exists where the following elements
concur:chanrob1es virtual 1aw library
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium. 8
Section 3 of the Insurance Code states that any contingent or unknown
event, whether past or future, which may damnify a person having an
insurable interest against him, may be insured against. Every person has an
insurable interest in the life and health of himself. Section 10
provides:chanrob1es virtual 1aw library
Every person has an insurable interest in the life and health:chanrob1es
virtual 1aw library
In the case at bar, the insurable interest of respondents husband in

obtaining the health care agreement was his own health. The health care
agreement was in the nature of non-life insurance, which is primarily a
contract of indemnity. 9 Once the member incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingent,
the health care provider must pay for the same to the extent agreed upon
under the contract.chanrob1es virtua1 1aw 1ibrary
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondents husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health
to furnish any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. 10 Specifically, the
Health Care Agreement signed by respondents husband states:chanrob1es
virtual 1aw library
We hereby declare and agree that all statement and answers contained
herein and in any addendum annexed to this application are full, complete
and true and bind all parties in interest under the Agreement herein applied
for, that there shall be no contract of health care coverage unless and until
an Agreement is issued on this application and the full Membership Fee
according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired
by any Representative of PhilamCare shall be binding upon PhilamCare
unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon
any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office Endorsement. 11
(Emphasis ours)
(1) of himself, of his spouse and of his children;
(4) of any person upon whose life any estate or interest vested in him
depends.
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of ________ to give to the PhilamCare
Health Systems, Inc. any and all information relative to any hospitalization.
consultation. treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage
only. A photographic copy of this authorization shall be as valid as the
original. 12 (Emphasis ours)
12
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
In addition to the above condition, petitioner additionally required the

applicant for authorization to inquire about the applicants medical history,
thus:chanrob1es virtual 1aw library
Page
(2) of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

Atty. Reyes
The answer assailed by petitioner was in response to the question relating to

the medical history of the applicant. This largely depends on opinion rather
than fact, especially coming from respondents husband who was not a
medical doctor. Where matters of opinion or judgment are called for,
answers made in good faith and without intent to deceive will not avoid a
policy even though they are untrue. 14 Thus,chanrob1es virtua1 1aw 1ibrary
(A)lthough false, a representation of the expectation, intention, belief,
opinion, or judgment of the insured will not avoid the policy if there is no
actual fraud in inducing the acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the rule although the statement is
material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement,
but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally
states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the
facts within his knowledge, since in such case the intent to deceive the
insurer is obvious and amounts to actual fraud. 15 (Emphasis ours)
The fraudulent intent on the part of the insured must be established to
warrant rescission of the insurance contract. 16 Concealment as a defense
for the health care provider or insurer to avoid liability is an affirmative
defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any case, with or
without the authority to investigate, petitioner is liable for claims made under
the contract. Having assumed a responsibility under the agreement,
petitioner is bound to answer the same to the extent agreed upon. In the
end, the liability of the health care provider attaches once the member is
hospitalized for the disease or injury covered by the agreement or whenever
he avails of the covered benefits which he has prepaid.
1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy
of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address
shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the
Insurance Code and upon request of insured, to furnish facts on which
cancellation is based. 18
None of the above pre-conditions was fulfilled in this case. When the terms
of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his
obligation. 19 Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the
contract the insurer. 20 By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance
contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 21 This is
equally applicable to Health Care Agreements. The phraseology used in
medical or hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or reasonably
susceptible of two interpretations the construction conferring coverage is to
be adopted, and exclusionary clauses of doubtful import should be strictly
construed against the provider. 22
Anent the incontestability of the membership of respondents husband, we
quote with approval the following findings of the trial court:chanrob1es virtual
1aw library
(U)nder the title Claim procedures of expenses, the defendant Philamcare
Health Systems Inc. had twelve months from the date of issuance of the
Agreement within which to contest the membership of the patient if he had
previous ailment of asthma, and six months from the issuance of the
agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer
13
Failure to disclose or misrepresentation of any material information by the

member in the application or medical examination, whether intentional or
unintentional, shall automatically invalidate the Agreement from the very
beginning and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the
applicant by Philamcare or the assessment of a higher Membership Fee for
the benefit or benefits applied for. 13
Under Section 27 of the Insurance Code, "a concealment entitles the injured
party to rescind a contract of insurance." The right to rescind should be
exercised previous to the commencement of an action on the contract. 17 In
this case, no rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of the following
conditions:chanrob1es virtual 1aw library
Page
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement"

which reads:chanrob1es virtual 1aw library

Atty. Reyes
lie. 23
Finally, petitioner alleges that respondent was not the legal wife of the
deceased member considering that at the time of their marriage, the
deceased was previously married to another woman who was still alive. The
health care agreement is in the nature of a contract of indemnity. Hence,
payment should be made to the party who incurred the expenses. It is not
controverted that respondent paid all the hospital and medical expenses.
She is therefore entitled to reimbursement. The records adequately prove
the expenses incurred by respondent for the deceaseds hospitalization,
medication and the professional fees of the attending physicians. 24
WHEREFORE, in view of the foregoing, the petition is DENIED. The
assailed decision of the Court of Appeals dated December 14, 1995 is
AFFIRMED.
SO ORDERED.
Page
14
Davide, Jr., C.J., Puno and Kapunan, JJ., concur.

Atty. Reyes
Simeon C. Sato for Petitioner.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE; CONCEALMENT; MATERIALITY;

DEFINED. The relevant statutory provisions as they stood at the time
Great Pacific issued the contract of insurance and at the time Jaime
Canilang died, are set out in P.D. No. 1460, also known as the Insurance
Code of 1978, which went into effect on 11 June 1978. These provisions
read as follows: "Sec. 26. A neglect to communicate that which a party
knows and ought to communicate, is called a concealment.." . . Sec. 28.
Each party to a contract of insurance must communicate to the other, in
good faith, all factors within his knowledge which are material to the contract
and as to which he makes no warranty, and which the other has not the
means of ascertaining." Under the foregoing provisions, the information
concealed must be information which the concealing party knew and "ought
to [have] communicate[d]," that is to say, information which was "material to
the contract." The test of materiality is contained in Section 31 of the
Insurance Code of 1978 which reads: "Sec. 31. Materiality is to be
determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in
making his inquiries."cralaw virtua1aw library
2. ID.; ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR. We agree with
the Court of Appeals that the information which Jaime Canilang failed to
disclose was material to the ability of Great Pacific to estimate the probable
risk he presented as a subject of life insurance. Had Canilang disclosed his
visits to his doctor, the diagnosis made and the medicines prescribed by
such doctor, in the insurance application, it may be reasonably assumed that
Great Pacific would have made further inquiries and would have probably
refused to issue a non-medical insurance policy or, at the very least,
required a higher premium for the same coverage. The materiality of the
information withheld by Great Pacific did not depend upon the state of mind
of Jaime Canilang. A mans state of mind or subjective belief is not capable
of proof in our judicial process, except through proof of external acts or
failure to act from which inferences as to his subjective belief may be
reasonably drawn. Neither does materiality depend upon the actual or
3. ID.; ID.; ID.; REMEDY, WHEN AVAILABLE. In 1985, the Insurance

Code of 1978 was amended by B.P. Blg. 874. This subsequent statute
modified Section 27 of the Insurance Code of 1978 so as to read as follows:
"Sec. 27. A concealment whether intentional or unintentional entitles the
injured party to rescind a contract of insurance." Section 27 of the Insurance
Code of 1978 is properly read as referring to "any concealment" without
regard to whether such concealment is intentional or unintentional. The
phrase "whether intentional or unintentional" was in fact superfluous. The
deletion of the phrase "whether intentional or unintentional" could not have
had the effect of imposing an affirmative requirement that a concealment
must be intentional if it is to entitle the injured party to rescind a contract of
insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase "whether
intentional or unintentional" merely underscored the fact that all throughout
(from 1914 to 1985), the statute did not require proof that concealment must
be "intentional" in order to authorize rescission by the injured party. In any
case, in the case at bar, the nature of the facts not conveyed to the insurer
was such that the failure to communicate must have been intentional rather
than merely inadvertent. For Jaime Canilang could not have been unaware
that his hear beat would at times rise to high and alarming levels and that he
had consulted a doctor twice in the two (2) months before applying for nonmedical insurance. Indeed, the last medical consultation took place just the
day before the insurance application was filed. In all probability, Jaime
Canilang went to visit his doctor precisely because of the discomfort and
concern brought about by his experiencing "sinus tachycardia."
DECISION
FELICIANO, J.:
On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and

was diagnosed as suffering from "sinus tachycardia." The doctor prescribed
the following for him: Trazepam, a tranquilizer; and Aptin, a beta-blocker
drug. Mr. Canilang consulted the same doctor again on 3 August 1982 and
this time was found to have "acute bronchitis." chanrobles.com:cralaw:red
15
THELMA VDA. DE CANILANG, Petitioner, v. HON. COURT OF APPEALS

and GREAT PACIFIC LIFE INSURANCE CORPORATION, Respondents.
physical events which insue. Materiality relates rather to the "probable and
reasonable influence of the facts" upon the party to whom the
communication should have been made, in assessing the risk involved in
making or omitting to make further inquiries and in accepting the application
for insurance; that "probable and reasonable influence of the facts"
concealed must, of course, be determined objectively, by the judge
ultimately.
Page
[G.R. No. 92492. June 17, 1993.]

Atty. Reyes
On the next day, 4 August 1982, Jaime Canilang applied for a "non-medical"
insurance policy with respondent Great Pacific Life Assurance Company
("Great Pacific") naming his wife, petitioner Thelma Canilang, as his
beneficiary. 1 Jaime Canilang was issued ordinary life insurance Policy No.
345163, with the face value of P19,700, effective as of 9 August 1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure,"
"anemia," and "chronic anemia." 2 Petitioner, widow and beneficiary of the
insured, filed a claim with Great Pacific which the insurer denied on 5
December 1983 upon the ground that the insured had concealed material
information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance
Commission for recovery of the insurance proceeds. During the hearing
called by the Insurance Commissioner, petitioner testified that she was not
aware of any serious illness suffered by her late husband 3 and that, as far
as she knew, her husband had died because of a kidney disorder. 4 A
deposition given by Dr. Wilfredo Claudio was presented by petitioner. There
Dr. Claudio stated that he was the family physician of the deceased Jaime
Canilang 5 and that he had previously treated him for "sinus tachycardia"
and "acute bronchitis." 6 Great Pacific for its part presented Dr. Esperanza
Quismorio, a physician and a medical underwriter working for Great Pacific 7
She testified that the deceaseds insurance application had been approved
on the basis of his medical declaration. 8 She explained that as a rule,
medical examinations are required only in cases where the applicant has
indicated in his application for insurance coverage that he has previously
undergone medical consultation and hospitalization. 9
In a decision dated 5 November 1985, Insurance Commissioner Armando
Ansaldo ordered Great Pacific to pay P19,700.00 plus legal interest and
P2,000.00 as attorneys fees after holding that:chanrob1es virtual 1aw library
1. the ailment of Jaime Canilang was not so serious that, even if it had been
disclosed, it would not have affected Great Pacifics decision to insure him;
not concealment was intentionally made, was not applicable to Canilangs

case as that law became effective only on 1 June 1985.
On appeal by Great Pacific, the Court of Appeals reversed and set aside the
decision of the Insurance Commissioner and dismissed Thelma Canilangs
complaint and Great Pacifics counterclaim. The Court of Appeals found that
the use of the word "intentionally" by the Insurance Commissioner in defining
and resolving the issue agreed upon by the parties at pre-trial before the
Insurance Commissioner was not supported by the evidence; that the issue
agreed upon by the parties had been whether the deceased insured, Jaime
Canilang, made a material concealment as to the state of his health at the
time of the filing of insurance application, justifying respondents denial of the
claim. The Court of Appeals also found that the failure of Jaime Canilang to
disclose previous medical consultation and treatment constituted material
information which should have been communicated to Great Pacific to
enable the latter to make proper inquiries. The Court of Appeals finally held
that the Ng Gan Zee case which had involved misrepresentation was not
applicable in respect of the case at bar which involves
concealment.cralawnad
Petitioner Thelma Canilang is now before this Court on a Petition for Review
on Certiorari alleging that:jgc:chanrobles.com.ph
"1. . . . the Honorable Court of Appeals, speaking with due respect, erred in
not holding that the issue in the case agreed upon between the parties
before the Insurance Commission is whether or not Jaime Canilang
ìntentionally made material concealment in stating his state of health;
2. . . . at any rate, the non-disclosure of certain facts about his previous
health conditions does not amount to fraud and private respondent is
deemed to have waived inquiry thereto." 11
The medical declaration which was set out in the application for insurance
executed by Jaime Canilang read as follows:jgc:chanrobles.com.ph
"MEDICAL DECLARATION
4. Batas Pambansa Blg. 874 which voids an insurance contract, whether or
(1) I have not been confined in any hospital, sanitarium or infirmary, nor
received any medical or surgical advice/attention within the last five (5)
years.
(2) I have never been treated nor consulted a physician for a heart condition,
high blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or
16
3. there was no intentional concealment on the part of the insured Jaime

Canilang as he had thought that he was merely suffering from a minor
ailment and simple cold; 10 and
Ì hereby declare that:chanrob1es virtual 1aw library
Page
2. Great Pacific had waived its right to inquire into the health condition of the
applicant by the issuance of the policy despite the lack of answers to "some
of the pertinent questions" in the insurance application;

Atty. Reyes
any other physical impairment.
"Sec. 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment."cralaw virtua1aw library
(3) I am, to the best of my knowledge, in good health.

x
EXCEPTIONS:chanrob1es virtual 1aw library

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_________________________
Sec. 28. Each party to a contract of insurance must communicate to the

other, in good faith, all factors within his knowledge which are material to the
contract and as to which he makes no warranty, and which the other has not
the means of ascertaining." (Emphasis supplied)
GENERAL DECLARATION
Under the foregoing provisions, the information concealed must be

information which the concealing party knew and "ought to [have]
communicate[d]," that is to say, information which was "material to the
contract." The test of materiality is contained in Section 31 of the Insurance
Code of 1978 which reads:jgc:chanrobles.com.ph
Illegible
__________________________
Signature of Applicant." 12
We note that in addition to the negative statements made by Mr. Canilang in
paragraphs 1 and 2 of the medical declaration, he failed to disclose in the
appropriate space, under the caption "Exceptions," that he had twice
consulted Dr. Wilfredo B. Claudio who had found him to be suffering from
"sinus tachycardia" and "acute bronchitis."cralaw virtua1aw library
The relevant statutory provisions as they stood at the time Great Pacific
issued the contract of insurance and at the time Jaime Canilang died, are set
out in P.D. No. 1460, also known as the Insurance Code of 1978, which
went into effect on 11 June 1978. These provisions read as
follows:jgc:chanrobles.com.ph
"Sinus tachycardia" is considered present "when the heart rate exceeds 100
beats per minute." 13 The symptoms of this condition include pounding in
the chest and sometimes faintness and weakness of the person affected.
The following elaboration was offered by Great Pacific and set out by the
Court of Appeals in its Decision:jgc:chanrobles.com.ph
"Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100
beats per minute. (Harrisons Principles of Internal Medicine, 8th ed. [1978],
p. 1193.) It is, among others, a common reaction to hear disease, including
myocardial infarction, and heart failure per se. (Henry J.L. Marriot, M.D.,
Electrocardiograph, 6th ed. [1977], p. 127.) The medication prescribed by
Dr. Claudio for treatment of Canilangs ailment on June 18, 1982, indicates
the condition that said physician was trying to manage. Thus, he prescribed
Trazepam, (Philippine Index of Medical Specialties (PIMS), Vol. 14, No. 3,
Dec. 1985, p. 112.) which is anti-anxiety, anti-convulsant, muscle-relaxant;
and Aptin, (Idem, p. 36) a cardiac drug, for palpitations and nervous heart.
Such treatment could have been a very material information to the insurer in
determining the action to be taken on Canilangs application for life
insurance coverage." 14
We agree with the Court of Appeals that the information which Jaime
Canilang failed to discloses was material to the ability of Great Pacific to
estimate the probable risk he presented as a subject of life insurance. Had
17
Signed at Manila this 4th day of August, 1992.
"Sec. 31. Materiality is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries." (Emphasis supplied)
Page
I hereby declare that all the foregoing answers and statements are complete,
true and correct. I hereby agree that if there be any fraud or
misrepresentation in the above statements material to the risk, the
INSURANCE COMPANY upon discovery within two (2) years from the
effective date of insurance shall have the right to declare such insurance null
and void. That the liabilities of the Company under the said
Policy/TA/Certificate shall accrue and begin only from the date of
commencement of risk stated in the Policy/TA/Certificate, provided that the
first premium is paid and the Policy/TA/Certificate is delivered to, and
accepted by me in person, when I am in actual good health.

Atty. Reyes
". . . if anything, the waiver of medical examination [in a non-medical

insurance contract] renders even more material the information required of
the applicant concerning previous condition of health and diseases suffered,
for such information necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether to issue the policy or not
. . .." 17 (Emphasis supplied)
The Insurance Commissioner had also ruled that the failure of Great Pacific
to convey certain information to the insurer was not "intentional" in nature,
for the reason that Jaime Canilang believed that he was suffering from minor
ailment like a common cold. Section 27 of the Insurance Code of 1978 as it
existed from 1974 up to 1985, that is, throughout the time range material for
present purposes, provided that:jgc:chanrobles.com.ph
"Sec. 27. A concealment entitles the injured party to rescind a contract of
insurance."cralaw virtua1aw library
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had
provided:jgc:chanrobles.com.ph
"Sec. 26. A concealment, whether intentional or unintentional, entitles the
injured party to rescind a contract of insurance." (Emphasis supplied)
"Sec. 27. A concealment whether intentional or unintentional entitles the

injured party to rescind a contract of insurance." (Emphasis supplied).
The unspoken theory of the Insurance Commissioner appears to have been
that by deleting the phrase "intentional or unintentional," the Insurance Code
of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds
of concealment which generate a right to rescind on the part of the injured
party to "intentional concealments." This argument is not persuasive. As a
simple matter of grammar, it may be noted that "intentional" and
"unintentional" cancel each other out. The net result therefore of the phrase
"whether intentional or unintentional" is precisely to leave unqualified the
term "concealment." Thus, Section 27 of the Insurance Code of 1978 is
properly read as referring to "any concealment" without regard to whether
such concealment is intentional or unintentional. The phrase "whether
intentional or unintentional" was in fact superfluous. The deletion of the
phrase "whether intentional or unintentional" could not have had the effect of
imposing an affirmative requirement that a concealment must be intentional
if it is to entitle the injured party to rescind a contract of insurance. The
restoration in 1985 by B.P. Blg. 874 of the phrase "whether intentional or
unintentional" merely underscored the fact that all throughout (from 1914 to
1985), the statute did not require proof that concealment must be
"intentional" in order to authorize rescission by the injured party.
In any case, in the case at bar, the nature of the facts not conveyed to the
insurer was such that the failure to communicate must have been intentional
rather than merely inadvertent. For Jaime Canilang could not have been
unaware that this heart beat would at times rise to high and alarming levels
and that he had consulted a doctor twice in the two (2) months before
applying for non-medical insurance. Indeed, the last medical consultation
took place just the day before the insurance application was filed. In all
probability, Jaime Canilang went to visit his doctor precisely because of the
discomfort and concern brought about by his experiencing "sinus
tachycardia."cralaw virtua1aw library
We find it difficult to take seriously the argument that Great Pacific had
waived inquiry into the concealment by issuing the insurance policy
notwithstanding Canilangs failure to set out answers to some of the
questions in the insurance application. Such failure precisely constituted
concealment on the part of Canilang. Petitioners argument, if accepted,
would obviously erase Section 27 from the Insurance Code of
1978.chanrobles lawlibrary : rednad
18
The insurance Great Pacific applied for was a "non-medical" insurance

policy. In Saturnino v. Philippine-American Life Insurance Company, 16 this
Court held that:jgc:chanrobles.com.ph
Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance
Code of 1978 so as to read as follows:jgc:chanrobles.com.ph
Page
Canilang disclosed his visits to his doctor, the diagnosis made and the
medicines prescribed by such doctor, in the insurance application, it may be
reasonably assumed that Great Pacific would have made further inquiries
and would have probably refused to issue a non-medical insurance policy or,
at the very least, required a higher premium for the same coverage. 15 The
materiality of the information withheld by Great Pacific did not depend upon
the state of mind of Jaime Canilang. A mans state of mind or subjective
belief is not capable of proof in our judicial process, except through proof of
external acts or failure to act from which inferences as to his subjective belief
may be reasonably drawn. Neither does materiality depend upon the actual
or physical events which ensue. Materiality relates rather to the "probable
and reasonable influence of the facts" upon the party to whom the
communication should have been made, in assessing the risk involved in
making or omitting to make further inquiries and in accepting the application
for insurance; that "probable and reasonable influence of the facts"
concealed must, of course, be determined objectively, by the judge
ultimately.

Atty. Reyes
It remains only to note that the Court of Appeals finding that the parties had
not agreed in the pretrial before the Insurance Commission that the relevant
issue was whether or not Jaime Canilang had intentionally concealed
material information from the insurer, was supported by the evidence of
record, i.e., the Pre-trial Order itself dated 17 October 1984 and the Minutes
of the Pre-trial Conference dated 15 October 1984, which "readily shows that
the word ìntentional does not appear in the statement or definition of the
issue in the said Order and Minutes." 18
WHEREFORE, the Petition for Review is DENIED for lack of merit and the
Decision of the Court of Appeals dated 16 October 1989 in C.A-G.R. SP No.
08696 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Page
19
Bidin, Davide, Jr., Romero and Melo, JJ., concur.

Atty. Reyes
[G.R. No. 48049. June 29, 1989.]
Ferry, De la Rosa and Associates for Private Respondent.
SYLLABUS
1. MERCANTILE LAW; INSURANCE; INCONTESTABILITY CLAUSE;

CONSTRUED. The so-called "incontestability clause" precludes the
insurer from raising the defenses of false representations or concealment of
material facts insofar as health and previous diseases are concerned if the
insurance has been in force for at least two years during the insureds
lifetime. The phrase "during the lifetime" found in Section 48 simply means
that the policy is no longer considered in force after the insured has died.
The facts of the case as found by the Court of Appeals

are:jgc:chanrobles.com.ph
"Petitioners appeal from the Decision of the Insurance Commissioner
dismissing herein petitioners complaint against respondent Philippine
American Life Insurance Company for the recovery of the proceeds of Policy
No. 1082467 in the amount of P80,000.00.
"On September 23, 1973, Tan Lee Siong, father of herein petitioners,
applied for life insurance in the amount of P80,000.00 with respondent
company. Said application was approved and Policy No. 1082467 was
issued effective November 6, 1973, with petitioners the beneficiaries thereof
(Exhibit A).
2. ID.; ID.; ID.; DEFENSE OF CONCEALMENT STILL LIES WITHIN THE

TWO YEAR PERIOD FROM ISSUANCE OF CONTRACT OR LAST
REINSTATEMENT. The insurer has two years from the date of issuance
of the insurance contract or of its last reinstatement within which to contest
the policy, whether or not, the insured still lives within such period. After two
years, the defenses of concealment or misrepresentation, no matter how
patent or well founded, no longer lie.
"On April 26, 1975, Tan Lee Siong died of hepatoma (Exhibit B). Petitioners
then filed with respondent company their claim for the proceeds of the life
insurance policy. However, in a letter dated September 11, 1975,
respondent company denied petitioners claim and rescinded the policy by
reason of the alleged misrepresentation and concealment of material facts
made by the deceased Tan Lee Siong in his application for insurance
(Exhibit 3). The premiums paid on the policy were thereupon refunded.
3. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF; FAILURE ON THE

PART OF PETITIONER TO SHOW THAT FINDINGS OF FACT OF
RESPONDENT COURT ARE NOT BASED ON SUBSTANTIAL EVIDENCE.
We are limited in this petition to ascertaining whether or not the
respondent Court of Appeals committed reversible error. It is the petitioners
burden to show that the factual findings of the respondent court are not
based on substantial evidence or that its conclusions are contrary to
applicable law and jurisprudence. They have failed to discharge that burden.
"Alleging that respondent companys refusal to pay them the proceeds of the
policy was unjustified and unreasonable, petitioners filed on November 27,
1975, a complaint against the former with the Office of the Insurance
Commissioner, docketed as I.C. Case No. 218.
"After hearing the evidence of both parties, the Insurance Commissioner
rendered judgment on August 3, 1977, dismissing petitioners complaint."
(Rollo, pp. 91-92)
The Court of Appeals dismissed the petitioners appeal from the Insurance
Commissioners decision for lack of merit.
DECISION
Hence, this petition.

GUTIERREZ, JR., J.:
The petitioners raise the following issues in their assignment of errors, to
20
O.F. Santos & P.C. Nolasco, for Petitioners.
This is a petition for review on certiorari of the Court of Appeals decision

affirming the decision of the Insurance Commissioner which dismissed the
petitioners complaint against respondent Philippine American Life Insurance
Company for the recovery of the proceeds from their late fathers
policy.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
Page
EMILIO TAN, JUANITO TAN, ALBERTO TAN and ARTURO

TAN, Petitioners, v. THE COURT OF APPEALS and THE PHILIPPINE
AMERICAN LIFE INSURANCE COMPANY, Respondents.

Atty. Reyes
wit:chanrob1es virtual 1aw library
A. The conclusion in law of respondent Court that respondent insurer has
the right to rescind the policy contract when insured is already dead is not in
accordance with existing law and applicable jurisprudence.
B. The conclusion in law of respondent Court that respondent insurer may
be allowed to avoid the policy on grounds of concealment by the deceased
assured, is contrary to the provisions of the policy contract itself, as well as,
of applicable legal provisions and established jurisprudence.
C. The inference of respondent Court that respondent insurer was misled in
issuing the policy are manifestly mistaken and contrary to admitted
evidence. (Rollo, p. 7)
The petitioners contend that the respondent company no longer had the right
to rescind the contract of insurance as rescission must allegedly be done
during the lifetime of the insured within two years and prior to the
commencement of action.chanrobles virtual lawlibrary
The contention is without merit.
paragraph of Section 48 is "for a period of two years."cralaw virtua1aw

library
As noted by the Court of Appeals, to wit:jgc:chanrobles.com.ph
"The policy was issued on November 6, 1973 and the insured died on April
26, 1975. The policy was thus in force for a period of only one year and five
months. Considering that the insured died before the two-year period had
lapsed, respondent company is not, therefore, barred from proving that the
policy is void ab initio by reason of the insureds fraudulent concealment or
misrepresentation. Moreover, respondent company rescinded the contract of
insurance and refunded the premiums paid on September 11, 1975,
previous to the commencement of this action on November 27, 1975."
(Rollo, pp. 99-100)
x
The petitioners contend that there could have been no concealment or

misrepresentation by their late father because Tan Lee Siong did not have to
buy insurance. He was only pressured by insistent salesmen to do so. The
petitioners state:jgc:chanrobles.com.ph
The pertinent section in the Insurance Code provides:jgc:chanrobles.com.ph
According to the petitioners, the Insurance Law was amended and the
second paragraph of Section 48 added to prevent the insurance company
from exercising a right to rescind after the death of the insured.
The so-called "incontestability clause" precludes the insurer from raising the
defenses of false representations or concealment of material facts insofar as
health and previous diseases are concerned if the insurance has been in
force for at least two years during the insureds lifetime. The phrase "during
the lifetime" found in Section 48 simply means that the policy is no longer
considered in force after the insured has died. The key phrase in the second
"Assured was a man of means. He could have obtained a bigger insurance,

not just P80,000.00. If his purpose were to misrepresent and to conceal his
ailments in anticipation of death during the two-year period, he certainly
could have gotten a bigger insurance. He did not.
"Insurer Philamlife could have presented as witness its Medical Examiner Dr.
Urbano Guinto. It was he who accomplished the application, Part II, medical.
Philamlife did not.
"Philamlife could have put to the witness stand its Agent Bievenido S.
Guinto, a relative to Dr. Guinto, Again Philamlife did not." (pp. 138-139,
Rollo)
x
21
"After a policy of life insurance made payable on the death of the insured
shall have been in force during the lifetime of the insured for a period of two
years from the date of its issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is rescindible by reason of the
fraudulent concealment or misrepresentation of the insured or his
agent."cralaw virtua1aw library
"Here then is a case of an assured whose application was submitted

because of repeated visits and solicitations by the insurers agent. Assured
did not knock at the door of the insurer to buy insurance. He was the object
of solicitations and visits.
Page
"Section 48. Whenever a right to rescind a contract of insurance is given to

the insurer by any provision of this chapter, such right must be exercised
previous to the commencement of an action on the contract.

Atty. Reyes
"It is of common knowledge that the selling of insurance today is subjected

to the whirlwind pressure of modern salesmanship."
"Insurance companies send detailed instructions to their agents to solicit
and procure application."
"These agents are to be found all over the length and breadth of the land.
They are stimulated to more active efforts by contests and by the keen
competition offered by the other rival insurance companies."
"They supply all the information, prepare and answer the applications,
submit the applications to their companies, conclude the transactions, and
otherwise smooth out all difficulties."
"The agents in short do what the company set them out to do."
"The Insular Life case was decided some forty years ago when the pressure
of insurance salesmanship was not overwhelming as it is now; when the
population of this country was less than one-fourth of what it is now; when
the insurance companies competing with one another could be counted by
the fingers." (pp. 140-142, Rollo)
x
"In the face of all the above, it would be unjust if, having been subjected to
the whirlwind pressure of insurance salesmanship this Court itself has long
denounced, the assured who dies within the two-year period, should stand
charged of fraudulent concealment and misrepresentation." (p. 142, Rollo)
The legislative answer to the arguments posed by the petitioners is the
"incontestability clause" added by the second paragraph of Section 48.
The petitioners argue that no evidence was presented to show that the
medical terms were explained in a laymans language to the insured. They
state that the insurer should have presented its two medical field examiners
as witnesses. Moreover, the petitioners allege that the policy intends that the
medical examination must be conducted before its issuance otherwise the
insurer "waives whatever imperfection by ratification."cralaw virtua1aw
library
We agree with the Court of Appeals which ruled:jgc:chanrobles.com.ph
"On the other hand, petitioners argue that no evidence was presented by
respondent company to show that the questions appearing in Part II of the
application for insurance were asked, explained to and understood by the
deceased so as to prove concealment on his part. The same is not well
taken. The deceased, by affixing his signature on the application form,
affirmed the correctness of all the entries and answers appearing therein. It
is but to be expected that he, a businessman, would not have affixed his
signature on the application form unless he clearly understood its
significance. For, the presumption is that a person intends the ordinary
consequence of his voluntary act and takes ordinary care of his concerns.
[Sec. 5(c) and (d), Rule 131, Rules of Court].
"The evidence for respondent company shows that on September 19, 1972,
the deceased was examined by Dr. Victoriano Lim and was found to be
diabetic and hypertensive; that by January, 1973, the deceased was
complaining of progressive weight loss and abdominal pain and was
diagnosed to be suffering from hepatoma, (t.s.n. August 23, 1976, pp. 8-10;
Exhibit 2). Another physician, Dr. Wenceslao Vitug, testified that the
deceased came to see him on December 14, 1973 for consultation and
claimed to have been diabetic for five years. (t.s.n., Aug. 23, 1976, p. 5;
Exhibit 6) Because of the concealment made by the deceased of his
consultations and treatments for hypertension, diabetes and liver disorders,
respondent company was thus misled into accepting the risk and approving
his application as medically standard (Exhibit 5-C) and dispensing with
22
We call attention to what this Honorable Court said in Insular Life v.

Feliciano, Et Al., 73 Phil. 201; at page 205:jgc:chanrobles.com.ph
The insurer has two years from the date of issuance of the insurance
contract or of its last reinstatement within which to contest the policy,
whether or not, the insured still lives within such period. After two years, the
defenses of concealment or misrepresentation, no matter how patent or well
founded, no longer lie. Congress felt this was a sufficient answer to the
various tactics employed by insurance companies to avoid liability. The
petitioners interpretation would give rise to the incongruous situation where
the beneficiaries of an insured who dies right after taking out and paying for
a life insurance policy, would be allowed to collect on the policy even if the
insured fraudulently concealed material facts.cralawnad
Page
"This Honorable Supreme Court has had occasion to denounce the pressure
and practice indulged in by agents in selling insurance. At one time or
another most of us have been subjected to that pressure, that practice. This
court took judicial cognizance of the whirlwind pressure of insurance selling
especially of the agents practice of supplying the information, preparing
and answering the application, submitting the application to their companies,
concluding the transactions and otherwise smoothing out all
difficulties."cralaw virtua1aw library

Atty. Reyes
further medical investigation and examination (Exhibit 5-A). For as long as
no adverse medical history is revealed in the application form, and applicant
for insurance is presumed to be healthy and physically fit and no further
medical investigation or examination is conducted by respondent company.
(t.s.n., April 8, 1976, pp. 6-8)." (Rollo, pp. 96-98)
There is no strong showing that we should apply the "fine print" or "contract
of adhesion" rule in this case. (Sweet Lines, Inc. v. Teves, 83 SCRA 361
[1978]). The petitioners cite:chanrobles virtual lawlibrary
"It is a matter of common knowledge that large amounts of money are
collected from ignorant persons by companies and associations which adopt
high sounding titles and print the amount of benefits they agree to pay in
large black-faced type, following such undertakings by fine print conditions
which destroy the substance of the promise. All provisions, conditions, or
exceptions which in any way tend to work a forfeiture of the policy should be
construed most strongly against those for whose benefit they are inserted,
and most favorably toward those against whom they are meant to operate.
(Trinidad v. Orient Protective Assurance Assn., 67 Phil. 184)
There is no showing that the questions in the application form for insurance
regarding the insureds medical history are in smaller print than the rest of
the printed form or that they are designed in such a way as to conceal from
the applicant their importance. If a warning in bold red letters or a boxed
warning similar to that required for cigarette advertisements by the Surgeon
General of the United States is necessary, that is for Congress or the
Insurance Commission to provide as protection against high pressure
insurance salesmanship. We are limited in this petition to ascertaining
whether or not the respondent Court of Appeals committed reversible error.
It is the petitioners burden to show that the factual findings of the
respondent court are not based on substantial evidence or that its
conclusions are contrary to applicable law and jurisprudence. They have
failed to discharge that burden.
WHEREFORE, the petition is hereby DENIED for lack of merit. The
questioned decision of the Court of Appeals is AFFIRMED.chanrobles virtual
lawlibrary
Feliciano, J., took no part.
Page
Fernan (C.J., Chairman), Bidin and Cortes, JJ., concur.
23
SO ORDERED.

Atty. Reyes
PRUDENTIAL GUARANTEE and ASSURANCE

INC., Petitioner, v. TRANS-ASIA SHIPPING LINES, INC., Respondent.
[G.R. NO. 151991 : June 20, 2006]
TRANS-ASIA SHIPPING LINES, INC., Petitioner, v. PRUDENTIAL
GUARANTEE and ASSURANCE INC., Respondent.
DECISION
CHICO-NAZARIO, J:
This is a consolidation of two separate Petitions for Review on Certiorari filed
by petitioner Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in
G.R. No. 151890 and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA) in G.R.
No. 151991, assailing the Decision1 dated 6 November 2001 of the Court of
Appeals in CA G.R. CV No. 68278, which reversed the Judgment 2 dated 6
June 2000 of the Regional Trial Court (RTC), Branch 13, Cebu City in Civil
Case No. CEB-20709. The 29 January 2002 Resolution3 of the Court of
Appeals, denying PRUDENTIAL's Motion for Reconsideration and TRANSASIA's Partial Motion for Reconsideration of the 6 November 2001 Decision,
is likewise sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and adopted by the
appellate court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In
consideration of payment of premiums, defendant [PRUDENTIAL] insured
M/V Asia Korea for loss/damage of the hull and machinery arising from
perils, inter alia, of fire and explosion for the sum of P40 Million, beginning
[from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by
Marine Policy No. MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993,
while the policy was in force, a fire broke out while [M/V Asia Korea was]
undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff
[TRANS-ASIA] filed its notice of claim for damage sustained by the vessel.
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document

denominated "Loan and Trust receipt", a portion of which read (sic):
"Received from Prudential Guarantee and Assurance, Inc., the sum of
PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without interest
under Policy No. MH 93/1353 [sic], repayable only in the event and to the
extent that any net recovery is made by Trans-Asia Shipping Corporation,
from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable occasioned by
the 25 October 1993: Fire on Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff's
claim (Exhibit "5"). The letter reads:
"After a careful review and evaluation of your claim arising from the abovecaptioned incident, it has been ascertained that you are in breach of policy
conditions, among them "WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED". Accordingly, we regret to advise that your claim is not
compensable and hereby DENIED."
This was followed by defendant's letter dated 21 July 1997 requesting the
return or payment of the P3,000,000.00 within a period of ten (10) days from
receipt of the letter (Exhibit "6").4
Following this development, on 13 August 1997, TRANS-ASIA filed a
Complaint5 for Sum of Money against PRUDENTIAL with the RTC of Cebu
City, docketed as Civil Case No. CEB-20709, wherein TRANS-ASIA sought
the amount of P8,395,072.26 from PRUDENTIAL, alleging that the same
represents the balance of the indemnity due upon the insurance policy in the
total amount of P11,395,072.26. TRANS-ASIA similarly sought interest at
42% per annum citing Section 2436 of Presidential Decreee No. 1460,
otherwise known as the "Insurance Code," as amended.
24
[G.R. NO. 151890 : June 20, 2006]
This is evidenced by a letter/formal claim of even date (Exhibit "B"). Plaintiff

[TRANS-ASIA] reserved its right to subsequently notify defendant
[PRUDENTIAL] as to the full amount of the claim upon final survey and
determination by average adjuster Richard Hogg International (Phil.) of the
damage sustained by reason of fire. An adjuster's report on the fire in
question was submitted by Richard Hogg International together with the UMarine Surveyor Report (Exhibits "4" to "4-115").
Page
FIRST DIVISION

Atty. Reyes
In its Answer,7 PRUDENTIAL denied the material allegations of the
Complaint and interposed the defense that TRANS-ASIA breached
insurance policy conditions, in particular: "WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged that it
acted as facts and law require and incurred no liability to TRANS-ASIA; that
TRANS-ASIA has no cause of action; and, that its claim has been effectively
waived and/or abandoned, or it is estopped from pursuing the same. By way
of a counterclaim, PRUDENTIAL sought a refund of P3,000,000.00, which it
allegedly advanced to TRANS-ASIA by way of a loan without interest and
without prejudice to the final evaluation of the claim, including the amounts
of P500,000.00, for survey fees and P200,000.00, representing attorney's
fees.
counterclaim stating that there is factual and legal basis for TRANS-ASIA to
return the amount of P3,000,000.00 by way of loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING the complaint for
its failure to prove a cause of action.
On defendant's counterclaim, plaintiff is directed to return the sum of
P3,000,000.00 representing the loan extended to it by the defendant, within
a period of ten (10) days from and after this judgment shall have become
final and executory.12
The Ruling of the Trial Court

The Ruling of the Court of Appeals
The court a quo did not award PRUDENTIAL's claim for P500,000.00,
representing expert survey fees on the ground of lack of sufficient basis in
support thereof. Neither did it award attorney's fees on the rationalization
that the instant case does not fall under the exceptions stated in Article
220811 of the Civil Code. However, the court a quo granted PRUDENTIAL's
On the issue of TRANS-ASIA's alleged breach of warranty of the policy

condition CLASSED AND CLASS MAINTAINED, the Court of Appeals ruled
that PRUDENTIAL, as the party asserting the non-compensability of the loss
had the burden of proof to show that TRANS-ASIA breached the warranty,
which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of
certification to the effect that TRANS-ASIA was CLASSED AND CLASS
MAINTAINED as its sole basis for reaching the conclusion that the warranty
was breached. The Court of Appeals opined that the lack of a certification
does not necessarily mean that the warranty was breached by TRANSASIA. Instead, the Court of Appeals considered PRUDENTIAL's admission
that at the time the insurance contract was entered into between the parties,
the vessel was properly classed by Bureau Veritas, a classification society
recognized by the industry. The Court of Appeals similarly gave weight to the
fact that it was the responsibility of Richards Hogg International (Phils.) Inc.,
the average adjuster hired by PRUDENTIAL, to secure a copy of such
certification to support its conclusion that mere absence of a certification
does not warrant denial of TRANS-ASIA's claim under the insurance policy.
In the same token, the Court of Appeals found the subject warranty allegedly
breached by TRANS-ASIA to be a rider which, while contained in the policy,
was inserted by PRUDENTIAL without the intervention of TRANS-ASIA. As
such, it partakes of a nature of a contract d adhesion which should be
construed against PRUDENTIAL, the party which drafted the contract.
Likewise, according to the Court of Appeals, PRUDENTIAL's renewal of the
25
Further, citing Section 10710 of the Insurance Code, the court a quo
ratiocinated that the concealment made by TRANS-ASIA that the vessel was
not adequately maintained to preserve its class was a material concealment
sufficient to avoid the policy and, thus, entitled the injured party to rescind
the contract. The court a quo found merit in PRUDENTIAL's contention that
there was nothing in the adjustment of the particular average submitted by
the adjuster that would show that TRANS-ASIA was not in breach of the
policy. Ruling on the denominated loan and trust receipt, the court a quo
said that in substance and in form, the same is a receipt for a loan. It held
that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as
advance payment, it should have so clearly stated as such.
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of

6 November 2001, reversed the 6 June 2000 Judgment of the RTC.
Page
On 6 June 2000, the court a quo rendered Judgment 8 finding for (therein
defendant) PRUDENTIAL. It ruled that a determination of the parties'
liabilities hinged on whether TRANS-ASIA violated and breached the policy
conditions on WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED. It interpreted the provision to mean that TRANS-ASIA is
required to maintain the vessel at a certain class at all times pertinent during
the life of the policy. According to the court a quo, TRANS-ASIA failed to
prove compliance of the terms of the warranty, the violation thereof entitled
PRUDENTIAL, the insured party, to rescind the contract. 9

Atty. Reyes
insurance policy from noon of 1 July 1994 to noon of 1 July 1995, and then
again, until noon of 1 July 1996 must be deemed a waiver by PRUDENTIAL
of any breach of warranty committed by TRANS-ASIA.
Aggrieved, PRUDENTIAL filed before this Court a Petition for Review,

docketed as G.R. No. 151890, relying on the following grounds, viz:
I.
Further, the Court of Appeals, contrary to the ruling of the court a quo,
interpreted the transaction between PRUDENTIAL and TRANS-ASIA as one
of subrogation, instead of a loan. The Court of Appeals concluded that
TRANS-ASIA has no obligation to pay back the amount of P3,000.000.00 to
PRUDENTIAL based on its finding that the aforesaid amount was
PRUDENTIAL's partial payment to TRANS-ASIA's claim under the policy.
Finally, the Court of Appeals denied TRANS-ASIA's prayer for attorney's
fees, but held TRANS-ASIA entitled to double interest on the policy for the
duration of the delay of payment of the unpaid balance, citing Section
24413 of the Insurance Code.
THE AWARD IS GROSSLY UNCONSCIONABLE.

II.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
VIOLATION BY TRANS-ASIA OF A MATERIAL WARRANTY, NAMELY,
WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY.
III.
Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this
wise:
WHEREFORE, the foregoing consideration, We find for Appellant. The
instant appeal is ALLOWED and the Judgment appealed from REVERSED.
The P3,000,000.00 initially paid by appellee Prudential Guarantee
Assurance Incorporated to appellant Trans-Asia and covered by a "Loan and
Trust Receipt" dated 29 May 1995 is HELD to be in partial settlement of the
loss suffered by appellant and covered by Marine Policy No. MH93/1363
issued by appellee. Further, appellee is hereby ORDERED to pay appellant
the additional amount of P8,395,072.26 representing the balance of the loss
suffered by the latter as recommended by the average adjuster Richard
Hogg International (Philippines) in its Report, with double interest starting
from the time Richard Hogg's Survey Report was completed, or on 13
August 1996, until the same is fully paid.
All other claims and counterclaims are hereby DISMISSED.
THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS

INSURER HAD THE BURDEN OF PROVING THAT THE ASSURED,
TRANS-ASIA, VIOLATED A MATERIAL WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY
CLAUSE EMBODIED IN THE INSURANCE POLICY CONTRACT WAS A
MERE RIDER.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED
RENEWALS OF THE POLICY CONSTITUTED A WAIVER ON THE PART
OF PRUDENTIAL OF THE BREACH OF THE WARRANTY BY TRANSASIA.
All costs against appellee.14
The Issues
THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND

TRUST RECEIPT" EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE
POLICY, THUS CONSTITUTING PARTIAL PAYMENT THEREOF.
VII.
Page
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a

Motion for Reconsideration and Partial Motion for Reconsideration thereon,
respectively, which motions were denied by the Court of Appeals in the
Resolution dated 29 January 2002.
26
VI.

Atty. Reyes
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ACCEPTANCE BY PRUDENTIAL OF THE FINDINGS OF RICHARDS
HOGG IS INDICATIVE OF A WAIVER ON THE PART OF PRUDENTIAL OF
ANY VIOLATION BY TRANS-ASIA OF THE WARRANTY.
Receipt," dated 29 May 1995; and (3) the amount of interest to be imposed
on the liability, if any, of either or both parties.
VIII.
Prefatorily, it must be emphasized that in a Petition for Review, only

questions of law, and not questions of fact, may be raised. 19 This rule may
be disregarded only when the findings of fact of the Court of Appeals are
contrary to the findings and conclusions of the trial court, or are not
supported by the evidence on record.20 In the case at bar, we find an
incongruence between the findings of fact of the Court of Appeals and the
court a quo, thus, in our determination of the issues, we are constrained to
assess the evidence adduced by the parties to make appropriate findings of
facts as are necessary.
I.
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING
ATTORNEY'S FEES TO PETITIONER TRANS-ASIA ON THE GROUND
THAT SUCH CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN
ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO BAD FAITH
ON THE PART OF RESPONDENT PRUDENTIAL IN DENYING HEREIN
PETITIONER TRANS-ASIA'S INSURANCE CLAIM.
II.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06
NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN DOUBLE
INTEREST BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST
AT THE RATE OF 24% PER ANNUM.16
In our Resolution of 2 December 2002, we granted TRANS-ASIA's Motion
for Consolidation17 of G.R. NOS. 151890 and 151991;18 hence, the instant
consolidated petitions.
In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL
to TRANS-ASIA arising from the subject insurance contract; (2) the liability, if
any, of TRANS-ASIA to PRUDENTIAL arising from the transaction between
the parties as evidenced by a document denominated as "Loan and Trust
I.
A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached
the policy condition on WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED, as contained in the subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANSASIA violated an express and material warranty in the subject insurance
contract, i.e., Marine Insurance Policy No. MH93/1363, specifically Warranty
Clause No. 5 thereof, which stipulates that the insured vessel, "M/V ASIA
KOREA" is required to be CLASSED AND CLASS MAINTAINED. According
to PRUDENTIAL, on 25 October 1993, or at the time of the occurrence of
the fire, "M/V ASIA KOREA" was in violation of the warranty as it was not
CLASSED AND CLASS MAINTAINED. PRUDENTIAL submits that Warranty
Clause No. 5 was a condition precedent to the recovery of TRANS-ASIA
under the policy, the violation of which entitled PRUDENTIAL to rescind the
contract under Sec. 7421 of the Insurance Code.
The warranty condition CLASSED AND CLASS MAINTAINED was
explained by PRUDENTIAL's Senior Manager of the Marine and Aviation
Division, Lucio Fernandez. The pertinent portions of his testimony on direct
examination is reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this claim,
what final action was taken?cralawlibrary
27
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals

filed a Petition for Review docketed as G.R. No. 151991, raising the
following grounds for the allowance of the petition, to wit:
Page
THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL

COURT, IN FINDING THAT PRUDENTIAL "UNJUSTIFIABLY REFUSED"
TO PAY THE CLAIM AND IN ORDERING PRUDENTIAL TO PAY TRANSASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13 AUGUST 1996,
UNTIL [THE] SAME IS FULLY PAID.15
Ruling of the Court

Atty. Reyes
A It was eventually determined that there was a breach of the policy
condition, and basically there is a breach of policy warranty condition and on
that basis the claim was denied.
Q To refer you (sic) the "policy warranty condition," I am showing to you a
policy here marked as Exhibits "1", "1-A" series, please point to the warranty
in the policy which you said was breached or violated by the plaintiff which
constituted your basis for denying the claim as you testified.
classification society. And it is not sufficient that the member of this

classification society at the time of a loss, their membership must be
continuous for the whole length of the policy such that during the effectivity
of the policy, their classification is suspended, and then thereafter, they get
reinstated, that again still a breach of the warranty that they maintained their
class (sic). Our maintaining team membership in the classification society
thereby maintaining the standards of the vessel (sic).
ATTY. LIM
A Warranted Vessel Classed and Class Maintained.

ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the
second page of the policy below the printed words: "Clauses, Endorsements,
Special Conditions and Warranties," below this are several typewritten
clauses and the witness pointed out in particular the clause reading:
"Warranted Vessel Classed and Class Maintained."
COURT
Q Will you explain that particular phrase?cralawlibrary
A Yes, a warranty is a condition that has to be complied with by the insured.
When we say a class warranty, it must be entered in the classification
society.
Q Can you mention some classification societies that you

know?cralawlibrary
A Well we have the Bureau Veritas, American Bureau of Shipping, D&V
Local Classification Society, The Philippine Registration of Ships Society,
China Classification, NKK and Company Classification Society, and many
others, we have among others, there are over 20 worldwide. 22
At the outset, it must be emphasized that the party which alleges a fact as a
matter of defense has the burden of proving it. PRUDENTIAL, as the party
which asserted the claim that TRANS-ASIA breached the warranty in the
policy, has the burden of evidence to establish the same. Hence, on the part
of PRUDENTIAL lies the initiative to show proof in support of its defense;
otherwise, failing to establish the same, it remains self-serving. Clearly, if no
evidence on the alleged breach of TRANS-ASIA of the subject warranty is
shown, a fortiori, TRANS-ASIA would be successful in claiming on the
policy. It follows that PRUDENTIAL bears the burden of evidence to
establish the fact of breach.
WITNESS
(continued)
A A classification society is an organization which sets certain standards for
a vessel to maintain in order to maintain their membership in the
classification society. So, if they failed to meet that standard, they are
considered not members of that class, and thus breaching the warranty, that
requires them to maintain membership or to maintain their class on that
We sustain the findings of the Court of Appeals that PRUDENTIAL was not
successful in discharging the burden of evidence that TRANS-ASIA
Page
Slowly.
In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has

the burden of proof to show proof of loss, and the coverage thereof, in the
subject insurance policy. However, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty or the burden of
evidence shifts to defendant to controvert plaintiff's prima facie case,
otherwise, a verdict must be returned in favor of plaintiff. 23 TRANS-ASIA was
able to establish proof of loss and the coverage of the loss, i.e., 25 October
1993: Fire on Board. Thereafter, the burden of evidence shifted to
PRUDENTIAL to counter TRANS-ASIA's case, and to prove its special and
affirmative defense that TRANS-ASIA was in violation of the particular
condition on CLASSED AND CLASS MAINTAINED.
28
COURT

Atty. Reyes
breached the subject policy condition on CLASSED AND CLASS
MAINTAINED.
particular average per "M/V Asia Korea" of the 25 October 1993 fire on
board.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and

Aviation Division, Lucio Fernandez, made a categorical admission that at the
time of the procurement of the insurance contract in July 1993, TRANSASIA's vessel, "M/V Asia Korea" was properly classed by Bureau Veritas,
thus:
We are not unmindful of the clear language of Sec. 74 of the Insurance

Code which provides that, "the violation of a material warranty, or other
material provision of a policy on the part of either party thereto, entitles the
other to rescind." It is generally accepted that "[a] warranty is a statement or
promise set forth in the policy, or by reference incorporated therein, the
untruth or non-fulfillment of which in any respect, and without reference to
whether the insurer was in fact prejudiced by such untruth or non-fulfillment,
renders the policy voidable by the insurer." 25 However, it is similarly
indubitable that for the breach of a warranty to avoid a policy, the same must
be duly shown by the party alleging the same. We cannot sustain an
allegation that is unfounded. Consequently, PRUDENTIAL, not having
shown that TRANS-ASIA breached the warranty condition, CLASSED AND
CLASS MAINTAINED, it remains that TRANS-ASIA must be allowed to
recover its rightful claims on the policy.
Q Kindly examine the records particularly the policy, please tell us if you
know whether M/V Asia Korea was classed at the time (sic) policy was
procured perthe (sic) insurance was procured that Exhibit "1" on 1st July
1993 (sic).
WITNESS
A I recall that they were classed.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on

WARRANTED VESSEL CLASSED AND CLASS MAINTAINED,
PRUDENTIAL made a valid waiver of the same.
ATTY. LIM
Q With what classification society?cralawlibrary
We are in accord with the ruling of the Court of Appeals that the lack of a
certification in PRUDENTIAL's records to the effect that TRANS-ASIA's "M/V
Asia Korea" was CLASSED AND CLASS MAINTAINED at the time of the
occurrence of the fire cannot be tantamount to the conclusion that TRANSASIA in fact breached the warranty contained in the policy. With more
reason must we sustain the findings of the Court of Appeals on the ground
that as admitted by PRUDENTIAL, it was likewise the responsibility of the
average adjuster, Richards Hogg International (Phils.), Inc., to secure a copy
of such certification, and the alleged breach of TRANS-ASIA cannot be
gleaned from the average adjuster's survey report, or adjustment of
Third, after the loss, Prudential renewed the insurance policy of Trans-Asia
for two (2) consecutive years, from noon of 01 July 1994 to noon of 01 July
1995, and then again until noon of 01 July 1996. This renewal is deemed a
waiver of any breach of warranty.26
PRUDENTIAL finds fault with the ruling of the appellate court when it ruled
that the renewal policies are deemed a waiver of TRANS-ASIA's alleged
breach, averring herein that the subsequent policies, designated as
MH94/1595 and MH95/1788 show that they were issued only on 1 July 1994
and 3 July 1995, respectively, prior to the time it made a request to TRANSASIA that it be furnished a copy of the certification specifying that the
insured vessel "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED.
PRUDENTIAL posits that it came to know of the breach by TRANS-ASIA of
the subject warranty clause only on 21 April 1997. On even date,
PRUDENTIAL sent TRANS-ASIA a letter of denial, advising the latter that
29
As found by the Court of Appeals and as supported by the records, Bureau

Veritas is a classification society recognized in the marine industry. As it is
undisputed that TRANS-ASIA was properly classed at the time the contract
of insurance was entered into, thus, it becomes incumbent upon
PRUDENTIAL to show evidence that the status of TRANS-ASIA as being
properly CLASSED by Bureau Veritas had shifted in violation of the
warranty. Unfortunately, PRUDENTIAL failed to support the allegation.
The Court of Appeals, in reversing the Judgment of the RTC which held that
TRANS-ASIA breached the warranty provision on CLASSED AND CLASS
MAINTAINED, underscored that PRUDENTIAL can be deemed to have
made a valid waiver of TRANS-ASIA's breach of warranty as alleged,
ratiocinating, thus:
Page
A I believe with Bureau
Veritas.24

Atty. Reyes
To our mind, the argument is made even more credulous by PRUDENTIAL's

lack of proof to support its allegation that the renewals of the policies were
taken only after a request was made to TRANS-ASIA to furnish them a copy
of the certificate attesting that "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. Notwithstanding PRUDENTIAL's claim that no certification
was issued to that effect, it renewed the policy, thereby, evidencing an
intention to waive TRANS-ASIA's alleged breach. Clearly, by granting the
renewal policies twice and successively after the loss, the intent was to
benefit the insured, TRANS-ASIA, as well as to waive compliance of the
warranty.
The foregoing finding renders a determination of whether the subject
warranty is a rider, moot, as raised by the PRUDENTIAL in its assignment of
errors. Whether it is a rider will not effectively alter the result for the reasons
that: (1) PRUDENTIAL was not able to discharge the burden of evidence to
show that TRANS-ASIA committed a breach, thereof; and (2) assuming
arguendo the commission of a breach by TRANS-ASIA, the same was
shown to have been waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS ASIA via a transaction between the parties evidenced by a document
denominated as "Loan and Trust Receipt," dated 29 May 1995 constituted
partial payment on the policy.
LOAN AND TRUST RECEIPT

Claim File No. MH-93-025 :
P3,000,000.00
Check No. PCIB066755
May 29, 1995
Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the

sum of PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without
interest, under Policy No. MH93/1353, repayable only in the event and to the
extent that any net recovery is made by TRANS ASIA SHIPPING CORP.,
from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable, occasioned by
the 25 October 1993: Fire on Board.
As security for such repayment, we hereby pledge to PRUDENTIAL
GUARANTEE AND ASSURANCE INC. whatever recovery we may make
and deliver to it all documents necessary to prove our interest in said
property. We also hereby agree to promptly prosecute suit against such
persons, corporation or corporations through whose negligence the
aforesaid loss was caused or who may otherwise be responsible therefore,
with all due diligence, in our own name, but at the expense of and under the
exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed
by the parties evidenced a loan of P3,000,000.00 which it granted to
TRANS-ASIA, and not an advance payment on the policy or a partial
payment for the loss. It further submits that it is a customary practice for
insurance companies in this country to extend loans gratuitously as part of
good business dealing with their assured, in order to afford their assured the
chance to continue business without embarrassment while awaiting outcome
of the settlement of their claims.30 According to PRUDENTIAL, the "Trust
and Loan Agreement" did not subrogate to it whatever rights and/or actions
TRANS-ASIA may have against third persons, and it cannot by no means be
taken that by virtue thereof, PRUDENTIAL was granted irrevocable power of
30
We are not impressed. We do not find that the Court of Appeals was in error
when it held that PRUDENTIAL, in renewing TRANS-ASIA's insurance policy
for two consecutive years after the loss covered by Policy No. MH93/1363,
was considered to have waived TRANS-ASIA's breach of the subject
warranty, if any. 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. In that event his liability under the policy continues as before. 28 There
can be no clearer intention of the waiver of the alleged breach than the
renewal of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in
MH94/1595 and MH95/1788, issued in the years 1994 and 1995,
respectively.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount

of P3,000,000.00. The same was evidenced by a transaction receipt
denominated as a "Loan and Trust Receipt," dated 29 May 1995,
reproduced hereunder:
Page
their claim is not compensable. In fine, PRUDENTIAL would have this Court
believe that the issuance of the renewal policies cannot be a waiver because
they were issued without knowledge of the alleged breach of warranty
committed by TRANS-ASIA.27

Atty. Reyes
The Philippine Insurance Code (PD 1460 as amended) was derived from the
old Insurance Law Act No. 2427 of the Philippine Legislature during the
American Regime. The Insurance Act was lifted verbatim from the law of
California, except Chapter V thereof, which was taken largely from the
insurance law of New York. Therefore, ruling case law in that jurisdiction is
to Us persuasive in interpreting provisions of our own Insurance Code. In
addition, the application of the adopted statute should correspond in
fundamental points with the application in its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals
in the Loan Receipt that the money was intended as a loan does not detract
from its real character as payment of claim, thus:
"The receipt of money by the insured employers from a surety company for
losses on account of forgery of drafts by an employee where no provision or
repayment of the money was made except upon condition that it be
recovered from other parties and neither interest nor security for the
asserted debts was provided for, the money constituted the payment of a
liability and not a mere loan, notwithstanding recitals in the written receipt
that the money was intended as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust Receipt
Agreement" is that appellant is obligated to hand over to appellee "whatever
recovery (Trans Asia) may make and deliver to (Prudential) all documents
necessary to prove its interest in the said property." For all intents and
purposes therefore, the money receipted is payment under the policy, with
Prudential having the right of subrogation to whatever net recovery TransAsia may obtain from third parties resulting from the fire. In the law on
insurance, subrogation is an equitable assignment to the insurer of all
remedies which the insured may have against third person whose
negligence or wrongful act caused the loss covered by the insurance policy,
which is created as the legal effect of payment by the insurer as an assignee
in equity. The loss in the first instance is that of the insured but after
We agree. Notwithstanding its designation, the tenor of the "Loan and Trust
Receipt" evidences that the real nature of the transaction between the
parties was that the amount of P3,000,000.00 was not intended as a loan
whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but rather, the
same was a partial payment or an advance on the policy of the claims due to
TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance payment to
TRANS-ASIA by PRUDENTIAL, subrogating the former to the extent of "any
net recovery made by TRANS ASIA SHIPPING CORP., from any person or
persons, corporation or corporations, or other parties, on account of loss by
any casualty for which they may be liable, occasioned by the 25 October
1993: Fire on Board."32
Second, we find that per the "Loan and Trust Receipt," even as TRANSASIA agreed to "promptly prosecute suit against such persons, corporation
or corporations through whose negligence the aforesaid loss was caused or
who may otherwise be responsible therefore, with all due diligence" in its
name, the prosecution of the claims against such third persons are to be
carried on "at the expense of and under the exclusive direction and control of
PRUDENTIAL GUARANTEE AND ASSURANCE INC."33 The clear import of
the phrase "at the expense of and under the exclusive direction and control"
as used in the "Loan and Trust Receipt" grants solely to PRUDENTIAL the
power to prosecute, even as the same is carried in the name of TRANSASIA, thereby making TRANS-ASIA merely an agent of PRUDENTIAL, the
principal, in the prosecution of the suit against parties who may have
occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of TRANSASIA to repay PRUDENTIAL is highly speculative and contingent, i.e., only
in the event and to the extent that any net recovery is made by TRANS-ASIA
from any person on account of loss occasioned by the fire of 25 October
1993. The transaction, therefore, was made to benefit TRANS-ASIA, such
that, if no recovery from third parties is made, PRUDENTIAL cannot be
repaid the amount. Verily, we do not think that this is constitutive of a
loan.34 The liberality in the tenor of the "Loan and Trust Receipt" in favor of
31
The Court of Appeals held that the real character of the transaction between
the parties as evidenced by the "Loan and Trust Receipt" is that of an
advance payment by PRUDENTIAL of TRANS-ASIA's claim on the
insurance, thus:
reimbursement or compensation, it becomes the loss of the insurer. It has

been referred to as the doctrine of substitution and rests on the principle that
substantial justice should be attained regardless of form, that is, its basis is
the doing of complete, essential, and perfect justice between all the parties
without regard to form.31
Page
attorney by TRANS-ASIA, as the sole power to prosecute lies solely with the
latter.

Atty. Reyes
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of

P8,395,072.26, representing the balance of the loss suffered by TRANSASIA and covered by Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is
entitled to the unpaid claims covered by Marine Policy No. MH93/1363, or a
total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the
form of attorney's fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorney's fees. It held that
attorney's fees cannot be awarded absent a showing of bad faith on the part
of PRUDENTIAL in rejecting TRANS-ASIA's claim, notwithstanding that the
rejection was erroneous. According to the Court of Appeals, attorney's fees
can be awarded only in the cases enumerated in Article 2208 of the Civil
Code which finds no application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages consisting of
attorney's fees and other expenses incurred by the insured after a finding by
the Insurance Commissioner or the Court, as the case may be, of an
unreasonable denial or withholding of the payment of the claims due.
Moreover, the law imposes an interest of twice the ceiling prescribed by the
Monetary Board on the amount of the claim due the insured from the date
following the time prescribed in Section 24235 or in Section 243,36 as the
case may be, until the claim is fully satisfied. Finally, Section 244 considers
the failure to pay the claims within the time prescribed in Sections 242 or
243, when applicable, as prima facieevidence of unreasonable delay in
payment.
To the mind of this Court, Section 244 does not require a showing of bad
faith in order that attorney's fees be granted. As earlier stated, under Section
244, a prima facie evidence of unreasonable delay in payment of the claim is
created by failure of the insurer to pay the claim within the time fixed in both
Sections 242 and 243 of the Insurance Code. As established in Section 244,
by reason of the delay and the consequent filing of the suit by the insured,
Section 244 reads:

In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the case
may be, to make a finding as to whether the payment of the claim of the
insured has been unreasonably denied or withheld; and in the affirmative
case, the insurance company shall be adjudged to pay damages which shall
consist of attorney's fees and other expenses incurred by the insured person
by reason of such unreasonable denial or withholding of payment plus
interest of twice the ceiling prescribed by the Monetary Board of the amount
of the claim due the insured, from the date following the time prescribed in
section two hundred forty-two or in section two hundred forty-three, as the
case may be, until the claim is fully satisfied; Provided, That the failure to
pay any such claim within the time prescribed in said sections shall be
consideredprima facie evidence of unreasonable delay in payment.
Sections 243 and 244 of the Insurance Code apply when the court finds an
unreasonable delay or refusal in the payment of the insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and confirmed
by the records show that there was an unreasonable delay by PRUDENTIAL
in the payment of the unpaid balance of P8,395,072.26 to TRANS-ASIA. On
26 October 1993, a day after the occurrence of the fire in "M/V Asia Korea",
TRANS-ASIA filed its notice of claim. On 13 August 1996, the adjuster,
Richards Hogg International (Phils.), Inc., completed its survey report
recommending the amount of P11,395,072.26 as the total indemnity due to
TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in a letter39 addressed to
TRANS-ASIA denied the latter's claim for the amount of P8,395,072.26
representing the balance of the total indemnity. On 21 July 1997,
PRUDENTIAL sent a second letter40 to TRANS-ASIA seeking a return of the
amount of P3,000,000.00. On 13 August 1997, TRANS-ASIA was
constrained to file a complaint for sum of money against PRUDENTIAL
praying, inter alia, for the sum of P8,395,072.26 representing the balance of
the proceeds of the insurance claim.
As can be gleaned from the foregoing, there was an unreasonable delay on
the part of PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the
latter's right to the insurance claims, from the time proof of loss was shown
and the ascertainment of the loss was made by the insurance adjuster.
32
III.
the insurers shall be adjudged to pay damages which shall consist of

attorney's fees and other expenses incurred by the insured. 37
Page
TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was

a form of an advance payment on TRANS-ASIA's claim on MH93/1353.

Atty. Reyes
Evidently, PRUDENTIAL's unreasonable delay in satisfying TRANS-ASIA's
unpaid claims compelled the latter to file a suit for collection.
D. The term "double interest" as used in the Decision of the Court of Appeals
must be interpreted to mean 24% per annum.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds

of the policy as attorney's fees to TRANS-ASIA is reasonable under the
circumstances, or otherwise stated, ten percent (10%) of P8,395,072.26. In
the case of Cathay Insurance, Co., Inc. v. Court of Appeals, 41where a finding
of an unreasonable delay under Section 244 of the Insurance Code was
made by this Court, we grant an award of attorney's fees equivalent to ten
percent (10%) of the total proceeds. We find no reason to deviate from this
judicial precedent in the case at bar.
PRUDENTIAL assails the award of interest, granted by the Court of Appeals,

in favor of TRANS-ASIA in the assailed Decision of 6 November 2001. It is
PRUDENTIAL's stance that the award is extortionate and grossly
unsconscionable. In support thereto, PRUDENTIAL makes a reference to
TRANS-ASIA's prayer in the Complaint filed with the court a quo wherein the
latter sought, "interest double the prevailing rate of interest of 21% per
annum now obtaining in the banking business or plus 42% per annum
pursuant to Article 243 of the Insurance Code x x x." 42
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as

attorney's fees) shall be imposed double interest in accordance with Section
244 of the Insurance Code.
The contention fails to persuade. It is settled that an award of double interest

is lawful and justified under Sections 243 and 244 of the Insurance
Code.43 In Finman General Assurance Corporation v. Court of
Appeals,44 this Court held that the payment of 24% interest per annum is
authorized by the Insurance Code.45 There is no gainsaying that the term
"double interest" as used in Sections 243 and 244 can only be interpreted to
mean twice 12% per annum or 24% per annum interest, thus:
SEC. 243. The amount of any loss or damage for which an insurer may be
liable, under any policy other than life insurance policy, shall be paid within
thirty days after proof of loss is received by the insurer and ascertainment of
the loss or damage is made either by agreement between the insured and
the insurer or by arbitration; but if such ascertainment is not had or made
within sixty days after such receipt by the insurer of the proof of loss, then
the loss or damage shall be paid within ninety days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed
herein will entitle the assured to collect interest on the proceeds of the policy
for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the ground
that the claim is fraudulent.
As specified, the assured is entitled to interest on the proceeds for the
duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board except when the failure or refusal of the insurer to pay was
founded on the ground that the claim is fraudulent.
E. The payment of double interest should be counted from 13 September

1996.
The Court of Appeals, in imposing double interest for the duration of the
delay of the payment of the unpaid balance due TRANS-ASIA, computed the
same from 13 August 1996 until such time when the amount is fully paid.
Although not raised by the parties, we find the computation of the duration of
the delay made by the appellate court to be patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of the policy for
the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board. Significantly, Section 243 mandates the payment of any
loss or damage for which an insurer may be liable, under any policy other
than life insurance policy, within thirty days after proof of loss is received by
the insurer and ascertainment of the loss or damage is made either by
33
Section 243 is hereunder reproduced:
The term "ceiling prescribed by the Monetary Board" means the legal rate of
interest of twelve per centum per annum (12%) as prescribed by the
Monetary Board in C.B. Circular No. 416, pursuant to P.D. No. 116,
amending the Usury Law; so that when Sections 242, 243 and 244 of the
Insurance Code provide that the insurer shall be liable to pay interest "twice
the ceiling prescribed by the Monetary Board", it means twice 12% per
annum or 24% per annum interest on the proceeds of the insurance. 46
Page
Section 244 of the Insurance Code is categorical in imposing an interest

twice the ceiling prescribed by the Monetary Board due the insured, from the
date following the time prescribed in Section 242 or in Section 243, as the
case may be, until the claim is fully satisfied. In the case at bar, we find
Section 243 to be applicable as what is involved herein is a marine
insurance, clearly, a policy other than life insurance.

Atty. Reyes
agreement between the insured and the insurer or by arbitration. It is clear
that under Section 243, the insurer has until the 30th day after proof of loss
and ascertainment of the loss or damage to pay its liability under the
insurance, and only after such time can the insurer be held to be in delay,
thereby necessitating the imposition of double interest.
In the case at bar, it was not disputed that the survey report on the
ascertainment of the loss was completed by the adjuster, Richard Hoggs
International (Phils.), Inc. on 13 August 1996. PRUDENTIAL had thirty days
from 13 August 1996 within which to pay its liability to TRANS-ASIA under
the insurance policy, or until 13 September 1996. Therefore, the double
interest can begin to run from 13 September 1996 only.
No. 68278 should be construed to mean interest at the rate of 24% per
annum, with a further clarification, that the same should be computed from
13 September 1996 until fully paid. The Decision and Resolution of the Court
of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001 and 29
January 2002, respectively, are, thus, MODIFIED in the following manner, to
wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of
P8,395,072.26, representing the balance of the loss suffered by TRANSASIA and covered by Marine Policy No. MH93/1363;
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the
form of attorney's fees equivalent to 10% of the amount of P8,395,072.26;
IV.
A. An interest of 12% per annum is similarly imposed on the TOTAL amount
of liability adjudged in section III herein, computed from the time of finality of
judgment until the full satisfaction thereof in conformity with this Court's
ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of Appeals,47 inscribed
the rule of thumb48 in the application of interest to be imposed on obligations,
regardless of their source. Eastern emphasized beyond cavil that when the
judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, regardless of whether the obligation
involves a loan or forbearance of money, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance49 of credit.
3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney's

fees) shall be imposed double interest at the rate of 24% per annum to be
computed from 13 September 1996 until fully paid; andcralawlibrary
4. An interest of 12% per annum is similarly imposed on the TOTAL amount
of liability adjudged as abovestated in paragraphs (1), (2), and (3) herein,
computed from the time of finality of judgment until the full satisfaction
thereof.
No costs.
SO ORDERED.
We find application of the rule in the case at bar proper, thus, a rate of 12%
per annum from the finality of judgment until the full satisfaction thereof must
be imposed on the total amount of liability adjudged to PRUDENTIAL. It is
clear that the interim period from the finality of judgment until the satisfaction
of the same is deemed equivalent to a forbearance of credit, hence, the
imposition of the aforesaid interest.
Page
WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the

Petition in G.R. No. 151991 is GRANTED, thus, we award the grant of
attorney's fees and make a clarification that the term "double interest" as
used in the 6 November 2001 Decision of the Court of Appeals in CA GR CV
34
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INSU Part IV Provisions and Cases

SEC. 28. Each party to a contract of insurance must communicate

SEC. 31. Materiality is to be determined not by the event, but

Matters which need not be communicated

SEC. 30. Neither party to a contract of insurance is bound to communicate

SEC. 35. Neither party to a contract of insurance is bound to communicate,

SEC. 26. A neglect to communicate that which a party knows and

INSU Part IV Provisions and Cases

SEC. 36. A representation may be oral or written

SEC. 44. A representation is to be deemed false when the facts

SEC. 37. A representation may be made at the time of, or before,

SEC. 45. If a representation is false in a material point, whether

SEC. 42. A representation must be presumed to refer to the date

Remedies available in case of concealment or false

After a policy of life insurance made payable on the death of

Effect of alteration or withdrawal

SEC. 41. A representation may be altered or withdrawn before the

SEC. 42. A representation must be presumed to refer to the date

Effect when representation is obtained from third persons

SEC. 43. When a person insured has no personal knowledge of a

When life insurance policy becomes incontestable

When rescission by the insurer may be exercised

SEC. 48. Whenever a right to rescind a contract of insurance is

SEC. 46. The materiality of a representation is determined by the

When presumed false; effect of falsity

INSU Part IV Provisions and Cases

SEC. 74. The violation of a material warranty, or other material

SEC. 76. A breach of warranty without fraud merely exonerates an

INSU Part IV Provisions and Cases

Answer: No. If so give details ___________.

On November 15, 1983, Grepalife issued Certificate No. B-18558, as

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF

INSU Part IV Provisions and Cases

4. THE LOWER COURT ERRED IN - HOLDING THAT THERE

Section 8 of the Insurance Code provides:

OR NATURE OF THE ACTION AND OVER THE PERSON

INSU Part IV Provisions and Cases

Insured may be regarded as the real party in interest, although he has

Contrary to appellants allegations, there was no sufficient proof that the

INSU Part IV Provisions and Cases

INSU Part IV Provisions and Cases

a) consulted any doctor or other health practitioner?

SUNLIFE ASSURANCE COMPANY OF CANADA, Petitioner, v. The Hon.

b) urine, kidney or bladder disorder?"

We grant the petition.

xxx xxx xxx

INSU Part IV Provisions and Cases

the judgment is based on a misappreciation of the facts (Geronimo v. Court

Section 26 of the Insurance Code is explicit in requiring a party to a contract

Materiality is to be determined not by the event, but solely by the probable

"Defendant's counterclaim is hereby Dismissed" (Rollo, pp. 43-44).cralaw

"A neglect to communicate that which a party knows and ought to

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and

INSU Part IV Provisions and Cases

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

INSU Part IV Provisions and Cases

physical therapist at home. Later, he was admitted at the Chinese General

WHEREFORE, in view of the forgoing, the Court renders judgment in favor

1. Defendants to pay and reimburse the medical and hospital coverage of

2. Defendants to pay the reduced amount of moral damages of P10,000.00

3. Defendants to pay the reduced amount of P10,000.00 as exemplary

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a

INSU Part IV Provisions and Cases

In the case at bar, the insurable interest of respondents husband in