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G.R. No.

L-8151

December 16, 1955

VIRGINIA CALANOC, petitioner,


vs.
COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE
CO., respondents.
Lucio Javillonar for petitioner.
J. A. Wolfson, Manuel Y. Mecias, Emilio Abello and Anselmo A. Reyes for respondents.

BAUTISTA ANGELO, J.:


This suit involves the collection of P2,000 representing the value of a supplemental
policy covering accidental death which was secured by one Melencio Basilio from the
Philippine American Life Insurance Company. The case originated in the Municipal Court
of Manila and judgment being favorable to the plaintiff it was appealed to the court of
first instance. The latter court affirmed the judgment but on appeal to the Court of
Appeals the judgment was reversed and the case is now before us on a petition for
review.
Melencio Basilio was a watchman of the Manila Auto Supply located at the corner of
Avenida Rizal and Zurbaran. He secured a life insurance policy from the Philippine
American Life Insurance Company in the amount of P2,000 to which was attached a
supplementary contract covering death by accident. On January 25, 1951, he died of a
gunshot wound on the occasion of a robbery committed in the house of Atty. Ojeda at the
corner of Oroquieta and Zurbaan streets. Virginia Calanoc, the widow, was paid the sum
of P2,000, face value of the policy, but when she demanded the payment of the
additional sum of P2,000 representing the value of the supplemental policy, the
company refused alleging, as main defense, that the deceased died because he was
murdered by a person who took part in the commission of the robbery and while making
an arrest as an officer of the law which contingencies were expressly excluded in the
contract and have the effect of exempting the company from liability.

The pertinent facts which need to be considered for the determination of the questions
raised are those reproduced in the decision of the Court of Appeals as follows:
The circumstances surrounding the death of Melencio Basilio show that when he was
killed at about seven o'clock in the night of January 25, 1951, he was on duty as
watchman of the Manila Auto Supply at the corner of Avenida Rizal and Zurbaran; that it
turned out that Atty. Antonio Ojeda who had his residence at the corner of Zurbaran and
Oroquieta, a block away from Basilio's station, had come home that night and found that

his house was well-lighted, but with the windows closed; that getting suspicious that
there were culprits in his house, Atty. Ojeda retreated to look for a policeman and finding
Basilio in khaki uniform, asked him to accompany him to the house with the latter
refusing on the ground that he was not a policeman, but suggesting that Atty. Ojeda
should ask the traffic policeman on duty at the corner of Rizal Avenue and Zurbaran; that
Atty. Ojeda went to the traffic policeman at said corner and reported the matter, asking
the policeman to come along with him, to which the policeman agreed; that on the way
to the Ojeda residence, the policeman and Atty. Ojeda passed by Basilio and somehow or
other invited the latter to come along; that as the tree approached the Ojeda residence
and stood in front of the main gate which was covered with galvanized iron, the fence
itself being partly concrete and partly adobe stone, a shot was fired; that immediately
after the shot, Atty. Ojeda and the policeman sought cover; that the policeman, at the
request of Atty. Ojeda, left the premises to look for reinforcement; that it turned out
afterwards that the special watchman Melencio Basilio was hit in the abdomen, the
wound causing his instantaneous death; that the shot must have come from inside the
yard of Atty. Ojeda, the bullet passing through a hole waist-high in the galvanized iron
gate; that upon inquiry Atty. Ojeda found out that the savings of his children in the
amount of P30 in coins kept in his aparador contained in stockings were taken away, the
aparador having been ransacked; that a month thereafter the corresponding
investigation conducted by the police authorities led to the arrest and prosecution of four
persons in Criminal Case No. 15104 of the Court of First Instance of Manila for 'Robbery
in an Inhabited House and in Band with Murder'.
It is contended in behalf of the company that Basilio was killed which "making an arrest
as an officer of the law" or as a result of an "assault or murder" committed in the place
and therefore his death was caused by one of the risks excluded by the supplementary
contract which exempts the company from liability. This contention was upheld by the
Court of Appeals and, in reaching this conclusion, made the following comment:
From the foregoing testimonies, we find that the deceased was a watchman of the
Manila Auto Supply, and, as such, he was not boud to leave his place and go with
Atty. Ojeda and Policeman Magsanoc to see the trouble, or robbery, that occurred
in the house of Atty. Ojeda. In fact, according to the finding of the lower court, Atty.
Ojeda finding Basilio in uniform asked him to accompany him to his house, but the
latter refused on the ground that he was not a policeman and suggested to Atty.
Ojeda to ask help from the traffic policeman on duty at the corner of Rizal Avenue
and Zurbaran, but after Atty. Ojeda secured the help of the traffic policeman, the
deceased went with Ojeda and said traffic policeman to the residence of Ojeda,
and while the deceased was standing in front of the main gate of said residence,
he was shot and thus died. The death, therefore, of Basilio, although unexpected,
was not caused by an accident, being a voluntary and intentional act on the part of
the one wh robbed, or one of those who robbed, the house of Atty. Ojeda. Hence, it
is out considered opinion that the death of Basilio, though unexpected, cannot be
considered accidental, for his death occurred because he left his post and joined
policeman Magsanoc and Atty. Ojeda to repair to the latter's residence to see what

happened thereat. Certainly, when Basilio joined Patrolman Magsanoc and Atty.
Ojeda, he should have realized the danger to which he was exposing himself, yet,
instead of remaining in his place, he went with Atty. Ojeda and Patrolman
Magsanoc to see what was the trouble in Atty. Ojeda's house and thus he was
fatally shot.

We dissent from the above findings of the Court of Appeals. For one thing, Basilio was a
watchman of the Manila Auto Supply which was a block away from the house of Atty.
Ojeda where something suspicious was happening which caused the latter to ask for
help. While at first he declied the invitation of Atty. Ojeda to go with him to his residence
to inquire into what was going on because he was not a regular policeman, he later
agreed to come along when prompted by the traffic policeman, and upon approaching
the gate of the residence he was shot and died. The circumstance that he was a mere
watchman and had no duty to heed the call of Atty. Ojeda should not be taken as a
capricious desire on his part to expose his life to danger considering the fact that the
place he was in duty-bound to guard was only a block away. In volunteering to extend
help under the situation, he might have thought, rightly or wrongly, that to know the
truth was in the interest of his employer it being a matter that affects the security of the
neighborhood. No doubt there was some risk coming to him in pursuing that errand, but
that risk always existed it being inherent in the position he was holding. He cannot
therefore be blamed solely for doing what he believed was in keeping with his duty as a
watchman and as a citizen. And he cannot be considered as making an arrest as an
officer of the law, as contended, simply because he went with the traffic policeman, for
certainly he did not go there for that purpose nor was he asked to do so by the
policeman.

Much less can it be pretended that Basilio died in the course of an assault or murder
considering the very nature of these crimes. In the first place, there is no proof that the
death of Basilio is the result of either crime for the record is barren of any circumstance
showing how the fatal shot was fired. Perhaps this may be clarified in the criminal case
now pending in court as regards the incident but before that is done anything that might
be said on the point would be a mere conjecture. Nor can it be said that the killing was
intentional for there is the possibility that the malefactor had fired the shot merely to
scare away the people around for his own protection and not necessarily to kill or hit the
victim. In any event, while the act may not excempt the triggerman from liability for the
damage done, the fact remains that the happening was a pure accident on the part of
the victim. The victim could have been either the policeman or Atty. Ojeda for it cannot
be pretended that the malefactor aimed at the deceased precisely because he wanted to
take his life.

We take note that these defenses are included among the risks exluded in the
supplementary contract which enumerates the cases which may exempt the company
from liability. While as a general rule "the parties may limit the coverage of the policy to
certain particular accidents and risks or causes of loss, and may expressly except other
risks or causes of loss therefrom" (45 C. J. S. 781-782), however, it is to be desired that
the terms and phraseology of the exception clause be clearly expressed so as to be
within the easy grasp and understanding of the insured, for if the terms are doubtful or
obscure the same must of necessity be interpreted or resolved aganst the one who has
caused the obscurity. (Article 1377, new Civil Code) And so it has bene generally held
that the "terms in an insurance policy, which are ambiguous, equivacal, or
uncertain . . . are to be construed strictly and most strongly against the insurer, and
liberally in favor of the insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where a forfeiture is involved" (29 Am. Jur., 181), and
the reason for this rule is that he "insured usually has no voice in the selection or
arrangement of the words employed and that the language of the contract is selected
with great care and deliberation by experts and legal advisers employed by, and acting
exclusively in the interest of, the insurance company." (44 C. J. S., p. 1174.)

Insurance is, in its nature, complex and difficult for the layman to understand. Policies
are prepared by experts who know and can anticipate the bearings and possible
complications of every contingency. So long as insurance companies insist upon the use
of ambiguous, intricate and technical provisions, which conceal rather than frankly
disclose, their own intentions, the courts must, in fairness to those who purchase
insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins.
Co., 91 Wash. 324, LRA 1917A, 1237.)

An insurer should not be allowed, by the use of obscure phrases and exceptions, to
defeat the very purpose for which the policy was procured. (Moore vs. Aetna Life
Insurance Co., LRA 1915D, 264.)
We are therefore persuaded to conclude that the circumstances unfolded in the present
case do not warrant the finding that the death of the unfortunate victim comes within
the purview of the exception clause of the supplementary policy and, hence, do not
exempt the company from liability.
Wherefore, reversing the decision appealed from, we hereby order the company to pay
petitioner-appellant the amount of P2,000, with legal interest from January 26, 1951 until
fully paid, with costs.

G.R. No. L-25579 March 29, 1972


EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN
and GRACIA T. BIAGTAN,plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.
Tanopo, Millora, Serafica, and Saez for plaintiff-appellees.
Araneta, Mendoza and Papa for defendant-appellant.

MAKALINTAL, J.:p
This is an appeal from the decision of the Court of First Instance of Pangasinan in its Civil
Case No. D-1700.
The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife
Assurance Company under Policy No. 398075 for the sum of P5,000.00 and, under a
supplementary contract denominated "Accidental Death Benefit Clause, for an additional
sum of P5,000.00 if "the death of the Insured resulted directly from bodily injury effected
solely through external and violent means sustained in an accident ... and independently
of all other causes." The clause, however,expressly provided that it would not apply
where death resulted from an injury"intentionally inflicted by another party."
On the night of May 20, 1964, or during the first hours of the following day a band of
robbers entered the house of the insured Juan S. Biagtan. What happened then is related
in the decision of the trial court as follows:
...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said
life policy and supplementary contract were in full force and effect, the house of insured
Juan S. Biagtan was robbed by a band of robbers who were charged in and convicted by
the Court of First Instance of Pangasinan for robbery with homicide; that in committing
the robbery, the robbers, on reaching the staircase landing on the second floor, rushed
towards the door of the second floor room, where they suddenly met a person near the
door of oneof the rooms who turned out to be the insured Juan S. Biagtan who received
thrusts from their sharp-pointed instruments, causing wounds on the body of said Juan S.
Biagtan resulting in his death at about 7 a.m. on the same day, May 21, 1964;
Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance
company paid the basic amount of P5,000.00 but refused to pay the additional sum of
P5,000.00 under the accidental death benefit clause, on the ground that the insured's
death resulted from injuries intentionally inflicted by third parties and therefore was not

covered. Plaintiffs filed suit to recover, and after due hearing the court a quo rendered
judgment in their favor. Hence the present appeal by the insurer.
The only issue here is whether under the facts are stipulated and found by the trial court
the wounds received by the insured at the hands of the robbers nine in all, five of
them mortal and four non-mortal were inflicted intentionally. The court, in ruling
negatively on the issue, stated that since the parties presented no evidence and
submitted the case upon stipulation, there was no "proof that the act of receiving thrust
(sic) from the sharp-pointed instrument of the robbers was intended to inflict injuries
upon the person of the insured or any other person or merely to scare away any person
so as to ward off any resistance or obstacle that might be offered in the pursuit of their
main objective which was robbery."
The trial court committed a plain error in drawing the conclusion it did from the admitted
facts. Nine wounds were inflicted upon the deceased, all by means of thrusts with sharppointed instruments wielded by the robbers. This is a physical fact as to which there is no
dispute. So is the fact that five of those wounds caused the death of the insured.
Whether the robbers had the intent to kill or merely to scare the victim or to ward off any
defense he might offer, it cannot be denied that the act itself of inflicting the injuries was
intentional. It should be noted that the exception in the accidental benefit clause invoked
by the appellant does not speak of the purpose whether homicidal or not of a third
party in causing the injuries, but only of the fact that such injuries have been
"intentionally" inflicted this obviously to distinguish them from injuries which, although
received at the hands of a third party, are purely accidental. This construction is the
basic idea expressed in the coverage of the clause itself, namely, that "the death of the
insured resulted directly from bodily injury effected solely through external and violent
means sustained in an accident ... and independently of all other causes." A gun which
discharges while being cleaned and kills a bystander; a hunter who shoots at his prey
and hits a person instead; an athlete in a competitive game involving physical effort who
collides with an opponent and fatally injures him as a result: these are instances where
the infliction of the injury is unintentional and therefore would be within the coverage of
an accidental death benefit clause such as thatin question in this case. But where a gang
of robbers enter a house and coming face to face with the owner, even if unexpectedly,
stab him repeatedly, it is contrary to all reason and logic to say that his injuries are not
intentionally inflicted, regardless of whether they prove fatal or not. As it was, in the
present case they did prove fatal, and the robbers have been accused and convicted of
the crime of robbery with homicide.
The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in
support of its decision. The facts in that case, however, are different from those
obtaining here. The insured there was a watchman in a certain company, who happened
to be invited by a policeman to come along as the latter was on his way to investigate a
reported robbery going on in a private house. As the two of them, together with the
owner of the house, approached and stood in front of the main gate, a shot was fired and
it turned out afterwards that the watchman was hit in the abdomen, the wound causing

his death. Under those circumstances this Court held that it could not be said that the
killing was intentional for there was the possibility that the malefactor had fired the shot
to scare people around for his own protection and not necessarrily to kill or hit the victim.
A similar possibility is clearly ruled out by the facts in the case now before Us. For while a
single shot fired from a distance, and by a person who was not even seen aiming at the
victim, could indeed have been fired without intent to kill or injure, nine wounds inflicted
with bladed weapons at close range cannot conceivably be considered as innocent
insofar as such intent is concerned. The manner of execution of the crime permits no
other conclusion.
Court decisions in the American jurisdiction, where similar provisions in accidental death
benefit clauses in insurance policies have been construed, may shed light on the issue
before Us. Thus, it has been held that "intentional" as used in an accident policy
excepting intentional injuries inflicted by the insured or any other person, etc., implies
the exercise of the reasoning faculties, consciousness and volition. 1 Where a provision of
the policy excludes intentional injury, it is the intention of the person inflicting the injury
that is controlling. 2 If the injuries suffered by the insured clearly resulted from the
intentional act of a third person the insurer is relieved from liability as stipulated. 3
In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am. St.
Rep. 484, the insured was waylaid and assassinated for the purpose of robbery. Two (2)
defenses were interposed to the action to recover indemnity, namely: (1) that the
insured having been killed by intentional means, his death was not accidental, and (2)
that the proviso in the policy expressly exempted the insurer from liability in case the
insured died from injuries intentionally inflicted by another person. In rendering
judgment for the insurance company the Court held that while the assassination of the
insured was as to him an unforeseen event and therefore accidental, "the clause of the
proviso that excludes the (insurer's) liability, in case death or injury is intentionally
inflicted by another person, applies to this case."
In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the
insured was shot three times by a person unknown late on a dark and stormy night,
while working in the coal shed of a railroad company. The policy did not cover death
resulting from "intentional injuries inflicted by the insured or any other person." The
inquiry was as to the question whether the shooting that caused the insured's death was
accidental or intentional; and the Court found that under the facts, showing that the
murderer knew his victim and that he fired with intent to kill, there could be no recovery
under the policy which excepted death from intentional injuries inflicted by any person.
WHEREFORE, the decision appealed from is reversed and the complaint dismissed,
without pronouncement as to costs.

G.R. No. 100970 September 2, 1992


FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.
Aquino and Associates for petitioner.
Public Attorney's Office for private respondent.

NOCON, J.:
This is a petition for certiorari with a prayer for the issuance of a restraining order and
preliminary mandatory injunction to annul and set aside the decision of the Court of
Appeals dated July 11, 1991, 1 affirming the decision dated March 20, 1990 of the
Insurance Commission 2 in ordering petitioner Finman General Assurance Corporation to
pay private respondent Julia Surposa the proceeds of the personal accident Insurance
policy with interest.
It appears on record that on October 22, 1986, deceased, Carlie Surposa was insured
with petitioner Finman General Assurance Corporation under Finman General Teachers
Protection Plan Master Policy No. 2005 and Individual Policy No. 08924 with his parents,
spouses Julia and Carlos Surposa, and brothers Christopher, Charles, Chester and Clifton,
all surnamed, Surposa, as beneficiaries. 3
While said insurance policy was in full force and effect, the insured, Carlie Surposa, died
on October 18, 1988 as a result of a stab wound inflicted by one of the three (3)
unidentified men without provocation and warning on the part of the former as he and
his cousin, Winston Surposa, were waiting for a ride on their way home along Rizal-Locsin
Streets, Bacolod City after attending the celebration of the "Maskarra Annual Festival."
Thereafter, private respondent and the other beneficiaries of said insurance policy filed a
written notice of claim with the petitioner insurance company which denied said claim
contending that murder and assault are not within the scope of the coverage of the
insurance policy.
On February 24, 1989, private respondent filed a complaint with the Insurance
Commission which subsequently rendered a decision, the pertinent portion of which
reads:
In the light of the foregoing. we find respondent liable to pay complainant the sum of
P15,000.00 representing the proceeds of the policy with interest. As no evidence was

submitted to prove the claim for mortuary aid in the sum of P1,000.00, the same cannot
be entertained.
WHEREFORE, judgment is hereby rendered ordering respondent to pay complainant the
sum of P15,000.00 with legal interest from the date of the filing of the complaint until
fully satisfied. With costs. 4
On July 11, 1991, the appellate court affirmed said decision.
Hence, petitioner filed this petition alleging grove abuse of discretion on the part of the
appellate court in applying the principle of "expresso unius exclusio alterius" in a
personal accident insurance policy since death resulting from murder and/or assault are
impliedly excluded in said insurance policy considering that the cause of death of the
insured was not accidental but rather a deliberate and intentional act of the assailant in
killing the former as indicated by the location of the lone stab wound on the insured.
Therefore, said death was committed with deliberate intent which, by the very nature of
a personal accident insurance policy, cannot be indemnified.
We do not agree.
The terms "accident" and "accidental" as used in insurance contracts have not acquired
any technical meaning, and are construed by the courts in their ordinary and common
acceptation. Thus, the terms have been taken to mean that which happen by chance or
fortuitously, without intention and design, and which is unexpected, unusual, and
unforeseen. An accident is an event that takes place without one's foresight or
expectation an event that proceeds from an unknown cause, or is an unusual effect of
a known cause and, therefore, not expected.
. . . The generally accepted rule is that, death or injury does not result from accident or
accidental means within the terms of an accident-policy if it is the natural result of the
insured's voluntary act, unaccompanied by anything unforeseen except the death or
injury. There is no accident when a deliberate act is performed unless some additional,
unexpected, independent, and unforeseen happening occurs which produces or brings
about the result of injury or death. In other words, where the death or injury is not the
natural or probable result of the insured's voluntary act, or if something unforeseen
occurs in the doing of the act which produces the injury, the resulting death is within the
protection of the policies insuring against death or injury from accident. 5
As correctly pointed out by the respondent appellate court in its decision:
In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an
assault or murder as a result of his voluntary act considering the very nature of these
crimes. In the first place, the insured and his companion were on their way home from
attending a festival. They were confronted by unidentified persons. The record is barren
of any circumstance showing how the stab wound was inflicted. Nor can it be pretended

that the malefactor aimed at the insured precisely because the killer wanted to take his
life. In any event, while the act may not exempt the unknown perpetrator from criminal
liability, the fact remains that the happening was a pure accident on the part of the
victim. The insured died from an event that took place without his foresight or
expectation, an event that proceeded from an unusual effect of a known cause and,
therefore, not expected. Neither can it be said that where was a capricious desire on the
part of the accused to expose his life to danger considering that he was just going home
after attending a festival. 6
Furthermore, the personal accident insurance policy involved herein specifically
enumerated only ten (10) circumstances wherein no liability attaches to petitioner
insurance company for any injury, disability or loss suffered by the insured as a result of
any of the stimulated causes. The principle of " expresso unius exclusio alterius" the
mention of one thing implies the exclusion of another thing is therefore applicable in
the instant case since murder and assault, not having been expressly included in the
enumeration of the circumstances that would negate liability in said insurance policy
cannot be considered by implication to discharge the petitioner insurance company from
liability for, any injury, disability or loss suffered by the insured. Thus, the failure of the
petitioner insurance company to include death resulting from murder or assault among
the prohibited risks leads inevitably to the conclusion that it did not intend to limit or
exempt itself from liability for such death.
Article 1377 of the Civil Code of the Philippines provides that:
The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
Moreover,
it is well settled that contracts of insurance are to be construed liberally in favor of the
insured and strictly against the insurer. Thus ambiguity in the words of an insurance
contract should be interpreted in favor of its beneficiary. 7
WHEREFORE, finding no irreversible error in the decision of the respondent Court of
Appeals, the petition forcertiorari with restraining order and preliminary injunction is
hereby DENIED for lack of merit.

4
FIRST DIVISION
[G.R. No. 85296. May 14, 1990.]
ZENITH INSURANCE CORPORATION, petitioner, vs. COURT OF
APPEALS and LAWRENCE FERNANDEZ, respondents.

DECISION

MEDIALDEA, J p:
Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V.
No. 13498 entitled, "Lawrence L. Fernandez, plaintiff-appellee v. Zenith Insurance
Corp., defendant-appellant" which affirmed in toto the decision of the Regional Trial
Court of Cebu, Branch XX in Civil Case No. CEB-1215 and the denial of petitioner's
Motion for Reconsideration.
The antecedent facts are as follows: LibLex
On January 25, 1983, private respondent Lawrence Fernandez insured his car
for "own damage" under private car Policy No. 50459 with petitioner Zenith Insurance
Corporation. On July 6, 1983, the car figured in an accident and suffered actual
damages in the amount of P3,640.00. After allegedly being given a run around by
Zenith for two (2) months, Fernandez filed a complaint with the Regional Trial Court of
Cebu for sum of money and damages resulting from the refusal of Zenith to pay the
amount claimed. The complaint was docketed as Civil Case No. CEB-1215. Aside from
actual damages and interests, Fernandez also prayed for more damages in the
amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees of
P3,000.00 and litigation expenses of P3,000.00.
On September 28, 1983, Zenith filed an answer alleging that it offered to pay
the claim of Fernandez pursuant to the terms and conditions of the contract which,
the private respondent rejected. After the issues had been joined, the pre-trial was
scheduled on October 17, 1983 but the same was moved to November 4, 1983 upon
petitioner's motion, allegedly to explore ways to settle the case although at an
amount lower than private respondent's claim. On November 14, 1983, the trial court
terminated the pre-trial. Subsequently, Fernandez presented his evidence. Petitioner
Zenith, however, failed to present its evidence in new of its failure to appear in court,
without justifiable reason, on the day scheduled for the purpose. The trial court
issued an order on August 23, 1984 submitting the case for decision without Zenith's
evidence (pp. 10-11, Rollo). Petitioner filed a petition for certiorari with the Court of
Appeals assailing the order of the trial court submitting the case for decision without
petitioner's evidence. The petition was docketed as C.A.-G.R. No. 04644. However,
the petition was denied due course on April 29, 1986 (p. 56, Rollo).
On June 4, 1986, a decision was rendered by the trial court in favor of private
respondent Fernandez. The dispositive portion of the trial court's decision provides:
"WHEREFORE, defendant is hereby ordered to pay to the
plaintiff:.

1.The amount of P3,640.00 representing the damage incurred


plus interest at the rate of twice the prevailing interest rates;
2.The amount of P20,000.00 by way of moral damages;
3.The amount of P20,000.00 by way of exemplary damages;
4.The amount of P5,000.00 as attorney's fees;
5.The amount of P3,000.00 as litigation expenses; and
6.Costs." (p. 9, Rollo)
Upon motion of Fernandez and before the expiration of the period to appeal,
the trial court, on June 20, 1986, ordered the execution of the decision pending
appeal. The order was assailed by petitioner in a petition for certiorari with the Court
of Appeals on October 23, 1986 in C.A. G.R No. 10420 but which petition was also
dismissed on December 24, 1986 (p. 69, Rollo). LLjur
On June 10, 1986, petitioner filed a notice of appeal before the trial court. The
notice of appeal was granted in the same order granting private respondent's motion
for execution pending appeal. The appeal to respondent court assigned the following
errors:
"I.The lower court erred in denying defendant appellant to
adduce evidence in its behalf.
II.The lower court erred in ordering Zenith Insurance Corporation
to pay the amount of P3,640.00 in its decision.
III.The lower court erred in awarding moral damages, attorney's
fees and exemplary damages, the worst is that, the court awarded
damages more than what are prayed for in the complaint." (p. 12,
Rollo)
On August 17, 1988, the Court of Appeals rendered its decision affirming in toto
the decision of the trial court. It also ruled that the matter of the trial court's denial of
Fernandez's right to adduce evidence is a closed matter in view of its (CA) ruling in
AC-G.R. 04644 wherein Zenith's petition questioning the trial court's order submitting
the case for decision without Zenith's evidence, was dismissed.
The Motion for Reconsideration of the decision of the Court of Appeals dated
August 17, 1988 was denied on September 29, 1988, for lack of merit. Hence, the
instant petition was filed by Zenith on October 18, 1988 on the allegation that
respondent Court of Appeals' decision and resolution ran counter to applicable
decisions of this Court and that they were rendered without or in excess of
jurisdiction. The issues raised by petitioners in this petition are:
a)The legal basis of respondent Court of Appeals in awarding
moral damages, exemplary damages and attorney's fees in an amount
more than that prayed for in the complaint.
b)The award of actual damages of P3,460.00 instead of only
P1,927.50 which was arrived at after deducting P250.00 and P274.00
as deductible franchise and 20% depreciation on parts as agreed upon
in the contract of insurance.
Petitioner contends that while the complaint of private respondent prayed for
P10,000.00 moral damages, the lower court awarded twice the amount, or
P20,000.00 without factual or legal basis; while private respondent prayed for

P5,000.00 exemplary damages, the trial court awarded P20,000.00; and while private
respondent prayed for P3,000.00 attorney's fees, the trial court awarded P5,000.00.
The propriety of the award of moral damages, exemplary damages and
attorney's fees is the main issue raised herein by petitioner.
The award of damages in case of unreasonable delay in the payment of
insurance claims is governed by the Philippine Insurance Code, which provides:
"SEC. 244.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 considered prima facie
evidence of unreasonable delay in payment."
It is clear that under the Insurance Code, in case of unreasonable delay in the
payment of the proceeds of an insurance policy, the damages that may be awarded
are: 1) attorney's fees; 2) other expenses incurred by the insured person by reason of
such unreasonable denial or withholding of payment; 3) interest at twice the ceiling
prescribed by the Monetary Board of the amount of the claim due the injured; and 4)
the amount of the claim.
As regards the award of moral and exemplary damages, the rules under the
Civil Code of the Philippines shall govern. prLL
"The purpose of moral damages is essentially indemnity or reparation, not
punishment or correction. Moral damages are emphatically not intended to enrich a
complainant at the expense of a defendant, they are awarded only to enable the
injured party to obtain means, diversions or amusements that will serve to
alleviate the moral suffering he has undergone by reason of the defendant's
culpable action." (J. Cezar S. Sangco, Philippine Law on Torts and Damages, Revised
Edition, p. 539) (See also R and B Surety & Insurance Co., Inc. v. IAC, G.R. No. 64515,
June 22, 1984; 129 SCRA 745). While it is true that no proof of pecuniary loss is
necessary in order that moral damages may be adjudicated, the assessment of which
is left to the discretion of the court according to the circumstances of each case (Art.
2216, New Civil Code), it is equally true that in awarding moral damages in case of
breach of contract, there must be a showing that the breach was wanton and
deliberately injurious or the one responsible acted fraudently or in bad faith (Perez v.
Court of Appeals, G.R. No. L-20238, January 30, 1965; 13 SCRA 137; Solis v. Salvador,
G.R. No. L-17022, August 14, 1965; 14 SCRA 887). In the instant case, there was a
finding that private respondent was given a "run-around" for two months, which is
the basis for the award of the damages granted under the Insurance Code for
unreasonable delay in the payment of the claim. However, the act of petitioner of
delaying payment for two months cannot be considered as so wanton or malevolent
to justify an award of P20,000.00 as moral damages, taking into consideration also

the fact that the actual damage on the car was only P3,460. In the pre-trial of the
case, it was shown that there was no total disclaimer by respondent. The reason for
petitioner's failure to indemnify private respondent within the two-month period was
that the parties could not come to an agreement as regards the amount of the actual
damage on the car. The amount of P10,000.00 prayed for by private respondent as
moral damages is equitable.
On the other hand, exemplary or corrective damages are imposed by way of
example or correction for the public good (Art. 2229, New Civil Code of the
Philippines). In the case of Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22, 1987; 151
SCRA 227, exemplary damages were not awarded as the insurance company had not
acted in wanton, oppressive or malevolent manner. The same is true in the case at
bar.
The amount of P5,000.00 awarded as attorney's fees is justified under the
circumstances of this case considering that there were other petitions filed and
defended by private respondent in connection with this case.
As regards the actual damages incurred by private respondent, the amount of
P3,640.00 had been established before the trial court and affirmed by the appellate
court. Respondent appellate court correctly ruled that the deductions of P250.00 and
P274.00 as deductible franchise and 20% depreciation on parts, respectively claimed
by petitioners as agreed upon in the contract, had no basis. Respondent court ruled:
"Under its second assigned error, defendant-appellant puts
forward two arguments, both of which are entirely without merit. It is
contented that the amount recoverable under the insurance policy
defendant-appellant issued over the car of plaintiff-appellee is subject
to deductible franchise, and . . .
"The policy (Exhibit G, pp. 4-9, Record), does not mention any
deductible franchise, . . ." (p. 13, Rollo)
Therefore, the award of moral damages is reduced to P10,000.00 and the
award of exemplary damages is hereby deleted. The awards due to private
respondent Fernandez are as follows: LLphil
1)P3,640.00 as actual claim plus interest of twice the ceiling
prescribed by the Monetary Board computed from the time of
submission of proof of loss;
2)P10,000.00 as moral damages;
3)P5,000.00 as attorney's fees;
4)P3,000.00 as litigation expenses and
5)Costs
ACCORDINGLY, the appealed decision is MODIFIED as above stated.
SO ORDERED.
Narvasa, Cruz and Grio-Aquino, JJ., concur.
Gancayco, J., is on leave.
||| (Zenith Insurance Corp. v. Court of Appeals, G.R. No. 85296, May 14, 1990)

5
FIRST DIVISION
[G.R. No. 92383. July 17, 1992.]
SUN INSURANCE OFFICE, LTD., petitioner, vs. THE HON. COURT OF
APPEALS and NERISSA LIM, respondents.

DECISION

CRUZ, J p:
The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value
of P200,000.00. Two months later, he was dead with a bullet wound in his head. As
beneficiary, his wife Nerissa Lim sought payment on the policy but her claim was
rejected. The petitioner agreed that there was no suicide. It argued, however, that there
was no accident either.
Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on
October 6, 1982, at about 10 o'clock in the evening, after his mother's birthday party.
According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with his
handgun, from which he had previously removed the magazine. As she watched the
television, he stood in front of her and pointed the gun at her. She pushed it aside and
said it might be loaded. He assured her it was not and then pointed it to his temple. The
next moment there was an explosion and Lim slumped to the floor. He was dead before
he fell. 1
The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was
sustained. 2 The petitioner was sentenced to pay her P200,000.00, representing the face
value of the policy, with interest at the legal rate; P10,000.00 as moral damages;
P5,000.00 as exemplary damages; P50,000.00 as actual and compensatory damages;
and P5,000.00 as attorney's fees, plus the cost of the suit. This decision was affirmed on
appeal, and the motion for reconsideration was denied. 3 The petitioner then came to
this Court of Appeals for approving the payment of the claim and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical
signification in law, and when used in an insurance contract are to be
construed and considered according to the ordinary understanding and
common usage and speech of people generally. In substance, the courts
are practically agreed that the words "accident" and "accidental" mean that
which happens by change or fortuitously, without intention or design, and
which is unexpected, unusual, and unforeseen. The definition that has
usually been adopted by the courts is that an accident is an event that
takes place without one's foresight or expectation an event that

proceeds from an unknown cause, or is an unusual effect of a known case,


and therefore not expected. 4
An accident is an event which happens without any human agency or, if
happening through human agency, an event which, under the
circumstances, is unusual to and not expected by the person to whom it
happens. It has also been defined as an injury which happens by reason of
some violence or casualty to the insured without his design, consent, or
voluntary co-operation. 5
In light of these definitions, the Court is convinced that the incident that resulted in Lim's
death was indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital
Insurance, 6 says that "there is no accident when a deliberate act is performed unless
some additional, unexpected, independent and unforeseen happening occurs which
produces or brings about their injury or death." There was such a happening. This was
the firing of the gun, which was the additional unexpected and independent and
unforeseen occurrence that led to the insured person's death. LibLex
The petitioner also cites one of the four exceptions provided for in the insurance contract
and contends that the private petitioner's claim is barred by such provision. It is there
stated:
Exceptions
The company shall not be liable in respect of.
1.Bodily injury.
xxx xxx xxx
b.consequent upon.
i)The insured persons attempting to commit suicide or wilfully exposing
himself to needless peril except in an attempt to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner
contends that the insured willfully exposed himself to needless peril and thus removed
himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril are in
pari materia because they both signify a disregard for one's life. The only difference is in
degree, as suicide imports a positive act of ending such life whereas the second act
indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person
who walks a tightrope one thousand meters above the ground and without any safety
device may not actually be intending to commit suicide, but his act is nonetheless
suicidal. He would thus be considered as "willfully exposing himself to needless peril"
within the meaning of the exception in question.

The petitioner maintains that by the mere act of pointing the gun to his temple, Lim had
willfully exposed himself to needless peril and so came under the exception. The theory
is that a gun is per se dangerous and should therefore be handled cautiously in every
case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had
removed the magazine from the gun and believed it was no longer dangerous. He
expressly assured her that the gun was not loaded. It is submitted that Lim did not
willfully expose himself to needless peril when he pointed the gun to his temple because
the fact is that he thought it was not unsafe to do so. The act was precisely intended to
assure Nalagon that the gun was indeed harmless. LLphil
The contrary view is expressed by the petitioner thus:
Accident insurance polices were never intended to reward the insured for
his tendency to show off or for his miscalculations. They were intended to
provide for contingencies. Hence, when I miscalculate and jump from the
Quezon Bridge into the Pasig River in the belief that I can overcome the
current, I have wilfully exposed myself to peril and must accept the
consequences of my act. If I drown I cannot go to the insurance
company to ask them to compensate me for my failure to swim as
well as I thought I could. The insured in the case at bar deliberately put
the gun to his head and pulled the trigger. He wilfully exposed himself to
peril.
The Court certainly agrees that a drowned man cannot go to the insurance
company to ask for compensation. That might frighten the insurance people to
death. We also agree that under the circumstances narrated, his beneficiary would not
be able to collect on the insurance policy for it is clear that when he braved the currents
below, he deliberately exposed himself to a known peril.
The private respondent maintains that Lim did not. That is where she says the analogy
fails. The petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge
that the currents below were dangerous. By contrast, Lim did not know that the gun he
put to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it
should not prevent his widow from recovering from the insurance policy he obtained
precisely against accident. There is nothing in the policy that relieves the insurer of the
responsibility to pay the indemnity agreed upon if the insured is shown to have
contributed to his own accident. Indeed, most accidents are caused by negligence.
There are only four exceptions expressly made in the contract to relieve the insurer from
liability, and none of these exceptions is applicable in the case at bar. *
It bears noting that insurance contracts are as a rule supposed to be interpreted liberally
in favor of the assured. There is no reason to deviate from this rule, especially in view of
the circumstances of this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the petitioner.
The basic issue raised in this case is, as the petitioner correctly observed, one of first
impression. It is evident that the petitioner was acting in good faith when it resisted the

private respondent's claim on the ground that the death of the insured was covered by
the exception. The issue was indeed debatable and was clearly not raised only for the
purpose of evading a legitimate obligation. We hold therefore that the award of moral
and exemplary damages and of attorney's fees is unjust and so must be disapproved.
In order that a person may be made liable to the payment of moral
damages, the law requires that his act be wrongful. The adverse result of
an action does not per se make the act wrongful and subject the act or to
the payment of moral damages. The law could not have meant to impose a
penalty on the right to litigate; such right is so precious that moral
damages may not be charged on those who may exercise it erroneously.
For these the law taxes costs. 7
The fact that the results of the trial were adverse to Barreto did not alone
make his act in bringing the action wrongful because in most cases one
party will lose; we would be imposing an unjust condition or limitation on
the right to litigate. We hold that the award of moral damages in the case
at bar is not justified by the facts and circumstances, as well as the law.
cdphil
If a party wins, he cannot, as a rule, recover attorney's fees and litigation
expenses, since it is not the fact of winning alone that entitles him to
recover such damages of the exceptional circumstances enumerated in Art.
2208. Otherwise, every time a defendant wins, automatically the plaintiff
must pay attorney's fees thereby putting premium on the right to litigate
which should not be so. For those expenses, the law deems the award of
costs as sufficient. 8
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED insofar as it
holds the petitioner liable to the private respondent in the sum of P200,000.00
representing the face value of the insurance contract, with interest at the legal rate from
the date of the filing of the complaint until the full amount is paid, but MODIFIED with the
deletion of all awards for damages, including attorney's fees, except the costs of the suit.
SO ORDERED.
Grio-Aquino, Medialdea and Bellosillo, JJ ., concur.

6
FIRST DIVISION
[G.R. No. L-54171. October 28, 1980.]
JEWEL VILLACORTA, assisted by her husband, GUERRERO
VILLACORTA, petitioner, vs. THE INSURANCE COMMISSION and
EMPIRE INSURANCE COMPANY, respondents.

DECISION

TEEHANKEE, Acting C.J p:


The Court sets aside respondent Insurance Commission's dismissal of petitioner's
complaint and holds that where the insured's car is wrongfully taken without the
insured's consent from the car service and repair shop to whom it had been entrusted for
check-up and repairs (assuming that such taking was for a joy ride, in the course of
which it was totally smashed in an accident), respondent insurer is liable and must pay
insured for the total loss of the insured vehicle under the theft clause of the policy. cdtai
The undisputed facts of the case as found in the appealed decision of April 14, 1980 of
respondent insurance commission are as follows:
"Complainant (petitioner) was the owner of a Colt Lancer, Model 1976,
insured with respondent company under Private Car Policy No. MBI/PC-0704
for P35,000.00 Own Damage; P30,000.00 Theft; and P30,000.00
Third Party Liability, effective May 16, 1977 to May 16, 1978. On May 9,
1978, the vehicle was brought to the Sunday Machine Works, Inc., for
general check-up and repairs. On May 11, 1978, while it was in the custody
of the Sunday Machine Works, the car was allegedly taken by six (6)
persons and driven out to Montalban, Rizal. While travelling along Mabini
St., Sitio Palyasan, Barrio Burgos, going North at Montalban, Rizal, the car
figured in an accident, hitting and bumping a gravel and sand truck parked
at the right side of the road going south. As a consequence, the gravel and
sand truck veered to the right side of the pavement going south and the
car veered to the right side of the pavement going north. The driver, Benito
Mabasa, and one of the passengers died and the other four sustained
physical injuries. The car, as well, suffered extensive damage. Complainant,
thereafter, filed a claim for total loss with the respondent company but
claim was denied. Hence, complainant was compelled to institute the
present action."
The comprehensive motor car insurance policy for P35,000.00 issued by respondent
Empire Insurance Company admittedly undertook to indemnify the petitioner-insured
against loss or damage to the car (a) by accidental collision or overturning, or collision or
overturning consequent upon mechanical breakdown or consequent upon wear and tear;

(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or


theft; and (c) by malicious act. LLjur
Respondent insurance commission, however, dismissed petitioner's complaint for
recovery of the total loss of the vehicle against private respondent, sustaining
respondent insurer's contention that the accident did not fall within the provisions of the
policy either for the Own Damage or Theft coverage, invoking the policy provision on
"Authorized Driver" clause. 1
Respondent commission upheld private respondent's contention on the
"Authorized Driver" clause in this wise: "It must be observed that under the abovequoted provisions, the policy limits the use of the insured vehicle to two (2) persons only,
namely: the insured himself or any person on his (insured's) permission. Under the
second category, it is to be noted that the words "any person' is qualified by the phrase
". . . on the insured's order or with his permission.' It is therefore clear that if the person
driving is other than the insured, he must have been duly authorized by the insured, to
drive the vehicle to make the Insurance company liable for the driver's negligence.
Complainant admitted that she did not know the person who drove her vehicle at the
time of the accident, much less consented to the use of the same (par. 5 of the
complaint). Her husband likewise admitted that he neither knew this driver Benito
Mabasa (Exhibit '4'). With these declarations of complainant and her husband, we hold
that the person who drove the vehicle, in the person of Benito Mabasa, is not an
authorized driver of the complainant. Apparently, this is a violation of the 'Authorized
Driver' clause of the policy."
Respondent commission likewise upheld private respondent's assertion that the car was
not stolen and therefore not covered by the Theft clause, ruling that "(T)he element of
'taking' in Article 308 of the Revised Penal Code means that the act of depriving another
of the possession and dominion of a movable thing is coupled . . . with the intention, at
the time of the 'taking', of withholding it with the character of permanency (People vs.
Galang, 7 Appt. Ct. Rep. 13). In other words, there must have been shown a felonious
intent upon the part of the taker of the car, and the intent must be an intent
permanently to deprive the insured of his car," and that "(S)uch was not the case in this
instance. The fact that the car was taken by one of the residents of the Sunday Machine
Works, and the withholding of the same, for a joy ride should not be construed to mean
'taking' under Art. 308 of the Revised Penal Code. If at all there was a 'taking', the same
was merely temporary in nature. A temporary taking is held not a taking insured against
(48 ALR 2d., page 15)."
The Court finds respondent commission's dismissal of the complaint to be contrary to the
evidence and the law.
First, respondent commission's ruling that the person who drove the vehicle in the
person of Benito Mabasa, who, according to its own finding, was one of the residents of
the Sunday Machine Works, Inc. to whom the car had been entrusted for general checkup and repairs was not an "authorized driver" of petitioner-complainant is too restrictive
and contrary to the established principle that insurance contracts, being contracts of
adhesion where the only participation of the other party is the signing of his signature or
his "adhesion" thereto, "obviously call for greater strictness and vigilance on the part of
courts of justice with a view of protecting the weaker party from abuse and imposition,
and prevent their becoming traps for the unwary." 2

The main purpose of the "authorized driver" clause, as may be seen from its text, supra,
is that a person other than the insured owner, who drives the car on the insured's order,
such as his regular driver, or with his permission, such as a friend or member of the
family or the employees of a car service or repair shop must be duly licensed drivers and
have no disqualification to drive a motor vehicle.
A car owner who entrusts his car to an established car service and repair shop
necessarily entrusts his car key to the shop owner and employees who are presumed to
have the insured's permission to drive the car for legitimate purposes of checking or
road-testing the car. The mere happenstance that the employee(s) of the shop owner
diverts the use of the car to his own illicit or unauthorized purpose in violation of the
trust reposed in the shop by the insured car owner does not mean that the "authorized
driver" clause has been violated such as to bar recovery, provided that such employee is
duly qualified to drive under a valid driver's license.
The situation is no different from the regular or family driver, who instead of carrying out
the owner's order to fetch the children from school takes out his girl friend instead for a
joy ride and instead wrecks the car. There is no question of his being an "authorized
driver" which allows recovery of the loss although his trip was for a personal or illicit
purpose without the owner's authorization. cdll
Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is
the theft clause, not the "authorized driver" clause, that applies), where a car is
admittedly as in this case unlawfully and wrongfully taken by some people, be they
employees of the car shop or not to whom it had been entrusted, and taken on a long
trip to Montalban without the owner's consent or knowledge, such taking constitutes or
partakes of the nature of theft as defined in Article 308 of the Revised Penal Code, viz.
"(W)ho are liable for theft. Theft is committed by any person who, with intent to gain
but without violence against or intimidation of persons nor force upon things, shall take
personal property of another without the latter's consent," for purposes of recovering the
loss under the policy in question.
The Court rejects respondent commission's premise that there must be an intent on the
part of the taker of the car "permanently to deprive the insured of his car" and that since
the taking here was for a "joy ride" and "merely temporary in nature," a "temporary
taking is held not a taking insured against."
The evidence does not warrant respondent commission's findings that it was a mere "joy
ride". From the very investigator's report cited in its comment, 3 the police found from
the waist of the car driver Benito Mabasa y Bartolome who smashed the car and was
found dead right after the incident "one Cal. 45 Colt. and one apple type grenade,"
hardly the materials one would bring along on a "joy ride". Then, again, it is equally
evident that the taking proved to be quite permanent rather than temporary, for the car
was totally smashed in the fatal accident and was never returned in serviceable and
useful condition to petitioner-owner.
Assuming, despite the totally inadequate evidence, that the taking was "temporary" and
for a "joy ride", the Court sustains as the better view that which holds that when a
person, either with the object of going to a certain place, or learning how to
drive, or enjoying a free ride, takes possession of a vehicle belonging to
another, without the consent of its owner, he is guilty of theft because by

taking possession of the personal property belonging to another and using it,
his intent to gain is evident since he derives therefrom utility, satisfaction,
enjoyment and pleasure. Justice Ramon C. Aquino cites in his work Groizard
who holds that the use of a thing constitutes gain and Cuello Calon who calls it
"hurt de uso." 4

The insurer must therefore indemnify the petitioner owner for the total loss of the
insured car in the sum of P35,000.00 under the theft clause of the policy, subject to the
filing of such claim for reimbursement or payment as it may have as subrogee against
the Sunday Machine Works, Inc. prLL
ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered
sentencing private respondent to pay petitioner the sum of P35,000.00 with legal
interest from the filing of the complaint until full payment is made and to pay the costs
of suit.
SO ORDERED.
Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.
|||

7
FIRST DIVISION
[G.R. No. L-36480. May 31, 1988.]
ANDREW PALERMO, plaintiff-appellee, vs. PYRAMID INSURANCE CO., INC.,
defendant-appellant.

DECISION

GRIO-AQUINO, J p:
The Court of Appeals certified this case to Us for proper disposition as the only question
involved is the interpretation of the provision of the insurance contract regarding the
"authorized driver" of the insured motor vehicle.
On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the Court
of First Instance of Negros Occidental against Pyramid Insurance Co., Inc., for payment of
his claim under a Private Car Comprehensive Policy MV-1251 issued by the defendant
(Exh. A).
In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it disallowed the
claim because at the time of the accident, the insured was driving his car with an expired
driver's license.
After the trial, the court a quo rendered judgment on October 29, 1969 ordering the
defendant "to pay the plaintiff the sum of P20,000.00, value of the insurance of the
motor vehicle in question and to pay the costs. LexLib
"On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution Pending
Appeal." It was opposed by the defendant, but was granted by the trial court on
December 15, 1969.
The trial court found the following facts to be undisputed:
"On October 12, 1968, after having purchased a brand new Nissan Cedric
de Luxe Sedan car bearing Motor No. 087797 from the Ng Sam Bok Motors
Co. in Bacolod City, plaintiff insured the same with the defendant insurance
company against any loss or damage for P20,000.00 and against third
party liability for P10,000.00. Plaintiff paid the defendant P361.34 premium
for one year, March 12, 1968 to March 12, 1969, for which defendant issued
Private Car Comprehensive Policy No. MV-1251, marked Exhibit 'A.'
"The automobile was, however, mortgaged by the plaintiff with the vendor,
Ng Sam Bok Motors Co., to secure the payment of the balance of the
purchase price, which explains why the registration certificate in the name

of the plaintiff remains in the hands of the mortgagee, Ng Sam Bok Motors
Co.
"On April 17, 1968, while driving the automobile in question, the plaintiff
met a violent accident. The La Carlota City fire engine crashed head on,
and as a consequence, the plaintiff sustained physical injuries, his father,
Cesar Palermo, who was with him in the car at the time was likewise
seriously injured and died shortly thereafter, and the car in question was
totally wrecked.
"The defendant was immediately notified of the occurrence, and upon its
orders, the damaged car was towed from the scene of the accident to the
compound of Ng Sam Bok Motors in Bacolod City where it remains
deposited up to the present time.
"The insurance policy, Exhibit 'A,' grants an option unto the defendant, in
case of accident either to indemnify the plaintiff for loss or damage to the
car in cash or to replace the damaged car. The defendant, however, refused
to take either of the above-mentioned alternatives for the reason as
alleged, that the insured himself had violated the terms of the policy when
he drove the car in question with an expired driver's license." (Decision,
Oct. 29, 1969, p. 68, Record on Appeal.)
Appellant alleges that the trial court erred in interpreting the following provision of the
Private Car Comprehensive Policy MV-1251:
"AUTHORIZED DRIVER:
Any of the following:
(a)The Insured.
(b)Any person driving on the Insured's order or with his
permission. Provided that the person driving is permitted in
accordance with the licensing or other laws or regulations to drive the
Motor Vehicle and is not disqualified from driving such motor vehicle
by order of a Court of law or by reason of any enactment or
regulation in that behalf." (Exh. 'A.')
There is no merit in the appellant's allegation that the plaintiff was not authorized to
drive the insured motor vehicle because his driver's license had expired. The driver of
the insured motor vehicle at the time of the accident was the insured himself, hence an
"authorized driver" under the policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the
highway without a license or with an expired license, an infraction of the Motor Vehicle
Law on the part of the insured, is not a bar to recovery under the insurance contract. It
however renders him subject to the penal sanctions of the Motor Vehicle Law.
The requirement that the driver be "permitted. in accordance with the licensing or other
laws or regulations to drive the Motor Vehicle and is not disqualified from driving such

motor vehicle by order of a Court of Law or by reason of any enactment or regulation in


that behalf," applies only when the driver "is driving on the insured's order or with his
permission." It does not apply when the person driving is the insured himself.
This view may be inferred from the decision of this Court in Villacorta vs. Insurance
Commission, 100 SCRA 467, where it was held that: LLpr
"The main purpose of the 'authorized driver' clause, as may be seen from
its text, is that a person other than the insured owner, who drives the car
on the insured's order, such as his regular driver, or with his permission,
such as a friend or member of the family or the employees of a car service
or repair shop, must be duly licensed drivers and have no disqualification to
drive a motor vehicle.
In an American case, where the insured herself was personally operating her automobile
but without a license to operate it, her license having expired prior to the issuance of the
policy, the Supreme Court of Massachusetts was more explicit:
". . . Operating an automobile on a public highway without a license, which
act is a statutory crime is not precluded by public policy from enforcing a
policy indemnifying her against liability for bodily injuries inflicted by use of
the automobile." (Drew C. Drewfield McMahon vs. Hannah Pearlman, et al.,
242 Mass. 367, 136 N.E. 154, 23 A.L.R. 1467.)
WHEREFORE, the appealed decision is affirmed with costs against the defendantappellant.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

8
THIRD DIVISION
[G.R. No. 60506. August 6, 1992.]
FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M.
MASESAR, LEONILA M. MALLARI, GILDA ANTONIO and the minors
LEAH, LOPE, JR., and ELVIRA, all surnamed MAGLANA, herein
represented by their mother, FIGURACION VDA. DE MAGLANA,
petitioners, vs. HONORABLE FRANCISCO Z. CONSOLACION, Presiding
Judge of Davao City, Branch II, and AFISCO INSURANCE
CORPORATION, respondents.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE;
THIRD PARTY LIABILITY; INSURER DIRECTLY LIABLE TO THE INJURED. "[W]here an
insurance policy insures directly against liability, the insurer's liability accrues
immediately upon the occurrence of the injury or event upon which the liability depends,
and does not depend on the recovery of judgment by the injured party against the
insured. The underlying reason behind the third party liability (TPL) of the Compulsory
Motor Vehicle Liability Insurance is "to protect injured persons against the insolvency of
the insured who causes such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy. . . ." (Shafer vs. Judge, RTC of Olongapo City, Br.
75, G.R. No. 78848, Nov. 14, 1988, 167 SCRA 386, 391)
2.ID.; ID.; ID.; ID.; LIABILITY OF INSURER DISTINCT FROM LIABILITY OF THE INSURED
AGAINST THIRD PARTIES. We cannot agree that AFISCO is likewise solidarily liable with
Destrajo. In Malayan Insurance Co. v. Court of Appeals, (L-36413, September 26, 1988,
165 SCRA 536, 544), this Court had the opportunity to resolve the issue as to the nature
of the liability of the insurer and the insured vis-a-vis the third party injured in an
accident. We categorically ruled thus: "While it is true that where the insurance contract
provides for indemnity against liability to third persons, such third persons can directly
sue the insurer, however, the direct liability of the insurer under indemnity contracts
against third party liability does not mean that the insurer can be held solidarily liable
with the insured and/or the other parties found at fault. The liability of the insurer is
based on contract; that of the insured is based on tort. . . . For if petitioner-insurer were
solidarily liable with said two (2) respondents by reason of the indemnity contract
against third party liability under which an insurer can be directly sued by a third party
this will result in a violation of the principles underlying solidary obligation and
insurance contracts."
3.ID.; ID.; INSURANCE CONTRACTS DISTINGUISHED FROM ORDINARY CONTRACTS. The
Court distinguish the extent of the liability and manner of enforcing the same in ordinary
contracts from that of insurance contracts. While in solidary obligations, the creditor may
enforce the entire obligation against one of the solidary debtors, in an insurance
contract, the insurer undertakes for a consideration to indemnify the insured against
loss, damage or liability arising from an unknown or contingent event. Thus, petitioner
therein, which, under the insurance contract is liable only up to P20,000.00, can not be

made solidarily liable with the insured for the entire obligation of P29,013.00 otherwise
there would result "an evident breach of the concept of solidary obligation."

DECISION

ROMERO, J p:
The nature of the liability of an insurer sued together with the insured/operator-owner of
a common carrier which figured in an accident causing the death of a third person is
sought to be defined in this petition for certiorari.
The facts as found by the trial court are as follows:
" . . . . Lope Maglana was an employee of the Bureau of Customs whose
work station was at Lasa, here in Davao City. On December 20, 1978, early
morning, Lope Maglana was on his way to his work station, driving a
motorcycle owned by the Bureau of Customs. At Km. 7, Lanang, he met an
accident that resulted in his death. He died on the spot. The PUJ jeep that
bumped the deceased was driven by Pepito Into, operated and owned by
defendant Destrajo. From the investigation conducted by the traffic
investigator, the PUJ jeep was overtaking another passenger jeep that was
going towards the city poblacion. While overtaking, the PUJ jeep of
defendant Destrajo running abreast with the overtaken jeep, bumped the
motorcycle driven by the deceased who was going towards the direction of
Lasa, Davao City. The point of impact was on the lane of the motorcycle
and the deceased was thrown from the road and met his untimely death." 1
Consequently, the heirs of Lope Maglana, Sr., here petitioners, filed an action for
damages and attorney's fees against operator Patricio Destrajo and the Afisco Insurance
Corporation (AFISCO for brevity) before the then Court of First Instance of Davao, Branch
II. An information for homicide thru reckless imprudence was also filed against Pepito
Into. prcd
During the pendency of the civil case, Into was sentenced to suffer an indeterminate
penalty of one (1) year, eight (8) months and one (1) day of prision correccional, as
minimum, to four (4) years, nine (9) months and eleven (11) days of prision correccional,
as maximum, with all the accessory penalties provided by law, and to indemnify the
heirs of Lope Maglana, Sr. in the amount of twelve thousand pesos (P12,000.00) with
subsidiary imprisonment in case of insolvency, plus five thousand pesos (P5,000.00) in
the concept of moral and exemplary damages with costs. No appeal was interposed by
the accused who later applied for probation. 2
On December 14, 1981, the lower court rendered a decision finding that Destrajo had not
exercised sufficient diligence as the operator of the jeepney. The dispositive portion of
the decision reads:
"WHEREFORE, the Court finds judgment in favor of the plaintiffs against
defendant Destrajo, ordering him to pay plaintiffs the sum of P28,000.00 for
loss of income; to pay plaintiffs the sum of P12,000.00 which amount
shall be deducted in the event judgment in Criminal Case No. 3527-

D against the driver, accused Into, shall have been enforced; to pay
plaintiffs the sum of P5,901.70 representing funeral and burial expenses of
the deceased; to pay plaintiffs the sum of P5,000.00 as moral
damages which shall be deducted in the event judgment (sic) in
Criminal Case No. 3527-D against the driver, accused Into; to pay
plaintiffs the sum of P3,000.00 as attorney's fees and to pay the costs of
suit.
The defendant insurance company is ordered to reimburse
defendant Destrajo whatever amounts the latter shall have paid
only up to the extent of its insurance coverage.
SO ORDERED." 3
Petitioners filed a motion for the reconsideration of the second paragraph of
the dispositive portion of the decision contending that AFISCO should not
merely be held secondarily liable because the Insurance Code provides that
the insurer's liability is "direct and primary and/or jointly and severally with
the operator of the vehicle, although only up to the extent of the insurance
coverage." 4 Hence, they argued that the P20,000.00 coverage of the insurance
policy issued by AFISCO, should have been awarded in their favor.
In its comment on the motion for reconsideration, AFISCO argued that since the
Insurance Code does not expressly provide for a solidary obligation, the presumption is
that the obligation is joint.
In its Order of February 9, 1982, the lower court denied the motion for reconsideration
ruling that since the insurance contract "is in the nature of suretyship, then the liability
of the insurer is secondary only up to the extent of the insurance coverage." 5
Petitioners filed a second motion for reconsideration reiterating that the liability of the
insurer is direct, primary and solidary with the jeepney operator because the
petitioners became direct beneficiaries under the provision of the policy
which, in effect, is a stipulation pour autrui. 6 This motion was likewise denied for
lack of merit. Cdpr
Hence, petitioners filed the instant petition for certiorari which, although it does not seek
the reversal of the lower court's decision in its entirety, prays for the setting aside or
modification of the second paragraph of the dispositive portion of said decision.
Petitioners reassert their position that the insurance company is directly and solidarily
liable with the negligent operator up to the extent of its insurance coverage.
We grant the petition.
The particular provision of the insurance policy on which petitioners base their claim is as
follows:
"SECTION 1 LIABILITY TO THE PUBLIC
1.The Company will, subject to the Limits of Liability, pay all sums
necessary to discharge liability of the insured in respect of.

(a)death of or bodily injury to any THIRD PARTY


(b). . . .
2.. . . .
3.In the event of the death of any person entitled to indemnity under this
Policy, the Company will, in respect of the liability incurred to such person
indemnify his personal representatives in terms of, and subject to the terms
and conditions hereof." 7
The above-quoted provision leads to no other conclusion but that AFISCO can be held
directly liable by petitioners. As this Court ruled in Shafer vs. Judge, RTC of Olongapo
City, Br. 75, "[w]here an insurance policy insures directly against liability, the
insurer's liability accrues immediately upon the occurrence of the injury or
event upon which the liability depends, and does not depend on the recovery
of judgment by the injured party against the insured." 8 The underlying reason
behind the third party liability (TPL) of the Compulsory Motor Vehicle Liability Insurance is
"to protect injured persons against the insolvency of the insured who causes
such injury, and to give such injured person a certain beneficial interest in the
proceeds of the policy . . . ." 9 Since petitioners had received from AFISCO the
sum of P5,000.00 under the no-fault clause, AFISCO's liability is now limited to
P15,000.00.

However, we cannot agree that AFISCO is likewise solidarily liable with


Destrajo. In Malayan Insurance Co., Inc. v. Court of Appeals, 10 this Court had the
opportunity to resolve the issue as to the nature of the liability of the insurer and the
insured vis-a-vis the third party injured in an accident. We categorically ruled thus:
"While it is true that where the insurance contract provides for indemnity
against liability to third persons, such third persons can directly sue the
insurer, however, the direct liability of the insurer under indemnity
contracts against third party liability does not mean that the
insurer can be held solidarily liable with the insured and/or the
other parties found at fault. The liability of the insurer is based on
contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent
Vallejos (the injured third party), but it cannot, as incorrectly held by the
trial court, be made `solidarily' liable with the two principal tortfeasors,
namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitionerinsurer were solidarily liable with said two (2) respondents by reason of the
indemnity contract against third party liability under which an insurer
can be directly sued by a third party this will result in a violation of the
principles underlying solidary obligation and insurance contracts"
(emphasis supplied). llcd
The Court then proceeded to distinguish the extent of the liability and manner of
enforcing the same in ordinary contracts from that of insurance contracts. While in

solidary obligations, the creditor may enforce the entire obligation against one of the
solidary debtors, in an insurance contract, the insurer undertakes for a
consideration to indemnify the insured against loss, damage or liability arising
from an unknown or contingent event. 11 Thus, petitioner therein, which, under
the insurance contract is liable only up to P20,000.00, can not be made
solidarily liable with the insured for the entire obligation of P29,013.00
otherwise there would result "an evident breach of the concept of solidary
obligation."
Similarly, petitioners herein cannot validly claim that AFISCO, whose liability under the
insurance policy is also P20,000.00, can be held solidarily liable with Destrajo for the
total amount of P53,901.70 in accordance with the decision of the lower court. Since
under both the law and the insurance policy, AFISCO's liability is only up to
P20,000.00, the second paragraph of the dispositive portion of the decision in
question may have unwittingly sown confusion among the petitioners and their
counsel. What should have been clearly stressed as to leave no room for doubt was the
liability of AFISCO under the explicit terms of the insurance contract.
In fine, we conclude that the liability of AFISCO based on the insurance contract is direct,
but not solidary with that of Destrajo which is based on Article 2180 of the Civil Code. 12
As such, petitioners have the option either to claim the P15,000 from AFISCO and the
balance from Destrajo or enforce the entire judgment from Destrajo subject to
reimbursement from AFISCO to the extent of the insurance coverage.
While the petition seeks a definitive ruling only on the nature of AFISCO's liability, we
noticed that the lower court erred in the computation of the probable loss of income.
Using the formula: 2/3 of (80-56) x P12,000.00, it awarded P28,000.00. 13 Upon
recomputation, the correct amount is P192,000.00. Being a "plain error," we opt to
correct the same. 14 Furthermore, in accordance with prevailing jurisprudence, the death
indemnity is hereby increased to P50,000.00. 15
WHEREFORE, premises considered, the present petition is hereby GRANTED. The award
of P28,800.00 representing loss of income is INCREASED to P192,000.00 and the death
indemnity of P12,000.00 to P50,000.00.
SO ORDERED.
Gutierrez, Jr., Bidin and Davide, JJ., concur.

9
SECOND DIVISION
[G.R. No. 96452. May 7, 1992.]
PERLA COMPANIA DE SEGUROS, INC., petitioner, vs. THE COURT OF
APPEALS, HERMINIO LIM and EVELYN LIM, respondents.
[G.R. No. 96493. May 7, 1992.]
FCP CREDIT CORPORATION, petitioner, vs. THE COURT OF APPEALS,
Special Third Division, HERMINIO LIM and EVELYN LIM,, respondents.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; LOSS OF MOTOR VEHICLE THRU THEFT; NO CAUSAL
CONNECTION BETWEEN POSSESSION OF A VALID DRIVER'S LICENSE AND LOSS OF
VEHICLE THRU THEFT. It is worthy to note that there is no causal connection between
the possession of a valid driver's license and the loss of a vehicle. To rule otherwise
would render car insurance practically a sham since an insurance company can easily
escape liability by citing restrictions which are not applicable or germane to the claim,
thereby reducing indemnity to a shadow.
2.ID.; ID.; INSURANCE POLICY MEANT TO BE ADDITIONAL SECURITY TO PRINCIPAL
CONTRACT; CASE AT BAR. The insurance policy was therefore meant to be an
additional security to the principal contract, that is, to insure that the promissory note
will be paid in case the automobile is lost through accident or theft. The Chattel
Mortgage Contract provided that: "'THE SAID MORTGAGOR COVENANTS AND AGREES
THAT HE/IT WILL CAUSE THE PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED
AGAINST LOSS OR DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE YEAR
FROM DATE HEREOF AND EVERY YEAR THEREAFTER UNTIL THE MORTGAGE OBLIGATION
IS FULLY PAID WITH AN INSURANCE COMPANY OR COMPANIES ACCEPTABLE TO THE
MORTGAGEE IN AN AMOUNT NOT LESS THAN THE OUTSTANDING BALANCE OF THE
MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE ALL LOSS, IF ANY, UNDER SUCH POLICY
OR POLICIES, PAYABLE TO THE MORTGAGEE OR ITS ASSIGNS AS ITS INTERESTS MAY
APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE MORTGAGEE, . . .'"
It is clear from the abovementioned provision that upon the loss of the insured vehicle,
the insurance company Perla undertakes to pay directly to the mortgagor or to their
assignee, FCP, the outstanding balance of the mortgage at the time of said loss under
the mortgage contract.
3.CIVIL LAW; CONTRACTS; CHATTEL MORTGAGE; MERELY AN ACCESSORY TO
PROMISSORY NOTE; PRINCIPAL CONTRACT UNAFFECTED BY WHATEVER BEFALLS
ACCESSORY CONTRACT; CASE AT BAR. The chattel mortgage constituted over the
automobile is merely an accessory contract to the promissory note. Being the principal
contract, the promissory note is unaffected by whatever befalls the subject matter of the
accessory contract. Therefore, the unpaid balance on the promissory note should be

paid, and not just the installments due and payable before the automobile was
carnapped, as erroneously held by the Court of Appeals.
4.ID.; DAMAGES; MAKER NOT LIABLE FOR INTEREST, LIQUIDATED DAMAGES AND
ATTORNEY'S FEES STIPULATED IN PROMISSORY NOTE REMAINING UNPAID DUE TO
INSURER'S DENIAL OF A VALID CLAIM; CASE AT BAR. Because petitioner Perla had
unreasonably denied their valid claim, private respondents should not be made to pay
the interest, liquidated damages and attorney's fees as stipulated in the promissory
note. As mentioned above, the contract of indemnity was procured to insure the return of
the money loaned from petitioner FCP, and the unjustified refusal of petitioner Perla to
recognize the valid claim of the private respondents should not in any way prejudice the
latter.
5.ID.; ID.; AWARD FOR MORAL AND EXEMPLARY DAMAGES, AS WELL AS ATTORNEY'S
FEES LEFT TO SOUND DISCRETION OF THE COURT; CASE AT BAR. As to the award of a
moral damages, exemplary damages and attorney's fees, private respondents are legally
entitled to the same since petitioner Perla had acted in bad faith by unreasonably
refusing to honor the insurance claim of the private respondents. Besides, awards for
moral and exemplary damages, as well as attorney's fees are left to the sound discretion
of the Court. Such discretion, if well exercised, will not be disturbed on appeal.

DECISION

NOCON, J p:
These are two petitions for review on certiorari, one filed by Perla Compania de Seguros,
Inc. in G.R. No. 96452, and the other by FCP Credit Corporation in G.R. No. 96493 both
seeking to annul and set aside the decision dated July 30, 1990 1 of the Court of Appeals
in CA-G.R. No. 13037, which reversed the decision of the Regional Trial Court of Manila,
Branch VIII in Civil Case No. 83-19098 for replevin and damages. The dispositive portion
of the decision of the Court of Appeals reads, as follows:
"WHEREFORE, the decision appealed from is reversed and appellee Perla
Compania de Seguros, Inc. is ordered to indemnify appellants Herminio and
Evelyn Lim for the loss of their insured vehicle; while said appellants are
ordered to pay appellee FCP Credit Corporation all the unpaid installments
that were due and payable before the date said vehicle was carnapped; and
appellee Perla Compania de Seguros, Inc. is also ordered to pay appellants
moral damages of P12,000.00 for the latter's mental sufferings, exemplary
damages of P20,000.00 for appellee Perla Compania de Seguros. Inc.'s
unreasonable refusal on sham grounds to honor the just insurance claim of
appellants by way of example and correction for public good, and attorney's
fees of P10,000.00 as a just and equitable reimbursement for the expenses
incurred therefor by appellants, and the costs of suit both in the lower court
and in this appeal." 2
The facts as found by the trial court are as follows:

On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed
a promissory note in favor of Supercars, Inc. in the sum of P77,940.00, payable in
monthly installments according to the schedule of payment indicated in said note, 3 and
secured by a chattel mortgage over a brand new red Ford Laser 1300 5DR Hatchback
1981 model with motor and serial No. SUPJYK-03780, which is registered under the name
of private respondent Herminio Lim 4 and insured with the petitioner Perla Compania de
Seguros, Inc. (Perla for brevity) for comprehensive coverage under Policy No. PC/41PPQCB-43383. 5
On the same date, Supercars, Inc., with notice to private respondents spouses, assigned
to petitioner FCP Credit Corporation (FCP for brevity) its rights, title and interest on said
promissory note and chattel mortgage as shown by the Deed of Assignment. 6
At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at
the back of Broadway Centrum along N. Domingo Street, Quezon City. Private respondent
Evelyn Lim, who was driving said car before it was carnapped, immediately called up the
Anti-Carnapping Unit of the Philippine Constabulary to report said incident and
thereafter, went to the nearest police substation at Araneta, Cubao to make a police
report regarding said incident, as shown by the certification issued by the Quezon City
police. 7
On November 10, 1982, private respondent Evelyn Lim reported said incident to the
Land Transportation Commission in Quezon City, as shown by the letter of her counsel to
said office, 8 in compliance with the insurance requirement. She also filed a complaint
with the Headquarters Constabulary Highway Patrol Group. 9
On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla
but said claim was denied on November 18, 1982 10 on the ground that Evelyn Lim, who
was using the vehicle before it was carnapped, was in possession of an expired driver's
license at the time of the loss of said vehicle which is in violation of the authorized driver
clause of the insurance policy, which states, to wit: Cdpr
"AUTHORIZED DRIVER:
Any of the following: (a) The Insured (b) Any person driving on the Insured's
order, or with his permission. Provided that the person driving is permitted,
in accordance with the licensing or other laws or regulations, to drive the
Scheduled Vehicle, or has been permitted and is not disqualified by order of
a Court of Law or by reason of any enactment or regulation in that behalf."
11
On November 17, 1982, private respondents requested from petitioner FCP for a
suspension of payment on the monthly amortization agreed upon due to the loss of the
vehicle and, since the carnapped vehicle was insured with petitioner Perla, said
insurance company should be made to pay the remaining balance of the promissory note
and the chattel mortgage contract.
Perla, however, denied private respondents' claim. Consequently, petitioner FCP
demanded that private respondents pay the whole balance of the promissory note or to
return the vehicle 12 but the latter refused.

On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in
turn filed an amended third party complaint against petitioner Perla on December 8,
1983. After trial on the merits, the trial court rendered a decision, the dispositive portion
of which reads.
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as
follows:
1.Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and
severally, plaintiff the sum of P55,055.93 plus interest thereon at the rate
of 24% per annum from July 2, 1983 until fully paid;
2.Ordering defendants to pay plaintiff P5,000.00 as and for attorney's fees;
and the costs of suit.
Upon the other hand, likewise, ordering the DISMISSAL of the Third Party
Complaint filed against Third-Party Defendant." 13
Not satisfied with said decision, private respondents appealed the same to the Court of
Appeals, which reversed said decision.
After petitioners' separate motions for reconsideration were denied by the Court of
Appeals in its resolution of December 10, 1990, petitioners filed these separate petitions
for review on certiorari.
Petitioner Perla alleged that there was grave abuse of discretion on the part of the
appellate court in holding that private respondents did not violate the insurance contract
because the authorized driver clause is not applicable to the "Theft" clause of said
Contract.

For its part, petitioner FCP raised the issue of whether or not the loss of the collateral
exempted the debtor from his admitted obligations under the promissory note
particularly the payment of interest, litigation expenses and attorney's fees. prLL
We find no merit in Perla's petition.
The comprehensive motor car insurance policy issued by petitioner Perla undertook to
indemnify the private respondents against loss or damages to the car (a) by accidental
collision or overturning, or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear; (b) by fire, external explosion, selfignition or lightning or burglary, housebreaking or theft; and (c) by malicious act. 14
Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the
owner's consent or knowledge, such taking constitutes theft, and, therefore, it is the
"THEFT" clause, and not the "AUTHORIZED DRIVER" clause, that should apply. As
correctly stated by the respondent court in its decision:
". . . Theft is an entirely different legal concept from that of accident. Theft
is committed by a person with the intent to gain or, to put it in another

way, with the concurrence of the doer's will. On the other hand, accident,
although it may proceed or result from negligence, is the happening of an
event without the concurrence of the will of the person by whose agency it
was caused. (Bouvier's Law Dictionary, Vol. I, 1914 ed., p. 101).
Clearly, the risk against accident is distinct from the risk against theft. The
'authorized driver clause' in a typical insurance policy as in contemplation
or anticipation of accident in the legal sense in which it should be
understood, and not in contemplation or anticipation of an event such as
theft. The distinction often seized upon by insurance companies in
resisting claims from their assureds between death occurring as a result
of accident and death occurring as a result of intent may, by analogy, apply
to the case at bar. Thus, if the insured vehicle had figured in an accident at
the time she drove it with an expired license, then, appellee Perla
Compania could properly resist appellants' claim for indemnification for the
loss or destruction of the vehicle resulting from the accident. But in the
present case, the loss of the insured vehicle did not result from an accident
where intent was involved; the loss in the present case was caused by
theft, the commission of which was attended by intent." 15
It is worthy to note that there is no causal connection between the possession of a valid
driver's license and the loss of a vehicle. To rule otherwise would render car insurance
practically a sham since an insurance company can easily escape liability by citing
restrictions which are not applicable or germane to the claim, thereby reducing
indemnity to a shadow.
We however find the petition of FCP meritorious.
This Court agrees with petitioner FCP that private respondents are not relieved of their
obligation to pay the former the installments due on the promissory note on account of
the loss of the automobile. The chattel mortgage constituted over the automobile is
merely an accessory contract to the promissory note. Being the principal contract, the
promissory note is unaffected by whatever befalls the subject matter of the accessory
contract. Therefore, the unpaid balance on the promissory note should be paid, and not
just the installments due and payable before the automobile was carnapped, as
erroneously held by the Court of Appeals.
However, this does not mean that private respondents are bound to pay the interest,
litigation expenses and attorney's fees stipulated in the promissory note. Because of the
peculiar relationship between the three contracts in this case, i. e., the promissory note,
the chattel mortgage contract and the insurance policy, this Court is compelled to
construe all three contracts as intimately interrelated to each other, despite the fact that
at first glance there is no relationship whatsoever between the parties thereto.
Under the promissory note, private respondents are obliged to pay Supercars, Inc. the
amount stated therein in accordance with the schedule provided for. To secure said
promissory note, private respondents constituted a chattel mortgage in favor of
Supercars, Inc. over the automobile the former purchased from the latter. The chattel
mortgage, in turn, required private respondents to insure the automobile and to make
the proceeds thereof payable to Supercars, Inc. The promissory note and chattel
mortgage were assigned by Supercars, Inc. to petitioner FCP, with the knowledge of

private respondents. Private respondents were able to secure an insurance policy from
petitioner Perla, and the same was made specifically payable to petitioner FCP. 16
The insurance policy was therefore meant to be an additional security to the principal
contract, that is, to insure that the promissory note will still be paid in case the
automobile is lost through accident or theft. The Chattel Mortgage Contract provided
that: LLjur
"'THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE
THE PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST
LOSS OR DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE
YEAR FROM DATE HEREOF AND EVERY YEAR THEREAFTER UNTIL THE
MORTGAGE OBLIGATION IS FULLY PAID WITH AN INSURANCE COMPANY OR
COMPANIES ACCEPTABLE TO THE MORTGAGEE IN AN AMOUNT NOT LESS
THAN THE OUTSTANDING BALANCE OF THE MORTGAGE OBLIGATION; THAT
HE/IT WILL MAKE ALL LOSS, IF ANY, UNDER SUCH POLICY OR POLICIES,
PAYABLE TO THE MORTGAGEE OR ITS ASSIGNS AS ITS INTERESTS MAY
APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE
MORTGAGEE, . . .'" 17
It is clear from the abovementioned provision that upon the loss of the insured vehicle,
the insurance company Perla undertakes to pay directly to the mortgagor or to their
assignee, FCP, the outstanding balance of the mortgage at the time of said loss under
the mortgage contract. If the claim on the insurance policy had been approved by
petitioner Perla, it would have paid the proceeds thereof directly to petitioner FCP, and
this would have had the effect of extinguishing private respondents' obligation to
petitioner FCP. Therefore, private respondents were justified in asking petitioner FCP to
demand the unpaid installments from petitioner Perla.
Because petitioner Perla had unreasonably denied their valid claim, private respondents
should not be made to pay the interest, liquidated damages and attorney's fees as
stipulated in the promissory note. As mentioned above, the contract of indemnity was
procured to insure the return of the money loaned from petitioner FCP, and the
unjustified refusal of petitioner Perla to recognize the valid claim of the private
respondents should not in any way prejudice the latter.
Private respondents can not be said to have unduly enriched themselves at the expense
of petitioner FCP since they will be required to pay the latter the unpaid balance of its
obligation under the promissory note.
In view of the foregoing discussion, We hold that the Court of Appeals did not err in
requiring petitioner Perla to indemnify private respondents for the loss of their insured
vehicle. However, the latter should be ordered to pay petitioner FCP the amount of
P55,055.93, representing the unpaid installments from December 30, 1982 up to July 1,
1983, as shown in the statement of account prepared by petitioner FCP, 18 plus legal
interest from July 2, 1983 until fully paid. llcd
As to the award of moral damages, exemplary damages and attorney's fees, private
respondents are legally entitled to the same since petitioner Perla had acted in bad faith
by unreasonably refusing to honor the insurance claim of the private respondents.
Besides, awards for moral and exemplary damages, as well as attorney's fees are left to

the sound discretion of the Court. Such discretion, if well exercised, will not be disturbed
on appeal. 19
WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require
private respondents to pay petitioner FCP the amount of P55,055.93, with legal interest
from July 2, 1983 until fully paid. The decision appealed from is hereby affirmed as to all
other respects. No pronouncement as to costs.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Regalado, JJ ., concur.
||| (Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No. 96452, 96493, May 07,
1992)

10
FIRST DIVISION
[G.R. No. 114427. February 6, 1995.]
ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS and COUNTRY
BANKERS INSURANCE CORPORATION, respondents.

DECISION

DAVIDE, JR., J p:
For our review under Rule 45 of the Rules of Court is the decision1 of the Court
of Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation
versus Armando Geagonia," reversing the decision of the Insurance Commission in
I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia against
private respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San
Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private
respondent fire insurance policy No. F-146222 for P100,000.00. The period of the
policy was from 22 December 1989 to 22 December 1990 and covered the following:
"Stock-in-trade consisting principally of dry goods such as RTW's for men and women
wear and other usual to assured's business."cdasia
The petitioner declared in the policy under the subheading entitled COINSURANCE that Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00.
From 1989 to 1990, the petitioner had in his inventory stocks amounting to
P392,130.50, itemized as follows:
Zenco Sales, Inc.P55,698.00
F. Legaspi Gen. Merchandise86,432.50
Cebu Tesing Textiles250,000.00 (on credit)
========
P392,130.50
The policy contained the following condition:
"3.The insured shall give notice to the Company of any insurance or
insurances already effected, or which may subsequently be
effected, covering any of the property or properties consisting
of stocks in trade, goods in process and/or inventories only
hereby insured, and unless notice be given and the particulars
of such insurance or insurances be stated therein or endorsed
in this policy pursuant to Section 50 of the Insurance Code, by
or on behalf of the Company before the occurrence of any loss
or damage, all benefits under this policy shall be deemed
forfeited, provided however, that this condition shall not apply
when the total insurance or insurances in force at the time of
the loss or damage is not more than P200,000.00."cdasia

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the
public market of San Francisco, Agusan del Sur. The petitioner's insured stocks-intrade were completely destroyed prompting him to file with the private respondent a
claim under the policy. On 28 December 1990, the private respondent denied the
claim because it found that at the time of the loss the petitioner's stocks-in-trade
were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144, for
P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance Co.,
Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs.
Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:
"MORTGAGEE:Loss, if any, shall be payable to Messrs.
Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of
this policy. CO-INSURANCE DECLARED:
P100,000. Phils. First CEB/F-24758" 4
The basis of the private respondent's denial was the petitioner's alleged
violation of Condition 3 of the policy.
The petitioner then filed a complaint5 against the private respondent with the
Insurance Commission (Case No. 3340) for the recovery of P100,000.00 under fire
insurance policy No. F-14622 and for attorney's fees and costs of litigation. He
attached as Annex "M" 6 thereof his letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two policies
issued by the PFIC were already in existence; however, he had no knowledge of the
provision in the private respondent's policy requiring him to inform it of the prior
policies; this requirement was not mentioned to him by the private respondent's
agent; and had it been so mentioned, he would not have withheld such information.
He further asserted that the total of the amounts claimed under the three policies was
below the actual value of his stocks at the time of loss, which was P1,000,000.00
In its answer,7 the private respondent specifically denied the allegations in the
complaint and set up as its principal defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993,8 the Insurance Commission found that the
petitioner did not violate Condition 3 as he had no knowledge of the existence of the
two fire insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles
which procured the PFIC policies without informing him or securing his consent; and
that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to know of the PFIC
policies only when he filed his claim with the private respondent and that Cebu Tesing
Textile obtained them and paid for their premiums without informing him thereof. The
Insurance Commission then decreed:cdasia
"WHEREFORE, judgment is hereby rendered ordering the respondent
company to pay complainant the sum of P100,000.00 with legal interest
from the time the complaint was filed until fully satisfied plus the amount of
P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of
respondent is hereby dismissed."
Its motion for the reconsideration of the decision9 having been denied by the
Insurance Commission in its resolution of 20 August 1993, 10 the private respondent

appealed to the Court of Appeals by way of a petition for review. The petition was
docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the
decision of the Insurance Commission because it found that the petitioner knew of the
existence of the two other policies issued by the PFIC. It said:
"It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144
that the insurance was taken in the name of private respondent [petitioner
herein]. The policy states that 'DISCOUNT MART (MR. ARMANDO GEAGONIA,
PROP)' was assured and that 'TESING TEXTILES' [was] only the mortgagee
of the goods.
In addition, the premiums on both policies were paid for by private
respondent, not by the Tesing Textiles which is alleged to have taken out
the other insurances without the knowledge of private respondent. This is
shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In
both invoices, Tesing Textiles is indicated to be only the mortgagee of the
goods insured but the party to which they were issued were the 'DISCOUNT
MART (MR. ARMANDO GEAGONIA).'
It is clear that it was the private respondent [petitioner herein] who took
out the policies on the same property subject of the insurance with
petitioner. Hence, in failing to disclose the existence of these insurances
private respondent violated Condition No. 3 of Fire Policy No. 14622. . . .
Indeed private respondent's allegation of lack of knowledge of the previous
insurances is belied by his letter to petitioner [of 18 January 1991. The body
of the letter reads as follows:]cdasia
xxx xxx xxx
'Please be informed that I have no knowledge of the provision
requiring me to inform your office about my prior insurance under
FGA-28146 and F-CEB-24758. Your representative did not mention
about said requirement at the time he was convincing me to insure
with you. If he only did or even inquired if I had other existing policies
covering my establishment, I would have told him so. You will note
that at the time he talked to me until I decided to insure with your
company the two policies aforementioned were already in effect.
Therefore I would have no reason to withhold such information and I
would have no reason to withhold such information and I would have
desisted to part with my hard earned peso to pay the insurance
premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my
investments. The actual value of my stocks damaged by the fire was
estimated by the Police Department to be P1,000,000.00 (Please see
xerox copy of Police Report Annex "A"). My Income Statement as of
December 31, 1989 or five months before the fire, shows my
merchandise inventory was already some P595,455,75. . . . These will

support my claim that the amount under the three policies are much
below the value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not know
that there were other insurances taken on the stock-in-trade and seriously
puts in question his credibility."cdasia
His motion to reconsider the adverse decision having been denied, the
petitioner filed the instant petition. He contends therein that the Court of Appeals
acted with grave abuse of discretion amounting to lack of excess of jurisdiction:
"A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS
ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT
PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN
AGAINST THE PRIVATE RESPONDENT."
The chief issues that crop up from the first and third grounds are (a) whether
the petitioner had prior knowledge of the two insurance policies issued by the PFIC
when he obtained the fire insurance policy from the private respondent, thereby, for
not disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether
he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the
petitioner's letter of reconsideration of 18 January 1991, is without merit. The
petitioner claims that the said letter was not offered in evidence and thus should not
have been considered in deciding the case. However, as correctly pointed out by the
Court of Appeals, a copy of this letter was attached to the petitioner's complaint in I.C.
Case No. 3340 as Annex "M" thereof and made an integral part of the complaint. 12 It
has attained the status of a judicial admission and since its due execution and
authenticity was not denied by the other party, the petitioner is bound by it even if it
were not introduced as an independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no
knowledge of the previous two policies. The Court of Appeals disagreed and found
otherwise in view of the explicit admission by the petitioner in his letter to the private
respondent of 18 January 1991, which was quoted in the challenged decision of the
Court of Appeals. These divergent findings of fact constitute an exception to the
general rule that in petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are conclusive and binding upon
this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies
issued by the PFIC. His letter of 18 January 1991 to the private respondent
conclusively proves this knowledge. His testimony to the contrary before the

Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission made ante litem motam. It was, indeed, incredible that he did not
know about the prior policies since these policies were not new or original. Policy No.
GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been
renewed twice, the previous policy being F-24792. cdasia
Condition 3 of the private respondent's Policy No. F-14622 is a condition which
is not proscribed by law. Its incorporation in the policy is allowed by Section 75 of the
Insurance Code 15 which provides that "[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." Such a condition is a provision which invariably
appears in fire insurance policies and is intended to prevent an increase in the moral
hazard. It is commonly known as the additional or "other insurance" clause and has
been upheld as valid and as a warranty that no other insurance exists. Its violation
would thus avoid the policy. 16 However, in order to constitute a violation, the other
insurance must be upon the same subject matter, the same interest therein, and the
same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both interests may be covered by one
policy, or each may take out a separate policy covering his interest, either at the
same or at separate times. 18 The mortgagor's insurable interest covers the full value
of the mortgaged property, even though the mortgage debt is equivalent to the full
value of the property. 19 The mortgagee's insurable interest is to the extent of the
debt, since the property is relied upon as security thereof, and in insuring he is not
insuring the property but his interest or lien thereon. His insurable interest is prima
facie the value mortgaged and extends only the amount of the debt, not exceeding
the value of the mortgaged property.20 Thus, separate insurances covering different
insurable interests may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the
mortgagee, which is the usual practice. The mortgagee may be made the beneficial
payee in several ways. He may become the assignee of the policy with the consent of
the insurer; or the mere pledgee without such consent; or the original policy may
contain a mortgage clause; or a rider making the policy payable to the mortgagee "as
his interest may appear" may be attached; or a "standard mortgage clause,"
containing a collateral independent contract between the mortgagee and insurer, may
be attached; or the policy, though by its terms payable absolutely to the mortgagor,
may have been procured by a mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the
proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the
mortgagee as his interest may appear, the mortgagee is only a beneficiary under the
contract, and recognized as such by the insurer but not made a party to the contract
itself. Hence, any act of the mortgagor which defeats his right will also defeat the
right of the mortgagee.22 This kind of policy covers only such interest as the
mortgagee has at the issuing of the policy. 23
On the other hand, a mortgagee may also procure a policy as a contracting
party in accordance with the terms of an agreement by which the mortgagor is to pay
the premiums upon such insurance. 24 It has been noted, however, that although the
mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains a policy on the

assurance that it insures him, the policy is in fact in the form used to insure a
mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the
assured and contain a mortgage clause which reads:cdasia
"Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu
City as their interest may appear subject to the terms of the policy."
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses
involved in General Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance
& Surety Corp. vs. Yap, 27 which read:
"The insured shall give notice to the company of any insurance or
insurances already effected, or which may subsequently be effected
covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or
endorsed on this Policy by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this Policy shall be
forfeited."
or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. 28 which
provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the
company to add or insert it in the policy, without which such policy shall be null and
void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in
the private respondent's policy No. F-14622 does not absolutely declare void any
violation thereof. It expressly provides that the condition "shall not apply when the
total insurance or insurances in force at the time of the loss or damage is not more
than P200,000.00."cdasia
It is a cardinal rule on insurance that a policy or insurance contract is to be
interpreted liberally in favor of the insured and strictly against the company, the
reason being, undoubtedly, to afford the greatest protection which the insured was
endeavoring to secure when he applied for insurance. It is also a cardinal principle of
law that forfeitures are not favored and that any construction which would result in
the forfeiture of the policy benefits for the person claiming thereunder, will be
avoided, if it is possible to construe the policy in a manner which would permit
recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated
differently, provisions, conditions or exceptions in policies which tend to work a
forfeiture of insurance policies should be construed most strictly against those for
whose benefits they are inserted, and most favorably toward those against whom
they are intended to operate. 30 The reason for this is that, except for riders which
may later be inserted, the insured sees the contract already in its final form and has
had no voice in the selection or arrangement of the words employed therein. On the
other hand, the language of the contract was carefully chosen and deliberated upon
by experts and legal advisers who had acted exclusively in the interest of the insurers
and the technical language employed therein is rarely understood by ordinary
laymen. 31
With these principles in mind, we are of the opinion that Condition 3 of the
subject policy is not totally free from ambiguity and must, perforce, be meticulously
analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to

double insurance, and (b) the nullity of the policy shall only be to the extent
exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to
other insurance "covering any of the property or properties consisting of stocks in
trade, goods in process and/or inventories only hereby insured," and the portion
regarding the insured's declaration on the subheading CO-INSURANCE that the coinsurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance
exists where the same person is insured by several insurers separately in respect of
the same subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate.
Since the two policies of the PFIC do not cover the same interest as that covered by
the policy of the private respondent, no double insurance exists. The non-disclosure
then of the former policies was not fatal to the petitioner's right to recover on the
private respondent's policy. cdasia
Furthermore, by stating within Condition 3 itself that such condition shall not
apply if the total insurance in force at the time of loss does not exceed P200,000.00,
the private respondent was amenable to assume a co-insurer's liability up to a loss
not exceeding P200,000.00. What it had in mind was to discourage over-insurance.
Indeed, the rationale behind the incorporation of "other insurance" clause in fire
policies is to prevent over-insurance and thus avert the perpetration of fraud. When a
property owner obtains insurance policies from two or more insurers in a total amount
that exceeds the property's value, the insured may have an inducement to destroy
the property for the purpose of collecting the insurance. The public as well as the
insurer is interested in preventing a situation in which a fire would be profitable to the
insured. 32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court
of Appeals in CA-G.R. SP No. 31916 is SET ASIDE and the decision of the Insurance
Commission in Case No. 3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.
Padilla, Bellosillo, Quiason and Kapunan, JJ ., concur.

11

FIRST DIVISION

[G.R. No. 115278. May 23, 1995.]


FORTUNE INSURANCE AND SURETY CO., INC., petitioner, vs. COURT OF
APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.
Santiago, Arevalo, Tomas & Associates for petitioner.
Julius Caesar Q. Llamas for private respondent.
SYLLABUS

1.COMMERCIAL LAW; INSURANCE; BURGLARY, THEFT AND ROBBERY POLICY; A CASUALTY


INSURANCE; GOVERNING PRINCIPLES. The insurance policy entered into by the parties
is a theft or robbery insurance policy which is a form of casualty insurance. Except with
respect to compulsory motor vehicle liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to robbery insurance in particular.
These contracts are, therefore, governed by the general provisions applicable to all types
of insurance. Outside of these, the rights and obligations of the parties must be
determined by the terms of their contract, taking into consideration its purpose and
always in accordance with the general principles of insurance law.
2.ID.; ID.; ID.; GENERAL EXCEPTIONS; SERVICE AND EMPLOYMENT; MEANING THEREOF.
It has been aptly observed that in burglary, robbery and theft insurance, "the opportunity
to defraud the insurer the moral hazard is so great that insurers have found it
necessary to fill up their policies with countless restrictions, many designed to reduce
this hazard. Seldom does the insurer assume the risk of all losses due to the hazards
insured against." Persons frequently excluded under such provisions are those in the
insured's service and employment. The purpose of the exception is to guard against
liability should the theft be committed by one having unrestricted access to the property.
In such cases, the terms specifying the excluded classes are to be given their meaning
as understood in common speech. The terms "service" and "employment" are generally
associated with the idea of selection, control, and compensation.
3.ID.; ID.; ID.; ID.; ID.; LABOR-ONLY CONTRACTS, CONSIDERED AUTHORIZED
REPRESENTATIVE IN CASE AT BAR. Notwithstanding the express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and the security
guards each shall supply to Producers are not the latter's employees, it may, in fact, be
that it is because the contracts are, indeed, "labor-only" contracts. Whether they are is,
in the light of the criteria provided for in Article 106 of the Labor Code, a question of fact.
Since the parties opted to submit the case for judgment on the basis of their stipulation
of facts which are strictly limited to the insurance policy, the contracts with PRC
Management Systems and Unicorn Security Services, the complaint for violation of P.D.
No. 532, and the information therefor filed by the City Fiscal of Pasay City, there is a
paucity of evidence as to whether the contracts between Producers and PRC
Management Systems and Unicorn Security Services are "labor-only" contracts. But even
granting for the sake of argument that these contracts were not "labor-only" contracts,
and PRC Management Systems and Unicorn Security Services were truly independent
contractors, we are satisfied that Magalong and Atiga were, in respect of the transfer of
Producer's money from its Pasay City branch to its head office in Makati, its "authorized
representatives" who served as such with its teller Maribeth Alampay. Howsoever
viewed, Producers entrusted the three with the specific duty to safely transfer the money
to its head office, with Alampay to be responsible for its custody in transit; Magalong to
drive the armored vehicle which would carry the money; and Atiga to provide the needed
security for the money, the vehicle, and his two other companions. In short, for these
particular tasks, the three acted as agents of Producers. A "representative" is defined as
one who represents or stands in the place of another; one who represents others or
another in a special capacity, as an agent, and is interchangeable with "agent." In view
of the foregoing, Fortune is exempt from liability under the general exceptions clause of
the insurance policy.
4.ID.; ID.; CONTRACT OF INSURANCE AS CONTRACT OF ADHESION; INTERPRETATION
THEREOF. A contract of insurance is a contract of adhesion, thus any ambiguity therein

should be resolved against the insurer, or it should be construed liberally in favor of the
insured and strictly against the insurer. Limitations of liability should be regarded with
extreme jealousy and must be construed in such a way as to preclude the insurer from
non-compliance with its obligation. It goes without saying then that if the terms of the
contract are clear and unambiguous, there is no room for construction and such terms
cannot be enlarged or diminished by judicial construction.
5.ID.; ID.; CONTRACT OF INSURANCE AS CONTRACT OF INDEMNITY. An insurance
contract is a contract of indemnity upon the terms and conditions specified therein. It is
settled that the terms of the policy constitute the measure of the insurer's liability. In the
absence of statutory prohibition to the contract, insurance companies have the same
rights as individuals to limit their liability and to impose whatever conditions they deem
best upon their obligations not inconsistent with public policy.

DECISION

DAVIDE, JR., J p:
The fundamental legal issue raised in this petition for review on certiorari is
whether the petitioner is liable under the Money, Security, and Payroll Robbery policy
it issued to the private respondent or whether recovery thereunder is precluded under
the general exceptions clause thereof. Both the trial court and the Court of Appeals
held that there should be recovery. The petitioner contends otherwise.
This case began with the filing with the Regional Trial Court (RTC) of Makati,
Metro Manila, by private respondent Producers Bank of the Philippines (hereinafter
Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter
Fortune) of a complaint for recovery of the sum of P725,000.00 under the policy
issued by Fortune. The sum was allegedly lost during a robbery of Producer's armored
vehicle while it was in transit to transfer the money from its Pasay City Branch to its
head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to
Branch 146 thereof. LibLex
After joinder of issues, the parties asked the trial court to render judgment
based on the following stipulation of facts:
1.The plaintiff was insured by the defendants and an insurance policy was
issued, the duplicate original of which is hereto attached as Exhibit
"A";
2.An armored car of the plaintiff, while in the process of transferring cash in
the sum of P725,000.00 under the custody of its teller, Maribeth
Alampay, from its Pasay Branch to its Head Office at 8737 Paseo de
Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said
cash. The robbery took place while the armored car was traveling
along Taft Avenue in Pasay City;
3.The said armored car was driven by Benjamin Magalong y de Vera,
escorted by Security Guard Saturnino Atiga y Rosete. Driver
Magalong was assigned by PRC Management Systems with the

plaintiff by virtue of an Agreement executed on August 7, 1983, a


duplicate original copy of which is hereto attached as Exhibit "B";
4.The Security Guard Atiga was assigned by Unicorn Security Services, Inc.
with the plaintiff by virtue of a contract of Security Service executed
on October 25, 1982, a duplicate original copy of which is hereto
attached as Exhibit "C";
5.After an investigation conducted by the Pasay police authorities, the
driver Magalong and guard Atiga were charged, together with
Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe, with
violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of
Pasay City. A copy of the complaint is hereto attached as Exhibit "D";
6.The Fiscal of Pasay City then filed an information charging the aforesaid
persons with the said crime before Branch 112 of the Regional Trial
Court of Pasay City. A copy of the said information is hereto attached
as Exhibit "E." The case is still being tried as of this date;
7.Demands were made by the plaintiff upon the defendant to pay the
amount of the loss of P725,000.00, but the latter refused to pay as
the loss is excluded from the coverage of the insurance policy,
attached hereto as Exhibit "A," specifically under page 1 thereof,
"General Exceptions" Section (b), which is marked as Exhibit "A-1,"
and which reads as follows:
"GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b)any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or
authorized representative of the Insured whether acting alone
or in conjunction with others. . . . "
8.The plaintiff opposes the contention of the defendant and contends that
Atiga and Magalong are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the robbery. 1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The
dispositive portion thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and against
defendant, and
(a)orders defendant to pay plaintiff the net amount of P540,000.00 as
liability under Policy No. 0207 (as mitigated by the P40,000.00
special clause deduction and by the recovered sum of

P145,000.00), with interest thereon at the legal rate, until fully


paid;
(b)orders defendant to pay plaintiff the sum of P30,000.00 as and for
attorney's fees; and
(c)orders defendant to pay costs of suit.
All other claims and counterclaims are accordingly dismissed forthwith.
SO ORDERED.2
The trial court ruled that Magalong and Atiga were not employees or
representatives of Producers. It said:
The Court is satisfied that plaintiff may not be said to have selected and
engaged Magalong and Atiga, their services as armored car driver and as
security guard having been merely offered by PRC Management and by
Unicorn Security and which latter firms assigned them to plaintiff. The
wages and salaries of both Magalong and Atiga are presumably paid by
their respective firms, which alone wields the power to dismiss them.
Magalong and Atiga are assigned to plaintiff in fulfillment of agreements to
provide driving services and property protection as such in a context
which does not impress the Court as translating into plaintiff's power to
control the conduct of any assigned driver or security guard, beyond
perhaps entitling plaintiff to request a replacement for such driver or guard.
The finding is accordingly compelled that neither Magalong nor Atiga were
plaintiff's "employees" in avoidance of defendant's liability under the policy,
particularly the general exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver


Magalong and guard Atiga were the "authorized representatives" of
plaintiff. They were merely an assigned armored car driver and security
guard, respectively, for the June 29, 1987 money transfer from plaintiff's
Pasay Branch to its Makati Head Office. Quite plainly it was teller
Maribeth Alampay who had "custody" of the P725,000.00 cash being
transferred along a specified money route, and hence plaintiff's then
designated "messenger" adverted to in the policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case
as CA-G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in
toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong
and Atiga were neither employees nor authorized representatives of Producers and
ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in favor of the
insured and strictly against the insurance company (New Life Enterprises
vs. Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of

Appeals, 211 SCRA 554). Contracts of insurance, like other contracts, are to
be construed according to the sense and meaning of the terms which the
parties themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and popular
sense (New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd.
vs. Court of Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted stipulation
is plain, ordinary and simple. No other interpretation is necessary. The word
"employee" should be taken to mean in the ordinary sense.
The Labor Code is a special law specifically dealing with/and specifically
designed to protect labor and therefore its definition as to employeremployee relationships insofar as the application/enforcement of said Code
is concerned must necessarily be inapplicable to an insurance contract
which defendant-appellant itself had formulated. Had it intended to apply
the Labor Code in defining what the word "employee" refers to, it
must/should have so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of
plaintiff-appellee bank because it has no power to hire or to dismiss said
driver and security guard under the contracts (Exhs. 8 and C) except only
to ask for their replacements from the contractors. 5
On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges
that the trial court and the Court of Appeals erred in holding it liable under the
insurance policy because the loss falls within the general exceptions clause
considering that driver Magalong and security guard Atiga were Producers' authorized
representatives or employees in the transfer of the money and payroll from its branch
office in Pasay City to its head office in Makati. LLpr
According to Fortune, when Producers commissioned a guard and a driver to
transfer its funds from one branch to another, they effectively and necessarily
became its authorized representatives in the care and custody of the money.
Assuming that they could not be considered authorized representatives, they were,
nevertheless, employees of Producers. It asserts that the existence of an employeremployee relationship "is determined by law and being such, it cannot be the subject
of agreement." Thus, if there was in reality an employer-employee relationship
between Producers, on the one hand, and Magalong and Atiga, on the other, the
provisions in the contracts of Producers with PRC Management System for Magalong
and with Unicorn Security Services for Atiga which state that Producers is not their
employer and that it is absolved from any liability as an employer, would not
obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four
standards: (1) the manner of selection and engagement of the putative employee; (2)
the mode of payment of wages; (3) the presence or absence of a power to dismiss;
and (4) the presence and absence of a power to control the putative employee's
conduct. Of the four, the right-of-control test has been held to be the decisive factor. 6
It asserts that the power of control over Magalong and Atiga was vested in and
exercised by Producers. Fortune further insists that PRC Management System and

Unicorn Security Services are but "labor-only" contractors under Article 106 of the
Labor Code which provides: prcd
Art. 106.Contractor or subcontractor. There is "labor-only" contracting
where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment,
machineries, work premises, among others, and the workers recruited and
placed by such persons are performing activities which are directly related
to the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who
shall be responsible to the workers in the same manner and extent as if the
latter were directly employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers,
following the ruling in International Timber Corp. vs. NLRC 7 that a finding that a
contractor is a "labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the project and the employee
of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its
employees since it had nothing to do with their selection and engagement, the
payment of their wages, their dismissal, and the control of their conduct. Producers
argued that the rule in International Timber Corp. is not applicable to all cases but
only when it becomes necessary to prevent any violation or circumvention of the
Labor Code, a social legislation whose provisions may set aside contracts entered into
by parties in order to give protection to the working man.
Producer further asseverates that what should be applied is the rule in
American President Lines vs. Clave,8 to wit:
In determining the existence of employer-employee relationship, the
following elements are generally considered, namely: (1) the selection and
engagement of the employee; (2) the payment of wages; (3) the power of
dismissal; and (4) the power to control the employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which
assigned Magalong as the driver of Producers' armored car and was responsible for
his faithful discharge of his duties and responsibilities, and since Producers paid the
monthly compensation of P1,400.00 per driver to PRC Management Systems and not
to Magalong, it is clear that Magalong was not Producers' employee. As to Atiga,
Producers relies on the provision of its contract with Unicorn Security Services which
provides that the guards of the latter "are in no sense employees of the CLIENT." prcd
There is merit in this petition.
It should be noted that the insurance policy entered into by the parties is a theft
or robbery insurance policy which is a form of casualty insurance. Section 174 of the
Insurance Code provides:
Sec. 174.Casualty insurance is insurance covering loss or liability arising
from accident or mishap, excluding certain types of loss which by law or
custom are considered as falling exclusively within the scope of insurance
such as fire or marine. It includes, but is not limited to, employer's liability
insurance, public liability insurance, motor vehicle liability insurance, plate

glass insurance, burglary and theft insurance, personal accident and health
insurance as written by non-life insurance companies, and other
substantially similar kinds of insurance. (emphasis supplied)
Except with respect to compulsory motor vehicle liability insurance, the
Insurance Code contains no other provisions applicable to casualty insurance or to
robbery insurance in particular. These contracts are, therefore, governed by the
general provisions applicable to all types of insurance. Outside of these, the rights
and obligations of the parties must be determined by the terms of their contract,
taking into consideration its purpose and always in accordance with the general
principles of insurance law.9
It has been aptly observed that in burglary, robbery, and theft insurance, "the
opportunity to defraud the insurer the moral hazard is so great that insurers
have found it necessary to fill up their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the insurer assume the risk of all losses
due to the hazards insured against." 10 Persons frequently excluded under such
provisions are those in the insured's service and employment. 11 The purpose of the
exception is to guard against liability should the theft be committed by one having
unrestricted access to the property." 12 In such cases, the terms specifying the
excluded classes are to be given their meaning as understood in common speech. 13
The terms "service" and "employment" are generally associated with the idea of
selection, control, and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein
should be resolved against the insurer, 15 or it should be construed liberally in favor
of the insured and strictly against the insurer. 16 Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to preclude
the insurer from non-compliance with its obligation. 17 It goes without saying then
that if the terms of the contract are clear and unambiguous, there is no room for
construction and such terms cannot be enlarged or diminished by judicial
construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions
specified therein. 19 It is settled that the terms of the policy constitute the measure of
the insurer's liability. 20 In the absence of statutory prohibition to the contrary,
insurance companies have the same rights as individuals to limit their liability and to
impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.
With the foregoing principles in mind, it may now be asked whether Magalong
and Atiga qualify as employees or authorized representatives of Producers under
paragraph (b) of the general exceptions clause of the policy which, for easy reference,
is again quoted: LibLex
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx

(b)any loss caused by any dishonest, fraudulent or criminal act of the


insured or any officer, employee, partner, director, trustee or
authorized representative of the Insured whether acting alone or in
conjunction with others. . . . (emphasis supplied)
There is marked disagreement between the parties on the correct meaning of
the terms "employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to
exclude and exempt from protection and coverage losses arising from dishonest,
fraudulent, or criminal acts of persons granted or having unrestricted access to
Producers' money or payroll. When it used then the term "employee," it must have
had in mind any person who qualifies as such as generally and universally
understood, or jurisprudentially established in the light of the four standards in the
determination of the employer-employee relationship, 21 or as statutorily declared
even in a limited sense as in the case of Article 106 of the Labor Code which considers
the employees under a "labor-only" contract as employees of the party employing
them and not of the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and
Unicorn Security Services are "labor-only" contracts. Producers, however, insists that
by the express terms thereof, it is not the employer of Magalong. Notwithstanding
such express assumption of PRC Management Systems and Unicorn Security Services
that the drivers and the security guards each shall supply to Producers are not the
latter's employees, it may, in fact, be that it is because the contracts are, indeed,
"labor-only" contracts. Whether they are is, in the light of the criteria provided for in
Article 106 of the Labor Code, a question of fact. Since the parties opted to submit the
case for judgment on the basis of their stipulation of facts which are strictly limited to
the insurance policy, the contracts with PRC Management Systems and Unicorn
Security Services, the complaint for violation of P.D. No. 532, and the information
therefor filed by the City Fiscal of Pasay City, there is a paucity of evidence as to
whether the contracts between Producers and the PRC Management Systems and
Unicorn Security Services are "labor-only" contracts. LLphil
But even granting for the sake of argument that these contracts were not
"labor-only" contracts, and PRC Management Systems and Unicorn Security Services
were truly independent contractors, we are satisfied that Magalong and Atiga were, in
respect of the transfer of Producer's money from its Pasay City branch to its head
office in Makati, its "authorized representatives" who served as such with its teller
Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific
duty to safely transfer the money to its head office, with Alampay to be responsible
for its custody in transit; Magalong to drive the armored vehicle which would carry the
money; and Atiga to provide the needed security for the money, the vehicle, and his
two other companions. In short, for these particular tasks, the three acted as agents
of Producers. A "representative" is defined as one who represents or stands in the
place of another; one who represents others or another in a special capacity, as an
agent, and is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general
exceptions clause of the insurance policy.
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court
of Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of

the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET
ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.
No pronouncement as to costs.
SO ORDERED.
Bellosillo and Kapunan, JJ., concur.
Padilla, J., took no part.
Quiason, J., is on leave.
||| (Fortune Insurance and Surety Co., Inc. v. Court of Appeals, G.R. No. 115278, May 23,
1995)

122

G.R. No. L-34200 September 30, 1982


REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitionersappellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST
INSTANCE OF
RIZAL, BRANCH V, QUEZON CITY, respondents-appellees.
K.V. Faylona for petitioners-appellants.
L. L. Reyes for respondents-appellees.

VASQUEZ, J.:
The question of law raised in this case that justified a direct appeal from a decision of the
Court of First Instance Rizal, Branch V, Quezon City, to be taken directly to the Supreme
Court is whether or not the acceptance by the private respondent insurance corporation
of the premium and the issuance of the corresponding certificate of insurance should be
deemed a waiver of the exclusionary condition of overage stated in the said certificate of
insurance.

The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied
with respondent insurance corporation for insurance coverage against accident and
injuries. She filled up the blank application form given to her and filed the same with the
respondent insurance corporation. In the said application form which was dated April 15,
1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the
sum of P20.00 representing the premium for which she was issued the corresponding
receipt signed by an authorized agent of the respondent insurance corporation. (Rollo, p.
27.) Upon the filing of said application and the payment of the premium on the policy
applied for, the respondent insurance corporation issued to Carmen O. Lapuz its
Certificate of Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a
period of 90 days.

On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen
O. Lapuz died in a vehicular accident in the North Diversion Road.

On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the
named beneficiary in the policy, filed her claim for the proceeds of the insurance,
submitting all the necessary papers and other requisites with the private respondent.
Her claim having been denied, Regina L. Edillon instituted this action in the Court of First
Instance of Rizal on August 27, 1969.

In resisting the claim of the petitioner, the respondent insurance corporation relies on a
provision contained in the Certificate of Insurance, excluding its liability to pay claims
under the policy in behalf of "persons who are under the age of sixteen (16) years of age
or over the age of sixty (60) years ..." It is pointed out that the insured being over sixty
(60) years of age when she applied for the insurance coverage, the policy was null and
void, and no risk on the part of the respondent insurance corporation had arisen
therefrom.

The trial court sustained the contention of the private respondent and dismissed the
complaint; ordered the petitioner to pay attorney's fees in the sum of ONE THOUSAND
(P1,000.00) PESOS in favor of the private respondent; and ordered the private
respondent to return the sum of TWENTY (P20.00) PESOS received by way of premium on
the insurancy policy. It was reasoned out that a policy of insurance being a contract of
adhesion, it was the duty of the insured to know the terms of the contract he or she is
entering into; the insured in this case, upon learning from its terms that she could not
have been qualified under the conditions stated in said contract, what she should have
done is simply to ask for a refund of the premium that she paid. It was further argued by
the trial court that the ruling calling for a liberal interpretation of an insurance contract in
favor of the insured and strictly against the insurer may not be applied in the present
case in view of the peculiar facts and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz
was not concealed to the insurance company. Her application for insurance coverage
which was on a printed form furnished by private respondent and which contained very
few items of information clearly indicated her age of the time of filing the same to be
almost 65 years of age. Despite such information which could hardly be overlooked in
the application form, considering its prominence thereon and its materiality to the
coverage applied for, the respondent insurance corporation received her payment of
premium and issued the corresponding certificate of insurance without question. The
accident which resulted in the death of the insured, a risk covered by the policy,
occurred on May 31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was
applied for. There was sufficient time for the private respondent to process the
application and to notice that the applicant was over 60 years of age and thereby cancel
the policy on that ground if it was minded to do so. If the private respondent failed to act,
it is either because it was willing to waive such disqualification; or, through the

negligence or incompetence of its employees for which it has only itself to blame, it
simply overlooked such fact. Under the circumstances, the insurance corporation is
already deemed in estoppel. It inaction to revoke the policy despite a departure from the
exclusionary condition contained in the said policy constituted a waiver of such
condition, as was held in the case of "Que Chee Gan vs. Law Union Insurance Co., Ltd.,",
98 Phil. 85. This case involved a claim on an insurance policy which contained a provision
as to the installation of fire hydrants the number of which depended on the height of the
external wan perimeter of the bodega that was insured. When it was determined that the
bodega should have eleven (11) fire hydrants in the compound as required by the terms
of the policy, instead of only two (2) that it had, the claim under the policy was resisted
on that ground. In ruling that the said deviation from the terms of the policy did not
prevent the claim under the same, this Court stated the following:

We are in agreement with the trial Court that the appellant is barred by waiver (or rather
estoppel) to claim violation of the so-called fire hydrants warranty, for the reason that
knowing fully an that the number of hydrants demanded therein never existed from the
very beginning, the appellant nevertheless issued the policies in question subject to such
warranty, and received the corresponding premiums. It would be perilously close to
conniving at fraud upon the insured to allow appellant to claim now as void ab initio the
policies that it had issued to the plaintiff without warning of their fatal defect, of which it
was informed, and after it had misled the defendant into believing that the policies were
effective.

The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Que Chee Gan and two
others nearby, owned by the municipality of Tabaco, contrary to the requirements of the
warranty in question. Such fact appears from positive testimony for the insured that
appellant's agents inspected the premises; and the simple denials of appellant's
representative (Jamiczon) can not overcome that proof. That such inspection was made it
moreover rendered probable by its being a prerequisite for the fixing of the discount on
the premium to which the insured was entitled, since the discount depended on the
number of hydrants, and the fire fighting equipment available (See"'Scale of Allowances"
to which the policies were expressly made subject). The law, supported by a long line of
cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate the
contract from its very inception, such knowledge constitutes a waiver of conditions in the
contract inconsistent with the known facts, and the insurer is stopped thereafter from

asserting the breach of such conditions. The law is charitable enough to assume, in the
absence of any showing to the contrary, that an insurance company intends to execute a
valid contract in return for the premium received; and when the policy contains a
condition which renders it voidable at its inception, and this result is known to the
insurer, it will be presumed to have intended to waive the conditions and to execute a
binding contract, rather than to have deceived the insured into thinking he is insured
when in fact he is not, and to have taken is money without consideration.' (29 Am. Jur.,
Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.


The plain, human justice of this doctrine is perfectly apparent. To allow a company to
accept one's money for a policy of insurance which it then knows to be void and of no
effect, though it knows as it must, that the assured believes it to be valid and binding, is
so contrary to the dictates of honesty and fair dealing, and so closely related to positive
fraud, as to be abhorent to fairminded men. It would be to allow the company to treat
the policy as valid long enough to get the premium on it, and leave it at liberty to
repudiate it the next moment. This cannot be deemed to be the real intention of the
parties. To hold that a literal construction of the policy expressed the true intention of the
company would be to indict it, for fraudulent purposes and designs which we cannot
believe it to be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540,
543544).

A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic
Era Co., Inc., 65 SCRA 134, which involved a violation of the provision of the policy
requiring the payment of premiums before the insurance shall become effective. The
company issued the policy upon the execution of a promissory note for the payment of
the premium. A check given subsequent by the insured as partial payment of the
premium was dishonored for lack of funds. Despite such deviation from the terms of the
policy, the insurer was held liable.

Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic
Era to pay the insurance premium within thirty (30) days from the effective date of
policy. By so doing, it has impliedly agreed to modify the tenor of the insurance policy
and in effect, waived the provision therein that it would only pay for the loss or damage
in case the same occurs after the payment of the premium. Considering that the
insurance policy is silent as to the mode of payment, Capital Insurance is deemed to
have accepted the promissory note in payment of the premium. This rendered the policy

immediately operative on the date it was delivered. The view taken in most cases in the
United States:

... is that although one of conditions of an insurance policy is that "it shall not be valid or
binding until the first premium is paid", if it is silent as to the mode of payment,
promissory notes received by the company must be deemed to have been accepted in
payment of the premium. In other words, a requirement for the payment of the first or
initial premium in advance or actual cash may be waived by acceptance of a promissory
note...
WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu
thereof, the private respondent insurance corporation is hereby ordered to pay to the
petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance
Certificate No. 128866 with interest at the legal rate from May 31, 1969 until fully paid,
the further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and
the costs of suit.

13
THIRD DIVISION
[G.R. No. 78860. May 28, 1990.]
PERLA COMPANIA DE SEGUROS, INC., petitioner, vs. HONORABLE
COURT OF APPEALS and MILAGROS CAYAS, respondents.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE; TERMS AND CONDITIONS IN THE POLICY;
MEASURES THE INSURER'S LIABILITY; CASE AT BAR. In the case at bar, the
insurance policy clearly and categorically placed petitioner's liability for all damages
arising out of death or bodily injury sustained by one person as a result of any one
accident at P12,000.00. Said amount complied with the minimum fixed by the law
then prevailing, Section 377 of Presidential Decree No. 612 (which was retained by
P.D. No. 1460, the Insurance Code of 1978), which provided that the liability of land
transportation vehicle operators for bodily injuries sustained by a passenger arising
out of the use of their vehicles shall not be less than P12,000. In other words, under
the law, the minimum liability is P12,000 per passenger. Petitioner's liability under the
insurance contract not being less than P12,000.00, and therefore not contrary to law,
morals, good customs, public order or public policy, said stipulation must be upheld as
effective, valid and binding as between the parties.
2.ID.; ID.; ID.; COMPLIANCE THEREWITH; CONDITION PRECEDENT TO THE RIGHT
OF RECOVERY OF THE INSURED. we rule as valid and binding upon private
respondent the condition above-quoted requiring her to secure the written permission
of petitioner before effecting any payment in settlement of any claim against her.
There is nothing unreasonable, arbitrary or objectionable in this stipulation as would
warrant its nullification. The same was obviously designed to safeguard the insurer's
interest against collusion between the insured and the claimants. It being specifically
required that petitioner's written consent be first secured before any payment in
settlement of any claim could be made, private respondent is precluded from seeking
reimbursement of the payments made to del Carmen, Magsarili and Antolin in view of
her failure to comply with the condition contained in the insurance policy.
3.CIVIL LAW; CONTRACTS; CONSIDERED PRIVATE LAWS OF THE CONTRACTING
PARTIES. The fundamental principle that contracts are respected as the law
between the contracting parties finds application in the present case. Thus, it was
error on the part of the trial and appellate courts to have disregarded the stipulations
of the parties and to have substituted their own interpretation of the insurance policy.
In Phil. American General Insurance Co., Inc. vs. Mutuc (G.R. No. L-19632, November
13, 1974, 61 SCRA 22, cited in Castro vs. Court of Appeals, G.R. No. L-44727,
September 11, 1980, 99 SCRA 197), we ruled that contracts which are the private
laws of the contracting parties should be fulfilled according to the literal sense of their
stipulations, if their terms are clear and leave no room for doubt as to the intention of
the contracting parties, for contracts are obligatory, no matter what form they may
be, whenever the essential requisites for their validity are present. Moreover, we
stated in Pacific Oxygen & Acetylene Co. vs. Central Bank (G.R. No. L-21881, March 1,
1969, 22 SCRA 917) that the first and fundamental duty of the courts is the

application of the law according to its express terms, interpretation being called for
only when such literal application is impossible.

DECISION

FERNAN, C.J p:
This is a petition for review on certiorari of the decision of the Court of Appeals
1 affirming in toto the decision of the Regional Trial Court of Cavite, Branch XVI, 2 the
dispositive portion of which states:
"IN VIEW OF THE FOREGOING, judgment is hereby rendered
ordering defendant Perla Compania de Seguros, Inc. to pay plaintiff
Milagros Cayas the sum of P50,000.00 under its maximum liability as
provided for in the insurance policy; and the sum of P5,000.00 as
reasonable attorney's fees, with costs against said defendant.
"SO ORDERED." 3
Private respondent Milagros Cayas was the registered owner of a Mazda bus
with serial No. TA3H4 P-000445 and plate No. PUB-4G-593. 4 Said passenger vehicle
was insured with Perla Compania de Seguros, Inc. (PCSI) under policy No. LTO/60CC04241 issued on February 3, 1978. 5
On December 17, 1978, the bus figured in an accident in Naic, Cavite injuring
several of its passengers. One of them, 19-year-old Edgardo Perea, sued Milagros
Cayas for damages in the Court of First Instance of Cavite, Branch I 6 docketed as
Civil Case No. NC-794; while three others, namely: Rosario del Carmen, Ricardo
Magsarili and Charlie Antolin, agreed to a settlement of P4,000.00 each with Milagros
Cayas.
At the pre-trial of Civil Case No. NC-794, Milagros Cayas failed to appear and
hence, she was declared as in default. After trial, the court rendered a decision 7 in
favor of Perea with its dispositive portion reading thus: llcd
"WHEREFORE, under our present imperatives, judgment is
hereby rendered in favor of the plaintiffs and against the defendant
Milagros Cayas who is hereby ordered to compensate the plaintiff
Edgar Perea with damages in the sum of Ten Thousand (P10,000.00)
Pesos for the medical predicament he found himself as damaging
consequences of defendant Milagros Cayas' complete lack of 'diligence
of a good father of a family' when she secured the driving services of
one Oscar Figueroa on December 17, 1978; the sum of Ten Thousand
(P10,000.00) Pesos for exemplary damages; the sum of Five Thousand
(P5,000.00) Pesos for moral damages; the sum of Seven Thousand
(P7,000.00) Pesos for Attorney's fees, under the imperatives of the
monetary power of the peso today;
"With costs against the defendant.
"SO ORDERED."
When the decision in Civil Case No. NC-794 was about to be executed against
her, Milagros Cayas filed a complaint against PCSI in the Office of the Insurance
Commissioner praying that PCSI be ordered to pay P40,000.00 for all the claims

against her arising from the vehicular accident plus legal and other expenses. 8
Realizing her procedural mistake, she later withdrew said complaint. 9
Consequently, on November 11, 1981, Milagros Cayas filed a complaint for a
sum of money and damages against PCSI in the Court of First Instance of Cavite (Civil
Case No. N-4161). She alleged therein that to satisfy the judgment in Civil Case No.
NC-794, her house and lot were levied upon and sold at public auction for P38,200;
10 that to avoid numerous suits and the "detention" of the insured vehicle, she paid
P4,000 to each of the following injured passengers: Rosario del Carmen, Ricardo
Magsarili and Charlie Antolin; that she could not have suffered said financial setback
had the counsel for PCSI, who also represented her, appeared at the trial of Civil Case
No. NC-794 and attended to the claims of the three other victims; that she sought
reimbursement of said amounts from the defendant, which, notwithstanding the fact
that her claim was within its contractual liability under the insurance policy, refused
to make such reimbursement; that she suffered moral damages as a consequence of
such refusal, and that she was constrained to secure the services of counsel to
protect her rights. She prayed that judgment be rendered directing PCSI to pay her
P50,000 for compensation of the injured victims, such sum as the court might
approximate as damages, and P6,000 as attorney's fees.
In view of Milagros Cayas' failure to prosecute the case, the court motu proprio
ordered its dismissal without prejudice. 11 Alleging that she had not received a copy
of the answer to the complaint, and that "out of sportsmanship", she did not file a
motion to hold PCSI in default, Milagros Cayas moved for the reconsideration of the
dismissal order. Said motion for reconsideration was acted upon favorably by the
court in its order of March 31, 1982.
About two months later, Milagros Cayas filed a motion to declare PCSI in default
for its failure to file an answer. The motion was granted and plaintiff was allowed to
adduce evidence ex-parte. On July 13, 1982, the court rendered judgment by default
ordering PCSI to pay Milagros Cayas P50,000 as compensation for the injured
passengers, P5,000 as moral damages and P5,000 as attorney's fees.
Said decision was set aside after the PCSI filed a motion therefor. Trial of the
case ensued. In due course, the court promulgated a decision in Civil Case No. N4161, the dispositive portion of which was quoted earlier, finding that: prLL
"In disavowing its obligation to plaintiff under the insurance
policy, defendant advanced the proposition that before it can be made
to pay, the liability must first be determined in an appropriate court
action. And so plaintiffs liability was determined in that case filed
against her by Perea in the Naic CFI. Still, despite this determination of
liability, defendant sought escape from its obligation by positing the
theory that plaintiff Milagros Cayas lost the Naic case due to her
negligence because of which, efforts exerted by defendant's lawyers in
protecting Cayas' rights proved futile and rendered nugatory. Blame
was laid entirely on plaintiff by defendant for losing the Naic case.
Defendant labored under the impression that had Cayas cooperated
fully with defendant's lawyers, the latter could have won the suit and
thus relieved of any obligation to Perea. Defendant's posture is
stretching the factual circumstances of the Naic case too far. But even
accepting defendant's postulate, it cannot be said, nor was it shown
positively and convincingly, that if the Naic case had proceeded on
trial on the merits, a decision favorable to Milagros Cayas could have

been obtained. Nor was it definitely established that if the pre-trial was
undertaken in that case, defendant's lawyers could have mitigated the
claim for damages by Perea against Cayas." 12
The court, however, held that inasmuch as Milagros Cayas failed to establish
that she underwent moral suffering and mental anguish to justify her prayer for
damages, there should be no such award. But, there being proof that she was
compelled to engage the services of counsel to protect her rights under the insurance
policy, the court allowed attorney's fees in the amount of P5,000.
PCSI appealed to the Court of Appeals, which, in its decision of May 8, 1987
affirmed in toto the lower court's decision. Its motion for reconsideration having been
denied by said appellate court, PCSI filed the instant petition charging the Court of
Appeals with having erred in affirming in toto the decision of the lower court.
At the outset, we hold as factual and therefore undeserving of this Court's
attention, petitioner's assertions that private respondent lost Civil Case No. NC-794
because of her negligence and that there is no proof that the decision in said case
has been executed. Said contentions, having been raised and threshed out in the
Court of Appeals and rejected by it, may no longer be addressed to this Court.
Petitioner's other contentions are primarily concerned with the extent of its
liability to private respondent under the insurance policy. This, we consider to be the
only issue in this case.
Petitioner seeks to limit its liability only to the payment made by private
respondent to Perea and only up to the amount of P12,000.00. It altogether denies
liability for the payments made by private respondents to the other three (3) injured
passengers Rosario del Carmen, Ricardo Magsarili and Charlie Antolin in the amount
of P4,000.00 each or a total of P12,000.00.
There is merit in petitioner's assertions.
The insurance policy involved explicitly limits petitioner's liability to P12,000.00
per person and to P50,000.00 per accident. 13 Pertinent provisions of the policy also
state:
"SECTION I Liability to the Public.
xxx xxx xxx
"3.The Limit of Liability stated in Schedule A as applicable (a) to
THIRD PARTY is the limit of the Company's liability for all damages
arising out of death, bodily injury and damage to property combined so
sustained as the result of any one accident; (b) "per person" for
PASSENGER liability is the limit of the Company's liability for all
damages arising out of death or bodily injury sustained by one person
as the result of any one accident; (c) "per accident" for PASSENGER
liability is, subject to the above provision respecting per person, the
total limit of the Company's liability for all such damages arising out of
death or bodily injury sustained by two or more persons as the result
of any one accident."
"Conditions Applicable to All Sections.
xxx xxx xxx

"5.No admission, offer, promise or payment shall be made by or


on behalf of the Insured without the written consent of the Company
which shall been titled, if it so desires, to take over and conduct in his
(sic) name the defense or settlement of any claim, or to prosecute in
his (sic) name for its own benefit any claim for indemnity or damages
or otherwise, and shall have full discretion in the conduct of any
proceedings in the settlement of any claim, and the insured shall give
all such information and assistance as the Company may require. If the
Company shall make any payment in settlement of any claim, and
such payment includes any amount not covered by this Policy, the
Insured shall repay the Company the amount not so covered.
We have ruled in Stokes vs. Malayan Insurance Co., Inc., 14 that the terms of
the contract constitute the measure of the insurer's liability and compliance therewith
is a condition precedent to the insured's right of recovery from the insurer. llcd
In the case at bar, the insurance policy clearly and categorically placed
petitioner's liability for all damages arising out of death or bodily injury sustained by
one person as a result of any one accident at P12,000.00. Said amount complied with
the minimum fixed by the law then prevailing, Section 377 of Presidential Decree No.
612 (which was retained by P.D. No. 1460, the Insurance Code of 1978), which
provided that the liability of land transportation vehicle operators for bodily injuries
sustained by a passenger arising out of the use of their vehicles shall not be less than
P12,000. In other words, under the law, the minimum liability is P12,000 per
passenger. Petitioner's liability under the insurance contract not being less than
P12,000.00, and therefore not contrary to law, morals, good customs, public order or
public policy, said stipulation must be upheld as effective, valid and binding as
between the parties. 15
In like manner, we rule as valid and binding upon private respondent the
condition above-quoted requiring her to secure the written permission of petitioner
before effecting any payment in settlement of any claim against her. There is nothing
unreasonable, arbitrary or objectionable in this stipulation as would warrant its
nullification. The same was obviously designed to safeguard the insurer's interest
against collusion between the insured and the claimants.
In her cross-examination before the trial court, Milagros Cayas admitted, thus:
"Atty. Yabut:
qWith respect to the other injured passengers of your bus wherein you
made payments you did not secure the consent of defendant (herein
petitioner) Perla Compania de Seguros when you made those
payments?
aI informed them about that.
qBut they did not give you the written authority that you were supposed to
pay those claims?
aNo, sir." 16
It being specifically required that petitioner's written consent be first secured
before any payment in settlement of any claim could be made, private respondent is
precluded from seeking reimbursement of the payments made to del Carmen,
Magsarili and Antolin in view of her failure to comply with the condition contained in
the insurance policy. LibLex

Clearly, the fundamental principle that contracts are respected as the law
between the contracting parties finds application in the present case. 17 Thus, it was
error on the part of the trial and appellate courts to have disregarded the stipulations
of the parties and to have substituted their own interpretation of the insurance policy.
In Phil. American General Insurance Co., Inc. vs. Mutuc, 18 we ruled that contracts
which are the private laws of the contracting parties should be fulfilled according to
the literal sense of their stipulations, if their terms are clear and leave no room for
doubt as to the intention of the contracting parties, for contracts are obligatory, no
matter what form they may be, whenever the essential requisites for their validity are
present.
Moreover, we stated in Pacific Oxygen & Acetylene Co. vs. Central Bank, 19
that the first and fundamental duty of the courts is the application of the law
according to its express terms, interpretation being called for only when such literal
application is impossible.
We observe that although Milagros Cayas was able to prove a total loss of only
P44,000.00, petitioner was made liable for the amount of P50,000.00, the maximum
liability per accident stipulated in the policy. This is patent error. An insurance
indemnity, being merely an assistance or restitution insofar as can be fairly
ascertained, cannot be availed of by any accident victim or claimant as an instrument
of enrichment by reason of an accident. 20
Finally, we find no reason to disturb the award of attorney's fees.
WHEREFORE, the decision of the Court of Appeals is hereby modified in that
petitioner shall pay Milagros Cayas the amount of Twelve Thousand Pesos
(P12,000.00) plus legal interest from the promulgation of the decision of the lower
court until it is fully paid and attorney's fees in the amount of P5,000.00. No
pronouncement as to costs.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

G.R. No. L-39419

14

April 12, 1982

MAPALAD AISPORNA, petitioner,


vs.
THE COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, respondents.

DE CASTRO, J.:

In this petition for certiorari, petitioner-accused Aisporna seeks the reversal of the
decision dated August 14, 1974 1 in CA-G.R. No. 13243-CR entitled "People of the
Philippines, plaintiff-appellee, vs. Mapalad Aisporna, defendant-appellant" of respondent
Court of Appeals affirming the judgment of the City Court of Cabanatuan 2 rendered on
August 2, 1971 which found the petitioner guilty for having violated Section 189 of the
Insurance Act (Act No. 2427, as amended) and sentenced her to pay a fine of P500.00
with subsidiary imprisonment in case of insolvency, and to pay the costs.

Petitioner Aisporna was charged in the City Court of Cabanatuan for violation of Section
189 of the Insurance Act on November 21, 1970 in an information 3 which reads as
follows:

That on or before the 21st day of June, 1969, in the City of Cabanatuan, Republic of the
Philippines, and within the jurisdiction of this Honorable Court, the above-named
accused, did then and there, wilfully, unlawfully and feloniously act as agent in the
solicitation or procurement of an application for insurance by soliciting therefor the
application of one Eugenio S. Isidro, for and in behalf of Perla Compania de Seguros, Inc.,
a duly organized insurance company, registered under the laws of the Republic of the
Philippines, resulting in the issuance of a Broad Personal Accident Policy No. 28PI-RSA
0001 in the amount not exceeding FIVE THOUSAND PESOS (P5,000.00) dated June 21,
1969, without said accused having first secured a certificate of authority to act as such
agent from the office of the Insurance Commissioner, Republic of the Philippines.

CONTRARY TO LAW.

The facts, 4 as found by the respondent Court of Appeals are quoted hereunder:

IT RESULTING: That there is no debate that since 7 March, 1969 and as of 21 June, 1969,
appellant's husband, Rodolfo S. Aisporna was duly licensed by Insurance Commission as
agent to Perla Compania de Seguros, with license to expire on 30 June, 1970, Exh. C; on
that date, at Cabanatuan City, Personal Accident Policy, Exh. D was issued by Perla thru
its author representative, Rodolfo S. Aisporna, for a period of twelve (12) months with
beneficiary as Ana M. Isidro, and for P5,000.00; apparently, insured died by violence
during lifetime of policy, and for reasons not explained in record, present information was
filed by Fiscal, with assistance of private prosecutor, charging wife of Rodolfo with
violation of Sec. 189 of Insurance Law for having, wilfully, unlawfully, and feloniously
acted, "as agent in the solicitation for insurance by soliciting therefore the application of
one Eugenio S. Isidro for and in behalf of Perla Compaa de Seguros, ... without said
accused having first secured a certificate of authority to act as such agent from the office
of the Insurance Commission, Republic of the Philippines."

and in the trial, People presented evidence that was hardly disputed, that
aforementioned policy was issued with active participation of appellant wife of Rodolfo,
against which appellant in her defense sought to show that being the wife of true agent,
Rodolfo, she naturally helped him in his work, as clerk, and that policy was merely a
renewal and was issued because Isidro had called by telephone to renew, and at that
time, her husband, Rodolfo, was absent and so she left a note on top of her husband's
desk to renew ...

Consequently, the trial court found herein petitioner guilty as charged. On appeal, the
trial court's decision was affirmed by the respondent appellate court finding the
petitioner guilty of a violation of the first paragraph of Section 189 of the Insurance Act.
Hence, this present recourse was filed on October 22, 1974. 5

In its resolution of October 28, 1974, 6 this Court resolved, without giving due course to
this instant petition, to require the respondent to comment on the aforesaid petition. In
the comment 7 filed on December 20, 1974, the respondent, represented by the Office of
the Solicitor General, submitted that petitioner may not be considered as having violated
Section 189 of the Insurance Act. 8 On April 3, 1975, petitioner submitted his Brief 9

while the Solicitor General, on behalf of the respondent, filed a manifestation 10 in lieu of
a Brief on May 3, 1975 reiterating his stand that the petitioner has not violated Section
189 of the Insurance Act.

In seeking reversal of the judgment of conviction, petitioner assigns the following errors
11 allegedly committed by the appellate court:

1.
THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT RECEIPT OF
COMPENSATION IS NOT AN ESSENTIAL ELEMENT OF THE CRIME DEFINED BY THE FIRST
PARAGRAPH OF SECTION 189 OF THE INSURANCE ACT.

2.
THE RESPONDENT COURT OF APPEALS ERRED IN GIVING DUE WEIGHT TO EXHIBITS
F, F-1, TO F-17, INCLUSIVE SUFFICIENT TO ESTABLISH PETITIONER'S GUILT BEYOND
REASONABLE DOUBT.

3.
THE RESPONDENT COURT OF APPEALS ERRED IN NOT ACQUITTING HEREIN
PETITIONER.

We find the petition meritorious.

The main issue raised is whether or not a person can be convicted of having violated the
first paragraph of Section 189 of the Insurance Act without reference to the second
paragraph of the same section. In other words, it is necessary to determine whether or
not the agent mentioned in the first paragraph of the aforesaid section is governed by
the definition of an insurance agent found on its second paragraph.

The pertinent provision of Section 189 of the Insurance Act reads as follows:

No insurance company doing business within the Philippine Islands, nor any agent
thereof, shall pay any commission or other compensation to any person for services in

obtaining new insurance, unless such person shall have first procured from the Insurance
Commissioner a certificate of authority to act as an agent of such company as
hereinafter provided. No person shall act as agent, sub-agent, or broker in the solicitation
of procurement of applications for insurance, or receive for services in obtaining new
insurance, any commission or other compensation from any insurance company doing
business in the Philippine Islands, or agent thereof, without first procuring a certificate of
authority so to act from the Insurance Commissioner, which must be renewed annually
on the first day of January, or within six months thereafter. Such certificate shall be
issued by the Insurance Commissioner only upon the written application of persons
desiring such authority, such application being approved and countersigned by the
company such person desires to represent, and shall be upon a form approved by the
Insurance Commissioner, giving such information as he may require. The Insurance
Commissioner shall have the right to refuse to issue or renew and to revoke any such
certificate in his discretion. No such certificate shall be valid, however, in any event after
the first day of July of the year following the issuing of such certificate. Renewal
certificates may be issued upon the application of the company.

Any person who for compensation solicits or obtains insurance on behalf of any
insurance company, or transmits for a person other than himself an application for a
policy of insurance to or from such company or offers or assumes to act in the
negotiating of such insurance, shall be an insurance agent within the intent of this
section, and shall thereby become liable to all the duties, requirements, liabilities, and
penalties to which an agent of such company is subject.

Any person or company violating the provisions of this section shall be fined in the sum
of five hundred pesos. On the conviction of any person acting as agent, sub-agent, or
broker, of the commission of any offense connected with the business of insurance, the
Insurance Commissioner shall immediately revoke the certificate of authority issued to
him and no such certificate shall thereafter be issued to such convicted person.

A careful perusal of the above-quoted provision shows that the first paragraph thereof
prohibits a person from acting as agent, sub-agent or broker in the solicitation or
procurement of applications for insurance without first procuring a certificate of authority
so to act from the Insurance Commissioner, while its second paragraph defines who is an
insurance agent within the intent of this section and, finally, the third paragraph thereof
prescribes the penalty to be imposed for its violation.

The respondent appellate court ruled that the petitioner is prosecuted not under the
second paragraph of Section 189 of the aforesaid Act but under its first paragraph. Thus

... it can no longer be denied that it was appellant's most active endeavors that
resulted in issuance of policy to Isidro, she was there and then acting as agent, and
received the pay thereof her defense that she was only acting as helper of her
husband can no longer be sustained, neither her point that she received no
compensation for issuance of the policy because

any person who for compensation solicits or obtains insurance on behalf of


any insurance company or transmits for a person other than himself an
application for a policy of insurance to or from such company or offers or
assumes to act in the negotiating of such insurance, shall be an insurance
agent within the intent of this section, and shall thereby become liable to all
the duties, requirements, liabilities, and penalties, to which an agent of such
company is subject. paragraph 2, Sec. 189, Insurance Law,

now it is true that information does not even allege that she had obtained the
insurance, for compensation which is the gist of the offense in Section 189 of the
Insurance Law in its 2nd paragraph, but what appellant apparently overlooks is
that she is prosecuted not under the 2nd but under the 1st paragraph of Sec. 189
wherein it is provided that,

No person shall act as agent, sub-agent, or broker, in the solicitation or


procurement of applications for insurance, or receive for services in obtaining
new insurance any commission or other compensation from any insurance
company doing business in the Philippine Island, or agent thereof, without
first procuring a certificate of authority to act from the insurance
commissioner, which must be renewed annually on the first day of January,
or within six months thereafter.

therefore, there was no technical defect in the wording of the charge, so that Errors
2 and 4 must be overruled. 12

From the above-mentioned ruling, the respondent appellate court seems to imply that
the definition of an insurance agent under the second paragraph of Section 189 is not
applicable to the insurance agent mentioned in the first paragraph. Parenthetically, the
respondent court concludes that under the second paragraph of Section 189, a person is
an insurance agent if he solicits and obtains an insurance for compensation, but, in its
first paragraph, there is no necessity that a person solicits an insurance for
compensation in order to be called an insurance agent.

We find this to be a reversible error. As correctly pointed out by the Solicitor General, the
definition of an insurance agent as found in the second paragraph of Section 189 is
intended to define the word "agent" mentioned in the first and second paragraphs of the
aforesaid section. More significantly, in its second paragraph, it is explicitly provided that
the definition of an insurance agent is within the intent of Section 189. Hence

Any person who for compensation ... shall be an insurance agent within the intent of this
section, ...

Patently, the definition of an insurance agent under the second paragraph holds true
with respect to the agent mentioned in the other two paragraphs of the said section. The
second paragraph of Section 189 is a definition and interpretative clause intended to
qualify the term "agent" mentioned in both the first and third paragraphs of the aforesaid
section.

Applying the definition of an insurance agent in the second paragraph to the agent
mentioned in the first and second paragraphs would give harmony to the aforesaid three
paragraphs of Section 189. Legislative intent must be ascertained from a consideration
of the statute as a whole. The particular words, clauses and phrases should not be
studied as detached and isolated expressions, but the whole and every part of the
statute must be considered in fixing the meaning of any of its parts and in order to
produce harmonious whole. 13 A statute must be so construed as to harmonize and give
effect to all its provisions whenever possible. 14 The meaning of the law, it must be
borne in mind, is not to be extracted from any single part, portion or section or from
isolated words and phrases, clauses or sentences but from a general consideration or
view of the act as a whole. 15 Every part of the statute must be interpreted with
reference to the context. This means that every part of the statute must be considered
together with the other parts, and kept subservient to the general intent of the whole
enactment, not separately and independently. 16 More importantly, the doctrine of

associated words (Noscitur a Sociis) provides that where a particular word or phrase in a
statement is ambiguous in itself or is equally susceptible of various meanings, its true
meaning may be made clear and specific by considering the company in which it is found
or with which it is associated. 17

Considering that the definition of an insurance agent as found in the second paragraph is
also applicable to the agent mentioned in the first paragraph, to receive a compensation
by the agent is an essential element for a violation of the first paragraph of the aforesaid
section. The appellate court has established ultimately that the petitioner-accused did
not receive any compensation for the issuance of the insurance policy of Eugenio Isidro.
Nevertheless, the accused was convicted by the appellate court for, according to the
latter, the receipt of compensation for issuing an insurance policy is not an essential
element for a violation of the first paragraph of Section 189 of the Insurance Act.

We rule otherwise. Under the Texas Penal Code 1911, Article 689, making it a
misdemeanor for any person for direct or indirect compensation to solicit insurance
without a certificate of authority to act as an insurance agent, an information, failing to
allege that the solicitor was to receive compensation either directly or indirectly, charges
no offense. 18 In the case of Bolen vs. Stake, 19 the provision of Section 3750, Snyder's
Compiled Laws of Oklahoma 1909 is intended to penalize persons only who acted as
insurance solicitors without license, and while acting in such capacity negotiated and
concluded insurance contracts for compensation. It must be noted that the information,
in the case at bar, does not allege that the negotiation of an insurance contracts by the
accused with Eugenio Isidro was one for compensation. This allegation is essential, and
having been omitted, a conviction of the accused could not be sustained. It is wellsettled in Our jurisprudence that to warrant conviction, every element of the crime must
be alleged and proved. 20

After going over the records of this case, We are fully convinced, as the Solicitor General
maintains, that accused did not violate Section 189 of the Insurance Act.

WHEREFORE, the judgment appealed from is reversed and the accused is acquitted of
the crime charged, with costs de oficio.

SO ORDERED.

Teehankee (Acting C.J.,) Makasiar, De Castro, Fernandez, Guerrero and Melencio-Herrera,


JJ., concur.

Plana, J., took no part.

G.R. No. 136914

15

January 25, 2002

COUNTRY BANKERS INSURANCE CORPORATION, petitioner,


vs.
LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE, INC., respondent.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of
Appeals2 dated December 29, 1998 in CA-G.R. CV Case No. 36902 affirming in toto the
Decision3 dated December 26, 1991 of the Regional Trial Court of Lianga, Surigao del Sur,
Branch 28, in Civil Case No. L-518 which ordered petitioner Country Bankers Insurance
Corporation to fully pay the insurance claim of respondent Lianga Bay and Community
Multi-Purpose Cooperative, Inc., under Fire Insurance Policy No. F-1397, for loss sustained
as a result of the fire that occurred on July 1, 1989 in the amount of Two Hundred
Thousand Pesos (P200,000.00), with interest at twelve percent (12%) per annum from
the date of filing of the complaint until fully paid, as well as Fifty Thousand Pesos
(P50,000.00) as actual damages, Fifty Thousand Pesos (P50,000.00) as exemplary
damages, Five Thousand Pesos (P5,000.00) as litigation expenses, Ten Thousand Pesos
(P10,000.00) as attorneys fees, and the costs of suit.

The facts are undisputed:


The petitioner is a domestic corporation principally engaged in the insurance business
wherein it undertakes, for a consideration, to indemnify another against loss, damage or
liability from an unknown or contingent event including fire while the respondent is a
duly registered cooperative judicially declared insolvent and represented by the elected
assignee, Cornelio Jamero.
It appears that sometime in 1989, the petitioner and the respondent entered into a
contract of fire insurance. Under Fire Insurance Policy No. F-1397, the petitioner insured
the respondents stocks-in-trade against fire loss, damage or liability during the period
starting from June 20, 1989 at 4:00 p.m. to June 20, 1990 at 4:00 p.m., for the sum of
Two Hundred Thousand Pesos (P200,000.00).

On July 1, 1989, at or about 12:40 a.m., the respondents building located at Barangay
Diatagon, Lianga, Surigao del Sur was gutted by fire and reduced to ashes, resulting in
the total loss of the respondents stocks-in-trade, pieces of furnitures and fixtures,
equipments and records.

Due to the loss, the respondent filed an insurance claim with the petitioner under its Fire
Insurance Policy No. F-1397, submitting: (a) the Spot Report of Pfc. Arturo V. Juarbal, INP
Investigator, dated July 1, 1989; (b) the Sworn Statement of Jose Lomocso; and (c) the
Sworn Statement of Ernesto Urbiztondo.
The petitioner, however, denied the insurance claim on the ground that, based on the
submitted documents, the building was set on fire by two (2) NPA rebels who wanted to
obtain canned goods, rice and medicines as provisions for their comrades in the forest,
and that such loss was an excepted risk under paragraph No. 6 of the policy conditions of
Fire Insurance Policy No. F-1397, which provides:
This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly, of any of the following occurrences, namely:
xxx

xxx

xxx

(d) Mutiny, riot, military or popular uprising, insurrection, rebellion, revolution, military or
usurped power.
Any loss or damage happening during the existence of abnormal conditions (whether
physical or otherwise) which are occasioned by or through or in consequence, directly or
indirectly, of any of said occurrences shall be deemed to be loss or damage which is not
covered by this insurance, except to the extent that the Insured shall prove that such
loss or damage happened independently of the existence of such abnormal conditions.
Finding the denial of its claim unacceptable, the respondent then instituted in the trial
court the complaint for recovery of "loss, damage or liability" against petitioner. The
petitioner answered the complaint and reiterated the ground it earlier cited to deny the
insurance claim, that is, that the loss was due to NPA rebels, an excepted risk under the
fire insurance policy.
In due time, the trial court rendered its Decision dated December 26, 1991 in favor of the
respondent, declaring that:

Based on its findings, it is therefore the considered opinion of this Court, as it so holds,
that the defenses raised by defendant-Country Bankers has utterly crumbled on account
of its inherent weakness, incredibility and unreliability, and after applying those helpful
tools like common sense, logic and the Courts honest appraisal of the real and actual
situation obtaining in this area, such defenses remains (sic) unimpressive and
unconvincing, and therefore, the defendant-Country Bankers has to be irreversibly
adjudged liable, as it should be, to plaintiff-Insolvent Cooperative, represented in this
action by its Assignee, Cornelio Jamero, and thus, ordering said defendant-Country
Bankers to pay the plaintiff-Insolvent Cooperative, as follows:

1. To fully pay the insurance claim for the loss the insured-plaintiff sustained as a result
of the fire under its Fire Insurance Policy No. F-1397 in its full face value of P200,000.00
with interest of 12% per annum from date of filing of the complaint until the same is fully
paid;
2. To pay as and in the concept of actual or compensatory damages in the total sum
of P50,000.00;
3. To pay as and in the concept of exemplary damages in the total sum of P50,000.00;
4. To pay in the concept of litigation expenses the sum of P5,000.00;
5. To pay by way of reimbursement the attorneys fees in the sum of P10,000.00; and
6. To pay the costs of the suit.

For being unsubstantiated with credible and positive evidence, the "counterclaim" is
dismissed.
IT IS SO ORDERED.

Petitioner interposed an appeal to the Court of Appeals. On December 29, 1998, the
appellate court affirmed the challenged decision of the trial court in its entirety.
Petitioner now comes before us via the instant petition anchored on three (3) assigned
errors,4 to wit:
1. THE HONORABLE COURT OF APPEALS FAILED TO APPRECIATE AND GIVE
CREDENCE TO THE SPOT REPORT OF PFC. ARTURO JUARBAL (EXH. 3) AND THE
SWORN STATEMENT OF JOSE LOMOCSO (EXH. 4) THAT THE RESPONDENTS
STOCK-IN-TRADE WAS BURNED BY THE NPA REBELS, HENCE AN EXCEPTED RISK
UNDER THE FIRE INSURANCE POLICY.
2. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER LIABLE
FOR 12% INTEREST PER ANNUM ON THE FACE VALUE OF THE POLICY FROM THE
FILING OF THE COMPLAINT UNTIL FULLY PAID.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THE PETITIONER
LIABLE FOR ACTUAL AND EXEMPLARY DAMAGES, LITIGATION EXPENSES,
ATTORNEYS FEES AND COST OF SUIT.

A party is bound by his own affirmative allegations. This is a well-known postulate


echoed in Section 1 of Rule 131 of the Revised Rules of Court. Each party must prove his
own affirmative allegations by the amount of evidence required by law which in civil
cases, as in this case, is preponderance of evidence, to obtain a favorable judgment. 5

In the instant case, the petitioner does not dispute that the respondents stocks-in-trade
were insured against fire loss, damage or liability under Fire Insurance Policy No. F- 1397
and that the respondent lost its stocks-in-trade in a fire that occurred on July 1, 1989,
within the duration of said fire insurance. The petitioner, however, posits the view that
the cause of the loss was an excepted risk under the terms of the fire insurance policy.

Where a risk is excepted by the terms of a policy which insures against other perils or
hazards, loss from such a risk constitutes a defense which the insurer may urge, since it
has not assumed that risk, and from this it follows that an insurer seeking to defeat a
claim because of an exception or limitation in the policy has the burden of proving that
the loss comes within the purview of the exception or limitation set up. If a proof is made
of a loss apparently within a contract of insurance, the burden is upon the insurer to
prove that the loss arose from a cause of loss which is excepted or for which it is not
liable, or from a cause which limits its liability.6 Stated else wise, since the petitioner in
this case is defending on the ground of non-coverage and relying upon an exemption or
exception clause in the fire insurance policy, it has the burden of proving the facts upon
which such excepted risk is based, by a preponderance of evidence.7 But petitioner failed
to do so.
The petitioner relies on the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo
as well as on the Spot Report of Pfc. Arturo V. Juarbal dated July 1, 1989, more
particularly the following statement therein:
xxx investigation revealed by Jose Lomocso that those armed men wanted to get can
goods and rice for their consumption in the forest PD investigation further disclosed that
the perpetrator are member (sic) of the NPA PD end x x x

A witness can testify only to those facts which he knows of his personal knowledge,
which means those facts which are derived from his perception. 8 Consequently, a witness
may not testify as to what he merely learned from others either because he was told or
read or heard the same. Such testimony is considered hearsay and may not be received
as proof of the truth of what he has learned. Such is the hearsay rule which applies not
only to oral testimony or statements but also to written evidence as well.9

The hearsay rule is based upon serious concerns about the trustworthiness and reliability
of hearsay evidence inasmuch as such evidence are not given under oath or solemn
affirmation and, more importantly, have not been subjected to cross-examination by
opposing counsel to test the perception, memory, veracity and articulateness of the outof-court declarant or actor upon whose reliability on which the worth of the out-of-court
statement depends.10

Thus, the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo are inadmissible in
evidence, for being hearsay, inasmuch as they did not take the witness stand and could
not therefore be cross-examined.
There are exceptions to the hearsay rule, among which are entries in official records. 11 To
be admissible in evidence, however, three (3) requisites must concur, to wit:
(a) that the entry was made by a public officer, or by another person specially enjoined
by law to do so;
(b) that it was made by the public officer in the performance of his duties, or by such
other person in the performance of a duty specially enjoined by law; and
(c) that the public officer or other person had sufficient knowledge of the facts by him
stated, which must have been acquired by him personally or through official
information.12
The third requisite was not met in this case since no investigation, independent of the
statements gathered from Jose Lomocso, was conducted by Pfc. Arturo V. Juarbal. In fact,
as the petitioner itself pointed out, citing the testimony of Pfc. Arturo Juarbal,13 the
latters Spot Report "was based on the personal knowledge of the caretaker Jose
Lomocso who witnessed every single incident surrounding the facts and circumstances
of the case." This argument undeniably weakens the petitioners defense, for the Spot
Report of Pfc. Arturo Juarbal relative to the statement of Jose Lomocso to the effect that
NPA rebels allegedly set fire to the respondents building is inadmissible in evidence, for
the purpose of proving the truth of the statements contained in the said report, for being
hearsay.

The said Spot Report is admissible only insofar as it constitutes part of the testimony of
Pfc. Arturo V. Juarbal since he himself took the witness stand and was available for crossexamination. The portions of his Spot Report which were of his personal knowledge or
which consisted of his perceptions and conclusions are not hearsay. The rest of the said
report relative to the statement of Jose Lomocso may be considered as independently
relevant statements gathered in the course of Juarbals investigation and may be
admitted as such but not necessarily to prove the truth thereof.14

The petitioners evidence to prove its defense is sadly wanting and thus, gives rise to its
liability to the respondent under Fire Insurance Policy No. F-1397. Nonetheless, we do not
sustain the trial courts imposition of twelve percent (12%) interest on the insurance
claim as well as the monetary award for actual and exemplary damages, litigation
expenses and attorneys fees for lack of legal and valid basis.
Concerning the application of the proper interest rates, the following guidelines were set
in Eastern Shipping Lines, Inc. v. Court of Appeals and Mercantile Insurance Co., Inc.:15

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,


delicts or quasi-delicts, is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its

satisfaction, this interim period being deemed to be by then an equivalent to a


forbearance of credit.

In the said case of Eastern Shipping, the Court further observed that a "forbearance" in
the context of the usury law is a "contractual obligation of lender or creditor to refrain,
during a given period of time, from requiring the borrower or debtor to repay a loan or
debt then due and payable."
Considering the foregoing, the insurance claim in this case is evidently not a forbearance
of money, goods or credit, and thus the interest rate should be as it is hereby fixed at six
percent (6%) computed from the date of filing of the complaint.

We find no justification for the award of actual damages of Fifty Thousand Pesos
(P50,000.00). Well-entrenched is the doctrine that actual, compensatory and
consequential damages must be proved, and cannot be presumed. 16That part of the
dispositive portion of the Decision of the trial court ordering the petitioner to pay actual
damages of Fifty Thousand Pesos (P50,000.00) has no basis at all. The justification, if
any, for such an award of actual damages does not appear in the body of the decision of
the trial court. Neither is there any testimonial and documentary evidence on the alleged
actual damages of Fifty Thousand Pesos (P50,000.00) to warrant such an award. Thus,
the same must be deleted.

Concerning the award of exemplary damages for Fifty Thousand Pesos (P50,000.00), we
likewise find no legal and valid basis for granting the same. Article 2229 of the New Civil
Code provides that exemplary damages may be imposed by way of example or
correction for the public good. Exemplary damages are imposed not to enrich one party
or impoverish another but to serve as a deterrent against or as a negative incentive to
curb socially deleterious actions. They are designed to permit the courts to mould
behavior that has socially deleterious consequences, and its imposition is required by
public policy to suppress the wanton acts of an offender. However, it cannot be
recovered as a matter of right. It is based entirely on the discretion of the court. We find
no cogent and valid reason to award the same in the case at bar.

With respect to the award of litigation expenses and attorneys fees, Article 2208 of the
New Civil Code17enumerates the instances where such may be awarded and, in all cases,
it must be reasonable, just and equitable if the same were to be granted. Attorneys fees
as part of damages are not meant to enrich the winning party at the expense of the
losing litigant. They are not awarded every time a party prevails in a suit because of the

policy that no premium should be placed on the right to litigate.18 The award of
attorneys fees is the exception rather than the general rule. As such, it is necessary for
the court to make findings of facts and law that would bring the case within the
exception and justify the grant of such award. We find none in this case to warrant the
award by the trial court of litigation expenses and attorneys fees in the amounts of Five
Thousand Pesos (P5,000.00) and Ten Thousand Pesos (P10,000.00), respectively, and
therefore, the same must also be deleted.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest on the adjudged
principal amount of Two Hundred Thousand Pesos (P200,000.00) shall be six percent
(6%) per annum computed from the date of filing of the Complaint in the trial court. The
awards in the amounts of Fifty Thousand Pesos (P50,000.00) as actual damages, Fifty
Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00)
as litigation expenses, and Ten Thousand Pesos (P10,000.00) as attorneys fees are
hereby DELETED. Costs against the petitioner.

G.R. No. 138941

16

October 8, 2001

AMERICAN HOME ASSURANCE COMPANY, petitioner,


vs.
TANTUCO ENTERPRISES, INC., respondent.
PUNO, J.:
Before us is a Petition for Review on Certiorari assailing the Decision of the Court of
Appeals in CA-G.R. CV No. 52221 promulgated on January 14, 1999, which affirmed in
toto the Decision of the Regional Trial Court, Branch 53, Lucena City in Civil Case No. 9251 dated October 16, 1995.

Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining
industry. It owns two oil mills. Both are located at factory compound at Iyam, Lucena City.
It appears that respondent commenced its business operations with only one oil mill. In
1988, it started operating its second oil mill. The latter came to be commonly referred to
as the new oil mill.

The two oil mills were separately covered by fire insurance policies issued by petitioner
American Home Assurance Co., Philippine Branch.1 The first oil mill was insured for three
million pesos (P3,000,000.00) under Policy No. 306-7432324-3 for the period March 1,
1991 to 1992.2 The new oil mill was insured for six million pesos (P6,000,000.00) under
Policy No. 306-7432321-9 for the same term.3 Official receipts indicating payment for the
full amount of the premium were issued by the petitioner's agent.4

A fire that broke out in the early morning of September 30,1991 gutted and consumed
the new oil mill. Respondent immediately notified the petitioner of the incident. The
latter then sent its appraisers who inspected the burned premises and the properties
destroyed. Thereafter, in a letter dated October 15, 1991, petitioner rejected
respondent's claim for the insurance proceeds on the ground that no policy was issued
by it covering the burned oil mill. It stated that the description of the insured
establishment referred to another building thus: "Our policy nos. 306-7432321-9 (Ps 6M)
and 306-7432324-4 (Ps 3M) extend insurance coverage to your oil mill under Building No.
5, whilst the affected oil mill was under Building No. 14. "5
A complaint for specific performance and damages was consequently instituted by the
respondent with the RTC, Branch 53 of Lucena City. On October 16, 1995, after trial, the
lower court rendered a Decision finding the petitioner liable on the insurance policy thus:

"WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to pay


plaintiff:
(a) P4,406,536.40 representing damages for loss by fire of its insured property with
interest at the legal rate;
(b) P80,000.00 for litigation expenses;
(c) P300,000.00 for and as attorney's fees; and
(d) Pay the costs.
SO ORDERED."6
Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld
the same in a Decision promulgated on January 14, 1999, the pertinent portion of which
states:

"WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the trial
court's Decision dated October 16, 1995 is hereby AFFIRMED in toto.
SO ORDERED."7

Petitioner moved for reconsideration. The motion, however, was denied for lack of merit
in a Resolution promulgated on June 10, 1999.

Hence, the present course of action, where petitioner ascribes to the appellate court the
following errors:
"(1) The Court of Appeals erred in its conclusion that the issue of non-payment of the
premium was beyond its jurisdiction because it was raised for the first time on appeal."8
"(2) The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing Appliances
Warranty' of the policy."9
"(3) With due respect, the conclusion of the Court of Appeals giving no regard to the
parole evidence rule and the principle of estoppel is erroneous."10

The petition is devoid of merit.

The primary reason advanced by the petitioner in resisting the claim of the respondent is
that the burned oil mill is not covered by any insurance policy. According to it, the oil mill
insured is specifically described in the policy by its boundaries in the following manner:
"Front: by a driveway thence at 18 meters distance by Bldg. No. 2.
Right: by an open space thence by Bldg. No. 4.
Left: Adjoining thence an imperfect wall by Bldg. No. 4.
Rear: by an open space thence at 8 meters distance."
However, it argues that this specific boundary description clearly pertains, not to the
burned oil mill, but to the other mill. In other words, the oil mill gutted by fire was not the
one described by the specific boundaries in the contested policy.

What exacerbates respondent's predicament, petitioner posits, is that it did not have the
supposed wrong description or mistake corrected. Despite the fact that the policy in
question was issued way back in 1988, or about three years before the fire, and despite
the "Important Notice" in the policy that "Please read and examine the policy and if
incorrect, return it immediately for alteration," respondent apparently did not call
petitioner's attention with respect to the misdescription.

By way of conclusion, petitioner argues that respondent is "barred by the parole


evidence rule from presenting evidence (other than the policy in question) of its selfserving intention (sic) that it intended really to insure the burned oil mill," just as it is
"barred by estoppel from claiming that the description of the insured oil mill in the policy
was wrong, because it retained the policy without having the same corrected before the
fire by an endorsement in accordance with its Condition No. 28."
These contentions can not pass judicial muster.

In construing the words used descriptive of a building insured, the greatest liberality is
shown by the courts in giving effect to the insurance.11 In view of the custom of
insurance agents to examine buildings before writing policies upon them, and since a
mistake as to the identity and character of the building is extremely unlikely, the courts
are inclined to consider that the policy of insurance covers any building which the parties
manifestly intended to insure, however inaccurate the description may be. 12

Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our


mind, that what the parties manifestly intended to insure was the new oil mill. This is
obvious from the categorical statement embodied in the policy, extending its protection:
"On machineries and equipment with complete accessories usual to a coconut oil mill
including stocks of copra, copra cake and copra mills whilst contained in the new oil
mill building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY
UNBLOCKED.''13 (emphasis supplied.)

If the parties really intended to protect the first oil mill, then there is no need to specify it
as new.
Indeed, it would be absurd to assume that respondent would protect its first oil mill for
different amounts and leave uncovered its second one. As mentioned earlier, the first oil
mill is already covered under Policy No. 306-7432324-4 issued by the petitioner. It is
unthinkable for respondent to obtain the other policy from the very same company. The
latter ought to know that a second agreement over that same realty results in its over
insurance.
The imperfection in the description of the insured oil mill's boundaries can be attributed
to a misunderstanding between the petitioner's general agent, Mr. Alfredo Borja, and its
policy issuing clerk, who made the error of copying the boundaries of the first oil mill
when typing the policy to be issued for the new one. As testified to by Mr. Borja:
"Atty. G. Camaligan:
Q:

What did you do when you received the report?

A:
I told them as will be shown by the map the intention really of Mr. Edison Tantuco
is to cover the new oil mill that is why when I presented the existing policy of the old
policy, the policy issuing clerk just merely (sic) copied the wording from the old policy
and what she typed is that the description of the boundaries from the old policy
was copied but she inserted covering the new oil mill and to me at that time
the important thing is that it covered the new oil mill because it is just within
one compound and there are only two oil mill[s] and so just enough, I had the
policy prepared. In fact, two policies were prepared having the same date one for the old
one and the other for the new oil mill and exactly the same policy period,
sir."14 (emphasis supplied)

It is thus clear that the source of the discrepancy happened during the preparation of the
written contract.

These facts lead us to hold that the present case falls within one of the recognized
exceptions to the parole evidence rule. Under the Rules of Court, a party may present
evidence to modify, explain or add to the terms of the written agreement if he puts in
issue in his pleading, among others, its failure to express the true intent and agreement
of the parties thereto.15 Here, the contractual intention of the parties cannot be
understood from a mere reading of the instrument. Thus, while the contract explicitly
stipulated that it was for the insurance of the new oil mill, the boundary description
written on the policy concededly pertains to the first oil mill. This irreconcilable difference
can only be clarified by admitting evidence aliunde, which will explain the imperfection
and clarify the intent of the parties.

Anent petitioner's argument that the respondent is barred by estoppel from claiming that
the description of the insured oil mill in the policy was wrong, we find that the same
proceeds from a wrong assumption. Evidence on record reveals that respondent's
operating manager, Mr. Edison Tantuco, notified Mr. Borja (the petitioner's agent with
whom respondent negotiated for the contract) about the inaccurate description in the
policy. However, Mr. Borja assured Mr. Tantuco that the use of the adjective new will
distinguish the insured property. The assurance convinced respondent, despite the
impreciseness in the specification of the boundaries, the insurance will cover the new oil
mill. This can be seen from the testimony on cross of Mr. Tantuco:
"ATTY. SALONGA:
Q:
You mentioned, sir, that at least in so far as Exhibit A is concern you have read
what the policy contents. (sic)
Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly
the boundaries of the property insured by the insurance policy Exhibit A, will you tell us
as the manager of the company whether the boundaries stated in Exhibit A-2 are the
boundaries of the old (sic) mill that was burned or not.
A:
It was not, I called up Mr. Borja regarding this matter and he told me that what is
important is the word new oil mill. Mr. Borja said, as a matter of fact, you can never
insured (sic) one property with two (2) policies, you will only do that if you will make to
increase the amount and it is by indorsement not by another policy, sir., 16
We again stress that the object of the court in construing a contract is to ascertain the
intent of the parties to the contract and to enforce the agreement which the parties have
entered into. In determining what the parties intended, the courts will read and construe
the policy as a whole and if possible, give effect to all the parts of the contract, keeping
in mind always, however, the prime rule that in the event of doubt, this doubt is to be
resolved against the insurer. In determining the intent of the parties to the contract, the
courts will consider the purpose and object of the contract.17

In a further attempt to avoid liability, petitioner claims that respondent forfeited the
renewal policy for its failure to pay the full amount of the premium and breach of the Fire
Extinguishing Appliances Warranty.
The amount of the premium stated on the face of the policy was P89,770.20. From the
admission of respondent's own witness, Mr. Borja, which the petitioner cited, the former
only paid it P75,147.00, leaving a difference of P14,623.20. The deficiency, petitioner
argues, suffices to invalidate the policy, in accordance with Section 77 of the Insurance
Code.18
The Court of Appeals refused to consider this contention of the petitioner. It held that this
issue was raised for the first time on appeal, hence, beyond its jurisdiction to resolve,
pursuant to Rule 46, Section 18 of the Rules of Court.19

Petitioner, however, contests this finding of the appellate court. It insists that the issue
was raised in paragraph 24 of its Answer, viz.:
"24. Plaintiff has not complied with the condition of the policy and renewal certificate
that the renewal premium should be paid on or before renewal date."
Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who
acknowledged that the paid amount was lacking by P14,623.20 by reason of a discount
or rebate, which rebate under Sec. 361 of the Insurance Code is illegal.

The argument fails to impress. It is true that the asseverations petitioner made in
paragraph 24 of its Answer ostensibly spoke of the policy's condition for payment of the
renewal premium on time and respondent's non-compliance with it. Yet, it did not contain
any specific and definite allegation that respondent did not pay the premium, or that it
did not pay the full amount, or that it did not pay the amount on time.
Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial
proceedings, the question of the supposed inadequate payment was never raised. Most
significant to point, petitioner fatally neglected to present, during the whole course of
the trial, any witness to testify that respondent indeed failed to pay the full amount of
the premium. The thrust of the cross-examination of Mr. Borja, on the other hand, was
not for the purpose of proving this fact. Though it briefly touched on the alleged
deficiency, such was made in the course of discussing a discount or rebate, which the
agent apparently gave the respondent. Certainly, the whole tenor of Mr. Borja's
testimony, both during direct and cross examinations, implicitly assumed a valid and
subsisting insurance policy. It must be remembered that he was called to the stand
basically to demonstrate that an existing policy issued by the petitioner covers the
burned building.

Finally, petitioner contends that respondent violated the express terms of the Fire
Extinguishing Appliances Warranty. The said warranty provides:
"WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as
mentioned below shall be maintained in efficient working order on the premises to which
insurance applies:
-

PORTABLE EXTINGUISHERS

INTERNAL HYDRANTS

EXTERNAL HYDRANTS

FIRE PUMP

24-HOUR SECURITY SERVICES

BREACH of this warranty shall render this policy null and void and the Company shall no
longer be liable for any loss which may occur."20

Petitioner argues that the warranty clearly obligates the insured to maintain all the
appliances specified therein. The breach occurred when the respondent failed to install
internal fire hydrants inside the burned building as warranted. This fact was admitted by
the oil mill's expeller operator, Gerardo Zarsuela.
Again, the argument lacks merit. We agree with the appellate court's conclusion that the
aforementioned warranty did not require respondent to provide for all the fire
extinguishing appliances enumerated therein. Additionally, we find that neither did it
require that the appliances are restricted to those mentioned in the warranty. In other
words, what the warranty mandates is that respondent should maintain in efficient
working condition within the premises of the insured property, fire fighting equipments
such as, but not limited to, those identified in the list, which will serve as the oil mill's
first line of defense in case any part of it bursts into flame.
To be sure, respondent was able to comply with the warranty. Within the vicinity of the
new oil mill can be found the following devices: numerous portable fire extinguishers,
two fire hoses,21 fire hydrant,22 and an emergency fire engine.23 All of these equipments
were in efficient working order when the fire occurred.
It ought to be remembered that not only are warranties strictly construed against the
insurer, but they should, likewise, by themselves be reasonably interpreted.24 That
reasonableness is to be ascertained in light of the factual conditions prevailing in each

case. Here, we find that there is no more need for an internal hydrant considering that
inside the burned building were: (1) numerous portable fire extinguishers, (2) an
emergency fire engine, and (3) a fire hose which has a connection to one of the external
hydrants.
IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant
petition is hereby DISMISSED.

17

G.R. No. 154514. July 28, 2005


WHITE GOLD MARINE SERVICES, INC., Petitioners,
vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP
MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals
in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance
Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no
violation of the Insurance Code and the respondents do not need license as insurer and
insurance agent/broker.
The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity
coverage for its vessels from The Steamship Mutual Underwriting Association (Bermuda)
Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer).
Subsequently, White Gold was issued a Certificate of Entry and Acceptance.3Pioneer also
issued receipts evidencing payments for the coverage. When White Gold failed to fully
pay its accounts, Steamship Mutual refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of
money to recover the latters unpaid balance. White Gold on the other hand, filed a
complaint before the Insurance Commission claiming that Steamship Mutual violated
Sections 1864 and 1875 of the Insurance Code, while Pioneer violated Sections
299,63007 and 3018 in relation to Sections 302 and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for
Steamship Mutual to secure a license because it was not engaged in the insurance
business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I
Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a
broker for Steamship Mutual because Steamship Mutual was not engaged in the
insurance business. Moreover, Pioneer was already licensed, hence, a separate license
solely as agent/broker of Steamship Mutual was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its
decision, the appellate court distinguished between P & I Clubs vis--vis conventional
insurance. The appellate court also held that Pioneer merely acted as a collection agent
of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the
appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED
NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER
AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER. 9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in
the insurance business in the Philippines? (2) Does Pioneer need a license as an
insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does
not have a license to do business in the Philippines although Pioneer is its resident agent.
This relationship is reflected in the certifications issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance
business. To buttress its assertion, it cites the definition of a P & I Club in Hyopsung
Maritime Co., Ltd. v. Court of Appeals10 as "an association composed of shipowners in
general who band together for the specific purpose of providing insurance cover on a
mutual basis against liabilities incidental to shipowning that the members incur in favor
of third parties." It stresses that as a P & I Club, Steamship Mutuals primary purpose is
to solicit and provide protection and indemnity coverage and for this purpose, it has
engaged the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in
the insurance business in the Philippines. It is merely an association of vessel owners
who have come together to provide mutual protection against liabilities incidental to
shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance
business" or "transacting an insurance business". These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized
as constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions, or that no separate or direct
consideration is received therefor, shall not preclude the existence of an insurance
business.12

The test to determine if a contract is an insurance contract or not, depends on the nature
of the promise, the act required to be performed, and the exact nature of the agreement

in the light of the occurrence, contingency, or circumstances under which the


performance becomes requisite. It is not by what it is called.13
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.14
In particular, a marine insurance undertakes to indemnify the assured against marine
losses, such as the losses incident to a marine adventure.15 Section 9916 of the Insurance
Code enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members


are both the insurer and insured. In it, the members all contribute, by a system of
premiums or assessments, to the creation of a fund from which all losses and liabilities
are paid, and where the profits are divided among themselves, in proportion to their
interest.17 Additionally, mutual insurance associations, or clubs, provide three types of
coverage, namely, protection and indemnity, war risks, and defense costs.18
A P & I Club is "a form of insurance against third party liability, where the third party is
anyone other than the P & I Club and the members."19 By definition then, Steamship
Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance
business.

The records reveal Steamship Mutual is doing business in the country albeit without the
requisite certificate of authority mandated by Section 18720 of the Insurance Code. It
maintains a resident agent in the Philippines to solicit insurance and to collect payments
in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it
was cancelled due to non-payment of the calls. Thus, to continue doing business here,
Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance
Commission.
Since a contract of insurance involves public interest, regulation by the State is
necessary. Thus, no insurer or insurance company is allowed to engage in the insurance
business without a license or a certificate of authority from the Insurance Commission. 21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?


Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration22 issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of authority23 issued by the same agency.

However, a Certification from the Commission states that Pioneer does not have a
separate license to be an agent/broker of Steamship Mutual.24
Although Pioneer is already licensed as an insurance company, it needs a separate
license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance
Code clearly states:

SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance,
any commission or other compensation from any insurance company doing business in
the Philippines or any agent thereof, without first procuring a license so to act from the
Commissioner, which must be renewed annually on the first day of January, or within six
months thereafter. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of
its directors and officers. Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of
the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance
Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting
Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED
to obtain licenses and to secure proper authorizations to do business as insurer and
insurance agent, respectively. The petitioners prayer for the revocation of Pioneers
Certificate of Authority and removal of its directors and officers, is DENIED. Costs against
respondents.

18

THIRD DIVISION

[G.R. No. 158085. October 14, 2005.]


REPUBLIC OF THE PHILIPPINES, Represented by the
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SUNLIFE
ASSURANCE COMPANY OF CANADA, respondent.
DECISION
PANGANIBAN, J p:
Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to
this Court that it is a bona fide cooperative, respondent is entitled to exemption from the
payment of taxes on life insurance premiums and documentary stamps. Not being
governed by the Cooperative Code of the Philippines, it is not required to be registered
with the Cooperative Development Authority in order to avail itself of the tax
exemptions. Significantly, neither the Tax Code nor the Insurance Code mandates this
administrative registration. acCDSH
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to nullify
the January 23, 2003 Decision 2 and the April 21, 2003 Resolution 3 of the Court of
Appeals (CA) in CA-GR SP No. 69125. The dispositive portion of the Decision reads as
follows:
"WHEREFORE, the petition for review is hereby DENIED." 4
The Facts
The antecedents, as narrated by the CA, are as follows:
"Sun Life is a mutual life insurance company organized and existing under
the laws of Canada. It is registered and authorized by the Securities and
Exchange Commission and the Insurance Commission to engage in
business in the Philippines as a mutual life insurance company with
principal office at Paseo de Roxas, Legaspi Village, Makati City.
"On October 20, 1997, Sun Life filed with the [Commissioner of Internal
Revenue] (CIR) its insurance premium tax return for the third quarter of
1997 and paid the premium tax in the amount of P31,485,834.51. For the
period covering August 21 to December 18, 1997, petitioner filed with the
CIR its [documentary stamp tax (DST)] declaration returns and paid the
total amount of P30,000,000.00.

"On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its
decision in Insular Life Assurance Co. Ltd. v. [CIR], which held that mutual
life insurance companies are purely cooperative companies and are exempt
from the payment of premium tax and DST. This pronouncement was later
affirmed by this court in [CIR] v. Insular Life Assurance Company, Ltd. Sun
Life surmised that[,] being a mutual life insurance company, it was likewise
exempt from the payment of premium tax and DST. Hence, on August 20,
1999, Sun Life filed with the CIR an administrative claim for tax credit of its
alleged erroneously paid premium tax and DST for the aforestated tax
periods.
"For failure of the CIR to act upon the administrative claim for tax credit
and with the 2-year period to file a claim for tax credit or refund dwindling
away and about to expire, Sun Life filed with the CTA a petition for review
on August 23, 1999. In its petition, it prayed for the issuance of a tax credit
certificate in the amount of P61,485,834.51 representing P31,485,834.51 of
erroneously paid premium tax for the third quarter of 1997 and
P30,000[,000].00 of DST on policies of insurance from August 21 to
December 18, 1997. Sun Life stood firm on its contention that it is a mutual
life insurance company vested with all the characteristic features and
elements of a cooperative company or association as defined in [S]ection
121 of the Tax Code. Primarily, the management and affairs of Sun Life
were conducted by its members; secondly, it is operated with money
collected from its members; and, lastly, it has for its purpose the mutual
protection of its members and not for profit or gain. cAEaSC
"In its answer, the CIR, then respondent, raised as special and affirmative
defenses the following:
'7.Petitioner's (Sun Life's) alleged claim for refund is subject to
administrative routinary investigation/examination by respondent's
(CIR's) Bureau.
'8.Petitioner must prove that it falls under the exception provided for
under Section 121 (now 123) of the Tax Code to be exempted from
premium tax and be entitled to the refund sought.
'9.Claims for tax refund/credit are construed strictly against the
claimants thereof as they are in the nature of exemption from
payment of tax.
'10.In an action for tax credit/refund, the burden is upon the taxpayer
to establish its right thereto, and failure to sustain this burden is fatal
to said claim. . . . .

'11.It is incumbent upon petitioner to show that it has complied with


the provisions of Section 204[,] in relation to Section 229, both in the
1997 Tax Code.'
"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely
from its earlier findings in Insular Life Assurance Company, Ltd. v. [CIR],
which it found to be on all fours with the present action, the CTA ruled:
'The [CA] has already spoken. It ruled that a mutual life insurance
company is a purely cooperative company[;] thus, exempted from the
payment of premium and documentary stamp taxes. Petitioner Sun
Life is without doubt a mutual life insurance company. . . . .
xxx xxx xxx
'Being similarly situated with Insular, Petitioner at bar is entitled to
the same interpretation given by this Court in the earlier cases of The
Insular Life Assurance Company, Ltd. vs. [CIR] (CTA Case Nos. 5336
and 5601) and by the [CA] in the case entitled [CIR] vs. The Insular
Life Assurance Company, Ltd., C.A. G.R. SP No. 46516, September 29,
1998. Petitioner Sun Life as a mutual life insurance company is[,]
therefore[,] a cooperative company or association and is exempted
from the payment of premium tax and [DST] on policies of insurance
pursuant to Section 121 (now Section 123) and Section 199[1]) (now
Section 199[a]) of the Tax Code.'
"Seeking reconsideration of the decision of the CTA, the CIR argued that
Sun Life ought to have registered, foremost, with the Cooperative
Development Authority before it could enjoy the exemptions from premium
tax and DST extended to purely cooperative companies or associations
under [S]ections 121 and 199 of the Tax Code. For its failure to register, it
could not avail of the exemptions prayed for. Moreover, the CIR alleged that
Sun Life failed to prove that ownership of the company was vested in its
members who are entitled to vote and elect the Board of Trustees among
[them]. The CIR further claimed that change in the 1997 Tax Code
subjecting mutual life insurance companies to the regular corporate income
tax rate reflected the legislature's recognition that these companies must
be earning profits.
"Notwithstanding these arguments, the CTA denied the CIR's motion for
reconsideration.
"Thwarted anew but nonetheless undaunted, the CIR comes to this court
via this petition on the sole ground that:

'The Tax Court erred in granting the refund[,] because respondent


does not fall under the exception provided for under Section 121
(now 123) of the Tax Code to be exempted from premium tax and
DST and be entitled to the refund.'
"The CIR repleads the arguments it raised with the CTA and proposes
further that the [CA] decision in [CIR] v. Insular Life Assurance Company,
Ltd. is not controlling and cannot constitute res judicata in the present
action. At best, the pronouncements are merely persuasive as the decisions
of the Supreme Court alone have a universal and mandatory effect." 5
Ruling of the Court of Appeals
In upholding the CTA, the CA reasoned that respondent was a purely cooperative
corporation duly licensed to engage in mutual life insurance business in the Philippines.
Thus, respondent was deemed exempt from premium and documentary stamp taxes,
because its affairs are managed and conducted by its members with money collected
from among themselves, solely for their own protection, and not for profit. Its members
or policyholders constituted both insurer and insured who contribute, by a system of
premiums or assessments, to the creation of a fund from which all losses and liabilities
were paid. The dividends it distributed to them were not profits, but returns of amounts
that had been overcharged them for insurance.
For having satisfactorily shown with substantial evidence that it had erroneously paid
and seasonably filed its claim for premium and documentary stamp taxes, respondent
was entitled to a refund, the CA ruled.
Hence, this Petition. 6
The Issues
Petitioner raises the following issues for our consideration:
"I.
"Whether or not respondent is a purely cooperative company or association
under Section 121 of the National Internal Revenue Code and a fraternal or
beneficiary society, order or cooperative company on the lodge system or
local cooperation plan and organized and conducted solely by the members
thereof for the exclusive benefit of each member and not for profit under
Section 199 of the National Internal Revenue Code. aATHIE
"II.
"Whether or not registration with the Cooperative Development Authority is
a sine qua non requirement to be entitled to tax exemption.

"III.
"Whether or not respondent is exempted from payment of tax on life
insurance premiums and documentary stamp tax." 7
We shall tackle the issues seriatim.
The Court's Ruling
The Petition has no merit.
First Issue:
Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association "conducted by the members
thereof with the money collected from among themselves and solely for their own
protection and not for profit." 8 Without a doubt, respondent is a cooperative engaged in
a mutual life insurance business. aHcDEC
First, it is managed by its members. Both the CA and the CTA found that the
management and affairs of respondent were conducted by its member-policyholders. 9
A stock insurance company doing business in the Philippines may "alter its organization
and transform itself into a mutual insurance company." 10 Respondent has been
mutualized or converted from a stock life insurance company to a nonstock mutual life
insurance corporation 11 pursuant to Section 266 of the Insurance Code of 1978. 12 On
the basis of its bylaws, its ownership has been vested in its member-policyholders who
are each entitled to one vote; 13 and who, in turn, elect from among themselves the
members of its board of trustees. 14 Being the governing body of a nonstock
corporation, the board exercises corporate powers, lays down all corporate business
policies, and assumes responsibility for the efficiency of management. 15

Second, it is operated with money collected from its members. Since respondent is
composed entirely of members who are also its policyholders, all premiums collected
obviously come only from them. 16
The member-policyholders constitute "both insurer and insured " 17 who "contribute, by
a system of premiums or assessments, to the creation of a fund from which all losses
and liabilities are paid." 18 The premiums 19 pooled into this fund are earmarked for the
payment of their indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of anyone.

As early as October 30, 1947, the director of commerce had already issued a license to
respondent a corporation organized and existing under the laws of Canada to engage
in business in the Philippines. 20 Pursuant to Section 225 of Canada's Insurance
Companies Act, the Canadian minister of state (for finance and privatization) also
declared in its Amending Letters Patent that respondent would be a mutual company
effective June 1, 1992. 21 In the Philippines, the insurance commissioner also granted it
annual Certificates of Authority to transact life insurance business, the most relevant of
which were dated July 1, 1997 and July 1, 1998. 22
A mutual life insurance company is conducted for the benefit of its memberpolicyholders, 23 who pay into its capital by way of premiums. To that extent, they are
responsible for the payment of all its losses. 24 "The cash paid in for premiums and the
premium notes constitute their assets . . . . " 25 In the event that the company itself fails
before the terms of the policies expire, the member-policyholders do not acquire the
status of creditors. 26 Rather, they simply become debtors for whatever premiums that
they have originally agreed to pay the company, if they have not yet paid those amounts
in full, for "[m]utual companies . . . depend solely upon . . . premiums." 27 Only when
the premiums will have accumulated to a sum larger than that required to pay for
company losses will the member-policyholders be entitled to a "pro rata division thereof
as profits." 28
Contributing to its capital, the member-policyholders of a mutual company are obviously
also its owners. 29 Sustaining a dual relationship inter se, they not only contribute to the
payment of its losses, but are also entitled to a proportionate share 30 and participate
alike 31 in its profits and surplus. DaTEIc
Where the insurance is taken at cost, it is important that the rates of premium charged
by a mutual company be larger than might reasonably be expected to carry the
insurance, in order to constitute a margin of safety. The table of mortality used will show
an admittedly higher death rate than will probably prevail; the assumed interest rate on
the investments of the company is made lower than is expected to be realized; and the
provision for contingencies and expenses, made greater than would ordinarily be
necessary. 32 This course of action is taken, because a mutual company has no capital
stock and relies solely upon its premiums to meet unexpected losses, contingencies and
expenses.
Certainly, many factors are considered in calculating the insurance premium. Since they
vary with the kind of insurance taken and with the group of policyholders insured, any
excess in the amount anticipated by a mutual company to cover the cost of providing for
the insurance over its actual realized cost will also vary. If a member-policyholder
receives an excess payment, then the apportionment must have been based upon a
calculation of the actual cost of insurance that the company has provided for that
particular member-policyholder. Accordingly, in apportioning divisible surpluses, any
mutual company uses a contribution method that aims to distribute those surpluses

among its member-policyholders, in the same proportion as they have contributed to the
surpluses by their payments. 33
Sharing in the common fund, any member-policyholder may choose to withdraw
dividends in cash or to apply them in order to reduce a subsequent premium, purchase
additional insurance, or accelerate the payment period. Although the premium made at
the beginning of a year is more than necessary to provide for the cost of carrying the
insurance, the member-policyholder will nevertheless receive the benefit of the
overcharge by way of dividends, at the end of the year when the cost is actually
ascertained. "The declaration of a dividend upon a policy reduces pro tanto the cost of
insurance to the holder of the policy. That is its purpose and effect." 34
A stipulated insurance premium "cannot be increased, but may be lessened annually by
so much as the experience of the preceding year has determined it to have been greater
than the cost of carrying the insurance . . . ." 35 The difference between that premium
and the cost of carrying the risk of loss constitutes the so-called "dividend" which,
however, "is not in any real sense a dividend." 36 It is a technical term that is well
understood in the insurance business to be widely different from that to which it is
ordinarily attached.
The so-called "dividend" that is received by member-policyholders is not a portion of
profits set aside for distribution to the stockholders in proportion to their subscription to
the capital stock of a corporation. 37 One, a mutual company has no capital stock to
which subscription is necessary; there are no stockholders to speak of, but only
members. And, two, the amount they receive does not partake of the nature of a profit or
income. The quasi-appearance of profit will not change its character. It remains an
overpayment, a benefit to which the member-policyholder is equitably entitled. 38
Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of
its own members. It does not operate for profit, but for the mutual benefit of its memberpolicyholders. They receive their insurance at cost, while reasonably and properly
guarding and maintaining the stability and solvency of the company. 39 "The economic
benefits filter to the cooperative members. Either equally or proportionally, they are
distributed among members in correlation with the resources of the association utilized."
40
It does not follow that because respondent is registered as a nonstock corporation and
thus exists for a purpose other than profit, the company can no longer make any profits.
41 Earning profits is merely its secondary, not primary, purpose. In fact, it may not
lawfully engage in any business activity for profit, for to do so would change or
contradict its nature 42 as a non-profit entity. 43 It may, however, invest its corporate
funds in order to earn additional income for paying its operating expenses and meeting
benefit claims. Any excess profit it obtains as an incident to its operations can only be
used, whenever necessary or proper, for the furtherance of the purpose for which it was
organized. 44

Second Issue:
Whether CDA Registration Is Necessary
Under the Tax Code although respondent is a cooperative, registration with the
Cooperative Development Authority (CDA) 45 is not necessary in order for it to be
exempt from the payment of both percentage taxes on insurance premiums, under
Section 121; and documentary stamp taxes on policies of insurance or annuities it
grants, under Section 199. aCSTDc
First, the Tax Code does not require registration with the CDA. No tax provision requires a
mutual life insurance company to register with that agency in order to enjoy exemption
from both percentage and documentary stamp taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the
submission of the Certificate of Registration with the CDA, 46 before the issuance of a
tax exemption certificate. That provision cannot prevail over the clear absence of an
equivalent requirement under the Tax Code. One, as we will explain below, the Circular
does not apply to respondent, but only to cooperatives that need to be registered under
the Cooperative Code. Two, it is a mere issuance directing all internal revenue officers to
publicize a new tax legislation. Although the Circular does not derogate from their
authority to implement the law, it cannot add a registration requirement, 47 when there
is none under the law to begin with.
Second, the provisions of the Cooperative Code of the Philippines 48 do not apply. Let us
trace the Code's development in our history.
As early as 1917, a cooperative company or association was already defined as one
"conducted by the members thereof with money collected from among themselves and
solely for their own protection and not profit." 49 In 1990, it was further defined by the
Cooperative Code as a "duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve a lawful common social or
economic end, making equitable contributions to the capital required and accepting a
fair share of the risks and benefits of the undertaking in accordance with universally
accepted cooperative principles." 50
The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973,
Presidential Decree (PD) No. 175 was signed into law by then President Ferdinand E.
Marcos in order to strengthen the cooperative movement. 51 The promotion of
cooperative development was one of the major programs of the "New Society" under his
administration. It sought to improve the country's trade and commerce by enhancing
agricultural production, cottage industries, community development, and agrarian reform
through cooperatives. 52
The whole cooperative system, with its vertical and horizontal linkages from the market
cooperative of agricultural products to cooperative rural banks, consumer cooperatives

and cooperative insurance was envisioned to offer considerable economic opportunities


to people who joined cooperatives. 53 As an effective instrument in redistributing
income and wealth, 54 cooperatives were promoted primarily to support the agrarian
reform program of the government. 55

Notably, the cooperative under PD 175 referred only to an organization composed


primarily of small producers and consumers who voluntarily joined to form a business
enterprise that they themselves owned, controlled, and patronized. 56 The Bureau of
Cooperatives Development under the Department of Local Government and
Community Development (later Ministry of Agriculture) 57 had the authority to
register, regulate and supervise only the following cooperatives: (1) barrio associations
involved in the issuance of certificates of land transfer; (2) local or primary cooperatives
composed of natural persons and/or barrio associations; (3) federations composed of
cooperatives that may or may not perform business activities; and (4) unions of
cooperatives that did not perform any business activities. 58 Respondent does not fall
under any of the above-mentioned types of cooperatives required to be registered under
PD 175.
When the Cooperative Code was enacted years later, all cooperatives that were
registered under PD 175 and previous laws were also deemed registered with the CDA.
59 Since respondent was not required to be registered under the old law on
cooperatives, it followed that it was not required to be registered even under the new
law.
Furthermore, only cooperatives to be formed or organized under the Cooperative Code
needed registration with the CDA. 60 Respondent already existed before the passage of
the new law on cooperatives. It was not even required to organize under the Cooperative
Code, not only because it performed a different set of functions, but also because it did
not operate to serve the same objectives under the new law particularly on
productivity, marketing and credit extension. 61
The insurance against losses of the members of a cooperative referred to in Article 6(7)
of the Cooperative Code is not the same as the life insurance provided by respondent to
member-policyholders. The former is a function of a service cooperative, 62 the latter is
not. Cooperative insurance under the Code is limited in scope and local in character. It is
not the same as mutual life insurance.
We have already determined that respondent is a cooperative. The distinguishing feature
of a cooperative enterprise 63 is the mutuality of cooperation among its memberpolicyholders united for that purpose. 64 So long as respondent meets this essential
feature, it does not even have to use 65 and carry the name of a cooperative to operate
its mutual life insurance business. Gratia argumenti that registration is mandatory, it
cannot deprive respondent of its tax exemption privilege merely because it failed to

register. The nature of its operations is clear; its purpose well-defined. Exemption when
granted cannot prevail over administrative convenience. EAcTDH
Third, not even the Insurance Code requires registration with the CDA. The provisions of
this Code primarily govern insurance contracts; only if a particular matter in question is
not specifically provided for shall the provisions of the Civil Code on contracts and
special laws govern. 66
True, the provisions of the Insurance Code relative to the organization and operation of
an insurance company also apply to cooperative insurance entities organized under the
Cooperative Code. 67 The latter law, however, does not apply to respondent, which
already existed as a cooperative company engaged in mutual life insurance prior to the
passage of that law. The statutes prevailing at the time of its organization and
mutualization were the Insurance Code and the Corporation Code, which imposed no
registration requirement with the CDA.
Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST
Having determined that respondent is a cooperative that does not have to be registered
with the CDA, we hold that it is entitled to exemption from both premium taxes and
documentary stamp taxes (DST).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative
companies from the 5 percent percentage tax on insurance premiums. On the other
hand, Section 199 also exempts from the DST, policies of insurance or annuities made or
granted by cooperative companies. Being a cooperative, respondent is thus exempt from
both types of taxes.
It is worthy to note that while RA 8424 amending the Tax Code has deleted the income
tax of 10 percent imposed upon the gross investment income of mutual life insurance
companies domestic 68 and foreign 69 the provisions of Section 121 and 199 remain
unchanged. 70
Having been seasonably filed and amply substantiated, the claim for exemption in the
amount of P61,485,834.51, representing percentage taxes on insurance premiums and
documentary stamp taxes on policies of insurance or annuities that were paid by
respondent in 1997, is in order. Thus, the grant of a tax credit certificate to respondent
as ordered by the appellate court was correct. aHCSTD
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are
AFFIRMED. No pronouncement as to costs.
SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio Morales and Garcia, JJ., concur.

19

FIRST DIVISION

[G.R. No. 125678. March 18, 2002.]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF


APPEALS and JULITA TRINOS, respondents.
SYNOPSIS
Ernani Trinos, deceased husband of respondent Julita Trinos, was issued a Health Care
Agreement for a health coverage with petitioner. During the period of his coverage, he
suffered a heart attack and was confined in the hospital. Respondent tried to claim the
benefits under the health care agreement, but petitioner denied her claim. Thus,
respondent paid the hospitalization expenses herself.
Respondent then filed with the RTC an action for damages against petitioner and its
president, Dr. Benito Reverente. The court ruled in favor of Julita and awarded damages.
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente. Hence, petitioner brought the
instant petition for review, raising the primary argument that a health care agreement is
not an insurance contract. IAaCST
In affirming the decision of the Court of Appeals, the Supreme Court ruled that an
insurance contract exists when the following elements concur: (1) the insured has an
insurable interest; (2) the insured is subject to a risk of loss by the happening of the
designated peril; (3) the insurer assumes the risk; (4) such assumption of risk is part of a
general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and (5) in consideration of the insurer's promise, the insured pays a
premium.
The health care agreement was in the nature of a non-life insurance, which is primarily a
contract of indemnity.
SYLLABUS
1.COMMERCIAL LAW; INSURANCE LAW; CONTRACT OF INSURANCE; DEFINED. 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.
2.ID.; ID.; ID.; ELEMENTS. An insurance contract exists where the following elements
concur: 1. The insured has an insurable interest; 2. The insured is subject to a risk of loss
by the happening of the designated peril; 3. The insurer assumes the risk; 4. Such
assumption of risk is part of a general scheme to distribute actual losses among a large

group of persons bearing a similar risk; and 5. In consideration of the insurer's promise,
the insured pays a premium.
3.ID.; ID.; ID.; INSURABLE INTEREST, CONSTRUED; CASE AT BAR. 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: "Every person has an insurable interest in the life and health: (1) of himself,
of his spouse and of his children; (2) of any person on whom he depends wholly or in part
for education or support, or in whom he has a pecuniary interest; (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 (4) of any person
upon whose life any estate or interest vested in him depends." In the case at bar, the
insurable interest of respondent's husband in obtaining the health care agreement was
his own health. The health care agreement was in the nature of non-life insurance, which
is primarily a contract of indemnity. Once the member incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingent, the health
care provider must pay for the same to the extent agreed upon under the contract.
4.ID.; ID.; ID.; CONCEALMENT; AVOIDS A POLICY; EXCEPTION; CASE AT BAR. 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 respondent's husband who was not a medical doctor. Where matters of
opinion or judgment are called for, answers made in good faith and without intent to
deceive will not avoid a policy even though they are untrue. Thus, "(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." CAacTH
5.ID.; ID.; ID.; ID.; MUST BE ESTABLISHED BY SATISFACTORY AND CONVINCING EVIDENCE
BY INSURER. The fraudulent intent on the part of the insured must be established to
warrant rescission of the insurance contract. Concealment as a defense for the health
care provider or insurer to avoid liability is an affirmative defense and the duty to
establish such defense by satisfactory and convincing evidence rests upon the provider
or insurer.
6.ID.; ID.; ID.; HEALTH CARE AGREEMENT; HEALTH CARE PROVIDER, WHEN LIABLE; CASE
AT BAR. 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.
7.ID.; ID.; ID.; RESCISSION OF; CONDITIONS; NOT FULFILLED IN CASE AT BAR. 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. 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: 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. None of the above pre-conditions was fulfilled in this case.
8.ID.; ID.; ID.; TERMS AND PHRASEOLOGY CONTAINED THEREIN MUST BE STRICTLY
INTERPRETED AGAINST THE INSURER AND LIBERALLY IN FAVOR OF THE INSURED; CASE
AT BAR. When the terms of insurance contract contain limitations on liability, courts
should construe them in such a way as to preclude the insurer from non-compliance with
his obligation. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract the insurer. By reason
of the exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 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.
DECISION
YNARES-SANTIAGO, J p:
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:
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

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, respondent's husband was entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein. He was also entitled to avail of "outpatient benefits" such as annual physical examinations, preventive health care and other
out-patient services.
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
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 Ernani's medical
history. Doctors at the MMC allegedly discovered at the time of Ernani's confinement that
he was hypertensive, diabetic and asthmatic, contrary to his answer in the application
form. Thus, respondent paid the hospitalization expenses herself, amounting to about
P76,000.00.

After her husband was discharged from the MMC, he was attended by a 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. THcaDA
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 attorney's fees. After trial, the lower court ruled
against petitioners, viz:
WHEREFORE, in view of the foregoing, the Court renders judgment in favor
of the plaintiff Julita Trinos, ordering:
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;
2.Defendants to pay the reduced amount of moral damages of P10,000.00
to plaintiff;

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


damages to plaintiff;
4.Defendants to pay attorney's fees of P20,000.00, plus costs of suit.
SO ORDERED. 3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente. 4 Petitioner's 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 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.
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:
1.The insured has an insurable interest;
2.The insured is subject to a risk of loss by the happening of the designated
peril;
3.The insurer assumes the risk;
4.Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5.In consideration of the insurer's promise, the insured pays a premium. 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:

Every person has an insurable interest in the life and health:


(1)of himself, of his spouse and of his children;
(2)of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(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
(4)of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondent's husband in obtaining the health
care agreement was his own health. The health care agreement was in the nature of
non-life insurance, which is primarily a contract of indemnity. 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. cDTHIE
Petitioner argues that respondent's husband concealed a material fact in his application.
It appears that in the application for health coverage, petitioners required respondent's
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 respondent's husband states:
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)

In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicant's medical history, thus:
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)
Petitioner cannot rely on the stipulation regarding "Invalidation of Agreement" which
reads:
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
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 respondent's husband who was not a medical doctor. Where matters of
opinion or judgment are called for, answers made in good faith and without intent to
deceive will not avoid a policy even though they are untrue. 14 Thus,
(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.
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:
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 respondent's husband, we quote with
approval the following findings of the trial court:

(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
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 deceased's 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.
Davide, Jr., C.J., Puno and Kapunan, JJ., concur.

20

FIRST DIVISION

[G.R. No. 119176. March 19, 2002.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN


PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA
LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS,
respondents.
SYNOPSIS
Subject insurance policy, at the time it was issued, contained an "automatic increase
clause." Private respondent paid documentary stamp taxes due on the policy based on
the initial sum assured. In 1984, when the automatic clause took effect, petitioner

Internal Revenue Commissioner issued deficiency documentary stamps tax assessment


corresponding to the automatic increase in the insurance coverage.
Private respondent questioned the deficiency documentary stamps tax assessment
because the "automatic increase clause" is not a separate agreement from the main
agreement.
The CTA nullified the deficiency tax assessment on the policy, which was affirmed by the
CA, ruling that the increase in the amount insured should not be included in the
computation of the documentary stamp taxes on the policy.
The Supreme Court held that the "automatic increase clause" in the policy is in the
nature of a condition obligation under Art. 1181 of the Civil Code. The additional
insurance that took effect in 1984 was an obligation to a suspensive obligation, but still
part of the insurance sold, to which private respondent was liable for the payment of the
documentary stamp tax without the need of another contract.
SYLLABUS
1.TAXATION; NATIONAL INTERNAL REVENUE CODE; DOCUMENTARY STAMPS TAX ON LIFE
INSURANCE POLICIES; PAYMENT, WHEN MADE; BASIS THEREOF; CASE AT BAR. The
subject insurance policy at the time it was issued contained an "automatic increase
clause." Although the clause was to take effect only in 1984, it was written into the policy
at the time of its issuance. The distinctive feature of the "junior estate builder policy"
called the "automatic increase clause" already formed part and parcel of the insurance
contract, hence, there was no need for an execution of a separate agreement for the
increase in the coverage that took effect in 1984 when the assured reached a certain
age. It is clear from Section 173 that the payment of documentary stamp taxes is done
at the time the act is done or transaction had and the tax base for the computation of
documentary stamp taxes on life insurance policies under Section 183 is the amount
fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement. What then is the amount fixed in the policy? Logically, we believe that the
amount fixed in the policy is the figure written on its face and whatever increases will
take effect in the future by reason of the "automatic increase clause" embodied in the
policy without the need of another contract.
2.ID.; ID.; ID.; LIABILITY FOR DEFICIENCY OF DOCUMENTARY STAMP TAX UPON THE
EFFECTIVITY OF AN "AUTOMATIC INCREASE CLAUSE" IN THE POLICY; CASE AT BAR. The
"automatic increase clause" in the policy is in the nature of a conditional obligation under
Article 1181, by which the increase of the insurance coverage shall depend upon the
happening of the event which constitutes the obligation. In the instant case, the
additional insurance that took effect in 1984 was an obligation subject to a suspensive
obligation, but still a part of the insurance sold to which private respondent was liable for
the payment of the documentary stamp tax. The deficiency of documentary stamp tax
imposed on private respondent is definitely not on the amount of the original insurance

coverage, but on the increase of the amount insured upon the effectivity of the "Junior
Estate Builder Policy." IaHCAD
DECISION
KAPUNAN, J p:
This is a petition for review on certiorari filed by the Commission on Internal Revenue of
the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224
which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life
Insurance Company, Inc.) is a domestic corporation registered with the Securities and
Exchange Commission and engaged in life insurance business. In the years prior to 1984,
private respondent issued a special kind of life insurance policy known as the "Junior
Estate Builder Policy," the distinguishing feature of which is a clause providing for an
automatic increase in the amount of life insurance coverage upon attainment of a certain
age by the insured without the need of issuing a new policy. The clause was to take
effect in the year 1984. Documentary stamp taxes due on the policy were paid by
petitioner only on the initial sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with a par
value of P100.00 per share or a total par value of P5,000,000.00. The actual value of said
shares, represented by its book value, was P19,307,500.00. Documentary stamp taxes
were paid based only on the par value of P5,000,000.00 and not on the book value.
Subsequently, petitioner issued deficiency documentary stamps tax assessment for the
year 1984 in the amounts of (a) P464,898.75, corresponding to the amount of automatic
increase of the sum assured on the policy issued by respondent, and (b) P78,991.25
corresponding to the book value in excess of the par value of the stock dividends. The
computation of the deficiency documentary stamp taxes is as follows:
On Policies Issued:
Total policy issued during the year P1,360,054,000.00
Documentary stamp tax due thereon
(P1,360,054,000.00 divided by
P200.00 multiplied by P0.35)P2,380,094.50
Less: PaymentP1,915,495.75
DeficiencyP464,598.75
Add: Compromise Penalty300.00
------------------TOTAL AMOUNT DUE & COLLECTIBLE P464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation
in a petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax
assessment on the stock dividends, as well as on the insurance policy. The dispositive
portion of the CTA's decision reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the
amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are
hereby cancelled for lack of merit. Respondent Commissioner of Internal
Revenue is ordered to desist from collecting said deficiency documentary
stamp taxes for the same are considered withdrawn.
SO ORDERED. 1
Petitioner appealed the CTA's decision to the Court of Appeals. On November 18, 1994,
the Court of Appeals promulgated a decision affirming the CTA's decision insofar as it
nullified the deficiency assessment on the insurance policy, but reversing the same with
regard to the deficiency assessment on the stock dividends. The CTA ruled that the
correct basis of the documentary stamp tax due on the stock dividends is the actual
value or book value represented by the shares. The dispositive portion of the Court of
Appeals' decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby
REVERSED with respect to the deficiency tax assessment on the stock
dividends, but AFFIRMED with regards to the assessment on the Insurance
Policies. Consequently, private respondent is ordered to pay the petitioner
herein the sum of P78,991.25, representing documentary stamp tax on the
stock dividends it issued. No costs pronouncement.
SO ORDERED. 2
A motion for reconsideration of the decision having been denied, 3 both the
Commissioner of Internal Revenue and private respondent appealed to this Court,
docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043,
private respondent appealed the decision of the Court of Appeals insofar as it upheld the
validity of the deficiency tax assessment on the stock dividends. The Commissioner of
Internal Revenue, on his part, filed the present petition questioning that portion of the
Court of Appeals' decision which invalidated the deficiency assessment on the insurance
policy, attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE
IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE
AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY

TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE


REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE
AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN
THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE
AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL
POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR
TRANSACTION. 4
Section 173 of the National Internal Revenue Code on documentary stamp taxes
provides:
Sec. 173.Stamp taxes upon documents, instruments and papers. Upon
documents, instruments, loan agreements, and papers, and upon
acceptances, assignments, sales, and transfers of the obligation, right or
property incident thereto, there shall be levied, collected and paid for, and
in respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following section of this Title,
by the person making, signing, issuing, accepting, or transferring the same
wherever the document is made, signed, issued, accepted, or transferred
when the obligation or right arises from Philippine sources or the property is
situated in the Philippines, and at the same time such act is done or
transaction had: Provided, That whenever one party to the taxable
document enjoys exemption from the tax herein imposed, the other party
thereto who is not exempt shall be the one directly liable for the tax. (As
amended by PD No. 1994) The basis for the value of documentary stamp
taxes to be paid on the insurance policy is Section 183 of the National
Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is
Section 183 of the National Internal Revenue Code which states in part:
Sec. 183.Stamp tax on life insurance policies. On all policies of insurance
or other instruments by whatever name the same may be called, whereby
any insurance shall be made or renewed upon any life or lives, there shall
be collected a documentary stamp tax of thirty (now 50c) centavos on each
Two hundred pesos per fractional part thereof, of the amount insured by
any such policy.
Petitioner claims that the "automatic increase clause" in the subject insurance policy is
separate and distinct from the main agreement and involves another transaction; and
that, while no new policy was issued, the original policy was essentially re-issued when

the additional obligation was assumed upon the effectivity of this "automatic increase
clause" in 1984; hence, a deficiency assessment based on the additional insurance not
covered in the main policy is in order.
The Court of Appeals sustained the CTA's ruling that there was only one transaction
involved in the issuance of the insurance policy and that the "automatic increase clause"
is an integral part of that policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the written
instrument in which a contract of insurance is set forth. 5 Section 50 of the same Code
provides that the policy, which is required to be in printed form, may contain any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete
the contract of insurance. 6 It is thus clear that any rider, clause, warranty or
endorsement pasted or attached to the policy is considered part of such policy or
contract of insurance.
The subject insurance policy at the time it was issued contained an "automatic increase
clause." Although the clause was to take effect only in 1984, it was written into the policy
at the time of its issuance. The distinctive feature of the "junior estate builder policy"
called the "automatic increase clause" already formed part and parcel of the insurance
contract, hence, there was no need for an execution of a separate agreement for the
increase in the coverage that took effect in 1984 when the assured reached a certain
age.
It is clear from Section 173 that the payment of documentary stamp taxes is done at the
time the act is done or transaction had and the tax base for the computation of
documentary stamp taxes on life insurance policies under Section 183 is the amount
fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement. 7 What then is the amount fixed in the policy? Logically, we believe that
the amount fixed in the policy is the figure written on its face and whatever increases will
take effect in the future by reason of the "automatic increase clause" embodied in the
policy without the need of another contract.
Here, although the automatic increase in the amount of life insurance coverage was to
take effect later on, the date of its effectivity, as well as the amount of the increase, was
already definite at the time of the issuance of the policy. Thus, the amount insured by
the policy at the time of its issuance necessarily included the additional sum covered by
the automatic increase clause because it was already determinable at the time the
transaction was entered into and formed part of the policy.
The "automatic increase clause" in the policy is in the nature of a conditional obligation
under Article 1181, 8 by which the increase of the insurance coverage shall depend upon
the happening of the event which constitutes the obligation. In the instant case, the

additional insurance that took effect in 1984 was an obligation subject to a suspensive
obligation, 9 but still a part of the insurance sold to which private respondent was liable
for the payment of the documentary stamp tax.
The deficiency of documentary stamp tax imposed on private respondent is definitely not
on the amount of the original insurance coverage, but on the increase of the amount
insured upon the effectivity of the "Junior Estate Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes and arrangements are
not prohibited, 10 tax laws cannot be circumvented in order to evade the payment of
just taxes. In the case at bar, to claim that the increase in the amount insured (by virtue
of the automatic increase clause incorporated into the policy at the time of issuance)
should not be included in the computation of the documentary stamp taxes due on the
policy would be a clear evasion of the law requiring that the tax be computed on the
basis of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of
Appeals is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals
nullifying the deficiency stamp tax assessment petitioner imposed on private respondent
in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under
the policy issued by respondent.
SO ORDERED.
Davide, Jr., C.J. and Ynares-Santiago, J., concur.
Puno, J., is on official leave.

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