LOSS
Bill of Lading No. 01 in favor of FAO.4The latter then secured insurance
G.R. No. 95070 September 5, 1991
PAN MALAYAN INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS and THE FOOD AND AGRICULTURAL
ORGANIZATION OF THE UNITED NATIONS,respondents.
Alejandro P. Ruiz, Jr. for petitioner.
Conrado R. Ayuyao for private respondent.
REGALADO, J.:
This case had its origin in a shipment of 1,500 metric petitions of IR-36
certified rice seeds which private respondent, The Food and Agricultural
Organization of the United Nations (hereinafter referred to as FAO), an
autonomous intergovernmental organization created by treaty, intended and
made arrangements to send to Kampuchea to be distributed to the people for
seedling purposes. Respondent court affirms the factual findings therein of
the court a quo as chronologized hereunder.
On May 22, 1980, FAO received a formal offer from the Luzon Stevedoring
Corporation (LUZTEVECO, for brevity) whereby the latter offered to ship the
former's aforesaid cargo, consisting of 3,000 metric petitions in two lots of
rice seeds, to Vietnam Ocean Shipping Industry in Vaung Tau, Vietnam for
freight fees of $55.50/MT, subject to the terms and conditions indicated in the
corresponding communication.1
On May 28, 1980, FAO wrote LUZTEVECO formally confirming its
acceptance of the foregoing offer amounting to US$83,325.92 in respect of
one lot of 1,500 metric petitions winch is the subject of the present
action.2 The cargo was loaded on board LUZTEVECO Barge No. LC-3000
and consisted of 34,122 bags of IR-36 certified rice seeds purchased by FAO
from the Bureau of Plant Industry for P4,602,270.00.3
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
On June 12, 1980, the loading was completed and LUZTEVECO issued its
coverage in the amount of P5,250,000.00 from petitioner, Pan Malayan
Insurance Corporation, as evidenced by the latter's Marine Cargo Policy No.
B-11474A and Premium Invoice No. 78615, dated June 16, 1980.5
On June 16, 1980, FAO gave instructions to LUZTEVECO to leave for Vaung
Tau, Vietnam to deliver the cargo which, by its nature, could not withstand
delay because of the inherent risks of termination and/or spoilage. On the
same date, the insurance premiums on the shipment was paid by FAO
petitioner.
On June 23, 1980, FAO was informed by LUZTEVECO that the tugboat and
barge carrying FAO's shipment returned to Manila after leaving on June 16,
1980 and that the shipment again left Manila for Vaung Tau Vietnam on June
21, 1980 with the barge being towed by a different tugboat. Since this was an
unauthorized deviation, FAO demanded an explanation on June 25, 1980.6
On June 26, 1980, FAO was advised of the sinking of the barge in the China
Sea, hence it informed petitioner thereof and, later, formally filed its claim
under the marine insurance policy.7 On July 29, 1980, FAO was informed by
LUSTEVECO of the recovery of the lost shipment, for which reason FAO
formally filed its claim with LUZTEVECO for compensation of damage to its
cargo.8
Thereafter, despite repeated demands to replace the same or to pay for the
total insured value in the sum of P5,250,000.00, LUSTEVECO failed and
refused to do so. Petitioner likewise failed to pay for the losses and damages
sustained by FAO by reason of its inability to recover the value of the
shipment from LUZTEVECO.9
Petitioner claims that on July 31, 1980 it supposedly engaged the services of
Pan Asiatic Adjustment and Marine Surveying Corporation to investigate and
examine the shipment. On August 4, 1980, J.A. Barroso, Jr. of said
corporation reportedly conducted a survey on the shipment and found that
9,629 bags of rice seeds were in good order, 23,510 bags sustained wattage
of 10% to 15%, and 983 bags were shorthanded or missing. After the alleged
survey, Barroso, Jr. made a report recommending to petitioner the denial of
FAO's claim because the partial damage suffered by the shipment is not
compensable under the policy. On the basis of said recommendation,
petitioner denied FAO's claim.10
Page 1
Petitioner further avers that upon the request of counsel of FAO, a survey of
the shipment was conducted on September 26, 27 and 29, 1980 by Conrado
Catalan, Jr. of Manila Adjusters & Surveyors Company and he found 6,200
bags in good order condition. At the time of his survey, 23,510 bags of the
shipment had allegedly already been sold by LUZTEVECO. Petitioner further
asserts that on September 29, 1980, FAO wrote a letter to petitioner
signifying its willingness to abandon the proceeds of the sale of the 23,510
bags and the remaining good order bags, but that on October 6, 1980
petitioner rejected FAO's proposed abandonment.
FAO then instituted Civil Case No. 41716 against LUZTEVECO and/or herein
petitioner, as defendants, with the Regional Trial Court of Pasig, Metro
Manila which, on December 14, 1987, rendered judgment in favor of FAO
with the following decretal portion:
WHEREFORE, by virtue of preponderance of evidence and in
consideration of justice and equity, this Court hereby renders
judgment in favor of the plaintiff against the defendant Luzon
Stevedoring Corporation and defendant Pan Malayan Insurance
Corporation, ordering both the defendants, to pay jointly and
severally, the plaintiff, to wit:
1. The sum of P5,250,000.00 with interest thereon, at legal rate from
September 29, 1980 until fully paid;
2. The sum of P250,000.00 by way of attorney's fees and expenses
of litigation; and
3. The cost of this suit.11
Petitioner alone appealed the said decision to respondent Court of Appeals,
docketed therein as CA-G.R. CV No. 22114, and on July 20, 1990
respondent court affirmed the decision of the trial court except for the award
of attorney's fees which was reduced to P25,000.00.12 Petitioner's motion for
reconsideration was denied in respondent court's resolution of September 3,
1990.13
The petition now before us raises the following issues: (1) Whether or not
respondent court committed a reversible error in holding that the trial court is
correct in holding that there is a total loss of the shipment; and (2) Whether
or not respondent court committed a reversible error in affirming the decision
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
of the trial court ordering petitioner to pay private respondent the amount of
P5,250,000.00 representing the full insured value of the rice seeds.14
The law classifies loss into either total or partial. Total loss may be actual or
absolute,15 or it may otherwise be constructive or technical.16 Petitioner
submits that respondent court erred in ruling that there was total loss of the
shipment despite the fact that only 27,922 bags of rice seeds out of 34,122
bags were rendered valueless to FAO and the shipment sustained only a
loss of 78%. FAO, however, claims that, for all intents and purposes, it has
practically lost its total or entire shipment in this case, inclusive of expenses,
premium fees, and so forth, despite the alleged recovery by defendant
LUZTEVECO.
As found by the court below and reproduced with approval by respondent
court, FAO "has never been compensated for this total loss or damage, a
fact which is not denied nor controverted. If there were some cargoes saved,
by LUZTEVECO, private respondent abandoned it and the same was sold or
used for the benefit of LUZTEVECO or Pan Malayan Corporation. Under
Sections 129 and 130 of the New Insurance Code, a total loss may either be
actual or constructive. In case of total loss in Marine Insurance, the assured
is entitled to recover from the underwriter the whole amount of his
subscription (Vol. 2, Arnould Mar. Ins. 9th Ed. P. 1304; Alsop vs. Commercial
Insurance Co. cc Mass IF Case No. 262, summ 451."(Emphasis in the
original text.)17
It is a fact that on July 9, 1980, FAO formally filed its claim under the marine
insurance policy issued by petitioner.18FAO thus claims actual loss under
paragraphs (c) and (d) of Section 130 of the Insurance Code which provides:
SEC. 130. An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by being broken
up;
(c) Any damage to the thing which renders it valueless to the owner
for the purpose for which he held it; or
(d) Any other event which effectively deprives the owner of the
possession, at the port of destination of the thing insured.
Page 2
Respondent court affirmed the ruling of the trial court to the effect that there
was indeed actual total loss, painstakingly explaining therein the following
grounds for holding petitioner liable for the entire amount of the insurance
coverage:
... The lower court was not incorrect in holding that there is a total or
entire loss of shipment in the case at bar.
First, the fact of the sinking of Barge LC-3000 as the occurrence of
the risk insured against under the marine insurance was proved and
borne out by the following findings of the court a quo, thus;
Here, we should not lose sight of the fact of sinking of the
barge according to the defendant LUZTEVECO, in a phone
call by Mr. Emata, defendant's representative, on June 26,
1980 and (of) which fact, the defendant Pan Malayan
Insurance Corporation was notified. Subsequently, there was
marine protest, based on said information released by the
defendant LUZTEVECO. In fine, the barge LC-3000 carrying
the load in question sank. If the barge was made to refloat, it
cannot be denied that it sank, otherwise, what is the use of
refloating the barge? What is mentioned in the law as the
risk orperil insured against is sinking. This is the risk or peril
covered by the Marine Insurance. (Decision, p. 4)
xxx xxx xxx
..., it is worth mentioning the following unrebutted documents,
testimonies and pleadings cited by the plaintiff-appellant, viz:
(1) Testimony of Mr. Keiner that he was informed by Mr.
Emata, a representative of LUZTEVECO, that the barge and
its cargo sank in the South China Sea on June 25, 1980
(Deposition, Q43 p. 11)
(2) Letter of Capt. Ilano of Luzon Stevedoring Corporation
dated June 26, 1980 confirming the sinking of Barge LC-
3000 and its cargo on June 25, 1980 (Exhibit "D-9").
(3) Marine protest executed on July 2, 1980 by Capt. Rudy
Vencer, master of tugboat towing Barge LC-3000, attesting
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
to said barge's sinking on June 25, 1980, 385 miles off South
Vietnam, due to very strong winds and rough seas. (Exhibit
"E- 4").
(4) The answer of defendant LUZTEVECO itself which
admits in no uncertain terms the sinking of Barge LC-3000
on June 25, 1980. ...
xxx xxx xxx
Basing on the evidence on record, the factual finding of the lower
court re sinking of Barge LC-3000 is not without basis but rather
sufficiently supported by evidence adduced by plaintiff-appellee.
Second, there is the direct testimony of Mr. Fritz Keiner (the UNFAO
officer-in-charge in the Philippines at the time of the loss) which
states as follows:
52. CONGEN:
What eventually happened to your Organization's entire
shipment of rice seedlings intended for the refugees of
Vietnam?
FK:
First, I would like to point out that the rice seeds were
intended for the people of Kampuchea, but for logistical
reasons, the shipment had to go through Vungtan, (sic)
Vietnam.
In spite of the alleged salvaging of our shipment, there was
absolutely no replacement or payment made by either
defendant LUZTEVECO or defendant Pan Malayan
Insurance Co. on our losses and eventually FAO did not
recover anything from either of the said defendants.
53. CONGEN:
Page 3
 Up to the present, has any replacement or payment of the
value of your lost cargo been made to your organization by
either of the defendants?
FPKEINER:
terminate. Moreover, all of said damaged/lost bags were no longer
available for reshipment to Vietnam because the same were
disposed of by defendant LUZTEVECO without authorization from
plaintiff-appellee, to answer for alleged salvage charges, while the
others were lost/shortlanded.

Up to the present, no replacement or payment of the value of Third the testimony of Mr. Conrado Catalan, Jr. that the shipment
our lost cargo was ever made to our Organization by either sustained a loss of 78% is not speculative. Uncontroverted is his
of the defendants in this case. (Deposition of Fritz Keiner, testimony which is based on data corroborated by the report of
pp. 13-14) defendant-appellant's adjuster/surveyor and on actual inspection of
the remaining bags stored in LUZTEVECO's warehouse. Exhibit '3'
of defendant-appellant states in part, thus:
As emphasized by said witness, the insured cargo was intended for
distribution by Vietnam Ocean Shipping Agency to the people of
Kampuchea for the purpose of alleviating the acute rice shortage Condition No. of Bags
then prevailing in that country and to improve the rice production
therein. (Deposition, Q17 p. 5). The bags containing said cargo were
marked "TREATED, UNFIT FOR FOOD" (Exh. "E-3-b"; TSN, Good order(dry) — 9,629
January 15, 1985, pp. 3-5) and the seeds themselves were of such a
fragile nature that they have the tendency to germinate upon mere Partly wet but damage limited
contact with water.
only to approximately 10% to
As shown, of the 34,122 bags of rice seeds shipped on board Barge
LC-3000 (Exh. "E-l"), 23,510 were determined by defendant- 15% of the contents. Wet
appellant's surveyor, the Pan Asiatic Adjustment and Marine
Surveying Corporation to be bad order bags (Exh. "3"). Add to these portion terminated/sprouted.
bad order bags the shortlanded/missing bags numbering 983 per
report of the same surveying corporation, the damaged/lost bags
Remaining 85% to 90% of the
would total 24,493 thereby leaving a balance of 9,269 (sic) presumed
to be good order/dry bags. Of these 9,629 good order/dry bags, an
additional 2,682 bags were found damaged/wetted after sorting (Exh. contents apparently dry — 23,510
"E"). All in all, therefore, 27,175 bags were determined to be
lost/damaged. Although 6,947 bags in apparent external good order Shortlanded/missing — 983
and condition were presumed to be inside the LUZTEVECO
warehouse, only 6,200 were actually determined to be there by Total 34,122 Bags
Conrado Catalan on September 26, 27 and 29, 1980 (Exh. "E", p. 2).
This increases the number of lost/damaged bags to 27,922.
It is understandable that plaintiff-appellee's surveyor (Mr. Conrado
Thus considered, We agree with the plaintiff-appellee that the 27,922 Catalan, Jr.) no longer saw the 23,510 bad order/damaged bags as
damaged/lost bags were rendered valueless to plaintiff-appellee for these were already sold at public auction by defendant
planting or seeding purposes in Kampuchea since the wetting or LUZTEVECO, while 983 more were shortlanded/missing. When Mr.
contact with water had definitely activated their tendency to Catalan sought to verify on September 26, 27 and 29, 1980 the

INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases) Page 4

 existence and condition of the 9,629 presumed to be good order
bags, he discovered that "an additional 2,629 bags were found
damaged/wetted, with the estimated 6,947 bags in apparently
external good order condition" (Exh. "E"). However, out of these
presumed 6,947 bags only approximately 6,200 bags were
computed and counted by Mr. Catalan to the best of his ability. (Exh.
"E", p. 2). It is even more than 78% per testimony of Mr. Catalan but
at least 82% if we divide 6,200 (the actual number of bags in the
warehouse) by 34,122 (the actual number of bags loaded on Barge
LC-3000).19
Petitioner, on the other hand, claims that respondent court gravely erred in
sustaining the ruling of the trial court that there was total loss of the shipment
since from the evidence on record and the findings of respondent court itself,
only 27,922 bags of rice seeds out of 34,122 bags were rendered valueless
to FAO and the shipment sustained only a loss of 78%. 20 Thus, petitioner
concludes that the findings of the court a quo, as affirmed by the Court of
Appeals, are contrary to the evidence. Upon an examination, however, of the
records presented before this Court, it is quite clear that there was indeed
actual total loss.
While this Court is not a trier of facts, yet, when the findings of the Court of
Appeals are alleged to be without citation of specific evidence on which they
are based, there is sufficient reason for us to review the appellate court's
decision.21 Under the factual milieu of this case, we find that there is
abundant evidence to support the conclusion of respondent court.
In his testimony on cross-examination at the trial, Conrado Catalan, Jr.,
declared:
Q You said that you did not make an actual count but you estimated,
how many bags all in all did you estimate?
A It is 6,200 bags if I may recall.
Q Out of these 6,200 bags you only opened two (2) bags?
A Yes, sir.
Q And the others, the balance you did not examine anymore?
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
A It is shown in the picture that it is stained.
Q You must answer the question.
A Yes, sir.
Q What was the damage of the two (2) bags that you examined?
A They are stained. (Emphasis supplied.)22
It will be recalled that said rice seeds were treated and would germinate upon
mere contact with water. The rule is that where the cargo by the process of
decomposition or other chemical agency no longer remains the same kind of
thing as before, an actual total loss has been suffered.
... However, the complete physical destruction of the subject matter
is not essential to constitute an actual total loss. Such a loss may
exist where the form and specie of the thing is destroyed, although
the materials of which it consisted still exist (Great Western Ins. Co.
vs. Fogarty, N.Y., 19 Wall 640, 22 L. Ed. 216), as where the cargo by
the process of decomposition or other chemical agency no longer
remains the same kind of thing as before (Williams vs. Cole, 16 Me.
207).23
Moreover, it is undisputed that no replacement whatsoever or any payment,
for that matter, of the value of said lost cargo was made to FAO by petitioner
or LUZTEVECO. It is thus clear that FAO suffered actual total loss under
Section 130 of the Insurance Code, specifically under paragraphs (c) and (d)
thereof, recompense for which it has been denied up to the present.
In view of our aforestated holding that there was actual total loss of the
goods insured in this case, it is no longer necessary to pass upon the issue
of the validity of the abandonment made by FAO. Section 135 of the
Insurance Code explicitly provides that "(u)pon an actual total loss, a person
insured is entitled to payment without notice of abandonment." This is a
statutory adoption of a long standing doctrine in maritime insurance law that
in case of actual total loss, the right of the insured to claim the whole
insurance is absolute, without need of a notice of abandonment.24
Page 5
WHEREFORE, the assailed judgment and resolution of respondent Court of OSTRAND, J.:
Appeals are hereby AFFIRMED in toto.
The three above entitled actions were instituted in the Court of First Instance
SO ORDERED. of Manila on March 25, 1929, to recover the full amount of three fire
insurance police aggregating P20,000. The complaints in each of these
cases alleged in substance that the plaintiff is a duly registered partnership
engaged in the sale of furniture; that the defendant is a company engaged in
the insurance business and duly constituted in accordance with the laws of
EN BANC the Philippine Islands; that the plaintiff insured against fire the articles
existing in its establishment situated at Nos. 626 and 628 Rizal Avenue,
G.R. No. L-35848 November 22, 1932 Manila; that the insurance policies issued by the defendants, respectively,
were: Globe & Rutgers, P5,000, in force from July 12, 1928, to July 12, 1929;
THE EAST FURNITURE INC., plaintiff-appellant, Commercial Union, P5,000, in force during the same period; and The
vs. Continental, P10,000, in force from August 16, 1928, to August 16, 1929; that
THE GLOBE & RUTGERS FIRE INSURANCE CO. OF NEW on March 2, 1929, a fire broke out in plaintiff's establishment, as a result of
YORK, defendant-appellee. which the insured articles therein found were destroyed by the fire; that within
the period marked in the policies the plaintiff presented to the insurance
-------------------------------------------- companies an inventory of the insured furniture which was destroyed by the
fire, the value of which, before or at the time of the fire, amounted to
P52,061.99; and that of the furniture destroyed by the fire some was saved,
G.R. No. L-35849 November 22, 1932
of the value of P5,000, more or less.
THE EAST FURNITURE INC., plaintiff-appellant,
The defendants in their respective answers interposed a general denial and
vs.
as special defenses alleged in substance (1) that the fire in question was of
COMMERCIAL UNION ASSURANCE COMPANY, LTD., defendant-
intentional origin; (2) that the claims of loss presented by the plaintiff were
appellee.
false and fraudulent; (3) that the furniture in question had been mortgaged by
the plaintiff to the Manila Finance and Discount Corporation, so that at the
-------------------------------------------- time of the fire the plaintiff was not the only party interested therein, contrary
to the representations made in its claims of loss; and (4) that the plaintiff
G.R. No. L-35850 November 22, 1932 violated one of the conditions of the policies by refusing to furnish the
defendants with a physical inventory of the contents of its store at the time of
THE EAST FURNITURE INC., plaintiff-appellant, the fire.
vs.
THE CONTINENTAL INSURANCE CO. OF NEW YORK, defendant- By agreement of the parties the three cases were tried jointly before Judge
appellee. Concepcion, who after the trial found that the claims presented by the plaintiff
were notoriously fraudulent, and, accordingly, sustained defendant's second
Juan Ortega for appellant. special defense and dismissed the complaint in each of the three cases, with
Gibbs & McDonough and Roman Ozaeta for appellees. costs against the plaintiff. As to the first special defense, referring to the
origin of the fire, the trial judge merely said that "altho much might be said
against the manager of the plaintiff corporation it is not necessary to make a
detailed analysis of the proofs with respect to the fire, inasmuch as for the
purposes of this decision a consideration of the second special defense is

INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases) Page 6

sufficient." The trial court overruled the third and fourth special defenses.
From that judgment the plaintiff appealed.
The appellant contends that the trial court erred (1) in finding that the claims
presented by the plaintiff to the insurance companies were fraudulent; (2) in
giving weight to the testimony of Captain Lorenzo, deputy chief of the Manila
Fire Department, and Isidro Guevara, a furniture manufacturer, as to the
value of the articles found in the premises after the fire; and (3) in dismissing
plaintiff's complaints.
The appellees sustain the finding of the trial court that appellant's claims of
loss were "notoriously fraudulent", and further urge before this court their first
special defense, i. e., that the fire in question was of intentional origin.
1. With reference to the origin of the fire, the evidence shows that it started at
about 9.55 p. m. in the second floor of the building which was occupied by
the plaintiff as office and workshop. That floor was constructed of wood, with
a galvanized iron roof. Immediately after the fire was extinguished Captain
Lorenzo, the deputy chief of the fire department, investigated its origin and
found in the second floor three cans containing gasoline and kapok saturated
with gasoline. For this reason, in his official report of that fire (Exhibit 3), he
stated the cause to be: "Suspected incendiary. Intentional. Preventable."
Filoteo Miranda, the proprietor and manager of the East Furniture Store,
while testifying as a witness for the plaintiff, made no attempt to deny the
presence of three cans of gasoline and kapok saturated with gasoline. His
only explanation was that "inasmuch as on that occasion I had an
automobile, I ordered them to buy gasoline, petroleum, and other
combustibles". When further asked to explain the presence of those cans of
gasoline in the upper story on the night of the fire, he replied: "How can I
explain it, since, as I have said, I paid no attention to those cans? The
laborers were the ones in charge of that." With regard to the kapok saturated
with gasoline, his only explanation was that "in my store mattresses and
pillows are sold, and it is possible that someone had taken kapok and
saturated it with gasoline".
It also appears from the record that in connection with the fire in question the
said Filoteo Miranda caused one Eugenio Lim Pineda to be prosecuted for
calumny, alleging that the latter had imputed to the former the commission of
a crime, namely, that Miranda had caused his store to be burned or ordered
a certain person to set it on fire. Pineda was acquitted by the Court of First
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
Instance of Manila on the ground that it was proven that the imputation made
by him against Miranda was true.
The said Eugenio Lim Pineda testified at the trial of these cases that he had
known Miranda for about fifteen years; that about six months before the fire
in question, Miranda intimated to him that he (Miranda) intended to burn the
East Furniture Store because it was on the verge of bankruptcy; that he
communicated this information to attorney Eriberto de Silva, who in turn
communicated it to his friend Aurelio Periquet, an insurance agent, and the
latter thereupon caused one of the policies — issued by Smith, Bell & Co. —
to be cancelled; that on the night of the fire he saw Garcia, the cashier of the
plaintiff enter the back door of the building in question, and that ten minutes
later the building burned; that witness called Garcia when he came out of the
building and said to him: "You have set fire to the building."
Attorney Eriberto de Silva, testifying in these cases, corroborated the
testimony of Pineda regarding the cancellation of the Smith-Bell policy
through his instrumentality, and further testified that sometime after the
cancellation of said policy he called on Miranda in connection with the latter's
account with the Philippine Finance Corporation, on which occasion Miranda
asked him why the insurance he (Miranda) had procured from Periquet was
cancelled, whereupon he replied: "Look here, Miranda, why should we not
cancel that policy when we heard from Mr. Lim Pineda that you people were
going to burn this establishment." That Miranda then replied: "That is
confidential, please don't repeat to anybody." (Pp. 143-146, trans.)
It further appears from the record that at the time of the fire the plaintiff was
heavily indebted to the Manila Finance & Discount Corporation, to the Bank
of the Philippine Islands, and to Attorney Alfonso E. Mendoza.
We are thus led to the conclusion that defendants' first special defense is
well founded — that the fire in question was of intentional origin and was
caused with the connivance of the plaintiff. Neither the interest of the justice
nor public policy would be promoted by an omission of the courts to expose
and condemn incendiarism once the same is established by competent
evidence. It would tend to encourage rather than suppress that great public
menace if the courts do not expose the crime to public condemnation when
the evidence in a case like the present shows that it has really been
committed.
Page 7
2. We may also consider the damage caused by the fire in relation with
defendant's second special defense that plaintiff's claims of loss were false
and fraudulent.
To each of the proofs of loss which the plaintiff presented to the respective
insurance companies four days after the fire was attached an inventory of the
furniture claimed to have been in the building at the time of the fire. This
inventory contains 506 pieces of furniture and 3,700 board feet of lumber of
the alleged total value of P52,061.99. This amount was the total loss claimed
to have been suffered by the plaintiff, although we note that in its complaints
in these cases amended it is conceded that some furniture of the value of
about P5,000 was saved.
The same inventory above referred to was offered by the plaintiff and
admitted in evidence, having been marked Exhibits F-1, F-2, F-3, and F-4. To
support the validity of this inventory Filoteo Miranda testified that he had
taken the date appearing therein from his books of account. Neither he nor
any other witness testified as to the correctness of the prices therein set
forth, and it was not even shown whether they were costs prices or selling
prices. But a comparison between the prices listed in Exhibit F-1 (the
inventory of all of plaintiff's stock, supposed, to have been taken on or as of
December 31, 1928), and those listed in Exhibit F-3 (the list of furniture sold
by the plaintiff from January 4, 1929, to the date of the fire) tends to show
that the value claimed against the insurance companies is much higher than
the selling price. For instance, Exhibit F-3 (2nd item) shows that during the
period from January 4 to March 2, 1929, the plaintiff sold 8 settees for P160
or at P20 each. These 8 settees must have been taken from the stock listed
in Exhibit F-1, and an examination of this document reveals that the settees
therein listed are valued by the plaintiff at from P32.50 to P110 each.
The only book the plaintiff produced and offered in evidence to support
Miranda's testimony as to the validity of the inventory in question is Exhibit J.
This appears to be a new book, only the first six pages of which contain
entries, the first page consisting of a testament of assets and liabilities as of
December 31, 1928, and the second to the sixth pages consisting of a list of
furniture and its price, from which list the inventory in question appears to
have been copied. The remaining 194 pages of said book are entirely blank.
This seems to us significant in view of Miranda's testimony that at the end of
the two preceding years, 1927 and 1926, he took a physical inventory similar
to that found in Exhibit J, and in view of his inability to account for the
whereabouts of those alleged previous inventories. The appellees contend
that Exhibit J is not genuine but was evidently prepared by the plaintiff for the
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
purpose of bolstering up its claim against the insurance companies; and we
believe such a conclusion is warranted by the facts and circumstances which
appear in the record.
Turning now to the evidence for the defense, we find from the uncontradicted
testimony of Captain Lorenzo, who had directed the task of extinguishing the
fire, that it lasted only twelve minutes and caused no damage to the first floor
of the building were most of the insured furniture was located. Said witness
also testified that he found but few pieces of furniture in the second floor and
that he believed none had been completely burned.
The record shows that from March 2, 1929, the date of the fire, to April 20,
1929, when the sheriff sold the furniture left in the building at the instance of
plaintiff's mortgages, the Manila Finance & Discount Corporation, the
premises in question were guarded by an Indian watchman whom the
insurance companies placed thereto to prevent anybody from taking away
any part of its contents. It appears from the evidence for the defense that on
April 4, 1929, at the request of the insurance companies, a furniture
manufacturer named Isidro Guevara, with the assistance of Julian Dacanay,
an employee of the adjusters, made an inventory of all the damaged and
undamaged furniture found in the building after the fire. That inventory, which
was offered in evidence as Exhibit 5, contains 202 pieces of furniture, the
cost price of which according to Guevara's appraisal is the total sum of
P4,184.60. It will be recalled that the plaintiff claimed that at the time of the
fire there were 506 pieces of furniture in the building of the total value of
P52,061.99.
No contention is advanced on behalf of the appellant to the effect that
Guevara's inventory is not a complete list of all the damaged and
undamaged furniture found in the building after the fire. The contention on its
behalf in this regard is that said inventory is not reliable (a) because Guevara
was not a competent appraiser of furniture, and (b) because some of the
furniture found in the building at the time of the fire may have been
completely consumed by the fire.
With regard to the competency of the witness Guevara to appraise the
furniture in question, he testified, and the trial court found, that he had been
engaged in the manufacture of furniture in Manila for eighteen years. His
testimony that the cost price of all the furniture found in the building after the
fire was P4,184.60 appears to be reasonable, as the same furniture was
Page 8
subsequently sold by the sheriff at public auction and brought only, the sum Pauco vs. Guardian Assurance Co., Ltd. (G. R. Nos. 28763, 28765, and
of P2,650. 28766). 1

With reference to appellant's contention that Guevara's inventory is not The judgment appealed from is affirmed, with costs against the appellant. So
reliable because some of the furniture found in the building at the time of the ordered.
fire may have been completely consumed by the fire, we think the question
may be narrowed down to this: Was it possible that the plaintiff had 506 Street, J., concurs.
pieces of furniture in the building at the time of the fire when after the fire only
202 pieces were found in the premises? Considering the undisputed fact that
most of the insured furniture was located in the ground floor of the building,
which was not damaged by the fire, and that the fire lasted only twelve
minutes and damaged only the second floor where comparatively few pieces
of furniture were found at the time of the fire; and considering the testimony
of Captain Lorenzo and Isidro Guevara to the effect that, judging from the
condition of the remains of the fire, they believed not a single piece of Separate Opinions
furniture was completely consumed by the fire, we do not hesitate to answer
that question in the negative. During the twelve minutes the fire lasted, an
enormous quantity of water was being pumped in by the firemen to
extinguish it. Judging, then, from the duration and intensity of the fire in
question, we cannot bring ourselves to believe it possible for some 304 MALCOLM, HULL, and VICKERS, JJ., concurring:
pieces of wooden furniture to have been entirely consumed without leaving
any vestige. We agree on the ground that it has been established that the plaintiff's claims
of loss were false and fraudulent. This was the finding of the trial judge, and
Regardless of any difference of opinion as to the value of the insured a clear preponderance of the evidence supports that conclusion. This result
furniture and the extent of the damage caused thereto by the fire in question, influenced the trial judge to refrain from expressing any opinion regarding the
the fact that the insured only had approximately 202 pieces of furniture in the other special defense of incendiarism, and in this view we fully concur.
building at the time of the fire and sought to compel the insurance companies
to pay for 506 pieces conclusively shows that its claim was not honestly BUTTE, J., dissenting:
conceived. The trial court's conclusion that said claim is notoriously
fraudulent, is correct.
The conclusion that the claim presented by the plaintiff and appellant to the
insurance companies was fraudulent because it was excessive and the
Condition 12 of each of the insurance policies sued upon provides that "if the conclusion that the fire in question was of an intentional origin and caused
claim be in any respect fraudulent, or if any false declaration be made or with the connivance of the plaintiff seem to be entirely warranted by the
used in support thereof, or if any fraudulent means or devices are used by resume of the evidence made in the foregoing opinion. I have made a careful
the Insured or anyone acting on his behalf to obtain any benefit under this examination of the entire record and I am convinced that said resume of the
policy; or, if the loss or damage be occasioned by the wilful act, or with the evidence gives very scant and inadequate consideration to the case of the
connivance of the Insured, — all benefit under this policy shall be forfeited." other side as actually presented in the record. Moreover, evidence is relied
This case is governed by the decisions of this court in Yu Cua vs. South upon which is clearly incompetent and improper; for example, the ex parte
British Insurance Co. (41 Phil., 134); Go Lu vs. Yorkshire Insurance Co. (43 report of the Chief of the Fire Department from which the following was
Phil., 633); Tuason vs. North China Insurance Co. (47 Phil., 14); Tan quoted: "Suspected incendiary. Intentional. Preventable." The acquittal of
It vs. Sun Insurance Office (51 Phil., 212); Prats & Co. vs. Phoenix Insurance Lim Pineda in the criminal prosecution for slander is not competent evidence
Co. (52 Phil., 807); and Philippine National Bank and J. M. Po

INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases) Page 9

and indeed it was not admitted by the court below. Furthermore, Lim
Pineda's testimony that he saw Garcia enter the building ten minutes before
the fire was refuted by Garcia's testimony, corroborated by an impartial
witness, that he was at the stadium at the time of the fire and had no
connection with it. This evidence is not mentioned nor are the facts
mentioned which impeach the credibility of the witness conclusively. The first
extract of Attorney Silva's testimony quoted and relied upon was ordered
stricken by the court below and was clearly improper because no predicate
had been laid for it. The second extract was so meaningless that when he
was asked what was to be kept "confidential" he testified that he did not
know.
There is no direct evidence whatever that the plaintiff and appellant set his
building on fire to collect the insurance. Nor can I reconcile the suspicion that
gasoline was put in the building in open cans to start the fire, with the finding
that the same gasoline was found unconsumed after the conflagration.
As to the second special defense of the insurance companies that the
plaintiff's claim of loss was fraudulent, I confess that I have more doubt with
regard to the facts on this point. Again I think the foregoing opinion has not
adequately stated the evidence of both sides. The claim of P52,061.99 was
undoubtedly unreasonably high. The policies aggregated P20,000. It is a
matter of common knowledge and borne out by many insurance cases which
have been considered by this court, that the insured expects insurance
companies to beat down his claim; and the respective claims of the insurer
and the insured then become a matter of negotiation and adjustment. Under
these circumstances, it is not surprising that the insured puffs the amount of
his loss. If the amount claimed exceeds the limit of the ordinary puffing, it
may also be so disproportionate to the fair value of the property lost as to
give ground for an inference of an attempt to defraud. I think the present
case was very close to that line. But in view of the facts that one of the
defendant's own witnesses estimated the loss at P20,000, and that the
plaintiff's inventory which appears to have been kept due in course of
business shows a value of P42,501.49 two months before the fire, I feel
disposed to give the benefit of the doubt to the insured. Suspicion of fraud is
not enough — for, I daresay, there never was a fire where some
circumstance could not be found that could be alleged as a ground for an
inference of fraud.lawphil.net
Avanceña, Villa-Real and Abad Santos, JJ., concur.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
G.R. No. L-19851 June 29, 1965
YU BAN CHUAN, plaintiff-appellant,
vs.
FIELDMEN'S INSURANCE CO., INC., ET AL., defendants-appellants.
Campos, Mendoza and Hernandez for plaintiff-appellant.
Caballo, Bendijo and Fajardo and De Santos, Herrera and Delfino for
defendants-appellants.
REYES, J.B.L., J.:
Direct appeal by both the plaintiff and the defendants from a decision of the
Court of First Instance of Manila, in its Civil Case No. 46166, sentencing the
defendants Fieldmen's Insurance Co., Inc. and Paramount Surety and
Insurance Co., Inc. to pay the plaintiff, Yu Ban Chuan, the sum of P200,000
and P140,000, respectively, with interest at the legal rate and costs.
The following facts are uncontroverted: Sometime in the later part of March,
1959, plaintiff Yu Ban Chuan began his business enterprise under the name
of "CMC Trading," which was engaged in the wholesale dealing in general
merchandise and school supplies, and was first situated at 612 Nueva Street,
Manila; that, while at this place, the plaintiff insured against fire the stock
merchandise contained therein with defendant Fieldmen's Insurance Co., for
which the latter issued, on 14 December 1959, an " open" policy limiting the
insurer's liability to the amount of P200,000 for a period of one (1) year; that
plaintiff again insured against fire the same stock of merchandise covered by
Fieldmen's policy with defendant Paramount Surety & Insurance Co., being
also issued, on 7 January 1960, an "open" policy limiting liability thereunder
to P140,000 for a one-year period; that on 14 January 1960, Fieldmen's
agreed to transfer the coverage of its insurance policy to plaintiff's store at
680 Muelle de Binondo, Manila, to which plaintiff transferred his business
establishment on the 15th or 16th of January 1960; that on 21 January 1960
Paramount also agreed to have the coverage of its insurance policy
transferred to the same new premises and acknowledged the existence of its
co-insurance with Fieldmen's; that on 23 January 1960 Fieldmen's also
acknowledged its co-insurance with Paramount; and that on 31 January
1960, while both insurance policies were in full force and effect, plaintiff's
business establishment at 680 Muelle de Binondo, Manila, was totally
destroyed by fire.
Page 10
The next day after the occurrence of the fire, plaintiff verbally notified the
respective agents of the defendants-insurers of such incident; and on the
same day, 1 February 1960, plaintiff and H. H. Bayne Adjustment Co. and
Manila Adjustment Co., adjusters of defendants Fieldmen's and Paramount,
respectively, executed "non-waiver" agreements for the purpose of
determining the circumstances of the fire and the value or amount of loss and
damage to the merchandise insured under said policies. Pursuant to such
agreements, H. H. Bayne Adjustment Co. sent a letter dated 2 February
1960 to plaintiff, and Manila Adjustment Co. sent its letter dated 6 February
1960, requiring the plaintiff to submit certain papers and documents. On 8
February 1960, plaintiff gave a written notice of the occurrence of the fire to
the defendants, and, in answer to the letters of the adjusters, plaintiff
submitted, on 24 February 1960, his separate formal fire claims, together
with some of the supporting papers required therein. Because of plaintiff's
non-compliance or failure to submit the required documents and the
adjusters' demand in subsequent letters that the insured submit additional
papers, the adjusters and plaintiff engaged in an exchange of
communications, until finally the defendants rejected plaintiff's claims, and
denied liability under their respective policies, evidently upon their respective
adjusters' recommendations.
The plaintiff commenced suit in the Court of First Instance of Manila (Civ.
Case No. 46166), and the defendants answered the complaint with identical
special defenses; to wit: (1) insured's failure to prove the loss claimed; (2)
false and fraudulent claim; and (3) arson or causes not independent of the
will of the insured; and counterclaims for the annulment of the policies. After
trial, the court below upheld the claim of the plaintiff, but refused to award
damages or interest at more than the legal rate. Both parties appealed.
In proving the value of his loss, the plaintiff relied upon a merchandise
inventory as of 31 December 1959, which he had allegedly submitted on 15
January 1960 to the Bureau of Internal Revenue. The inventory reflected the
total value of stocks of the CMC Trading at 680 Muelle de Binondo, Manila,
at P328,202.67. The plaintiff claims purchases for the month of January 1960
in the amount of P34,505.08 and sales in the amount of P12,000, thus the
resulting balance of the stocks allegedly burned was estimated by the plaintiff
to be P350,707.75.
The fact of the filing of the inventory as of 15 January 1960 should be
considered as true, since there is no evidence to the contrary. The lack of an
initial of the receiving clerk in the rubber stamp indicating the receipt of the
document by the BIR office on 15 January 1960, or that the receiving stamps
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
were within the access of just anybody who visits the said office because the
stamps just lie around on the employees' desks, while showing the lack of a
better administrative system, do not necessarily show the falsity of the
inventory as of the date stamped therein, and as certified by the chief of the
administrative division.
The court a quo, however, committed error in accepting as true the actual
existence at the burned premises of the stocks mentioned in the inventory.
Six (6) of the many copies of the invoices submitted by the plaintiff to the
adjusters uncover a clear case of fraud and misrepresentation which avoid
the insurers' liability as per condition No. 13 of Fieldmen's policy No. 15 HO
7756 and Paramount policy No. 3164. These five invoices alone inflate the
supposed stocks by P248,370.00. The purchase invoice from Western
Pacific Industrial Development Co. (Exh. "J-15") for powder puffs, ballpen
filler, rubber band and ballpen plastic body totalling P76,525.00 was
denounced as fake by the former manager, Pablo S. Sison, and he denied
that the signature appearing thereon is his. His testimony that this company
does not deal in the above-named merchandise is corroborated by the
letterhead of the company's stationery and the invoice itself that it is an
"operator of forest concessions." On sight, the exhibit excites incredulity —
what should a logging company be doing with rubber bands or powder puffs?
The invoice from Victoria Commercial Corporation (Exh, "J-18") for
P33,800.00 is, likewise, dubious. On its face, it shows that the address of the
company is "303 Trade & Commerce Building, J. Luna, Manila, Philippines,"
but a check by adjuster Mario Santos was negative, showing that no
company by that name was registered by the Securities and Exchange
Commission (Exh. "18-Paramount"). The superintendent of the building
testified that there had never been a tenant by that name.
Again, the MJC Trading Enterprise's invoice for P37,176.00 (Exh. "J-20",
Exhibit folder, fol. 97) indicates the company's address to be "308 T & C
Building, J. Luna, Manila", but there is no such room in the building
mentioned nor any such company registered with the Securities and
Exchange Commission (Exh. "18-Paramount").
Another fictitious invoice is that supposedly issued by Cosmopolitan
Commercial Enterprises for P37,800.00 (Exh. "J-19") for sales of
"mechanical pencil plastic body," fountain pens, and tape measures. This
establishment is a single proprietorship belonging to Trinidad M. Lim; it is not
engaged in the kind of merchandise purportedly sold, as per the invoice, nor
Page 11
issue this kind of invoice, nor the signature as that of Mrs. Lim appearing
thereon genuine, according to the husband of the owner, Benjamin Chua
Meer, who manages the enterprise. The fact that Mrs. Lim did not testify
does not make the invoice any less false; at least Meer should know and
recognize his wife's signature.
There are two (2) invoices supposedly issued by Nelina Trading (Exhs. "N-2"
& "N-3") on 2 October 1959 and 17 October 1959, respectively, for
purchases aggregating P63,069.00. A check at the company's supposed
address failed to show the existence of the company, and the records of the
Bureau of Commerce (Exh. 20-a Paramount) show that it went out of
business on 13 April 1959.
The plaintiff, Yu Ban Chuan, adopted a uniform, too uniform, in fact, to be
believed, explanation for all the invoices: that he did not buy the merchandise
at the companies' addresses but bought from the agents who brought the
goods to him; that the originals of the invoices were burned and that he
requested for true copies from the agents whom he met casually in the
streets after the fire and these agents delivered the exhibits to him; but he did
not remember, or know the names of these agents, nor did he know their
whereabouts. In other words, he wants the court to believe also that these
agents performed a vanishing act after each one of them had turned in the
copy of each invoice to the plaintiff.
It will be noted that the plaintiff transferred to his new business address at
680 Muelle de Binondo, Manila, on 15 or 16 January 1960, but he offered no
satisfactory explanation on the purported dates of the following exhibits:
An invoice (Exh. "L-29") from Standard Manufacturing Company for
P6,750.00 is dated 10 September 1959, but the address of the
purchaser, CMC Trading, is shown as already at 680 Muelle de
Binondo;
Another invoice from the same company, (Exh. "I-40") is dated 14
December 1959, but the CMC Trading appears as at its new
location;
The same is true with still five (5) more invoice, (Exhs. D, I-31, I-41,
I-28, &, I-27) from the same company, all bearing dates before the
transfer of the CMC Trading to 680 Muelle de Binondo.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
The plaintiff adheres to the inventory as the immaculate basis for the actual
worth of stocks that were burned, on the ground that it was made from actual
count, and in compliance with law. But this inventory is not binding on the
defendants, since it was prepared without their intervention. It is well to note
that plaintiff had every reason to show that the value of his stock of goods
exceeded the amount of insurance that he carried. And the inventory, having
been made prior to the fire, was no proof of the existence of these goods at
the store when the fire occurred. True, there were merchandise that were
actually destroyed by fire (Exhibits 2, 2-a, 2-b, 3, 3-a, 4, 4-a, 4-b Paramount).
But when fraud is conceived, what is true is subtly hidden by the schemer
beneath proper and legal appearances, including the preparation of the
inventory.
Shielding himself under Section 82 of the Insurance Act, the plaintiff asserts
that in submitting his proof of loss he was "not bound to give such proof as
would be necessary in a court of justice". The assertion is correct, but does
not give him any justification for submitting false proofs. Their falsity is the
best evidence of the fraudulent character and the unmeritoriousness of
plaintiff's claim.
The filing of collection suits for unpaid purchases against Yu Ban Chuan,
however valid these may be, do not legitimize his fraudulent claim against
the insurers in the present case, nor show that the goods allegedly delivered
were at the store when the fire occurred. It is markworthy that in some
instances (Exhs. L-6, L-8, L-10) the debts are only attested by certifications
from the creditors.
The plaintiff, Yu Ban Chuan, is a Chinese who came to this country in 1948.
His combined income from 1956 through 1958 amounted to only P10,000.
Yet in 1959 he appeared as running a, business of his own worth almost half
a million pesos. The source of the investment, accordingly to him, were
unsecured loans in the fantastic sum of P224,000.00. From these
circumstances, and the facts herein before stated, it is plain that no credence
can be given to plaintiff's claims.
For the foregoing reasons, the appealed judgment is hereby reversed, and
the appellee's action dismissed, with costs against the plaintiff-appellant Yu
Ban Chuan.
IN VIEW OF THE CONCLUSIONS REACHED, the plaintiff's appeal against
the non-award of damages to him must be necessarily dismissed.
Page 12
 The plaintiff, Lim-Juco, sued the defendant, Lim-Yap, for damages in the sum
of 13,000 pesos for breach of a contract to insure a cargo of rice. The
defendant in his answer denied that he was under any obligation to pay this
sum, upon the ground that the second contract of insurance represented by
the policy introduced in evidence by the plaintiff is void.
DOUBLE INSURANCE
The court below, in view of the evidence adduced by the parties and in
[G.R. No. 982. January 4, 1904. ] consideration of the facts admitted and agreed upon between them, rendered
judgment for the defendant, with the costs against the plaintiff.
LIM-JUCO, Plaintiff-Appellant, v. LIM-YAP, Defendant-Appellee.
The complaint upon which it is sought to recover the sum of 13,000 pesos as
L. D. Hargis and R. S. MacDougall, for Appellant. damages is based upon the failure of the defendant to fulfill his obligation of
executing a valid and enforceable policy of insurance upon a cargo of rice.
Davis & Cohn and Alberto Barretto, for Appellee.
The parties litigant agree that long prior to June 14, 1900, when a contract of
SYLLABUS insurance was entered into between the plaintiff, Lim-Juco, and the
defendant, Lim-Yap, as representative of the King Yuen Insurance Company,
1. INSURANCE; DOUBLE INSURANCE. — The plaintiff applied to the agent Limited, insuring 3,000 sacks of rice, valued at 13,000 pesos, loaded on the
of an insurance company for insurance on a cargo of rice. The agent issued barkentine Registro, they had entered into the agreement which appears in
no policy, but gave him a letter to the insurance company containing a section 9, page 2 of the bill of exceptions. This agreement, the plaintiff
statement that the cargo was insured. Shortly after the plaintiff applied to the contends, constituted a contract of insurance between him and the firm of
defendant, the agent of another insurance company, and obtained from him Germann & Co., the agents of La Federal Insurance Company, for the
a policy of insurance upon the same cargo. This policy was not drawn in the insurance of the same 3,000 sacks of rice before referred to for their total
formed prescribed by the Code of Commerce. The cargo was lost and the value.
first company paid the loss. Subsequently the insured sued the agent of the
second company for the value of the rice lost upon the ground that the policy The brig in question, which sailed from the port of Dagupan June 15, 1900,
issued by him was unenforceable on account of noncompliance with the legal for this city, carrying the 3,000 sacks of rice so insured, was wrecked on the
requirements as to form, and that the agent had failed to bind his principal by following day, the 16th, near the port of Vigan, Island of Luzon, the entire
the policy issued:chanrob1es virtual 1aw library cargo being lost. On the 17th of the same month Pio Acosta, the skipper,
together with some of the members of the shipwrecked vessel, entered,
Held, that the prohibition against double insurance prevents a recovery, and before the customs inspector in the port of Vigan, a ship’s protest in due
that the first company having paid the amount of the loss the unenforceability form, with respect to the said shipwreck. Upon their arrival in this city this
of the second policy does not give the insured a right of action against the protest was repeated before the notary public, Enrique Barrera. Of all these
agent of the second company. facts the defendant had immediate notice.

The plaintiff has been completely indemnified for the loss of the 3,000 sacks
DECISION of rice which went down in the wreck of the brig Registro. On the 11th of
August, 1901, he received from the firm of Germann & Co. the sum of 13,000
pesos, the amount of insurance underwritten by that firm in favor of the
TORRES, J. : plaintiff. (Bill of exceptions, pp. 6 and 7.) The manager of the firm testified to
this fact, and stated that he had written a letter to the defendant notifying him
that he had paid the amount of the insurance on the lost rice belonging to the

INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases) Page 13

plaintiff, Lim-Juco.
Article 782 of the Code of Commerce provides that if different contracts of
insurance have been entered into concerning the same thing, in the absence
of fraud only the first contract shall subsist, provided it covers the full value of
the things insured. Subsequent insurers shall be relieved from responsibility,
and received one-half of 1 per cent of the amount insured.
If the first contract does not cover the entire value of the thing insured, then
the liability for the excess shall fall upon the subsequent insurers in order of
priority.
The only error assigned by the appellant is that the court erred in the
rendering judgment for the defendant and in imposing the costs upon the
plaintiff, Lim-Juco.
The plaintiff has not demanded from the defendant , Lim-Yap, the value of
the rice insured by him as agent of the Panag Khean Guan Insurance
Company, Limited, nor has he affirmed or denied the validity or enforceability
of the policy executed in his favor by the defendant, notwithstanding the fact
that it was the second contract of insurance upon the same thing.
The plaintiff, Lim-Juco, realizing that no action had accrued to him and that
his policy was unenforceable from his point of view — that is, for the reason
that it was defective in form and not because of the existence of a former
contract of insurance, covering the same 3,000 sacks of rice — commenced
this suit against the insurance agent to recover damages for the amount of
the injury occasioned by the loss of the rice. The action was based upon the
alleged nullity of the policy, which in the opinion of the plaintiff was deficient
and had been executed without the formalities required by law.
We do not deem it necessary to make any decision as to the conditions of
the said policy, inasmuch as the plaintiff has not suffered damage by reason
of the deficiency resulting from a failure to comply with the formal requisites
prescribed by the article 738 of the Code of Commerce.
The unenforceability of this policy, even if all the legal formalities had been
complied with in its execution, is due to the prohibition established by the law
against the double recovery of the value of a cargo of property insured and
lost by any maritime accident.
It is a fact disclosed by the evidence that the plaintiff has recovered the entire
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
amount of the value of 3,000 sacks of rice insured and subsequently lost by
the wrecking of the vessel. Therefore, in accordance with the provisions of
article 782 of the Code of Commerce, the second or subsequent insurer, the
defendant herein, is free from all liability. The law will not permit Lim-Juco,
after having collected from Germann & Co. an amount in excess of the value
of the rice insured, to collect for the second time from a second insurer. The
latter’s obligation in the premises has been annulled by the provisions of the
law.
It is unnecessary to discuss the condition of the contract of insurance signed
by Germann & Co. on behalf of the Federal Insurance Company, in view of
the unquestionable fact that the plaintiff collected and received from the said
firm more than the entire value of the rice lost. For this reason, whatever may
have been the defects in the policy issued by the insurer, no action has
accrued to the plaintiff for the recovery of damages. Upon the facts of the
case there is no law which sanctions such an action. It is a demand as unjust
as it is immoral, and seeks to elude the prohibition of a double recovery of
the value of the property insured.
As the second contract of insurance entered into is null and void and
therefore, by express provision of the law, produces no obligation with
respect to the Chinese Company represented by the defendant, the plaintiff
having recovered the total amount of the insurance from the first insurer,
there is no legal reason upon which the agent of the company can be
compelled to pay the amount of the second policy of insurance, from which,
as above stated, this agent was freed by operation of law. Neither can an
action for damage be successfully maintained against the agent, as none of
the articles of the Code of Commerce which deal with commission agents,
factors, and clerks create such an obligation. Nor is such an obligation
created by any of the articles of the same code concerning marine
insurance.
For the reasons given, the action against the defendant, Lim-Yap, is
dismissed and the judgment below affirmed, with the costs to the plaintiff.
Judgment will be entered and the case remanded to the court below twenty
days from the date of the notification of this decision. So ordered.
G.R. No. 114427 February 6, 1995
Page 14
 ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision 1 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."
The petitioner declared in the policy under the subheading entitled CO-
INSURANCE 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
3. The insured shall give notice to the Company of any
insurance or insurances already affected, 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 such
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.
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
stock-in-trade 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:
MORTGAGE: 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

F. Legaspi Gen. Merchandise 86,432.50 The basis of the private respondent's denial was the petitioner's alleged
Cebu Tesing Textiles 250,000.00 (on credit) violation of Condition 3 of the policy.

————— The petitioner then filed a complaint 5 against the private respondent with the
Insurance Commission (Case No. 3340) for the recovery of P100,000.00
P392,130.50 under fire insurance policy No. F-14622 and for attorney's fees and costs of
litigation. He attached as Annex "AM"6 thereof his letter of 18 January 1991
The policy contained the following condition: 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

INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases) Page 15

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 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:
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 decision 9 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
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
of private respondent [petitioner herein]. The policy states
that "DISCOUNT MART (MR. ARMANDO GEAGONIA,
PROP)" was the 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 insurance 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)."
In 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. 1462.
...
Indeed private respondent's allegation of lack of knowledge
of the provisions insurances is belied by his letter to
petitioner [of 18 January 1991. The body of the letter reads
as follows;]
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 die 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
Page 16
 aforementioned were already in effect.
Therefore 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 claimed 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.
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 or 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;
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
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. 3440 as Annex "M" thereof and
made 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.
Page 17
F-24758, while Policy No. GA-28146 had been renewed twice, the previous
policy being F-24792.
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 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 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 to 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
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
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 himself. 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 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:
Loss, if any, shall be payable to MESSRS. TESING
TEXTILES, Cebu City as their interest may appear subject to
the terms of this 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
Page 18
 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."
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 co-insurer is Mercantile Insurance Co., Inc. in the sum
of P50,000.00. A double insurance exists where the same person is insured
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
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.
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.
G.R. No. 184300 July 11, 2012
MALAYAN INSURANCE CO., INC., Petitioner,
vs.
PHILIPPINES FIRST INSURANCE CO., INC. and REPUTABLE
FORWARDER SERVICES, INC., Respondents.
DECISION
Page 19
REYES, J.:
Before the Court is a petitiOn for review on certiorari filed by petitioner
Malayan Insurance Co., lnc. (Malayan) assailing the Decision 1 dated
February 29, 2008 and Resolution2 dated August 28, 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 71204 which affirmed with modification the
decision of the Regional Trial Court (RTC), Branch 38 of Manila.
Antecedent Facts
Since 1989, Wyeth Philippines, Inc. (Wyeth) and respondent Reputable
Forwarder Services, Inc. (Reputable) had been annually executing a contract
of carriage, whereby the latter undertook to transport and deliver the former’s
products to its customers, dealers or salesmen.3
On November 18, 1993, Wyeth procured Marine Policy No. MAR 13797
(Marine Policy) from respondent Philippines First Insurance Co., Inc.
(Philippines First) to secure its interest over its own products. Philippines
First thereby insured Wyeth’s nutritional, pharmaceutical and other products
usual or incidental to the insured’s business while the same were being
transported or shipped in the Philippines. The policy covers all risks of direct
physical loss or damage from any external cause, if by land, and provides a
limit of P6,000,000.00 per any one land vehicle.
On December 1, 1993, Wyeth executed its annual contract of carriage with
Reputable. It turned out, however, that the contract was not signed by
Wyeth’s representative/s.4 Nevertheless, it was admittedly signed by
Reputable’s representatives, the terms thereof faithfully observed by the
parties and, as previously stated, the same contract of carriage had been
annually executed by the parties every year since 1989.5
Under the contract, Reputable undertook to answer for "all risks with respect
to the goods and shall be liable to the COMPANY (Wyeth), for the loss,
destruction, or damage of the goods/products due to any and all causes
whatsoever, including theft, robbery, flood, storm, earthquakes, lightning, and
other force majeure while the goods/products are in transit and until actual
delivery to the customers, salesmen, and dealers of the COMPANY".6
The contract also required Reputable to secure an insurance policy on
Wyeth’s goods.7 Thus, on February 11, 1994, Reputable signed a Special
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
Risk Insurance Policy (SR Policy) with petitioner Malayan for the amount of
P1,000,000.00.
On October 6, 1994, during the effectivity of the Marine Policy and SR Policy,
Reputable received from Wyeth 1,000 boxes of Promil infant formula worth
P2,357,582.70 to be delivered by Reputable to Mercury Drug Corporation in
Libis, Quezon City. Unfortunately, on the same date, the truck carrying
Wyeth’s products was hijacked by about 10 armed men. They threatened to
kill the truck driver and two of his helpers should they refuse to turn over the
truck and its contents to the said highway robbers. The hijacked truck was
recovered two weeks later without its cargo.
On March 8, 1995, Philippines First, after due investigation and adjustment,
and pursuant to the Marine Policy, paid Wyeth P2,133,257.00 as indemnity.
Philippines First then demanded reimbursement from Reputable, having
been subrogated to the rights of Wyeth by virtue of the payment. The latter,
however, ignored the demand.
Consequently, Philippines First instituted an action for sum of money against
Reputable on August 12, 1996.8 In its complaint, Philippines First stated that
Reputable is a "private corporation engaged in the business of a common
carrier." In its answer,9 Reputable claimed that it is a private carrier. It also
claimed that it cannot be made liable under the contract of carriage with
Wyeth since the contract was not signed by Wyeth’s representative and that
the cause of the loss was force majeure, i.e., the hijacking incident.
Subsequently, Reputable impleaded Malayan as third-party defendant in an
effort to collect the amount covered in the SR Policy. According to Reputable,
"it was validly insured with Malayan for P1,000,000.00 with respect to the lost
products under the latter’s Insurance Policy No. SR-0001-02577 effective
February 1, 1994 to February 1, 1995" and that the SR Policy covered the
risk of robbery or hijacking.10
Disclaiming any liability, Malayan argued, among others, that under Section 5
of the SR Policy, the insurance does not cover any loss or damage to
property which at the time of the happening of such loss or damage is
insured by any marine policy and that the SR Policy expressly excluded third-
party liability.
After trial, the RTC rendered its Decision11 finding Reputable liable to
Philippines First for the amount of indemnity it paid to Wyeth, among others.
Page 20
In turn, Malayan was found by the RTC to be liable to Reputable to the extent
of the policy coverage. The dispositive portion of the RTC decision provides:
WHEREFORE, on the main Complaint, judgment is hereby rendered finding
[Reputable] liable for the loss of the Wyeth products and orders it to pay
Philippines First the following:
1. the amount of P2,133,257.00 representing the amount paid by
Philippines First to Wyeth for the loss of the products in question;
2. the amount of P15,650.00 representing the adjustment fees paid
by Philippines First to hired adjusters/surveyors;
3. the amount of P50,000.00 as attorney’s fees; and
4. the costs of suit.
On the third-party Complaint, judgment is hereby rendered finding
Malayan liable to indemnify [Reputable] the following:
1. the amount of P1,000,000.00 representing the proceeds of the
insurance policy;
2. the amount of P50,000.00 as attorney’s fees; and
3. the costs of suit.
SO ORDERED.12
Dissatisfied, both Reputable and Malayan filed their respective appeals from
the RTC decision.
Reputable asserted that the RTC erred in holding that its contract of carriage
with Wyeth was binding despite Wyeth’s failure to sign the same. Reputable
further contended that the provisions of the contract are unreasonable,
unjust, and contrary to law and public policy.
For its part, Malayan invoked Section 5 of its SR Policy, which provides:
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
Section 5. INSURANCE WITH OTHER COMPANIES. The insurance does
not cover any loss or damage to property which at the time of the happening
of such loss or damage is insured by or would but for the existence of this
policy, be insured by any Fire or Marine policy or policies except in respect of
any excess beyond the amount which would have been payable under the
Fire or Marine policy or policies had this insurance not been effected.
Malayan argued that inasmuch as there was already a marine policy issued
by Philippines First securing the same subject matter against loss and that
since the monetary coverage/value of the Marine Policy is more than enough
to indemnify the hijacked cargo, Philippines First alone must bear the loss.
Malayan sought the dismissal of the third-party complaint against it. In the
alternative, it prayed that it be held liable for no more than P468,766.70, its
alleged pro-rata share of the loss based on the amount covered by the
policy, subject to the provision of Section 12 of the SR Policy, which states:
12. OTHER INSURANCE CLAUSE. If at the time of any loss or damage
happening to any property hereby insured, there be any other subsisting
insurance or insurances, whether effected by the insured or by any other
person or persons, covering the same property, the company shall not be
liable to pay or contribute more than its ratable proportion of such loss or
damage.
On February 29, 2008, the CA rendered the assailed decision sustaining the
ruling of the RTC, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, the assailed Decision dated 29
September 2000, as modified in the Order dated 21 July 2001, is AFFIRMED
with MODIFICATION in that the award of attorney’s fees in favor of
Reputable is DELETED.
SO ORDERED.13
The CA ruled, among others, that: (1) Reputable is estopped from assailing
the validity of the contract of carriage on the ground of lack of signature of
Wyeth’s representative/s; (2) Reputable is liable under the contract for the
value of the goods even if the same was lost due to fortuitous event; and (3)
Section 12 of the SR Policy prevails over Section 5, it being the latter
provision; however, since the ratable proportion provision of Section 12
applies only in case of double insurance, which is not present, then it should
Page 21
not be applied and Malayan should be held liable for the full amount of the
policy coverage, that is, P1,000,000.00.14
On March 14, 2008, Malayan moved for reconsideration of the assailed
decision but it was denied by the CA in its Resolution dated August 28,
2008.15
Hence, this petition.
Malayan insists that the CA failed to properly resolve the issue on the
"statutory limitations on the liability of common carriers" and the "difference
between an ‘other insurance clause’ and an ‘over insurance clause’."
Malayan also contends that the CA erred when it held that Reputable is a
private carrier and should be bound by the contractual stipulations in the
contract of carriage. This argument is based on its assertion that Philippines
First judicially admitted in its complaint that Reputable is a common carrier
and as such, Reputable should not be held liable pursuant to Article 1745(6)
of the Civil Code.16 Necessarily, if Reputable is not liable for the loss, then
there is no reason to hold Malayan liable to Reputable.
Further, Malayan posits that there resulted in an impairment of contract when
the CA failed to apply the express provisions of Section 5 (referred to by
Malayan as over insurance clause) and Section 12 (referred to by Malayan
as other insurance clause) of its SR Policy as these provisions could have
been read together there being no actual conflict between them.
Reputable, meanwhile, contends that it is exempt from liability for acts
committed by thieves/robbers who act with grave or irresistible threat
whether it is a common carrier or a private/special carrier. It, however,
maintains the correctness of the CA ruling that Malayan is liable to
Philippines First for the full amount of its policy coverage and not merely a
ratable portion thereof under Section 12 of the SR Policy.
Finally, Philippines First contends that the factual finding that Reputable is a
private carrier should be accorded the highest degree of respect and must be
considered conclusive between the parties, and that a review of such finding
by the Court is not warranted under the circumstances. As to its alleged
judicial admission that Reputable is a common carrier, Philippines First
proffered the declaration made by Reputable that it is a private carrier. Said
declaration was allegedly reiterated by Reputable in its third party complaint,
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
which in turn was duly admitted by Malayan in its answer to the said third-
party complaint. In addition, Reputable even presented evidence to prove
that it is a private carrier.
As to the applicability of Sections 5 and 12 in the SR Policy, Philippines First
reiterated the ruling of the CA. Philippines First, however, prayed for a slight
modification of the assailed decision, praying that Reputable and Malayan be
rendered solidarily liable to it in the amount of P998,000.00, which represents
the balance from the P1,000.000.00 coverage of the SR Policy after
deducting P2,000.00 under Section 10 of the said SR Policy. 17
Issues
The liability of Malayan under the SR Policy hinges on the following issues
for resolution:
1) Whether Reputable is a private carrier;
2) Whether Reputable is strictly bound by the stipulations in its
contract of carriage with Wyeth, such that it should be liable for any
risk of loss or damage, for any cause whatsoever, including that due
to theft or robbery and other force majeure;
3) Whether the RTC and CA erred in rendering "nugatory" Sections 5
and Section 12 of the SR Policy; and
4) Whether Reputable should be held solidarily liable with Malayan
for the amount of P998,000.00 due to Philippines First.
The Court’s Ruling
On the first issue – Reputable is a private carrier.
The Court agrees with the RTC and CA that Reputable is a private carrier.
Well-entrenched in jurisprudence is the rule that factual findings of the trial
court, especially when affirmed by the appellate court, are accorded the
highest degree of respect and considered conclusive between the parties,
save for certain exceptional and meritorious circumstances, none of which
are present in this case.18
Page 22
Malayan relies on the alleged judicial admission of Philippines First in its
complaint that Reputable is a common carrier.19 Invoking Section 4, Rule 129
of the Rules on Evidence that "an admission verbal or written, made by a
party in the course of the proceeding in the same case, does not require
proof," it is Malayan’s position that the RTC and CA should have ruled that
Reputable is a common carrier. Consequently, pursuant to Article 1745(6) of
the Civil Code, the liability of Reputable for the loss of Wyeth’s goods should
be dispensed with, or at least diminished.
It is true that judicial admissions, such as matters alleged in the pleadings do
not require proof, and need not be offered to be considered by the court.
"The court, for the proper decision of the case, may and should consider,
without the introduction of evidence, the facts admitted by the parties." 20 The
rule on judicial admission, however, also states that such allegation,
statement, or admission is conclusive as against the pleader, 21 and that the
facts alleged in the complaint are deemed admissions of the plaintiff and
binding upon him.22 In this case, the pleader or the plaintiff who alleged that
Reputable is a common carrier was Philippines First. It cannot, by any stretch
of imagination, be made conclusive as against Reputable whose nature of
business is in question.
It should be stressed that Philippines First is not privy to the SR Policy
between Wyeth and Reputable; rather, it is a mere subrogee to the right of
Wyeth to collect from Reputable under the terms of the contract of carriage.
Philippines First is not in any position to make any admission, much more a
definitive pronouncement, as to the nature of Reputable’s business and there
appears no other connection between Philippines First and Reputable which
suggests mutual familiarity between them.
Moreover, records show that the alleged judicial admission of Philippines
First was essentially disputed by Reputable when it stated in paragraphs 2,
4, and 11 of its answer that it is actually a private or special carrier. 23 In
addition, Reputable stated in paragraph 2 of its third-party complaint that it is
"a private carrier engaged in the carriage of goods."24 Such allegation was, in
turn, admitted by Malayan in paragraph 2 of its answer to the third-party
complaint.25 There is also nothing in the records which show that Philippines
First persistently maintained its stance that Reputable is a common carrier or
that it even contested or proved otherwise Reputable’s position that it is a
private or special carrier.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
Hence, in the face of Reputable’s contrary admission as to the nature of its
own business, what was stated by Philippines First in its complaint is
reduced to nothing more than mere allegation, which must be proved for it to
be given any weight or value. The settled rule is that mere allegation is not
proof.26
More importantly, the finding of the RTC and CA that Reputable is a special
or private carrier is warranted by the evidence on record, primarily, the
unrebutted testimony of Reputable’s Vice President and General Manager,
Mr. William Ang Lian Suan, who expressly stated in open court that
Reputable serves only one customer, Wyeth.27
Under Article 1732 of the Civil Code, common carriers are persons,
corporations, firms, or associations engaged in the business of carrying or
transporting passenger or goods, or both by land, water or air for
compensation, offering their services to the public. On the other hand, a
private carrier is one wherein the carriage is generally undertaken by special
agreement and it does not hold itself out to carry goods for the general
public.28 A common carrier becomes a private carrier when it undertakes to
carry a special cargo or chartered to a special person only. 29 For all intents
and purposes, therefore, Reputable operated as a private/special carrier with
regard to its contract of carriage with Wyeth.
On the second issue – Reputable is bound by the terms of the contract of
carriage.
The extent of a private carrier’s obligation is dictated by the stipulations of a
contract it entered into, provided its stipulations, clauses, terms and
conditions are not contrary to law, morals, good customs, public order, or
public policy. "The Civil Code provisions on common carriers should not be
applied where the carrier is not acting as such but as a private carrier. Public
policy governing common carriers has no force where the public at large is
not involved."30
Thus, being a private carrier, the extent of Reputable’s liability is fully
governed by the stipulations of the contract of carriage, one of which is that it
shall be liable to Wyeth for the loss of the goods/products due to any and all
causes whatsoever, including theft, robbery and other force majeure while
the goods/products are in transit and until actual delivery to Wyeth’s
customers, salesmen and dealers.31
Page 23
On the third issue – other insurance vis-à-vis over insurance.
Malayan refers to Section 5 of its SR Policy as an "over insurance clause"
and to Section 12 as a "modified ‘other insurance’ clause". 32 In rendering
inapplicable said provisions in the SR Policy, the CA ruled in this wise:
Since Sec. 5 calls for Malayan’s complete absolution in case the other
insurance would be sufficient to cover the entire amount of the loss, it is in
direct conflict with Sec. 12 which provides only for a pro-rated contribution
between the two insurers. Being the later provision, and pursuant to the rules
on interpretation of contracts, Sec. 12 should therefore prevail.
xxxx
x x x The intention of both Reputable and Malayan should be given effect as
against the wordings of Sec. 12 of their contract, as it was intended by the
parties to operate only in case of double insurance, or where the benefits of
the policies of both plaintiff-appellee and Malayan should pertain to
Reputable alone. But since the court a quo correctly ruled that there is no
double insurance in this case inasmuch as Reputable was not privy thereto,
and therefore did not stand to benefit from the policy issued by plaintiff-
appellee in favor of Wyeth, then Malayan’s stand should be rejected.
To rule that Sec. 12 operates even in the absence of double insurance would
work injustice to Reputable which, despite paying premiums for a
P1,000,000.00 insurance coverage, would not be entitled to recover said
amount for the simple reason that the same property is covered by another
insurance policy, a policy to which it was not a party to and much less, from
which it did not stand to benefit. Plainly, this unfair situation could not have
been the intention of both Reputable and Malayan in signing the insurance
contract in question.33
In questioning said ruling, Malayan posits that Sections 5 and 12 are
separate provisions applicable under distinct circumstances. Malayan argues
that "it will not be completely absolved under Section 5 of its policy if it were
the assured itself who obtained additional insurance coverage on the same
property and the loss incurred by Wyeth’s cargo was more than that insured
by Philippines First’s marine policy. On the other hand, Section 12 will not
completely absolve Malayan if additional insurance coverage on the same
cargo were obtained by someone besides Reputable, in which case
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
Malayan’s SR policy will contribute or share ratable proportion of a covered
cargo loss."34
Malayan’s position cannot be countenanced.
Section 5 is actually the other insurance clause (also called "additional
insurance" and "double insurance"), one akin to Condition No. 3 in issue in
Geagonia v. CA,35 which validity was upheld by the Court as a warranty that
no other insurance exists. The Court ruled that Condition No. 336 is a
condition which is not proscribed by law as its incorporation in the policy is
allowed by Section 75 of the Insurance Code. It was also the Court’s finding
that unlike the other insurance clauses, Condition No. 3 does not absolutely
declare void any violation thereof but 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."
In this case, similar to Condition No. 3 in Geagonia, Section 5 does not
provide for the nullity of the SR Policy but simply limits the liability of Malayan
only up to the excess of the amount that was not covered by the other
insurance policy. In interpreting the "other insurance clause" in Geagonia, the
Court ruled that the prohibition applies only in case of double insurance. The
Court ruled that in order to constitute a violation of the clause, the other
insurance must be upon same subject matter, the same interest therein, and
the same risk. Thus, even though the multiple insurance policies involved
were all issued in the name of the same assured, over the same subject
matter and covering the same risk, it was ruled that there was no violation of
the "other insurance clause" since there was no double insurance.
Section 12 of the SR Policy, on the other hand, is the over insurance clause.
More particularly, it covers the situation where there is over insurance due to
double insurance. In such case, Section 15 provides that Malayan shall "not
be liable to pay or contribute more than its ratable proportion of such loss or
damage." This is in accord with the principle of contribution provided under
Section 94(e) of the Insurance Code,37 which states that "where the insured
is over insured by double insurance, each insurer is bound, as between
himself and the other insurers, to contribute ratably to the loss in proportion
to the amount for which he is liable under his contract."
Clearly, both Sections 5 and 12 presuppose the existence of a double
insurance. The pivotal question that now arises is whether there is double
Page 24
insurance in this case such that either Section 5 or Section 12 of the SR
Policy may be applied.
By the express provision of Section 93 of the Insurance Code, double
insurance exists where the same person is insured by several insurers
separately in respect to the same subject and interest. The requisites in order
for double insurance to arise are as follows:38
1. The person insured is the same;
2. Two or more insurers insuring separately;
3. There is identity of subject matter;
4. There is identity of interest insured; and
5. There is identity of the risk or peril insured against.
In the present case, while it is true that the Marine Policy and the SR Policy
were both issued over the same subject matter, i.e. goods belonging to
Wyeth, and both covered the same peril insured against, it is, however,
beyond cavil that the said policies were issued to two different persons or
entities. It is undisputed that Wyeth is the recognized insured of Philippines
First under its Marine Policy, while Reputable is the recognized insured of
Malayan under the SR Policy. The fact that Reputable procured Malayan’s
SR Policy over the goods of Wyeth pursuant merely to the stipulated
requirement under its contract of carriage with the latter does not make
Reputable a mere agent of Wyeth in obtaining the said SR Policy.
The interest of Wyeth over the property subject matter of both insurance
contracts is also different and distinct from that of Reputable’s. The policy
issued by Philippines First was in consideration of the legal and/or equitable
interest of Wyeth over its own goods. On the other hand, what was issued by
Malayan to Reputable was over the latter’s insurable interest over the safety
of the goods, which may become the basis of the latter’s liability in case of
loss or damage to the property and falls within the contemplation of Section
15 of the Insurance Code.39
Therefore, even though the two concerned insurance policies were issued
over the same goods and cover the same risk, there arises no double
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
insurance since they were issued to two different persons/entities having
distinct insurable interests. Necessarily, over insurance by double insurance
cannot likewise exist. Hence, as correctly ruled by the RTC and CA, neither
Section 5 nor Section 12 of the SR Policy can be applied.
Apart from the foregoing, the Court is also wont to strictly construe the
controversial provisions of the SR Policy against Malayan.1âwphi1 This is in
keeping with the rule that:
"Indemnity and liability insurance policies are construed in accordance with
the general rule of resolving any ambiguity therein in favor of the insured,
where the contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other words, it should be
construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with
its obligations."40
Moreover, the CA correctly ruled that:
To rule that Sec. 12 operates even in the absence of double insurance would
work injustice to Reputable which, despite paying premiums for a
P1,000,000.00 insurance coverage, would not be entitled to recover said
amount for the simple reason that the same property is covered by another
insurance policy, a policy to which it was not a party to and much less, from
which it did not stand to benefit. x x x41
On the fourth issue – Reputable is not solidarily liable with Malayan.
There is solidary liability only when the obligation expressly so states, when
the law so provides or when the nature of the obligation so requires.
In Heirs of George Y. Poe v. Malayan lnsurance Company., lnc.,42 the Court
ruled that:
Where the insurance contract provides for indemnity against liability to third
persons, the liability of the insurer is direct and such third persons can
directly sue the insurer. The direct liability of the insurer under indemnity
contracts against third party[- ]liability does not mean, however, that the
insurer can be held solidarily liable with the insured and/or the other parties
Page 25
found at fault, since they are being held liable under different obligations. The
liability of the insured carrier or vehicle owner is based on tort, in accordance
with the provisions of the Civil Code; while that of the insurer arises from
contract, particularly, the insurance policy:43 (Citation omitted and emphasis
supplied)
Suffice it to say that Malayan's and Reputable's respective liabilities arose
from different obligations- Malayan's is based on the SR Policy while
Reputable's is based on the contract of carriage.
All told, the Court finds no reversible error in the judgment sought to be
reviewed.
WHEREFORE, premises considered, the petition is DENIED. The Decision
dated February 29, 2008 and Resolution dated August 28, 2008 of the Court
of Appeals in CA-G.R. CV No. 71204 are hereby AFFIRMED.
Cost against petitioner Malayan Insurance Co., Inc.
SO ORDERED.
RE-INSURANCE
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO.,
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO
MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court
of Appeals in CA-G.R. CV No. 66195 which modified the decision of the then
Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs
complaint (petitioner in G.R. No. 84197) against all defendants (respondents
in G.R. No. 84197) was dismissed but in all other respects the trial court's
decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant
Jacob S. Lim requiring Lim to pay plaintiff the amount of
P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to
plaintiff as attorney's fees from July 2,1966, until full payment
is made; plus P70,000.00 moral and exemplary damages.
It is found in the records that the cross party plaintiffs
incurred additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant
Jacob S. Lim is further required to pay cross party plaintiff,
Bormaheco, the Cervanteses one-half and Maglana the
other half, the amount of Pl84,878.74 with interest from the
filing of the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of
P184,878.84 with interest from the filing of the cross-
Page 26
 complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each of
the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to
Bormaheco and the Cervanteses, and another P20,000.00
to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses
and Constancio B. Maglana, is dismissed. Instead, plaintiff is
required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees
and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B.
Maglana the amount of P20,000.00 as attorney's fees and
costs.
No moral or exemplary damages is awarded against plaintiff
for this action was filed in good faith. The fact that the
properties of the Bormaheco and the Cervanteses were
attached and that they were required to file a counterbond in
order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be
saddled with moral or exemplary damages. Furthermore, the
rights exercised were provided for in the Rules of Court, and
it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance
Company, Inc., the third-party defendant, for it only secured
the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in
performing an act which is clearly within its power and which
is the reason for its being, then nobody would engage in the
insurance business. No further claim or counter-claim for or
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
against anybody is declared by this Court. (Rollo - G.R. No.
24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the
airline business as owner-operator of Southern Air Lines (SAL) a single
proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim
entered into and executed a sales contract (Exhibit A) for the sale and
purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare
parts for the total agreed price of US $109,000.00 to be paid in installments.
One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June
7,1965 while the other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer,
petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond
No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the
balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
Constancio Maglana (respondents in both petitions) contributed some funds
used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to
expand his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by
Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to indemnify and
hold and save harmless Pioneer from and against any/all damages, losses,
costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become
surety upon the bond/note and to pay, reimburse and make good to Pioneer,
its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL
executed in favor of Pioneer as deed of chattel mortgage as security for the
latter's suretyship in favor of the former. It was stipulated therein that Lim
transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was
Page 27
duly registered with the Office of the Register of Deeds of the City of Manila
and with the Civil Aeronautics Administration pursuant to the Chattel
Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.
The petitioner questions the following findings of the appellate court:
Lim defaulted on his subsequent installment payments prompting JDA to
request payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana,
however, filed a third party claim alleging that they are co-owners of the
aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
application for a writ of preliminary attachment against Lim and respondents,
the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-
claims against Lim alleging that they were not privies to the contracts signed
by Lim and, by way of counterclaim, sought for damages for being exposed
to litigation and for recovery of the sums of money they advanced to Lim for
the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay
Pioneer but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that
the plaintiffs complaint against all the defendants was dismissed. In all other
respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY
ERRED WHEN IT DISMISSED THE APPEAL OF
PETITIONER ON THE SOLE GROUND THAT PETITIONER
HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA
AND THAT IT CANNOT REPRESENT A REINSURER TO
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
RECOVER THE AMOUNT FROM HEREIN PRIVATE
RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo - G. R. No. 84197, p. 10)
We find no merit in plaintiffs appeal. It is undisputed that
plaintiff Pioneer had reinsured its risk of liability under the
surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00.
Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery
of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to
institute the instant action as it does not stand to be
benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the
reinsurer to recover the amount from defendants, hence, it
instituted the action is utterly devoid of merit. Plaintiff did not
even present any evidence that it is the attorney-in-fact of
the reinsurance company, authorized to institute an action
for and in behalf of the latter. To qualify a person to be a real
party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of
the right sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been held that
the real party in interest is the party who would be benefited
or injured by the judgment or the party entitled to the avails
of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy
or a future, contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine
Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1
NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669,
quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already
Page 28
 been paid by the reinsurer the sum of P295,000.00 — the
bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received
by plaintiff Pioneer from its reinsurer, the former was able to
foreclose extra-judicially one of the subject airplanes and its
spare engine, realizing the total amount of P37,050.00 from
the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in
the amount of P33,383.72 considering that the total amount
it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount in
excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance
company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well
settled is the rule that no person should unjustly enrich
himself at the expense of another (Article 22, New Civil
Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based
its finding that petitioner was paid by its reinsurer in the aforesaid amount, as
this matter has never been raised by any of the parties herein both in their
answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its
reinsurer, still none of the respondents had any interest in the matter since
the reinsurance is strictly between the petitioner and the re-insurer pursuant
to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents
Bormaheco and Maglana; and (4) the principle of unjust enrichment is not
applicable considering that whatever amount he would recover from the co-
indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance
money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the
issues threshed out were:
xxx xxx xxx
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
1. Has Pioneer a cause of action against defendants with
respect to so much of its obligations to JDA as has been
paid with reinsurance money?
2. If the answer to the preceding question is in the negative,
has Pioneer still any claim against defendants, considering
the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R. No.
84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under
the surety bond it had executed in favor of JDA, collected the
proceeds of such reinsurance in the sum of P295,000, and
paid with the said amount the bulk of its alleged liability to
JDA under the said surety bond, it is plain that on this score
it no longer has any right to collect to the extent of the said
amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the amount
paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers
opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as
the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in
the complaint that Pioneer is suing as attorney-in- fact of the
reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own
name an action for the benefit of the reinsurers. It is well-
settled that an action brought by an attorney-in-fact in his
own name instead of that of the principal will not prosper,
and this is so even where the name of the principal is
disclosed in the complaint.
Page 29
 Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be
prosecuted in the name of the real party in
interest.' This provision is mandatory. The
real party in interest is the party who would
be benefitted or injured by the judgment or is
the party entitled to the avails of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest,
that there is no law permitting an action to
be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil.
Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23
SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29.
Since Pioneer has collected P295,000.00 from the
reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is
the amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid and
effective. But since the amount realized from the sale of the
mortgaged chattels are P35,000.00 for one of the airplanes
and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer
has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that
cropped up was the effect of payment made by the reinsurers to the
petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as
insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the
same rights by subrogation as are acquired in similar cases
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
where the original insurer pays a loss (Universal Ins. Co. v.
Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies
are in general applicable to actions or contracts of
reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins.
Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he
has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated
to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or
loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines,
Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently
applied in Manila Mahogany Manufacturing Corporation v. Court of
Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that
the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the
one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the
insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in
dismissing the petitioner's complaint as against the respondents for the
Page 30
reason that the petitioner was not the real party in interest in the complaint
and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the
evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12,
Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable
to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after the
execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the
spare parts involved, agreed to issue the bond provided that
the same would be mortgaged to it, but this was not possible
because the planes were still in Japan and could not be
mortgaged here in the Philippines. As soon as the aircrafts
were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the
mortgaged properties have impaired and
rendered insufficient the security under the
chattel mortgage and there is thus no other
sufficient security for the claim sought to be
enforced by this action.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
This is judicial admission and aside from the chattel
mortgage there is no other security for the claim sought to be
enforced by this action, which necessarily means that the
indemnity agreement had ceased to have any force and
effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed
the chattel mortgage on the planes and spare parts, no
longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The
indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as
indemnitors, would be entitled to be subrogated to the right
of Pioneer should they make payments to the latter. Articles
2067 and 2080 of the New Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's
election of the remedy of foreclosure precludes any further
action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and
last installments to JDA and Pioneer as surety having made
of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil
Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant
suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance
and any agreement to the contrary is void.' Cruz, et al. v.
Filipinas Investment & Finance Corp. No. L- 24772, May
27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped
from through the contention that Pioneer is not the vendor
but JDA. The reason is that Pioneer is actually exercising the
rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed
Page 31
 on the ground that these defendants and defendant Maglana
are not the vendee but indemnitors. Pascual, et al. v.
Universal Motors Corporation, G.R. No. L- 27862, Nov.
20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the
change of their maturity dates discharged these defendants
from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish
the original obligations thru novations thus discharging the
indemnitors.
The principal hereof shall be paid in eight
equal successive three months interval
installments, the first of which shall be due
and payable 25 August 1965, the remainder
of which ... shall be due and payable on the
26th day x x x of each succeeding three
months and the last of which shall be due
and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA, modifying
the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight
equal successive three month interval
installments the first of which shall be due
and payable 4 September 1965, the
remainder of which ... shall be due and
payable on the 4th day ... of each
succeeding months and the last of which
shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported
promissory notes bearing maturity dates different from that
fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the
rest of the installments, the 15th of each succeeding three
months, that of the last installment being July 15, 1967.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
These restructuring of the obligations with regard to their
maturity dates, effected twice, were done without the
knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and
defendant Maglana knew of and consented to the
modification of the obligations. But if that were so, there
would have been the corresponding documents in the form
of a written notice to as well as written conformity of these
defendants, and there are no such document. The
consequence of this was the extinguishment of the
obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable
by analogy are the rulings of the Supreme Court in the case
of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and
the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil.
532, 538.
Art. 2079. An extension granted to the
debtor by the creditor without the consent of
the guarantor extinguishes the guaranty The
mere failure on the part of the creditor to
demand payment after the debt has become
due does not of itself constitute any
extension time referred to herein, (New Civil
Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563,
M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36
O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed
when Pioneer paid the same. Consequently, Pioneer has no
more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of
an express stipulation in the surety bond, the failure of JDA
to present its claim to Pioneer within ten days from default of
Lim or SAL on every installment, released Pioneer from
liability from the claim.
Page 32
 Therefore, Pioneer is not entitled to exact reimbursement
from these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor
shall not entitle him to reimbursement from
his co-debtors if such payment is made after
the obligation has prescribed or became
illegal.
These defendants are entitled to recover damages and
attorney's fees from Pioneer and its surety by reason of the
filing of the instant case against them and the attachment
and garnishment of their properties. The instant action is
clearly unfounded insofar as plaintiff drags these defendants
and defendant Maglana.' (Record on Appeal, pp. 363-369,
Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-
investors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be
treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form?
This Petition presents these fundamental questions which
we believe were resolved erroneously by the Court of
Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of
the failure of respondents Bormaheco, Spouses Cervantes, Constancio
Maglana and petitioner Lim to incorporate, a de facto partnership among
them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the
petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74
as correctly found by the trial court, with interest from the
filing of the cross-complaints until the amount is fully paid.
Defendant Lim should pay one-half of the said amount to
Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that
defendant Lim had duly received the amount of Pl51,000.00
from defendants Bormaheco and Maglana representing the
latter's participation in the ownership of the subject airplanes
and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum
of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights
of the stockholders in a defectively incorporated association
should be governed by the supposed charter and the laws of
the state relating thereto and not by the rules governing
partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md.
446, 94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy the position of
partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl.
615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase
property to carry on a business, and their organization is so
defective as to come short of creating a corporation within
the statute, they become in legal effect partners inter se, and
their rights as members of the company to the property
acquired by the company will be recognized (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555;
Whipple v. Parker, 29 Mich. 369). So, where certain persons
associated themselves as a corporation for the development
of land for irrigation purposes, and each conveyed land to
the corporation, and two of them contracted to pay a third
the difference in the proportionate value of the land
Page 33
 conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in
an action between them for an accounting, and its capital
stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value
of the property contributed by each (Shorb v. Beaudry, 56
Cal. 446). However, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their
purpose is that no partnership shall exist (London Assur.
Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to
do justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner
with other subscribers who engage in business under the
name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership
and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted
by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23).
(Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-
suited for his failure to appear during the pretrial despite notification. In his
answer, the petitioner denied having received any amount from respondents
Bormaheco, the Cervanteses and Maglana. The trial court and the appellate
court, however, found through Exhibit 58, that the petitioner received the
amount of P151,000.00 representing the participation of Bormaheco and
Atty. Constancio B. Maglana in the ownership of the subject airplanes and
spare parts. The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This
gives credence to the cross-claims of the respondents to the effect that they
were induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
... that sometime in early 1965, Jacob Lim proposed to
Francisco Cervantes and Maglana to expand his airline
business. Lim was to procure two DC-3's from Japan and
secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes his
share of P75,000.00 for delivery to Lim which Cervantes did
and Lim acknowledged receipt thereof. Cervantes, likewise,
delivered his share of the undertaking. Lim in an undertaking
sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement
and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused,
failed and still refuses to set up the corporation or return the
money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced
the answering defendants to purchase two airplanes and
spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed
corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary
to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the
alleged chattel mortgage and surety bond agreement in his
personal capacity as the alleged proprietor of the SAL. The
answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when
the herein plaintiff chattel mortgage (sic) allegedly executed
by defendant Lim, thereby forcing them to file an adverse
claim in the form of third party claim. Notwithstanding
repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession
of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate
sum of P 178,997.14 as evidenced by a statement of
Page 34
 accounts, the latter ignored, omitted and refused to comply
with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the supposed losses of the
proposed corporation. The record shows that the petitioner was acting on his
own and not in behalf of his other would-be incorporators in transacting the
sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned
decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-19255 January 18, 1968
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, petitioner,
vs.
THE AUDITOR GENERAL, respondent.
Lim, Macias, De la Rosa and Salonga for petitioner.
Office of the Solicitor General and J. Respicio for respondent.
SANCHEZ, J.:
Broadly stated, petitioner's appeal challenges the correctness of the Auditor
General's ruling that "[r]emittance of premia on insurance policies issued or
renewed on or after July 16, 1959, or even if issued or renewed before the
said date, but their reinsurance was effected, only thereafter, are not exempt
from the margin fee, even if the reinsurance treaty under which they are
reinsured was approved by the Central Bank before July 16, 1959." So
stated, the case calls into question the applicability of Section 3 of the Margin
Law (Republic Act 2609, approved on July 16, 1959) which exempts certain
obligations from payment of the margin fee, thus:
Sec. 3. The provisions of this Act shall not apply to the liquidation of
drafts drawn under letters of credit nor of contractual obligations
calling for payment of foreign exchange issued, approved and
outstanding as of the date this Act takes effect and the extension
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
thereof, with the same terms and conditions as the original
contractual obligations: Provided, That the repayment of loans
contracted by the government of the Philippines with foreign
governments and/or private banks and the importation of
machineries and equipment by provinces, cities or municipalities for
the exclusive use in the operation of public utilities fully-owned and
maintained by them shall likewise be exempted from the operation of
this Act.
Appropriate to state here is that — except as otherwise in the law stated —
the Margin Law subjects all sales of foreign exchange by the Central Bank
and its authorized agent banks to a uniform margin of not more than forty per
cent (40%) over the banks' selling rates. 1 The Monetary Board is empowered
to fix the margin "at such rate as it may deem necessary to effectively curtail
any excessive demand upon the international reserve." 2 Such margin,
however, "shall not be changed oftener than once a year except upon the
recommendation of the National Economic Council and the approval of the
President." 3 The Monetary Board has pegged the margin fee at 25%. 4
Following are the facts that gave rise to the present controversy:
On January 1, 1950, Philippine American Life Insurance Company
[Philamlife], a domestic life insurance corporation, and American
International Reinsurance Company [Airco] of Pembroke, Bermuda, a
corporation organized under the laws of the Republic of Panama, entered
into an agreement — reinsurance treaty — which provides in its paragraph 1,
Article I, the following:
Art. I. On and after the 1st day of January 1950, the Ceding
Company [Philamlife] agrees to reinsure with AIRCO the entire first
excess of such life insurance on the lives of persons as may be
written by the Ceding Company under direct application over and
above its maximum limit of retention for life insurance, and AIRCO
binds itself, subject to the terms and provisions of this agreement, to
accept such reinsurances on the same terms and for an amount not
exceeding its maximum limit for automatic acceptance of life
reinsurance. . . .
By the third paragraph of the same Article I, it is also stipulated that even
though Philamlife "is already on a risk for its maximum retention under
policies previously issued, when new policies are applied for and issued
Page 35
[Philamlife] can cede automatically any amount, within the limits . . .
specified, on the same terms on which it would be willing to accept the risk
for its own account, if it did not already have its limit of retention."
Reinsurances under said reinsurance treaty of January 1, 1950 may also be
had facultatively upon other cases pursuant to Article II thereof, whereby
Airco's liability begins from acceptance of the risk. These cases include those
set forth in paragraph 2 of the treaty's Article I which expressly excludes from
automatic reinsurance the following: (a) any application for life insurance with
Philamlife which, together with other papers containing information as to
insurability of the risk, shows that "the total amount of life insurance
(including accidental death benefit) applied for to or already issued by all
companies [other life insurance companies which had previously accepted
the risk] exceeds the equivalent of Five Hundred Thousand Dollars
($500,000) United States currency," and (b) any life on which Philamlife
'retains for its own account less than its regular maximum limit of retention for
the age, sex, plan, rating and occupation of the risk.'
Every life insurance policy reinsured under the aforecited agreement "shall
be upon the yearly renewable term plan for the amount at risk under the
policy reinsured." 5
Philamlife agrees to pay premiums for all reinsurances "on an annual
premium basis." 6
It is conceded that no question ever arose with respect to the remittances
made by Philamlife to Airco before July 16, 1959, the date of approval of the
Margin Law.
The Central Bank of the Philippines collected the sum of P268,747.48 as
foreign exchange margin on Philamlife remittances to Airco purportedly
totalling $610,998.63 and made subsequent to July 16, 1959.
Philamlife subsequently filed with the Central Bank a claim for the refund of
the above sum of P268,747.48. The ground therefor was that the reinsurance
premiums so remitted were paid pursuant to the January 1, 1950 reinsurance
treaty, and, therefore, were pre-existing obligations expressly exempt from
the margin fee.
On June 7, 1960, the Monetary Board — in line with the opinion of its Acting
Legal Counsel resolved that "reinsurance contracts entered into and
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
approved by the Central Bank before July 17, 1959 are exempt from the
payment of the 25% foreign exchange margin, even if remittances thereof
are made after July 17, 1959," because such remittances "are only made in
the implementation of a mother contract, a continuing contract, which is the
reinsurance treaty." 7
The foregoing resolution notwithstanding, the Auditor of the Central Bank, on
April 19, 1961, refused to pass in audit Philamlife's claim for refund.
On May 17, 1961, Philamlife sought reconsideration with the Auditor
General.
On October 24, 1961, the request for reconsideration was denied. The
Auditor General in effect expressed the view that the existence of the
reinsurance treaty of January 1, 1950 did not place reinsurance premia — on
reinsurance effected on or after the approval of the Margin Law on July 17,
1959 — out of the reach of said statute. 8
Hence, the present petition for review.
1. The thrust of petitioner's argument is that the premia remitted were in
pursuance of its reinsurance treaty with Airco of January 1, 1950, a contract
antedating the Margin Law, which took effect only on July 16, 1959.
But the validity of such claim must be tested by the provisions of Section 3 of
the Margin Law quoted earlier in this opinion. Said Section 3 expressly
withholds the enforcement of the provisions of said Act on "contractual
obligations calling for payment of foreign exchange issued approved and
outstanding as of the date this Act takes effect and the extension thereof,
with the same terms and conditions as the original contractual obligations."
True, the reinsurance treaty precedes the Margin Law by over nine years.
Nothing in that treaty, however, obligates Philamlife to remit to Airco a fixed,
certain, and obligatory sum by way of reinsurance premiums. All that the
reinsurance treaty provides on this point is that Philamlife "agrees to
reinsure." The treaty speaks of a probability; not a reality. For, without
reinsurance, no premium is due. Of course, the reinsurance treaty lays down
the duty to remit premiums — if any reinsurance is effected upon the
covenants in that treaty written. So it is that the reinsurance treaty per
se cannot give rise to a contractual obligation calling for the payment of
Page 36
foreign exchange "issued, approved and outstanding as of the date this Act
[Republic Act 2609] takes effect."
For an exemption to come into play, there must be a reinsurance policy or,
as in the reinsurance treaty provided, a "reinsurance cession" 9 which may be
automatic or facultative. 10
There should not be any misapprehension as to the distinction between
a reinsurance treaty, on the one hand, and a reinsurance policy or
a reinsurance cession, on the other. The concept of one and the other is well
expressed thus:
. . . A reinsurance policy is thus a contract of indemnity one insurer
makes with another to protect the first insurer from a risk it has
already assumed. . . . In contradistinction a reinsurance treaty is
merely an agreement between two insurance companies whereby
one agrees to cede and the other to accept reinsurance business
pursuant to provisions specified in the treaty. The practice of issuing
policies by insurance companies includes, among other things, the
issuance of reinsurance policies on standard risks and also on
substandard risks under special arrangements. The lumping of the
different agreements under a contract has resulted in the term known
to the insurance world as "treaties." Such a treaty is, in fact, an
agreement between insurance companies to cover the different
situations described. Reinsurance treaties and reinsurance policies
are not synonymous. Treaties are contracts for insurance;
reinsurance policies or cessions . . . are contracts of insurance. 11
Philamlife's obligation to remit reinsurance premiums becomes fixed and
definite upon the execution of the reinsurance cession. Because, for every
life insurance policy ceded to Airco, Philamlife agrees to pay premium. 12 It is
only after a reinsurance cession is made that payment of reinsurance
premium may be exacted, as it is only after Philamlife seeks to remit that
reinsurance premium that the obligation to pay the margin fee arises.
Upon the premise that the margin fee of P268,747.48 was collected on
remittances made on reinsurance effected on or after the Margin Law took
effect, refund thereof does not come within the coverage of the exemption
circumscribed in Section 3 of the said law.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
2. Nor will the argument that the Margin Law impairs the obligations of
contract — constitutionally proscribed — under the reinsurance treaty, carry
the day for petitioner.
Petitioner's point is that if the Margin Law were, applied, it "would have paid
much more to have the continuing benefit of reinsurance of its risks than it
has been required to do so by the reinsurance treaty in question" and that
"the theoretical equality between the contracting parties . . . would be
disturbed and one of them placed at a distinct disadvantage in relation to the
other."
This pose at once loses potency on the face of the rule long recognized that,
existing laws form part of the contract "as the measure of the obligation to
perform them by the one party and the right acquired by the other." 13 Stated
otherwise, "[t]he obligation does not inhere and subsist in the contract
itself, propio vigore, but in the law applicable to the contract." 14 Indeed,
Article 1315 of the Civil Code gives out the precept that parties to a perfected
contract "are bound . . . to all the consequences which, according to their
nature, may be in keeping with . . . law."
Accordingly, when petitioner entered into the reinsurance treaty of January 1,
1950 with Airco, it did so with the understanding that the municipal laws of
the Philippines at the time said treaty was executed, became an unwritten
condition thereof. Such municipal laws constitute part of the obligations of
contract. It is in this context that we say that Republic Act 265, the Central
Bank Act, enacted on June 15, 1948 — previous to the date of the
reinsurance treaty — became a part of the obligations of contract created by
the latter. And under Republic Act 265, reasonable restrictions may be
imposed by the State through the Central Bank on all foreign exchange
transactions "in order to protect the international reserve of the Central Bank
during an exchange crisis." 15 The Margin Law is nothing more than a
supplement to the Central Bank Act; it is a reasonable restriction on
transactions in foreign exchange. It, too, is an additional arm given, the
Central Bank to attain its objectives, to wit: (1) "[t]o maintain monetary
stability in the Philippines;" and (2) "[t]o preserve the international value of
the peso and the convertibility of the peso into other freely convertible
currencies." 16 On top of all these is that that statute was enacted in a
background of "dangerously low international reserves." 17
The following explanatory note by the Committee on Banks, Currency and
Corporations on House Bill No. 3663, which later became the Margin Law,
Page 37
Republic Act 2609, is expressive of the purpose of the law, namely, to reduce
the excessive demand on and prevent further decline of our international
reserves, viz:
The international reserves of the Philippines have reached such a
low level as to require remedial action beyond that provided in
Republic Act No. 265, inspite of exchange controls which have been
in force since 1949. The decline in the level of our international
reserves has persisted. The means and the measures presently
authorized in the Charter of the Central Bank for dealing with the
balance of payments problem have been found inadequate.
The purpose of this Bill is to provide the Central Bank with an
additional instrument for effectively coping with the problem and
achieving domestic and international stability of our currency. The
additional instrument of Central Bank action provided for by this bill
consists of a cost restriction on all imports, as well as invisibles, to
reduce the excessive demand for foreign exchange. The proceeds
that may accrue to the Central Bank from the margin will be
distributed in accordance with the provisions of section 41 of the
Bank's Charter.
That some such law as Republic Act 2609 was envisioned by the contracting
parties, Philamlife and Airco, when the January 1, 1950 reinsurance treaty
was executed, may be gleaned from the provisions of Article VI of said treaty
whereunder "[e]xcept in those instances where AIRCO is taxed directly and
independently on premiums collected by it from the Ceding Company,
AIRCO shall reimburse the Ceding Company for the tax paid on reinsurance
premiums paid AIRCO by the Ceding Company which are not allowed the
Ceding Company, as a deduction in the statement of the Ceding Company."
Petitioner complains that reinsurance contracts abroad would be made
impractical by the imposition of the 25% margin fee. Reasons there are
which should deter us from giving in to this view. First, there is no concrete
evidence that such imposition of the 25% margin fee is unreasonable.
Second, if really continuance of the existing reinsurance treaty becomes
unbearable that contract itself provides that petitioner may potestatively
write finisthereto on ninety days' written notice. 18 In truth, petitioner is not
forced to continue its reinsurance treaty indefinitely with Airco.
3. Another roadblock is astride petitioner's route to refund.
INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases)
To maintain domestic and international stability in currency is a primary
concern of the State; it is in pursuance of the constitutional mandate, in the
preamble ordained to "promote the general welfare"; it is a matter of public
policy. This could mean action to forestall a currency debacle, to improve the
low international reserve, or to conserve and even increase such reserve.
The Margin Law, Republic Act 2609, it is well to remember, is a remedial
currency measure. It was thus passed to reduce as far as is practicable the
excessive demand for foreign exchange. Petitioner's stand that because it
had a continuing — though revocable — reinsurance treaty with Airco, all
remittances of reinsurance premia made by it to its foreign reinsurer should
be withdrawn from the operation of the Margin Law, we are constrained to
state, is at war with the State's economic policy of preserving the stability of
our currency. Petitioner may not, in the words of the Solicitor General, "tie
the hands of the State and render it powerless to impose certain margin or
cost restrictions on its remittances of reinsurance premia in foreign exchange
to fall due as policies become reinsurable under said treaty, whenever such
remittances would constitute an excessive demand on our international
reserves."
Viewed from this focal point, there cannot be an impairment of the obligation
of contracts. For, the State may, through its police power, adopt whatever
economic policy may reasonably be deemed to promote public welfare, and
to enforce that policy by legislation adapted to its purpose. 19 We have, in
Abe vs. Foster Wheeler Corporation, 20 declared that: "The freedom of
contract, under our system of government, is not meant to be absolute. The
same is understood to be subject to reasonable legislative regulation aimed
at the promotion of publicity health, morals, safety and welfare. In other
words, the constitutional guaranty of non-impairment of obligations of
contract is limited by the exercise of the police power of the State, in the
interest of public health, safety, morals and general welfare." It has been
said, and we believe correctly, that "the economic interests of the State may
justify the exercise of its continuing and dominant protective power
notwithstanding interference with contracts." 21 It bears repetition to state at
this point that the Margin Law is part of the economic "Stabilization Program"
of the country. 22
Tersely put then, "the [constitutional] obligation of contracts provision does
not bar a proper exercise of the state's police power." 23 Nebia vs. New
York, 24 reasons out that: "Under our form of government the use of property
and the making of contracts are normally matters of private and not of public
concern. The general rule is that both shall be free of governmental
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interference. But neither property rights nor contract rights are absolute; for
government cannot exist if the citizen may at will use his property to the
detriment of his fellows, or exercise his freedom of contract to work them
harm. Equally fundamental with the private right is that of the public to
regulate it in the common interest." As emphatic, if not more, is the following
from Norman vs. Baltimore & Ohio Railroad Company, 25 thus: "Contracts,
however express, cannot fetter the constitutional authority of the Congress.
Contracts may create rights of property, but when contracts deal with a
subject matter which lies within the control of the Congress, they have a
congenital infirmity. Parties cannot remove their transactions from the reach
of dominant constitutional power by making contracts about them." More. In
another case, pronouncement was made that: "Not only are existing laws
read into contracts in order to fix obligations as between the parties, but the
reservation of essential attributes of sovereign power is also read into
contracts as a postulate of the legal order. The policy of protecting contracts
against impairment presupposes the maintenance of a government by virtue
of which contractual relations are worthwhile — a government which retains
adequate authority to secure the peace and good order of society." 26

For the reasons given, the petition for review is hereby denied, and the ruling
of the Auditor General of October 24, 1961 denying refund is hereby
affirmed.

Costs against petitioner. So ordered.

INSURANCE LAW (Loss, Double Insurance and Re-insurance Cases) Page 39