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FIRST DIVISION

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

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE


AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.

DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of
Appeals in CA-G.R. SP No. 60144, affirming the Decision[2] dated May 3, 2000 of the
Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there
was no violation of the Insurance Code and the respondents do not need license as
insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity
coverage for its vessels from The Steamship Mutual Underwriting Association
(Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety
Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and
Acceptance.[3] Pioneer also issued receipts evidencing payments for the coverage.
When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew
the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of
money to recover the latters unpaid balance. White Gold on the other hand, filed a
complaint before the Insurance Commission claiming that Steamship Mutual violated
Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections
299,[6] 300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need
for Steamship Mutual to secure a license because it was not engaged in the insurance
business. It explained that Steamship Mutual was a Protection and Indemnity Club (P &
I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a
broker for Steamship Mutual because Steamship Mutual was not engaged in the
insurance business. Moreover, Pioneer was already licensed, hence, a separate license
solely as agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its
decision, the appellate court distinguished between P & I Clubs vis--vis conventional
insurance. The appellate court also held that Pioneer merely acted as a collection agent
of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the
appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS


NOT DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT
COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER
HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN
INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF
ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE
BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER


NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN
AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT


PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF
RESPONDENT PIONEER.[9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need a license
as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it
does not have a license to do business in the Philippines although Pioneer is its
resident agent. This relationship is reflected in the certifications issued by the Insurance
Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance
business. To buttress its assertion, it cites the definition of a P & I Club in Hyopsung
Maritime Co., Ltd. v. Court of Appeals[10] as an association composed of shipowners in
general who band together for the specific purpose of providing insurance cover on a
mutual basis against liabilities incidental to shipowning that the members incur in favor
of third parties. It stresses that as a P & I Club, Steamship Mutuals primary purpose is
to solicit and provide protection and indemnity coverage and for this purpose, it has
engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not
engaged in the insurance business in the Philippines. It is merely an association of
vessel owners who have come together to provide mutual protection against liabilities
incidental to shipowning.[11] Respondents aver Hyopsung is inapplicable in this case
because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an
insurance business or transacting an insurance business. These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a


vocation and not as merely incidental to any other legitimate business or
activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically


recognized as constituting the doing of an insurance business within the
meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the


foregoing in a manner designed to evade the provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the making
of insurance contracts, agreements or transactions, or that no separate or direct
consideration is received therefor, shall not preclude the existence of an insurance
business.[12]
The test to determine if a contract is an insurance contract or not, depends on the
nature of the promise, the act required to be performed, and the exact nature of the
agreement in the light of the occurrence, contingency, or circumstances under which the
performance becomes requisite. It is not by what it is called.[13]
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for
a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured against
marine losses, such as the losses incident to a marine adventure. [15] Section 99[16] of the
Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the
members are both the insurer and insured. In it, the members all contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses and
liabilities are paid, and where the profits are divided among themselves, in proportion to
their interest.[17] Additionally, mutual insurance associations, or clubs, provide three
types of coverage, namely, protection and indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the third party
is anyone other than the P & I Club and the members.[19] By definition then, Steamship
Mutual as a P & I Club is a mutual insurance association engaged in the marine
insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without
the requisite certificate of authority mandated by Section 187[20] of the Insurance Code.
It maintains a resident agent in the Philippines to solicit insurance and to collect
payments in its behalf. We note that Steamship Mutual even renewed its P & I Club
cover until it was cancelled due to non-payment of the calls. Thus, to continue doing
business here, Steamship Mutual or through its agent Pioneer, must secure a license
from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is
necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the Insurance
Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration[22] issued by the Insurance Commission. It has been licensed to do or
transact insurance business by virtue of the certificate of authority[23] issued by the
same agency. However, a Certification from the Commission states that Pioneer does
not have a separate license to be an agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a separate
license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance
Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation


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

Finally, White Gold seeks revocation of Pioneers certificate of authority and removal
of its directors and officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30,
2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance
Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations to do
business as insurer and insurance agent, respectively. The petitioners prayer for the
revocation of Pioneers Certificate of Authority and removal of its directors and officers,
is DENIED. Costs against respondents.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,


vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE
PHILIPPINES, respondents.

G.R. No. 76399 January 22, 1993

FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,


vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.

B.L. Padilla for petitioner.

Sabino Padilla, Jr. for Fidelity & Surety, Co.

MELO, J.:

The two consolidated cases involved herein stemmed from the issuance by
Fidelity and Surety Insurance Company of the Philippines (Fidelity for short) of its
Fire Insurance Policy No. F-18876 effective between June 23, 1980 and June 23,
1981 covering Rafael (Rex) Verendia's residential building located at Tulip Drive,
Beverly Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as
beneficiary was the Monte de Piedad & Savings Bank. Verendia also insured the
same building with two other companies, namely, The Country Bankers Insurance
for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981, and The
Development Insurance for P400,000.00 under Policy No. F-48867 expiring on
June 30, 198l.

While the three fire insurance policies were in force, the insured property was
completely destroyed by fire on the early morning of December 28, 1980. Fidelity
was accordingly informed of the loss and despite demands, refused payment
under its policy, thus prompting Verendia to file a complaint with the then Court
of First Instance of Quezon City, praying for payment of P385,000.00, legal
interest thereon, plus attorney's fees and litigation expenses. The complaint was
later amended to include Monte de Piedad as an "unwilling defendant" (P. 16,
Record).

Answering the complaint, Fidelity, among other things, averred that the policy
was avoided by reason of over-insurance; that Verendia maliciously represented
that the building at the time of the fire was leased under a contract executed on
June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo Garcia
who was the lessee.

On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz,
ruling in favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial
court ruled that Paragraph 3 of the policy was also violated by Verendia in that
the insured failed to inform Fidelity of his other insurance coverages with
Country Bankers Insurance and Development Insurance.

Verendia appealed to the then Intermediate Appellate Court and in a decision


promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa,
Bartolome, and Ejercito (P), JJ.), the appellate court reversed for the following
reasons: (a) there was no misrepresentation concerning the lease for the contract
was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3
of the policy contract requiring Verendia to give notice to Fidelity of other
contracts of insurance was waived by Fidelity as shown by its conduct in
attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).

Fidelity received a copy of the appellate court's decision on April 4, 1986, but
instead of directly filing a motion for reconsideration within 15 days therefrom,
Fidelity filed on April 21, 1986, a motion for extension of 3 days within which to
file a motion for reconsideration. The motion for extension was not filed on April
19, 1986 which was the 15th day after receipt of the decision because said 15th
day was a Saturday and of course, the following day was a Sunday (p.
14., Rollo of G.R. No. 75605). The motion for extension was granted by the
appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity had in the meantime
filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).

Verendia filed a motion to expunge from the record Fidelity's motion for
reconsideration on the ground that the motion for extension was filed out of time
because the 15th day from receipt of the decision which fell on a Saturday was
ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate
Court has personnel receiving pleadings even on Saturdays.

The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a
motion for reconsideration was similarly brushed aside on July 22, 1986 (p.
30, ibid .), the petition herein docketed as G.R. No. 75605 was initiated.
Subsequently, or more specifically on October 21, 1986, the appellate court
denied Fidelity's motion for reconsideration and account thereof. Fidelity filed on
March 31, 1986, the petition for review on certiorari now docketed as G.R. No.
76399. The two petitions, inter-related as they are, were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.

Before we can even begin to look into the merits of the main case which is the
petition for review on certiorari, we must first determine whether the decision of
the appellate court may still be reviewed, or whether the same is beyond further
judicial scrutiny. Stated otherwise, before anything else, inquiry must be made
into the issue of whether Fidelity could have legally asked for an extension of the
15-day reglementary period for appealing or for moving for reconsideration.

As early as 1944, this Court through Justice Ozaeta already pronounced the
doctrine that the pendency of a motion for extension of time to perfect an appeal
does not suspend the running of the period sought to be extended (Garcia vs.
Buenaventura 74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs
vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138 [1962]),
and Joe vs. King (20 SCRA 1120 [1967]).

The above cases notwithstanding and because the Rules of Court do not
expressly prohibit the filing of a motion for extension of time to file a motion for
reconsideration in regard to a final order or judgment, magistrates, including
those in the Court of Appeals, held sharply divided opinions on whether the
period for appealing which also includes the period for moving to reconsider may
be extended. The matter was not definitely settled until this Court issued its
Resolution in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]),
declaring that beginning one month from the promulgation of the resolution on
May 30, 1986 —

. . . the rule shall be strictly enforced that no motion for extension of


time to file a motion for new trial or reconsideration shall be filed . . .
(at p. 212.)

In the instant case, the motion for extension was filed and granted before June
30, 1986, although, of course, Verendia's motion to expunge the motion for
reconsideration was not finally disposed until July 22, 1986, or after the dictum
in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for
extension came before its formal proscription under Habaluyas, for which reason
we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or
not the contract of lease submitted by Verendia to support his claim on the fire
insurance policy constitutes a false declaration which would forfeit his benefits
under Section 13 of the policy and (b) whether or not, in submitting the
subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia's
claim in the amount stated in said receipt.1

Verging on the factual, the issue of the veracity or falsity of the lease contract could
have been better resolved by the appellate court for, in a petition for review
on certiorari under Rule 45, the jurisdiction of this Court is limited to the review of errors
of law. The appellate court's findings of fact are, therefore, conclusive upon this Court
except in the following cases: (1) when the conclusion is a finding grounded entirely on
speculation, surmises, or conjectures; (2) when the inference made is manifestly
absurd, mistaken, or impossible; (3) when there is grave abuse of discretion in the
appreciation of facts; (4) when the judgment is premised on a misapprehension of facts;
(5) when the findings of fact are conflicting; and (6) when the Court of Appeals in
making its findings went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA
433 [1991]). In view of the conflicting findings of the trial court and the appellate court on
important issues in these consolidated cases and it appearing that the appellate court
judgment is based on a misapprehension of facts, this Court shall review the evidence
on record.

The contract of lease upon which Verendia relies to support his claim for insurance
benefits, was entered into between him and one Robert Garcia, married to Helen
Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the
insurance policy. When the rented residential building was razed to the ground on
December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within
the premises. However, according to the investigation report prepared by Pat. Eleuterio
M. Buenviaje of the Antipolo police, the building appeared to have "no occupant" and
that Mr. Roberto Garcia was "renting on the otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that
Marcelo Garcia, whom he considered as the real lessee, was occupying the building
when it was burned (TSN, July 27, 1982, p.10).

Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster
was able to locate him. Robert Garcia then executed an affidavit before the National
Intelligence and Security Authority (NISA) to the effect that he was not the lessee of
Verendia's house and that his signature on the contract of lease was a complete
forgery. Thus, on the strength of these facts, the adjuster submitted a report dated
December 4, 1981 recommending the denial of Verendia's claim (Exh. "2").

Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed
the lease contract. According to Verendia, it was signed by Marcelo Garcia, cousin of
Robert, who had been paying the rentals all the while. Verendia, however, failed to
explain why Marcelo had to sign his cousin's name when he in fact was paying for the
rent and why he (Verendia) himself, the lessor, allowed such a ruse. Fidelity's
conclusions on these proven facts appear, therefore, to have sufficient bases; Verendia
concocted the lease contract to deflect responsibility for the fire towards an alleged
"lessee", inflated the value of the property by the alleged monthly rental of P6,500 when
in fact, the Provincial Assessor of Rizal had assessed the property's fair market value to
be only P40,300.00, insured the same property with two other insurance companies for
a total coverage of around P900,000, and created a dead-end for the adjuster by the
disappearance of Robert Garcia.

Basically a contract of indemnity, an insurance contract is the law between the parties
(Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and
conditions constitute the measure of the insurer's liability and compliance therewith is a
condition precedent to the insured's right to recovery from the insurer (Oriental
Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla
Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As it is also a
contract of adhesion, an insurance contract should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it (Western
Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).

Considering, however, the foregoing discussion pointing to the fact that Verendia used a
false lease contract to support his claim under Fire Insurance Policy No. F-18876, the
terms of the policy should be strictly construed against the insured. Verendia failed to
live by the terms of the policy, specifically Section 13 thereof which is expressed in
terms that are clear and unambiguous, that all benefits under the policy shall be
forfeited "If the claim be in any respect fraudulent, or if any false declaration be made or
used in support thereof, or if any fraudulent means or devises are used by the Insured
or anyone acting in his behalf to obtain any benefit under the policy". Verendia, having
presented a false declaration to support his claim for benefits in the form of a fraudulent
lease contract, he forfeited all benefits therein by virtue of Section 13 of the policy in the
absence of proof that Fidelity waived such provision (Pacific Banking Corporation vs.
Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia,
reprehensibly disregarded the principle that insurance contracts are uberrimae
fidae and demand the most abundant good faith (Velasco vs. Apostol, 173 SCRA 228
[1989]).

There is also no reason to conclude that by submitting the subrogation receipt as


evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia's
claims in consideration of the amount of P142,685.77. While the said receipt appears to
have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It is
even incomplete as the blank spaces for a witness and his address are not filled up.
More significantly, the same receipt states that Verendia had received the aforesaid
amount. However, that Verendia had not received the amount stated therein, is proven
by the fact that Verendia himself filed the complaint for the full amount of P385,000.00
stated in the policy. It might be that there had been efforts to settle Verendia's claims,
but surely, the subrogation receipt by itself does not prove that a settlement had been
arrived at and enforced. Thus, to interpret Fidelity's presentation of the subrogation
receipt in evidence as indicative of its accession to its "terms" is not only wanting in
rational basis but would be substituting the will of the Court for that of the parties.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No.
76399 is GRANTED and the decision of the then Intermediate Appellate Court under
review is REVERSED and SET ASIDE and that of the trial court is hereby
REINSTATED and UPHELD.

SO ORDERED.

THIRD DIVISION

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

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF


APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the July 15, 1993 Decision[1] and October 22,
1993 Resolution[2] of the Court of Appeals[3] in CA-G.R. CV NO. 28779, which
modified the Ruling[4] of the Regional Trial Court of Pasig, Branch 161, in Civil
Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued
Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc.
(Transworld), initially for One Million (P1,000,000.00) Pesos and eventually
increased to One Million Five Hundred Thousand (P1,500,000.00) Pesos,
covering the period from August 14, 1980 to March 13, 1981.

Pertinent portions of subject policy on the buildings insured, and location thereof,
read:

"On stocks of finished and/or unfinished products, raw materials and


supplies of every kind and description, the properties of the Insureds
and/or held by them in trust, on commission or on joint account with others
and/or for which they (sic) responsible in case of loss whilst contained
and/or stored during the currency of this Policy in the premises occupied
by them forming part of the buildings situate (sic) within own Compound at
MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA,
PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx

Said building of four-span lofty one storey in height with mezzanine


portions is constructed of reinforced concrete and hollow blocks and/or
concrete under galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly plant, offices,
warehouse and caretaker's quarters.

'Bounds in front partly by one-storey concrete building under galvanized


iron roof occupied as canteen and guardhouse, partly by building of two
and partly one storey constructed of concrete below, timber above
undergalvanized iron roof occupied as garage and quarters and partly by
open space and/or tracking/ packing, beyond which is the aforementioned
Magdalo Street; on its right and left by driveway, thence open spaces, and
at the rear by open spaces.'"[5]

The same pieces of property insured with the petitioner were also insured with
New India Assurance Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld, razing the
middle portion of its four-span building and partly gutting the left and right
sections thereof. A two-storey building (behind said four-span building) where fun
and amusement machines and spare parts were stored, was also destroyed by
the fire.

Transworld filed its insurance claims with Rizal Surety & Insurance Company and
New India Assurance Company but to no avail.

On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages, docketed as
Civil Case No. 46106 before Branch 161 of the then Court of First Instance of
Rizal; praying for judgment ordering Rizal Insurance and New India to pay the
amount of P2,747, 867.00 plus legal interest, P400,000.00 as attorney's fees,
exemplary damages, expenses of litigation of P50,000.00 and costs of suit.[6]

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

On January 4, 1990, the trial court rendered its decision; disposing as follows:

"ACCORDINGLY, judgment is hereby rendered as follows:

(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay
Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00
representing the actual value of the losses suffered by it; and

(3) Cost against defendant Rizal Surety and Insurance Company.

SO ORDERED."[8]

Both the petitioner, Rizal Insurance Company, and private respondent,


Transworld Knitting Mills, Inc., went to the Court of Appeals, which came out with
its decision of July 15, 1993 under attack, the decretal portion of which reads:

"WHEREFORE, and upon all the foregoing, the decision of the court
below is MODIFIED in that defendant New India Assurance Company has
and is hereby required to pay plaintiff-appellant the amount of
P1,818,604.19 while the other Rizal Surety has to pay the plaintiff-
appellant P470,328.67, based on the actual losses sustained by plaintiff
Transworld in the fire, totalling P2,790,376.00 as against the amounts of
fire insurance coverages respectively extended by New India in the
amount of P5,800,000.00 and Rizal Surety and Insurance Company in the
amount of P1,500,000.00.

No costs.

SO ORDERED."[9]

On August 20, 1993, from the aforesaid judgment of the Court of Appeals New
India appealed to this Court theorizing inter alia that the private respondent could
not be compensated for the loss of the fun and amusement machines and spare
parts stored at the two-storey building because it (Transworld) had no insurable
interest in said goods or items.

On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-
111118 (New India Assurance Company Ltd. vs. Court of Appeals).

Petitioner Rizal Insurance and private respondent Transworld, interposed a


Motion for Reconsideration before the Court of Appeals, and on October 22,
1993, the Court of Appeals reconsidered its decision of July 15, 1993, as regards
the imposition of interest, ruling thus:

"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar
as the imposition of legal interest is concerned, that, on the assessment
against New India Assurance Company on the amount of P1,818,604.19
and that against Rizal Surety & Insurance Company on the amount of
P470,328.67, from May 26, 1982 when the complaint was filed until
payment is made. The rest of the said decision is retained in all other
respects.

SO ORDERED."[10]

Undaunted, petitioner Rizal Surety & Insurance Company found its way to this
Court via the present Petition, contending that:

I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE


ANNEX BUILDING WHERE THE BULK OF THE BURNED PROPERTIES
WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE
INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.

II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED


IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL
SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY
SHOW THAT THE PREMISES OCCUPIED BY TRANSWORLD, WHERE
THE INSURED PROPERTIES WERE LOCATED, SUSTAINED PARTIAL
DAMAGE ONLY.

III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT


TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH
MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN
NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL
AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS
ATTORNEY'S FEES AND EXPENSES OF LITIGATION (ART. 2208
PARS. 4 and 11, CIVIL CODE).[11]

The Petition is not impressed with merit.

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

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

"xxx contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in question
did not limit its coverage to what were stored in the four-span building. As opined
by the trial court of origin, two requirements must concur in order that the said fun
and amusement machines and spare parts would be deemed protected by the
fire insurance policy under scrutiny, to wit:

"First, said properties must be contained and/or stored in the areas


occupied by Transworld and second, said areas must form part of the
building described in the policy xxx"[14]

'Said building of four-span lofty one storey in height with


mezzanine portions is constructed of reinforced concrete
and hollow blocks and/or concrete under galvanized iron roof
and occupied as hosiery mills, garment and lingerie factory,
transistor-stereo assembly plant, offices, ware house and
caretaker's quarter.'

The Court is mindful of the well-entrenched doctrine that factual findings by the
Court of Appeals are conclusive on the parties and not reviewable by this Court,
and the same carry even more weight when the Court of Appeals has affirmed
the findings of fact arrived at by the lower court.[15]

In the case under consideration, both the trial court and the Court of Appeals
found that the so called "annex " was not an annex building but an integral and
inseparable part of the four-span building described in the policy and
consequently, the machines and spare parts stored therein were covered by the
fire insurance in dispute. The letter-report of the Manila Adjusters and Surveyor's
Company, which petitioner itself cited and invoked, describes the "annex"
building as follows:

"Two-storey building constructed of partly timber and partly concrete


hollow blocks under g.i. roof which is adjoining and intercommunicating
with the repair of the first right span of the lofty storey building and thence
by property fence wall."[16]

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

So also, considering that the two-storey building aforementioned was already


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

After a careful study, the Court does not find any basis for disturbing what the
lower courts found and arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building insured
thereby. Article 1377 of the New Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a contract


shall not favor the party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved against the
petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted
the fire insurance policy contract under scrutiny. Citing the aforecited provision of
law in point, the Court in Landicho vs. Government Service Insurance
System,[19] ruled:

"This is particularly true as regards insurance policies, in respect of which


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

Equally relevant is the following disquisition of the Court in Fieldmen's Insurance


Company, Inc. vs. Vda. De Songco,[21] to wit:

"'This rigid application of the rule on ambiguities has become necessary in


view of current business practices. The courts cannot ignore that
nowadays monopolies, cartels and concentration of capital, endowed with
overwhelming economic power, manage to impose upon parties dealing
with them cunningly prepared 'agreements' that the weaker party may not
change one whit, his participation in the 'agreement' being reduced to the
alternative to 'take it or leave it' labelled since Raymond Saleilles
'contracts by adherence' (contrats [sic] d'adhesion), in contrast to these
entered into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are prime
example) obviously call for greater strictness and vigilance on the part of
courts of justice with a view to protecting the weaker party from abuses
and imposition, and prevent their becoming traps for the unwary (New
Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27
February 1942.)'"[22]

The issue of whether or not Transworld has an insurable interest in the fun and
amusement machines and spare parts, which entitles it to be indemnified for the
loss thereof, had been settled in G.R. No. L-111118, entitled New India
Assurance Company, Ltd., vs. Court of Appeals, where the appeal of New India
from the decision of the Court of Appeals under review, was denied with finality
by this Court on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises,


precludes the relitigation of a particular fact or issue in another action between
the same parties based on a different claim or cause of action. "xxx the judgment
in the prior action operates as estoppel only as to those matters in issue or points
controverted, upon the determination of which the finding or judgment was
rendered. In fine, the previous judgment is conclusive in the second case, only as
those matters actually and directly controverted and determined and not as to
matters merely involved therein."[23]

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

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru')
had been negligent, or so negligent as to have proximately caused the
collision between them, was an issue that was actually, directly and
expressly raised, controverted and litigated in C.A.-G.R. No. 61320-R.
Reyes, L.B., J., resolved that issue in his Decision and held the 'Don
Carlos' to have been negligent rather than the 'Yotai Maru' and, as already
noted, that Decision was affirmed by this Court in G.R. No. L-48839 in a
Resolution dated 6 December 1987. The Reyes Decision thus became
final and executory approximately two (2) years before the Sison Decision,
which is assailed in the case at bar, was promulgated. Applying the rule of
conclusiveness of judgment, the question of which vessel had been
negligent in the collision between the two (2) vessels, had long been
settled by this Court and could no longer be relitigated in C.A.-G.R. No.
61206-R. Private respondent Go Thong was certainly bound by the ruling
or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals
fell into clear and reversible error when it disregarded the Decision of this
Court affirming the Reyes Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering that
private respondent's insurable interest in, and compensability for the loss of
subject fun and amusement machines and spare parts, had been adjudicated,
settled and sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and by
this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994, the
same can no longer be relitigated and passed upon in the present case.
Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the
ruling of the Court of Appeals and of this Court that the private respondent has
an insurable interest in the aforesaid fun and amusement machines and spare
parts; and should be indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for the amount
of P470,328.67, it being the total loss and damage suffered by Transworld for
which petitioner Rizal Insurance is liable.[26]

All things studiedly considered and viewed in proper perspective, the Court is of
the irresistible conclusion, and so finds, that the Court of Appeals erred not in
holding the petitioner, Rizal Surety Insurance Company, liable for the destruction
and loss of the insured buildings and articles of the private respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated
October 22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are
AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

FIRST DIVISION

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

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


JULITA TRINOS, respondents.

DECISION
YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health
care coverage with petitioner Philamcare Health Systems, Inc. In the standard
application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes,
give details).[1]

The application was approved for a period of one year from March 1, 1988 to March
1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the
agreement, respondents husband was entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein. He was also entitled to avail of out-
patient benefits such as annual physical examinations, preventive health care and other
out-patient services.
Upon the termination of the agreement, the same was extended for another year
from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The
amount of coverage was increased to a maximum sum of P75,000.00 per disability. [2]
During the period of his coverage, Ernani suffered a heart attack and was confined
at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her
husband was in the hospital, respondent tried to claim the benefits under the health
care agreement. However, petitioner denied her claim saying that the Health Care
Agreement was void. According to petitioner, there was a concealment regarding
Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis
confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in
the application form. Thus, respondent paid the hospitalization expenses herself,
amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent
was constrained to bring him back to the Chinese General Hospital where he died on
the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorneys fees. After trial, the
lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to
plaintiff who paid the same;

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


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

4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted
all awards for damages and absolved petitioner Reverente.[4] Petitioners motion for
reconsideration was denied.[5]Hence, petitioner brought the instant petition for review,
raising the primary argument that a health care agreement is not an insurance contract;
hence the incontestability clause under the Insurance Code[6]does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-
ups and hospitalization which a member may immediately enjoy so long as he is alive
upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also
points out that only medical and hospitalization benefits are given under the agreement
without any indemnification, unlike in an insurance contract where the insured is
indemnified for his loss. Moreover, since Health Care Agreements are only for a period
of one year, as compared to insurance contracts which last longer, [7] petitioner argues
that the incontestability clause does not apply, as the same requires an effectivity period
of at least two years. Petitioner further argues that it is not an insurance company,
which is governed by the Insurance Commission, but a Health Maintenance
Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.[8]
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest against
him, may be insured against. Every person has an insurable interest in the life
and health of himself. Section 10 provides:

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

(1) of himself, of his spouse and of his children;


(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;

(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining the
health care agreement was his own health. The health care agreement was in the
nature of non-life insurance, which is primarily a contract of indemnity. [9] Once the
member incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingent, the health care provider must pay for the same to the extent
agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners required
respondents husband to sign an express authorization for any person, organization or
entity that has any record or knowledge of his health to furnish any and all information
relative to any hospitalization, consultation, treatment or any other medical advice or
examination.[10] Specifically, the Health Care Agreement signed by respondents
husband states:

We hereby declare and agree that all statement and answers contained herein and in
any addendum annexed to this application are full, complete and true and bind all
parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied for
is actually paid during the lifetime and good health of proposed Members; that no
information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime relative to any
information acquired by him in his professional capacity upon any question affecting the
eligibility for health care coverage of the Proposed Members and that the acceptance of
any Agreement issued on this application shall be a ratification of any correction in or
addition to this application as stated in the space for Home Office
Endorsement.[11] (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicants medical history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge
of my health and/or that of __________ to give to the PhilamCare Health Systems,
Inc. any and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination. This authorization is in connection with the
application for health care coverage only. A photographic copy of this authorization shall
be as valid as the original.[12] (Underscoring ours)

Petitioner cannot rely on the stipulation regarding Invalidation of agreement which


reads:

Failure to disclose or misrepresentation of any material information by the member in


the application or medical examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation would have resulted in
the declination of the applicant by Philamcare or the assessment of a higher
Membership Fee for the benefit or benefits applied for.[13]

The answer assailed by petitioner was in response to the question relating to the
medical history of the applicant. This largely depends on opinion rather than fact,
especially coming from respondents husband who was not a medical doctor. Where
matters of opinion or judgment are called for, answers made in good faith and without
intent to deceive will not avoid a policy even though they are untrue.[14]Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or


judgment of the insured will not avoid the policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise
the rule although the statement is material to the risk, if the statement is obviously of the
foregoing character, since in such case the insurer is not justified in relying upon such
statement, but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally states to be
true, as a matter of expectation or belief, that which he then knows, to be actually
untrue, or the impossibility of which is shown by the facts within his knowledge, since in
such case the intent to deceive the insurer is obvious and amounts to actual
fraud.[15] (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.[16] Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate, petitioner is liable for
claims made under the contract. Having assumed a responsibility under the agreement,
petitioner is bound to answer the same to the extent agreed upon. In the end, the
liability of the health care provider attaches once the member is hospitalized for the
disease or injury covered by the agreement or whenever he avails of the covered
benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to
rescind a contract of insurance. The right to rescind should be exercised previous to the
commencement of an action on the contract.[17] In this case, no rescission was
made. Besides, the cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or
more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and
upon request of insured, to furnish facts on which cancellation is based. [18]

None of the above pre-conditions was fulfilled in this case. When the terms of
insurance contract contain limitations on liability, courts should construe them in such a
way as to preclude the insurer from non-compliance with his obligation.[19] Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly
against the party which prepared the contract the insurer.[20] By reason of the exclusive
control of the insurance company over the terms and phraseology of the insurance
contract, ambiguity must be strictly interpreted against the insurer and liberally in favor
of the insured, especially to avoid forfeiture.[21] This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital service contracts, such as the
one at bar, must be liberally construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations the construction conferring coverage is to
be adopted, and exclusionary clauses of doubtful import should be strictly construed
against the provider.[22]
Anent the incontestability of the membership of respondents husband, we quote
with approval the following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health
Systems Inc. had twelve months from the date of issuance of the Agreement within
which to contest the membership of the patient if he had previous ailment of asthma,
and six months from the issuance of the agreement if the patient was sick of diabetes or
hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.[23]

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

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,


vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the
petitioner is liable under the Money, Security, and Payroll Robbery policy it issued to the
private respondent or whether recovery thereunder is precluded under the general
exceptions clause thereof. Both the trial court and the Court of Appeals held that there
should be recovery. The petitioner contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro
Manila, by private respondent Producers Bank of the Philippines (hereinafter Producers)
against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a
complaint for recovery of the sum of P725,000.00 under the policy issued by Fortune.
The sum was allegedly lost during a robbery of Producer's armored vehicle while it was
in transit to transfer the money from its Pasay City Branch to its head office in Makati.
The case was docketed as Civil Case No. 1817 and assigned to Branch 146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the
following stipulation of facts:

1. The plaintiff was insured by the defendants and an


insurance policy was issued, the duplicate original of which
is hereto attached as Exhibit "A";
2. An armored car of the plaintiff, while in the process of
transferring cash in the sum of P725,000.00 under the
custody of its teller, Maribeth Alampay, from its Pasay
Branch to its Head Office at 8737 Paseo de Roxas, Makati,
Metro Manila on June 29, 1987, was robbed of the said
cash. The robbery took place while the armored car was
traveling along Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong


Y de Vera, escorted by Security Guard Saturnino Atiga Y
Rosete. Driver Magalong was assigned by PRC
Management Systems with the plaintiff by virtue of an
Agreement executed on August 7, 1983, a duplicate original
copy of which is hereto attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn


Security Services, Inc. with the plaintiff by virtue of a contract
of Security Service executed on October 25, 1982, a
duplicate original copy of which is hereto attached as Exhibit
"C";

5. After an investigation conducted by the Pasay police


authorities, the driver Magalong and guard Atiga were
charged, together with Edelmer Bantigue Y Eulalio,
Reynaldo Aquino and John Doe, with violation of P.D. 532
(Anti-Highway Robbery Law) before the Fiscal of Pasay City.
A copy of the complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging


the aforesaid persons with the said crime before Branch 112
of the Regional Trial Court of Pasay City. A copy of the said
information is hereto attached as Exhibit "E." The case is still
being tried as of this date;

7. Demands were made by the plaintiff upon the defendant


to pay the amount of the loss of P725,000.00, but the latter
refused to pay as the loss is excluded from the coverage of
the insurance policy, attached hereto as Exhibit "A,"
specifically under page 1 thereof, "General Exceptions"
Section (b), which is marked as Exhibit "A-1," and which
reads as follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of


xxx xxx xxx

(b) any loss caused by any dishonest,


fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representative of the Insured
whether acting alone or in conjunction with
others. . . .

8. The plaintiff opposes the contention of the defendant and


contends that Atiga and Magalong are not its "officer,
employee, . . . trustee or authorized representative . . . at the
time of the robbery.1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The
dispositive portion thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and


against defendant, and

(a) orders defendant to pay plaintiff the net


amount of P540,000.00 as liability under Policy
No. 0207 (as mitigated by the P40,000.00
special clause deduction and by the recovered
sum of P145,000.00), with interest thereon at
the legal rate, until fully paid;

(b) orders defendant to pay plaintiff the sum of


P30,000.00 as and for attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of
Producers. It Said:

The Court is satisfied that plaintiff may not be said to have selected and
engaged Magalong and Atiga, their services as armored car driver and as
security guard having been merely offered by PRC Management and by
Unicorn Security and which latter firms assigned them to plaintiff. The
wages and salaries of both Magalong and Atiga are presumably paid by
their respective firms, which alone wields the power to dismiss them.
Magalong and Atiga are assigned to plaintiff in fulfillment of agreements to
provide driving services and property protection as such — in a context
which does not impress the Court as translating into plaintiff's power to
control the conduct of any assigned driver or security guard, beyond
perhaps entitling plaintiff to request are replacement for such driver guard.
The finding is accordingly compelled that neither Magalong nor Atiga were
plaintiff's "employees" in avoidance of defendant's liability under the policy,
particularly the general exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver


Magalong and guard Atiga were the "authorized representatives" of
plaintiff. They were merely an assigned armored car driver and security
guard, respectively, for the June 29, 1987 money transfer from plaintiff's
Pasay Branch to its Makati Head Office. Quite plainly — it was teller
Maribeth Alampay who had "custody" of the P725,000.00 cash being
transferred along a specified money route, and hence plaintiff's then
designated "messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-
G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the
appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and
Atiga were neither employees nor authorized representatives of Producers and
ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the


insured and strictly against the insurance company (New Life Enterprises
vs. Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court
of Appeals, 211 SCRA 554). Contracts of insurance, like other contracts,
are to be construed according to the sense and meaning of the terms
which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary
and popular sense (New Life Enterprises Case, supra, p. 676; Sun
Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation


is plain, ordinary and simple. No other interpretation is necessary. The
word "employee" must be taken to mean in the ordinary sense.

The Labor Code is a special law specifically dealing with/and specifically


designed to protect labor and therefore its definition as to employer-
employee relationships insofar as the application/enforcement of said
Code is concerned must necessarily be inapplicable to an insurance
contract which defendant-appellant itself had formulated. Had it intended
to apply the Labor Code in defining what the word "employee" refers to, it
must/should have so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of
plaintiff-appellee bank because it has no power to hire or to dismiss said
driver and security guard under the contracts (Exhs. 8 and C) except only
to ask for their replacements from the contractors.5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the
trial court and the Court of Appeals erred in holding it liable under the insurance policy
because the loss falls within the general exceptions clause considering that driver
Magalong and security guard Atiga were Producers' authorized representatives or
employees in the transfer of the money and payroll from its branch office in Pasay City
to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer


its funds from one branch to another, they effectively and necessarily became its
authorized representatives in the care and custody of the money. Assuming that they
could not be considered authorized representatives, they were, nevertheless,
employees of Producers. It asserts that the existence of an employer-employee
relationship "is determined by law and being such, it cannot be the subject of
agreement." Thus, if there was in reality an employer-employee relationship between
Producers, on the one hand, and Magalong and Atiga, on the other, the provisions in
the contracts of Producers with PRC Management System for Magalong and with
Unicorn Security Services for Atiga which state that Producers is not their employer and
that it is absolved from any liability as an employer, would not obliterate the relationship.

Fortune points out that an employer-employee relationship depends upon four


standards: (1) the manner of selection and engagement of the putative employee; (2)
the mode of payment of wages; (3) the presence or absence of a power to dismiss; and
(4) the presence and absence of a power to control the putative employee's conduct. Of
the four, the right-of-control test has been held to be the decisive factor. 6 It asserts that
the power of control over Magalong and Atiga was vested in and exercised by
Producers. Fortune further insists that PRC Management System and Unicorn Security
Services are but "labor-only" contractors under Article 106 of the Labor Code which
provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting


where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment,
machineries, work premises, among others, and the workers recruited and
placed by such persons are performing activities which are directly related
to the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who
shall be responsible to the workers in the same manner and extent as if
the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers,
following the ruling in International Timber Corp. vs. NLRC 7 that a finding that a
contractor is a "labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the project and the employees of
the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its
employees since it had nothing to do with their selection and engagement, the payment
of their wages, their dismissal, and the control of their conduct. Producers argued that
the rule in International Timber Corp. is not applicable to all cases but only when it
becomes necessary to prevent any violation or circumvention of the Labor Code, a
social legislation whose provisions may set aside contracts entered into by parties in
order to give protection to the working man.

Producers further asseverates that what should be applied is the rule in American
President Lines vs. Clave, 8 to wit:

In determining the existence of employer-employee relationship, the


following elements are generally considered, namely: (1) the selection and
engagement of the employee; (2) the payment of wages; (3) the power of
dismissal; and (4) the power to control the employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which
assigned Magalong as the driver of Producers' armored car and was responsible for his
faithful discharge of his duties and responsibilities, and since Producers paid the
monthly compensation of P1,400.00 per driver to PRC Management Systems and not to
Magalong, it is clear that Magalong was not Producers' employee. As to Atiga,
Producers relies on the provision of its contract with Unicorn Security Services which
provides that the guards of the latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Section 174 of the
Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising


from accident or mishap, excluding certain types of loss which by law or
custom are considered as falling exclusively within the scope of insurance
such as fire or marine. It includes, but is not limited to, employer's liability
insurance, public liability insurance, motor vehicle liability insurance, plate
glass insurance, burglary and theft insurance, personal accident and
health insurance as written by non-life insurance companies, and other
substantially similar kinds of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code
contains no other provisions applicable to casualty insurance or to robbery insurance in
particular. These contracts are, therefore, governed by the general provisions applicable
to all types of insurance. Outside of these, the rights and obligations of the parties must
be determined by the terms of their contract, taking into consideration its purpose and
always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the
opportunity to defraud the insurer — the moral hazard — is so great that insurers have
found it necessary to fill up their policies with countless restrictions, many designed to
reduce this hazard. Seldom does the insurer assume the risk of all losses due to the
hazards insured against." 10 Persons frequently excluded under such provisions are
those in the insured's service and employment. 11 The purpose of the exception is to
guard against liability should the theft be committed by one having unrestricted access
to the property. 12 In such cases, the terms specifying the excluded classes are to be
given their meaning as understood in common speech. 13 The terms "service" and
"employment" are generally associated with the idea of selection, control, and
compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be


resolved against the insurer, 15 or it should be construed liberally in favor of the insured
and strictly against the insurer. 16 Limitations of liability should be regarded with extreme
jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It
goes without saying then that if the terms of the contract are clear and unambiguous,
there is no room for construction and such terms cannot be enlarged or diminished by
judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified
therein. 19 It is settled that the terms of the policy constitute the measure of the insurer's
liability. 20 In the absence of statutory prohibition to the contrary, insurance companies
have the same rights as individuals to limit their liability and to impose whatever
conditions they deem best upon their obligations not inconsistent with public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga
qualify as employees or authorized representatives of Producers under paragraph (b) of
the general exceptions clause of the policy which, for easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

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


act of the insured or any officer, employee, partner,
director, trustee or authorized representative of the Insured
whether acting alone or in conjunction with others. . . .
(emphases supplied)
There is marked disagreement between the parties on the correct meaning of the terms
"employee" and "authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and
exempt from protection and coverage losses arising from dishonest, fraudulent, or
criminal acts of persons granted or having unrestricted access to Producers' money or
payroll. When it used then the term "employee," it must have had in mind any person
who qualifies as such as generally and universally understood, or jurisprudentially
established in the light of the four standards in the determination of the employer-
employee relationship, 21 or as statutorily declared even in a limited sense as in the
case of Article 106 of the Labor Code which considers the employees under a "labor-
only" contract as employees of the party employing them and not of the party who
supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn
Security Services are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the
employer of Magalong. Notwithstanding such express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and the
security guards each shall supply to Producers are not the latter's employees, it
may, in fact, be that it is because the contracts are, indeed, "labor-only"
contracts. Whether they are is, in the light of the criteria provided for in Article
106 of the Labor Code, a question of fact. Since the parties opted to submit the
case for judgment on the basis of their stipulation of facts which are strictly
limited to the insurance policy, the contracts with PRC Management Systems
and Unicorn Security Services, the complaint for violation of P.D. No. 532, and
the information therefor filed by the City Fiscal of Pasay City, there is a paucity of
evidence as to whether the contracts between Producers and PRC Management
Systems and Unicorn Security Services are "labor-only" contracts.

But even granting for the sake of argument that these contracts were not "labor-only"
contracts, and PRC Management Systems and Unicorn Security Services were truly
independent contractors, we are satisfied that Magalong and Atiga were, in respect of
the transfer of Producer's money from its Pasay City branch to its head office in Makati,
its "authorized representatives" who served as such with its teller Maribeth Alampay.
Howsoever viewed, Producers entrusted the three with the specific duty to safely
transfer the money to its head office, with Alampay to be responsible for its custody in
transit; Magalong to drive the armored vehicle which would carry the money; and Atiga
to provide the needed security for the money, the vehicle, and his two other
companions. In short, for these particular tasks, the three acted as agents of Producers.
A "representative" is defined as one who represents or stands in the place of another;
one who represents others or another in a special capacity, as an agent, and is
interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general exceptions
clause of the insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of
the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET
ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.

No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

[G.R. No. 156167. May 16, 2005]

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE


CORPORATION, respondent.

DECISION
PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER
INSURANCE CORPORATION. Petitioner assails the appellate court decision[1] which
dismissed its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope
of the insurance companys liability for earthquake damage to petitioners properties.
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are
as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance Company
(AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from 1984-85;
1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and 4
respectively), the risk of loss from earthquake shock was extended only to plaintiffs two
swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and
two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies
referred to the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that
subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering
the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the
earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and F-1
was deleted and the entry under Endorsements/Warranties at the time of issue read
that plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to
March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which carried the entry under
Endorsement/Warranties at Time of Issue, which read Endorsement to Include
Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and paid P42,658.14
(Exhs. 6-A and 6-B) as premium thereof, computed as follows:

Item -P7,691,000.00 - on the Clubhouse only


@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:

a) Tilter House- P19,800.00- 0.551%


b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. H) provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy
No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991
for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the computation of
the premium, defendants Policy No. 31944 (Exh. I), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:

Rate-Various

Premium - P37,420.60 F/L


2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs. C,
D, E, F, G and H), the premium against the peril of earthquake shock is the same, that
is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1;
6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944 issued by
defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the


sum included additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this policy due to the contrary, that this insurance covers loss
or damage to shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that on
July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs
properties covered by Policy No. 31944 issued by defendant, including the two
swimming pools in its Agoo Playa Resort were damaged.[2]

After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned the investigation of the claim to
an independent claims adjuster, Bayne Adjusters and Surveyors, Inc. [3] On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors,
Inc., through its Vice-President A.R. de Leon,[4]rendered a preliminary report[5] finding
extensive damage caused by the earthquake to the clubhouse and to the two swimming
pools. Mr. de Leon stated that except for the swimming pools, all affected items have no
coverage for earthquake shocks.[6] On August 11, 1990, petitioner filed its formal
demand[7] for settlement of the damage to all its properties in the Agoo Playa Resort. On
August 23, 1990, respondent denied petitioners claim on the ground that its insurance
policy only afforded earthquake shock coverage to the two swimming pools of the
resort.[8] Petitioner and respondent failed to arrive at a settlement.[9] Thus, on January
24, 1991, petitioner filed a complaint[10] with the regional trial court of Pasig praying for
the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured


properties, with interest thereon, as computed under par. 29 of the policy
(Annex B) until fully paid;

2.) The sum of P428,842.00 per month, representing continuing losses


sustained by plaintiff on account of defendants refusal to pay the claims;

3.) The sum of P500,000.00, by way of exemplary damages;


4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;

5.) Costs.[11]

Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:

The above schedule clearly shows that plaintiff paid only a premium of P393.00 against
the peril of earthquake shock, the same premium it paid against earthquake shock only
on the two swimming pools in all the policies issued by AHAC(AIU) (Exhibits C, D, E, F
and G). From this fact the Court must consequently agree with the position of defendant
that the endorsement rider (Exhibit 7-C) means that only the two swimming pools were
insured against earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck
on July 16, 1990. Defendant having admitted that the damage to the swimming pools
was appraised by defendants adjuster at P386,000.00, defendant must, by virtue of the
contract of insurance, pay plaintiff said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to
the counterclaims of defendant, the Court does not agree that the action filed by plaintiff
is baseless and highly speculative since such action is a lawful exercise of the plaintiffs
right to come to Court in the honest belief that their Complaint is meritorious. The
prayer, therefore, of defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of


THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date of
the filing of the Complaint until defendants obligation to plaintiff is fully paid.

No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal
with the Court of Appeals based on the following assigned errors:[14]

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN


ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS
FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE
PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT


TO RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY
LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM
THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS
OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS


ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24%
PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower courts
failure to award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled,
thus:

However, after carefully perusing the documentary evidence of both parties, We are not
convinced that the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-
appellant had with AHAC (AIU) and upon which the subject insurance contract with
Philippine Charter Insurance Corporation is said to have been based and copied (Exh.
I), covered an extended earthquake shock insurance on all the insured properties.

xxx

We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools, as
the Court a quo and this Court correctly found it to be liable only, it then cannot be said
that it was in default and therefore liable for interest.

Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the


rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et al.,
G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award (Country
Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R.
No. 136914, January 25, 2002). Therefore, holding that the plaintiff-appellants action is
not baseless and highly speculative, We find that the Court a quo did not err in granting
the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.[15]

Petitioner filed the present petition raising the following issues:[16]

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER


RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2)
SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE
SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS


PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE
CLAIMED, ATTORNEYS FEES AND EXPENSES OF LITIGATION.

Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words any property
insured by this policy, and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states that it
is [s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On
Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence
over the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved
in favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondents liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium
was not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended
to extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company (AHAC-
AIU), which covered all the resorts properties for earthquake shock damage and
respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner
that it was covered for earthquake shock. Respondents insurance adjuster, Bayne
Adjusters and Surveyors, Inc., likewise requested petitioner to submit the necessary
documents for its building claims and other repair costs. Thus, under the doctrine of
equitable estoppel, it cannot deny that the insurance policy it issued to petitioner
covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under
Rule 45 of the Revised Rules of Court as its remedy, and there is no need for calibration
of the evidence in order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments: [18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioners insured properties
other than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only
the two swimming pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier policies, and there was
no increase in the premium paid. AHAC-AIU, in a letter[19] by its representative Manuel
C. Quijano, categorically stated that its previous policy, from which respondents policy
was copied, covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00
shows that the policy only covered earthquake shock damage on the two swimming
pools. The amount was the same amount paid by petitioner for earthquake shock
coverage on the two swimming pools from 1990-1991. No additional premium was paid
to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioners properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by petitioner.
Although the first five policies contained the said qualification in their riders title, in the
last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J.
Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did
not make the policy incomplete, nor did it broaden the scope of the endorsement whose
descriptive title was merely enumerated. Any ambiguity in the policy can be easily
resolved by looking at the other provisions, specially the enumeration of the items
insured, where only the two swimming pools were noted as covered for earthquake
shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through
1988, the phrase Item 5 P393,000.00 on the two swimming pools only (against the peril
of earthquake shock only) meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to 1990,
the only difference being the designation of the two swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums
must be paid for all the properties covered. In all of its seven insurance policies,
petitioner only paid P393.00 as premium for coverage of the swimming pools against
earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier ANY instead of ALL to describe the
property covered was done deliberately to enable the parties to specify the properties
included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioners own evidence shows
that it only required respondent to follow the exact provisions of its previous policy from
AHAC-AIU. Respondent complied with this requirement. Respondents only deviation
from the agreement was when it modified the provisions regarding the replacement cost
endorsement. With regard to the issue under litigation, the riders of the old policy and
the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as
would estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjusters letter notifying petitioner to present certain documents
for its building claims and repair costs was given to petitioner before the adjuster knew
the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item
5 Only after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties clear intention to limit earthquake
shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It
did not object to any deficiency nor did it institute any action to reform the policy. The
policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and
litigation expenses. Since respondent was willing and able to pay for the damage
caused on the two swimming pools, it cannot be considered to be in default, and
therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the
case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:

ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake
shock only)[20]

Second, under the breakdown for premium payments,[21] it was stated that:

PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

xxx

3 393,000.00 0.100%-E/S 393.00[22]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:--

(a) Earthquake, volcanic eruption or other convulsion of nature. [23]

Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To
Include the Perils of Explosion, Aircraft, Vehicle and Smoke), stated, viz:

ANNUAL PAYMENT AGREEMENT ON


LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS


INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A
DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x
AND TO PAY THE PREMIUM.

Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . .


. . . . . . . . . . additional premium the Company agrees, notwithstanding what is stated in
the printed conditions of this Policy to the contrary, that this insurance covers loss or
damage (including loss or damage by fire) to any of the property insured by this Policy
occasioned by or through or in consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as they
may be hereby expressly varied) and that any reference therein to loss or damage by
fire should be deemed to apply also to loss or damage occasioned by or through or in
consequence of Earthquake.[24]

Petitioner contends that pursuant to this rider, no qualifications were placed on the
scope of the earthquake shock coverage. Thus, the policy extended earthquake shock
coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other.[25] All its parts are reflective of the true intent
of the parties. The policy cannot be construed piecemeal. Certain stipulations cannot be
segregated and then made to control; neither do particular words or phrases necessarily
determine its character. Petitioner cannot focus on the earthquake shock endorsement
to the exclusion of the other provisions. All the provisions and riders, taken and
interpreted together, indubitably show the intention of the parties to extend earthquake
shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear
intent of the parties to extend earthquake shock coverage only to the two swimming
pools. Section 2(1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. Thus, an
insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated


peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual


losses among a large group of persons bearing a similar risk; and

5. In consideration of the insurer's promise, the insured pays a


premium.[26] (Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaking to


indemnify the insured against a specified peril.[27] In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches.[28] In the
subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioners previous insurance policies from AHAC-AIU. As
borne out by petitioners witnesses:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991


pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4, 1985 the
coverage on earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to
the two swimming pools only?
A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991


pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are
of course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to
March 14, 1989, did you give written instruction to Forte Insurance Agency
advising it that the earthquake shock coverage must extend to all properties
of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other
properties of the company.
Q. And that instruction, according to you, was very important because in April
1987 there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the
[future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be
covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home
Assurance Company marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools
only, I was contented already that the previous limitation pertaining to the
two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement
on Long Term Policies[29] to the insurance policy as proof of the intent of the parties to
extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements
to which the policy is subject, as required under Section 50, paragraph 2 of the
Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for
AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA III[30]


TSN, August 11, 1992
pp. 9-12

Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did
you have occasion to review of (sic) these six (6) policies issued by your
company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to
H respectively carries an earthquake shock endorsement[?] My question to
you is, on the basis on (sic) the wordings indicated in Exhibits C to H
respectively what was the extent of the coverage [against] the peril of
earthquake shock as provided for in each of the six (6) policies?
xxx

WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock
as provided for in each of the six (6) policies extend to the two (2)
swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake
Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone
basis. For swimming pools we do cover earthquake shock. For building we
covered it for full earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific
coverage for other things other than swimming pool? You are covering
building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering
building or another we can issue earthquake shock solely but that the
moment I see this, the thing that comes to my mind is either insuring a
swimming pool, foundations, they are normally affected by earthquake but
not by fire, sir.

DIRECT EXAMINATION OF JUAN BARANDA III


TSN, August 11, 1992
pp. 23-25

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C,
D, E and F inclusive [remained] its coverage against earthquake shock to
two (2) swimming pools only but that Exhibits G and H respectively entend
the coverage against earthquake shock to all the properties indicated in the
respective schedules attached to said policies, what can you say about that
testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without
the other half of it. I assure you that this one covers the two swimming pools
with respect to earthquake shock endorsement. Based on it, if we are going
to look at the premium there has been no change with respect to the rates.
Everytime (sic) there is a renewal if the intention of the insurer was to
include the earthquake shock, I think there is a substantial increase in the
premium. We are not only going to consider the two (2) swimming pools of
the other as stated in the policy. As I see, there is no increase in the
amount of the premium. I must say that the coverage was not broaden (sic)
to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you
are going to do some computation based on the rates you will arrive at the
same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6

ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire
insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only
was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which
you have pointed to during your direct-examination, the phrase Item no. 5
only meaning to (sic) the two (2) swimming pools was deleted from the
policies issued by AIU, is it not?

xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the
deletion of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is
inadvertent. Being a company underwriter, we do not cover. . it was
inadvertent because of the previous policies that we have issued with no
specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous
and subsequent acts to the issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioners own witness testified to this agreement, viz:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC


TSN, January 14, 1992
pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what
exactly did you tell Atty. Omlas (sic) to copy from Exhibit H for purposes of
procuring the policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same
provisions as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium
rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates
that they will be charging will be limited to this one. I (sic) can even be
lesser.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC


TSN, January 14, 1992
pp. 12-14

Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
provisions and scope of coverage of Exhibits I and H sometime in the third
week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the
policy wordings as well as scope of coverage of Exhibits I and H
respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the insurance
policy I sent them but it was only when this case erupted that we discovered
some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit I and those
indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only against
the peril of earthquake shock which I understood before that this provision
will have to be placed here because this particular provision under the peril
of earthquake shock only is requested because this is an insurance policy
and therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of
Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to
believe that the endorsement for earthquake shock covered properties other than the
two swimming pools, viz:

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne


Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26

Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item
3 specifically that the coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had
found out in the policy and he confirmed to me indeed only Item 3 which
were the two swimming pools have coverage for earthquake shock.

xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that
except for the swimming pools all affected items have no coverage for
earthquake shock?

xxx

A. I based my statement on my findings, because upon my examination of the


policy I found out that under Item 3 it was specific on the wordings that on
the two swimming pools only, then enclosed in parenthesis (against the
peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming
pools have a computation for premium payment for earthquake shock and
all the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion which
should be liberally construed in favor of the insured and strictly against the insurer
company which usually prepares it.[31] A contract of adhesion is one wherein a party,
usually a corporation, prepares the stipulations in the contract, while the other party
merely affixes his signature or his "adhesion" thereto. Through the years, the courts
have held that in these type of contracts, the parties do not bargain on equal footing, the
weaker party's participation being reduced to the alternative to take it or leave it. Thus,
these contracts are viewed as traps for the weaker party whom the courts of justice
must protect.[32] Consequently, any ambiguity therein is resolved against the insurer, or
construed liberally in favor of the insured.[33]
The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided.[34] Thus, we
have called on lower courts to remain careful in scrutinizing the factual circumstances
behind each case to determine the efficacy of the claims of contending parties.
In Development Bank of the Philippines v. National Merchandising Corporation, et
al.,[35] the parties, who were acute businessmen of experience, were presumed to have
assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the inception of
the policy, petitioner had required the respondent to copy verbatim the provisions and
terms of its latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo
Mantohac, a direct participant in securing the insurance policy of petitioner, is reflective
of petitioners knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]


TSN, September 23, 1991
pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for
those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the same
or exact provisions of the previous insurance policy we had with American
Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you
wanted in the American Home Insurance policy are to be incorporated in
the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the
AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU
Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there
was variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-AIUs policy.
Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this case
as the parties intent to limit the coverage of the policy to the two swimming pools only is
not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-52756 October 12, 1987

MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,


vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

PADILLA, J:

Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642,
dated 21 March 1979, ordering petitioner Manila Mahogany Manufacturing Corporation
to pay private respondent Zenith Insurance Corporation the sum of Five Thousand
Pesos (P5,000.00) with 6% annual interest from 18 January 1973, attorney's fees in the
sum of five hundred pesos (P500.00), and costs of suit, and the resolution of the same
Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's
decision.

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door
sedan with respondent insurance company. On 4 May 1970 the insured vehicle was
bumped and damaged by a truck owned by San Miguel Corporation. For the damage
caused, respondent company paid petitioner five thousand pesos (P5,000.00) in
amicable settlement. Petitioner's general manager executed a Release of Claim,
subrogating respondent company to all its right to action against San Miguel
Corporation.

On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to


demand reimbursement from San Miguel Corporation of the amount it had paid
petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that San Miguel
Corporation had already paid petitioner P4,500.00 for the damages to petitioner's motor
vehicle, as evidenced by a cash voucher and a Release of Claim executed by the
General Manager of petitioner discharging San Miguel Corporation from "all actions,
claims, demands the rights of action that now exist or hereafter [sic] develop arising out
of or as a consequence of the accident."

Respondent insurance company thus demanded from petitioner reimbursement of the


sum of P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence,
respondent company filed suit in the City Court of Manila for the recovery of P4,500.00.
The City Court ordered petitioner to pay respondent P4,500.00. On appeal the Court of
First Instance of Manila affirmed the City Court's decision in toto, which CFI decision
was affirmed by the Court of Appeals, with the modification that petitioner was to pay
respondent the total amount of P5,000.00 that it had earlier received from the
respondent insurance company.

Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to
respondent company as the subrogation in the Release of Claim it executed in favor of
respondent was conditioned on recovery of the total amount of damages petitioner had
sustained. Since total damages were valued by petitioner at P9,486.43 and only
P5,000.00 was received by petitioner from respondent, petitioner argues that it was
entitled to go after San Miguel Corporation to claim the additional P4,500.00 eventually
paid to it by the latter, without having to turn over said amount to respondent.
Respondent of course disputes this allegation and states that there was no qualification
to its right of subrogation under the Release of Claim executed by petitioner, the
contents of said deed having expressed all the intents and purposes of the parties.

To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation,
petitioner cites Art. 2207 of the Civil Code, which states:

If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong
or breach of contract complained of the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss the aggrieved party shall
be entitled to recover the deficiency from the person causing the loss or
injury.

Petitioner also invokes Art. 1304 of the Civil Code, stating.

A creditor, to whom partial payment has been made, may exercise his
right for the remainder, and he shall be preferred to the person who has
been subrogated in his place in virtue of the partial payment of the same
credit.

We find petitioners arguments to be untenable and without merit. In the absence of any
other evidence to support its allegation that a gentlemen's agreement existed between it
and respondent, not embodied in the Release of Claim, such ease of Claim must be
taken as the best evidence of the intent and purpose of the parties. Thus, the Court of
Appeals rightly stated:

Petitioner argues that the release claim it executed subrogating Private


respondent to any right of action it had against San Miguel Corporation did
not preclude Manila Mahogany from filing a deficiency claim against the
wrongdoer. Citing Article 2207, New Civil Code, to the effect that if the
amount paid by an insurance company does not fully cover the loss, the
aggrieved party shall be entitled to recover the deficiency from the person
causing the loss, petitioner claims a preferred right to retain the amount
coming from San Miguel Corporation, despite the subrogation in favor of
Private respondent.

Although petitioners right to file a deficiency claim against San Miguel


Corporation is with legal basis, without prejudice to the insurer's right of
subrogation, nevertheless when Manila Mahogany executed another
release claim (Exhibit K) discharging San Miguel Corporation from "all
actions, claims, demands and rights of action that now exist or hereafter
arising out of or as a consequence of the accident" after the insurer had
paid the proceeds of the policy- the compromise agreement of P5,000.00
being based on the insurance policy-the insurer is entitled to recover from
the insured the amount of insurance money paid (Metropolitan Casualty
Insurance Company of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132
cited in Insurance Code and Insolvency Law with comments and
annotations, H.B. Perez 1976, p. 151). Since petitioner by its own acts
released San Miguel Corporation, thereby defeating private respondents,
the right of subrogation, the right of action of petitioner against the insurer
was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54
O.G. 391) Otherwise stated: private respondent may recover the sum of
P5,000.00 it had earlier paid to petitioner. 1

As held in Phil. Air Lines v. Heald Lumber Co., 2

If a property is insured and the owner receives the indemnity from the
insurer, it is provided in [Article 2207 of the New Civil Code] 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.
... 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 3 (Emphasis supplied)

The decision of the respondent court ordering petitioner to pay respondent company,
not the P4,500.00 as originally asked for, but P5,000.00, the amount respondent
company paid petitioner as insurance, is also in accord with law and jurisprudence. In
disposing of this issue, the Court of Appeals held:

... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel
Corporation under its clear right to file a deficiency claim for damages
incurred, against the wrongdoer, should the insurance company not fully
pay for the injury caused (Article 2207, New Civil Code). However, when
petitioner released San Miguel Corporation from any liability, petitioner's
right to retain the sum of P5,000.00 no longer existed, thereby entitling
private respondent to recover the same. (Emphasis supplied)
As has been observed:

... The right of subrogation can only exist after the insurer has paid the
otherwise the insured will be deprived of his right to full indemnity. If the
insurance proceeds are not sufficient to cover the damages suffered by
the insured, then he may sue the party responsible for the damage for the
the [sic] remainder. To the extent of the amount he has already received
from the insurer enjoy's [sic] the right of subrogation.

Since the insurer can be subrogated to only such rights as the insured
may have, should the insured, after receiving payment from the insurer,
release the wrongdoer who caused the loss, the insurer loses his rights
against the latter. But in such a case, the insurer will be entitled to recover
from the insured whatever it has paid to the latter, unless the release was
made with the consent of the insurer. 4(Emphasis supplied.)

And even if the specific amount asked for in the complaint is P4,500.00 only and not
P5,000.00, still, the respondent Court acted well within its discretion in awarding
P5,000.00, the total amount paid by the insurer. The Court of Appeals rightly reasoned
as follows:

It is to be noted that private respondent, in its companies, prays for the


recovery, not of P5,000.00 it had paid under the insurance policy but
P4,500.00 San Miguel Corporation had paid to petitioner. On this score,
We believe the City Court and Court of First Instance erred in not
awarding the proper relief. Although private respondent prays for the
reimbursement of P4,500.00 paid by San Miguel Corporation, instead of
P5,000.00 paid under the insurance policy, the trial court should have
awarded the latter, although not prayed for, under the general prayer in
the complaint "for such further or other relief as may be deemed just or
equitable, (Rule 6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes
Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim, 50 Phil. 844; Baguiro vs.
Barrios Tupas, 77 Phil 120).

WHEREFORE, premises considered, the petition is DENIED. The judgment appealed


from is hereby AFFIRMED with costs against petitioner.

SO ORDERED.
THIRD DIVISION

[G.R. No. 150094. August 18, 2004]

FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME ASSURANCE


COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.

DECISION
PANGANIBAN, J.:

Basic is the requirement that before suing to recover loss of or damage to


transported goods, the plaintiff must give the carrier notice of the loss or damage, within
the period prescribed by the Warsaw Convention and/or the airway bill.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging
the June 4, 2001 Decision[2] and the September 21, 2001 Resolution[3] of the Court of
Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as follows:

WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack
of merit. The appealed Decision of Branch 149 of the Regional Trial Court of Makati City
in Civil Case No. 95-1219,entitled American Home Assurance Co. and PHILAM
Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS,
INC. (formerly U-WAREHOUSE, INC.), is hereby AFFIRMED and REITERATED.

Costs against the [petitioner and Cargohaus, Inc.].[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The antecedent facts are summarized by the appellate court as follows:

On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska,


USA delivered to Burlington Air Express (BURLINGTON), an agent of [Petitioner]
Federal Express Corporation, a shipment of 109 cartons of veterinary biologicals for
delivery to consignee SMITHKLINE and French Overseas Company in Makati City,
Metro Manila. The shipment was covered by Burlington Airway Bill No. 11263825 with
the words, REFRIGERATE WHEN NOT IN TRANSIT and PERISHABLE stamp marked
on its face. That same day, Burlington insured the cargoes in the amount of $39,339.00
with American Home Assurance Company (AHAC). The following day, Burlington
turned over the custody of said cargoes to Federal Express which transported the same
to Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29,
1994 in Flight No. 0071-28NRT and was immediately stored at [Cargohaus Inc.s]
warehouse. While the second, consisting of 17 cartons, came in two (2) days later, or
on January 31, 1994, in Flight No. 0071-30NRT which was likewise immediately stored
at Cargohaus warehouse. Prior to the arrival of the cargoes, Federal Express informed
GETC Cargo International Corporation, the customs broker hired by the consignee to
facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival
of its clients cargoes.

On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the
cargoes arrived in Manila, a non-licensed customs broker who was assigned by GETC
to facilitate the release of the subject cargoes, found out, while he was about to cause
the release of the said cargoes, that the same [were] stored only in a room with two (2)
air conditioners running, to cool the place instead of a refrigerator. When he asked an
employee of Cargohaus why the cargoes were stored in the cool room only, the latter
told him that the cartons where the vaccines were contained specifically indicated
therein that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA,
upon instructions from GETC, did not proceed with the withdrawal of the vaccines and
instead, samples of the same were taken and brought to the Bureau of Animal Industry
of the Department of Agriculture in the Philippines by SMITHKLINE for examination
wherein it was discovered that the ELISA reading of vaccinates sera are below the
positive reference serum.

As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE


abandoned the shipment and, declaring total loss for the unusable shipment, filed a
claim with AHAC through its representative in the Philippines, the Philam Insurance Co.,
Inc. (PHILAM) which recompensed SMITHKLINE for the whole insured amount of
THIRTY NINE THOUSAND THREE HUNDRED THIRTY NINE DOLLARS ($39,339.00).
Thereafter, [respondents] filed an action for damages against the [petitioner] imputing
negligence on either or both of them in the handling of the cargo.

Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held
solidarily liable for the loss as follows:

WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner


and its Co-Defendant Cargohaus] are directed to pay [respondents], jointly and
severally, the following:

1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest
from the time of the filing of the complaint to the time the same is fully paid.

2. Attorneys fees in the amount of P50,000.00 and


3. Costs of suit.

SO ORDERED.

Aggrieved, [petitioner] appealed to [the CA].[5]

Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture (Animal and
Plant Health Inspection Service) was found by the CA to be inadmissible in evidence.
Despite this ruling, the appellate court held that the shipping Receipts were a prima
facie proof that the goods had indeed been delivered to the carrier in good condition.
We quote from the ruling as follows:

Where the plaintiff introduces evidence which shows prima facie that the goods were
delivered to the carrier in good condition [i.e., the shipping receipts], and that the carrier
delivered the goods in a damaged condition, a presumption is raised that the damage
occurred through the fault or negligence of the carrier, and this casts upon the carrier
the burden of showing that the goods were not in good condition when delivered to the
carrier, or that the damage was occasioned by some cause excepting the carrier from
absolute liability. This the [petitioner] failed to discharge. x x x.[6]

Found devoid of merit was petitioners claim that respondents had no personality to
sue. This argument was supposedly not raised in the Answer or during trial.
Hence, this Petition.[7]

The Issues

In its Memorandum, petitioner raises the following issues for our consideration:
I.

Are the decision and resolution of the Honorable Court of Appeals proper subject for
review by the Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?

II.

Is the conclusion of the Honorable Court of Appeals petitioners claim that respondents
have no personality to sue because the payment was made by the respondents to
Smithkline when the insured under the policy is Burlington Air Express is devoid of merit
correct or not?

III.
Is the conclusion of the Honorable Court of Appeals that the goods were received in
good condition, correct or not?

IV.

Are Exhibits F and G hearsay evidence, and therefore, not admissible?

V.

Is the Honorable Court of Appeals correct in ignoring and disregarding respondents own
admission that petitioner is not liable? and

VI.

Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention? [8]

Simply stated, the issues are as follows: (1) Is the Petition proper for review by the
Supreme Court? (2) Is Federal Express liable for damage to or loss of the insured
goods?

This Courts Ruling

The Petition has merit.

Preliminary Issue:
Propriety of Review

The correctness of legal conclusions drawn by the Court of Appeals from


undisputed facts is a question of law cognizable by the Supreme Court. [9]
In the present case, the facts are undisputed. As will be shown shortly, petitioner is
questioning the conclusions drawn from such facts. Hence, this case is a proper subject
for review by this Court.

Main Issue:
Liability for Damages

Petitioner contends that respondents have no personality to sue -- thus, no cause of


action against it -- because the payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance[10] (Certificate) that both
opposing parties cite in support of their respective positions. They differ only in their
interpretation of what their rights are under its terms. The determination of those rights
involves a question of law, not a question of fact. As distinguished from a question of
law which exists when the doubt or difference arises as to what the law is on a certain
state of facts -- there is a question of fact when the doubt or difference arises as to the
truth or the falsehood of alleged facts; or when the query necessarily invites calibration
of the whole evidence considering mainly the credibility of witnesses, existence and
relevancy of specific surrounding circumstance, their relation to each other and to the
whole and the probabilities of the situation.[11]

Proper Payee

The Certificate specifies that loss of or damage to the insured cargo is payable to
order x x x upon surrender of this Certificate. Such wording conveys the right of
collecting on any such damage or loss, as fully as if the property were covered by a
special policy in the name of the holder itself. At the back of the Certificate appears the
signature of the representative of Burlington. This document has thus been duly
indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of
collecting or of being indemnified for loss of or damage to the insured shipment, as fully
as if the property were covered by a special policy in the name of the holder. Hence,
being the holder of the Certificate and having an insurable interest in the goods,
Smithkline was the proper payee of the insurance proceeds.

Subrogation

Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a


subrogation Receipt[12] in favor of respondents. The latter were thus authorized to file
claims and begin suit against any such carrier, vessel, person, corporation or
government. Undeniably, the consignee had a legal right to receive the goods in the
same condition it was delivered for transport to petitioner. If that right was violated, the
consignee would have a cause of action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the
insured goods, the insurers entitlement to subrogation pro tanto -- being of the highest
equity -- equips it with a cause of action in case of a contractual breach or
negligence.[13] Further, the insurers subrogatory right to sue for recovery under the bill of
lading in case of loss of or damage to the cargo is jurisprudentially upheld. [14]
In the exercise of its subrogatory right, an insurer may proceed against an erring
carrier. To all intents and purposes, it stands in the place and in substitution of the
consignee. A fortiori, both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading.[15]
Prescription of Claim

From the initial proceedings in the trial court up to the present, petitioner has
tirelessly pointed out that respondents claim and right of action are already barred. The
latter, and even the consignee, never filed with the carrier any written notice or
complaint regarding its claim for damage of or loss to the subject cargo within the period
required by the Warsaw Convention and/or in the airway bill. Indeed, this fact has never
been denied by respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:

6. No action shall be maintained in the case of damage to or partial loss of the shipment
unless a written notice, sufficiently describing the goods concerned, the approximate
date of the damage or loss, and the details of the claim, is presented by shipper or
consignee to an office of Burlington within (14) days from the date the goods are placed
at the disposal of the person entitled to delivery, or in the case of total loss (including
non-delivery) unless presented within (120) days from the date of issue of the [Airway
Bill].[16]

Relevantly, petitioners airway bill states:

12./12.1 The person entitled to delivery must make a complaint to the carrier in writing
in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the
damage and at the latest within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date of
receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at
his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days
from the date of the issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air
waybill was used, or to the first carrier or to the last carrier or to the carrier who
performed the transportation during which the loss, damage or delay took place.[17]

Article 26 of the Warsaw Convention, on the other hand, provides:

ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without
complaint shall be prima facie evidence that the same have been delivered in good
condition and in accordance with the document of transportation.

(2) In case of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within 3 days from the
date of receipt in the case of baggage and 7 days from the date of receipt in the case of
goods. In case of delay the complaint must be made at the latest within 14 days from
the date on which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or by
separate notice in writing dispatched within the times aforesaid.

(4) Failing complaint within the times aforesaid, no action shall lie against the carrier,
save in the case of fraud on his part.[18]

Condition Precedent

In this jurisdiction, the filing of a claim with the carrier within the time limitation
therefor actually constitutes a condition precedent to the accrual of a right of action
against a carrier for loss of or damage to the goods.[19] The shipper or consignee must
allege and prove the fulfillment of the condition. If it fails to do so, no right of action
against the carrier can accrue in favor of the former. The aforementioned requirement is
a reasonable condition precedent; it does not constitute a limitation of action. [20]
The requirement of giving notice of loss of or injury to the goods is not an empty
formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier
that the cargo has been damaged, and that it is being charged with liability therefor; and
(2) to give it an opportunity to examine the nature and extent of the injury. This protects
the carrier by affording it an opportunity to make an investigation of a claim while the
matter is fresh and easily investigated so as to safeguard itself from false and fraudulent
claims.[21]
When an airway bill -- or any contract of carriage for that matter -- has a stipulation
that requires a notice of claim for loss of or damage to goods shipped and the
stipulation is not complied with, its enforcement can be prevented and the liability
cannot be imposed on the carrier. To stress, notice is a condition precedent, and the
carrier is not liable if notice is not given in accordance with the stipulation.[22] Failure to comply
with such a stipulation bars recovery for the loss or damage suffered.[23]
Being a condition precedent, the notice must precede a suit for enforcement. [24] In
the present case, there is neither an allegation nor a showing of respondents
compliance with this requirement within the prescribed period. While respondents may
have had a cause of action then, they cannot now enforce it for their failure to comply
with the aforesaid condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other issues
raised by petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. -- petitioners
co-defendant in respondents Complaint below -- has been adjudged by the trial court as
liable for, inter alia, actual damages in the amount of the peso equivalent of US
$39,339.[25] This judgment was affirmed by the Court of Appeals and is already final and
executory.[26]
WHEREFORE, the Petition is GRANTED, and the assailed
Decision REVERSED insofar as it pertains to Petitioner Federal Express Corporation.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Baguio City

SECOND DIVISION

ETERNAL GARDENS MEMORIAL G.R. No. 166245


PARK CORPORATION,
Petitioner,
Present:
CARPIO MORALES,
- versus - Acting Chairperson,
TINGA,
VELASCO, JR.,
CHICO-NAZARIO,* and
BRION, JJ.
THE PHILIPPINE AMERICAN Promulgated:
LIFE INSURANCE COMPANY,
Respondent. April 9, 2008
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse
and set aside the November 26, 2004 Decision [1] of the Court of Appeals (CA) in CA-
G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company


(Philamlife) entered into an agreement denominated as Creditor Group Life Policy No.
P-1920[2] with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under
the policy, the clients of Eternal who purchased burial lots from it on installment basis
would be insured by Philamlife. The amount of insurance coverage depended upon the
existing balance of the purchased burial lots. The policy was to be effective for a period
of one year, renewable on a yearly basis.

The relevant provisions of the policy are:

ELIGIBILITY.

Any Lot Purchaser of the Assured who is at least 18 but not more than 65
years of age, is indebted to the Assured for the unpaid balance of his loan
with the Assured, and is accepted for Life Insurance coverage by the
Company on its effective date is eligible for insurance under the Policy.

EVIDENCE OF INSURABILITY.

No medical examination shall be required for amounts of insurance up to


P50,000.00. However, a declaration of good health shall be required for all
Lot Purchasers as part of the application. The Company reserves the right
to require further evidence of insurability satisfactory to the Company in
respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.

LIFE INSURANCE BENEFIT.

The Life Insurance coverage of any Lot Purchaser at any time shall be the
amount of the unpaid balance of his loan (including arrears up to but not
exceeding 2 months) as reported by the Assured to the Company or the
sum of P100,000.00, whichever is smaller. Such benefit shall be paid to
the Assured if the Lot Purchaser dies while insured under the Policy.

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date
he contracts a loan with the Assured. However, there shall be no
insurance if the application of the Lot Purchaser is not approved by the
Company.[3]

Eternal was required under the policy to submit to Philamlife a list of all new lot
purchasers, together with a copy of the application of each purchaser, and the amounts
of the respective unpaid balances of all insured lot purchasers. In relation to the instant
petition, Eternal complied by submitting a letter dated December 29, 1982,[4] containing
a list of insurable balances of its lot buyers for October 1982. One of those included in
the list as new business was a certain John Chuang. His balance of payments was PhP
100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 1984[5] to Philamlife, which served as an
insurance claim for Chuangs death. Attached to the claim were the following
documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating that
Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of
Attending Physician; and (5) Assureds Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984, [6] requiring
Eternal to submit the following documents relative to its insurance claim for Chuangs
death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate (with
form attached); (3) Application for Insurance accomplished and signed by the insured,
Chuang, while still living; and (4) Statement of Account showing the unpaid balance of
Chuang before his death.

Eternal transmitted the required documents through a letter dated November 14,
1984,[7]which was received by Philamlife on November 15, 1984.

After more than a year, Philamlife had not furnished Eternal with any reply to the
latters insurance claim. This prompted Eternal to demand from Philamlife the payment
of the claim for PhP 100,000 on April 25, 1986.[8]

In response to Eternals demand, Philamlife denied Eternals insurance claim in a


letter dated May 20, 1986,[9] a portion of which reads:

The deceased was 59 years old when he entered into Contract #9558 and
9529 with Eternal Gardens Memorial Park in October 1982 for the total
maximum insurable amount of P100,000.00 each. No application for
Group Insurance was submitted in our office prior to his death on August
2, 1984.

In accordance with our Creditors Group Life Policy No. P-1920, under
Evidence of Insurability provision, a declaration of good health shall be
required for all Lot Purchasers as party of the application. We cite further
the provision on Effective Date of Coverage under the policy which states
that there shall be no insurance if the application is not approved by the
Company. Since no application had been submitted by the
Insured/Assured, prior to his death, for our approval but was submitted
instead on November 15, 1984, after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to point out
that Eternal Gardens being the Assured was a party to the Contract and
was therefore aware of these pertinent provisions.

With regard to our acceptance of premiums, these do not connote our


approval per se of the insurance coverage but are held by us in trust for
the payor until the prerequisites for insurance coverage shall have been
met. We will however, return all the premiums which have been paid in
behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for
a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial court
decided in favor of Eternal, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in


favor of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the
Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until
fully paid; and, to pay the sum of P10,000.00 as attorneys fees.

SO ORDERED.

The RTC found that Eternal submitted Chuangs application for insurance which
he accomplished before his death, as testified to by Eternals witness and evidenced by
the letter dated December 29, 1982, stating, among others: Encl: Phil-Am Life
Insurance Application Forms & Cert.[10] It further ruled that due to Philamlifes inaction
from the submission of the requirements of the group insurance on December 29,
1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the
premiums during the same period, Philamlife was deemed to have approved Chuangs
application. The RTC said that since the contract is a group life insurance, once proof of
death is submitted, payment must follow.

Philamlife appealed to the CA, which ruled, thus:

WHEREFORE, the decision of the Regional Trial Court of Makati in


Civil Case No. 57810 is REVERSED and SET ASIDE, and the complaint
is DISMISSED. No costs.

SO ORDERED.[11]

The CA based its Decision on the factual finding that Chuangs application was not
enclosed in Eternals letter dated December 29, 1982. It further ruled that the non-
accomplishment of the submitted application form violated Section 26 of the Insurance
Code. Thus, the CA concluded, there being no application form, Chuang was not
covered by Philamlifes insurance.

Hence, we have this petition with the following grounds:

The Honorable Court of Appeals has decided a question of substance,


not therefore determined by this Honorable Court, or has decided it in a
way not in accord with law or with the applicable jurisprudence, in holding
that:
I. The application for insurance was not duly submitted to
respondent PhilamLife before the death of John Chuang;

II. There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional Trial
Court dated May 29, 1996.

The Courts Ruling

As a general rule, this Court is not a trier of facts and will not re-examine factual
issues raised before the CA and first level courts, considering their findings of facts are
conclusive and binding on this Court. However, such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:

(1) when the findings are grounded entirely on speculation, surmises or


conjectures; (2) when the inference made is manifestly mistaken, absurd
or impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its findings the [CA] went beyond
the issues of the case, or its findings are contrary to the admissions of
both the appellant and the appellee; (7) when the findings [of the CA]
are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the
facts set forth in the petition as well as in the petitioners main and reply
briefs are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and contradicted by
the evidence on record; and (11) when the Court of Appeals manifestly
overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion. [12] (Emphasis
supplied.)

In the instant case, the factual findings of the RTC were reversed by the CA; thus, this
Court may review them.

Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before his
death. In Eternals letter dated December 29, 1982, a list of insurable interests of buyers
for October 1982 was attached, including Chuang in the list of new businesses. Eternal
added it was noted at the bottom of said letter that the corresponding Phil-Am Life
Insurance Application Forms & Cert. were enclosed in the letter that was apparently
received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a
copy of the insurance application which was signed by Chuang himself and executed
before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife received
a copy of Chuangs insurance application.

The evidence on record supports Eternals position.

The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped
as received, states that the insurance forms for the attached list of burial lot buyers were
attached to the letter. Such stamp of receipt has the effect of acknowledging receipt of
the letter together with the attachments. Such receipt is an admission by Philamlife
against its own interest.[13] The burden of evidence has shifted to Philamlife, which must
prove that the letter did not contain Chuangs insurance application. However, Philamlife
failed to do so; thus, Philamlife is deemed to have received Chuangs insurance
application.

To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal
letter is stamped as received, the contents of the letter are correct and accounted for.

Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the
reliability and credibility of the witnesses, because it has the opportunity to observe
firsthand the witnesses demeanor, conduct, and attitude. Findings of the trial court on
such matters are binding and conclusive on the appellate court, unless some facts or
circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,[14] that, if considered, might affect the result of the case.[15]

An examination of the testimonies of the witnesses mentioned by Philamlife, however,


reveals no overlooked facts of substance and value.

Philamlife primarily claims that Eternal did not even know where the original insurance
application of Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:

Q Where is the original of the application form which is required in case of


new coverage?

[Mendoza:]

A It is [a] standard operating procedure for the new client to fill up two
copies of this form and the original of this is submitted to Philamlife
together with the monthly remittances and the second copy is remained or
retained with the marketing department of Eternal Gardens.

Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is
merely asking for the location and does not [ask] for the number of copy.

Atty. Arevalo:

Q Where is the original?

[Mendoza:]

A As far as I remember I do not know where the original but when I


submitted with that payment together with the new clients all the originals I
see to it before I sign the transmittal letter the originals are attached
therein.[16]

In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as an
attachment to a transmittal letter.

As to the seeming inconsistencies between the testimony of Manuel Cortez on


whether one or two insurance application forms were accomplished and the testimony
of Mendoza on who actually filled out the application form, these are minor
inconsistencies that do not affect the credibility of the witnesses. Thus, we ruled
in People v. Paredesthat minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed.[17]

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential


integrity of the prosecutions evidence as a whole or reflect on the
witnesses honesty. The test is whether the testimonies agree on essential
facts and whether the respective versions corroborate and substantially
coincide with each other so as to make a consistent and coherent
whole.[18]
In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by
Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are minor
and do not affect the credibility of Eternals witnesses.

However, the question arises as to whether Philamlife assumed the risk of loss
without approving the application.

This question must be answered in the affirmative.


As earlier stated, Philamlife and Eternal entered into an agreement denominated
as Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is
provided that:

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on


the date he contracts a loan with the Assured. However, there shall be no
insurance if the application of the Lot Purchaser is not approved by the
Company.

An examination of the above provision would show ambiguity between its two
sentences. The first sentence appears to state that the insurance coverage of the
clients of Eternal already became effective upon contracting a loan with Eternal while
the second sentence appears to require Philamlife to approve the insurance contract
before the same can become effective.

It must be remembered that an insurance contract is a contract of adhesion


which must be construed liberally in favor of the insured and strictly against the insurer
in order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held 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.[19] (Emphasis supplied.)

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals,
we reiterated the above ruling, stating that:

When the terms of insurance contract contain limitations on liability,


courts should construe them in such a way as to preclude the insurer from
non-compliance with his obligation. Being a contract of adhesion, the
terms of an insurance contract are to be construed strictly against the
party which prepared the contract, the insurer. By reason of the exclusive
control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the
insurer and liberally in favor of the insured, especially to avoid forfeiture. [20]
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920
dated December 10, 1980, must be construed in favor of the insured and in favor of the
effectivity of the insurance contract.

On the other hand, the seemingly conflicting provisions must be harmonized to


mean that upon a partys purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser is created and the same is effective, valid,
and binding until terminated by Philamlife by disapproving the insurance application.
The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date of
Benefit is in the nature of a resolutory condition which would lead to the cessation of the
insurance contract. Moreover, the mere inaction of the insurer on the insurance
application must not work to prejudice the insured; it cannot be interpreted as a
termination of the insurance contract. The termination of the insurance contract by the
insurer must be explicit and unambiguous.

As a final note, to characterize the insurer and the insured as contracting parties
on equal footing is inaccurate at best. Insurance contracts are wholly prepared by the
insurer with vast amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to be
delineated. Hence, in order to protect the interest of insurance applicants, insurance
companies must be obligated to act with haste upon insurance applications, to either
deny or approve the same, or otherwise be bound to honor the application as a valid,
binding, and effective insurance contract.[21]

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-
G.R. CV No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the
Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP
100,000 from the time of extra-judicial demand by Eternal until Philamlifes receipt of the
May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP
100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

No costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma.


Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Jose A. Espiritu for appellant.


Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late
Joaquin Ma. Herrer to recover from the defendant life insurance company the sum of
pesos 6,000 paid by the deceased for a life annuity. The trial court gave judgment for
the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made
application to the Sun Life Assurance Company of Canada through its office in Manila
for a life annuity. Two days later he paid the sum of P6,000 to the manager of the
company's Manila office and was given a receipt reading as follows:

MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela
Renta Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y
aprobacion de la Oficina Central de la Compañia.

The application was immediately forwarded to the head office of the company at
Montreal, Canada. On November 26, 1917, the head office gave notice of acceptance
by cable to Manila. (Whether on the same day the cable was received notice was sent
by the Manila office of Herrer that the application had been accepted, is a disputed
point, which will be discussed later.) On December 4, 1917, the policy was issued at
Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office
of the company stating that Herrer desired to withdraw his application. The following day
the local office replied to Mr. Torres, stating that the policy had been issued, and called
attention to the notification of November 26, 1917. This letter was received by Mr.
Torres on the morning of December 21, 1917. Mr. Herrer died on December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received
notice of acceptance of his application. To resolve this question, we propose to go
directly to the evidence of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at
the time of the trial testified that he prepared the letter introduced in evidence as Exhibit
3, of date November 26, 1917, and handed it to the local manager, Mr. E. E. White, for
signature. The witness admitted on cross-examination that after preparing the letter and
giving it to he manager, he new nothing of what became of it. The local manager, Mr.
White, testified to having received the cablegram accepting the application of Mr. Herrer
from the home office on November 26, 1917. He said that on the same day he signed a
letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after
being signed, were sent to the chief clerk and placed on the mailing desk for
transmission. The witness could not tell if the letter had every actually been placed in
the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917, was not called
as a witness. For the defense, attorney Manuel Torres testified to having prepared the
will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application
for a life annuity, and that he said that the only document relating to the transaction in
his possession was the provisional receipt. Rafael Enriquez, the administrator of the
estate, testified that he had gone through the effects of the deceased and had found no
letter of notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26,
1917, notifying Mr. Herrer that his application had been accepted, was prepared and
signed in the local office of the insurance company, was placed in the ordinary channels
for transmission, but as far as we know, was never actually mailed and thus was never
received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law
which should be applied to the facts. In order to reach our legal goal, the obvious
signposts along the way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were
found in the Code of Commerce and the Civil Code. In the Code of the Commerce,
there formerly existed Title VIII of Book III and Section III of Title III of Book III, which
dealt with insurance contracts. In the Civil Code there formerly existed and presumably
still exist, Chapters II and IV, entitled insurance contracts and life annuities,
respectively, of Title XII of Book IV. On the after July 1, 1915, there was, however, in
force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health
insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of
Book III of the code of Commerce. The law of insurance is consequently now found in
the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the
methods to be followed in order that there may be a contract of insurance. On the other
hand, the Civil Code, in article 1802, not only describes a contact of life annuity
markedly similar to the one we are considering, but in two other articles, gives strong
clues as to the proper disposition of the case. For instance, article 16 of the Civil Code
provides that "In matters which are governed by special laws, any deficiency of the latter
shall be supplied by the provisions of this Code." On the supposition, therefore, which is
incontestable, that the special law on the subject of insurance is deficient in enunciating
the principles governing acceptance, the subject-matter of the Civil code, if there be
any, would be controlling. In the Civil Code is found article 1262 providing that "Consent
is shown by the concurrence of offer and acceptance with respect to the thing and the
consideration which are to constitute the contract. An acceptance made by letter shall
not bind the person making the offer except from the time it came to his knowledge. The
contract, in such case, is presumed to have been entered into at the place where the
offer was made." This latter article is in opposition to the provisions of article 54 of the
Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a
conclusion, then the only duty remaining is for the court to apply the law as it is found.
The legislature in its wisdom having enacted a new law on insurance, and expressly
repealed the provisions in the Code of Commerce on the same subject, and having thus
left a void in the commercial law, it would seem logical to make use of the only pertinent
provision of law found in the Civil code, closely related to the chapter concerning life
annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the
offer only from the date it came to his knowledge, may not be the best expression of
modern commercial usage. Still it must be admitted that its enforcement avoids
uncertainty and tends to security. Not only this, but in order that the principle may not be
taken too lightly, let it be noticed that it is identical with the principles announced by a
considerable number of respectable courts in the United States. The courts who take
this view have expressly held that an acceptance of an offer of insurance not actually or
constructively communicated to the proposer does not make a contract. Only the
mailing of acceptance, it has been said, completes the contract of insurance, as
the locus poenitentiae is ended when the acceptance has passed beyond the control of
the party. (I Joyce, The Law of Insurance, pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph
of article 1262 of the Civil Code providing that an acceptance made by letter shall not
bind the person making the offer except from the time it came to his knowledge. The
pertinent fact is, that according to the provisional receipt, three things had to be
accomplished by the insurance company before there was a contract: (1) There had to
be a medical examination of the applicant; (2) there had to be approval of the
application by the head office of the company; and (3) this approval had in some way to
be communicated by the company to the applicant. The further admitted facts are that
the head office in Montreal did accept the application, did cable the Manila office to that
effect, did actually issue the policy and did, through its agent in Manila, actually write the
letter of notification and place it in the usual channels for transmission to the addressee.
The fact as to the letter of notification thus fails to concur with the essential elements of
the general rule pertaining to the mailing and delivery of mail matter as announced by
the American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have been transmitted to him in the
ordinary course of the mails. But if any one of these elemental facts fails to appear, it is
fatal to the presumption. For instance, a letter will not be presumed to have been
received by the addressee unless it is shown that it was deposited in the post-office,
properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et
seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because
it has not been proved satisfactorily that the acceptance of the application ever came to
the knowledge of the applicant.lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the
sum of P6,000 with legal interest from November 20, 1918, until paid, without special
finding as to costs in either instance. So ordered.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,


vs.
HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, petitioner,


vs.
HON. COURT OF APPEALS and NGO HING, respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner
Company.
Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court
dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases
seek similar relief, through these petitions for certiorari by way of appeal, from the
amended decision of respondent Court of Appeals which affirmed in toto the decision of
the Court of First Instance of Cebu, ordering "the defendants (herein petitioners Great
Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay plaintiff
(herein private respondent Ngo Hing) the amount of P50,000.00 with interest at 6% from
the date of the filing of the complaint, and the sum of P1,077.75, without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application with
the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life) for a
twenty-year endownment policy in the amount of P50,000.00 on the life of his one-year
old daughter Helen Go. Said respondent supplied the essential data which petitioner
Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the
corresponding form in his own handwriting (Exhibit I-M). Mondragon finally type-wrote
the data on the application form which was signed by private respondent Ngo Hing. The
latter paid the annual premuim the sum of P1,077.75 going over to the Company, but he
reatined the amount of P1,317.00 as his commission for being a duly authorized agebt
of Pacific Life. Upon the payment of the insurance premuim, the binding deposit receipt
(Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner Mondragon
handwrote at the bottom of the back page of the application form his strong
recommendation for the approval of the insurance application. Then on April 30, 1957,
Mondragon received a letter from Pacific Life disapproving the insurance application
(Exhibit 3-M). The letter stated that the said life insurance application for 20-year
endowment plan is not available for minors below seven years old, but Pacific Life can
consider the same under the Juvenile Triple Action Plan, and advised that if the offer is
acceptable, the Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children, pointing out that since
1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4-
M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza
with complication of bronchopneumonia. Thereupon, private respondent sought the
payment of the proceeds of the insurance, but having failed in his effort, he filed the
action for the recovery of the same before the Court of First Instance of Cebu, which
rendered the adverse decision as earlier refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit
E) constituted a temporary contract of the life insurance in question; and (2) whether
private respondent Ngo Hing concealed the state of health and physical condition of
Helen Go, which rendered void the aforesaid Exhibit E.

1. At the back of Exhibit E are condition precedents required before a deposit is


considered a BINDING RECEIPT. These conditions state that:

A. If the Company or its agent, shan have received the premium deposit ...
and the insurance application, ON or PRIOR to the date of medical
examination ... said insurance shan be in force and in effect from the date
of such medical examination, for such period as is covered by the deposit
..., PROVIDED the company shall be satisfied that on said date the
applicant was insurable on standard rates under its rule for the amount of
insurance and the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the
amount of insurance and/or the kind of policy requested in the
application but issue, or offers to issue a policy for a different plan and/or
amount ..., the insurance shall not be in force and in effect until the
applicant shall have accepted the policy as issued or offered by the
Company and shall have paid the full premium thereof. If the applicant
does not accept the policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above,
and the Company declines to approve the application the insurance
applied for shall not have been in force at any time and the sum paid be
returned to the applicant upon the surrender of this receipt. (Emphasis
Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is
intended to be merely a provisional or temporary insurance contract and only upon
compliance of the following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company does not accept the
application and offers to issue a policy for a different plan, the insurance contract shall
not be binding until the applicant accepts the policy offered; otherwise, the deposit shall
be reftmded; and (3) that if the applicant is not ble according to the standard rates, and
the company disapproves the application, the insurance applied for shall not be in force
at any time, and the premium paid shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had accepted
the application subject for processing by the insurance company; and that the latter will
either approve or reject the same on the basis of whether or not the applicant is
"insurable on standard rates." Since petitioner Pacific Life disapproved the insurance
application of respondent Ngo Hing, the binding deposit receipt in question had never
become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement is
made between the applicant and the agent, no liability shall attach until the principal
approves the risk and a receipt is given by the agent. The acceptance is merely
conditional and is subordinated to the act of the company in approving or rejecting the
application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure
by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing
over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the
latter's one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have been no
insurance contract duly perfected between thenl Accordingly, the deposit paid by private
respondent shall have to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person or
by their agents ... The contract, to be binding from the date of the application, must have
been a completed contract, one that leaves nothing to be dione, nothing to be
completed, nothing to be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in agreement."

We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would not
have any adverse effect on the allegedly perfected temporary contract (Respondent's
Brief, pp. 13-14). In this first place, there was no contract perfected between the parties
who had no meeting of their minds. Private respondet, being an authorized insurance
agent of Pacific Life at Cebu branch office, is indubitably aware that said company does
not offer the life insurance applied for. When he filed the insurance application in
dispute, private respondent was, therefore, only taking the chance that Pacific Life will
approve the recommendation of Mondragon for the acceptance and approval of the
application in question along with his proposal that the insurance company starts to
offer the 20-year endowment insurance plan for children less than seven years.
Nonetheless, the record discloses that Pacific Life had rejected the proposal and
recommendation. Secondly, having an insurable interest on the life of his one-year old
daughter, aside from being an insurance agent and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must have known and followed the progress
on the processing of such application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of then
Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from his
dissenting opinion to the amended decision of the respondent court which completely
reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of


rejection (Exhibit 3-M) nor the reply thereto of appellant Mondragon
reiterating the desire for applicant's father to have the application
considered as one for a 20-year endowment plan was ever duly
communicated to Ngo; Hing, father of the minor applicant. I am not quite
conninced that this was so. Ngo Hing, as father of the applicant herself,
was precisely the "underwriter who wrote this case" (Exhibit H-1). The
unchallenged statement of appellant Mondragon in his letter of May 6,
1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our
associate" and that it was the latter who "insisted that the plan be placed
on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was
not brought home to his knowledge. He must have been duly apprised of
the rejection of the application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing himself who
insisted on the application as originally filed, thereby implictly declining the
offer to consider the application under the Juvenile Triple Action Plan.
Besides, the associate of Mondragon that he was, Ngo Hing should only
be presumed to know what kind of policies are available in the company
for minors below 7 years old. What he and Mondragon were apparently
trying to do in the premises was merely to prod the company into going
into the business of issuing endowment policies for minors just as other
insurance companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have been
bound at all under the binding slip for a plan of insurance that it could not
have, by then issued at all. (Amended Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief
that private respondent had deliberately concealed the state of health and piysical
condition of his daughter Helen Go. Wher private regpondeit supplied the required
essential data for the insurance application form, he was fully aware that his one-year
old daughter is typically a mongoloid child. Such a congenital physical defect could
never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad
faith, withheld the fact materal to the risk to be assumed by the insurance compary. As
an insurance agent of Pacific Life, he ought to know, as he surely must have known. his
duty and responsibility to such a material fact. Had he diamond said significant fact in
the insurance application fom Pacific Life would have verified the same and would have
had no choice but to disapprove the application outright.

The contract of insurance is one of perfect good faith uberrima fides meaning good
faith, absolute and perfect candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not for
the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de
Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a partY
knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or
unintentional the concealment entitles the insurer to rescind the contract of insurance
(Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs.
Philippine American Life Insurance Company, 7 SCRA 316). Private respondent
appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the
parties with the noncompliance of the conditions provided in the binding receipt, and
concealment, as legally defined, having been comraitted by herein private respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one
is hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life
Assurance Company from their civil liabilities as found by respondent Court and
ordering the aforesaid insurance company to reimburse the amount of P1,077.75,
without interest, to private respondent, Ngo Hing. Costs against private respondent.

SO ORDERED.
SECOND DIVISION

[G.R. Nos. 128833. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D.


LAO, petitioners, vs. COURT OF APPEALS and GOYU & SONS,
INC.,respondents.

[G.R. No. 128834. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF


APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY
GO, respondents.

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.

D EC I S I O N
MELO, J.:

The issues relevant to the herein three consolidated petitions revolve around the fire
loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance
Company, Inc. (MICO) in connection with the mortgage contracts entered into by and
between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commencing July 27, 1992. RCBC was
ordered to pay actual and compensatory damages in the amount of
P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU
P1,500,000.00 as exemplary damages and P1,500,000.00 for attorneys fees. GOYUs
obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest,
surcharges, and penalties. RCBC and MICO appealed separately but, in view of the
common facts and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo
Branch. After due evaluation, RCBC Binondo Branch, through its key officers,
petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs application for approval
by RCBCs executive committee. A credit facility in the amount of P30 million was
initially granted. Upon GOYUs application and Uys and Laos recommendation, RCBCs
executive committee increased GOYUs credit facility to P50 million, then to P90 million,
and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC, which were registered with the
Registry of Deeds at Valenzuela, Metro Manila. Under each of these four mortgage
contracts, GOYU committed itself to insure the mortgaged property with an insurance
company approved by RCBC, and subsequently, to endorse and deliver the insurance
policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February
1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the
Malayan insurance policies, issued nine endorsements in favor of RCBC seemingly
upon instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by
fire. Consequently, GOYU submitted its claim for indemnity on account of the loss
insured against. MICO denied the claim on the ground that the insurance policies were
either attached pursuant to writs of attachments/garnishments issued by various courts
or that the insurance proceeds were also claimed by other creditors of GOYU alleging
better rights to the proceeds than the insured. GOYU filed a complaint for specific
performance and damages which was docketed at the Regional Trial Court of the
National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now
subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the same
reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the
Regional Trial Court of Manila (Branch 3), confirmed that GOYUs other creditors,
namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the ten insurance policies be
deposited with the said court minus the aforementioned P14,938,080.23. Accordingly,
on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of
the Manila RTC.
In the meantime, another notice of garnishment was handed down by another
Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,
disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking
Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58
less the amount of P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by way of interest for the duration of the delay
since July 27, 1992 (ninety days after defendant insurers receipt of the
required proof of loss and notice of loss) at the rate of twice the ceiling
prescribed by the Monetary Board, on the following amounts:

1) P50,000,000.00 from July 27, 1992 up to the time said amount was
deposited with this Court on January 7, 1994;

2) P24,040,518.58 from July 27, 1992 up to the time when the writs of
attachments were received by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of


P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its
loan obligations with defendant RCBC in the amount of P68,785,069.04, as of
April 27, 1992, with interest thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties) per computation, pp. 14-A,
14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to
release immediately to the plaintiff the amount of P50,000,000.00 deposited with the
Court by defendant Malayan, together with all the interests earned thereon.

(Record, pp. 478-479.)


From this judgment, all parties interposed their respective appeals. GOYU was
unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed the trial
courts findings of liability on their part. The Court of Appeals partly granted GOYUs
appeal, but sustained the findings of the trial court with respect to MICO and RCBCs
liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified
as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the
amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and
damages by way of interest commencing July 27, 1992 until the time Goyu receives the
said amount at the rate of thirty-seven (37%) percent per annum which is twice the
ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of


P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL


BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan
obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any
interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to
immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No.
3649285) deposited with it by Malayan Insurance Co., Inc., together with all the
interests thereon.

(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively,
seeking review and consequent reversal of the above dispositions of the Court of
Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-
48376, which case, by virtue of the Court of Appeals resolution dated August 7, 1996,
was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At
issue in said petition is RCBCs right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies
were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in
relation to the pertinent and applicable laws, we find merit in the submissions of RCBC
and MICO.
The several causes of action pursued below by GOYU gave rise to several related
issues which are now submitted in the petitions before us. This Court, however,
discerns one primary and central issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in
case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to
GOYU, the latter executed several mortgage contracts in favor of RCBC. It was
expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged
property with any of the insurance companies acceptable to RCBC. GOYU indeed
insured the mortgaged property with MICO, an insurance company acceptable to
RCBC. Based on their stipulations in the mortgage contracts, GOYU was supposed to
endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester
Insurance Agency, Inc., MICOs underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see Exh. 1-Malayan to 9-Malayan;
also Exh. 51-RCBC to 59-RCBC), copies of which were delivered to GOYU, RCBC, and
MICO. However, because these endorsements do not bear the signature of any officer
of GOYU, the trial court, as well as the Court of Appeals, concluded that the
endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the
same property for his own sole benefit. There is no question that GOYU could insure
the mortgaged property for its own exclusive benefit. In the present case, although it
appears that GOYU obtained the subject insurance policies naming itself as the sole
payee, the intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in
favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of
endorsing any specific insurance policy in favor of any particular beneficiary or payee
other than the insured had not such named payee or beneficiary been specifically
disclosed by the insured itself. It is also significant that GOYU voluntarily and purposely
took the insurance policies from MICO, a sister company of RCBC, and not just from
any other insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been voluntarily
disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have known
of GOYUs intention of obtaining insurance coverage in compliance with its undertaking
in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed
the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is
constrained to rule in favor of mortgagor RCBC. The basis and purpose of the doctrine
was explained in Philippine National Bank vs. Court of Appeals (94 SCRA 357 [1979]),
to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good
faith and justice, and its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to whom they were directed and
who reasonably relied thereon. The doctrine of estoppel springs from equitable
principles and the equities in the case. It is designed to aid the law in the administration
of justice where without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a
certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine
endorsement documents for GOYUs nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement documents were sent to GOYU, and
the others were sent to RCBC and MICO, while the fourth copies were retained for
Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received from
Alchester the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was
only pursuant to the stipulation in the mortgage contracts. We find such reliance to be
justified under the circumstances of the case. GOYU failed to seasonably repudiate the
authority of the person or persons who prepared such endorsements. Over and above
this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities
extended to it by RCBC. After the occurrence of the loss insured against, it was too late
for GOYU to disown the endorsements for any imagined or contrived lack of authority of
Alchester to prepare and issue said endorsements. If there had not been actually an
implied ratification of said endorsements by virtue of GOYUs inaction in this case,
GOYU is at the very least estopped from assailing their operative effects. To permit
GOYU to capitalize on its non-confirmation of these endorsements while it continued to
enjoy the benefits of the credit facilities of RCBC which believed in good faith that there
was due endorsement pursuant to their mortgage contracts, is to countenance grave
contravention of public policy, fair dealing, good faith, and justice. Such an unjust
situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this
case, the Court is bound to recognize RCBCs right to the proceeds of the insurance
policies if not for the actual endorsement of the policies, at least on the basis of the
equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides
that the proceeds of insurance shall exclusively apply to the interest of the person in
whose name or for whose benefit it is made. The peculiarity of the circumstances
obtaining in the instant case presents a justification to take exception to the strict
application of said provision, it having been sufficiently established that it was the
intention of the parties to designate RCBC as the party for whose benefit the insurance
policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage
contracts entered into between RCBC and GOYU in consideration of and for securing
GOYUs credit facilities from RCBC. The mortgage contracts contained common
provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property
properly covered against any loss by an insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property


from MICO, no less than a sister company of RCBC and definitely an acceptable
insurance company to RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance


Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not
assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit
facilities extended by RCBC which was conditioned upon the endorsement of the
insurance policies to be taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the absence of
its written conformity thereto, obviously considered said endorsement to be sufficient
compliance with its obligation under the mortgage contracts since RCBC accordingly
continued to extend the benefits of its credit facilities and GOYU continued to benefit
therefrom. Just as plain too is the intention of the parties to constitute RCBC as the
beneficiary of the various insurance policies obtained by GOYU.The intention of the
parties will have to be given full force and effect in this particular case. The insurance
proceeds may, therefore, be exclusively applied to RCBC, which under the factual
circumstances of the case, is truly the person or entity for whose benefit the policies
were clearly intended.
Moreover, the laws evident intention to protect the interests of the mortgagee upon
the mortgaged property is expressed in Article 2127 of the Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate
remains in the possession of the mortgagor, or it passes into the hands of a third
person.

Significantly, the Court notes that out of the 10 insurance policies subject of this
case, only 8 of them appear to have been subject of the endorsements prepared and
delivered by Alchester for and upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number : F-114-07795 None

Issue Date : March 18, 1992

Expiry Date : April 5, 1993

Amount : P9,646,224.92

b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992

Expiry Date : (not legible)


Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992

Expiry Date : January 13, 1993

Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991


Expiry Date : October 19, 1992

Amount : P32,252,125.20

j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991

Expiry Date : December 5, 1992

Amount : P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was
admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the
record shows no endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one
of the endorsement documents, Exhibit 5-Malayan, refers to a certain insurance policy
number ACIA-F-07066, which is not among the insurance policies involved in the
complaint.
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to
P89,974,488.36. Being exclusively payable to RCBC by reason of the endorsement by
Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYUs other
creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor. Section
53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies
shall be applied exclusively to the proper interest of the person for whose benefit it was
made. In this case, to the extent of GOYUs obligation with RCBC, the interest of GOYU
in the subject policies had been transferred to RCBC effective as of the time of the
endorsement. These policies may no longer be attached by the other creditors of
GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in view of the results reached
herein. Only the two other policies amounting to P19,646,224.92 may be validly
attached, garnished, and levied upon by GOYUs other creditors. To the extent of
GOYUs outstanding obligation with RCBC, all the rest of the other insurance policies
above-listed which were endorsed to RCBC, are, therefore, to be released from
attachment, garnishment, and levy by the other creditors of GOYU.
This brings us to the next relevant issue to be resolved, which is, the extent of
GOYUs outstanding obligation with RCBC which the proceeds of the 8 insurance
policies will discharge and liquidate, or put differently, the actual amount of GOYUs
liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that
GOYUS total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus
sanctioning the trial courts exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory
Note No. 952-91) on the ground that their execution is highly questionable for not only
are these dated after the fire, but also because the signatures of either GOYU or any its
representative are conspicuously absent.Accordingly, the Court of Appeals speculated
thusly:

Hence, this Court is inclined to conclude that said promissory notes were pre-signed by
plaintiff in blank terms, as averred by plaintiff, in contemplation of the speedy grant of
future loans, for the same practice of procedure has always been adopted in its
previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not
necessarily mean that the documents are spurious, for it is presumed that the ordinary
course of business had been followed (Metropolitan Bank and Trust Company vs. Quilts
and All, Inc., 222 SCRA 486 [1993]). The obligor and not the holder of the negotiable
instrument has the burden of proof of showing that he no longer owes the obligee any
amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of
the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU
as indicated in the testimony of Go Song Hiap when he answered the queries of the trial
court:
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is
correct, Your Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of
the 29 promissory notes as hereinabove quoted, GOYU also offered and admitted to
RCBC that its obligation be fixed at P116,301,992.60 as shown in its letter dated March
9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past
due account of this company in the amount of P116,301,992.60 as of 21 January 1993,
specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the
Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city,
respectively, less the total of P8,851,519.71 paid from the Seaboard and Equitable
insurance companies and other legitimate deductions. We accept and confirm this
amount of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the
excluded promissory notes are dated after the fire. It failed to consider that said notes
had for their origin transactions consummated prior to the fire. Thus, careful attention
must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are
mere renewals of Promissory Notes No. 908-91 and 952-91, loans already availed of by
GOYU.
The two courts below erred in failing to see that the promissory notes which they
ruled should be excluded for bearing dates which are after that of the fire, are
mere renewals of previous ones. The proceeds of the loan represented by these
promissory notes were admittedly received by GOYU. There is ample factual and legal
basis for giving GOYUs judicial admission of liability in the amount of P116,301,992.60
full force and effect
It should, however, be quickly added that whatever amount RCBC may have
recovered from the other insurers of the mortgaged property will, nonetheless, have to
be applied as payment against GOYUs obligation. But, contrary to the lower courts
findings, payments effected by GOYU prior to January 21, 1993 should no longer be
deducted. Such payments had obviously been duly considered by GOYU, in its
aforequoted letter dated March 9, 1993, wherein it admitted that its past due account
totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90
as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60

Broken down as follows


Principal[1] Interest

Regular 80,535,946.32

FDU 7,548,025.17

____________ _____________

Total: 108,083,971.49 8,218,021.11[2]

LESS:

1) Proceeds from

Seaboard Eastern

Insurance Company: 6,095,145.81

2) Proceeds from

Equitable Insurance

Company: 2,756,373.00

3) Payment from

foreign department

negotiation: 203,584.89

9,055,104.70[3]

NET AMOUNT as of January 21, 1993: P 107,246,887.90

The need for the payment of interest due upon the principal amount of the
obligation, which is the cost of money to RCBC, the primary end and the ultimate
reason for RCBCs existence and being, was duly recognized by the trial court when it
ruled favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation with
RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest thereon at the
rate stipulated in the respective promissory notes (without surcharges and penalties)
per computation, pp. 14-A, 14-B, 14-C (Record, p. 479).Inexplicably, the Court of
Appeals, without even laying down the factual or legal justification for its ruling, modified
the trial courts ruling and ordered GOYU to pay the principal amount of
P68,785,069.04 without any interest, surcharges and penalties (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much
uncertainty deleted the payment of additional interest, penalties, and charges, in this
manner:

Regarding defendant RCBCs commitment not to charge additional interest, penalties


and surcharges, the same does not require that it be embodied in a document or some
form of writing to be binding and enforceable. The principle is well known that generally
a verbal agreement or contract is no less binding and effective than a written one. And
the existence of such a verbal agreement has been amply established by the evidence
in this case. In any event, regardless of the existence of such verbal agreement, it
would still be unjust and inequitable for defendant RCBC to charge the plaintiff with
surcharges and penalties considering the latters pitiful situation. (Emphasis supplied.)

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate
and distinct from that of surcharges and penalties. What may justify a court in not
allowing the creditor to charge surcharges and penalties despite express stipulation
therefor in a valid agreement, may not equally justify non-payment of interest. The
charging of interest for loans forms a very essential and fundamental element of the
banking business, which may truly be considered to be at the very core of its existence
or being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeals outright deletion of the
payment of interest as agreed upon in the respective promissory notes.This constitutes
gross error.
For the computation of the interest due to be paid to RCBC, the following rules of
thumb laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234
SCRA 78 [1994]), shall apply, to wit:

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


delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run
only from the date of the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific
promissory note as summarized and tabulated by the trial court in its decision (pp.470
and 471, Record) such agreed interest rates must be followed. This is very clear from
paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs
pitiful situation must be taken into account. We do not agree, however, that payment of
any amount as surcharges and penalties should altogether be deleted. Even assuming
that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun
Bing, may have relayed its assurance for assistance to GOYU immediately after the
occurrence of the fire, we cannot accept the lower courts finding that RCBC had
thereby ipso facto effectively waived collection of any additional interests, surcharges,
and penalties from GOYU. Assurances of assistance are one thing, but waiver of
additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake
of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the
Civil Code.Article 2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be


equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable,


the Court must consider the circumstances of each case. It should be stressed that the
Court will not make any sweeping ruling that surcharges and penalties imposed by
banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be
totally just and equitable in another. This provision of law will have to be applied to the
established facts of any given case. Given the circumstances under which GOYU found
itself after the occurrence of the fire, the Court rules the surcharges rates ranging
anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous
and unconscionable. The Court tempers these rates to 2% and 3%,
respectively. Furthermore, in the light of GOYUs offer to pay the amount of
P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we
find it more in keeping with justice and equity for RCBC not to charge additional interest,
surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO
liable in damages for denying or withholding the proceeds of the insurance claim to
GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the
insurance policies, RCBC has the right to claim the insurance proceeds, in substitution
of the property lost in the fire. Having assigned its rights, GOYU lost its standing as the
beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and
withholding payment of insurance proceeds, the delay must be wanton, oppressive, or
malevolent (Zenith Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It is generally
agreed, however, that an insurer may in good faith and honesty entertain a difference of
opinion as to its liability.Accordingly, the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be inflicted unless the evidence and circumstances
show that such refusal was willful and without reasonable cause as the facts appear to
a reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53,
70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep
307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case
at bar does not show that MICO wantonly and in bad faith delayed the release of the
proceeds. The problem in the determination of who is the actual beneficiary of the
insurance policies, aggravated by the claim of various creditors who wanted to partake
of the insurance proceeds, not to mention the importance of the endorsement to RCBC,
to our mind, and as now borne out by the outcome herein, justified MICO in withholding
payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that
RCBC cannot avail itself of two simultaneous remedies in enforcing the claim of an
unpaid creditor, one for specific performance and the other for foreclosure. In doing so,
said the appellate court, the second action is deemed barred, RCBC having split a
single cause of action (Rollo, pp. 195-199). The Court of Appeals was too
accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R CV
No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court
of Appeals pre-empted the resolution of said foreclosure case which is not before
it. This is plain reversible error if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):
It should have been enough, nonetheless, for the appellate court to merely set aside the
questioned orders of the trial court for having been issued by the latter with grave abuse
of discretion. In likewise enjoining permanently herein petitioner from entering in and
interfering with the use or occupation and enjoyment of petitioners (now private
respondent) residential house and compound, the appellate court in effect, precipitately
resolved with finality the case for injunction that was yet to be heard on the merits by the
lower court. Elevated to the appellate court, it might be stressed, were mere incidents of
the principal case still pending with the trial court. In Municipality of Bian, Laguna vs.
Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have no
jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits
of the main case itself which was not on appeal before it.

(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga
Regional Trial Court, since it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the preferential right of RCBC
over the MICO insurance policies.It is basic and fundamental that the first mortgagee
has superior rights over junior mortgagees or attaching creditors (Alpha Insurance &
Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs.
Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution
of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby
REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442
before Branch 3 of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking


Corporation the proceeds of the insurance policies in the amount of P51,862,390.94
(per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2 and 2-1), less the
amount of P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the
interests earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking
Corporation in the principal amount of P107,246,887.90, with interest at the respective
rates stipulated in each promissory note from January 21, 1993 until finality of this
judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March
9, 1993, minus payments made by Malayan Insurance Company, Inc. and the proceeds
of the amount deposited with the trial court and its earned interest. The total amount
due RCBC at the time of the finality of this judgment shall earn interest at the legal rate
of 12% in lieu of all other stipulated interests and charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court
in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results
herein arrived at. Respondent Sebastians right as attaching creditor must yield to the
preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance
policies as first mortgagee.
SO ORDERED.

FIRST DIVISION

G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,


vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision 1 dated October 11,
2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the
Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC)
in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner);
and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned
by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still appearing in
the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from the
date of the covering invoice or actual delivery of the merchandise whichever shall
first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12)
days after the close of every calendar month all amount shown in their books of
accounts as unpaid and thus become receivable item from their customers and
dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks of
ready-made clothing materials sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It


alleges that IMC and LSPI filed with respondent their claims under their respective fire
insurance policies with book debt endorsements; that as of February 25, 1991, the
unpaid accounts of petitioner on the sale and delivery of ready-made clothing materials
with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid
the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon
petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not
be held liable because the property covered by the insurance policies were destroyed
due to fortuities event or force majeure; that respondent's right of subrogation has no
basis inasmuch as there was no breach of contract committed by it since the loss was
due to fire which it could not prevent or foresee; that IMC and LSPI never
communicated to it that they insured their properties; that it never consented to paying
the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement. 7 Thus,
trial on the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire was not
attributable to the negligence of the petitioner; that it has not been established that
petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it is
further agreed that merely for purpose of securing the payment of purchase price, the
above-described merchandise remains the property of the vendor until the purchase
price is fully paid", IMC and LSPI retained ownership of the delivered goods and must
bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision
reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to
pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-


appellant to the insured Inter Capitol Marketing Corporation, plus legal interest
from the time of demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-


appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time
of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the
nature, quantity and cost of the thing sold; that loss of the goods in the fire must be
borne by petitioner since the proviso contained in the sales invoices is an exception
under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of the thing at the time the loss under the
principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the
delivery of the lost goods but the payment of its unpaid account and as such the
obligation to pay is not extinguished, even if the fire is considered a fortuitous event;
that by subrogation, the insurer has the right to go against petitioner; that, being a fire
insurance with book debt endorsements, what was insured was the vendor's interest as
a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13

Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE


INSTANT CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC


SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot
be deemed to be over credit since an insurance "on credit" belies not only the nature of
fire insurance but the express terms of the policies; that it was not credit that was
insured since respondent paid on the occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner of any obligation; that, even if the
insurance is deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner for payment
of the debt and such demands came from respondent only after it had already paid IMC
and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since
all risk had transferred to petitioner upon delivery of the goods; that petitioner was not
privy to the insurance contract or the payment between respondent and its insured nor
was its consent or approval ever secured; that this lack of privity forecloses any real
interest on the part of respondent in the obligation to pay, limiting its interest to keeping
the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from its
destruction by fire; that petitioner is liable for loss of the ready-made clothing materials
since it failed to overcome the presumption of liability under Article 1265 16 of the Civil
Code; that the fire was caused through petitioner's negligence in failing to provide
stringent measures of caution, care and maintenance on its property because electric
wires do not usually short circuit unless there are defects in their installation or when
there is lack of proper maintenance and supervision of the property; that petitioner is
guilty of gross and evident bad faith in refusing to pay respondent's valid claim and
should be liable to respondent for contracted lawyer's fees, litigation expenses and cost
of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought
before it from the CA is limited to reviewing questions of law which involves no
examination of the probative value of the evidence presented by the litigants or any of
them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or weigh
evidence all over again.19 Accordingly, findings of fact of the appellate court are
generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues


may be resolved by this Court, such as: (1) when the findings are grounded entirely on
speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the CA went beyond the issues of the case,
or its findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed
by the respondent; (10) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.21 Exceptions (4), (5), (7), and
(11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims
that the CA erred in construing a fire insurance policy on book debts as one covering
the unpaid accounts of IMC and LSPI since such insurance applies to loss of the ready-
made clothing materials sold and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."24 Nowhere is it provided in the questioned insurance policies
that the subject of the insurance is the goods sold and delivered to the customers and
dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify
an attempt to read into it any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the contract. 25 Thus, what were
insured against were the accounts of IMC and LSPI with petitioner which remained
unpaid 45 days after the loss through fire, and not the loss or destruction of the goods
delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed that
merely for purpose of securing the payment of the purchase price the above described
merchandise remains the property of the vendor until the purchase price thereof is fully
paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer,
in pursuance of the contract and the ownership in the goods has been retained by the
seller merely to secure performance by the buyer of his obligations under the contract,
the goods are at the buyer's risk from the time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of
the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by concept
of title, but whether insured has substantial economic interest in the property. 28

Section 13 of our Insurance Code defines insurable interest as "every interest in


property, whether real or personal, or any relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property


interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an interest,
it is sufficient that the insured is so situated with reference to the property that he would
be liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction.30Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other
words, so long as he would suffer by its destruction, as where he has a vendor's
lien.31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid
accounts appearing in their Books of Account 45 days after the time of the loss covered
by the policies.

The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by
fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after
the fire. Accordingly, petitioner's obligation is for the payment of money. As correctly
stated by the CA, where the obligation consists in the payment of money, the failure of
the debtor to make the payment even by reason of a fortuitous event shall not relieve
him of his liability.33 The rationale for this is that the rule that an obligor should be held
exempt from liability when the loss occurs thru a fortuitous event only holds true when
the obligation consists in the delivery of a determinate thing and there is no stipulation
holding him liable even in case of fortuitous event. It does not apply when the obligation
is pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation." If
the obligation is generic in the sense that the object thereof is designated merely by its
class or genus without any particular designation or physical segregation from all others
of the same class, the loss or destruction of anything of the same kind even without the
debtor's fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based on the principle that the genus of a
thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the debtor. 37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C"
to "C-22"38 show that petitioner has an outstanding account with IMC in the amount
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit
"F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of
the insurance proceeds. All these documents have been properly identified, presented
and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent as insurer and IMC as the insured, but
also the amount paid to settle the insurance claim. The right of subrogation accrues
simply upon payment by the insurance company of the insurance claim. 41 Respondent's
action against petitioner is squarely sanctioned by Article 2207 of the Civil Code which
provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action.
No evidentiary weight can be given to Exhibit "F Levi Strauss", 42 a letter dated April 23,
1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an
admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's
products in the amount of P535,613.00 in the fire that razed petitioner's building on
February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no


subrogation receipt was offered in evidence. Thus, there is no evidence that respondent
has been subrogated to any right which LSPI may have against petitioner. Failure to
substantiate the claim of subrogation is fatal to petitioner's case for recovery of the
amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount
of P535,613.00 to respondent is DELETED for lack of factual basis.

No pronouncement as to costs.

SO ORDERED.