INSURANCE LAW Sometime in early 1982, private respondent American Home Assurance Co.

Course Outline (AHAC), represented by American International Underwriters (Phils.), Inc.,

Atty. Claire Marie B. Mauro issued in favor of petitioner Makati Tuscany Condominium Corporation
(TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building and
premises, for a period beginning 1 March 1982 and ending 1 March 1983, with
a total premium of P466,103.05. The premium was paid on installments on 12
March 1982, 20 May 1982, 21 June 1982 and 16 November 1982, all of which
PART 2
were accepted by private respondent.

On 10 February 1983, private respondent issued to petitioner Insurance Policy

No. AH-CPP-9210596, which replaced and renewed the previous policy, for a
I. PREMIUM
term covering 1 March 1983 to 1 March 1984. The premium in the amount of
A. Concept P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3
August 1983, 9 September 1983, and 21 November 1983. All payments were
likewise accepted by private respondent.
B. Effect of non-payment of premium; Exceptions

On 20 January 1984, the policy was again renewed and private respondent
1. Grace period issued to petitioner Insurance Policy No. AH-CPP-9210651 for the period 1
March 1984 to 1 March 1985. On this renewed policy, petitioner made two
2. Acknowledgment installment payments, both accepted by private respondent, the first on 6
3. Installment February 1984 for P52,000.00 and the second, on 6 June 1984 for
P100,000.00. Thereafter, petitioner refused to pay the balance of the
4. Credit extension premium.
5. Estoppel
6. Surety Consequently, private respondent filed an action to recover the unpaid
balance of P314,103.05 for Insurance Policy No. AH-CPP-9210651.

C. Devices to prevent the lapsing of an insurance contract: In its answer with counterclaim, petitioner admitted the issuance of Insurance
1. Grace period Policy No. AH-CPP-9210651. It explained that it discontinued the payment of
premiums because the policy did not contain a credit clause in its favor and
2. Automatic policy loan the receipts for the installment payments covering the policy for 1984-85, as
Cash surrender value in a life insurance well as the two (2) previous policies, stated the following reservations:

3. Application of dividend
2. Acceptance of this payment shall not waive any of the company rights to
A Participating deny liability on any claim under the policy arising before such payments or
4. Reinstatement clause – Sec. 233(j) after the expiration of the credit clause of the policy; and

3. Subject to no loss prior to premium payment. If there be any loss such is

D. When insured entitled to return of premiums
not covered.

1. When the thing was not exposed to the peril insured against
2. Time policy
3. Voidable policy
4. When there is over-insurance by several insurers (Sec. 83)
Makati Tuscany Condominium Corp. vs. CA (215 SCRA 462)
G.R. No. 95546 November 6, 1992
Petitioner further claimed that the policy was never binding and valid, and no
risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for
the premiums already paid for 1984-85, and in its answer with amended
counterclaim, sought the refund of P924,206.10 representing the premium
payments for 1982-85.
After some incidents, petitioner and private respondent moved for summary
judgment.

MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by
American International Underwriters (Phils.), Inc., respondent.
BELLOSILLO, J.:
On 8 October 1987, the trial court dismissed the complaint and the
counterclaim upon the following findings:
While it is true that the receipts issued to the defendant contained the
aforementioned reservations, it is equally true that payment of the premiums
of the three aforementioned policies (being sought to be refunded) were
made during the lifetime or term of said policies, hence, it could not be said,
inspite of the reservations, that no risk attached under the policies.
Consequently, defendant's counterclaim for refund is not justified.

As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in

This case involves a purely legal question: whether payment by installment of the
view of the reservation in the receipts ordinarily issued by the plaintiff on
premiums due on an insurance policy invalidates the contract of insurance, in view of
premium payments the only plausible conclusion is that plaintiff has no right
Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which
to demand their payment after the lapse of the term of said policy on March 1,
provides:
1985. Therefore, the defendant was justified in refusing to pay the same. 1

Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is
Both parties appealed from the judgment of the trial court. Thereafter, the
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
Court of Appeals rendered a decision 2 modifying that of the trial court by
policy or contract of insurance issued by an insurance company is valid and binding
ordering herein petitioner to pay the balance of the premiums due on Policy
unless and until the premium thereof has been paid, except in the case of a life or an
No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and
industrial life policy whenever the grace period provision applies.
affirming the denial of the counterclaim. The appellate court thus explained —
The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the For the 1984 policy, petitioner paid two (2) installments although it refused to
entire premium. Here, the parties herein agreed to make the premiums payable in pay the balance.
installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years, the
It appearing from the peculiar circumstances that the parties actually
second and third policies being a renewal/replacement for the previous one. And the
intended to make three (3) insurance contracts valid, effective and binding,
insured never informed the insurer that it was terminating the policy because the terms
petitioner may not be allowed to renege on its obligation to pay the balance of
were unacceptable.
the premium after the expiration of the whole term of the third policy (No. AH-
CPP-9210651) in March 1985. Moreover, as correctly observed by the
While it may be true that under Section 77 of the Insurance Code, the parties may not appellate court, where the risk is entire and the contract is indivisible, the
agree to make the insurance contract valid and binding without payment of premiums, insured is not entitled to a refund of the premiums paid if the insurer was
there is nothing in said section which suggests that the parties may not agree to allow exposed to the risk insured for any period, however brief or momentary.
payment of the premiums in installment, or to consider the contract as valid and binding
upon payment of the first premium. Otherwise, we would allow the insurer to renege on
WHEREFORE, finding no reversible error in the judgment appealed from, the
its liability under the contract, had a loss incurred (sic) before completion of payment of
same is AFFIRMED. Costs against petitioner. SO ORDERED.
the entire premium, despite its voluntary acceptance of partial payments, a result
eschewed by a basic considerations of fairness and equity.

To our mind, the insurance contract became valid and binding upon payment of the first
premium, and the plaintiff could not have denied liability on the ground that payment was
not made in full, for the reason that it agreed to accept installment payment. . . . 3

Petitioner now asserts that its payment by installment of the premiums for the insurance
policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of
Sec. 77 of the Insurance Code, as amended, and by the conditions stipulated by the
insurer in its receipts, disclaiming liability for loss for occurring before payment of
premiums.

It argues that where the premiums is not actually paid in full, the policy would only be
effective if there is an acknowledgment in the policy of the receipt of premium pursuant
to Sec. 78 of the Insurance Code. The absence of an express acknowledgment in the
policies of such receipt of the corresponding premium payments, and petitioner's failure
to pay said premiums on or before the effective dates of said policies rendered them
invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance
upon mere partial payment of the premiums because under Sec. 77 of the Insurance
Code, no contract of insurance is valid and binding unless the premium thereof has been
paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks UCPB General Insurance vs. Masagana Telamart (June 15, 1999)
a refund of all premium payments made on the alleged invalid insurance policies.
[G.R. No. 137172. June 15, 1999.]

We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that petitioner and private respondent intended
subject insurance policies to be binding and effective notwithstanding the staggered
payment of the premiums. The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's
intention to honor the policies it issued to petitioner. Certainly, basic principles of equity
and fairness would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the lame excuse that
the premiums were not prepared in full.
We therefore sustain the Court of Appeals. We quote with approval the well-reasoned
findings and conclusion of the appellate court contained in its Resolution denying the
motion to reconsider its Decision —
While the import of Section 77 is that prepayment of premiums is strictly required as a
condition to the validity of the contract, We are not prepared to rule that the request to
make installment payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment in
the insurance policy of receipt of premium as conclusive evidence of payment so far as
to make the policy binding despite the fact that premium is actually unpaid. Section 77
merely precludes the parties from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement granting credit extension, and
such an agreement is not contrary to morals, good customs, public order or public policy
(De Leon, the Insurance Code, at p. 175). So is an understanding to allow insured to pay
premiums in installments not so proscribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have voluntarily accepted. 4
The reliance by petitioner on Arce vs. Capital Surety and Insurance
Co. 5 is unavailing because the facts therein are substantially different from those in the
case at bar. In Arce, no payment was made by the insured at all despite the grace period
given. In the case before Us, petitioner paid the initial installment and thereafter made
staggered payments resulting in full payment of the 1982 and 1983 insurance policies.
UCPB GENERAL INSURANCE CO., INC., Petitioner, v. MASAGANA
TELAMART, INC., Respondent.
The case is an appeal via certiorari seeking to set aside the decision of the
Court of Appeals, 1 affirming with modification that of the Regional Trial
Court, Branch 58, Makati, ordering petitioner to pay respondent the sum of
P18,645,000.00, as the proceeds of the insurance coverage of respondent’s
property razed by fire; 25% of the total amount due as attorney’s fees and
P25,000.00 as litigation expenses, and costs.chanrobles.com.ph : virtual law
library
The facts are undisputed and may be related as follows:chanrob1es virtual
1aw library
On April 15, 1991, petitioner issued five (5) insurance policies covering
respondent’s various property described therein against fire, for the period
from May 22, 1991 to May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew
them upon expiration of their terms on May 22, 1992. Petitioner advised
respondent’s broker, Zuellig Insurance Brokers, Inc. of its intention not to
renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-
renewal of the policies at the address stated in the policies.
On June 13, 1992, fire razed respondent’s property covered by three of the
insurance policies petitioner issued.
On July 13, 1992, respondent presented to petitioner’s cashier at its head
office five (5) manager’s checks in the total amount of P225,753.95,
representing premium for the renewal of the policies from May 22, 1992 to
May 22, 1993. No notice of loss was filed by respondent under the policies
prior to July 14, 1992. existed a sixty (60) to ninety (90) days credit agreement between UCPB and
Masagana, and that, finally, the Supreme Court could not review factual
On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of findings of the lower court affirmed by the Court of Appeals. 10
the insured property razed by fire.chanrobles.com:cralaw:red
We give due course to the appeal.
On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager’s
checks that it tendered, and at the same time rejected respondent’s claim for the reasons The basic issue raised is whether the fire insurance policies issued by
(a) that the policies had expired and were not renewed, and (b) that the fire occurred on petitioner to the respondent covering the period May 22, 1991 to May 22,
June 13, 1992, before respondent’s tender of premium payment. 1992, had expired on the latter date or had been extended or renewed by an
implied credit arrangement though actual payment of premium was tendered
On July, 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati City, a on a latter date after the occurrence of the risk (fire) insured
civil complaint against petitioner for recovery of P18,645,000.00, representing the face against.chanrobles.com.ph : virtual law library
value of the policies covering respondent’s insured property razed by fire, and for
attorney’s fees. 2 The answer is easily found in the Insurance Code. No, an insurance policy,
other than life, issued originally or on renewal, is not valid and binding until
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an actual payment of the premium. Any agreement to the contrary is void. 11 The
answer to the complaint. It alleged that the complaint "fails to state a cause of action" ; parties may not agree expressly or impliedly on the extension of credit or time
that petitioner was not liable to respondent for insurance proceeds under the policies to pay the premium and consider the policy binding before actual
because at the time of the loss of respondent’s property due to fire, the policies had long payment.chanrobles lawlibrary : rednad
expired and were not renewed. 3
The case of Malayan Insurance Co., Inc. v. Cruz-Arnaldo, 12 cited by the Court
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati, rendered of Appeals, is not applicable. In that case, payment of the premium was in
decision, the dispositive portion of which reads:chanroblesvirtuallawlibrary fact actually made on December 24, 1981, and the fire occurred on January
18, 1982. Here, the payment of the premium for renewal of the policies was
"WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff tendered on July 13, 1992, a month after the fire occurred on June 13, 1992.
and against the defendant, as follows. The assured did not even give the insurer a notice of loss within a reasonable
time after occurrence of the fire.
"(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of
P225,753.95 (refused by the defendant) as full payment of the corresponding premiums WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of
for the replacement-renewal policies for Exhibits A, B, C, D and E; the Court of Appeals in CA-G.R. CV No. 42321. In lieu thereof, the Court
renders judgment dismissing respondent’s complaint and petitioner’s
"(2) Declaring plaintiff to have fully complied with its obligation to pay the premium counterclaims thereto filed with the Regional Trial Court, Branch 58, Makati
thereby rendering the replacement-renewal policy of Exhibits A, B, C, D and E effective City, in Civil Case No. 92-2023. Without costs.
and binding for the duration May 22, 1992 until May 22, 1993; and, ordering defendant to
deliver forthwith to plaintiff the said replacement-renewal policies; SO ORDERED.chanrobles.com.ph : virtual law library

"(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992 and
August 9, 1991 to August 9, 1992, respectively; and UCPB General Insurance vs. Masagana Telamart (356
SCRA 307)
"(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00 representing
the latter’s claim for indemnity under Exhibits A, B & C and/or its replacement-renewal
policies; (b) 25% of the total amount due as and for attorney’s fees; (c) P25,000.00 as
necessary litigation expenses; and, (d) the costs of suit.

"All other claims and counterclaims asserted by the parties are denied and/or dismissed,
including plaintiffs claim for interests.

"SO ORDERED.

"Makati, Metro-Manila, March 10, 1993.

"ZOSIMO Z. ANGELES

Judge." 4

In due time, petitioner appealed to the Court of Appeals. 5

On September 7, 1998, the Court of Appeals promulgated its decision 6 affirming that of
the Regional Trial Court with the modification that item No. 3 of the dispositive portion
was deleted, and the award of attorney’s fees was reduced to 10% of the total amount
due. 7

The Court of Appeals held that following previous practise, respondent was allowed a American Home Insurance vs. Chua (G.R. No. 130421,
sixty (60) to ninety (90) day credit term for the renewal of its policies, and that the June 28, 1999)
acceptance of the late premium payment suggested an understanding that payment
could be made later.
[G.R. No. 130421. June 28, 1999.]
Hence, this appeal.
AMERICAN HOME ASSURANCE COMPANY, Petitioner, v. ANTONIO CHUA,
Respondent.
By resolution adopted on March 24, 1999, we required respondent to comment on the
petition, not to file a motion to dismiss within ten (10) days from notice. 8 On April 22,
1999, respondent filed its comment. 9
In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Respondent submits that the Court of Appeals correctly ruled that no timely notice of Procedure, petitioner seeks the reversal of the decision 1 of the Court of
non-renewal was sent. The notice of non-renewal sent to broker Zuellig which claimed Appeals in CA-G.R. CV No. 40751, which affirmed in toto the decision of the
that it verbally notified the insurance agency but not respondent itself did not suffice. Regional Trial Court, Makati City, Branch 150 (hereafter trial court), in Civil
Respondent submits further that the Court of Appeals did not err in finding that there Case No. 91-1009.chanroblesvirtualawlibrary
 to the peril insured against. Notwithstanding any agreement to the contrary,
Petitioner is a domestic corporation engaged in the insurance business. Sometime in no policy or contract of insurance issued by an insurance company is valid
1990, respondent obtained from petitioner a fire insurance covering the stock-in-trade of and binding unless and until the premium thereof has been paid, except in the
his business, Moonlight Enterprises, located at Valencia, Bukidnon. The insurance was case of life or an industrial life policy whenever the grace period provision
due to expire on 25 March 1990. applies.

On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of
P2,983.50 to petitioner’s agent, James Uy, as payment for the renewal of the policy. In
turn, the latter delivered Renewal Certificate No. 00099047 to Respondent. The check was
drawn against a Manila bank and deposited in petitioner’s bank account in Cagayan de
Oro City. The corresponding official receipt was issued on 10 April. Subsequently, a new
insurance policy, Policy No. 206-4234498-7, was issued, whereby petitioner undertook to
indemnify respondent for any damage or loss arising from fire up to P200,000 for the
period 25 March 1990 to 25 March 1991.
On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was
estimated between P4,000,000 and P5,000,000. Respondent filed an insurance claim with
petitioner and four other co-insurers, namely, Pioneer Insurance and Surety Corporation,
Prudential Guarantee and Assurance, Inc., Filipino Merchants Insurance Co. and
Domestic Insurance Company of the Philippines. Petitioner refused to honor the claim
notwithstanding several demands by respondent, thus, the latter filed an action against
petitioner before the trial court.
In its defense, petitioner claimed there was no existing insurance contract when the fire
occurred since respondent did not pay the premium. It also alleged that even assuming
there was a contract, respondent violated several conditions of the policy, particularly: (1)
his submission of fraudulent income tax return and financial statements; (2) his failure to
establish the actual loss, which petitioner assessed at P70,000; and (3) his failure to
notify to petitioner of any insurance already effected to cover the insured goods. These
violations, petitioner insisted, justified the denial of the claim.chanrobles.com.ph : virtual
law library
The trial court ruled in favor of Respondent. It found that respondent paid by way of check
a day before the fire occurred. The check, which was deposited in petitioner’s bank
account, was even acknowledged in the renewal certificate issued by petitioner’s agent. It
declared that the alleged fraudulent documents were limited to the disparity between the
official receipts issued by the Bureau of Internal Revenue (BIR) and the income tax
returns for the years 1987 to 1989. All the other documents were found to be genuine.
Nonetheless, it gave credence to the BIR certification that respondent paid the
corresponding taxes due for the questioned years.
As to respondent’s failure to notify petitioner of the other insurance contracts covering
the same goods, the trial court held that petitioner failed to show that such omission was
intentional and fraudulent. Finally, it noted that petitioner’s investigation of respondent’s
claim was done in collaboration with the representatives of other insurance companies
who found no irregularity therein. In fact, Pioneer Insurance and Surety Corporation and
Prudential Guarantee and Assurance, Inc. promptly paid the claims filed by Respondent.
The trial court decreed as follows:chanrob1es virtual 1aw
and cites the case of Arce v. Capital Insurance & Surety Co., Inc., 2 where we
ruled that unless and until the premium is paid there is no insurance.
Petitioner emphasizes that when the fire occurred on 6 April 1990 the
insurance contract was not yet subsisting pursuant to Article 1249 3 of the
Civil Code, which recognizes that a check can only effect payment once it has
been cashed. Although respondent testified that he gave the check on 5 April
to a certain James Uy, the check, drawn against a Manila bank and deposited
in a Cagayan de Oro City bank, could not have been cleared by 6 April, the
date of the fire. In fact, the official receipt issued for respondent’s check
payment was dated 10 April 1990, four days after the fire occurred.chanrobles
virtual lawlibrary
Citing jurisprudence, 4 petitioner also contends that respondent’s non-
disclosure of the other insurance contracts rendered the policy void. It
underscores the trial court’s neglect in considering the Commission on
Audit’s certification that the BIR receipts submitted by respondent were, in
effect, fake since they were issued to other persons. Finally, petitioner argues
that the award of damages was excessive and unreasonable considering that
it did not act in bad faith in denying respondent’s claim.
Respondent counters that the issue of non-payment of premium is a question
of fact which can no longer be assailed. The trial court’s finding on the matter,
which was affirmed by the Court of Appeals, is conclusive.
Respondent refutes the reason for petitioner’s denial of his claim. As found by
the trial court, petitioner’s loss adjuster admitted prior knowledge of
respondent’s existing insurance contracts with the other insurance
companies. Nonetheless, the loss adjuster recommended the denial of the
claim, not because of the said contracts, but because he was suspicious of
the authenticity of certain documents which respondent submitted in filing
his claim.
To bolster his argument, respondent cites Section 66 of the Insurance Code, 5
which requires the insurer to give a notice to the insured of its intention to
terminate the policy forty-five days before the policy period ends. In the
instant case, petitioner opted not to terminate the policy. Instead, it renewed
the policy by sending its agent to respondent, who was issued a renewal
certificate upon delivery of his check payment for the renewal of premium. At
this precise moment the contract of insurance was executed and already in
effect. Respondent also claims that it is standard operating procedure in the
provinces to pay insurance premiums by check when collected by insurance
library agents.chanrobles.com : virtual law library

WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the On the issue of damages, respondent maintains that the amounts awarded
[petitioner] ordering the latter to pay the former the following:chanrob1es virtual 1aw were reasonable. He cites numerous trips he had to make from Cagayan de
library Oro City to Manila to follow up his rightful claim. He imputes bad faith on
petitioner who made enforcement of his claim difficult in the hope that he
1. P200,000.00, representing the amount of the insurance, plus legal interest from the would eventually abandon it. He further emphasizes that the adjusters of the
date of filing of this case; other insurance companies recommended payment of his claim, and they
complied therewith.
2. P200,000.00 as moral damages;
In its reply, petitioner alleges that the petition questions the conclusions of
3. P200,000.00 as loss of profit; law made by the trial court and the Court of Appeals.

4. P100,000.00 as exemplary damages; Petitioner invokes respondent’s admission that his check for the renewal of
the policy was received only on 10 April 1990, taking into account that the
5. P50,000.00 as attorney’s fees; and policy period was 25 March 1990 to 25 March 1991. The official receipt was
dated 10 April 1990. Anent respondent’s testimony that the check was given
6. Cost of suit.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph to petitioner’s agent, a certain James Uy, the latter points out that even
respondent was not sure if Uy was indeed its agent. It faults respondent for
On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court not producing Uy as his witness and not taking any receipt from him upon
of Appeals found that respondent’s claim was substantially proved and petitioner’s presentment of the check. Even assuming that the check was received a day
unjustified refusal to pay the claim entitled respondent to the award of damages. before the occurrence of the fire, there still could not have been any payment
until the check was cleared.
Its motion for reconsideration of the judgment having been denied, petitioner filed the
petition in this case. Petitioner reiterates its stand that there was no existing insurance Moreover, petitioner denies respondent’s allegation that it intended a renewal
contract between the parties. It invokes Section 77 of the Insurance Code, which of the contract for the renewal certificate clearly specified the following
provides:chanrob1es virtual 1aw library conditions:chanrob1es virtual 1aw library

An insurer is entitled to payment of the premium as soon as the thing insured is exposed Subject to the payment by the assured of the amount due prior to renewal
date, the policy shall be renewed for the period stated.
Any payment tendered other than in cash is received subject to actual cash collection.
Subject to no loss prior to premium payment. If there be any loss, and is not covered [sic].
Petitioner asserts that an insurance contract can only be enforced upon the payment of
the premium, which should have been made before the renewal period.chanrobles
lawlibrary : rednad
Finally, in assailing the excessive damages awarded to respondent petitioner stresses
that the policy in issue was limited to a liability of P200,000; but the trial court granted the
following monetary awards: P200,000 as actual damages; P200,000 as moral damages;
P100,000 as exemplary damages; and P50,000 as attorney’s fees.
The following issues must be resolved: first, whether there was a valid payment of
premium, considering that respondent’s check was cashed after the occurrence of the
fire; second, whether respondent violated the policy by his submission of fraudulent
documents and non-disclosure of the other existing insurance contracts; and finally,
whether respondent is entitled to the award of damages.
The general rule in insurance laws is that unless the premium is paid the insurance policy
is not valid and binding. The only exceptions are life and industrial life insurance. 6
Whether payment was indeed made is a question of fact which is best determined by the
trial court. The trial court found, as affirmed by the Court of Appeals, that there was a
valid check payment by respondent to petitioner. Well-settled is the rule that the factual
findings and conclusions of the trial court and the Court of Appeals are entitled to great
weight and respect, and will not be disturbed on appeal in the absence of any clear
showing that the trial court overlooked certain facts or circumstances which would
substantially affect the disposition of the case. 7 We see no reason to depart from this
ruling.
According to the trial court the renewal certificate issued to respondent contained the
acknowledgment that premium had been paid. It is not disputed that the check drawn by
respondent in favor of petitioner and delivered to its agent was honored when presented
and petitioner forthwith issued its official receipt to respondent on 10 April 1990. Section
306 of the Insurance Code provides that any insurance company which delivers a policy
or contract of insurance to an insurance agent or insurance broker shall be deemed to
have authorized such agent or broker to receive on its behalf payment of any premium
which is due on such policy or contract of insurance at the time of its issuance or delivery
or which becomes due thereon. 8 In the instant case, the best evidence of such authority
is the fact that petitioner accepted the check and issued the official receipt for the
payment. It is, as well, bound by its agent’s acknowledgment of receipt of
payment.chanroblesvirtual|awlibrary
Section 78 of the Insurance Code explicitly provides:chanrob1es virtual 1aw library
An acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding
any stipulation therein that it shall not be binding until the premium is actually paid.
This Section establishes a legal fiction of payment and should be interpreted as an
exception to Section 77. 9 contract of insurance. Under Article 2220 of the Civil Code, moral damages
Is respondent guilty of the policy violations imputed against him? We are not convinced
by petitioner’s arguments. The submission of the alleged fraudulent documents pertained
to respondent’s income tax returns for 1987 to 1989. Respondent, however, presented a
BIR certification that he had paid the proper taxes for the said years. The trial court and
the Court of Appeals gave credence to the certification and it being a question of fact, we
hold that said finding is conclusive.chanroblesvirtual|awlibrary
Ordinarily, where the insurance policy specifies as a condition the disclosure of existing
co-insurers, non-disclosure thereof is a violation that entitles the insurer to avoid the
policy. This condition is common in fire insurance policies and is known as the "other
insurance clause." The purpose for the inclusion of this clause is to prevent an increase in
the moral hazard. We have ruled on its validity and the case of Geagonia v. Court of
Appeals 10 clearly illustrates such principle. However, we see an exception in the instant
case.
Citing Section 29 11 of the Insurance Code, the trial court reasoned that respondent’s
failure to disclose was not intentional and fraudulent. The application of Section 29 is
misplaced. Section 29 concerns concealment which is intentional. The relevant provision
is Section 75, which provides that:chanrob1es virtual 1aw library
A policy may declare that a violation of specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the policy.
To constitute a violation the other existing insurance contracts must be upon
the same subject matter and with the same interest and risk. 12 Indeed,
respondent acquired several co-insurers and he failed to disclose this
information to petitioner. Nonetheless, petitioner is estopped from invoking
this argument. The trial court cited the testimony of petitioner’s loss adjuster
who admitted previous knowledge of the co-insurers. Thus,
COURT:chanrob1es virtual 1aw library
Q The matter of additional insurance of other companies, was that ever
discussed in your investigation?
A Yes, sir.
Q In other words, from the start, you were aware the insured was insured with
other companies like Pioneer and so on?
A Yes, Your Honor.
Q But in your report you never recommended the denial of the claim simply
because of the non-disclosure of other insurance? [sic]
A Yes, Your Honor.
Q In other words, to be emphatic about this, the only reason you
recommended the denial of the claim, you found three documents to be
spurious. That is your only basis?chanrobles.com:cralaw:red
A Yes, Your Honor. 13 [Emphasis supplied]
Indubitably, it cannot be said that petitioner was deceived by respondent by
the latter’s non-disclosure of the other insurance contracts when petitioner
actually had prior knowledge thereof. Petitioner’s loss adjuster had known all
along of the other existing insurance contracts, yet, he did not use that as
basis for his recommendation of denial. The loss adjuster, being an employee
of petitioner, is deemed a representative of the latter whose awareness of the
other insurance contracts binds petitioner. We, therefore, hold that there was
no violation of the "other insurance" clause by Respondent.
Petitioner is liable to pay its share of the loss. The trial court and the Court of
Appeals were correct in awarding P200,000 for this. There is, however, merit
in petitioner’s grievance against the damages and attorney’s fees awarded.
There is no legal and factual basis for the award of P200,000 for loss of
profit. It cannot be denied that the fire totally gutted respondent’s business;
thus, respondent no longer had any business to operate. His loss of profit
cannot be shouldered by petitioner whose obligation is limited to the object of
insurance, which was the stock-in-trade, and not the expected loss in income
or profit.
Neither can we approve the award of moral and exemplary damages. At the
core of this case is petitioner’s alleged breach of its obligation under a
may be awarded in breaches of contracts where the defendant acted
fraudulently or in bad faith. We find no such fraud or bad faith. It must again
be stressed that moral damages are emphatically not intended to enrich a
plaintiff at the expense of the defendant. Such damages are awarded only to
enable the injured party to obtain means, diversion or amusements that will
serve to obviate the moral suffering he has undergone, by reason of the
defendant’s culpable action. Its award is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and it must be
proportional to the suffering inflicted. 14 When awarded, moral damages
must not be palpably and scandalously excessive as to indicate that it was
the result of passion, prejudice or corruption on the part of the trial court
judge. 15cralawnad
The law 16 is likewise clear that in contracts and quasi-contracts the court
may award exemplary damages if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. Nothing thereof can
be attributed to petitioner which merely tried to resist what it claimed to be an
unfounded claim for enforcement of the fire insurance policy.
As to attorney’s fees, the general rule is that attorney’s fees cannot be
recovered as part of damages because of the policy that no premium should
be placed on the right to litigate. 17 In short, the grant of attorney’s fees as
part of damages is the exception rather than the rule; counsel’s fees are not
awarded every time a party prevails in a suit. It can be awarded only in the
cases enumerated in Article 2208 of the Civil Code, and in all cases it must be
reasonable. 18 Thereunder, the trial court may award attorney’s fees where it deems just
and equitable that it be so granted. While we respect the trial court’s exercise of its
discretion in this case, the award of P50,000 is unreasonable and excessive. It should be
reduced to P10,000.
WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the
Court of Appeals in CA-G.R. No. 40751 is hereby MODIFIED by a) deleting the awards of
P200,000 for loss of profit, P200,000 as moral damages and P100,000 as exemplary
damages, and b) reducing the award of attorney’s fees from P50,000 to
P10,000.chanroblesvirtuallawlibrary
No pronouncement as to costs. SO ORDERED.
Tibay vs. CA (257 SCRA 126)
G.R. No. 119655 May 24, 1996
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA
M. RORALDO, VIRGILIO M. RORALDO, MYRNA M. RORALDO and ROSABELLA M.
RORALDO, petitioners,
vs.
COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC.,
respondents.
May a fire insurance policy be valid, binding and enforceable upon mere partial payment
of premium?
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc.
(FORTUNE) issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or
Nicolas Roraldo on their two-storey residential building located at 5855 Zobel Street,
Makati City, together with all their personal effects therein. The insurance was for
P600,000.00 covering the period from 23 January 1987 to 23 January 1988. On 23
January 1987, of the total premium of P2,983.50, petitioner Violeta Tibay only paid
P600.00 thus leaving a considerable balance unpaid.
On 8 March 1987 the insured building was completely destroyed by fire. Two days later or
on 10 March 1987 Violeta Tibay paid the balance of the premium. On the same day, she
filed with FORTUNE a claim on the fire insurance policy. Her claim was accordingly
referred to its adjuster, Goodwill Adjustment Services, Inc. (GASI), which immediately
wrote Violeta requesting her to furnish it with the necessary documents for the
investigation and processing of her claim. Petitioner forthwith complied. On 28 March
1987 she signed a non-waiver agreement with GASI to the effect that any action taken by
the companies or their representatives in investigating the claim made by the claimant for
his loss which occurred at 5855 Zobel Roxas, Makati on March 8, 1987, or in the
investigating or ascertainment of the amount of actual cash value and loss, shall not waive
or invalidate any condition of the policies of such companies held by said claimant, nor the
rights of either or any of the parties to this agreement, and such action shall not be, or be
claimed to be, an admission of liability on the part of said companies or any of them.1
In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy
Condition No. 2 and of Sec. 77 of the Insurance Code. Efforts to settle the case before
the Insurance Commission proved futile. On 3 March 1988 Violets and the other
petitioners sued FORTUNE for damages in the amount of P600,000.00 representing the
total coverage of the fire insurance policy plus 12% interest per annum, P100,000.00
moral damages, and attorney's fees equivalent to 20% of the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the
total value of the insured building and personal properties in the amount of P600,000.00
plus interest at the legal rate of 6% per annum from the filing of the complaint until full
payment, and attorney's fees equivalent to 20% of the total amount claimed plus costs of
suit.2
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE
not to be liable to plaintiff-appellees therein but ordering defendant-appellant to return to
the former the premium of P2,983.50 plus 12% interest from 10 March 1987 until full
payment.3
Hence this petition for review with petitioners contending mainly that contrary to the
conclusion of the appellate court, FORTUNE remains liable under the subject fire
insurance policy in spite of the failure of petitioners to pay their premium in
full.
We find no merit in the petition; hence, we affirm the Court of Appeals.
Insurance is a contract whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown
or contingent event.4 The consideration is the premium, which must be paid
at the time and in the way and manner specified in the policy, and if not so
paid, the policy will lapse and be forfeited by its own terms.5
The pertinent provisions in the Policy on premium read —
THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the
Company in accordance with Policy Condition No. 2 of the total premiums by
the insured as stipulated above for the period aforementioned for insuring
against Loss or Damage by Fire or Lightning as herein appears, the Property
herein described . . .
2. This policy including any renewal thereof and/or any endorsement thereon is
not in force until the premium has been fully paid to and duly receipted by the
Company in the manner provided herein.
Any supplementary agreement seeking to amend this condition prepared by
agent, broker or Company official, shall be deemed invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules and
regulations which are or may hereafter be in force provide for the payment of
the stipulated premiums in periodic installments at fixed percentage, it is
hereby declared, agreed and warranted that this policy shall be deemed
effective, valid and binding upon the Company only when the premiums
therefor have actually been paid in full and duly acknowledged in a receipt
signed by any authorized official or representative/agent of the Company in
such manner as provided herein. (emphasis supplied).6
Clearly the Policy provides for payment of premium in full. Accordingly, where
the premium has only been partially paid and the balance paid only after the
peril insured against has occurred, the insurance contract did not take effect
and the insured cannot collect at all on the policy. This is fully supported by
Sec. 77 of the Insurance Code which provides —
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof
has been paid, except in the case of a life or an industrial life policy whenever
the grace period provision applies (emphasis supplied).
Apparently the crux of the controversy lies in the phrase " unless and until the
premium thereof has been paid." This leads us to the manner of payment
envisioned by the law to make the insurance policy operative and binding. For
whatever judicial construction may be accorded the disputed phrase must
ultimately yield to the clear mandate of the law. The principle that where the
law does not distinguish the court should neither distinguish assumes that
the legislature made no qualification on the use of a general word or
expression. In Escosura v. San Miguel Brewery, Inc.,7 the Court through Mr.
Justice Jesus G. Barrera, interpreting the phrase "with pay" used in
connection with leaves of absence with pay granted to employees, ruled —
. . . the legislative practice seems to be that when the intention is to
distinguish between full and partial payment, the modifying term is used . . .
Citing C.A. No. 647 governing maternity leaves of married women in
government, R. A. No. 679 regulating employment of women and children,
R.A. No. 843 granting vacation and sick leaves to judges of municipal courts
and justices of the peace, and finally, Art. 1695 of the New Civil Code
providing that every househelp shall be allowed four (4) days vacation each
month, which laws simply stated "with pay," the Court concluded that it was
undisputed that in all these laws the phrase "with pay" used without any
qualifying adjective meant that the employee was entitled to full compensation during his
leave of absence.
Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite
partial payment of the premium due and the express stipulation thereof to the contrary,
petitioners rely heavily on the 1967 case of Philippine Phoenix and Insurance Co., Inc. v.
Woodworks, Inc.8 where the Court through Mr. Justice Arsenio P. Dizon sustained the
ruling of the trial court that partial payment of the premium made the policy effective
during the whole period of the policy. In that case, the insurance company commenced
action against the insured for the unpaid balance on a fire insurance policy. In its defense
the insured claimed that nonpayment of premium produced the cancellation of the
insurance contract. Ruling otherwise the Court held —
It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by appellee
and delivered to appellant, and that on September 22 of the same year, the latter paid to
the former the sum of P3,000.00 on account of the total premium of P6,051.95 due
thereon. There is, consequently, no doubt at all that, as between the insurer and the
insured, there was not only a perfected contract of insurance but a partially performed
one as far as the payment of the agreed premium was concerned. Thereafter the
obligation of the insurer to pay the insured the amount, for which the policy was issued in
case the conditions therefor had been complied with, arose and became binding upon it,
while the obligation of the insured to pay the remainder of the total amount of the
premium due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For
one, the factual scenario is different. In Phoenix it was the insurance company that sued
for the balance of the premium, i.e., it recognized and admitted the existence of an
insurance contract with the insured. In the case before us, there is, quite unlike in
Phoenix, a specific stipulation that (t)his policy . . . is not in force until the premium has
been fully paid and duly receipted by the Company . . . Resultantly, it is correct to say that
in Phoenix a contract was perfected upon partial payment of the premium since the
parties had not otherwise stipulated that prepayment of the premium in full was a
condition precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the
remainder of the premium without any other precondition to its enforceability as in the
instant case, the insurer in effect had shown its intention to continue with the existing
contract of insurance, as in fact it was enforcing its right to collect premium, or exact
specific performance from the insured. This is not so here. By express agreement of the
parties, no vinculum juris or bond of law was to be established until full payment was
effected prior to the occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals9 the parties mutually agreed
that the premiums could be paid in installments, which in fact they did for three (3) years,
hence, this Court refused to invalidate the insurance policy. In giving effect to the policy,
the Court quoted with approval the Court of Appeals —
The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the
entire premium. Here, the parties . . . agreed to make the premiums payable in
installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years, the
second and third policies being a renewal/replacement for the previous one. And the
insured never informed the insurer that it was terminating the policy because the terms
were unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties may not
agree to make the insurance contract valid and binding without payment of premiums,
there is nothing in said section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract as valid and binding
upon
payment of the first premium. Otherwise we would allow the insurer to renege on its
liability under the contract, had a loss incurred (sic) before completion of payment of the
entire premium, despite its voluntary acceptance of partial payments, a result eschewed
by basic considerations of fairness and equity . . .
These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either
express or implied, of prepayment in full by the insurer: impliedly, by suing for the balance
of the premium as in Phoenix, and expressly, by agreeing to make premiums payable in
installments as in Tuscany. But contrary to the stance taken by petitioners, there is no
waiver express or implied in the case at bench. Precisely, the insurer and the insured
expressly stipulated that (t)his policy including any renewal thereof and/or any
indorsement thereon is not in force until the premium has been fully paid to and duly
receipted by the Company . . . and that this policy shall be deemed effective, valid and
binding upon the Company only when the premiums therefor have actually
been paid in full and duly acknowledged.
Conformably with the aforesaid stipulations explicitly worded and taken in
conjunction with Sec. 77 of the Insurance Code the payment of partial
premium by the assured in this particular instance should not be considered
the payment required by the law and the stipulation of the parties. Rather, it
must be taken in the concept of a deposit to be held in trust by the insurer
until such time that the full amount has been tendered and duly receipted for.
In other words, as expressly agreed upon in the contract, full payment must
be made before the risk occurs for the policy to be considered effective and in
force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the
assured according to law ever resulted from the fractional payment of
premium. The insurance contract itself expressly provided that the policy
would be effective only when the premium was paid in full. It would have been
altogether different were it not so stipulated. Ergo, petitioners had absolute
freedom of choice whether or not to be insured by FORTUNE under the terms
of its policy and they freely opted to adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of
an insurance contract is the intention of the parties as expressed in the
policy. 10 Courts have no other function but to enforce the same. The rule
that contracts of insurance will be construed in favor of the insured and most
strongly against the insurer should not be permitted to have the effect of
making a plain agreement ambiguous and then construe it in favor of the
insured. 11 Verily, it is elemental law that the payment of premium is requisite
to keep the policy of insurance in force. If the premium is not paid in the
manner prescribed in the policy as intended by the parties the policy is
ineffective. Partial payment even when accepted as a partial payment will not
keep the policy alive even for such fractional part of the year as the part
payment bears to the whole
payment.12
Applying further the rules of statutory construction, the position maintained
by petitioners becomes even more untenable. The case of South Sea Surety
and Insurance Company, Inc. v. Court Of Appeals, 13 speaks only of two (2)
statutory exceptions to the requirement of payment of the entire premium as
a prerequisite to the validity of the insurance contract. These exceptions are:
(a) in case the insurance coverage relates to life or industrial life (health)
insurance when a grace period applies, and (b) when the insurer makes a
written acknowledgment of the receipt of premium, this acknowledgment
being declared by law to be then conclusive evidence of the premium
payment. 14
A maxim of recognized practicality is the rule that the expressed exception or
exemption excludes others. Exceptio firmat regulim in casibus non exceptis.
The express mention of exceptions operates to exclude other exceptions;
conversely, those which are not within the enumerated exceptions are
deemed included in the general rule. Thus, under Sec. 77, as well as Sec. 78,
until the premium is paid, and the law has not expressly excepted partial
payments, there is no valid and binding contract. Hence, in the absence of
clear waiver of prepayment in full by the insurer, the insured cannot collect on
the proceeds of the policy.
In the desire to safeguard the interest of the assured, it must not be ignored
that the contract of insurance is primarily a risk distributing device, a
mechanism by which all members of a group exposed to a particular risk
contribute premiums to an insurer. From these contributory funds are paid
whatever losses occur due to exposure to the peril insured against. Each
party therefore takes a risk: the insurer, that of being compelled upon the
happening of the contingency to pay the entire sum agreed upon, and the
insured, that of parting with the amount required as premium, without
receiving anything therefor in case the contingency does not happen. To
ensure payment for these losses, the law mandates all insurance companies
to maintain a legal reserve fund in favor of those claiming under their policies.
15 It should be understood that the integrity of this fund cannot be secured
and maintained if by judicial fiat partial offerings of premiums were to be
construed as a legal nexus between the applicant and the insurer despite an
express agreement to the contrary. For what could prevent the insurance
applicant from deliberately or wilfully holding back full premium payment and
wait for the risk insured against to transpire and then conveniently pass on
the balance of the premium to be deducted from the proceeds of the
insurance? Worse, what if the insured makes an initial payment of only 10%, or even 1%,
of the required premium, and when the risk occurs simply points to the proceeds from
where to source the balance? Can an insurance company then exist and survive upon the
payment of 1%, or even 10%, of the premium stipulated in the policy on the basis that,
after all, the insurer can deduct from the proceeds of the insurance should the risk
insured against occur?
Interpreting the contract of insurance stringently against the insurer but liberally in favor
of the insured despite clearly defined obligations of the parties to the policy can be
carried out to extremes that there is the danger that we may, so to speak, "kill the goose
that lays the golden egg." We are well aware of insurance companies falling into the
despicable habit of collecting premiums promptly yet resorting to all kinds of excuses to
deny or delay payment of just insurance claims. But, in this case, the law is manifestly on
the side of the insurer. For as long as the current Insurance Code remains unchanged and
partial payment of premiums is not mentioned at all as among the exceptions provided in
Sees. 77 and 78, no policy of insurance can ever pretend to be efficacious or effective
until premium has been fully paid.
And so it must be. For it cannot be disputed that premium is the elixir vitae of the
insurance business because by law the insurer must maintain a legal reserve fund to
meet its contingent obligations to the public, hence, the imperative need for its prompt
payment and full satisfaction. 16 It must be emphasized here that all actuarial
calculations and various tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt payment of premiums. Upon this
bedrock insurance firms are enabled to offer the assurance of security to the public at
favorable rates. But once payment of premium is left to the whim and caprice of the
insured, as when the courts tolerate the payment of a mere P600.00 as partial
undertaking out of the stipulated total premium of P2,983.50 and the balance to be paid
even after the risk insured against has occurred, as petitioners have done in this case, on
the principle that the strength of the vinculum juris is not measured by any specific
amount of premium payment, we will surely wreak havoc on the business and set to
naught what has taken actuarians centuries to devise to arrive at a fair and equitable
distribution of risks and benefits between the insurer and the insured.
The terms of the insurance policy constitute the measure of the insurer's liability. 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. 17 The validity of these
limitations is by law passed upon by the Insurance Commissioner who is empowered to
approve all forms of policies, certificates or contracts of insurance which insurers intend
to issue or deliver. That the policy contract in the case at bench was approved and
allowed issuance simply reaffirms the validity of such policy, particularly the provision in
question.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals
dated 24 March 1995 is AFFIRMED.SO ORDERED.
Phil. Phoenix Surety & Ins., Co. vs. Woodworks, Inc., (92 SCRA
419)
G.R. No. L-25317 August 6, 1979
PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, plaintiff-appellee,
vs.WOODWORKS, INC., defendant-appellant.
This case was certified to this Tribunal by the Court of Appeals in its Resolution of
October 4, 1965 on a pure question of law and "because the issues raised are practically
the same as those in CA-G.R. No. 32017-R" between the same parties, which case had
been forwarded to us on April 1, 1964. The latter case, "Philippine Phoenix Surety &
Insurance Inc. vs. Woodworks, Inc.," docketed in this Court as L-22684, was decided on
August 31, 1967 and has been reported in 20 SCRA 1270.
Specifically, this action is for recovery of unpaid premium on a fire insurance policy
issued by plaintiff, Philippine Phoenix Surety & Insurance Company, in favor of defendant
Woodworks, Inc.
The following are the established facts:
On July 21, 1960, upon defendant's application, plaintiff issued in its favor Fire
Insurance Policy No. 9749 for P500,000.00 whereby plaintiff insured
defendant's building, machinery and equipment for a term of one year from
July 21, 1960 to July 21, 1961 against loss by fire. The premium and other
charges including the margin fee surcharge of P590.76 and the documentary
stamps in the amount of P156.60 affixed on the Policy, amounted to
P10,593.36.
It is undisputed that defendant did not pay the premium stipulated in the
Policy when it was issued nor at any time thereafter.
On April 19, 1961, or before the expiration of the one-year term, plaintiff
notified defendant, through its Indorsement No. F-6963/61, of the
cancellation of the Policy allegedly upon request of defendant. 1 The latter
has denied having made such a request. In said Indorsement, plaintiff
credited defendant with the amount of P3,110.25 for the unexpired period of
94 days, and claimed the balance of P7,483.11 representing ,learned premium
from July 21, 1960 to 18th April 1961 or, say 271 days." On July 6, 1961,
plaintiff demanded in writing for the payment of said amount. 2 Defendant,
through counsel, disclaimed any liability in its reply- letter of August 15, 1961,
contending, in essence, that it need not pay premium "because the Insurer did
not stand liable for any indemnity during the period the premiums were not
paid." 3
On January 30, 1962, plaintiff commenced action in the Court of First
Instance of Manila, Branch IV (Civil Case No. 49468), to recover the amount of
P7,483.11 as "earned premium." Defendant controverted basically on the
theory that its failure "to pay the premium after the issuance of the policy put
an end to the insurance contract and rendered the policy unenforceable." 4
On September 13, 1962, judgment was rendered in plaintiff's favor "ordering
defendant to pay plaintiff the sum of P7,483.11, with interest thereon at the
rate of 6%, per annum from January 30, 1962, until the principal shall have
been fully paid, plus the sum of P700.00 as attorney's fees of the plaintiff, and
the costs of the suit." From this adverse Decision, defendant appealed to the
Court of Appeals which, as heretofore stated, certified the case to us on a
question of law.
The errors assigned read:
1. The lower court erred in sustaining that Fire Insurance Policy, Exhibit A, was
a binding contract even if the premium stated in the policy has not been paid.
2. That the lower court erred in sustaining that the premium in Insurance
Policy, Exhibit B, became an obligation which was demandable even after the
period in the Policy has expired.
3. The lower court erred in not deciding that a premium not paid is not a debt
enforceable by action of the insurer.
We find the appeal meritorious.
Insurance is "a contract whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown
or contingent event." 5 The consideration is the "premium". "The premium
must be paid at the time and in the way and manner specified in the policy
and, if not so paid, the policy will lapse and be forfeited by its own terms." 6
The provisions on premium in the subject Policy read:
THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of —
MESSRS. WOODWORKS, INC. — hereinafter called the Insured, paying to the
PHILIPPINE PHOENIX SURETY AND INSURANCE, INC., hereinafter called the
Company, the sum of — PESOS NINE THOUSAND EIGHT HUNDRED FORTY
SIX ONLY — the Premium for the first period hereinafter mentioned. ...
xxx xxx xxx
THE COMPANY HEREBY AGREES with the Insured ... that if the Property
above described, or any part thereof, shall be destroyed or damaged by Fire or
Lightning after payment of Premium, at any time between 4:00 o'clock in the afternoon of
the TWENTY FIRST day of JULY One Thousand Nine Hundred and SIXTY and 4:00 o'clock
in the afternoon of the TWENTY FIRST day of JULY One Thousand Nine Hundred and
SIXTY ONE. ... (Emphasis supplied)
The foregoing findings are buttressed by section 77 of the Insurance Code
(Presidential Decree No. 612, promulgated on December 18, 1974), which
now provides that no contract of insurance issued by an insurance company
is valid and binding unless and until the premium thereof has been paid,
notwithstanding any agreement to the contrary.

Paragraph "2" of the Policy further contained the following condition:

WHEREFORE, the judgment appealed from is reversed, and plaintiff's
complaint hereby dismissed.
2. No payment in respect of any premium shall be deemed to be payment to the
Company unless a printed form of receipt for the same signed by an Official or duly-
appointed Agent of the Company shall have been given to the Insured.

Paragraph "10" of the Policy also provided:

10. This insurance may be terminated at any time at the request of the Insured, in which
case the Company will retain the customary short period rate for the time the policy has
been in force. This insurance may also at any time be terminated at the option of the
Company, on notice to that effect being given to the Insured, in which case the Company
shall be liable to repay on demand a ratable proportion of the premium for the unexpired
term from the date of the cancelment.

Clearly, the Policy provides for pre-payment of premium. Accordingly; "when the policy is
tendered the insured must pay the premium unless credit is given or there is a waiver, or
some agreement obviating the necessity for prepayment." 7 To constitute an extension of
credit there must be a clear and express agreement therefor." 8

From the Policy provisions, we fail to find any clear agreement that a credit extension was
accorded defendant. And even if it were to be presumed that plaintiff had extended credit
from the circumstances of the unconditional delivery of the Policy without prepayment of
the premium, yet it is obvious that defendant had not accepted the insurer's offer to
extend credit, which is essential for the validity of such agreement.

An acceptance of an offer to allow credit, if one was made, is as essential to make a valid
agreement for credit, to change a conditional delivery of an insurance policy to an
unconditional delivery, as it is to make any other contract. Such an acceptance could not
be merely a mental act or state of mind, but would require a promise to pay made known
in some manner to defendant. 9

In this respect, the instant case differs from that involving the same parties
entitled Philippine Phoenix Surety & Insurance Inc. vs. Woodworks, Inc., 10 where recovery
of the balance of the unpaid premium was allowed inasmuch as in that case "there was
not only a perfected contract of insurance but a partially performed one as far as the
payment of the agreed premium was concerned." This is not the situation obtaining here
where no partial payment of premiums has been made whatsoever.

Since the premium had not been paid, the policy must be deemed to have lapsed.

The non-payment of premiums does not merely suspend but put, an end to an insurance
contract, since the time of the payment is peculiarly of the essence of the contract. 11

... the rule is that under policy provisions that upon the failure to make a payment of a
premium or assessment at the time provided for, the policy shall become void or
forfeited, or the obligation of the insurer shall cease, or words to like effect, because the
contract so prescribes and because such a stipulation is a material and essential part of
the contract. This is true, for instance, in the case of life, health and accident, fire and hail
insurance policies. 12

In fact, if the peril insured against had occurred, plaintiff, as insurer, would have had a
valid defense against recovery under the Policy it had issued. Explicit in the Policy itself is
plaintiff's agreement to indemnify defendant for loss by fire only "after payment of
premium," supra. Compliance by the insured with the terms of the contract is a condition
precedent to the right of recovery.

The burden is on an insured to keep a policy in force by the payment of premiums, rather
than on the insurer to exert every effort to prevent the insured from allowing a policy to
elapse through a failure to make premium payments. The continuance of the insurer's
obligation is conditional upon the payment of premiums, so that no recovery can be had
upon a lapsed policy, the contractual relation between the parties having ceased. 13

Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting
premiums and invalid for the purpose of indemnity." 14

II. THE POLICY
A. Definition and form
B. Fine print rule
C. Papers attached to the policy and their binding effect (rider, warranties, clause,
and endorsement)
D. Kinds of policy
1. open
2. valued
3. running
E. Cover notes
F. Cancellation of policy
G. Time to commence action on the policy; effect of stipulation
Pacific Timber Export Corporation vs. CA (112 SCRA 199)
G.R. No. L-38613 February 25, 1982
PACIFIC TIMBER EXPORT CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WORKMEN'S INSURANCE COMPANY, INC.,
respondents.
This petition seeks the review of the decision of the Court of Appeals reversing the
decision of the Court of First Instance of Manila in favor of petitioner and against private
respondent which ordered the latter to pay the sum of Pll,042.04 with interest at the rate
of 12% interest from receipt of notice of loss on April 15, 1963 up to the complete
payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby dismissing
petitioner s complaint with costs. 2
The findings of the of fact of the Court of Appeals, which are generally binding upon this
Court, Except as shall be indicated in the discussion of the opinion of this Court the
substantial correctness of still particular finding having been disputed, thereby raising a
question of law reviewable by this Court 3 are as follows:
March 19, l963, the plaintiff secured temporary insurance from the defendant for its
exportation of 1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped
from the Diapitan. Bay, Quezon Province to Okinawa and Tokyo, Japan. The defendant
issued on said date Cover Note No. 1010, insuring the said cargo of the plaintiff "Subject
to the Terms and Conditions of the WORKMEN'S INSURANCE COMPANY, INC. printed
Marine Policy form as filed with and approved by the Office of the Insurance
Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in favor of the plaintiff on
April 2, 1963. The two marine policies bore the numbers 53 HO 1032 and 53 HO 1033
(Exhibits B and C, respectively). Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces of
logs equivalent to 499,950 board feet. Policy No. 53 H0 1033 was for 853 pieces of logs
equivalent to 695,548 board feet (Exhibit C). The total cargo insured under the two marine
policies accordingly consisted of 1,395 logs, or the equivalent of 1,195.498 bd. ft.
After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two
marine policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to be
exported were lost during loading operations in the Diapitan Bay. The logs were to be
loaded on the 'SS Woodlock' which docked about 500 meters from the shoreline of the
Diapitan Bay. The logs were taken from the log pond of the plaintiff and from which they
were towed in rafts to the vessel. At about 10:00 o'clock a. m. on March 29, 1963, while
the logs were alongside the vessel, bad weather developed resulting in 75 pieces of logs
which were rafted together co break loose from each other. 45 pieces of logs were
salvaged, but 30 pieces were verified to have been lost or washed away as a result of the
accident.
In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of
'appropriately 32 pieces of log's during loading of the 'SS Woodlock'. The said letter
(Exhibit F) reads as follows:
April 4, 1963
Workmen's Insurance Company, Inc. Manila, Philippines
Gentlemen:
This has reference to Insurance Cover Note No. 1010 for shipment of
1,250,000 bd. ft. Philippine Lauan and Apitong Logs. We would like to inform
you that we have received advance preliminary report from our Office in
Diapitan, Quezon that we have lost approximately 32 pieces of logs during
loading of the SS Woodlock.
We will send you an accurate report all the details including values as soon as
same will be reported to us.
Thank you for your attention, we wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT CORPORATION
(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.
Although dated April 4, 1963, the letter was received in the office of the
defendant only on April 15, 1963, as shown by the stamp impression
appearing on the left bottom corner of said letter. The plaintiff subsequently
submitted a 'Claim Statement demanding payment of the loss under Policies
Nos. 53 HO 1032 and 53 HO 1033, in the total amount of P19,286.79 (Exhibit
G).
On July 17, 1963, the defendant requested the First Philippine Adjustment
Corporation to inspect the loss and assess the damage. The adjustment
company submitted its 'Report on August 23, 1963 (Exhibit H). In said report,
the adjuster found that 'the loss of 30 pieces of logs is not covered by
Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the
actual number of logs loaded on board the 'SS Woodlock' However, the loss of
30 pieces of logs is within the 1,250,000 bd. ft. covered by Cover Note 1010
insured for $70,000.00.
On September 14, 1963, the adjustment company submitted a computation of
the defendant's probable liability on the loss sustained by the shipment, in the
total amount of Pl1,042.04 (Exhibit 4).
On January 13, 1964, the defendant wrote the plaintiff denying the latter's
claim, on the ground they defendant's investigation revealed that the entire
shipment of logs covered by the two marines policies No. 53 110 1032 and
713 HO 1033 were received in good order at their point of destination. It was
further stated that the said loss may be considered as covered under Cover
Note No. 1010 because the said Note had become 'null and void by virtue of
the issuance of Marine Policy Nos. 53 HO 1032 and 1033'(Exhibit J-1). The
denial of the claim by the defendant was brought by the plaintiff to the
attention of the Insurance Commissioner by means of a letter dated March
21, 1964 (Exhibit K). In a reply letter dated March 30, 1964, Insurance
Commissioner Francisco Y. Mandanas observed that 'it is only fair and
equitable to indemnify the insured under Cover Note No. 1010', and advised
early settlement of the said marine loss and salvage claim (Exhibit L).
On June 26, 1964, the defendant informed the Insurance Commissioner that,
on advice of their attorneys, the claim of the plaintiff is being denied on the
ground that the cover note is null and void for lack of valuable consideration
(Exhibit M). 4
Petitioner assigned as errors of the Court of Appeals, the following:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS
NULL AND VOID FOR LACK OF VALUABLE CONSIDERATION BECAUSE THE
COURT DISREGARDED THE PROVEN FACTS THAT PREMIUMS FOR THE
COMPREHENSIVE INSURANCE COVERAGE THAT INCLUDED THE COVER NOTE WAS
PAID BY PETITIONER AND THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER
AND THAT NO SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON
ALL ITS COVER NOTES.
II
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS
RELEASED FROM LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE DELAY
IN GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED THE PROVEN FACT
THAT PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE
CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND, CONSEQUENTLY,
OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE INSURANCE
ACT. 5
1. Petitioner contends that the Cover Note was issued with a consideration when, by
express stipulation, the cover note is made subject to the terms and conditions of the
marine policies, and the payment of premiums is one of the terms of the policies. From
this undisputed fact, We uphold petitioner's submission that the Cover Note was not
without consideration for which the respondent court held the Cover Note as null and
void, and denied recovery therefrom. The fact that no separate premium was paid on the
Cover Note before the loss insured against occurred, does not militate against the validity
of petitioner's contention, for no such premium could have been paid, since by the nature
of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the
shipment that would serve as basis for the computation of the premiums. As a logical
consequence, no separate premiums are intended or required to be paid on a Cover Note.
This is a fact admitted by an official of respondent company, Juan Jose Camacho, in
charge of issuing cover notes of the respondent company (p. 33, tsn, September 24,
1965).
At any rate, it is not disputed that petitioner paid in full all the premiums as called for by
the statement issued by private respondent after the issuance of the two regular marine
insurance policies, thereby leaving no account unpaid by petitioner due on the insurance
coverage, which must be deemed to include the Cover Note. If the Note is to be treated as
a separate policy instead of integrating it to the regular policies subsequently issued, the
purpose and function of the Cover Note would be set at naught or rendered meaningless,
for it is in a real sense a contract, not a mere application for insurance which is a mere
offer. 6
It may be true that the marine insurance policies issued were for logs no longer including
those which had been lost during loading operations. This had to be so because the risk
insured against is not for loss during operations anymore, but for loss during transit, the
logs having already been safely placed aboard. This would make no difference, however,
insofar as the liability on the cover note is concerned, for the number or volume of logs
lost can be determined independently as in fact it had been so ascertained at the
instance of private respondent itself when it sent its own adjuster to investigate and
assess the loss, after the issuance of the marine insurance policies.
The adjuster went as far as submitting his report to respondent, as well as its
computation of respondent's liability on the insurance coverage. This coverage could not
have been no other than what was stipulated in the Cover Note, for no loss or damage
had to be assessed on the coverage arising from the marine insurance policies. For
obvious reasons, it was not necessary to ask petitioner to pay premium on the Cover
Note, for the loss insured against having already occurred, the more practical procedure
is simply to deduct the premium from the amount due the petitioner on the Cover Note.
The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner
to lose what is due it as if there had been payment of premium, for non-payment by it was
not chargeable against its fault. Had all the logs been lost during the loading operations,
but after the issuance of the Cover Note, liability on the note would have already arisen
even before payment of premium. This is how the cover note as a "binder" should legally
operate otherwise, it would serve no practical purpose in the realm of commerce, and is
supported by the doctrine that where a policy is delivered without requiring payment of
the premium, the presumption is that a credit was intended and policy is valid. 7
2. The defense of delay as raised by private respondent in resisting the claim cannot be
sustained. The law requires this ground of delay to be promptly and specifically asserted
when a claim on the insurance agreement is made. The undisputed facts show that
instead of invoking the ground of delay in objecting to petitioner's claim of recovery on
the cover note, it took steps clearly indicative that this particular ground for objection to
the claim was never in its mind. The nature of this specific ground for resisting a claim
places the insurer on duty to inquire when the loss took place, so that it could determine
whether delay would be a valid ground upon which to object to a claim against it.
As already stated earlier, private respondent's reaction upon receipt of the
notice of loss, which was on April 15, 1963, was to set in motion from July
1963 what would be necessary to determine the cause and extent of the loss,
with a view to the payment thereof on the insurance agreement. Thus it sent
its adjuster to investigate and assess the loss in July, 1963. The adjuster
submitted his report on August 23, 1963 and its computation of respondent's
liability on September 14, 1963. From April 1963 to July, 1963, enough time
was available for private respondent to determine if petitioner was guilty of
delay in communicating the loss to respondent company. In the proceedings
that took place later in the Office of the Insurance Commissioner, private
respondent should then have raised this ground of delay to avoid liability. It
did not do so. It must be because it did not find any delay, as this Court fails
to find a real and substantial sign thereof. But even on the assumption that
there was delay, this Court is satisfied and convinced that as expressly
provided by law, waiver can successfully be raised against private respondent.
Thus Section 84 of the Insurance Act provides:
Section 84.—Delay in the presentation to an insurer of notice or proof of loss
is waived if caused by any act of his or if he omits to take objection promptly
and specifically upon that ground.
From what has been said, We find duly substantiated petitioner's assignments
of error.
ACCORDINGLY, the appealed decision is set aside and the decision of the
Court of First Instance is reinstated in toto with the affirmance of this Court.
No special pronouncement as to costs. SO ORDERED.
Great Pacific Life Assurance Corporation vs. CA, 89 SCRA 543
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.
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.
PhilAm Life and General Insurance Co. vs. Judge Valencia-Bagalacsa (GR No.
139776; August 1, 2002)
G.R. No. 139776 August 1, 2002
PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, petitioner,
vs.
JUDGE LORE R. VALENCIA-BAGALACSA, Regional Trial Court of Libmanan, Camarines
Sur, Branch 56, and EDUARDO Z. LUMANIOG, CELSO Z. LUMANIOG and RUBEN Z.
LUMANIOG, respondents.
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Philippine American Life and General Insurance Company prays that the
decision of the Court of Appeals promulgated on April 30, 1999 be reversed and set aside
and that the Complaint filed against it by private respondents Eduardo Z. Lumaniog,
Celso Z. Lumaniog and Ruben Z. Lumaniog before the Regional Trial Court of Libmanan,
Camarines Sur, docketed as Civil Case No. L-787 be ordered dismissed on ground of
prescription of action.
The facts of the case:
On June 20, 1995, private respondents, as legitimate children and forced heirs of their
late father, Faustino Lumaniog, filed with the aforesaid RTC, a complaint for recovery of
sum of money against petitioner alleging that: their father was insured by petitioner under
Life Insurance Policy No. 1305486 with a face value of P50,000.00; their father died of
"coronary thrombosis" on November 25, 1980; on June 22, 1981, they claimed and
continuously claimed for all the proceeds and interests under the life insurance policy in
the amount of P641,000.00, despite repeated demands for payment and/or
settlement of the claim due from petitioner, the last of which is on December
1, 1994, petitioner finally refused or disallowed said claim on February 14,
1995;1 and so, they filed their complaint on June 20, 1995.
Petitioner filed an Answer with Counterclaim and Motion to Dismiss,
contending that: the cause of action of private respondents had prescribed
and they are guilty of laches; it had denied private respondents’ claim in a
letter dated March 12, 1982, signed by its then Assistant Vice President,
Amado Dimalanta, on ground of concealment on the part of the deceased
insured Faustino when he asserted in his application for insurance coverage
that he had not been treated for indication of "chest pain, palpitation, high
blood pressure, rheumatic fever, heart murmur, heart attack or other disorder
of the heart or blood vessel" when in fact he was a known hypertensive since
1974; private respondents sent a letter dated May 25, 19832 requesting for
reconsideration of the denial; in a letter dated July 11, 1983, it reiterated its
decision to deny the claim for payment of the proceeds;3 more than ten (10)
years later, or on December 1, 1994, it received a letter from Jose C. Claro, a
provincial board member of the province of Camarines Sur, reiterating the
early request for reconsideration which it denied in a letter dated February 14,
1995.4
Private respondents opposed the motion to dismiss.5
On June 7, 1996, the RTC issued an Order which reads:
"After a perusal of the motion to dismiss filed by defendants’ counsel and the
objection submitted by plaintiff’s counsel, the Court finds that the matters
treated in their respective pleadings are evidentiary in nature, hence, the
necessity of a trial on the merits.
"Set therefore the hearing in this case on August 1, 1996 at 8:30 a.m.,
considering that the calendar of the Court is already filled up until the end of
July. Notify parties and counsels.
"SO ORDERED."6
Petitioner’s motion for reconsideration was denied by the RTC in its Order
dated December 12, 1997 upholding however in the same Order the claim of
private respondents’ counsel that the running of the 10-year period was
"stopped" on May 25, 1983 when private respondents requested for a
reconsideration of the denial and it was only on February 14, 1995 when
petitioner finally decided to deny their claim that the 10-year period began to
run.7
Petitioner filed a petition for certiorari (docketed as CA-G.R. SP No. 47885)
under Rule 65 of the Rules of Court in the Court of Appeals and after the
comment of the private respondents and reply of petitioner, the appellate
court rendered its Decision, dated April 30, 1999, portions of which read as
follows:
"Thus, this Court of the opinion and so holds that the prescriptive period to
bring the present action commences to run only on February 14, 1995 (Rollo,
pp. 25-26), the date when the petitioner finally rejected the claim of private
respondents and not in 1983. The ten year period should instead be counted
from the date of rejection by the insurer in this case February 14, 1995 –since
this is the time when the cause of action accrues.
"This fact was supported further by the letter of the petitioner to Atty. Claro
dated December 20, 1994, stating that they were reviewing the claim and shall
advise Atty. Claro of their action regarding his request for reconsideration (Id.,
p. 53).
"In the case of Summit Guaranty and Insurance Co., Inc. Vs. De Guzman (151
SCRA 389, 397-398), citing the case of Eagle Star Insurance Co., Ltd., et al. vs.
Chia Yu, the Supreme Court held that:
‘The plaintiff’s cause of action did not accrue until his claim was finally
rejected by the insurance company. This is because, before such final
rejection, there was no real necessity for bringing suit.’
"In the same case, the case of ACCFA vs. Alpha Insurance and Surety Co., was likewise
cited where the Supreme Court ruled in this wise:
‘Since a ‘cause of action’ requires, as essential elements, not only a legal right of the
plaintiff and a correlative of the defendant but also ‘an act or omission of the defendant
in violation of said legal right’, the cause of action does not accrue until the party
obligated refuses, expressly or impliedly, to comply with its duty.’
"Hence, We find no grave abuse of discretion committed by the court a quo when it
issued the Orders dated June 7, 1996 and dated December 12, 1997.
"WHEREFORE, the instant petition for certiorari with prayer for issuance of temporary
restraining order and/or preliminary injunction is DENIED DUE COURSE and is accordingly
DISMISSED by this Court for lack of merit.
"Costs against the petitioner.
"SO ORDERED."8
Hence, the present petition for review. Petitioner posits the following issues:
"A. Whether or not the complaint filed by private respondents for
payment of life insurance proceeds is already barred by
prescription of action.
"B. Whether or not an extrajudicial demand made after an action
has prescribed shall cause the revival of the action."9
Private respondents filed their Comment and petitioners, their Reply.
Before we determine whether the Court of Appeals had committed any reversible error,
we must necessarily first ascertain whether or not the RTC committed grave abuse of
discretion in issuing the Orders dated June 7, 1996 and December 12, 1997.
Notably, the RTC was initially correct in issuing the Order dated June 7, 1996 when it set
the case below for hearing as there are matters in the respective pleadings of the parties
"that are evidentiary in nature, hence the necessity of a trial on the merits"10 , in effect,
denying the motion to dismiss, pursuant to the then prevailing Section 3, Rule 16, of the
Rules of Court, to wit:
"Sec. 3. Hearing and order. - After hearing the court may deny or grant the motion or allow
amendment of pleading, or may defer the hearing and determination of the motion until
the trial if the ground alleged therein does not appear to be indubitable."
before it was amended by the 1997 Rules of Civil Procedure, effective July 1, 1997.11
It must be emphasized that petitioner had specifically alleged in the Answer that it had
denied private respondents’ claim per its letter dated July 11, 1983. 12 Hence, due
process demands that it be given the opportunity to prove that private respondents had
received said letter, dated July 11, 1983. Said letter is crucial to petitioner’s defense that
the filing of the complaint for recovery of sum of money in June, 1995 is beyond the 10-
year prescriptive period13 .
It is for the above reason that the RTC committed a grave abuse of discretion when, in
resolving the motion for reconsideration of petitioner, it arbitrarily ruled in its Order dated
December 12, 1997, that the period of ten (10) years had not yet lapsed. It based its
finding on a mere explanation of the private respondents’ counsel and not on evidence
presented by the parties as to the date when to reckon the prescriptive period. Portions
of the Order dated December 12, 1997 read:
"A perusal of the record will likewise reveal that plaintiffs’ counsel
explained that the running of the ten (10) year period was stopped
on May 25, 1983, upon demand of Celso Lomaniog for the
compliance of the contract and reconsideration of the decision.
Counsel also wrote the President of the Company on December 1,
1994, asking for reconsideration. The letter was answered by the
Assistant Vice President of the Claims Department of Philamlife,
with the advise ‘that the company is reviewing the claim.’ On
February 14, 1995, Atty. Abis sent a letter to counsel, finally
deciding the plaintiffs’ claim. Thus, the period of
prescription should commence to run only from
February 14, 1995, when Atty. Abis finally decided
plaintiffs’ claim.1âwphi1
"It is evident from the foregoing that the ten (10) year
period for plaintiffs to claim the insurance proceeds
has not yet prescribed. The final determination
denying the claim was made only on February 14,
1995. Hence, when the instant case was filed on June
20, 1995, the ten year period has not yet lapsed.
Moreover, defendant’s counsel failed to comply with
the requirements of the Rules in filing his motion for
reconsideration."14 (emphasis supplied)
The ruling of the RTC that the cause of action of private respondents had not
prescribed, is arbitrary and patently erroneous for not being founded on
evidence on record, and therefore, the same is void.15
Consequently, while the Court of Appeals did not err in upholding the June 7,
1986 Order of the RTC, it committed a reversible error when it declared that
the RTC did not commit any grave abuse of discretion in issuing the Order
dated December 12, 1997.
The appellate court should have granted the petition for certiorari assailing
said Order of December 12, 1997. Certiorari is an appropriate remedy to assail
an interlocutory order (1) when the tribunal issued such order without or in
excess of jurisdiction or with grave abuse of discretion and (2) when the
assailed interlocutory order is patently erroneous and the remedy of appeal
would not afford adequate and expeditious relief.16 Said Order was issued
with grave abuse of discretion for being patently erroneous and arbitrary, thus,
depriving petitioner of due process, as discussed earlier.
WHEREFORE, the petition is partly GRANTED. The assailed decision of the
Court of Appeals dated April 30, 1999 insofar only as it upheld the Order
dated December 12, 1997 is REVERSED and SET ASIDE. A new judgment is
entered reversing and setting aside the Order dated December 12, 1997 of the
Regional Trial Court of Libmanan, Camarines Sur (Branch 56) and affirming its
Order dated June 20, 1995. Said RTC is directed to proceed with dispatch with
Civil Case No. L-787. No costs SO ORDERED.
III. ASCERTAINNG AND CONTROLLING RISKS
A. Concealment
1. Concept
2. Duty to communicate
3. Test of materiality
4. Effect of concealment
5. Matters which need not be communicated
6. Waiver of information
B. Representation
1. Concept
2. Kinds of representation
3. Test of materiality
4. Effect of alteration or withdrawal
5. Time to which representation refers
6. Effect when representation is obtained from third persons
7. When presumed false; effect of falsity
C. Remedies available in case of concealment or false representation
1. When rescission by the insurer may be exercised
2. When life insurance policy becomes incontestable

a. requisites for incontestability
b. theory and object of incontestability
c. defenses not barred by incontestability
D. Warranties
1. Concept; distinguished from representation
2. Kinds of warranties (express, implied, affirmative, promissory)
3. Time to which warranty refers (Sec. 68, ICP)
4. Effect of breach (Sec. 74, 75, & 76, ICP)
Great Pacific Life Assurance vs. CA (316 SCRA 678)
[G.R. No. 113899. October 13, 1999]
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, Respondents.
This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated
May 17, 1993, of the Court of Appeals and its Resolution 2 dated January 4, 1994 in CA-
G.R. CV No. 18341. The appellate court affirmed in toto the judgment of the Misamis
Oriental Regional Trial Court, Branch 18, in an insurance claim filed by private respondent
against Great Pacific Life Assurance Co. The dispositive portion of the trial courts
decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorneys fees and litigation expenses in the complaint and counterclaim, with costs
against the defendant and dismissing the complaint in respect to the plaintiffs, other than
the widow-beneficiary, for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life
Assurance Corporation (hereinafter Grepalife) and Development Bank of the Philippines
(hereinafter DBP). Grepalife agreed to insure the lives of eligible housing loan mortgagors
of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP
applied for membership in the group life insurance plan. In an application form, Dr.
Leuterio answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.4
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage
of Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to eighty-six
thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage. Consequently,
DBP submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr.
Leuterio was not physically healthy when he applied for an insurance coverage on
November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he had been
suffering from hypertension, which caused his death. Allegedly, such non-disclosure
constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio,
filed a complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against
Grepalife for Specific Performance with Damages. 5 During the trial, Dr.
Hernando Mejia, who issued the death certificate, was called to testify. Dr.
Mejias findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably due to
high blood pressure. The inference was not conclusive because Dr. Leuterio
was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of
respondent widow and against Grepalife. On May 17, 1993, the Court of
Appeals sustained the trial courts decision. Hence, the present petition.
Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE
TO THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A
PARTY TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF PLAINTIFFS HUSBAND
WILFREDO LEUTERIO ONE OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO
PAY TO DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO
DBP IN ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH
DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO
CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE
CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO. 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as
beneficiary in a group life insurance contract from a complaint filed by the
widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio
concealed that he had hypertension, which would vitiate the insurance
contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the
amount of eighty six thousand, two hundred (P86,200.00) pesos without
proof of the actual outstanding mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr.
Leuterio, not the real party in interest, hence the trial court acquired no
jurisdiction over the case. It argues that when the Court of Appeals affirmed
the trial courts judgment, Grepalife was held liable to pay the proceeds of
insurance contract in favor of DBP, the indispensable party who was not
joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged
properties and the parties to this type of contract. The rationale of a group
insurance policy of mortgagors, otherwise known as the mortgage
redemption insurance, is a device for the protection of both the mortgagee
and the mortgagor. On the part of the mortgagee, it has to enter into such
form of contract so that in the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage contract, the proceeds
from such insurance will be applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from paying the obligation. 7 In a
similar vein, ample protection is given to the mortgagor under such a concept
so that in the event of death; the mortgage obligation will be extinguished by
the application of the insurance proceeds to the mortgage
indebtedness.8 Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor
continues to be a party to the contract. In this type of policy insurance, the mortgagee is The insured, Dr. Leuterio, had answered in his insurance application that he
simply an appointee of the insurance fund, such loss-payable clause does not make the was in good health and that he had not consulted a doctor or any of the
mortgagee a party to the contract.9cräläwvirtualibräry enumerated ailments, including hypertension; when he died the attending
physician had certified in the death certificate that the former died of cerebral
hemorrhage, probably secondary to hypertension. From this report, the
Section 8 of the Insurance Code provides:
appellant insurance company refused to pay the insurance claim. Appellant
alleged that the insured had concealed the fact that he had hypertension.
Unless the policy provides, where a mortgagor of property effects insurance in his own
name providing that the loss shall be payable to the mortgagee, or assigns a policy of
Contrary to appellants allegations, there was no sufficient proof that the
insurance to a mortgagee, the insurance is deemed to be upon the interest of the
insured had suffered from hypertension. Aside from the statement of the
mortgagor, who does not cease to be a party to the original contract, and any act of his,
insureds widow who was not even sure if the medicines taken by Dr. Leuterio
prior to the loss, which would otherwise avoid the insurance, will have the same effect,
were for hypertension, the appellant had not proven nor produced any witness
although the property is in the hands of the mortgagee, but any act which, under the
who could attest to Dr. Leuterios medical history...
contract of insurance, is to be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had been performed by the
mortgagor. xxx

The insured private respondent did not cede to the mortgagee all his rights or interests in Appellant insurance company had failed to establish that there was
the insurance, the policy stating that: In the event of the debtors death before his concealment made by the insured, hence, it cannot refuse payment of the
indebtedness with the Creditor [DBP] shall have been fully paid, an amount to pay the claim.17
outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the
The fraudulent intent on the part of the insured must be established to entitle
debtor.10 When DBP submitted the insurance claim against petitioner, the latter denied
the insurer to rescind the contract. 18 Misrepresentation as a defense of the
payment thereof, interposing the defense of concealment committed by the insured.
insurer to avoid liability is an affirmative defense and the duty to establish
Thereafter, DBP collected the debt from the mortgagor and took the necessary action of
such defense by satisfactory and convincing evidence rests upon the
foreclosure on the residential lot of private respondent. 11 In Gonzales La O vs. Yek Tong
insurer.19 In the case at bar, the petitioner failed to clearly and satisfactorily
Lin Fire & Marine Ins. Co.12 we held:
establish its defense, and is therefore liable to pay the proceeds of the
insurance.
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus sue,
And that brings us to the last point in the review of the case at bar. Petitioner
although the policy is taken wholly or in part for the benefit of another person named or
claims that there was no evidence as to the amount of Dr. Leuterios
unnamed, and although it is expressly made payable to another as his interest may
outstanding indebtedness to DBP at the time of the mortgagors death. Hence,
appear or otherwise. * * * Although a policy issued to a mortgagor is taken out for the
for private respondents failure to establish the same, the action for specific
benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon
performance should be dismissed. Petitioners claim is without merit. A life
in his own name, especially where the mortgagees interest is less than the full amount
insurance policy is a valued policy. 20 Unless the interest of a person insured is
recoverable under the policy, * * *.
susceptible of exact pecuniary measurement, the measure of indemnity under
a policy of insurance upon life or health is the sum fixed in the policy. 21 The
And in volume 33, page 82, of the same work, we read the following: mortgagor paid the premium according to the coverage of his insurance,
which states that:

Insured may be regarded as the real party in interest, although he has assigned the policy
for the purpose of collection, or has assigned as collateral security any judgment he may The policy states that upon receipt of due proof of the Debtors death during
obtain.13 the terms of this insurance, a death benefit in the amount of P86,200.00 shall
be paid.

And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such person In the event of the debtors death before his indebtedness with the creditor
may recover it whatever the insured might have recovered, 14 the widow of the decedent shall have been fully paid, an amount to pay the outstanding indebtedness
Dr. Leuterio may file the suit against the insurer, Grepalife. shall first be paid to the Creditor and the balance of the Sum Assured, if there
is any shall then be paid to the beneficiary/ies designated by the
debtor.22 (Emphasis omitted)
The second assigned error refers to an alleged concealment that the petitioner
interposed as its defense to annul the insurance contract. Petitioner contends that Dr.
Leuterio failed to disclose that he had hypertension, which might have caused his death. However, we noted that the Court of Appeals decision was promulgated on
Concealment exists where the assured had knowledge of a fact material to the risk, and May 17, 1993. In private respondents memorandum, she states that DBP
honesty, good faith, and fair dealing requires that he should communicate it to the foreclosed in 1995 their residential lot, in satisfaction of mortgagors
assured, but he designedly and intentionally withholds the same. 15cräläwvirtualibräry outstanding loan. Considering this supervening event, the insurance proceeds
shall inure to the benefit of the heirs of the deceased person or his
beneficiaries. Equity dictates that DBP should not unjustly enrich itself at the
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia,
expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
as supported by the information given by the widow of the decedent. Grepalife asserts
collect the insurance proceeds, after it already foreclosed on the mortgage.
that Dr. Mejias technical diagnosis of the cause of death of Dr. Leuterio was a duly
The proceeds now rightly belong to Dr. Leuterios heirs represented by his
documented hospital record, and that the widows declaration that her husband had
widow, herein private respondent Medarda Leuterio.
possible hypertension several years ago should not be considered as hearsay, but as part
of res gestae.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of
the Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION
On the contrary the medical findings were not conclusive because Dr. Mejia did not
that the petitioner is ORDERED to pay the insurance proceeds amounting to
conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia
Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the
stated that he had no knowledge of Dr. Leuterios any previous hospital confinement. 16 Dr.
insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior
Leuterios death certificate stated that hypertension was only the possible cause of death.
settlement of mortgagors indebtedness to Development Bank of the
The private respondents statement, as to the medical history of her husband, was due to
Philippines. Costs against petitioner. SO ORDERED.
her unreliable recollection of events. Hence, the statement of the physician was properly
considered by the trial court as hearsay.

Sun Life Assurance Co. of Canada vs. CA (G.R. No.

The question of whether there was concealment was aptly answered by the appellate
105135, June 22, 1995)
court, thus:
 [G.R. No. 105135. June 22, 1995.]
SUNLIFE ASSURANCE COMPANY OF CANADA, Petitioner, v. The Hon. COURT OF
APPEALS and Spouses ROLANDO and BERNARDA BACANI, Respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF LOWER COURTS; RULE AND
EXCEPTION. — The rule that factual findings of the lower court and the appellate court
are binding on this Court is not absolute and admits of exceptions, such as when the
judgment is based on a misappreciation of the facts.
2. COMMERCIAL LAW; INSURANCE; CONCEALMENT; DEFINED. — Section 26 of The
Insurance Code is explicit in requiring a party to a contract of insurance to communicate
to the other, in good faith, all facts within his knowledge which are material to the
contract and as to which he makes no warranty, and which the other has no means of
ascertaining. Said Section provides: "A neglect to communicate that which a party knows
and ought to communicate. is called concealment."cralaw virtua1aw library
3. ID.; ID.; ID.; TEST OF MATERIALITY; RULE; APPLICATION IN CASE AT BAR. — Materiality
is to be determined not by the event, but solely by the probable and reasonable influence
of the facts upon the party to whom communication is due, in forming his estimate of the
disadvantages of the proposed contract or in making his inquiries (The Insurance Code,
Sec. 31). The terms of the contract are clear. The insured is specifically required to
disclose to the insurer matters relating to his health. The information which the insured
failed to disclose were material and relevant to the approval and issuance of the
insurance policy. The matters concealed would have definitely affected petitioner’s action
on his application, either by approving it with the corresponding adjustment for a higher
premium or rejecting the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application. In Vda. de Canilang v. Court of Appeals, 223 SCRA
443 (1993), we held that materiality of the information withheld does not depend on the
state of mind of the insured. Neither does it depend on the actual or physical events
which ensue. Thus, "good faith" is no defense in concealment. The insured’s failure to
disclose the fact that he was hospitalized for two weeks prior to filing his application for
insurance, raises grave doubts about his bonafides. It appears that such concealment
was deliberate on his part.
4. ID.; ID.; ID.; RULE IN CASE THERE IS A WAIVER OF MEDICAL EXAMINATION. — The
argument, that petitioner’s waiver of the medical examination of the insured debunks the
materiality of the facts concealed, is untenable. We reiterate our ruling in Saturnino v.
Philippine American Life Insurance Company, 7 SCRA 316 (1963), that "x x x the waiver of
a medical examination [in a non-medical insurance contract renders even more material
the information required of the applicant concerning previous condition of health and
diseases suffered, for such information necessarily constitutes an important factor which
the insurer takes into consideration in deciding whether to issue the policy or not x x x."
Moreover, such argument of private respondents would make Section 27 of the Insurance
Code, which allows the injured party to rescind a contract of insurance where there is
concealment, ineffective.
5. ID.; ID.; ID.; RULE IN CASE THE FACTS CONCEALED HAD NO BEARING TO THE CAUSE
OF DEATH OF THE INSURED. — Anent the finding that the facts concealed had no bearing
to the cause of death of the insured, it is well settled that the insured need not die of the
disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure
misled the insurer in forming his estimates of the risks of the proposed insurance policy
or in making inquiries.
DECISION
QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to
reverse and set aside the Decision dated February 21, 1992 of the Court of Appeals in CA-
G.R. CV No. 29068, and its Resolution dated April 22, 1992, denying reconsideration
thereof.
We grant the petition.
I
On April 15, 1986, Robert John B. Bacani procured a life insurance contract
for himself from petitioner. He was issued Policy No. 3-903-766-X valued
P100,000.00, with double indemnity in case of accidental death. The
designated beneficiary was his mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda
Bacani filed a claim with petitioner, seeking the benefits of the insurance
policy taken by her son. Petitioner conducted an investigation and its findings
prompted it to reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani, that the insured
did not disclosed material facts relevant to the issuance of the policy, thus
rendering the contract of insurance voidable. A check representing the total
premiums paid in the amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application
when he answered the following questions:jgc:chanrobles.com.ph
"5. Within the past 5 years have you:chanrob1es virtual 1aw library
a) consulted any doctor or other health practitioner?
b) submitted to:chanrob1es virtual 1aw library
ECG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?
"6. Have you ever had or sought advice for:chanrob1es virtual 1aw library
x x x
b) urine, kidney or bladder disorder?"
(Rollo, p. 53).
The deceased answered questions No. 5(a) in the affirmative but limited his
answer to a consultation with a certain Dr. Reinaldo D. Raymundo of the
Chinese General Hospital on February 1986, for cough and flu complications.
The other questions were answered in the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for insurance, the
insured was examined and confined at the Lung Center of the Philippines,
where he was diagnosed for renal failure. During his confinement, the
deceased was subjected to urinalysis, ultra-sonography and hematology
tests.
On November 17, 1988, respondent Bernarda Bacani and her husband,
respondent Rolando Bacani, filed an action for specific performance against
petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila.
Petitioner filed its answer with counterclaim and a list off exhibits consisting
of medical records furnished by the Lung Center of the Philippines.
On January, 14, 1990, private respondents filed a "Proposed Stipulation with
Prayer for Summary Judgment" where they manifested that they "have no
evidence to refute the documentary evidence of
concealment/misrepresentation by the decedent of his health condition"
(Rollo, p. 62).
Petitioner filed its Request for Admissions relative to the authenticity and due
execution of several documents as well as allegations regarding the health of
the insured. Private respondents failed to oppose said request or reply
thereto, thereby rendering an admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in
favor of private respondents. The dispositive portion of the decision is reproduced as
follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendants, condemning the latter to pay the former the amount of One Hundred
Thousand Pesos (P100,000.00) the face value of insured’s Insurance Policy No. 3903766,
and the Accidental Death Benefit in the amount of One Hundred Thousand Pesos
(P100,000.00) and further sum of P5,000.00 in the concept of reasonable attorney’s fees
and the costs of the suit.
"Defendant’s counterclaim is hereby Dismissed" (Rollo, pp. 43-44).
In the ruling of private respondents, the trial court concluded that the facts concealed by
the insured were made in good faith and under the belief that they need not be disclosed.
Moreover, it held that the health history of the insured was immaterial since the insurance
policy was "non-medical."cralaw virtua1aw library
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court.
The appellate court ruled that petitioner cannot avoid its obligation by claiming
concealment because the cause of death was unrelated to the facts concealed by the
insured. It also sustained the finding of the trial court that the matters relating to the
health history of the insured were irrelevant since the petitioner waived the medical
examination prior to the approval and issuance of the insurance policy. Moreover, the
appellate court agreed with the trial court that the policy was "non-medical" (Rollo, pp. 4-
5).
Petitioner’s motion for reconsideration was denied, hence, this petition.
Philippine American Life Insurance Company, 7 SCRA 316 (1963), that." . . the
waiver of a medical examination [in a non-medical insurance contract]
renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer
takes into consideration in deciding whether to issue the policy or
not . . . ."cralaw virtua1aw library
Moreover, such argument of private respondents would make Section 27 of
the Insurance Code, which allows the injured party to rescind a contract of
insurance where there is concealment, ineffective (See Vda de Canilang v.
Court of Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of
death of the insured, it is well settled that the insured need not die of the
disease he had failed to disclose to the insurer. It is sufficient that his non-
disclosure misled the insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries (Henson v. The Philippine
American Life Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the
contract of insurance by reason of the concealment employed by the insured.
It must be emphasized that rescission was exercised within the two-year
contestability period as recognized in Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of
Appeals is REVERSED and SET ASIDE.

II SO ORDERED.

We reverse the decision of the Court of Appeals.

The rule that factual findings of the lower court and the appellate court are binding on
this Court is not absolute and admits of exceptions, such as when the judgment is based
on a misappreciation of the facts (Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).

In weighing the evidence presented, the trial court concluded that indeed there was
concealment and misrepresentation, however, the same was made in "good faith" and the
facts concealed or misrepresented were irrelevant since the policy was "non-medical." We
disagree.

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

to communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other has
no means of ascertaining. Said Section provides:jgc:chanrobles.com.ph

"A neglect to communicate that which a party knows and ought to communicate, is called
concealment."cralaw virtua1aw library

Materiality is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom communication is due, in forming his
estimate of the disadvantages of the proposed contract or in making his inquiries (The
Insurance Code, Sec 31).

The terms of the contract are clear. The insured is specifically required to disclose to the
insurer matters relating to his health.

The information which the insured failed to disclose were material and relevant to the
approval and the issuance of the insurance policy. The matters concealed would have
definitely affected petitioner’s action on his application, either by approving it with the
corresponding adjustment for a higher premium or rejecting the same. Moreover, a
disclosure may have warranted a medical examination of the insured by petitioner in
order for it to reasonably assess the risk involved in accepting the application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of
the information withheld does not depend on the state of mind of the insured. Neither
does it depend on the actual or physical events which ensue.

Thus, "good faith" is no defense in concealment. The insured’s failure to disclose the fact
that he was hospitalized for two weeks prior to filing his application for insurance, raises
grave doubts about his bonafides. It appears that such concealment was deliberate on
his part.

The argument, that petitioner’s waiver of the medical examination of the insured debunks
the materiality of the facts concealed, is untenable. We reiterate our ruling in Saturnino v.

Philamcare Health Systems Inc. vs. CA (379 SCRA 356)
G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
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, respondent’s 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 Ernani’s medical
history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that
he was hypertensive, diabetic and asthmatic, contrary to his answer in the application
form. Thus, respondent paid the hospitalization expenses herself, amounting to about
P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was
constrained to bring him back to the Chinese General Hospital where he died on the same
day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44,
an action for damages against petitioner and its president, Dr. Benito Reverente, which
was docketed as Civil Case No. 90-53795. She asked for reimbursement of her expenses
plus moral damages and attorney’s fees. After trial, the lower court ruled against
petitioners, viz:
WHEREFORE, in view of the 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 attorney’s fees of P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner Reverente. 4
Petitioner’s motion for reconsideration was denied. 5 Hence, petitioner brought
the instant petition for review, raising the primary argument that a health care
agreement is not an insurance contract; hence the "incontestability clause"
under the Insurance Code6 does not apply.1âwphi1.nêt
Petitioner argues that the agreement grants "living benefits," such as medical
check-ups and hospitalization which a member may immediately enjoy so
long as he is alive upon effectivity of the agreement until its expiration one-
year thereafter. Petitioner also points out that only medical and
hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is
indemnified for his loss. Moreover, since Health Care Agreements are only for
a period of one year, as compared to insurance contracts which last longer, 7
petitioner argues that the incontestability clause does not apply, as the same
requires an effectivity period of at least two years. Petitioner further argues
that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of
the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a premium.8
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable
interest against him, may be insured against. Every person has an insurable
interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondent’s husband in obtaining
the health care agreement was his own health. The health care agreement
was in the nature of non-life insurance, which is primarily a contract of
indemnity.9 Once the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract.
Petitioner argues that respondent’s husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondent’s husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health to furnish 1. Prior notice of cancellation to insured;
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
2. Notice must be based on the occurrence after effective date of the policy
respondent’s husband states:
of one or more of the grounds mentioned;

We hereby declare and agree that all statement and answers contained herein and in any
3. Must be in writing, mailed or delivered to the insured at the address shown
addendum annexed to this application are full, complete and true and bind all parties in
in the policy;
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 4. Must state the grounds relied upon provided in Section 64 of the Insurance
lifetime and good health of proposed Members; that no information acquired by any Code and upon request of insured, to furnish facts on which cancellation is
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing based.18
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
None of the above pre-conditions was fulfilled in this case. When the terms of
professional capacity upon any question affecting the eligibility for health care coverage
insurance contract contain limitations on liability, courts should construe
of the Proposed Members and that the acceptance of any Agreement issued on this
them in such a way as to preclude the insurer from non-compliance with his
application shall be a ratification of any correction in or addition to this application as
obligation.19 Being a contract of adhesion, the terms of an insurance contract
stated in the space for Home Office Endorsement.11 (Underscoring ours)
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
In addition to the above condition, petitioner additionally required the applicant for over the terms and phraseology of the insurance contract, ambiguity must be
authorization to inquire about the applicant’s medical history, thus: 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,
I hereby authorize any person, organization, or entity that has any record or knowledge of
such as the one at bar, must be liberally construed in favor of the subscriber,
my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any
and if doubtful or reasonably susceptible of two interpretations the
and all information relative to any hospitalization, consultation, treatment or any other
construction conferring coverage is to be adopted, and exclusionary clauses
medical advice or examination. This authorization is in connection with the application
of doubtful import should be strictly construed against the provider.22
for health care coverage only. A photographic copy of this authorization shall be as valid
as the original.12 (Underscoring ours)
Anent the incontestability of the membership of respondent’s husband, we
quote with approval the following findings of the trial court:
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which
reads:
(U)nder the title Claim procedures of expenses, the defendant Philamcare
Health Systems Inc. had twelve months from the date of issuance of the
Failure to disclose or misrepresentation of any material information by the member in the
Agreement within which to contest the membership of the patient if he had
application or medical examination, whether intentional or unintentional, shall
previous ailment of asthma, and six months from the issuance of the
automatically invalidate the Agreement from the very beginning and liability of
agreement if the patient was sick of diabetes or hypertension. The periods
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
having expired, the defense of concealment or misrepresentation no longer
misrepresented information is deemed material if its revelation would have resulted in
lie.23
the declination of the applicant by Philamcare or the assessment of a higher Membership
Fee for the benefit or benefits applied for.13
Finally, petitioner alleges that respondent was not the legal wife of the
deceased member considering that at the time of their marriage, the
The answer assailed by petitioner was in response to the question relating to the medical
deceased was previously married to another woman who was still alive. The
history of the applicant. This largely depends on opinion rather than fact, especially
health care agreement is in the nature of a contract of indemnity. Hence,
coming from respondent’s husband who was not a medical doctor. Where matters of
payment should be made to the party who incurred the expenses. It is not
opinion or judgment are called for, answers made in good faith and without intent to
controverted that respondent paid all the hospital and medical expenses. She
deceive will not avoid a policy even though they are untrue.14 Thus,
is therefore entitled to reimbursement. The records adequately prove the
expenses incurred by respondent for the deceased’s hospitalization,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or medication and the professional fees of the attending physicians.24
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
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
the rule although the statement is material to the risk, if the statement is obviously of the
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED. SO
foregoing character, since in such case the insurer is not justified in relying upon such
ORDERED.
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 Vda de Canilang vs. CA (G.R. No. 92492, June 17,
case the intent to deceive the insurer is obvious and amounts to actual fraud. 15 1993);
(Underscoring ours) [G.R. No. 92492. June 17, 1993.]

THELMA VDA. DE CANILANG, Petitioner, v. HON. COURT OF APPEALS and

The fraudulent intent on the part of the insured must be established to warrant rescission
GREAT PACIFIC LIFE INSURANCE CORPORATION, Respondents.
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
Simeon C. Sato for Petitioner.
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 SYLLABUS
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. COMMERCIAL LAW; INSURANCE; CONCEALMENT; MATERIALITY;
DEFINED. — The relevant statutory provisions as they stood at the time Great
Pacific issued the contract of insurance and at the time Jaime Canilang died,
are set out in P.D. No. 1460, also known as the Insurance Code of 1978, which
went into effect on 11 June 1978. These provisions read as follows: "Sec. 26. A neglect to
communicate that which a party knows and ought to communicate, is called a
concealment.." . . Sec. 28. Each party to a contract of insurance must communicate to the
other, in good faith, all factors within his knowledge which are material to the contract
and as to which he makes no warranty, and which the other has not the means of
ascertaining." Under the foregoing provisions, the information concealed must be
information which the concealing party knew and "ought to [have] communicate[d]," that
is to say, information which was "material to the contract." The test of materiality is
contained in Section 31 of the Insurance Code of 1978 which reads: "Sec. 31. Materiality
is to be determined not by the event, but solely by the probable and reasonable influence
of the facts upon the party to whom the communication is due, in forming his estimate of
the disadvantages of the proposed contract, or in making his inquiries."cralaw virtua1aw
library
2. ID.; ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR. — We agree with the Court of
Appeals that the information which Jaime Canilang failed to disclose was material to the
ability of Great Pacific to estimate the probable risk he presented as a subject of life
insurance. Had Canilang disclosed his visits to his doctor, the diagnosis made and the
medicines prescribed by such doctor, in the insurance application, it may be reasonably
assumed that Great Pacific would have made further inquiries and would have probably
refused to issue a non-medical insurance policy or, at the very least, required a higher
premium for the same coverage. The materiality of the information withheld by Great
Pacific did not depend upon the state of mind of Jaime Canilang. A man’s state of mind
or subjective belief is not capable of proof in our judicial process, except through proof of
external acts or failure to act from which inferences as to his subjective belief may be
reasonably drawn. Neither does materiality depend upon the actual or physical events
which insue. Materiality relates rather to the "probable and reasonable influence of the
facts" upon the party to whom the communication should have been made, in assessing
the risk involved in making or omitting to make further inquiries and in accepting the
application for insurance; that "probable and reasonable influence of the facts" concealed
must, of course, be determined objectively, by the judge ultimately.
3. ID.; ID.; ID.; REMEDY, WHEN AVAILABLE. — In 1985, the Insurance Code of 1978 was
amended by B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance
Code of 1978 so as to read as follows: "Sec. 27. A concealment whether intentional or
unintentional entitles the injured party to rescind a contract of insurance." Section 27 of
the Insurance Code of 1978 is properly read as referring to "any concealment" without
regard to whether such concealment is intentional or unintentional. The phrase "whether
intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether
intentional or unintentional" could not have had the effect of imposing an affirmative
requirement that a concealment must be intentional if it is to entitle the injured party to
rescind a contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase
"whether intentional or unintentional" merely underscored the fact that all throughout
(from 1914 to 1985), the statute did not require proof that concealment must be
"intentional" in order to authorize rescission by the injured party. In any case, in the case
at bar, the nature of the facts not conveyed to the insurer was such that the failure to
communicate must have been intentional rather than merely inadvertent. For Jaime
Canilang could not have been unaware that his hear beat would at times rise to high and
alarming levels and that he had consulted a doctor twice in the two (2) months before
applying for non-medical insurance. Indeed, the last medical consultation took place just
the day before the insurance application was filed. In all probability, Jaime Canilang went
to visit his doctor precisely because of the discomfort and concern brought about by his
experiencing "sinus tachycardia."
DECISION
FELICIANO, J.:
On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed
as suffering from "sinus tachycardia." The doctor prescribed the following for him:
Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang consulted the same
doctor again on 3 August 1982 and this time was found to have "acute bronchitis."
chanrobles.com:cralaw:red
On the next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance
policy with respondent Great Pacific Life Assurance Company ("Great Pacific") naming
his wife, petitioner Thelma Canilang, as his beneficiary. 1 Jaime Canilang was issued
ordinary life insurance Policy No. 345163, with the face value of P19,700, effective as of 9
August 1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and
"chronic anemia." 2 Petitioner, widow and beneficiary of the insured, filed a
claim with Great Pacific which the insurer denied on 5 December 1983 upon
the ground that the insured had concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance
Commission for recovery of the insurance proceeds. During the hearing called
by the Insurance Commissioner, petitioner testified that she was not aware of
any serious illness suffered by her late husband 3 and that, as far as she
knew, her husband had died because of a kidney disorder. 4 A deposition
given by Dr. Wilfredo Claudio was presented by petitioner. There Dr. Claudio
stated that he was the family physician of the deceased Jaime Canilang 5
and that he had previously treated him for "sinus tachycardia" and "acute
bronchitis." 6 Great Pacific for its part presented Dr. Esperanza Quismorio, a
physician and a medical underwriter working for Great Pacific 7 She testified
that the deceased’s insurance application had been approved on the basis of
his medical declaration. 8 She explained that as a rule, medical examinations
are required only in cases where the applicant has indicated in his application
for insurance coverage that he has previously undergone medical
consultation and hospitalization. 9
In a decision dated 5 November 1985, Insurance Commissioner Armando
Ansaldo ordered Great Pacific to pay P19,700.00 plus legal interest and
P2,000.00 as attorney’s fees after holding that:chanrob1es virtual 1aw library
1. the ailment of Jaime Canilang was not so serious that, even if it had been
disclosed, it would not have affected Great Pacific’s decision to insure him;
2. Great Pacific had waived its right to inquire into the health condition of the
applicant by the issuance of the policy despite the lack of answers to "some
of the pertinent questions" in the insurance application;
3. there was no intentional concealment on the part of the insured Jaime
Canilang as he had thought that he was merely suffering from a minor
ailment and simple cold; 10 and
4. Batas Pambansa Blg. 874 which voids an insurance contract, whether or
not concealment was intentionally made, was not applicable to Canilang’s
case as that law became effective only on 1 June 1985.
On appeal by Great Pacific, the Court of Appeals reversed and set aside the
decision of the Insurance Commissioner and dismissed Thelma Canilang’s
complaint and Great Pacific’s counterclaim. The Court of Appeals found that
the use of the word "intentionally" by the Insurance Commissioner in defining
and resolving the issue agreed upon by the parties at pre-trial before the
Insurance Commissioner was not supported by the evidence; that the issue
agreed upon by the parties had been whether the deceased insured, Jaime
Canilang, made a material concealment as to the state of his health at the
time of the filing of insurance application, justifying respondent’s denial of the
claim. The Court of Appeals also found that the failure of Jaime Canilang to
disclose previous medical consultation and treatment constituted material
information which should have been communicated to Great Pacific to enable
the latter to make proper inquiries. The Court of Appeals finally held that the
Ng Gan Zee case which had involved misrepresentation was not applicable in
respect of the case at bar which involves concealment.cralawnad
Petitioner Thelma Canilang is now before this Court on a Petition for Review
on Certiorari alleging that:jgc:chanrobles.com.ph
"1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not
holding that the issue in the case agreed upon between the parties before the
Insurance Commission is whether or not Jaime Canilang `intentionally’ made
material concealment in stating his state of health;
2. . . . at any rate, the non-disclosure of certain facts about his previous health
conditions does not amount to fraud and private respondent is deemed to
have waived inquiry thereto." 11
The medical declaration which was set out in the application for insurance
executed by Jaime Canilang read as follows:jgc:chanrobles.com.ph
"MEDICAL DECLARATION
`I hereby declare that:chanrob1es virtual 1aw library
(1) I have not been confined in any hospital, sanitarium or infirmary, nor
received any medical or surgical advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a physician for a heart condition, high blood prescribed Trazepam, (Philippine Index of Medical Specialties (PIMS), Vol. 14,
pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical No. 3, Dec. 1985, p. 112.) which is anti-anxiety, anti-convulsant, muscle-
impairment. relaxant; and Aptin, (Idem, p. 36) a cardiac drug, for palpitations and nervous
heart. Such treatment could have been a very material information to the
(3) I am, to the best of my knowledge, in good health. insurer in determining the action to be taken on Canilang’s application for life
insurance coverage." 14
EXCEPTIONS:chanrob1es virtual 1aw library
We agree with the Court of Appeals that the information which Jaime
_______________________________________________________________________________________ Canilang failed to discloses was material to the ability of Great Pacific to
_______________________________________________________________________________________ estimate the probable risk he presented as a subject of life insurance. Had
__________________________________ Canilang disclosed his visits to his doctor, the diagnosis made and the
medicines prescribed by such doctor, in the insurance application, it may be
GENERAL DECLARATION reasonably assumed that Great Pacific would have made further inquiries and
would have probably refused to issue a non-medical insurance policy or, at
I hereby declare that all the foregoing answers and statements are complete, true and the very least, required a higher premium for the same coverage. 15 The
correct. I hereby agree that if there be any fraud or misrepresentation in the above materiality of the information withheld by Great Pacific did not depend upon
statements material to the risk, the INSURANCE COMPANY upon discovery within two (2) the state of mind of Jaime Canilang. A man’s state of mind or subjective
years from the effective date of insurance shall have the right to declare such insurance belief is not capable of proof in our judicial process, except through proof of
null and void. That the liabilities of the Company under the said Policy/TA/Certificate external acts or failure to act from which inferences as to his subjective belief
shall accrue and begin only from the date of commencement of risk stated in the may be reasonably drawn. Neither does materiality depend upon the actual or
Policy/TA/Certificate, provided that the first premium is paid and the physical events which ensue. Materiality relates rather to the "probable and
Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in actual reasonable influence of the facts" upon the party to whom the
good health. communication should have been made, in assessing the risk involved in
making or omitting to make further inquiries and in accepting the application
Signed at Manila this 4th day of August, 1992. for insurance; that "probable and reasonable influence of the facts" concealed
must, of course, be determined objectively, by the judge ultimately.
Illegible
The insurance Great Pacific applied for was a "non-medical" insurance policy.
__________________________ In Saturnino v. Philippine-American Life Insurance Company, 16 this Court
held that:jgc:chanrobles.com.ph
Signature of Applicant." 12
". . . if anything, the waiver of medical examination [in a non-medical
We note that in addition to the negative statements made by Mr. Canilang in paragraphs 1 insurance contract] renders even more material the information required of
and 2 of the medical declaration, he failed to disclose in the appropriate space, under the the applicant concerning previous condition of health and diseases suffered,
caption "Exceptions," that he had twice consulted Dr. Wilfredo B. Claudio who had found for such information necessarily constitutes an important factor which the
him to be suffering from "sinus tachycardia" and "acute bronchitis."cralaw virtua1aw insurer takes into consideration in deciding whether to issue the policy or not .
library . .." 17 (Emphasis supplied)

The relevant statutory provisions as they stood at the time Great Pacific issued the The Insurance Commissioner had also ruled that the failure of Great Pacific to
contract of insurance and at the time Jaime Canilang died, are set out in P.D. No. 1460, convey certain information to the insurer was not "intentional" in nature, for
also known as the Insurance Code of 1978, which went into effect on 11 June 1978. the reason that Jaime Canilang believed that he was suffering from minor
These provisions read as follows:jgc:chanrobles.com.ph ailment like a common cold. Section 27 of the Insurance Code of 1978 as it
existed from 1974 up to 1985, that is, throughout the time range material for
"Sec. 26. A neglect to communicate that which a party knows and ought to communicate, present purposes, provided that:jgc:chanrobles.com.ph
is called a concealment."cralaw virtua1aw library
"Sec. 27. A concealment entitles the injured party to rescind a contract of
x x x insurance."cralaw virtua1aw library

Sec. 28. Each party to a contract of insurance must communicate to the other, in good
faith, all factors within his knowledge which are material to the contract and as to which
he makes no warranty, and which the other has not the means of ascertaining."
(Emphasis supplied)
Under the foregoing provisions, the information concealed must be information which the
concealing party knew and "ought to [have] communicate[d]," that is to say, information
which was "material to the contract." The test of materiality is contained in Section 31 of
the Insurance Code of 1978 which reads:jgc:chanrobles.com.ph
"Sec. 31. Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in making his
inquiries." (Emphasis supplied)
"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per
minute." 13 The symptoms of this condition include pounding in the chest and
sometimes faintness and weakness of the person affected. The following elaboration
was offered by Great Pacific and set out by the Court of Appeals in its
Decision:jgc:chanrobles.com.ph
"Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per
minute. (Harrison’s Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is, among
others, a common reaction to hear disease, including myocardial infarction, and heart
failure per se. (Henry J.L. Marriot, M.D., Electrocardiograph, 6th ed. [1977], p. 127.) The
medication prescribed by Dr. Claudio for treatment of Canilang’s ailment on June 18,
1982, indicates the condition that said physician was trying to manage. Thus, he
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had
provided:jgc:chanrobles.com.ph
"Sec. 26. A concealment, whether intentional or unintentional, entitles the
injured party to rescind a contract of insurance." (Emphasis supplied)
Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance
Code of 1978 so as to read as follows:jgc:chanrobles.com.ph
"Sec. 27. A concealment whether intentional or unintentional entitles the
injured party to rescind a contract of insurance." (Emphasis supplied).
The unspoken theory of the Insurance Commissioner appears to have been
that by deleting the phrase "intentional or unintentional," the Insurance Code
of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party
to "intentional concealments." This argument is not persuasive. As a simple
matter of grammar, it may be noted that "intentional" and "unintentional"
cancel each other out. The net result therefore of the phrase "whether
intentional or unintentional" is precisely to leave unqualified the term
"concealment." Thus, Section 27 of the Insurance Code of 1978 is properly
read as referring to "any concealment" without regard to whether such
concealment is intentional or unintentional. The phrase "whether intentional
or unintentional" was in fact superfluous. The deletion of the phrase "whether
intentional or unintentional" could not have had the effect of imposing an
affirmative requirement that a concealment must be intentional if it is to
entitle the injured party to rescind a contract of insurance. The restoration in
1985 by B.P. Blg. 874 of the phrase "whether intentional or unintentional"
merely underscored the fact that all throughout (from 1914 to 1985), the statute did not
require proof that concealment must be "intentional" in order to authorize rescission by
the injured party.

In any case, in the case at bar, the nature of the facts not conveyed to the insurer was
such that the failure to communicate must have been intentional rather than merely
inadvertent. For Jaime Canilang could not have been unaware that this heart beat would
at times rise to high and alarming levels and that he had consulted a doctor twice in the
two (2) months before applying for non-medical insurance. Indeed, the last medical
consultation took place just the day before the insurance application was filed. In all
probability, Jaime Canilang went to visit his doctor precisely because of the discomfort
and concern brought about by his experiencing "sinus tachycardia."cralaw virtua1aw
library

We find it difficult to take seriously the argument that Great Pacific had waived inquiry
into the concealment by issuing the insurance policy notwithstanding Canilang’s failure to
set out answers to some of the questions in the insurance application. Such failure
precisely constituted concealment on the part of Canilang. Petitioner’s argument, if
accepted, would obviously erase Section 27 from the Insurance Code of 1978.chanrobles
lawlibrary : rednad

It remains only to note that the Court of Appeals finding that the parties had not agreed in
the pretrial before the Insurance Commission that the relevant issue was whether or not
Jaime Canilang had intentionally concealed material information from the insurer, was
supported by the evidence of record, i.e., the Pre-trial Order itself dated 17 October 1984
and the Minutes of the Pre-trial Conference dated 15 October 1984, which "readily shows
that the word `intentional’ does not appear in the statement or definition of the issue in
the said Order and Minutes." 18

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the
Court of Appeals dated 16 October 1989 in C.A-G.R. SP No. 08696 is hereby AFFIRMED.
No pronouncement as to costs.

SO ORDERED.
 ailments he suffered from;

Tan vs. CA (June 29, 1989) Florendo v. Philam Plans, G.R. No. 2. Whether or not the CA erred in holding that Manuel was bound by the
186983, February 22, 2012 failure of respondents Perla and Ma. Celeste to declare the condition of
[G.R. No. 186983 : February 22, 2012] Manuel’s health in the pension plan application; and

MA. LOURDES S. FLORENDO, PETITIONER, VS. PHILAM PLANS, INC., PERLA ABCEDE 3. Whether or not the CA erred in finding that Philam Plans’ approval of
AND MA. CELESTE ABCEDE, RESPONDENTS. Manuel’s pension plan application and acceptance of his premium payments
precluded it from denying Lourdes’ claim.
DECISION

Rulings of the Court

ABAD, J.:
This case is about an insured’s alleged concealment in his pension plan application of his
true state of health and its effect on the life insurance portion of that plan in case of
death.cralaw
One. Lourdes points out that, seeing the unfilled spaces in Manuel’s pension
plan application relating to his medical history, Philam Plans should have
returned it to him for completion. Since Philam Plans chose to approve the
application just as it was, it cannot cry concealment on Manuel’s part. Further,
Lourdes adds that Philam Plans never queried Manuel directly regarding the
state of his health. Consequently, it could not blame him for not mentioning it.
[19]

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for comprehensive pension
plan with respondent Philam Plans, Inc. (Philam Plans) after some convincing by
respondent Perla Abcede. The plan had a pre-need price of P997,050.00, payable in 10
years, and had a maturity value of P2,890,000.00 after 20 years. [1] Manuel signed the
application and left to Perla the task of supplying the information needed in the
application.[2] Respondent Ma. Celeste Abcede, Perla’s daughter, signed the application as
sales counselor.[3]
Aside from pension benefits, the comprehensive pension plan also provided life
insurance coverage to Florendo.[4] This was covered by a Group Master Policy that
Philippine American Life Insurance Company (Philam Life) issued to Philam Plans. [5]
Under the master policy, Philam Life was to automatically provide life insurance coverage,
including accidental death, to all who signed up for Philam Plans’ comprehensive pension
plan.[6] If the plan holder died before the maturity of the plan, his beneficiary was to
instead receive the proceeds of the life insurance, equivalent to the pre-need price.
Further, the life insurance was to take care of any unpaid premium until the pension plan
matured, entitling the beneficiary to the maturity value of the pension plan. [7]
But Lourdes is shifting to Philam Plans the burden of putting on the pension
plan application the true state of Manuel’s health. She forgets that since
Philam Plans waived medical examination for Manuel, it had to rely largely on
his stating the truth regarding his health in his application. For, after all, he
knew more than anyone that he had been under treatment for heart condition
and diabetes for more than five years preceding his submission of that
application. But he kept those crucial facts from Philam Plans.
Besides, when Manuel signed the pension plan application, he adopted as his
own the written representations and declarations embodied in it. It is clear
from these representations that he concealed his chronic heart ailment and
diabetes from Philam Plans. The pertinent portion of his representations and
declarations read as follows:
I hereby represent and declare to the best of my
knowledge that:
xxxx

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 [8] to I have never been treated for heart condition, high blood pressure, cancer, diabetes,
Manuel, with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel (c) lung, kidney or stomach disorder or any other physical impairment in the last five
paid his quarterly premiums.[9] years.

Eleven months later or on September 15, 1998, Manuel died of blood poisoning.
Subsequently, Lourdes filed a claim with Philam Plans for the payment of the benefits
(d) I am in good health and physical condition.
under her husband’s plan.[10] Because Manuel died before his pension plan matured and
his wife was to get only the benefits of his life insurance, Philam Plans forwarded her
claim to Philam Life.[11]
If your answer to any of the statements above reveal
On May 3, 1999 Philam Plans wrote Lourdes a letter, [12] declining her claim. Philam Life otherwise, please give details in the space provided
found that Manuel was on maintenance medicine for his heart and had an implanted for:
pacemaker. Further, he suffered from diabetes mellitus and was taking insulin. Lourdes
renewed her demand for payment under the plan [13] but Philam Plans rejected it,[14]
Date of confinement : ____________________________
prompting her to file the present action against the pension plan company before the
Regional Trial Court (RTC) of Quezon City. [15]
Name of Hospital or Clinic : ____________________________

On March 30, 2006 the RTC rendered judgment, ordering Philam Plans, Perla and
[16]
Name of Attending Physician : ____________________________
Ma. Celeste, solidarily, to pay Lourdes all the benefits from her husband’s pension
plan, namely: P997,050.00, the proceeds of his term insurance, and P2,890,000.00 Findings : ____________________________
lump sum pension benefit upon maturity of his plan; P100,000.00 as moral damages;
and to pay the costs of the suit. The RTC ruled that Manuel was not guilty of Others: (Please specify) : ____________________________
concealing the state of his health from his pension plan application.

On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, [17] holding x x x x.[20] (Emphasis supplied)
that insurance policies are traditionally contracts uberrimae fidae or contracts of utmost
good faith. As such, it required Manuel to disclose to Philam Plans conditions affecting
the risk of which he was aware or material facts that he knew or ought to know. [18] Since Manuel signed the application without filling in the details regarding his
continuing treatments for heart condition and diabetes, the assumption is
that he has never been treated for the said illnesses in the last five years
Issues Presented
preceding his application. This is implicit from the phrase “If your answer to
any of the statements above (specifically, the statement: I have never been
treated for heart condition or diabetes) reveal otherwise, please give details in
The issues presented in this case are:
the space provided for.” But this is untrue since he had been on “Coumadin,” a
treatment for venous thrombosis,[21] and insulin, a drug used in the treatment
1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he
of diabetes mellitus, at that time. [22]
kept blank and did not answer questions in his pension plan application regarding the

Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew
that Manuel had a pacemaker implanted on his chest in the 70s or about 20 years before
he signed up for the pension plan. [23] But by its tenor, the responsibility for preparing the
application belonged to Manuel. Nothing in it implies that someone else may provide the
information that Philam Plans needed. Manuel cannot sign the application and disown
the responsibility for having it filled up. If he furnished Perla the needed information and
delegated to her the filling up of the application, then she acted on his instruction, not on
Philam Plans’ instruction.
Lourdes next points out that it made no difference if Manuel failed to reveal the fact that
he had a pacemaker implant in the early 70s since this did not fall within the five-year
timeframe that the disclosure contemplated. [24] But a pacemaker is an electronic device
implanted into the body and connected to the wall of the heart, designed to provide
regular, mild, electric shock that stimulates the contraction of the heart muscles and
restores normalcy to the heartbeat.[25] That Manuel still had his pacemaker when he
applied for a pension plan in October 1997 is an admission that he remained under
consideration he could not have been unaware as it
was precisely the reason for his procuring the same.[32]
The same may be said of Manuel, a civil engineer and manager of a
construction company.[33] He could be expected to know that one must read
every document, especially if it creates rights and obligations affecting him,
before signing the same. Manuel is not unschooled that the Court must come
to his succor. It could reasonably be expected that he would not trifle with
something that would provide additional financial security to him and to his
wife in his twilight years.
Three. In a final attempt to defend her claim for benefits under Manuel’s
pension plan, Lourdes points out that any defect or insufficiency in the
information provided by his pension plan application should be deemed
waived after the same has been approved, the policy has been issued, and the
premiums have been collected. [34]

treatment for irregular heartbeat within five years preceding that application.
Besides, as already stated, Manuel had been taking medicine for his heart condition and
diabetes when he submitted his pension plan application. These clearly fell within the
five-year period. More, even if Perla’s knowledge of Manuel’s pacemaker may be applied
to Philam Plans under the theory of imputed knowledge, [26] it is not claimed that Perla was
aware of his two other afflictions that needed medical treatments. Pursuant to Section
27[27] of the Insurance Code, Manuel’s concealment entitles Philam Plans to rescind its
contract of insurance with him.
Two. Lourdes contends that the mere fact that Manuel signed the application in blank
and let Perla fill in the required details did not make her his agent and bind him to her
concealment of his true state of health. Since there is no evidence of collusion between
them, Perla’s fault must be considered solely her own and cannot prejudice Manuel. [28]
But Manuel forgot that in signing the pension plan application, he certified that he wrote
The Court cannot agree. The comprehensive pension plan that Philam Plans
issued contains a one-year incontestability period. It states:
VIII. INCONTESTABILITY
After this Agreement has remained in force for one (1)
year, we can no longer contest for health reasons any
claim for insurance under this Agreement, except for
the reason that installment has not been paid (lapsed),
or that you are not insurable at the time you bought
this pension program by reason of age. If this
Agreement lapses but is reinstated afterwards, the
one (1) year contestability period shall start again on
the date of approval of your request for reinstatement.
[35]

all the information stated in it or had someone do it under his direction. Thus:

APPLICATION FOR PENSION PLAN The above incontestability clause precludes the insurer from disowning
liability under the policy it issued on the ground of concealment or
(Comprehensive) misrepresentation regarding the health of the insured after a year of its
issuance.
I hereby apply to purchase from PHILAM PLANS, INC. a Pension
Plan Program described herein in accordance with the General Since Manuel died on the eleventh month following the issuance of his plan,
Provisions set forth in this application and hereby certify that the
[36]
the one year incontestability period has not yet set in. Consequently,
date and other information stated herein are written by me or Philam Plans was not barred from questioning Lourdes’ entitlement to the
under my direction. x x x.[29] (Emphasis supplied) benefits of her husband’s pension plan.cralaw

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of
Assuming that it was Perla who filled up the application form, Manuel is still bound by Appeals in CA-G.R. CV 87085 dated December 18, 2007.
what it contains since he certified that he authorized her action. Philam Plans had every
right to act on the faith of that certification. SO ORDERED.

Lourdes could not seek comfort from her claim that Perla had assured Manuel that the
state of his health would not hinder the approval of his application and that what is
written on his application made no difference to the insurance company. But, indubitably,
Manuel was made aware when he signed the pension plan application that, in granting
the same, Philam Plans and Philam Life were acting on the truth of the representations
contained in that application. Thus:

DECLARATIONS AND REPRESENTATIONS

x x x x

I agree that the insurance coverage of this application is based

on the truth of the foregoing representations and is subject to the
provisions of the Group Life Insurance Policy issued by THE
PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM PLANS,
INC.[30] (Emphasis supplied)

As the Court said in New Life Enterprises v. Court of Appeals: [31]

It may be true that x x x insured persons may accept policies

without reading them, and that this is not negligence per se. But,
this is not without any exception. It is and was incumbent upon
petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a
businessman since 1965 and the contract concerns indemnity in
case of loss in his money-making trade of which important
IV. LOSS AND NOTICE OF LOSS
Bonifacio Bros. Inc. vs. Mora (May 29, 1967)
G.R. No. L-20853 May 29, 1967
BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,
vs.
ENRIQUE MORA, ET AL., defendants-appellees.
G. Magsaysay for plaintiffs-appellants.
Abad Santos and Pablo for defendant-appellee H. E. Reyes, Inc.
J. P. Santilla and A. D. Hidalgo, Jr. for other defendant-appellee.
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in
civil case 48823, affirming the decision of the Municipal Court of Manila, declaring the
H.S. Reyes, Inc. as having a better right than the Bonifacio Bros., Inc. and the Ayala Auto
Parts Company, appellants herein, to the proceeds of motor insurance policy A-0615, in
the sum of P2,002.73, issued by the State Bonding & Insurance Co. Inc., and directing
payment of the said amount to the H. Reyes, Inc.
Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged
the same to the H.S. Reyes, Inc., with the condition that the former would insure the
automobile with the latter as beneficiary. The automobile was thereafter insured on June
23, 1959 with the State Bonding & Insurance Co., Inc., and motor car insurance policy A-
0615 was issued to Enrique Mora, the pertinent provisions of which read:
1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to the
Limits of Liability, indemnify the Insured against loss of or damages to the Motor Vehicle
and its accessories and spare parts whilst thereon; (a) by accidental collision or
overturning or collision or overturning consequent upon mechanical breakdown or
consequent upon wear and tear,
xxx xxx xxx
2. At its own option the Company may pay in cash the amount of the loss or damage or
may repair, reinstate, or replace the Motor Vehicle or any part thereof or its accessories or
spare parts. The liability of the Company shall not exceed the value of the parts
whichever is the less. The Insured's estimate of value stated in the schedule will be the
maximum amount payable by the Company in respect of any claim for loss or
damage.1äwphï1.ñët
xxx xxx xxx
4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for
which the Company may be liable under this Policy provided that: — (a) The estimated
cost of such repair does not exceed the Authorized Repair Limit, (b) A detailed estimate
of the cost is forwarded to the Company without delay, subject to the condition that
"Loss, if any is payable to H.S. Reyes, Inc.," by virtue of the fact that said Oldsmobile
sedan was mortgaged in favor of the said H.S. Reyes, Inc. and that under a clause in said
insurance policy, any loss was made payable to the H.S. Reyes, Inc. as Mortgagee;
xxx xxx xxx
During the effectivity of the insurance contract, the car met with an accident. The
insurance company then assigned the accident to the Bayne Adjustment Co. for
investigation and appraisal of the damage. Enrique Mora, without the knowledge and
consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the labor
and materials, some of which were supplied by the Ayala Auto Parts Co. For the cost of
labor and materials, Enrique Mora was billed at P2,102.73 through the H.H. Bayne
Adjustment Co. The insurance company after claiming a franchise in the amount of P100,
drew a check in the amount of P2,002.73, as proceeds of the insurance policy, payable to
the order of Enrique Mora or H.S. Reyes,. Inc., and entrusted the check to the H.H. Bayne
Adjustment Co. for disposition and delivery to the proper party. In the meantime, the car
was delivered to Enrique Mora without the consent of the H.S. Reyes, Inc., and without
payment to the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. of the cost of repairs
and materials.
Upon the theory that the insurance proceeds should be paid directly to them,
the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a
complaint with the Municipal Court of Manila against Enrique Mora and the
State Bonding & Insurance Co., Inc. for the collection of the sum of P2,002.73
The insurance company filed its answer with a counterclaim for interpleader,
requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in
order to determine who has better right to the insurance proceeds in question.
Enrique Mora was declared in default for failure to appear at the hearing, and
evidence against him was received ex parte. However, the counsel for the
Bonifacio Bros. Inc., Ayala Auto Parts Co. and State Bonding & Insurance Co.
Inc. submitted a stipulation of facts, on the basis of which are Municipal
Court rendered a decision declaring the H.S. Reyes, Inc. as having a better
right to the disputed amount and ordering State Bonding & Insurance Co. Inc.
to pay to the H. S. Reyes, Inc. the said sum of P2,002.73. From this decision,
the appellants elevated the case to the Court of First Instance of Manila
which the stipulation of facts was reproduced. On October 19, 1962 the latter
court rendered a decision, affirming the decision of the Municipal Court. The
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. moved for reconsideration
of the decision, but the trial court denied the motion. Hence, this appeal.
The main issue raised is whether there is privity of contract between the
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. on the one hand and the
insurance company on the other. The appellants argue that the insurance
company and Enrique Mora are parties to the repair of the car as well as the
towage thereof performed. The authority for this assertion is to be found, it is
alleged, in paragraph 4 of the insurance contract which provides that "the
insured may authorize the repair of the Motor Vehicle necessitated by
damage for which the company may be liable under the policy provided that
(a) the estimated cost of such repair does not exceed the Authorized Repair
Limit, and (b) a detailed estimate of the cost is forwarded to the company
without delay." It is stressed that the H.H. Bayne Adjustment Company's
recommendation of payment of the appellants' bill for materials and repairs
for which the latter drew a check for P2,002.73 indicates that Mora and the
H.H. Bayne Adjustment Co. acted for and in representation of the insurance
company.
This argument is, in our view, beside the point, because from the undisputed
facts and from the pleadings it will be seen that the appellants' alleged cause
of action rests exclusively upon the terms of the insurance contract. The
appellants seek to recover the insurance proceeds, and for this purpose, they
rely upon paragraph 4 of the insurance contract document executed by and
between the State Bonding & Insurance Company, Inc. and Enrique Mora. The
appellants are not mentioned in the contract as parties thereto nor is there
any clause or provision thereof from which we can infer that there is an
obligation on the part of the insurance company to pay the cost of repairs
directly to them. It is fundamental that contracts take effect only between the
parties thereto, except in some specific instances provided by law where the
contract contains some stipulation in favor of a third person. 1 Such
stipulation is known as stipulation pour autrui or a provision in favor of a third
person not a pay to the contract. Under this doctrine, a third person is allowed
to avail himself of a benefit granted to him by the terms of the contract,
provided that the contracting parties have clearly and deliberately conferred a
favor upon such person.2 Consequently, a third person not a party to the
contract has no action against the parties thereto, and cannot generally
demand the enforcement of the same. 3 The question of whether a third
person has an enforcible interest in a contract, must be settled by
determining whether the contracting parties intended to tender him such an
interest by deliberately inserting terms in their agreement with the avowed
purpose of conferring a favor upon such third person. In this connection, this
Court has laid down the rule that the fairest test to determine whether the
interest of a third person in a contract is a stipulation pour autrui or merely an
incidental interest, is to rely upon the intention of the parties as disclosed by
their contract.4 In the instant case the insurance contract does not contain
any words or clauses to disclose an intent to give any benefit to any
repairmen or materialmen in case of repair of the car in question. The parties
to the insurance contract omitted such stipulation, which is a circumstance
that supports the said conclusion. On the other hand, the "loss payable"
clause of the insurance policy stipulates that "Loss, if any, is payable to H.S.
Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended
to benefit.
We likewise observe from the brief of the State Bonding & Insurance
Company that it has vehemently opposed the assertion or pretension of the
appellants that they are privy to the contract. If it were the intention of the
insurance company to make itself liable to the repair shop or materialmen, it
could have easily inserted in the contract a stipulation to that effect. To hold now that the
original parties to the insurance contract intended to confer upon the appellants the
benefit claimed by them would require us to ignore the indespensable requisite that a
stipulation pour autrui must be clearly expressed by the parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that
instead of establishing privity between the appellants and the insurance company, such
stipulation merely establishes the procedure that the insured has to follow in order to be
entitled to indemnity for repair. This paragraph therefore should not be construed as
bringing into existence in favor of the appellants a right of action against the insurance
company as such intention can never be inferred therefrom.
Another cogent reason for not recognizing a right of action by the appellants against the
insurance company is that "a policy of insurance is a distinct and independent contract
between the insured and insurer, and third persons have no right either in a court of
equity, or in a court of law, to the proceeds of it, unless there be some contract of trust,
expressed or implied between the insured and third person." 5 In this case, no contract of
trust, expressed or implied exists. We, therefore, agree with the trial court that no cause
of action exists in favor of the appellants in so far as the proceeds of insurance are
concerned. The appellants' claim, if at all, is merely equitable in nature and must be made
effective through Enrique Mora who entered into a contract with the Bonifacio Bros. Inc.
This conclusion is deducible not only from the principle governing the operation and
effect of insurance contracts in general, but is clearly covered by the express provisions
of section 50 of the Insurance Act which read:
The insurance shall be applied exclusively to the proper interests of the person in whose
name it is made unless otherwise specified in the policy.
The policy in question has been so framed that "Loss, if any, is payable to H.S. Reyes,
Inc.," which unmistakably shows the intention of the parties.
The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the
insurance proceeds arises only if there was loss and not where there is mere damage as
in the instant case. Suffice it to say that any attempt to draw a distinction between "loss"
and "damage" is uncalled for, because the word "loss" in insurance law embraces injury or
damage.
Loss in insurance, defined. — The injury or damage sustained by the insured in
consequence of the happening of one or more of the accidents or misfortune against
which the insurer, in consideration of the premium, has undertaken to indemnify the
insured. (1 Bouv. Ins. No. 1215; Black's Law Dictionary; Cyclopedic Law Dictionary, cited
in Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).
Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.
Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.
The Insular Life Assurance vs. Ebrado, 80 SCRA 181
G.R. No. L-44059 October 28, 1977
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary
in the life insurance policy of a legally married man claim the proceeds thereof in case of
death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance
Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental
Death for the same amount Buenaventura C. Ebrado designated T. Ebrado as the
revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he
was hit by a failing branch of a tree. As the policy was in force, The Insular
Life Assurance Co., Ltd. liable to pay the coverage in the total amount of
P11,745.73, representing the face value of the policy in the amount of
P5,882.00 plus the additional benefits for accidental death also in the amount
of P5,882.00 and the refund of P18.00 paid for the premium due November,
1969, minus the unpaid premiums and interest thereon due for January and
February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy
as the designated beneficiary therein, although she admits that she and the
insured Buenaventura C. Ebrado were merely living as husband and wife
without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased
insured. She asserts that she is the one entitled to the insurance proceeds,
not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The
Insular Life Assurance Co., Ltd. commenced an action for Interpleader before
the Court of First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8,
1972, after which, a pre-trial order was entered reading as follows: ñé+.£ªwph!
1
During the pre-trial conference, the parties manifested to the court. that there
is no possibility of amicable settlement. Hence, the Court proceeded to have
the parties submit their evidence for the purpose of the pre-trial and make
admissions for the purpose of pretrial. During this conference, parties
Carponia T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the
deceased Buenaventura Ebrado was married to Pascuala Ebrado with whom
she has six — (legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo
and Helen, all surnamed Ebrado; 2) that during the lifetime of the deceased, he
was insured with Insular Life Assurance Co. Under Policy No. 009929 whole
life plan, dated September 1, 1968 for the sum of P5,882.00 with the rider for
accidental death benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1
for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during
the lifetime of Buenaventura Ebrado, he was living with his common-wife,
Carponia Ebrado, with whom she had 2 children although he was not legally
separated from his legal wife; 4) that Buenaventura in accident on October 21,
1969 as evidenced by the death Exhibit 3 and affidavit of the police report of
his death Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the
Insular Life Assurance Co. which was contested by Pascuala Ebrado who also
filed claim for the proceeds of said policy 6) that in view ofthe adverse claims
the insurance company filed this action against the two herein claimants
Carponia and Pascuala Ebrado; 7) that there is now due from the Insular Life
Assurance Co. as proceeds of the policy P11,745.73; 8) that the beneficiary
designated by the insured in the policy is Carponia Ebrado and the insured
made reservation to change the beneficiary but although the insured made
the option to change the beneficiary, same was never changed up to the time
of his death and the wife did not have any opportunity to write the company
that there was reservation to change the designation of the parties agreed
that a decision be rendered based on and stipulation of facts as to who
among the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their
simultaneous memoranda from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among
others, Carponia T. Ebrado disqualified from becoming beneficiary of the
insured Buenaventura Cristor Ebrado and directing the payment of the
insurance proceeds to the estate of the deceased insured. The trial court
held: ñé+.£ªwph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish
the disqualification mentioned therein. Neither is it also necessary that a
finding of such guilt or commission of those acts be made in a separate
independent action brought for the purpose. The guilt of the donee
(beneficiary) may be proved by preponderance of evidence in the same proceeding (the
action brought to declare the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in the policy in question for the disqualification
and incapacity to exist and that it is only necessary that such fact be established by
preponderance of evidence in the trial. Since it is agreed in their stipulation above-quoted
that the deceased insured and defendant Carponia T. Ebrado were living together as
husband and wife without being legally married and that the marriage of the insured with
the other defendant Pascuala Vda. de Ebrado was valid and still existing at the time the
insurance in question was purchased there is no question that defendant Carponia T.
Ebrado is disqualified from becoming the beneficiary of the policy in question and as
such she is not entitled to the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11,
1976, the Appellate Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended) does not contain any specific provision
grossly resolutory of the prime question at hand. Section 50 of the Insurance Act which
provides that "(t)he insurance shag be applied exclusively to the proper interest of the
person in whose name it is made" 1 cannot be validly seized upon to hold that the mm
includes the beneficiary. The word "interest" highly suggests that the provision refers only
to the "insured" and not to the beneficiary, since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws against illicit relationships especially on
property and descent will be rendered nugatory, as the same could easily be
circumvented by modes of insurance. Rather, the general rules of civil law should be
applied to resolve this void in the Insurance Law. Article 2011 of the New Civil Code
states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed
by the general rules of the civil law regulating contracts. 3 And under Article 2012 of the
same Code, "any person who is forbidden from receiving any donation under Article 739
cannot be named beneficiary of a fife insurance policy by the person who cannot make a
donation to him. 4 Common-law spouses are, definitely, barred from receiving donations
from each other. Article 739 of the new Civil Code provides: ñé+.£ªwph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the time of
donation;
Those made between persons found guilty of the same criminal offense, in consideration
thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of his
office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by preponderance
of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance.
As a consequence, the proscription in Article 739 of the new Civil Code should equally
operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any
person who cannot receive a donation cannot be named as beneficiary in the life
insurance policy of the person who cannot make the donation. 5 Under American law, a
policy of life insurance is considered as a testament and in construing it, the courts will,
so far as possible treat it as a will and determine the effect of a clause designating the
beneficiary by rules under which wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a barrier
between common law spouses in record to Property relations since such hip ultimately
encroaches upon the nuptial and filial rights of the legitimate family There is every reason
to hold that the bar in donations between legitimate spouses and those between
illegitimate ones should be enforced in life insurance policies since the same are based
on similar consideration As above pointed out, a beneficiary in a fife insurance policy is
no different from a donee. Both are recipients of pure beneficence. So long as
manage remains the threshold of family laws, reason and morality dictate
that the impediments imposed upon married couple should likewise be
imposed upon extra-marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v.
Cervantes, 7 this Court, through Justice Fernando, said: ñé+.£ªwph!1
If the policy of the law is, in the language of the opinion of the then Justice
J.B.L. Reyes of that court (Court of Appeals), 'to prohibit donations in favor of
the other consort and his descendants because of and undue and improper
pressure and influence upon the donor, a prejudice deeply rooted in our
ancient law;" por-que no se enganen desponjandose el uno al otro por amor
que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV),
reiterating the rationale 'No Mutuato amore invicem spoliarentur' the
Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem); then there is very
reason to apply the same prohibitive policy to persons living together as
husband and wife without the benefit of nuptials. For it is not to be doubted
that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to
avoid is correspondingly increased. Moreover, as already pointed out by
Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not be just that such
donations should subsist, lest the condition 6f those who incurred guilt
should turn out to be better.' So long as marriage remains the cornerstone of
our family law, reason and morality alike demand that the disabilities attached
to marriage should likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above
pronouncement, any other conclusion cannot stand the test of scrutiny. It
would be to indict the frame of the Civil Code for a failure to apply a laudable
rule to a situation which in its essentials cannot be distinguished. Moreover, if
it is at all to be differentiated the policy of the law which embodies a deeply
rooted notion of what is just and what is right would be nullified if such
irregular relationship instead of being visited with disabilities would be
attended with benefits. Certainly a legal norm should not be susceptible to
such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a
part of it as what is written, this is it. Otherwise the basic purpose discernible
in such codal provision would not be attained. Whatever omission may be
apparent in an interpretation purely literal of the language used must be
remedied by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted
before the disabilities mentioned in Article 739 may effectuate. More
specifically, with record to the disability on "persons who were guilty of
adultery or concubinage at the time of the donation," Article 739 itself
provides: ñé+.£ªwph!1
In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilty of the donee may
be proved by preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the
offense is a condition precedent. In fact, it cannot even be from the
aforequoted provision that a prosecution is needed. On the contrary, the law
plainly states that the guilt of the party may be proved "in the same acting for
declaration of nullity of donation. And, it would be sufficient if evidence
preponderates upon the guilt of the consort for the offense indicated. The
quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between
the insured and the beneficiary has been conveniently supplied by the
stipulations between the parties in the pre-trial conference of the case. It case
agreed upon and stipulated therein that the deceased insured Buenaventura
C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate
children; that during his lifetime, the deceased insured was living with his
common-law wife, Carponia Ebrado, with whom he has two children. These
stipulations are nothing less than judicial admissions which, as a
consequence, no longer require proof and cannot be contradicted. 8 A fortiori,
on the basis of these admissions, a judgment may be validly rendered without
going through the rigors of a trial for the sole purpose of proving the illicit
liaison between the insured and the beneficiary. In fact, in that pretrial, the
parties even agreed "that a decision be rendered based on this agreement and stipulation
of facts as to who among the two claimants is entitled to the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T.
Ebrado is hereby declared disqualified to be the beneficiary of the late Buenaventura C.
Ebrado in his life insurance policy. As a consequence, the proceeds of the policy are
hereby held payable to the estate of the deceased insured. Costs against Carponia T.
Ebrado.
SO ORDERED.
Vda. de Consuegra vs. GSIS (37 SCRA 315)
G.R. No. L-28093 January 30, 1971
BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA LOURDES, JOSE, JR.,
RODRIGO, LINEDA and LUIS, all surnamed CONSUEGRA, petitioners-appellants,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, COMMISSIONER OF PUBLIC HIGHWAYS,
HIGHWAY DISTRICT ENGINEER OF SURIGAO DEL NORTE, COMMISSIONER OF CIVIL
SERVICE, and ROSARIO DIAZ, respondents-appellees.
Appeal on purely questions of law from the decision of the Court of First Instance of
Surigao del Norte, dated March 7, 1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are the
following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman of
the office of the District Engineer in the province of Surigao del Norte. In his lifetime,
Consuegra contracted two marriages, the first with herein respondent Rosario Diaz,
solemnized in the parish church of San Nicolas de Tolentino, Surigao, Surigao, on July 15,
1937, out of which marriage were born two children, namely, Jose Consuegra, Jr. and
Pedro Consuegra, but both predeceased their father; and the second, which was
contracted in good faith while the first marriage was subsisting, with herein petitioner
Basilia Berdin, on May 1, 1957 in the same parish and municipality, out of which marriage
were born seven children, namely, Juliana, Pacita, Maria Lourdes, Jose, Rodrigo, Lenida
and Luz, all surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when
Consuegra died on September 26, 1965, the proceeds of his life insurance under policy
No. 601801 were paid by the GSIS to petitioner Basilia Berdin and her children who were
the beneficiaries named in the policy. Having been in the service of the government for
22.5028 years, Consuegra was entitled to retirement insurance benefits in the sum of
P6,304.47 pursuant to Section 12(c) of Commonwealth Act 186 as amended by Republic
Acts 1616 and 3836. Consuegra did not designate any beneficiary who would receive the
retirement insurance benefits due to him. Respondent Rosario Diaz, the widow by the first
marriage, filed a claim with the GSIS asking that the retirement insurance benefits be paid
to her as the only legal heir of Consuegra, considering that the deceased did not
designate any beneficiary with respect to his retirement insurance benefits. Petitioner
Basilia Berdin and her children, likewise, filed a similar claim with the GSIS, asserting that
being the beneficiaries named in the life insurance policy of Consuegra, they are the only
ones entitled to receive the retirement insurance benefits due the deceased Consuegra.
Resolving the conflicting claims, the GSIS ruled that the legal heirs of the late Jose
Consuegra were Rosario Diaz, his widow by his first marriage who is entitled to one-half,
or 8/16, of the retirement insurance benefits, on the one hand; and Basilia Berdin, his
widow by the second marriage and their seven children, on the other hand, who are
entitled to the remaining one-half, or 8/16, each of them to receive an equal share of
1/16.
Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia Berdin
and her children1 filed on October 10, 1966 a petition for mandamus with preliminary
injunction in the Court of First Instance of Surigao, naming as respondents the GSIS, the
Commissioner of Public Highways, the Highway District Engineer of Surigao del Norte,
the Commissioner of Civil Service, and Rosario Diaz, praying that they (petitioners
therein) be declared the legal heirs and exclusive beneficiaries of the retirement
insurance of the late Jose Consuegra, and that a writ of preliminary injunction be issued
restraining the implementation of the adjudication made by the GSIS. On October 26,
1966, the trial court issued an order requiring therein respondents to file their respective
answers, but refrained from issuing the writ of preliminary injunction prayed
for. On February 11, 1967, the parties submitted a stipulation of facts, prayed
that the same be admitted and approved and that judgment be rendered on
the basis of the stipulation of facts. On March 7, 1967, the court below
rendered judgment, the pertinent portions of which are quoted hereunder:
This Court, in conformity with the foregoing stipulation of facts, likewise is in
full accord with the parties with respect to the authority cited by them in
support of said stipulation and which is herein-below cited for purposes of
this judgment, to wit:
"When two women innocently and in good faith are legally united in holy
matrimony to the same man, they and their children, born of said wedlock, will
be regarded as legitimate children and each family be entitled to one half of
the estate. Lao & Lao vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc.,
(CA) 39 OG 79; Pisalbon vs. Bejec, 74 Phil. 88.
WHEREFORE, in view of the above premises, this Court is of the opinion that
the foregoing stipulation of facts is in order and in accordance with law and
the same is hereby approved. Judgment, therefore, is hereby rendered
declaring the petitioner Basilia Berdin Vda. de Consuegra and her co-
petitioners Juliana, Pacita, Maria Lourdes, Jose, Jr., Rodrigo, Lenida and Luis,
all surnamed Consuegra, beneficiary and entitled to one-half (1/2) of the
retirement benefit in the amount of Six Thousand Three Hundred Four Pesos
and Fourty-Seven Centavos (P6,304.47) due to the deceased Jose Consuegra
from the Government Service Insurance System or the amount of P3,152.235
to be divided equally among them in the proportional amount of 1/16 each.
Likewise, the respondent Rosario Diaz Vda. de Consuegra is hereby declared
beneficiary and entitled to the other half of the retirement benefit of the late
Jose Consuegra or the amount of P3,152.235. The case with respect to the
Highway District Engineer of Surigao del Norte is hereby ordered dismissed.
Hence the present appeal by herein petitioners-appellants, Basilia Berdin and
her children.
It is the contention of appellants that the lower court erred in not holding that
the designated beneficiaries in the life insurance of the late Jose Consuegra
are also the exclusive beneficiaries in the retirement insurance of said
deceased. In other words, it is the submission of appellants that because the
deceased Jose Consuegra failed to designate the beneficiaries in his
retirement insurance, the appellants who were the beneficiaries named in the
life insurance should automatically be considered the beneficiaries to receive
the retirement insurance benefits, to the exclusion of respondent Rosario
Diaz. From the arguments adduced by appellants in their brief We gather that
it is their stand that the system of life insurance and the system of retirement
insurance, that are provided for in Commonwealth Act 186 as amended, are
simply complementary to each other, or that one is a part or an extension of
the other, such that whoever is named the beneficiary in the life insurance is
also the beneficiary in the retirement insurance when no such beneficiary is
named in the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Government Service Insurance
System is Commonwealth Act 186 which was enacted by the National
Assembly on November 14, 1936. As originally approved, Commonwealth Act
186 provided for the compulsory membership in the Government Service
Insurance System of all regularly and permanently appointed officials and
employees of the government, considering as automatically insured on life all
such officials and employees, and issuing to them the corresponding
membership policy under the terms and conditions as provided in the Act. 2
Originally, Commonwealth Act 186 provided for life insurance only.
Commonwealth Act 186 was amended by Republic Act 660 which was
enacted by the Congress of the Philippines on June 16, 1951, and, among
others, the amendatory Act provided that aside from the system of life
insurance under the Government Service Insurance System there was also
established the system of retirement insurance. Thus, We will note in Republic
Act 660 that there is a chapter on life insurance and another chapter on
retirement insurance. 3 Under the chapter on life insurance are sections 8, 9
and 10 of Commonwealth Act 186, as amended; and under the chapter on
retirement insurance are sections 11, 12, 13 and 13-A. On May 31, 1957,
Republic Act 1616 was enacted by Congress, amending section 12 of
Commonwealth Act 186 as amended by Republic Act 660, by adding thereto two new
subsections, designated as subsections (b) and (c). This subsection (c) of section 12 of
Commonwealth Act 186, as amended by Republic Acts 660, 1616 and 3096, was again
amended by Republic Act 3836 which was enacted on June 22, 1963.lâwphî1.ñèt The
pertinent provisions of subsection (c) of Section 12 of Commonwealth Act 186, as thus
amended and reamended, read as follows:
(c) Retirement is likewise allowed to a member, regardless of age, who has rendered at
least twenty years of service. The benefit shall, in addition to the return of his personal
contributions plus interest and the payment of the corresponding employer's premiums
described in subsection (a) of Section 5 hereof, without interest, be only a gratuity
equivalent to one month's salary for every year of service, based on the highest rate
received, but not to exceed twenty-four months; Provided, That the retiring officer or
employee has been in the service of the said employer or office for at least four years,
immediately preceding his retirement.
xxx xxx xxx
The gratuity is payable by the employer or office concerned which is hereby authorized to
provide the necessary appropriation to pay the same from any unexpended items of
appropriations.
Elective or appointive officials and employees paid gratuity under this subsection shall be
entitled to the commutation of the unused vacation and sick leave, based on the highest
rate received, which they may have to their credit at the time of retirement.
Jose Consuegra died on September 26, 1965, and so at the time of his death he had
acquired rights under the above-quoted provisions of subsection (c) of Section 12 of
Com. Act 186, as finally amended by Rep. Act 3836 on June 22, 1963. When Consuegra
died on September 26, 1965, he had to his credit 22.5028 years of service in the
government, and pursuant to the above-quoted provisions of subsection (c) of Section 12
of Com. Act 186, as amended, on the basis of the highest rate of salary received by him
which was P282.83 per month, he was entitled to receive retirement insurance benefits in
the amount of P6,304.47. This is the retirement benefits that are the subject of dispute
between the appellants, on the one hand, and the appellee Rosario Diaz, on the other, in
the present case. The question posed is: to whom should this retirement insurance
benefits of Jose Consuegra be paid, because he did not, or failed to, designate the
beneficiary of his retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on September
26, 1965, it follows that he started in the government service sometime during the early
part of 1943, or before 1943. In 1943 Com. Act 186 was not yet amended, and the only
benefits then provided for in said Com. Act 186 were those that proceed from a life
insurance. Upon entering the government service Consuegra became a compulsory
member of the GSIS, being automatically insured on his life, pursuant to the provisions of
Com. Act 186 which was in force at the time. During 1943 the operation of the
Government Service Insurance System was suspended because of the war, and the
operation was resumed sometime in 1946. When Consuegra designated his beneficiaries
in his life insurance he could not have intended those beneficiaries of his life insurance as
also the beneficiaries of his retirement insurance because the provisions on retirement
insurance under the GSIS came about only when Com. Act 186 was amended by Rep. Act
660 on June 16, 1951. Hence, it cannot be said that because herein appellants were
designated beneficiaries in Consuegra's life insurance they automatically became the
beneficiaries also of his retirement insurance. Rep. Act 660 added to Com. Act 186
provisions regarding retirement insurance, which are Sections 11, 12, and 13 of Com. Act
186, as amended. Subsection (b) of Section 11 of Com. Act 186, as amended by Rep. Act
660, provides as follows:
(b) Survivors benefit. — Upon death before he becomes eligible for retirement, his
beneficiaries as recorded in the application for retirement annuity filed with the System
shall be paid his own premiums with interest of three per centum per annum,
compounded monthly. If on his death he is eligible for retirement, then the automatic
retirement annuity or the annuity chosen by him previously shall be paid accordingly.
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186,
as amended by Rep. Act 660, clearly indicate that there is need for the employee to file an
application for retirement insurance benefits when he becomes a member of the GSIS,
and he should state in his application the beneficiary of his retirement insurance. Hence,
the beneficiary named in the life insurance does not automatically become the
beneficiary in the retirement insurance unless the same beneficiary in the life insurance is
so designated in the application for retirement insurance.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides
for a life insurance fund and for a retirement insurance fund. There was no
such provision in Com. Act 186 before it was amended by Rep. Act 660. Thus,
subsections (a) and (b) of Section 24 of Commonwealth Act 186, as amended
by Rep. Act 660, partly read as follows:
(a) Life insurance fund. — This shall consist of all premiums for life insurance
benefit and/or earnings and savings therefrom. It shall meet death claims as
they may arise or such equities as any member may be entitled to, under the
conditions of his policy, and shall maintain the required reserves to the end of
guaranteeing the fulfillment of the life insurance contracts issued by the
System ...
(b) Retirement insurance fund. — This shall consist of all contributions for
retirement insurance benefit and of earnings and savings therefrom. It shall
meet annuity payments and establish the required reserves to the end of
guaranteeing the fulfillment of the contracts issued by the System. ...
Thus, We see that the GSIS offers two separate and distinct systems of
benefits to its members — one is the life insurance and the other is the
retirement insurance. These two distinct systems of benefits are paid out
from two distinct and separate funds that are maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever
is named the beneficiary in the life insurance policy. As in the case of a life
insurance provided for in the Insurance Act (Act 2427, as amended), the
beneficiary in a life insurance under the GSIS may not necessarily be a heir of
the insured. The insured in a life insurance may designate any person as
beneficiary unless disqualified to be so under the provisions of the Civil
Code.4 And in the absence of any beneficiary named in the life insurance
policy, the proceeds of the insurance will go to the estate of the insured.
Retirement insurance is primarily intended for the benefit of the employee —
to provide for his old age, or incapacity, after rendering service in the
government for a required number of years. If the employee reaches the age
of retirement, he gets the retirement benefits even to the exclusion of the
beneficiary or beneficiaries named in his application for retirement insurance.
The beneficiary of the retirement insurance can only claim the proceeds of the
retirement insurance if the employee dies before retirement. If the employee
failed or overlooked to state the beneficiary of his retirement insurance, the
retirement benefits will accrue to his estate and will be given to his legal heirs
in accordance with law, as in the case of a life insurance if no beneficiary is
named in the insurance policy.
It is Our view, therefore, that the respondent GSIS had correctly acted when it
ruled that the proceeds of the retirement insurance of the late Jose
Consuegra should be divided equally between his first living wife Rosario
Diaz, on the one hand, and his second wife Basilia Berdin and his children by
her, on the other; and the lower court did not commit error when it confirmed
the action of the GSIS, it being accepted as a fact that the second marriage of
Jose Consuegra to Basilia Berdin was contracted in good faith. The lower
court has correctly applied the ruling of this Court in the case of Lao, et al. vs.
Dee Tim, et al., 45 Phil. 739 as cited in the stipulation of facts and in the
decision appealed from.5 In the recent case of Gomez vs. Lipana, L-23214,
June 30, 1970,6 this Court, in construing the rights of two women who were
married to the same man — a situation more or less similar to the case of
appellant Basilia Berdin and appellee Rosario Diaz — held "that since the
defendant's first marriage has not been dissolved or declared void the
conjugal partnership established by that marriage has not ceased. Nor has
the first wife lost or relinquished her status as putative heir of her husband
under the new Civil Code, entitled to share in his estate upon his death should
she survive him. Consequently, whether as conjugal partner in a still
subsisting marriage or as such putative heir she has an interest in the
husband's share in the property here in dispute.... " And with respect to the
right of the second wife, this Court observed that although the second
marriage can be presumed to be void ab initio as it was celebrated while the
first marriage was still subsisting, still there is need for judicial declaration of
such nullity. And inasmuch as the conjugal partnership formed by the second
marriage was dissolved before judicial declaration of its nullity, "[t]he only lust
and equitable solution in this case would be to recognize the right of the
second wife to her share of one-half in the property acquired by her and her
husband and consider the other half as pertaining to the conjugal partnership
of the first marriage."
WHEREFORE, the decision appealed from is affirmed, with costs against petitioners-
appellants. It is so ordered.
Asian Terminals, Inc. v. Malayan Insurance, Co., Inc., (G.R. No.
171406, April 4, 2011)
G.R. No. 171406 April 4, 2011
ASIAN TERMINALS, INC., Petitioner,
vs.
MALAYAN INSURANCE, CO., INC., Respondent.
DECISION
DEL CASTILLO, J.:
Once the insurer pays the insured, equity demands reimbursement as no one should
benefit at the expense of another.
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the July
14, 2005 Decision2 and the February 14, 2006 Resolution 3 of the Court of Appeals (CA) in
CA G.R. CV No. 61798.
Factual Antecedents
On November 14, 1995, Shandong Weifang Soda Ash Plant shipped on board the vessel
MV "Jinlian I" 60,000 plastic bags of soda ash dense (each bag weighing 50 kilograms)
from China to Manila.4 The shipment, with an invoice value of US$456,000.00, was
insured with respondent Malayan Insurance Company, Inc. under Marine Risk Note No.
RN-0001-21430, and covered by a Bill of Lading issued by Tianjin Navigation Company
with Philippine Banking Corporation as the consignee and Chemphil Albright and Wilson
Corporation as the notify party.5
On November 21, 1995, upon arrival of the vessel at Pier 9, South Harbor, Manila, the
stevedores of petitioner Asian Terminals, Inc., a duly registered domestic corporation
engaged in providing arrastre and stevedoring services, 7 unloaded the 60,000 bags of
soda ash dense from the vessel and brought them to the open storage area of petitioner
for temporary storage and safekeeping, pending clearance from the Bureau of Customs
and delivery to the consignee. 8 When the unloading of the bags was completed on
November 28, 1995, 2,702 bags were found to be in bad order condition.9
On November 29, 1995, the stevedores of petitioner began loading the bags in the trucks
of MEC Customs Brokerage for transport and delivery to the consignee. 10 On December
28, 1995, after all the bags were unloaded in the warehouses of the consignee, a total of
2,881 bags were in bad order condition due to spillage, caking, and hardening of the
contents.11
On April 19, 1996, respondent, as insurer, paid the value of the lost/ damaged cargoes to
the consignee in the amount of ₱643,600.25.12
Ruling of the Regional Trial Court
On November 20, 1996, respondent, as subrogee of the consignee, filed before the
Regional Trial Court (RTC) of Manila, Branch 35, a Complaint 13 for damages against
petitioner, the shipper Inchcape Shipping Services, and the cargo broker MEC Customs
Brokerage.14
After the filing of the Answers,15 trial ensued.
On June 26, 1998, the RTC rendered a Decision 16 finding petitioner liable for the
damage/loss sustained by the shipment but absolving the other defendants. The RTC
found that the proximate cause of the damage/loss was the negligence of petitioner’s
stevedores who handled the unloading of the cargoes from the vessel. 17 The RTC
emphasized that despite the admonitions of Marine Cargo Surveyors Edgar Liceralde and
Redentor Antonio not to use steel hooks in retrieving and picking-up the bags, petitioner’s
stevedores continued to use such tools, which pierced the bags and caused the
spillage.18 The RTC, thus, ruled that petitioner, as employer, is liable for the acts and
omissions of its stevedores under Articles 2176 19 and 2180 paragraph (4) 20 of
the Civil Code.21 Hence, the dispositive portion of the Decision reads:
WHEREFORE, judgment is rendered ordering defendant Asian Terminal, Inc. to
pay plaintiff Malayan Insurance Company, Inc. the sum of ₱643,600.25 plus
interest thereon at legal rate computed from November 20, 1996, the date the
Complaint was filed, until the principal obligation is fully paid, and the costs.
The complaint of the plaintiff against defendants Inchcape Shipping Services
and MEC Customs Brokerage, and the counterclaims of said defendants
against the plaintiff are dismissed.
SO ORDERED.22
Ruling of the Court of Appeals
Aggrieved, petitioner appealed23 to the CA but the appeal was denied. In its
July 14, 2005 Decision, the CA agreed with the RTC that the damage/loss was
caused by the negligence of petitioner’s stevedores in handling and storing
the subject shipment.24 The CA likewise rejected petitioner’s assertion that it
received the subject shipment in bad order condition as this was belied by
Marine Cargo Surveyors Redentor Antonio and Edgar Liceralde, who both
testified that the actual counting of bad order bags was done only after all the
bags were unloaded from the vessel and that the Turn Over Survey of Bad
Order Cargoes (TOSBOC) upon which petitioner anchors its defense was
prepared only on November 28, 1995 or after the unloading of the bags was
completed.25 Thus, the CA disposed of the appeal as follows:
WHEREFORE, premises considered, the appeal is DENIED. The assailed
Decision dated June 26, 1998 of the Regional Trial Court of Manila, Branch 35,
in Civil Case No. 96-80945 is hereby AFFIRMED in all respects.
SO ORDERED.26
Petitioner moved for reconsideration 27 but the CA denied the same in a
Resolution28 dated February 14, 2006 for lack of merit.
6
Issues
Hence, the present recourse, petitioner contending that:
1. RESPONDENT-INSURER IS NOT ENTITLED TO THE RELIEF GRANTED AS IT
FAILED TO ESTABLISH ITS CAUSE OF ACTION AGAINST HEREIN PETITIONER
SINCE, AS THE ALLEGED SUBROGEE, IT NEVER PRESENTED ANY VALID,
EXISTING, ENFORCEABLE INSURANCE POLICY OR ANY COPY THEREOF IN
COURT.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IT OVERLOOKED THE
FACT THAT THE TOSBOC & RESBOC WERE ADOPTED AS COMMON EXHIBITS
BY BOTH PETITIONER AND RESPONDENT.
3. CONTRARY TO TESTIMONIAL EVIDENCE ON RECORD, VARIOUS
DOCUMENTATIONS WOULD POINT TO THE VESSEL’S LIABILITY AS THERE IS,
IN THIS INSTANT CASE, AN OVERWHELMING DOCUMENTARY EVIDENCE TO
PROVE THAT THE DAMAGE IN QUESTION WERE SUSTAINED WHEN THE
SHIPMENT WAS IN THE CUSTODY OF THE VESSEL.
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT ADJUDGED
HEREIN DEFENDANT LIABLE DUE TO [THE] FACT THAT THE TURN OVER
SURVEY OF BAD ORDER CARGOES (TOSBOC) WAS PREPARED ONLY AFTER
THE COMPLETION OF THE DISCHARGING OPERATIONS OR ON NOVEMBER
28, 1995. THUS, CONCLUDING THAT DAMAGE TO THE CARGOES WAS DUE
TO THE IMPROPER HANDLING THEREOF BY ATI STEVEDORES.
5. THE HONORABLE COURT OF APPEALS ERRED IN NOT TAKING JUDICIAL
NOTICE OF THE CONTRACT FOR CARGO HANDLING SERVICES BETWEEN
PPA AND ATI AND APPLYING THE PERTINENT PROVISIONS THEREOF AS
REGARDS ATI’S LIABILITY.29
In sum, the issues are: (1) whether the non-presentation of the insurance contract or
policy is fatal to respondent’s cause of action; (2) whether the proximate cause of the
damage/loss to the shipment was the negligence of petitioner’s stevedores; and (3)
whether the court can take judicial notice of the Management Contract between
petitioner and the Philippine Ports Authority (PPA) in determining petitioner’s liability.
Petitioner’s Arguments
bound by the delimitation of the issues during the pre-trial because they
themselves agreed to the same."52
Neither was this issue raised on appeal. 53 Basic is the rule that "issues or
grounds not raised below cannot be resolved on review by the Supreme Court,
for to allow the parties to raise new issues is antithetical to the sporting idea
of fair play, justice and due process."54

Petitioner contends that respondent has no cause of action because it failed to present Besides, non-presentation of the insurance contract or policy is not
the insurance contract or policy covering the subject shipment. 30 Petitioner argues that
the Subrogation Receipt presented by respondent is not sufficient to prove that the
necessarily fatal.55 In Delsan Transport Lines, Inc. v. Court of Appeals, 56 we
subject shipment was insured and that respondent was validly subrogated to the rights of
ruled that:
the consignee.31 Thus, petitioner submits that without proof of a valid subrogation,
respondent is not entitled to any reimbursement.32
Anent the second issue, it is our view and so hold that the presentation in
evidence of the marine insurance policy is not indispensable in this case
Petitioner likewise puts in issue the finding of the RTC, which was affirmed by the CA, that
before the insurer may recover from the common carrier the insured value of
the proximate cause of the damage/loss to the shipment was the negligence of
the lost cargo in the exercise of its subrogatory right. The subrogation receipt,
petitioner’s stevedores.33 Petitioner avers that such finding is contrary to the documentary
by itself, is sufficient to establish not only the relationship of herein private
evidence, i.e., the TOSBOC, the Request for Bad Order Survey (RESBOC) and the Report of
respondent as insurer and Caltex, as the assured shipper of the lost cargo of
Survey.34 According to petitioner, these documents prove that it received the subject
industrial fuel oil, but also the amount paid to settle the insurance claim. The
shipment in bad order condition and that no additional damage was sustained by the
right of subrogation accrues simply upon payment by the insurance company
subject shipment under its custody.35 Petitioner asserts that although the TOSBOC was
of the insurance claim.
prepared only after all the bags were unloaded by petitioner’s stevedores, this does not
mean that the damage/loss was caused by its stevedores.36
The presentation of the insurance policy was necessary in the case of Home
Insurance Corporation v. CA (a case cited by petitioner) because the shipment
Petitioner also claims that the amount of damages should not be more than ₱5,000.00,
therein (hydraulic engines) passed through several stages with different
pursuant to its Management Contract for cargo handling services with the PPA. 37
parties involved in each stage. First, from the shipper to the port of departure;
Petitioner contends that the CA should have taken judicial notice of the said contract
second, from the port of departure to the M/S Oriental Statesman; third, from
since it is an official act of an executive department subject to judicial cognizance. 38
the M/S Oriental Statesman to the M/S Pacific Conveyor; fourth, from the M/S
Pacific Conveyor to the port of arrival; fifth, from the port of arrival to the
Respondent’s Arguments arrastre operator; sixth, from the arrastre operator to the hauler, Mabuhay
Brokerage Co., Inc. (private respondent therein); and lastly, from the hauler to
the consignee. We emphasized in that case that in the absence of proof of
Respondent, on the other hand, argues that the non-presentation of the insurance
stipulations to the contrary, the hauler can be liable only for any damage that
contract or policy was not raised in the trial court. Thus, it cannot be raised for the first
occurred from the time it received the cargo until it finally delivered it to the
time on appeal.39 Respondent likewise contends that under prevailing jurisprudence,
consignee. Ordinarily, it cannot be held responsible for the handling of the
presentation of the insurance policy is not indispensable. 40 Moreover, with or without the
cargo before it actually received it. The insurance contract, which was not
insurance contract or policy, respondent claims that it should be allowed to recover under
presented in evidence in that case would have indicated the scope of the
Article 123641 of the Civil Code.42 Respondent further avers that "the right of subrogation
insurer’s liability, if any, since no evidence was adduced indicating at what
has its roots in equity - it is designed to promote and to accomplish justice and is the
stage in the handling process the damage to the cargo was sustained. 57
mode which equity adopts to compel the ultimate payment of a debt by one who in
(Emphasis supplied.)
justice, equity and good conscience ought to pay."43

In International Container Terminal Services, Inc. v. FGU Insurance

Respondent likewise maintains that the RTC and the CA correctly found that the
Corporation,58 we used the same line of reasoning in upholding the Decision
damage/loss sustained by the subject shipment was caused by the negligent acts of
of the CA finding the arrastre contractor liable for the lost shipment despite
petitioner’s stevedores.44 Such factual findings of the RTC, affirmed by the CA, are
the failure of the insurance company to offer in evidence the insurance
conclusive and should no longer be disturbed. 45 In fact, under Section 146 of Rule 45 of the
contract or policy. We explained:
Rules of Court, only questions of law may be raised in a petition for review on certiorari. 47

Indeed, jurisprudence has it that the marine insurance policy needs to be

As to the Management Contract for cargo handling services, respondent contends that
this is outside the operation of judicial notice. 48 And even if it is not, petitioner’s liability
cannot be limited by it since it is a contract of adhesion. 49
Our Ruling
The petition is bereft of merit.
Non-presentation of the insurance contract or policy is not fatal in the instant case
presented in evidence before the trial court or even belatedly before the
appellate court. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp., the
Court stated that the presentation of the marine insurance policy was
necessary, as the issues raised therein arose from the very existence of an
insurance contract between Malayan Insurance and its consignee, ABB
Koppel, even prior to the loss of the shipment. In Wallem Philippines Shipping,
Inc. v. Prudential Guarantee and Assurance, Inc., the Court ruled that the
insurance contract must be presented in evidence in order to determine the
extent of the coverage. This was also the ruling of the Court in Home
Insurance Corporation v. Court of Appeals.

Petitioner claims that respondent’s non-presentation of the insurance contract or policy
between the respondent and the consignee is fatal to its cause of action.
We do not agree.
First of all, this was never raised as an issue before the RTC. In fact, it is not among the
issues agreed upon by the parties to be resolved during the pre-trial. 50 As we have said,
"the determination of issues during the pre-trial conference bars the consideration of
other questions, whether during trial or on appeal." 51 Thus, "[t]he parties must disclose
during pre-trial all issues they intend to raise during the trial, except those involving
privileged or impeaching matters. x x x The basis of the rule is simple. Petitioners are
However, as in every general rule, there are admitted exceptions. In Delsan
Transport Lines, Inc. v. Court of Appeals, the Court stated that the
presentation of the insurance policy was not fatal because the loss of the
cargo undoubtedly occurred while on board the petitioner’s vessel, unlike in
Home Insurance in which the cargo passed through several stages with
different parties and it could not be determined when the damage to the
cargo occurred, such that the insurer should be liable for it.
As in Delsan, there is no doubt that the loss of the cargo in the present case
occurred while in petitioner’s custody. Moreover, there is no issue as regards
the provisions of Marine Open Policy No. MOP-12763, such that the
presentation of the contract itself is necessary for perusal, not to mention
that its existence was already admitted by petitioner in open court. And even
though it was not offered in evidence, it still can be considered by the court as long as
they have been properly identified by testimony duly recorded and they have themselves
been incorporated in the records of the case.59
Similarly, in this case, the presentation of the insurance contract or policy was not
necessary. Although petitioner objected to the admission of the Subrogation Receipt in
its Comment to respondent’s formal offer of evidence on the ground that respondent
failed to present the insurance contract or policy, 60 a perusal of petitioner’s Answer 61 and
Pre-Trial Brief62 shows that petitioner never questioned respondent’s right to subrogation,
nor did it dispute the coverage of the insurance contract or policy. Since there was no
issue regarding the validity of the insurance contract or policy, or any provision thereof,
respondent had no reason to present the insurance contract or policy as evidence during
the trial.
Factual findings of the CA, affirming the RTC, are conclusive and binding
Petitioner’s attempt to absolve itself from liability must likewise fail.
Only questions of law are allowed in petitions for review on certiorari under Rule 45 of the
Rules of Court. Thus, it is not our duty "to review, examine, and evaluate or weigh all over
again the probative value of the evidence presented,"63 especially where the findings of
both the trial court and the appellate court coincide on the matter. 64 As we have often
said, factual findings of the CA affirming those of the RTC are conclusive and binding,
except in the following cases: "(1) when the inference made is manifestly mistaken,
absurd or impossible; (2) when there is grave abuse of discretion; (3) when the findings
are grounded entirely on speculations, surmises or conjectures; (4) when the judgment of
the [CA] is based on misapprehension of facts; (5) when the [CA], in making its findings,
went beyond the issues of the case and the same is contrary to the admissions of both
appellant and appellee; (6) when the findings of fact are conclusions without citation of
specific evidence on which they are based; (7) when the [CA] manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion; and (8) when the findings of fact of the [CA] are premised
on the absence of evidence and are contradicted by the evidence on record." 65 None of
these are availing in the present case.
Both the RTC and the CA found the negligence of petitioner’s stevedores to be the
proximate cause of the damage/loss to the shipment. In disregarding the contention of
petitioner that such finding is contrary to the documentary evidence, the CA had this to
say:
ATI, however, contends that the finding of the trial court was contrary to the documentary
evidence of record, particularly, the Turn Over Survey of Bad Order Cargoes dated
November 28, 1995, which was executed prior to the turn-over of the cargo by the carrier
to the arrastre operator ATI, and which showed that the shipment already contained 2,702
damaged bags.
We are not persuaded.
Contrary to ATI’s assertion, witness Redentor Antonio, marine cargo surveyor of Inchcape
for the vessel Jinlian I which arrived on November 21, 1995 and up to completion of
discharging on November 28, 1995, testified that it was only after all the bags were
unloaded from the vessel that the actual counting of bad order bags was made, thus:
xxxx
The above testimony of Redentor Antonio was corroborated by Edgar Liceralde, marine
cargo surveyor connected with SMS Average Surveyors and Adjusters, Inc., the company
requested by consignee Chemphil Albright and Wilson Corporation to provide
superintendence, report the condition and determine the final outturn of quantity/weight
of the subject shipment. x x x
xxxx
Defendant-appellant ATI, for its part, presented its claim officer as witness who testified
that a survey was conducted by the shipping company and ATI before the shipment was
turned over to the possession of ATI and that the Turn Over Survey of Bad Order Cargoes
was prepared by ATI’s Bad Order (BO) Inspector.
Considering that the shipment arrived on November 21, 1998 and the unloading
operation commenced on said date and was completed on November 26, 1998, while
the Turn Over Survey of Bad Order Cargoes, reflecting a figure of 2,702 damaged bags,
was prepared and signed on November 28, 1998 by ATI’s BO Inspector and
co-signed by a representative of the shipping company, the trial court’s
finding that the damage to the cargoes was due to the improper handling
thereof by ATI’s stevedores cannot be said to be without substantial support
from the records.
We thus see no cogent reason to depart from the ruling of the trial court that
ATI should be made liable for the 2,702 bags of damaged shipment. Needless
to state, it is hornbook doctrine that the assessment of witnesses and their
testimonies is a matter best undertaken by the trial court, which had the
opportunity to observe the demeanor, conduct or attitude of the witnesses.
The findings of the trial court on this point are accorded great respect and will
not be reversed on appeal, unless it overlooked substantial facts and
circumstances which, if considered, would materially affect the result of the
case.
We also find ATI liable for the additional 179 damaged bags discovered upon
delivery of the shipment at the consignee’s warehouse in Pasig. The final
Report of Survey executed by SMS Average Surveyors & Adjusters, Inc., and
independent surveyor hired by the consignee, shows that the subject
shipment incurred a total of 2881 damaged bags.
The Report states that the withdrawal and delivery of the shipment took about
ninety-five (95) trips from November 29, 1995 to December 28, 1995 and it
was upon completion of the delivery to consignee’s warehouse where the final
count of 2881 damaged bags was made. The damage consisted of torn/bad
order condition of the bags due to spillages and caked/hardened portions.
We agree with the trial court that the damage to the shipment was caused by
the negligence of ATI’s stevedores and for which ATI is liable under Articles
2180 and 2176 of the Civil Code. The proximate cause of the damage (i.e.,
torn bags, spillage of contents and caked/hardened portions of the contents)
was the improper handling of the cargoes by ATI’s stevedores, x x x
xxxx
ATI has not satisfactorily rebutted plaintiff-appellee’s evidence on the
negligence of ATI’s stevedores in the handling and safekeeping of the
cargoes. x x x
xxxx
We find no reason to disagree with the trial court’s conclusion. Indeed, from
the nature of the [damage] caused to the shipment, i.e., torn bags, spillage of
contents and hardened or caked portions of the contents, it is not difficult to
see that the damage caused was due to the negligence of ATI’s stevedores
who used steel hooks to retrieve the bags from the higher portions of the
piles thereby piercing the bags and spilling their contents, and who piled the
bags in the open storage area of ATI with insufficient cover thereby exposing
them to the elements and [causing] the contents to cake or harden.66
Clearly, the finding of negligence on the part of petitioner’s stevedores is
supported by both testimonial and documentary evidence. Hence, we see no
reason to disturb the same.
Judicial notice does not apply
Finally, petitioner implores us to take judicial notice of Section 7.01, 67 Article
VII of the Management Contract for cargo handling services it entered with
the PPA, which limits petitioner’s liability to ₱5,000.00 per package.
Unfortunately for the petitioner, it cannot avail of judicial notice.
Sections 1 and 2 of Rule 129 of the Rules of Court provide that:
SECTION 1. Judicial notice, when mandatory. — A court shall take judicial
notice, without the introduction of evidence, of the existence and territorial
extent of states, their political history, forms of government and symbols of
nationality, the law of nations, the admiralty and maritime courts of the world
and their seals, the political constitution and history of the Philippines, the
 official acts of the legislative, executive and judicial departments of the Philippines, the
laws of nature, the measure of time, and the geographical divisions.1avvphi1
SEC. 2. Judicial notice, when discretionary. — A court may take judicial notice of matters
which are of public knowledge, or are capable of unquestionable demonstration or ought
to be known to judges because of their judicial functions.
The Management Contract entered into by petitioner and the PPA is clearly not among
the matters which the courts can take judicial notice of. It cannot be considered an
official act of the executive department. The PPA, which was created by virtue of
Presidential Decree No. 857, as amended, 68 is a government-owned and controlled
corporation in charge of administering the ports in the country. 69 Obviously, the PPA was
only performing a proprietary function when it entered into a Management Contract with
petitioner. As such, judicial notice cannot be applied.
WHEREFORE, the petition is hereby DENIED. The assailed July 14, 2005 Decision and the
February 14, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 61798 are hereby
AFFIRMED.
SO ORDERED.
V. CLAIMS SETTLEMENT AND SUBROGATION
A. Unfair claim settlement practices
B. Claims for life insurance policies
C. Claims for non-life insurance policies
D. Delay in payment of claims
Tio Khe Chio vs. CA (September 30, 1991)
G.R. No. 76101-02 September 30, 1991
TIO KHE CHIO, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND SURETY
CORPORATION, respondents.
Rodolfo M. Morelos for petitioner.
Ferrer, Mariano, Sangalang & Gatdula for private respondent.
FERNAN, C.J.:
The issue in this petition for certiorari and prohibition is the legal rate of interest to be
imposed in actions for damages arising from unpaid insurance claims. Petitioner Tio Khe
Chio claims that it should be twelve (12%) per cent pursuant to Articles 243 and 244 of
the Insurance Code while private respondent Eastern Assurance and Surety Corporation
(EASCO) claims that it should be six (6%) per cent under Article 2209 of the Civil Code.
The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one
thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A. Dallas,
Texas, U.S.A. The goods were insured with respondent EASCO and shipped on board the
M/V Peskov, a vessel owned by Far Eastern Shipping Company. When the goods reached
Manila on January 28, 1979, they were found to have been damaged by sea water which
rendered the fishmeal useless. Petitioner filed a claim with EASCO and Far Eastern
Shipping. Both refused to pay. Whereupon, petitioner sued them before the then Court of
First Instance of Cebu, Branch II for damages. EASCO, as the insurer, filed a counterclaim
against the petitioner for the recovery of P18,387.86 representing the unpaid insurance
premiums.
On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern
Shipping to pay petitioner solidarily the sum of P105,986.68 less the amount of
P18,387.86 for unpaid premiums with interest at the legal rate from the filing
of the complaint, the sum of P15,000.00 as attorney's fees and the costs.1
The judgment became final as to EASCO but the shipping company appealed
to the Court of Appeals and was absolved from liability by the said court in
AC-G.R. No. 00161, entitled "Tio Khe Chio vs. Eastern Assurance and Surety
Corporation."
The trial court, upon motion by petitioner, issued a writ of execution against
EASCO. The sheriff enforcing the writ reportedly fixed the legal rate of interest
at twelve (12%). Respondent EASCO moved to quash the writ alleging that the
legal interest to be computed should be six (6%) per cent per annum in
accordance with Article 2209 of the Civil Code and not twelve (12%) per cent
as insisted upon by petitioner's counsel. In its order of July 30, 1986, the trial
court denied EASCO's motion. EASCO then filed a petition for certiorari and
prohibition before the Court of Appeals.
On July 30, 1986, the Appellate Court rendered the assailed judgment, the
dispositive part of which states:
WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it
fixes the interest at 12% on the principal amount of P87,598.82 from the date
of filing of the complaint until the full payment of the amount, and the interest
that the private respondent is entitled to collect from the petitioner is hereby
reduced to 6% per annum.
No pronouncement as to costs.2
In disputing the aforesaid decision of the Court of Appeals, petitioner
maintains that not only is it unjust and unfair but it is also contrary to the
correct interpretation of the fixing of interest rates under Sections 243 and
244 of the Insurance Code. And since petitioner's claims is based on an
insurance contract, then it is the Insurance Code which must govern and not
the Civil Code.
We rule for respondent EASCO. The legal rate of interest in the case at bar is
six (6%) per annum as correctly held by the Appellate Court.
Section 243 of the Insurance Code provides:
The amount of any loss or damage for which an insurer may be liable, under
any policy other than life insurance policy, shall be paid within thirty days after
proof of loss is received by the insurer and ascertainment of the loss or
damage is made either by agreement between the insured and the insurer or
by arbitration; but if such ascertainment is not had or made within sixty days
after such receipt by the insurer of the proof of loss, then the loss or damage
shall be paid within ninety days after such receipt. Refusal or failure to pay the
loss or damage within the time prescribed herein will entitle the assured to
collect interest on the proceeds of the policy for the duration of the delay at
the rate of twice the ceiling prescribed by the Monetary Board, unless such
failure or refusal to pay is based on the ground that the claim is fraudulent.
Section 244 of the aforementioned Code also provides:
In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the case
may be, to make a finding as to whether the payment of the claim of the
insured has been unreasonably denied or withheld; and in the affirmative
case, the insurance company shall be adjudged to pay damages which shall
consist of attorney's fees and other expenses incurred by the insured person
by reason of such undeniable denial or withholding of payment plus interest
of twice the ceiling prescribed by the Monetary Board of the amount of the
claim due the insured, from the date following the time prescribed in section
two hundred forty-two or in section two hundred forty-three, as the case may
be, until the claim is fully satisfied; Provided, That the failure to pay any such
claim within the time prescribed in said sections shall be considered prima
facie evidence of unreasonable delay in payment.
In the case at bar, the Court of Appeals made no finding that there was an unjustified Court of Appeals (CA) in CA-G.R. CV No. 46721 directing petitioner to pay the
refusal or withholding of payment on petitioner's claim. In fact, respondent court had this insurance claim of Usiphil Incorporated (private respondent). The appellate
to say on EASCO's refusal to settle the claim of petitioner: court’s Resolution, dated May 13, 1999, which denied petitioner’s motion for
reconsideration, is likewise sought to be reversed and set aside.chanrob1es
virtua1 1aw 1ibrary
... EASCO's refusal to settle the claim to Tio Khe Chio was based on some ground which,
while not sufficient to free it from liability under its policy, nevertheless is sufficient to
The antecedent facts, as culled from the decision of the trial court and the CA,
negate any assertion that in refusing to pay, it acted unjustifiably.
are as follows:chanrob1es virtual 1aw library

xxx xxx xxx On September 15, 1981, private respondent obtained a fire insurance policy
from petitioner (then doing business under the name Summa Insurance
Corporation) covering certain properties, e.g., office, furniture, fixtures, shop
The case posed some genuine issues of interpretation of the terms of the policy as to
machinery and other trade equipment. Under Policy No. F3100 issued to
which persons may honestly differ. This is the reason the trial court did not say EASCO's
private respondent, petitioner undertook to indemnify private respondent for
refusal was unjustified.3
any damage to or loss of said properties arising from fire.

Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant
case. They apply only when the court finds an unreasonable delay or refusal in the
payment of the claims.
Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of
interest from six (6%) to twelve (12%) per cent apply to the case at bar as by the
petitioner. The adjusted rate mentioned in the circular refers only to loans or forbearances
of money, goods or credits and court judgments thereon but not to court judgments for
damages arising from injury to persons and loss of property which does not involve a
loan.4
In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143
SCRA 158, the Court declared that the legal rate of interest is six (6%) per cent per
annum, and not twelve (12%) per cent, where a judgment award is based on an action for
damages for personal injury, not use or forbearance of money, goods or credit. In the
same vein, the Court held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30, 1986,
145 SCRA 311, that the rates under the Usury Law (amended by P.D. 116) are applicable
only to interest by way of compensation for the use or forbearance of money, interest by
way of damages is governed by Article 2209 of the Civil Code.
Clearly, the applicable law is Article 2209 of the Civil Code which reads:
If the obligation consists in the payment of a sum of money and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of interest agreed upon, and in the absence of stipulation, the legal interest
which is six per cent per annum.
And in the light of the fact that the contending parties did not allege the rate of interest
stipulated in the insurance contract, the legal interest was properly pegged by the
Appellate Court at six (6%) per cent.
Sometime in 1982, private respondent filed with petitioner an insurance claim
amounting to P987,126.11 for the loss of the insured properties due to fire.
Acting thereon, petitioner appointed Adjuster H.H. Bayne to undertake the
valuation and adjustment of the loss. H.H. Bayne then required private
respondent to file a formal claim and submit proof of loss. In compliance
therewith, private respondent submitted its Sworn Statement of Loss and
Formal Claim, dated July 22, 1982, signed by Reynaldo Cayetano, private
respondent’s Manager. Respondent likewise submitted Proof of Loss signed
by its Accounting Manager Pedro Palallos and countersigned by H.H. Bayne’s
Adjuster F.C. Medina.
Palallos personally followed-up private respondent’s claim with petitioner’s
President Joaquin Ortega. During their meeting, Ortega instructed their
Finance Manager, Rosauro Maghirang, to reconcile the records. Thereafter,
Maghirang and Palallos signed a Statement/Agreement, dated February 28,
1985, which indicated that the amount due respondent was P842,683.40.
Despite repeated demands by private respondent, petitioner refused to pay
the insurance claim. Thus, private respondent was constrained to file a
complaint against petitioner for the unpaid insurance claim. In its Answer,
petitioner maintained that the claim of private respondent could not be
allowed because it failed to comply with Policy Condition No. 13 regarding the
submission of certain documents to prove the loss.
Trial ensued. On July 6, 1994, the trial court rendered judgment in favor of
private Respondent. The dispositive portion of the decision reads:chanrob1es
virtual 1aw library
WHEREFORE, in view of the above observations and findings, judgment is
hereby rendered in favor of the plaintiff and against the defendant, ordering
the latter:chanrob1es virtual 1aw library
1. To pay the plaintiff the sum of P842,683.40 and to pay 24% interest per
annum from February 28, 1985 until fully paid (par. 29 of Exh. K);

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit. 2. To pay the plaintiff the sum equivalent to 10% of the principal obligation as
and for attorney’s fees, plus P1,500.00 per court appearance of counsel;

SO ORDERED. 3. To pay the plaintiff the amount of P30,000.00 as exemplary damages in

addition to the actual and compensatory damages awarded;

4. Dismissing the claim of P30,000.00 for actual damages under par. 4 of the
Finman General Assurance Corporation (July 12, 2001) prayer, since the actual damages. has been awarded under par. 1 of the
decision’s dispositive portion;

5. Dismissing the claim of interest under par. 2 of the prayer, there being no
[G.R. No. 138737. July 12, 2001.]
agreement to such effect;

FINMAN GENERAL ASSURANCE CORPORATION, Petitioner, v. COURT OF APPEALS and

6. Dismissing the counter-claim for lack of merit;
USIPHIL INCORPORATED, Respondents.
7. Ordering the defendant to pay the cost of suit.
DECISION
SO ORDERED. 1

On appeal, the CA substantially affirmed the decision of the trial court. The
KAPUNAN, J.: dispositive portion of the CA decision reads:chanrob1es virtua1 1aw 1ibrary

WHEREFORE, the appealed decision is hereby AFFIRMED with the

modification that defendant-appellant is ordered to pay plaintiff-appellee the
Through this petition for review on certiorari Finman General Assurance Corporation sum of P842,683.40 and to pay 24% interest per annum from 03 May 1985
(petitioner) seeks to reverse and set aside the Decision, dated January 14, 1999, of the until fully paid. In all other respects, the appealed decision is AFFIRMED IN
TOTO. 1. Your formal claim (which may be accomplished in the enclosed),
accompanied by a detailed inventory of the documents submitted.
SO ORDERED. 2
2. Certification from the appropriate government office showing that the
Petitioner now comes to this Court assailing the decision of the appellate court. Insured’s property was involved in the fire as a consequence of which the
Petitioner alleges that:chanrob1es virtual 1aw library claim is being filed.

Respondent Court of Appeals erred in finding that there is evidence sufficient to justify 3. Proof of premium payment.
the Decision of the lower court;
4. Three colored photographs of the debris, property
Respondent Court of Appeals erred in failing to consider the fact that Private Respondent captioned/identified/dated and initiated by the claimant at the back; in a floor
committed a violation of the Insurance Policy which justifies the denial of the claim by plan, indicate the point from where the picture was taken and by an arrow
Petitioner; where the camera was facing.

Respondent Court of Appeals further erred in finding that Petitioner is liable to pay the 4.1 Close-up (not more than 2 meters away) of the most severely damaged.
respondent, Usiphil, Inc., an interest of 24% per annum in addition to the principal amount
of P842,683.40. 3 4.2 Close-up (not more than 2 meters away) of the least damaged.

Essentially, petitioner argues that the disallowance of private respondent’s claim is 4.3 Overall view of the debris (may be from farther than 2 meters away);
justified by its failure to submit the required documents in accordance with Policy splice two or more frames if necessary.
Condition No. 13. Said requirements were allegedly communicated to private respondent
in the two letters of H.H. Bayne to private Respondent. The first letter stated:chanrob1es Our adjuster will also take photographs.
virtual 1aw library
5. Books of accounts bill, invoices and other vouchers, or certified copies
To be able to expedite adjustment of this case, please submit to us without delay the thereof if originals be lost. This requirement includes, but. is not limited to,
following documents and/or particulars:chanrob1es virtual 1aw library purchase and sales invoices, delivery

For FFF, Machineries/Equipment Claims 6. Certified copies of income tax returns for the last three years and the
accompanying financial statements.
1. Your formal claim (which may be accomplished in the enclosed form) accompanied by
a detailed inventory of the documents submitted. 7. Latest inventory of merchandise filed with a financial institution, the Bureau
of Internal Revenue or any government entity prior to the loss.
2. Certification from the appropriate government office indicating the date of the
occurrence of the fire, the property involved, its location and possible point of origin. 8. A detailed inventory of the articles damaged or destroyed, showing the cost
price of each, extent of loss, if any, if the risk sustained partial or water
3. Proof of premium payment. damaged.chanrob1es virtua1 1aw 1ibrary

4. Three color photographs of the debris properly captioned/identified/dated and initiated 9. Certificates of registration.
by the claimant at the back.
10. Bank Statements.
4.1 Close-up (not more than 2 meters away) of the most severely damaged.
11. For losses where the estimated value of stocks claimed which are burned
4.2 Close-up (not more than 2 meters away) of the least damaged. but of sight and/or which may no longer be subject to actual physical count
exceeds P50,000.00, a CPA’s detailed computations in support of such
4.3 Original view of the debris (may be from farther than 2 meters away); splice two or estimated value.
more frames if necessary.
12. In the absence of purchase invoices/delivery receipts (state reason for
Though our adjusters will also take photographs in the manner prescribed above, please absence), submit suppliers’ certificate of sales and delivery.
do not rely on his photographs in the preservations of your evidence of loss thru pictures.
13. Others (to be specified).
5. Copies of purchase invoices.
Statement of salvage of the affected stocks in trade.
6. In the absence of No. 5, suppliers’ certificates of sales and delivery.chanrob1es virtua1
1aw 1ibrary Your compliance with this request will enable us to expedite adjustment of
the loss in caption. 5
7. Appraisal report, if any.
According to petitioner, in complete disregard of the foregoing requirements,
8. Where initial estimated loss is exceeding P20,000.00, submit estimate by at least 2 private respondent never submitted any of the documents mentioned therein.
contractors/suppliers. Further, petitioner assails the award in favor of private respondent of an
interest rate of 24% per annum. Since there was allegedly no express finding
9. Others (to be specified) that petitioner unreasonably denied or withheld the payment of the subject
insurance claim, then the award of 24% per annum is not proper. Petitioner
1. Repairs cost of the affected items including quotation or invoices in support thereof; opines that the judgment should only bear the legal interest rate of 12% per
annum for the delay in the payment of the claim.
2. Complete lists of furniture, fixtures & fittings including date and cost of acquisition,
and; The petition is bereft of merit.

3. Statement of salvage on burned items. Well-settled is the rule that factual findings and conclusions of the trial court
and the CA are entitled to great weight and respect, and will not be disturbed
Your preferential attention to this request will be fully appreciated. 4 on appeal in the absence of any clear showing that the trial court overlooked
certain facts or circumstances which would substantially affect the
While the other letter stated:chanrob1es virtual 1aw library disposition of the case. 6 There is no cogent reason to deviate from this
salutary rule in the present case.
Please submit to us without delay the following documents and/or particulars.
Both the trial court and the CA concur in holding that private respondent had
For Stock Claim substantially complied with Policy Condition No. 13 which reads:chanrob1es
virtual 1aw library
13. The insured shall give immediate written notice to the Company of any loss, protect
the property from further damage, forthwith separate the damaged and undamaged
personal property, put it in the best possible order, furnish a complete inventory of the
destroyed, damaged, and undamaged property, showing in detail quantities, costs, actual
cash value and the amount of loss claimed; AND WITHIN SIXTY DAYS AFTER THE LOSS,
UNLESS SUCH TIME IS EXTENDED IN WRITING BY THE COMPANY, THE INSURED SHALL
RENDER TO THE COMPANY A PROOF OF LOSS, signed and sworn to by the insured,
stating the knowledge and belief of the insured as to the following: the time and origin of
the loss, the interest of the insured and of all others in the property, the actual cash value
of each item thereof and the amount of loss thereto, all encumbrances thereon, all other
contracts of insurance, whether valid or not, covering any of said property, any changes in
the title, use, occupation, location, possession or exposures of said property since the
issuing of this policy by whom and for what purpose any buildings herein described and
the several parts thereof were occupied at the time of loss and whether or not it then
stood on leased ground, and shall furnish a copy of all the descriptions and schedules in
all policies, and if required verified plans and specifications of any building, fixtures, or
machinery destroyed or damaged. The insured, as often as may be reasonably required,
shall exhibit to any person designated by the company all that remains of any property
herein described, and submit to examination under oath by any person named by the
Company, and subscribe the same; and, as often as may be reasonably required, shall
produce for examination all books of account, bills, invoices, and other vouchers or
certified copies thereof if originals be lost, at such reasonable time and place as may be
designated by the Company or its representative and shall permit extracts and copies
thereof to be made.chanrob1es virtua1 1aw 1ibrary
No claim under this policy shall be payable unless the terms of this condition have been
complied with. 7 prescribed in section two hundred forty-two or in section two hundred forty-
A perusal of the records shows that private respondent, after the occurrence of the fire,
immediately notified petitioner thereof. Thereafter, private respondent submitted the
following documents: (1) Sworn Statement of Loss and Formal Claim (Exhibit C) and; (2)
Proof of Loss (Exhibit D). The submission of these documents, to the Court’s mind,
constitutes substantial compliance with the above provision. Indeed, as regards the
submission of documents to prove loss, substantial, not strict as urged by petitioner,
compliance with the requirements will always be deemed sufficient. 8
In any case, petitioner itself acknowledged its liability when through its Finance Manager,
Rosauro Maghirang, it signed the document indicating that the amount due private
respondent is P842,683.40 (Exhibit E). As correctly held by the appellate
court:chanrob1es virtual 1aw library
Under the aforequoted provision of the insurance policy, the insured was required to
submit to the insurer written notice of the loss; and a complete inventory of the properties
damaged within 60 days after the fire, as well as a signed and sworn statement of Proof
of Loss. It is admitted by all parties that plaintiff-appellee notified the insurer Summa
Corporation of the fire which occurred on 27 May 1982. It is likewise admitted by all
parties that plaintiff-appellee submitted the following documents in support of its claim:
(1) Sworn Statement of Loss (Exhibit C); (2) formal claim dated 22 July 1982; (3)
unnotarized sworn statement of proof of loss (Exhibit D). There was, therefore, sufficient
compliance with the requirements in Section 13 of the policy. But, even assuming that
plaintiff-appellee indeed failed to submit certain required documents as proof of loss per
Section 13, such violation was waived by the insurer Summa when it signed the
document marked Exhibit E, a breakdown of the amount due to plaintiff-appellee as of
February 1985 on the insurance claim. By such act, Defendant-Appellant acknowledged
its liability under the insurance policy.
Antecedent to the execution of Exhibit E, there was a conference between Pallalos,
representing plaintiff-appellee and Ortega representing Summa Insurance. There is no
evidence that in that meeting, Summa Insurance questioned plaintiff-appellee’s
submission of the required documents. What happened was that Ortega summoned
Maghirang so that be could settle with Pallalos regarding the amount due to plaintiff-
appellee from insurance claim. The result is a reconciliation of claim in Exhibit E which
shows that as of February 1985, the net due sum is P842,683.49.
Defendant-appellant alleges that Maghirang was without authority to sign Exhibit E, and
therefore without authority to bind defendant-appellant corporation. We de not agree. The
evidence indicate that at a meeting between plaintiff-appellee’s corporate president
Pedro. Pallalos and his counterpart in defendant-appellant corporation, Joaquin Ortega,
the latter summoned Rosauro Maghirang to reconcile the claims of plaintiff-appellee. One
who clothes another with apparent authority as his agent and holds him to the public as
such, cannot. later be allowed to deny the. authority of such person to act as his agent
when such third person entered into the contract in good faith and in an honest belief that
he is such, agent. Witness for defendant-appellant Luis Manapat’s testimony that
Maghirang was without authority to bind the defendant-appellant cannot be given
credence because, as he himself testified, he was not yet part of the Summa Corporation
at the time the negotiations in question were going on. 9
Anent the payment of 24% interest per annum computed from May 3, 1985
until fully paid, suffice it to say that the same is authorized by Sections 243
and 244 of the Insurance Code:chanrob1es virtua1 1aw 1ibrary
SECTION 243. The amount of any loss or damage for which an insurer may be
liable, under any policy other than life insurance policy, shall be paid within
thirty days after proof of loss is received by the insurer and ascertainment of
the loss or damage is made either by agreement between the insured and the
insurer or by arbitration; but if such ascertainment is not had or made within
sixty days after such receipt by the insurer of the proof of loss, then the loss
or damage shall be paid within ninety days after such receipt. Refusal or
failure to pay the loss or damage within the time prescribed herein will entitle
the assured to collect interest on the proceeds of the policy for the duration of
the delay at the rate of twice the ceiling prescribed by the Monetary Board,
unless such failure or refusal to pay is based on the ground that the claim is
fraudulent.
SECTION 244. In case of any litigation for the enforcement of any policy or
contract of insurance, it shall be the duty of the Commissioner or the Court,
as the case may be, to make a finding as to whether the payment of the claim
of the insured has been unreasonably denied or withheld; and in the
affirmative case, the insurance company shall be adjudged to pay damages
which shall consist of attorney’s fees and other expenses incurred by the
insured person by reason of such unreasonable denial or withholding of
payment plus interest of twice the ceiling prescribed by the Monetary Board
of the amount of the claim due the insured, from the date following the time
three, as the case may be, until the claim is fully satisfied: Provided, That the
failure to pay any such claim within the time prescribed in said sections shall
be considered prima facie evidence of reasonable delay in payment.
Notably, under Section 244, a prima facie evidence of unreasonable delay in
payment of the claim is created by the failure of the insurer to pay the claim
within the time fixed in both Sections 243 and 244. 10 Further, Section 29 of
the policy itself provides for the payment of such interest:chanrob1es virtual
1aw library
29. Settlement of claim clause. The amount of any .loss or damage for which
the company may be liable, under this policy shall be paid within thirty days
after proof of loss is received by the company and ascertainment of the loss
or damage is made either in an agreement between the insured and the
company or by arbitration; but if such ascertainment is not had or made
within sixty days after such receipt by the company of the proof of loss, then
the loss or damage shall be paid within ninety days after such receipt. Refusal
or failure to pay the loss or damage within the time prescribed herein will
entitle the assured to collect interest on the proceeds of the policy for the
duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board. unless such failure or refusal to pay is based on the grounds
(sic) that the claim is fraudulent. 11
The policy itself obliges petitioner to pay the insurance claim within thirty
days after proof of loss and ascertainment of the loss made in an agreement
between private respondent and petitioner. In this case, as found by the CA,
petitioner and private respondent signed the agreement (Exhibit E) indicating
that the amount due private respondent was P842,683.40 on April 2, 1985.
Petitioner thus had until May 2, 1985 to pay private respondent’s insurance.
12 For its failure to do so, the CA and the trial court rightfully directed
petitioner to pay, inter alia, 24% interest per annum in accordance with the
above quoted provisions.
WHEREFORE, the instant petition is hereby DENIED for lack of merit. The
Decision, dated January 14, 1999, of the Court of Appeals in CA-G.R. CV No.
46721 and its Resolution, dated May 13, 1999, are AFFIRMED IN
TOTO.chanrob1es virtua1 1aw 1ibrary
SO ORDERED.

Prudential Guarantee vs. Trans-Asia Shipping Lines, Inc. G.R. No.
151890, 20 June 2006
G.R. No. 151890 June 20, 2006
PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,
vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 151991 June 20, 2006
TRANS-ASIA SHIPPING LINES, INC., petitioner,
vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.
DECISION
CHICO-NAZARIO, J:
This is a consolidation of two separate Petitions for Review on Certiorari filed by
petitioner Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890
and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991, assailing the
Decision1 dated 6 November 2001 of the Court of Appeals in CA G.R. CV No. 68278,
which reversed the Judgment 2 dated 6 June 2000 of the Regional Trial Court (RTC),
Branch 13, Cebu City in Civil Case No. CEB-20709. The 29 January 2002 Resolution 3 of
the Court of Appeals, denying PRUDENTIAL’s Motion for Reconsideration and TRANS-
ASIA’s Partial Motion for Reconsideration of the 6 November 2001 Decision, is likewise
sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and adopted by the appellate court
are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of
payment of premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for
loss/damage of the hull and machinery arising from perils, inter alia, of fire and explosion
for the sum of P40 Million, beginning [from] the period [of] July 1, 1993 up to July 1, 1994.
This is evidenced by Marine Policy No. MH93/1363 (Exhibits "A" to "A-11"). On October 25,
1993, while the policy was in force, a fire broke out while [M/V Asia Korea was]
undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff [TRANS-ASIA] filed
its notice of claim for damage sustained by the vessel. This is evidenced by a
letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its right to
subsequently notify defendant [PRUDENTIAL] as to the full amount of the claim upon final
survey and determination by average adjuster Richard Hogg International (Phil.) of the
damage sustained by reason of fire. An adjuster’s report on the fire in question was
submitted by Richard Hogg International together with the U-Marine Surveyor Report
(Exhibits "4" to "4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and
Trust receipt", a portion of which read (sic):
"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE
MILLION ONLY (P3,000,000.00) as a loan without interest under Policy No. MH 93/1353
[sic], repayable only in the event and to the extent that any net recovery is made by Trans-
Asia Shipping Corporation, from any person or persons, corporation or corporations, or
other parties, on account of loss by any casualty for which they may be liable occasioned
by the 25 October 1993: Fire on Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff’s claim (Exhibit
"5"). The letter reads:
"After a careful review and evaluation of your claim arising from the above-captioned
incident, it has been ascertained that you are in breach of policy conditions, among them
"WARRANTED VESSEL CLASSED AND CLASS MAINTAINED". Accordingly, we
regret to advise that your claim is not compensable and hereby DENIED."
This was followed by defendant’s letter dated 21 July 1997 requesting the
return or payment of the P3,000,000.00 within a period of ten (10) days from
receipt of the letter (Exhibit "6").4
Following this development, on 13 August 1997, TRANS-ASIA filed a
Complaint5 for Sum of Money against PRUDENTIAL with the RTC of Cebu City,
docketed as Civil Case No. CEB-20709, wherein TRANS-ASIA sought the
amount of P8,395,072.26 from PRUDENTIAL, alleging that the same
represents the balance of the indemnity due upon the insurance policy in the
total amount of P11,395,072.26. TRANS-ASIA similarly sought interest at 42%
per annum citing Section 2436 of Presidential Decreee No. 1460, otherwise
known as the "Insurance Code," as amended.
In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint
and interposed the defense that TRANS-ASIA breached insurance policy
conditions, in particular: "WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED." PRUDENTIAL further alleged that it acted as facts and law
require and incurred no liability to TRANS-ASIA; that TRANS-ASIA has no
cause of action; and, that its claim has been effectively waived and/or
abandoned, or it is estopped from pursuing the same. By way of a
counterclaim, PRUDENTIAL sought a refund of P3,000,000.00, which it
allegedly advanced to TRANS-ASIA by way of a loan without interest and
without prejudice to the final evaluation of the claim, including the amounts of
P500,000.00, for survey fees and P200,000.00, representing attorney’s fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered Judgment 8 finding for (therein
defendant) PRUDENTIAL. It ruled that a determination of the parties’ liabilities
hinged on whether TRANS-ASIA violated and breached the policy conditions
on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It interpreted
the provision to mean that TRANS-ASIA is required to maintain the vessel at a
certain class at all times pertinent during the life of the policy. According to
the court a quo, TRANS-ASIA failed to prove compliance of the terms of the
warranty, the violation thereof entitled PRUDENTIAL, the insured party, to
rescind the contract.9
Further, citing Section 10710 of the Insurance Code, the court a quo
ratiocinated that the concealment made by TRANS-ASIA that the vessel was
not adequately maintained to preserve its class was a material concealment
sufficient to avoid the policy and, thus, entitled the injured party to rescind the
contract. The court a quo found merit in PRUDENTIAL’s contention that there
was nothing in the adjustment of the particular average submitted by the
adjuster that would show that TRANS-ASIA was not in breach of the policy.
Ruling on the denominated loan and trust receipt, the court a quo said that in
substance and in form, the same is a receipt for a loan. It held that if TRANS-
ASIA intended to receive the amount of P3,000,000.00 as advance payment, it
should have so clearly stated as such.
The court a quo did not award PRUDENTIAL’s claim for P500,000.00,
representing expert survey fees on the ground of lack of sufficient basis in
support thereof. Neither did it award attorney’s fees on the rationalization that
the instant case does not fall under the exceptions stated in Article 2208 11 of
the Civil Code. However, the court a quo granted PRUDENTIAL’s counterclaim
stating that there is factual and legal basis for TRANS-ASIA to return the
amount of P3,000,000.00 by way of loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its
failure to prove a cause of action.
On defendant’s counterclaim, plaintiff is directed to return the sum of
P3,000,000.00 representing the loan extended to it by the defendant, within a
period of ten (10) days from and after this judgment shall have become final
and executory.12
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November THE COURT OF APPEALS ERRED IN HOLDING THAT
2001, reversed the 6 June 2000 Judgment of the RTC. THERE WAS NO VIOLATION BY TRANS-ASIA OF A
MATERIAL WARRANTY, NAMELY, WARRANTY CLAUSE
NO. 5, OF THE INSURANCE POLICY.
On the issue of TRANS-ASIA’s alleged breach of warranty of the policy condition
CLASSED AND CLASS MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the
party asserting the non-compensability of the loss had the burden of proof to show that III.
TRANS-ASIA breached the warranty, which burden it failed to discharge. PRUDENTIAL
cannot rely on the lack of certification to the effect that TRANS-ASIA was CLASSED AND
THE COURT OF APPEALS ERRED IN HOLDING THAT
CLASS MAINTAINED as its sole basis for reaching the conclusion that the warranty was
PRUDENTIAL, AS INSURER HAD THE BURDEN OF
breached. The Court of Appeals opined that the lack of a certification does not
PROVING THAT THE ASSURED, TRANS-ASIA,
necessarily mean that the warranty was breached by TRANS-ASIA. Instead, the Court of
VIOLATED A MATERIAL WARRANTY.
Appeals considered PRUDENTIAL’s admission that at the time the insurance contract was
entered into between the parties, the vessel was properly classed by Bureau Veritas, a
classification society recognized by the industry. The Court of Appeals similarly gave IV.
weight to the fact that it was the responsibility of Richards Hogg International (Phils.)
Inc., the average adjuster hired by PRUDENTIAL, to secure a copy of such certification to
THE COURT OF APPEALS ERRED IN HOLDING THAT
support its conclusion that mere absence of a certification does not warrant denial of
THE WARRANTY CLAUSE EMBODIED IN THE
TRANS-ASIA’s claim under the insurance policy.
INSURANCE POLICY CONTRACT WAS A MERE RIDER.

In the same token, the Court of Appeals found the subject warranty allegedly breached by
V.
TRANS-ASIA to be a rider which, while contained in the policy, was inserted by
PRUDENTIAL without the intervention of TRANS-ASIA. As such, it partakes of a nature of
a contract d’adhesion which should be construed against PRUDENTIAL, the party which THE COURT OF APPEALS ERRED IN HOLDING THAT
drafted the contract. Likewise, according to the Court of Appeals, PRUDENTIAL’s renewal THE ALLEGED RENEWALS OF THE POLICY
of the insurance policy from noon of 1 July 1994 to noon of 1 July 1995, and then again, CONSTITUTED A WAIVER ON THE PART OF
until noon of 1 July 1996 must be deemed a waiver by PRUDENTIAL of any breach of PRUDENTIAL OF THE BREACH OF THE WARRANTY BY
warranty committed by TRANS-ASIA. TRANS-ASIA.

Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the VI.
transaction between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a
loan. The Court of Appeals concluded that TRANS-ASIA has no obligation to pay back the
THE COURT OF APPEALS ERRED IN HOLDING THAT
amount of P3,000.000.00 to PRUDENTIAL based on its finding that the aforesaid amount
THE "LOAN AND TRUST RECEIPT" EXECUTED BY
was PRUDENTIAL’s partial payment to TRANS-ASIA’s claim under the policy. Finally, the
TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS
Court of Appeals denied TRANS-ASIA’s prayer for attorney’s fees, but held TRANS-ASIA
CONSTITUTING PARTIAL PAYMENT THEREOF.
entitled to double interest on the policy for the duration of the delay of payment of the
unpaid balance, citing Section 24413 of the Insurance Code.
VII.
Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:
THE COURT OF APPEALS ERRED IN HOLDING THAT
THE ACCEPTANCE BY PRUDENTIAL OF THE
WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is
FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A
ALLOWED and the Judgment appealed from REVERSED. The P3,000,000.00 initially paid
WAIVER ON THE PART OF PRUDENTIAL OF ANY
by appellee Prudential Guarantee Assurance Incorporated to appellant Trans-Asia and
VIOLATION BY TRANS-ASIA OF THE WARRANTY.
covered by a "Loan and Trust Receipt" dated 29 May 1995 is HELD to be in partial
settlement of the loss suffered by appellant and covered by Marine Policy No.
MH93/1363 issued by appellee. Further, appellee is hereby ORDERED to pay appellant the VIII.
additional amount of P8,395,072.26 representing the balance of the loss suffered by the
latter as recommended by the average adjuster Richard Hogg International (Philippines)
THE COURT OF APPEALS ERRRED (sic) IN REVERSING
in its Report, with double interest starting from the time Richard Hogg’s Survey Report
THE TRIAL COURT, IN FINDING THAT PRUDENTIAL
was completed, or on 13 August 1996, until the same is fully paid.
"UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND
IN ORDERING PRUDENTIAL TO PAY TRANS-ASIA
All other claims and counterclaims are hereby DISMISSED. P8,395,072.26 PLUS DOUBLE INTEREST FROM 13
AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID.15
All costs against appellee.14
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a
Petition for Review docketed as G.R. No. 151991, raising the following
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for
grounds for the allowance of the petition, to wit:
Reconsideration and Partial Motion for Reconsideration thereon, respectively, which
motions were denied by the Court of Appeals in the Resolution dated 29 January 2002.
I.
The Issues
THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING ATTORNEY’S FEES TO PETITIONER
Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R.
TRANS-ASIA ON THE GROUND THAT SUCH CAN ONLY
No. 151890, relying on the following grounds, viz:
BE AWARDED IN THE CASES ENUMERATED IN
ARTICLE 2208 OF THE CIVIL CODE, AND THERE
I. BEING NO BAD FAITH ON THE PART OF RESPONDENT
PRUDENTIAL IN DENYING HEREIN PETITIONER
TRANS-ASIA’S INSURANCE CLAIM.
THE AWARD IS GROSSLY UNCONSCIONABLE.

II.
II.

THE "DOUBLE INTEREST" REFERRED TO IN THE

DECISION DATED 06 NOVEMBER 2001 SHOULD BE
 CONSTRUED TO MEAN DOUBLE INTEREST BASED ON THE LEGAL
INTEREST OF 12%, OR INTEREST AT THE RATE OF 24% PER
ANNUM.16
In our Resolution of 2 December 2002, we granted TRANS-ASIA’s Motion for
Consolidation17 of G.R. Nos. 151890 and 151991; 18 hence, the instant consolidated
petitions.
In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA
arising from the subject insurance contract; (2) the liability, if any, of TRANS-ASIA to
PRUDENTIAL arising from the transaction between the parties as evidenced by a
document denominated as "Loan and Trust Receipt," dated 29 May 1995; and (3) the
amount of interest to be imposed on the liability, if any, of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for review, only questions of law, and
not questions of fact, may be raised. 19 This rule may be disregarded only when the
findings of fact of the Court of Appeals are contrary to the findings and conclusions of
the trial court, or are not supported by the evidence on record. 20 In the case at bar, we find
an incongruence between the findings of fact of the Court of Appeals and the court a quo,
thus, in our determination of the issues, we are constrained to assess the evidence
adduced by the parties to make appropriate findings of facts as are necessary.
I.
A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy
condition on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as contained in
the subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an
express and material warranty in the subject insurance contract, i.e., Marine Insurance
Policy No. MH93/1363, specifically Warranty Clause No. 5 thereof, which stipulates that
the insured vessel, "M/V ASIA KOREA" is required to be CLASSED AND CLASS
MAINTAINED. According to PRUDENTIAL, on 25 October 1993, or at the time of the
occurrence of the fire, "M/V ASIA KOREA" was in violation of the warranty as it was not
CLASSED AND CLASS MAINTAINED. PRUDENTIAL submits that Warranty Clause No. 5
was a condition precedent to the recovery of TRANS-ASIA under the policy, the violation
of which entitled PRUDENTIAL to rescind the contract under Sec. 74 21 of the Insurance
Code.
The warranty condition CLASSED AND CLASS MAINTAINED was explained by
PRUDENTIAL’s Senior Manager of the Marine and Aviation Division, Lucio Fernandez. The
pertinent portions of his testimony on direct examination is reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final
action was taken?
A It was eventually determined that there was a breach of the policy condition, and
basically there is a breach of policy warranty condition and on that basis the claim was
denied.
Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here
marked as Exhibits "1", "1-A" series, please point to the warranty in the policy which you
said was breached or violated by the plaintiff which constituted your basis for denying
the claim as you testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of
the policy below the printed words: "Clauses, Endorsements, Special Conditions and
Warranties," below this are several typewritten clauses and the witness pointed out in
particular the clause reading: "Warranted Vessel Classed and Class Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied with by the insured.
When we say a class warranty, it must be entered in the classification society.
COURT
Slowly.
WITNESS
(continued)
A A classification society is an organization which sets certain standards for
a vessel to maintain in order to maintain their membership in the
classification society. So, if they failed to meet that standard, they are
considered not members of that class, and thus breaching the warranty, that
requires them to maintain membership or to maintain their class on that
classification society. And it is not sufficient that the member of this
classification society at the time of a loss, their membership must be
continuous for the whole length of the policy such that during the effectivity
of the policy, their classification is suspended, and then thereafter, they get
reinstated, that again still a breach of the warranty that they maintained their
class (sic). Our maintaining team membership in the classification society
thereby maintaining the standards of the vessel (sic).
ATTY. LIM
Q Can you mention some classification societies that you know?
A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local
Classification Society, The Philippine Registration of Ships Society, China
Classification, NKK and Company Classification Society, and many others, we
have among others, there are over 20 worldwide. 22
At the outset, it must be emphasized that the party which alleges a fact as a
matter of defense has the burden of proving it. PRUDENTIAL, as the party
which asserted the claim that TRANS-ASIA breached the warranty in the
policy, has the burden of evidence to establish the same. Hence, on the part
of PRUDENTIAL lies the initiative to show proof in support of its defense;
otherwise, failing to establish the same, it remains self-serving. Clearly, if no
evidence on the alleged breach of TRANS-ASIA of the subject warranty is
shown, a fortiori, TRANS-ASIA would be successful in claiming on the policy.
It follows that PRUDENTIAL bears the burden of evidence to establish the fact
of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has
the burden of proof to show proof of loss, and the coverage thereof, in the
subject insurance policy. However, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty or the burden of
evidence shifts to defendant to controvert plaintiff’s prima facie case,
otherwise, a verdict must be returned in favor of plaintiff. 23 TRANS-ASIA was
able to establish proof of loss and the coverage of the loss, i.e., 25 October
1993: Fire on Board. Thereafter, the burden of evidence shifted to
PRUDENTIAL to counter TRANS-ASIA’s case, and to prove its special and
affirmative defense that TRANS-ASIA was in violation of the particular
condition on CLASSED AND CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that PRUDENTIAL was not
successful in discharging the burden of evidence that TRANS-ASIA breached
the subject policy condition on CLASSED AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and
Aviation Division, Lucio Fernandez, made a categorical admission that at the
time of the procurement of the insurance contract in July 1993, TRANS-ASIA’s
vessel, "M/V Asia Korea" was properly classed by Bureau Veritas, thus:
Q Kindly examine the records particularly the policy, please tell us if you know
whether M/V Asia Korea was classed at the time (sic) policy was procured
perthe (sic) insurance was procured that Exhibit "1" on 1st July 1993 (sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
A I believe with Bureau Veritas. 24
As found by the Court of Appeals and as supported by the records, Bureau Veritas is a
classification society recognized in the marine industry. As it is undisputed that TRANS-
ASIA was properly classed at the time the contract of insurance was entered into, thus, it
becomes incumbent upon PRUDENTIAL to show evidence that the status of TRANS-ASIA
as being properly CLASSED by Bureau Veritas had shifted in violation of the warranty.
Unfortunately, PRUDENTIAL failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that the lack of a certification in
PRUDENTIAL’s records to the effect that TRANS-ASIA’s "M/V Asia Korea" was CLASSED
AND CLASS MAINTAINED at the time of the occurrence of the fire cannot be tantamount
to the conclusion that TRANS-ASIA in fact breached the warranty contained in the policy.
With more reason must we sustain the findings of the Court of Appeals on the ground
that as admitted by PRUDENTIAL, it was likewise the responsibility of the average
adjuster, Richards Hogg International (Phils.), Inc., to secure a copy of such certification,
and the alleged breach of TRANS-ASIA cannot be gleaned from the average adjuster’s
survey report, or adjustment of particular average per "M/V Asia Korea" of the 25 October
1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the Insurance Code which
provides that, "the violation of a material warranty, or other material provision of a policy
on the part of either party thereto, entitles the other to rescind." It is generally accepted
that "[a] warranty is a statement or promise set forth in the policy, or by reference
incorporated therein, the untruth or non-fulfillment of which in any respect, and without
reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment,
renders the policy voidable by the insurer."25 However, it is similarly indubitable that for the
breach of a warranty to avoid a policy, the same must be duly shown by the party alleging
the same. We cannot sustain an allegation that is unfounded. Consequently,
PRUDENTIAL, not having shown that TRANS-ASIA breached the warranty condition,
CLASSED AND CLASS MAINTAINED, it remains that TRANS-ASIA must be allowed to
recover its rightful claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED
VESSEL CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the
same.
The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA
breached the warranty provision on CLASSED AND CLASS MAINTAINED, underscored
that PRUDENTIAL can be deemed to have made a valid waiver of TRANS-ASIA’s breach of
warranty as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2)
consecutive years, from noon of 01 July 1994 to noon of 01 July 1995, and then again
until noon of 01 July 1996. This renewal is deemed a waiver of any breach of warranty. 26
PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the
renewal policies are deemed a waiver of TRANS-ASIA’s alleged breach, averring herein
that the subsequent policies, designated as MH94/1595 and MH95/1788 show that they
were issued only on 1 July 1994 and 3 July 1995, respectively, prior to the time it made a
request to TRANS-ASIA that it be furnished a copy of the certification specifying that the
insured vessel "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED. PRUDENTIAL
posits that it came to know of the breach by TRANS-ASIA of the subject warranty clause
only on 21 April 1997. On even date, PRUDENTIAL sent TRANS-ASIA a letter of denial,
advising the latter that their claim is not compensable. In fine, PRUDENTIAL would have
this Court believe that the issuance of the renewal policies cannot be a waiver because
they were issued without knowledge of the alleged breach of warranty committed by
TRANS-ASIA.27
We are not impressed. We do not find that the Court of Appeals was in error when it held
that PRUDENTIAL, in renewing TRANS-ASIA’s insurance policy for two consecutive years
after the loss covered by Policy No. MH93/1363, was considered to have waived TRANS-
ASIA’s breach of the subject warranty, if any. Breach of a warranty or of a condition
renders the contract defeasible at the option of the insurer; but if he so elects,
he may waive his privilege and power to rescind by the mere expression of an
intention so to do. In that event his liability under the policy continues as
before.28 There can be no clearer intention of the waiver of the alleged breach
than the renewal of the policy insurance granted by PRUDENTIAL to TRANS-
ASIA in MH94/1595 and MH95/1788, issued in the years 1994 and 1995,
respectively.
To our mind, the argument is made even more credulous by PRUDENTIAL’s
lack of proof to support its allegation that the renewals of the policies were
taken only after a request was made to TRANS-ASIA to furnish them a copy of
the certificate attesting that "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. Notwithstanding PRUDENTIAL’s claim that no certification was
issued to that effect, it renewed the policy, thereby, evidencing an intention to
waive TRANS-ASIA’s alleged breach. Clearly, by granting the renewal policies
twice and successively after the loss, the intent was to benefit the insured,
TRANS-ASIA, as well as to waive compliance of the warranty.
The foregoing finding renders a determination of whether the subject
warranty is a rider, moot, as raised by the PRUDENTIAL in its assignment of
errors. Whether it is a rider will not effectively alter the result for the reasons
that: (1) PRUDENTIAL was not able to discharge the burden of evidence to
show that TRANS-ASIA committed a breach, thereof; and (2) assuming
arguendo the commission of a breach by TRANS-ASIA, the same was shown
to have been waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via
a transaction between the parties evidenced by a document denominated as
"Loan and Trust Receipt," dated 29 May 1995 constituted partial payment on
the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of
P3,000,000.00. The same was evidenced by a transaction receipt
denominated as a "Loan and Trust Receipt," dated 29 May 1995, reproduced
hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025 May 29, 1995
P3,000,000.00
Check No. PCIB066755
Received FROM PRUDENTIAL GUARANTEE AND
ASSURANCE INC., the sum of PESOS THREE MILLION
ONLY (P3,000,000.00) as a loan without interest, under
Policy No. MH93/1353, repayable only in the event
and to the extent that any net recovery is made by
TRANS ASIA SHIPPING CORP., from any person or
persons, corporation or corporations, or other parties,
on account of loss by any casualty for which they may
be liable, occasioned by the 25 October 1993: Fire on
Board.
As security for such repayment, we hereby pledge to
PRUDENTIAL GUARANTEE AND ASSURANCE INC.
whatever recovery we may make and deliver to it all
documents necessary to prove our interest in said
property. We also hereby agree to promptly prosecute
suit against such persons, corporation or corporations
through whose negligence the aforesaid loss was
caused or who may otherwise be responsible
therefore, with all due diligence, in our own name, but
at the expense of and under the exclusive direction
and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by
the parties evidenced a loan of P3,000,000.00 which it granted to TRANS-
ASIA, and not an advance payment on the policy or a partial payment for the loss. It
further submits that it is a customary practice for insurance companies in this country to
extend loans gratuitously as part of good business dealing with their assured, in order to
afford their assured the chance to continue business without embarrassment while
awaiting outcome of the settlement of their claims.30 According to PRUDENTIAL, the
"Trust and Loan Agreement" did not subrogate to it whatever rights and/or actions
TRANS-ASIA may have against third persons, and it cannot by no means be taken that by
virtue thereof, PRUDENTIAL was granted irrevocable power of attorney by TRANS-ASIA,
as the sole power to prosecute lies solely with the latter.
The Court of Appeals held that the real character of the transaction between the parties
as evidenced by the "Loan and Trust Receipt" is that of an advance payment by
PRUDENTIAL of TRANS-ASIA’s claim on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived from the old
Insurance Law Act No. 2427 of the Philippine Legislature during the American Regime.
The Insurance Act was lifted verbatim from the law of California, except Chapter V
thereof, which was taken largely from the insurance law of New York. Therefore, ruling
case law in that jurisdiction is to Us persuasive in interpreting provisions of our own
Insurance Code. In addition, the application of the adopted statute should correspond in
fundamental points with the application in its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan
Receipt that the money was intended as a loan does not detract from its real character as
payment of claim, thus:
"The receipt of money by the insured employers from a surety company for losses on
account of forgery of drafts by an employee where no provision or repayment of the
money was made except upon condition that it be recovered from other parties and
neither interest nor security for the asserted debts was provided for, the money
constituted the payment of a liability and not a mere loan, notwithstanding recitals in the
written receipt that the money was intended as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is
that appellant is obligated to hand over to appellee "whatever recovery (Trans Asia) may
make and deliver to (Prudential) all documents necessary to prove its interest in the said
property." For all intents and purposes therefore, the money receipted is payment under
the policy, with Prudential having the right of subrogation to whatever net recovery Trans-
Asia may obtain from third parties resulting from the fire. In the law on insurance,
subrogation is an equitable assignment to the insurer of all remedies which the insured
may have against third person whose negligence or wrongful act caused the loss covered
by the insurance policy, which is created as the legal effect of payment by the insurer as
an assignee in equity. The loss in the first instance is that of the insured but after
reimbursement or compensation, it becomes the loss of the insurer. It has been referred
to as the doctrine of substitution and rests on the principle that substantial justice should
be attained regardless of form, that is, its basis is the doing of complete, essential, and
perfect justice between all the parties without regard to form. 31
We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt"
evidences that the real nature of the transaction between the parties was that the amount
of P3,000,000.00 was not intended as a loan whereby TRANS-ASIA is obligated to pay
PRUDENTIAL, but rather, the same was a partial payment or an advance on the policy of
the claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by
PRUDENTIAL, subrogating the former to the extent of "any net recovery made by TRANS
ASIA SHIPPING CORP., from any person or persons, corporation or corporations, or other
parties, on account of loss by any casualty for which they may be liable, occasioned by
the 25 October 1993: Fire on Board."32
Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to
"promptly prosecute suit against such persons, corporation or corporations through
whose negligence the aforesaid loss was caused or who may otherwise be responsible
therefore, with all due diligence" in its name, the prosecution of the claims against such
third persons are to be carried on "at the expense of and under the exclusive direction and
control of PRUDENTIAL GUARANTEE AND ASSURANCE INC." 33 The clear import of the
phrase "at the expense of and under the exclusive direction and control" as used in the
"Loan and Trust Receipt" grants solely to PRUDENTIAL the power to prosecute, even as
the same is carried in the name of TRANS-ASIA, thereby making TRANS-ASIA merely an
agent of PRUDENTIAL, the principal, in the prosecution of the suit against parties who
may have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA
to repay PRUDENTIAL is highly speculative and contingent, i.e., only in the
event and to the extent that any net recovery is made by TRANS-ASIA from
any person on account of loss occasioned by the fire of 25 October 1993. The
transaction, therefore, was made to benefit TRANS-ASIA, such that, if no
recovery from third parties is made, PRUDENTIAL cannot be repaid the
amount. Verily, we do not think that this is constitutive of a loan. 34 The
liberality in the tenor of the "Loan and Trust Receipt" in favor of TRANS-ASIA
leads to the conclusion that the amount of P3,000,000.00 was a form of an
advance payment on TRANS-ASIA’s claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26,
representing the balance of the loss suffered by TRANS-ASIA and covered by
Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is
entitled to the unpaid claims covered by Marine Policy No. MH93/1363, or a
total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the
form of attorney’s fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorney’s fees. It held that
attorney’s fees cannot be awarded absent a showing of bad faith on the part
of PRUDENTIAL in rejecting TRANS-ASIA’s claim, notwithstanding that the
rejection was erroneous. According to the Court of Appeals, attorney’s fees
can be awarded only in the cases enumerated in Article 2208 of the Civil Code
which finds no application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages consisting of
attorney’s fees and other expenses incurred by the insured after a finding by
the Insurance Commissioner or the Court, as the case may be, of an
unreasonable denial or withholding of the payment of the claims due.
Moreover, the law imposes an interest of twice the ceiling prescribed by the
Monetary Board on the amount of the claim due the insured from the date
following the time prescribed in Section 242 35 or in Section 243,36 as the case
may be, until the claim is fully satisfied. Finally, Section 244 considers the
failure to pay the claims within the time prescribed in Sections 242 or 243,
when applicable, as prima facie evidence of unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a showing of bad faith
in order that attorney’s fees be granted. As earlier stated, under Section 244, a
prima facie evidence of unreasonable delay in payment of the claim is
created by failure of the insurer to pay the claim within the time fixed in both
Sections 242 and 243 of the Insurance Code. As established in Section 244,
by reason of the delay and the consequent filing of the suit by the insured, the
insurers shall be adjudged to pay damages which shall consist of attorney’s
fees and other expenses incurred by the insured.37
Section 244 reads:
In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the case
may be, to make a finding as to whether the payment of the claim of the
insured has been unreasonably denied or withheld; and in the affirmative
case, the insurance company shall be adjudged to pay damages which shall
consist of attorney’s fees and other expenses incurred by the insured person
by reason of such unreasonable denial or withholding of payment plus
interest of twice the ceiling prescribed by the Monetary Board of the amount
of the claim due the insured, from the date following the time prescribed in
section two hundred forty-two or in section two hundred forty-three, as the
case may be, until the claim is fully satisfied; Provided, That the failure to pay
any such claim within the time prescribed in said sections shall be considered
prima facie evidence of unreasonable delay in payment.
Sections 243 and 244 of the Insurance Code apply when the court finds an
unreasonable delay or refusal in the payment of the insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and confirmed
by the records show that there was an unreasonable delay by PRUDENTIAL in
the payment of the unpaid balance of P8,395,072.26 to TRANS-ASIA. On 26 October
1993, a day after the occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its
notice of claim. On 13 August 1996, the adjuster, Richards Hogg International (Phils.),
Inc., completed its survey report recommending the amount of P11,395,072.26 as the
total indemnity due to TRANS-ASIA. 38 On 21 April 1997, PRUDENTIAL, in a letter 39
addressed to TRANS-ASIA denied the latter’s claim for the amount of P8,395,072.26
representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent a
second letter40 to TRANS-ASIA seeking a return of the amount of P3,000,000.00. On 13
August 1997, TRANS-ASIA was constrained to file a complaint for sum of money against
PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing the balance of
the proceeds of the insurance claim.
As can be gleaned from the foregoing, there was an unreasonable delay on the part of
PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the latter’s right to the insurance
claims, from the time proof of loss was shown and the ascertainment of the loss was
made by the insurance adjuster. Evidently, PRUDENTIAL’s unreasonable delay in satisfying
TRANS-ASIA’s unpaid claims compelled the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy
as attorney’s fees to TRANS-ASIA is reasonable under the circumstances, or otherwise
stated, ten percent (10%) of P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v.
Court of Appeals,41 where a finding of an unreasonable delay under Section 244 of the
Insurance Code was made by this Court, we grant an award of attorney’s fees equivalent
to ten percent (10%) of the total proceeds. We find no reason to deviate from this judicial
precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees)
shall be imposed double interest in accordance with Section 244 of the Insurance Code.
Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling
prescribed by the Monetary Board due the insured, from the date following the time
prescribed in Section 242 or in Section 243, as the case may be, until the claim is fully
satisfied. In the case at bar, we find Section 243 to be applicable as what is involved
herein is a marine insurance, clearly, a policy other than life insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an insurer may be liable, under
any policy other than life insurance policy, shall be paid within thirty days after proof of
loss is received by the insurer and ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by arbitration; but if such
ascertainment is not had or made within sixty days after such receipt by the insurer of the
proof of loss, then the loss or damage shall be paid within ninety days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed herein will entitle
the assured to collect interest on the proceeds of the policy for the duration of the delay
at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or
refusal to pay is based on the ground that the claim is fraudulent.
As specified, the assured is entitled to interest on the proceeds for the duration of the
delay at the rate of twice the ceiling prescribed by the Monetary Board except when the
failure or refusal of the insurer to pay was founded on the ground that the claim is
fraudulent.
D. The term "double interest" as used in the Decision of the Court of Appeals must be
interpreted to mean 24% per annum.
PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of
TRANS-ASIA in the assailed Decision of 6 November 2001. It is PRUDENTIAL’s stance
that the award is extortionate and grossly unsconscionable. In support thereto,
PRUDENTIAL makes a reference to TRANS-ASIA’s prayer in the Complaint filed with the
court a quo wherein the latter sought, "interest double the prevailing rate of interest of
21% per annum now obtaining in the banking business or plus 42% per annum pursuant
to Article 243 of the Insurance Code x x x." 42
The contention fails to persuade. It is settled that an award of double interest is lawful
and justified under Sections 243 and 244 of the Insurance Code. 43 In Finman General
Assurance Corporation v. Court of Appeals,44 this Court held that the payment of 24%
interest per annum is authorized by the Insurance Code. 45 There is no gainsaying that the
term "double interest" as used in Sections 243 and 244 can only be interpreted to mean
twice 12% per annum or 24% per annum interest, thus:
The term "ceiling prescribed by the Monetary Board" means the legal rate of
interest of twelve per centum per annum (12%) as prescribed by the Monetary
Board in C.B. Circular No. 416, pursuant to P.D. No. 116, amending the Usury
Law; so that when Sections 242, 243 and 244 of the Insurance Code provide
that the insurer shall be liable to pay interest "twice the ceiling prescribed by
the Monetary Board", it means twice 12% per annum or 24% per annum
interest on the proceeds of the insurance.46
E. The payment of double interest should be counted from 13 September
1996.
The Court of Appeals, in imposing double interest for the duration of the delay
of the payment of the unpaid balance due TRANS-ASIA, computed the same
from 13 August 1996 until such time when the amount is fully paid. Although
not raised by the parties, we find the computation of the duration of the delay
made by the appellate court to be patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of the policy for the
duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board. Significantly, Section 243 mandates the payment of any loss
or damage for which an insurer may be liable, under any policy other than life
insurance policy, within thirty days after proof of loss is received by the
insurer and ascertainment of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration. It is clear that under
Section 243, the insurer has until the 30th day after proof of loss and
ascertainment of the loss or damage to pay its liability under the insurance,
and only after such time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.
In the case at bar, it was not disputed that the survey report on the
ascertainment of the loss was completed by the adjuster, Richard Hoggs
International (Phils.), Inc. on 13 August 1996. PRUDENTIAL had thirty days
from 13 August 1996 within which to pay its liability to TRANS-ASIA under the
insurance policy, or until 13 September 1996. Therefore, the double interest
can begin to run from 13 September 1996 only.
IV.
A. An interest of 12% per annum is similarly imposed on the TOTAL amount of
liability adjudged in section III herein, computed from the time of finality of
judgment until the full satisfaction thereof in conformity with this Court’s
ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47 inscribed the
rule of thumb48 in the application of interest to be imposed on obligations,
regardless of their source. Eastern emphasized beyond cavil that when the
judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, regardless of whether the obligation
involves a loan or forbearance of money, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance49 of credit.
We find application of the rule in the case at bar proper, thus, a rate of 12% per
annum from the finality of judgment until the full satisfaction thereof must be
imposed on the total amount of liability adjudged to PRUDENTIAL. It is clear
that the interim period from the finality of judgment until the satisfaction of
the same is deemed equivalent to a forbearance of credit, hence, the
imposition of the aforesaid interest.
Fallo
WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition
in G.R. No. 151991 is GRANTED, thus, we award the grant of attorney’s fees
and make a clarification that the term "double interest" as used in the 6
November 2001 Decision of the Court of Appeals in CA GR CV No. 68278
should be construed to mean interest at the rate of 24% per annum, with a
further clarification, that the same should be computed from 13 September
1996 until fully paid. The Decision and Resolution of the Court of Appeals, in
CA-G.R. CV No. 68278, dated 6 November 2001 and 29 January 2002,
respectively, are, thus, MODIFIED in the following manner, to wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26, insurance. The appellate court also held that Pioneer merely acted as a
representing the balance of the loss suffered by TRANS-ASIA and covered by Marine collection agent of Steamship Mutual.
Policy No. MH93/1363;

In this petition, petitioner assigns the following errors allegedly committed by

2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of the appellate court,
attorney’s fees equivalent to 10% of the amount of P8,395,072.26;

FIRST ASSIGNMENT OF ERROR

3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest at the rate of 24% per annum to be computed from 13
THE COURT A QUO ERRED WHEN IT RULED THAT
September 1996 until fully paid; and
RESPONDENT STEAMSHIP IS NOT DOING BUSINESS
IN THE PHILIPPINES ON THE GROUND THAT IT
4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability COURSED . . . ITS TRANSACTIONS THROUGH ITS
adjudged as abovestated in paragraphs (1), (2), and (3) herein, computed from the time of AGENT AND/OR BROKER HENCE AS AN INSURER IT
finality of judgment until the full satisfaction thereof. NEED NOT SECURE A LICENSE TO ENGAGE IN
INSURANCE BUSINESS IN THE PHILIPPINES.

No costs.
SECOND ASSIGNMENT OF ERROR

SO ORDERED.
THE COURT A QUO ERRED WHEN IT RULED THAT THE
RECORD IS BEREFT OF ANY EVIDENCE THAT
RESPONDENT STEAMSHIP IS ENGAGED IN
E. Right of subrogation INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

White Gold Marine Services vs. Pioneer Insurance, et al. (GR No.
154514, 28 July 2005)
THE COURT A QUO ERRED WHEN IT RULED, THAT
RESPONDENT PIONEER NEED NOT SECURE A
LICENSE WHEN CONDUCTING ITS AFFAIR AS AN
[G.R. NO. 154514. July 28, 2005] AGENT/BROKER OF RESPONDENT STEAMSHIP.

WHITE GOLD MARINE SERVICES, INC., Petitioners, v. PIONEER INSURANCE AND FOURTH ASSIGNMENT OF ERROR
SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., Respondents.
THE COURT A QUO ERRED IN NOT REVOKING THE
LICENSE OF RESPONDENT PIONEER AND [IN NOT
DECISION REMOVING] THE OFFICERS AND DIRECTORS OF
RESPONDENT PIONEER.9
QUISUMBING, J.:
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
This Petition for Review assails the Decision1 dated July 30, 2002 of the Court of Appeals
a license as an insurance agent/broker for Steamship Mutual?
in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance
chanroblesvirtualawlibrary
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 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
The facts are undisputed.
issued by the Insurance Commission.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the
coverage for its vessels from The Steamship Mutual Underwriting Association (Bermuda)
insurance business. To buttress its assertion, it cites the definition of a P & I
Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer).
Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals 10 as "an association
Subsequently, White Gold was issued a Certificate of Entry and Acceptance. 3 Pioneer also
composed of shipowners in general who band together for the specific
issued receipts evidencing payments for the coverage. When White Gold failed to fully
purpose of providing insurance cover on a mutual basis against liabilities
pay its accounts, Steamship Mutual refused to renew the coverage.
incidental to shipowning that the members incur in favor of third parties." It
stresses that as a P & I Club, Steamship Mutual's primary purpose is to solicit
Steamship Mutual thereafter filed a case against White Gold for collection of sum of and provide protection and indemnity coverage and for this purpose, it has
money to recover the latter's unpaid balance. White Gold on the other hand, filed a engaged the services of Pioneer to act as its agent.
complaint before the Insurance Commission claiming that Steamship Mutual violated
Sections 1864 and 1875 of the Insurance Code, while Pioneer violated Sections 299, 6 3007
Respondents contend that although Steamship Mutual is a P & I Club, it is not
and 3018 in relation to Sections 302 and 303, thereof.
engaged in the insurance business in the Philippines. It is merely an
association of vessel owners who have come together to provide mutual
The Insurance Commission dismissed the complaint. It said that there was no need for protection against liabilities incidental to shipowning. 11 Respondents aver
Steamship Mutual to secure a license because it was not engaged in the insurance Hyopsung is inapplicable in this case because the issue in Hyopsung was the
business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I jurisdiction of the court over Hyopsung.
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
Is Steamship Mutual engaged in the insurance business?
insurance business. Moreover, Pioneer was already licensed, hence, a separate license
chanroblesvirtualawlibrary
solely as agent/broker of Steamship Mutual was already superfluous.

Section 2(2) of the Insurance Code enumerates what constitutes "doing an

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its
insurance business" or "transacting an insurance business". These are:
decision, the appellate court distinguished between P & I Clubs vis - à-vis conventional
(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.
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 Pioneer's 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
The same provision also provides, the fact that no profit is derived from the making of
Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer
insurance contracts, agreements or transactions, or that no separate or direct
Insurance and Surety Corporation are ORDERED to obtain licenses and to
consideration is received therefor, shall not preclude the existence of an insurance
secure proper authorizations to do business as insurer and insurance agent,
business.12
respectively. The petitioner's prayer for the revocation of Pioneer's Certificate
of Authority and removal of its directors and officers, is DENIED. Costs
The test to determine if a contract is an insurance contract or not, depends on the nature against respondents.
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
SO ORDERED.
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 Verendia vs. CA (217 SCRA 417)
unknown or contingent event.14

In particular, a marine insurance undertakes to indemnify the assured against marine

G.R. No. 75605 January 22, 1993
losses, such as the losses incident to a marine adventure. 15 Section 9916 of the Insurance
Code enumerates the coverage of marine insurance.
RAFAEL (REX) VERENDIA, petitioner,
vs.
Relatedly, a mutual insurance company is a cooperative enterprise where the members
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES,
are both the insurer and insured. In it, the members all contribute, by a system of
respondents.
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 G.R. No. 76399 January 22, 1993
coverage, namely, protection and indemnity, war risks, and defense costs. 18
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
A P & I Club is "a form of insurance against third party liability, where the third party is vs.
anyone other than the P & I Club and the members." 19 By definition then, Steamship RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance
business.
B.L. Padilla for petitioner.

The records reveal Steamship Mutual is doing business in the country albeit without the
Sabino Padilla, Jr. for Fidelity & Surety, Co.
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
MELO, J.:
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?
chanroblesvirtualawlibrary
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration22 issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of 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 . . .
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.
Rizal Surety and Insurance Co. vs. CA (336 SCRA 12)
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 Decision1 and October 22, 1993 Resolution2 of the
Court of Appeals3 in CA-G.R. CV NO. 28779, which modified the Ruling4 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 (₱1,000,000.00) Pesos and eventually increased to One Million Five
Hundred Thousand (₱1,500,000.00) 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 ₱2,747, 867.00 plus legal interest, ₱400,000.00 as attorney's
fees, exemplary damages, expenses of litigation of ₱50,000.00 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
building13 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.1âwphi1 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.
Philamcare Health Systems Inc. vs. CA (379 SCRA
356) SAME CASE
Fortune Insurance and Surety Co., Inc. vs. CA (244
SCRA 308)
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
mentioned@ .490%;

In view of the foregoing, Fortune is exempt from liability under the general exceptions
clause of the insurance policy.

- 393,000.00 - on the two swimming pools, only (against the

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of earthquake shock only) @ 0.100%
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.
- 116,600.00 other buildings include as follows:

Gulf Resorts Inc. vs. Philippine Charter Insurance Corp. GR No.

155167, 16 May 2005 a) Tilter House - P19,800.00 - 0.551%

G.R. No. 156167 May 16, 2005

b) Power House - P41,000.00 - 0.551%

GULF RESORTS, INC., petitioner,

vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
c) House Shed - P55,000.00 - 0.540%

DECISION

PUNO, J.: P100,000.00 - for furniture, fixtures, lines air-con and operatin

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 that plaintiff agreed to insure with defendant the properties covered by AHAC
dismissed its two appeals and affirmed the judgment of the trial court. (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
For review are the warring interpretations of petitioner and respondent on the scope of
14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of
the insurance company’s liability for earthquake damage to petitioner’s properties.
P45,159.92 (Exh. "I"); that in the computation of the premium, defendant’s
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 (Exh. "I"), which is the policy in question, contained on the
Policy No. 31944 covers all damages to the properties within its resort caused by
right-hand upper portion of page 7 thereof, the following:
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 Rate-Various
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 Premium – P37,420.60 F/L
(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 plaintiff’s 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 – 2,061.52 – Typhoon
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 plaintiff’s 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" – 1,030.76 – EC
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. – 393.00 – ES
"6-A" and "6-B") as premium thereof, computed as follows:

Doc. Stamps 3,068.10

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

@ .392%;
F.S.T. 776.89

- 1,500,000.00 - on the furniture, etc. contained in the building above-


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 plaintiff’s
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 petitioner’s 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 complaint10 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 defendant’s 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 attorney’s 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 defendant’s 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
plaintiff’s 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 defendant’s obligation
to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner’s 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-APPELLANT’S
RIGHT TO RECOVER UNDER DEFENDANT-APPELLEE’S 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
court’s failure to award it attorney’s 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-
appellant’s 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-appellant’s prayer for an attorney’s 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-appellant’s 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 RESPONDENT’S
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 PETITIONER’S PRAYER FOR
DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEY’S FEES AND
EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policy’s 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 respondent’s 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 resort’s properties for
earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake
shock. Respondent’s 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 petitioner’s 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 respondent’s policy
was copied, covered only earthquake shock for the two swimming pools.
Second, petitioner’s 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 petitioner’s 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 rider’s 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. Petitioner’s
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. Respondent’s 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 adjuster’s 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-AIU’s 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, attorney’s 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 393.0022]
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 ½
% 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
petitioner’s previous insurance policies from AHAC-AIU. As borne out by
petitioner’s 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 III30
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: ATTY. ANDRES:

As far as earthquake shock endorsement you do not have a specific coverage for other As an insurance executive will you not attach any significance to the deletion
things other than swimming pool? You are covering building? They are covered by a of the qualifying phrase for the policies?
general insurance?

WITNESS:
WITNESS:

My answer to that would be, the deletion of that particular phrase is

Earthquake shock coverage could not stand alone. If we are covering building or another inadvertent. Being a company underwriter, we do not cover. . it was
we can issue earthquake shock solely but that the moment I see this, the thing that inadvertent because of the previous policies that we have issued with no
comes to my mind is either insuring a swimming pool, foundations, they are normally specific attachments, premium rates and so on. It was inadvertent, sir.
affected by earthquake but not by fire, sir.

The Court also rejects petitioner’s contention that respondent’s

DIRECT EXAMINATION OF JUAN BARANDA III contemporaneous and subsequent acts to the issuance of the insurance
TSN, August 11, 1992 policy falsely gave the petitioner assurance that the coverage of the
pp. 23-25 earthquake shock endorsement included all its properties in the resort.
Respondent only insured the properties as intended by the petitioner.
Petitioner’s own witness testified to this agreement, viz:
Q. Plaintiff’s 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 CROSS EXAMINATION OF LEOPOLDO MANTOHAC
to all the properties indicated in the respective schedules attached to said policies, what TSN, January 14, 1992
can you say about that testimony of plaintiff’s witness? pp. 4-5

WITNESS: 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?
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 A. I told him that the insurance that they will have to get will have the same
has been no change with respect to the rates. Everytime (sic) there is a renewal if the provisions as this American Home Insurance Policy No. 206-4568061-9.
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
Q. You are referring to Exhibit "H" of course?
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.
A. Yes, sir, to Exhibit "H".
COURT:
Q. So, all the provisions here will be the same except that of the premium
rates?
They are the same, the premium rates?

A. Yes, sir. He assured me that with regards to the insurance premium rates
WITNESS:
that they will be charging will be limited to this one. I (sic) can even be lesser.

They are the same in the sence (sic), in the amount of the coverage. If you are going to do
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
some computation based on the rates you will arrive at the same premiums, your Honor.
TSN, January 14, 1992
pp. 12-14
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
Atty. Mejia:
pp. 4-6

Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
ATTY. ANDRES:
provisions and scope of coverage of Exhibits "I" and "H" sometime in the third
week of March, 1990 or thereabout?
Would you as a matter of practice [insure] swimming pools for fire insurance?

A. Yes, sir, about that time.

WITNESS:

Q. And at that time did you notice any discrepancy or difference between the
No, we don’t, sir. policy wordings as well as scope of coverage of Exhibits "I" and "H"
respectively?

Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was
placed, is it not? 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
A. Yes, sir.
some discrepancies.

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
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 Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for
shock only is requested because this is an insurance policy and therefore cannot be those facilities in Agoo Playa?
insured against fire, so this has to be placed.

A. Yes, sir. I told him that I will agree to that renewal of this policy under
The verbal assurances allegedly given by respondent’s representative Atty. Umlas were Philippine Charter Insurance Corporation as long as it will follow the same or
not proved. Atty. Umlas categorically denied having given such assurances. exact provisions of the previous insurance policy we had with American
Home Assurance Corporation.

Finally, petitioner puts much stress on the letter of respondent’s 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:
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.
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
Q. What steps did you take?
pp. 22-26

A. When I examined the policy of the Philippine Charter Insurance Corporation

Q. Do you recall the circumstances that led to your discussion regarding the extent of
I specifically told him that the policy and wordings shall be copied from the
coverage of the policy issued by Philippine Charter Insurance Corporation?
AIU Policy No. 206-4568061-9.

A. I remember that when I returned to the office after the inspection, I got a photocopy of
Respondent, in compliance with the condition set by the petitioner, copied AIU
the insurance coverage policy and it was indicated under Item 3 specifically that the
Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true
coverage is only for earthquake shock. Then, I remember I had a talk with Atty. Umlas
that there was variance in some terms, specifically in the replacement cost
(sic), and I relayed to him what I had found out in the policy and he confirmed to me
endorsement, but the principal provisions of the policy remained essentially
indeed only Item 3 which were the two swimming pools have coverage for earthquake
similar to AHAC-AIU’s policy. Consequently, we cannot apply the "fine print" or
shock.
"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
xxx

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The

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

SO ORDERED.
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 petitioner’s
knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC 36

TSN, September 23, 1991
pp. 20-21
 Manila Mahogany vs. CA (154 SCRA 650)
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs. CA AND ZENITH INSURANCE CORPORATION, respondents.
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.
Federal Express Corporation vs. American Home Assurance
Company and Phil-Am
G.R. No. 150094 August 18, 2004
FEDERAL EXPRESS CORPORATION, petitioner,
vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC.,
respondents.
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 Review1 under Rule 45 of the Rules of Court, challenging the
June 4, 2001 Decision2 and the September 21, 2001 Resolution3 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 petitioner's 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 client's
cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the
cargoes arrived in Manila, a non-licensed custom's 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. Attorney's 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 petitioner's 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 – petitioner's 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 Court's 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 Insurance10 ("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 Receipt12 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 insurer's 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 insurer's 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, petitioner's 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. -- petitioner's 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.
Insurance Company, Inc., G.R. No. 150094, 18 August 2004)
G.R. No. 150094 August 18, 2004
FEDERAL EXPRESS CORPORATION, petitioner,
vs. AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE
COMPANY, INC., respondents.
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 Review1 under Rule 45 of the Rules of Court,
challenging the June 4, 2001 Decision2 and the September 21, 2001
Resolution3 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 petitioner's 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 client's cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after
the cargoes arrived in Manila, a non-licensed custom's 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. Attorney's 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 petitioner's 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 – petitioner's 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 Court's 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 Insurance10 ("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 Receipt12 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.
(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

Upon payment to the consignee of an indemnity for the loss of or damage to the insured
Condition Precedent
goods, the insurer's 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 insurer's subrogatory right to sue for recovery under the bill of lading in case of loss In this jurisdiction, the filing of a claim with the carrier within the time
of or damage to the cargo is jurisprudentially upheld."14 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
In the exercise of its subrogatory right, an insurer may proceed against an erring carrier.
it fails to do so, no right of action against the carrier can accrue in favor of the
To all intents and purposes, it stands in the place and in substitution of the consignee. A
former. The aforementioned requirement is a reasonable condition precedent;
fortiori, both the insurer and the consignee are bound by the contractual stipulations
it does not constitute a limitation of action.20
under the bill of lading.15

The requirement of giving notice of loss of or injury to the goods is not an

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.
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

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, petitioner's 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;
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. --
petitioner's 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

12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal;
and WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED
insofar as it pertains to Petitioner Federal Express Corporation. No
pronouncement as to costs.
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.
SO ORDERED.

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
Eternal Gardens Memorial Park Corporation vs. Phil.
American Life Insurance Co., GR No. 166245, 09 April
Article 26 of the Warsaw Convention, on the other hand, provides: 2008

"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without G.R. No. 166245 April 9, 2008
complaint shall be prima facie evidence that the same have been delivered in good
condition and in accordance with the document of transportation.
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
vs.THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
(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
The Case
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.
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-
19202 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 Chuang’s death. Attached to the claim were the following documents: (1)
Chuang’s 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) Assured’s 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 Chuang’s death: (1)
Certificate of Claimant (with form attached); (2) Assured’s 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 latter’s 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 Eternal’s demand, Philamlife denied Eternal’s 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 Creditor’s 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 attorney’s fees. SO ORDERED.
The RTC found that Eternal submitted Chuang’s application for insurance
which he accomplished before his death, as testified to by Eternal’s 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 Philamlife’s inaction from the submission of the requirements of the
group insurance on December 29, 1982 to Chuang’s death on August 2, 1984,
as well as Philamlife’s acceptance of the premiums during the same period,
Philamlife was deemed to have approved Chuang’s 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 Chuang’s application
was not enclosed in Eternal’s 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 Philamlife’s 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 Philamlife primarily claims that Eternal did not even know where the original
the death of John Chuang; insurance application of Chuang was, as shown by the testimony of Edilberto
Mendoza:

II. There was no valid insurance coverage; and

Atty. Arevalo:
Q Where is the original of the application form which is required in case of
III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29,
new coverage?
1996.
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies
The Court’s Ruling 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.
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 Atty. Miranda: We move to strike out the answer as it is not responsive as
enunciated in Sampayan v. Court of Appeals: counsel is merely asking for the location and does not [ask] for the number of
copy.

(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 Atty. Arevalo: Q Where is the original?
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]
[Mendoza:] A As far as I remember I do not know where the original but when
went beyond the issues of the case, or its findings are contrary to the admissions of both
I submitted with that payment together with the new clients all the originals I
the appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial
see to it before I sign the transmittal letter the originals are attached therein.16
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 In other words, the witness admitted not knowing where the original
findings of fact are premised on the supposed absence of evidence and contradicted by insurance application was, but believed that the application was transmitted
the evidence on record; and (11) when the Court of Appeals manifestly overlooked to Philamlife as an attachment to a transmittal letter.
certain relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion.12 (Emphasis supplied.)
As to the s eveeming inconsistencies between the testimony of Manuel
Cortez on whether one or two insurance application forms were
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this accomplished and the testimony of Mendoza on who actually filled out the
Court may review them. application form, these are minor inconsistencies that do not affect the
credibility of the witnesses. Thus, we ruled in People v. Paredes that minor
inconsistencies are too trivial to affect the credibility of witnesses, and these
Eternal claims that the evidence that it presented before the trial court supports its
may even serve to strengthen their credibility as these negate any suspicion
contention that it submitted a copy of the insurance application of Chuang before his
that the testimonies have been rehearsed.17
death. In Eternal’s 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 We reiterated the above ruling in Merencillo v. People:
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
Minor discrepancies or inconsistencies do not impair the essential integrity of
of the insurance application which was signed by Chuang himself and executed before
the prosecution’s evidence as a whole or reflect on the witnesses’ honesty.
his death.
The test is whether the testimonies agree on essential facts and whether the
respective versions corroborate and substantially coincide with each other so
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, as to make a consistent and coherent whole.18
arguing that Eternal must present evidence showing that Philamlife received a copy of
Chuang’s insurance application.
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
The evidence on record supports Eternal’s position. presented by Eternal has been falsified. Thus, the inconsistencies pointed out
by Philamlife are minor and do not affect the credibility of Eternal’s witnesses.

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 However, the question arises as to whether Philamlife assumed the risk of
attached to the letter. Such stamp of receipt has the effect of acknowledging receipt of loss without approving the application.
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
This question must be answered in the affirmative.
prove that the letter did not contain Chuang’s insurance application. However, Philamlife
failed to do so; thus, Philamlife is deemed to have received Chuang’s insurance
application. 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:
To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter
is stamped as received, the contents of the letter are correct and accounted for.
EFFECTIVE DATE OF BENEFIT.
Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the The insurance of any eligible Lot Purchaser shall be effective on the date he
reliability and credibility of the witnesses, because it has the opportunity to observe contracts a loan with the Assured. However, there shall be no insurance if the
firsthand the witnesses’ demeanor, conduct, and attitude. Findings of the trial court on application of the Lot Purchaser is not approved by the Company.
such matters are binding and conclusive on the appellate court, unless some facts or
circumstances of weight and substance have been overlooked, misapprehended, or
An examination of the above provision would show ambiguity between its two
misinterpreted,14 that, if considered, might affect the result of the case.15
sentences. The first sentence appears to state that the insurance coverage of
the clients of Eternal already became effective upon contracting a loan with
An examination of the testimonies of the witnesses mentioned by Philamlife, however, Eternal while the second sentence appears to require Philamlife to approve
reveals no overlooked facts of substance and value. 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 latter’s 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 party’s 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 Philamlife’s 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 attorney’s fees in the amount of PhP 10,000.

No costs.

SO ORDERED.