[G.R. No. 154514.

July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND
SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., respondents.
D E C I S I O N
QUISUMBING, J.:
This petition for review assails the Decision
[1]
dated July 30, 2002 of the Court
of Appeals in CA-G.R. SP No. 60144, affirming the Decision
[2]
dated May 3, 2000 of
the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that
there was no violation of the Insurance Code and the respondents do not need
license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and
Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of
Entry and Acceptance.
[3]
Pioneer also issued receipts evidencing payments for the
coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of
sum of money to recover the latters unpaid balance. White Gold on the other
hand, filed a complaint before the Insurance Commission claiming that Steamship
Mutual violated Sections 186
[4]
and 187
[5]
of the Insurance Code, while Pioneer
violated Sections 299,
[6]
300
[7]
and 301
[8]
in relation to Sections 302 and 303,
thereof.
The Insurance Commission dismissed the complaint. It said that there was no
need for Steamship Mutual to secure a license because it was not engaged in the
insurance business. It explained that Steamship Mutual was a Protection and
Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual
was not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship Mutual was
already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In
its decision, the appellate court distinguished between P & I Clubs vis--
vis conventional insurance. The appellate court also held that Pioneer merely acted
as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by
the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT
NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT
PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT
PIONEER.
[9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need a
license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual
admits it does not have a license to do business in the Philippines although Pioneer
is its resident agent. This relationship is reflected in the certifications issued by the
Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the
insurance business. To buttress its assertion, it cites the definition of a P & I Club
in Hyopsung Maritime Co., Ltd. v. Court of Appeals
[10]
as an association composed
of shipowners in general who band together for the specific purpose of providing
insurance cover on a mutual basis against liabilities incidental to shipowning that
the members incur in favor of third parties. It stresses that as a P & I Club,
Steamship Mutuals primary purpose is to solicit and provide protection and
indemnity coverage and for this purpose, it has engaged the services of Pioneer to
act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not
engaged in the insurance business in the Philippines. It is merely an association of
vessel owners who have come together to provide mutual protection against
liabilities incidental to shipowning.
[11]
Respondents aver Hyopsung is inapplicable in
this case because the issue in Hyopsung was the jurisdiction of the court
over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an
insurance business or transacting an insurance business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provisions of this Code.
. . .
The same provision also provides, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions, or that no separate or
direct consideration is received therefor, shall not preclude the existence of an
insurance business.
[12]

The test to determine if a contract is an insurance contract or not, depends on
the nature of the promise, the act required to be performed, and the exact nature
of the agreement in the light of the occurrence, contingency, or circumstances
under which the performance becomes requisite. It is not by what it is called.
[13]

Basically, an insurance contract is a contract of indemnity. In it, one
undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.
[14]

In particular, a marine insurance undertakes to indemnify the assured against
marine losses, such as the losses incident to a marine adventure.
[15]
Section 99
[16]
of
the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the
members are both the insurer and insured. In it, the members all contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses
and liabilities are paid, and where the profits are divided among themselves, in
proportion to their interest.
[17]
Additionally, mutual insurance associations, or clubs,
provide three types of coverage, namely, protection and indemnity, war risks, and
defense costs.
[18]

A P & I Club is a form of insurance against third party liability, where the third
party is anyone other than the P & I Club and the members.
[19]
By definition then,
Steamship Mutual as a P & I Club is a mutual insurance association engaged in the
marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit
without the requisite certificate of authority mandated by Section 187
[20]
of the
Insurance Code. It maintains a resident agent in the Philippines to solicit insurance
and to collect payments in its behalf. We note that Steamship Mutual even
renewed its P & I Club cover until it was cancelled due to non-payment of the calls.
Thus, to continue doing business here, Steamship Mutual or through its agent
Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is
necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the Insurance
Commission.
[21]

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the
certificate of registration
[22]
issued by the Insurance Commission. It has been
licensed to do or transact insurance business by virtue of the certificate of
authority
[23]
issued by the same agency. However, a Certification from the
Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.
[24]

Although Pioneer is already licensed as an insurance company, it needs a
separate license to act as insurance agent for Steamship Mutual. Section 299 of the
Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the
solicitation or procurement of applications for insurance, or receive for services in
obtaining insurance, any commission or other compensation from any insurance
company doing business in the Philippines or any agent thereof, without first
procuring a license so to act from the Commissioner, which must be renewed
annually on the first day of January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and
removal of its directors and officers. Regrettably, we are not the forum for these
issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30,
2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the
Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations to
do business as insurer and insurance agent, respectively. The petitioners prayer for
the revocation of Pioneers Certificate of Authority and removal of its directors and
officers, is DENIED. Costs against respondents.

















































[G.R. No. 125678. March 18, 2002]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and
JULITA TRINOS, respondents.
D E C I S I O N
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, Inc. In the
standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic
ulcer? (If Yes, give details).
[1]

The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondents husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was
also entitled to avail of out-patient benefits such as annual physical examinations,
preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1,
1990. The amount of coverage was increased to a maximum sum of P75,000.00 per
disability.
[2]

During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning March 9,
1990. While her husband was in the hospital, respondent tried to claim the benefits
under the health care agreement. However, petitioner denied her claim saying that
the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC allegedly
discovered at the time of Ernanis confinement that he was hypertensive, diabetic
and asthmatic, contrary to his answer in the application form. Thus, respondent
paid the hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a
physical therapist at home. Later, he was admitted at the Chinese General
Hospital. Due to financial difficulties, however, respondent brought her husband
home again. In the morning of April 13, 1990, Ernani had fever and was feeling very
weak. Respondent was constrained to bring him back to the Chinese General
Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of
Manila, Branch 44, an action for damages against petitioner and its president, Dr.
Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorneys fees. After
trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the
late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is
fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to
plaintiff;
3. Defendants to pay the reduced amount of

P10,000.00 as exemplary damages
to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.
[3]

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

Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the
life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education
or support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of
money, respecting property or service, of which death or illness
might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondents husband in obtaining
the health care agreement was his own health. The health care agreement was in
the nature of non-life insurance, which is primarily a contract of indemnity.
[9]
Once
the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondents husband to sign an express authorization for any person,
organization or entity that has any record or knowledge of his health to furnish any
and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination.
[10]
Specifically, the Health Care Agreement
signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and
in any addendum annexed to this application are full, complete and true and bind
all parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied
for is actually paid during the lifetime and good health of proposed Members; that
no information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon any
question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall
be a ratification of any correction in or addition to this application as stated in the
space for Home Office Endorsement.
[11]
(Underscoring ours)
In addition to the above condition, petitioner additionally required the
applicant for authorization to inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare
Health Systems, Inc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage only. A
photographic copy of this authorization shall be as valid as the
original.
[12]
(Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement
which reads:
Failure to disclose or misrepresentation of any material information by the member
in the application or medical examination, whether intentional or unintentional,
shall automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed
or misrepresented information is deemed material if its revelation would have
resulted in the declination of the applicant by Philamcare or the assessment of a
higher Membership Fee for the benefit or benefits applied for.
[13]

The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather than
fact, especially coming from respondents husband who was not a medical
doctor. Where matters of opinion or judgment are called for, answers made in
good faith and without intent to deceive will not avoid a policy even though they
are untrue.
[14]
Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in
inducing the acceptance of the risk, or its acceptance at a lower rate of premium,
and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is
not justified in relying upon such statement, but is obligated to make further
inquiry. There is a clear distinction between such a case and one in which the
insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the
impossibility of which is shown by the facts within his knowledge, since in such case
the intent to deceive the insurer is obvious and amounts to actual
fraud.
[15]
(Underscoring ours)
The fraudulent intent on the part of the insured must be established to
warrant rescission of the insurance contract.
[16]
Concealment as a defense for the
health care provider or insurer to avoid liability is an affirmative defense and the
duty to establish such defense by satisfactory and convincing evidence rests upon
the provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to answer the same to the
extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement
or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured
party to rescind a contract of insurance. The right to rescind should be exercised
previous to the commencement of an action on the contract.
[17]
In this case, no
rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of
one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in
the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance
Code and upon request of insured, to furnish facts on which cancellation is
based.
[18]

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

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

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

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
























































G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
R E S O L U T I O N
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people
and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to
health development which shall endeavor to make essential goods, health and
other social services available to all the people at affordable cost. There shall be
priority for the needs of the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free medical care to paupers.
1

For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.
2

We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish,
maintain, conduct and operate a prepaid group practice health care delivery system
or a health maintenance organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the administrative, legal, and
financial responsibilities of the organization." Individuals enrolled in its health care
programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice
health delivery system at a hospital or clinic owned, operated or accredited by it.
x x x x x x x x x
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent
petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for
the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioners health care agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx
x x x x x x x x x
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20,
1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of
25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997
VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioners health care agreement
was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health
care agreement was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from collecting
the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73
as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been
fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed
this case.
x x x x x x x x x
In a decision dated June 12, 2008, the Court denied the petition and affirmed the
CAs decision. We held that petitioners health care agreement during the pertinent
period was in the nature of non-life insurance which is a contract of indemnity,
citing Blue Cross Healthcare, Inc. v. Olivares
3
and Philamcare Health Systems, Inc. v.
CA.
4
We also ruled that petitioners contention that it is a health maintenance
organization (HMO) and not an insurance company is irrelevant because contracts
between companies like petitioner and the beneficiaries under their plans are
treated as insurance contracts. Moreover, DST is not a tax on the business
transacted but an excise on the privilege, opportunity or facility offered at
exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting the
following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is
imposed only on a company engaged in the business of fidelity bonds and
other insurance policies. Petitioner, as an HMO, is a service provider, not
an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank,
affirmed in effect the CAs disposition that health care services are not in
the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject
to DST is clear, especially in the light of the amendments made in the DST
law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of
indemnity, they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health
insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of
insurance" mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA
5
9480 for the
taxable year 2005 and all prior years. Therefore, the questioned
assessments on the DST are now rendered moot and academic.
6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted
their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed
of a tax amnesty under RA 9480
7
(also known as the "Tax Amnesty Act of 2007") by
fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the
year ending December 31, 2005.
8

We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.
9
It is engaged in the dispensation of the
following medical services to individuals who enter into health care agreements
with it:
Preventive medical services such as periodic monitoring of health problems, family
planning counseling, consultation and advices on diet, exercise and other healthy
habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the
enrolled member.
10

Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to
enrolled members in a hospital or clinic owned, operated or accredited by
petitioner, through physicians, medical and dental practitioners under contract with
it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of
emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it
11
or whose services are contracted by
it.
12
Petitioner also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.
13
If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates.
14

To avail of petitioners health care programs, the individual members are required
to sign and execute a standard health care agreement embodying the terms and
conditions for the provision of the health care services. The same agreement
contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled member may actually
make use of the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO
and not an insurer because its agreements are treated as insurance contracts and
the DST is not a tax on the business but an excise on the privilege, opportunity or
facility used in the transaction of the business.
15

Petitioner, however, submits that it is of critical importance to characterize the
business it is engaged in, that is, to determine whether it is an HMO or an insurance
company, as this distinction is indispensable in turn to the issue of whether or not it
is liable for DST on its health care agreements.
16

A second hard look at the relevant law and jurisprudence convinces the Court that
the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all
policies of insurance or bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of
any office or position, for the doing or not doing of anything therein specified, and
on all obligations guaranteeing the validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such
person, company or corporation, there shall be collected a documentary stamp tax
of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of
the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders every
word operative is preferred over that which makes some words idle and
nugatory.
17
This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the
statute its every word.
18

From the language of Section 185, it is evident that two requisites must concur
before the DST can apply, namely: (1) the document must be a policy of insurance
or an obligation in the nature of indemnity and (2)the maker should be
transacting the business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except
life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance
Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a fixed prepaid
premium."
19
The payments do not vary with the extent, frequency or type of
services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance
during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD
20
1460 (otherwise known as the Insurance Code) enumerates
what constitutes "doing an insurance business" or "transacting an insurance
business:"
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.
In the application of the provisions of this Code, the fact that no profit is derived
from the making of insurance contracts, agreements or transactions or that no
separate or direct consideration is received therefore, shall not be deemed
conclusive to show that the making thereof does not constitute the doing or
transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on
our decisions,
21
have determined that HMOs are not in the insurance business. One
test that they have applied is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental to its business. If
these are the principal objectives, the business is that of insurance. But if they are
merely incidental and service is the principal purpose, then the business is not
insurance.
Applying the "principal object and purpose test,"
22
there is significant American
case law supporting the argument that a corporation (such as an HMO, whether or
not organized for profit), whose main object is to provide the members of a group
with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association
23
wherein the Court
of Appeals of the District of Columbia Circuit held that Group Health Association
should not be considered as engaged in insurance activities since it was created
primarily for the distribution of health care services rather than the assumption of
insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The
functions of such an organization are not identical with those of insurance or
indemnity companies. The latter are concerned primarily, if not exclusively, with
risk and the consequences of its descent, not with service, or its extension in kind,
quantity or distribution; with the unusual occurrence, not the daily routine of living.
Hazard is predominant. On the other hand, the cooperative is concerned
principally with getting service rendered to its members and doing so at lower
prices made possible by quantity purchasing and economies in operation. Its
primary purpose is to reduce the cost rather than the risk of medical care; to
broaden the service to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss
caused by extraordinary and unusual occurrences, such as death, disaster at sea,
fire and tornado. It is, in this instance, to take care of colds, ordinary aches and
pains, minor ills and all the temporary bodily discomforts as well as the more
serious and unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short,
getting the medical job done and paid for; not, except incidentally to these
features, the indemnification for cost after the services is rendered. Except the
last, these are not distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in
this way for the rendering of service, even on the contingency that it be needed,
and contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should
not outweigh all other factors. If attention is focused only on that feature, the line
between insurance or indemnity and other types of legal arrangement and
economic function becomes faint, if not extinct. This is especially true when the
contract is for the sale of goods or services on contingency. But obviously it was not
the purpose of the insurance statutes to regulate all arrangements for assumption
or distribution of risk. That view would cause them to engulf practically all
contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present
or their subordination to it. The question turns, not on whether risk is involved or
assumed, but on whether that or something else to which it is related in the
particular plan is its principal object purpose.
24
(Emphasis supplied)
In California Physicians Service v. Garrison,
25
the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service
rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of risk or
peril is not the sole test to be applied in determining its status. The question,
more broadly, is whether, looking at the plan of operation as a whole, service
rather than indemnity is its principal object and purpose. Certainly the objects
and purposes of the corporation organized and maintained by the California
physicians have a wide scope in the field of social service. Probably there is no
more impelling need than that of adequate medical care on a voluntary, low-cost
basis for persons of small income. The medical profession unitedly is endeavoring
to meet that need. Unquestionably this is service of a high order and not
indemnity.
26
(Emphasis supplied)
American courts have pointed out that the main difference between an HMO and
an insurance company is that HMOs undertake to provide or arrange for the
provision of medical services through participating physicians while insurance
companies simply undertake to indemnify the insured for medical expenses
incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon
Blue Cross and Blue Shield of New Jersey
27
is clear on this point:
The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical
services through participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an insured for
medical expenses up to, but not beyond, the schedule of rates contained in the
policy.
x x x x x x x x x
The primary purpose of a medical service corporation, however, is an undertaking
to provide physicians who will render services to subscribers on a prepaid
basis. Hence, if there are no physicians participating in the medical service
corporations plan, not only will the subscribers be deprived of the protection
which they might reasonably have expected would be provided, but the
corporation will, in effect, be doing business solely as a health and accident
indemnity insurer without having qualified as such and rendering itself subject to
the more stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to
render health care services to or for persons covered by a contract issued by health
service corporation in return for which the health service corporation agrees to
make payment directly to the participating provider.
28
(Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the
primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services.
29
In short, even if
petitioner assumes the risk of paying the cost of these services even if significantly
more than what the member has prepaid, it nevertheless cannot be considered as
being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services
rendered in case of emergency by non-participating health providers would still be
incidental to petitioners purpose of providing and arranging for health care
services and does not transform it into an insurer. To fulfill its obligations to its
members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that
indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and
diagnostic medical services intended to keep members from developing medical
conditions or diseases.
30
As an HMO, it is its obligation to maintain the good health
of its members. Accordingly, its health care programs are designed to prevent or
to minimize the possibility of any assumption of risk on its part. Thus, its
undertaking under its agreements is not to indemnify its members against any loss
or damage arising from a medical condition but, on the contrary, to provide the
health and medical services needed to prevent such loss or damage.
31

Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal
activity of providing them medical care. The "insurance-like" aspect of petitioners
business is miniscule compared to its noninsurance activities. Therefore, since it
substantially provides health care services rather than insurance services, it cannot
be considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in
the above-quoted U.S. cases, we are not saying that petitioners operations are
identical in every respect to those of the HMOs or health providers which were
parties to those cases. What we are stating is that, for the purpose of determining
what "doing an insurance business" means, we have to scrutinize the operations of
the business as a whole and not its mere components. This is of course only
prudent and appropriate, taking into account the burdensome and strict laws, rules
and regulations applicable to insurers and other entities engaged in the insurance
business. Moreover, we are also not unmindful that there are other American
authorities who have found particular HMOs to be actually engaged in insurance
activities.
32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance
industry. This is evident from the fact that it is not supervised by the Insurance
Commission but by the Department of Health.
33
In fact, in a letter dated September
3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in
the insurance business. This determination of the commissioner must be accorded
great weight. It is well-settled that the interpretation of an administrative agency
which is tasked to implement a statute is accorded great respect and ordinarily
controls the interpretation of laws by the courts. The reason behind this rule was
explained in Nestle Philippines, Inc. v. Court of Appeals:
34

The rationale for this rule relates not only to the emergence of the multifarious
needs of a modern or modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying those needs; it also relates to
the accumulation of experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,
35
the Court stressed that executive
officials are presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The courts give
much weight to the government agency officials charged with the implementation
of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret.
36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under
Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or obligations
of the nature of indemnity for loss, damage, or liability." In our decision dated
June 12, 2008, we ruled that petitioners health care agreements are contracts of
indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or
damage because, under the said agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and related expenses (such as
professional fees of physicians). The term "loss or damage" is broad enough to
cover the monetary expense or liability a member will incur in case of illness or
injury.
Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or emergency or his
availment of so-called "out-patient services" (including physical examination, x-ray
and laboratory tests, medical consultations, vaccine administration and family
planning counseling) is the contingent event which gives rise to liability on the part
of the member. In case of exposure of the member to liability, he would be entitled
to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim that its
services are prepaid. The expenses to be incurred by each member cannot be
predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of
paying for the costs of the services even if they are significantly and substantially
more than what the member has "prepaid." Petitioner does not bear the costs
alone but distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care program. This is
insurance.
37

We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all
policies of insurance or bondsor obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes
are strictly construed against the taxing authority.
38
This is because taxation is a
destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the
government.
39
Hence, tax laws may not be extended by implication beyond the
clear import of their language, nor their operation enlarged so as to embrace
matters not specifically provided.
40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a
health care agreement is in the nature of non-life insurance, which is primarily a
contract of indemnity. However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health service provider to a
member under the terms of their health care agreement. Such contracts, as
contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue
Cross andPhilamcare are applicable here.
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 designed
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.
41

Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that,
even if a contract contains all the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance contract. The primary purpose
of the parties in making the contract may negate the existence of an insurance
contract. For example, a law firm which enters into contracts with clients whereby
in consideration of periodical payments, it promises to represent such clients in all
suits for or against them, is not engaged in the insurance business. Its contracts are
simply for the purpose of rendering personal services. On the other hand, a
contract by which a corporation, in consideration of a stipulated amount, agrees at
its own expense to defend a physician against all suits for damages for malpractice
is one of insurance, and the corporation will be deemed as engaged in the business
of insurance. Unlike the lawyers retainer contract, the essential purpose of such a
contract is not to render personal services, but to indemnify against loss and
damage resulting from the defense of actions for malpractice.
42
(Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in
petitioners agreements. To begin with, there is no loss, damage or liability on the
part of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in
exchange for the hospital, medical and professional services rendered by the
petitioners physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or
indemnify the member as the latter does not pay any third party. Instead, it is the
petitioner who pays the participating physicians and other health care providers for
the services rendered at pre-agreed rates. The member does not make any such
payment.
In other words, there is nothing in petitioner's agreements that gives rise to a
monetary liability on the part of the member to any third party-provider of medical
services which might in turn necessitate indemnification from petitioner. The terms
"indemnify" or "indemnity" presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under
the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the
benefits anytime, e.g.laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who
receives care from a non-participating physician or hospital. However, this is only a
very minor part of the list of services available. The assumption of the expense by
petitioner is not confined to the happening of a contingency but includes incidents
even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program,
Inc.,
43
although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor, this
did not make defendant an insurer. Citing Jordan, the Court determined that "the
primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."
44
Since indemnity of
the insured was not the focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not partake of the nature of a
contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial risk.
Consequently, there is a need to distinguish prepaid service contracts (like those of
petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide
health services: the risk that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar only to insurance companies.
Insurance risk, also known as actuarial risk, is the risk that the cost of insurance
claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured.
45

However, assuming that petitioners commitment to provide medical services to its
members can be construed as an acceptance of the risk that it will shell out more
than the prepaid fees, it still will not qualify as an insurance contract because
petitioners objective is to provide medical services at reduced cost, not to
distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to
conclude that it is not an insurance contract within the context of our Insurance
Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of
HMOs
Furthermore, militating in convincing fashion against the imposition of DST on
petitioners health care agreements under Section 185 of the NIRC of 1997 is the
provisions legislative history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise
known as the "Internal Revenue Law of 1904")
46
enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the
NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to
wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the
several bonds, debentures, or certificates of stock and indebtedness, and other
documents, instruments, matters, and things mentioned and described in this
section, or for or in respect to the vellum, parchment, or paper upon which such
instrument, matters, or things or any of them shall be written or printed by any
person or persons who shall make, sign, or issue the same, on and after January
first, nineteen hundred and five, the several taxes following:
x x x x x x x x x
Third xxx (c) on all policies of insurance or bond or obligation of the nature of
indemnity for loss, damage, or liability made or renewed by any person,
association, company, or corporation transacting the business of accident, fidelity,
employers liability, plate glass, steam boiler, burglar, elevator, automatic
sprinkle, or other branch of insurance (except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was
enacted revising and consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code).
Upon its amendment on March 10, 1917, the pertinent DST provision became
Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of
1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the
NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an
amendment introduced by RA 40 on October 1, 1946, the DST rate was increased
but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was
again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the
NIRC of 1977 was renumbered as Section 198. And under Section 23 of EO
47
273
dated July 25, 1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only
with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424
(or the NIRC of 1997), the subject legal provision was retained as the present
Section 185. In 2004, amendments to the DST provisions were introduced by RA
9243
48
but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with
the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO
was later reorganized and renamed Integrated Health Care Services, Inc. (or
Intercare). However, there are those who claim that Health Maintenance, Inc. is the
HMO industry pioneer, having set foot in the Philippines as early as 1965 and having
been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2
million.
49

We can clearly see from these two histories (of the DST on the one hand and HMOs
on the other) that when the law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various amendments to the DST
law were enacted, they were already in existence in the Philippines and the term
had in fact already been defined by RA 7875. If it had been the intent of the
legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact
that the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact, petitioner was assessed
its DST liability only on January 27, 2000, after more than a decade in the business
as an HMO.
50

Considering that Section 185 did not change since 1904 (except for the rate of tax),
it would be safe to say that health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in the business of insurance
within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in
its range, acknowledging in its very nature no limits, so that security against its
abuse is to be found only in the responsibility of the legislature which imposes the
tax on the constituency who is to pay it.
51
So potent indeed is the power that it was
once opined that "the power to tax involves the power to destroy."
52

Petitioner claims that the assessed DST to date which amounts to P376 million
53
is
way beyond its net worth ofP259 million.
54
Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner would
be highly oppressive. It is not the purpose of the government to throttle private
business. On the contrary, the government ought to encourage private
enterprise.
55
Petitioner, just like any concern organized for a lawful economic
activity, has a right to maintain a legitimate business.
56
As aptly held in Roxas, et al.
v. CTA, et al.:
57

The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill
the "hen that lays the golden egg."
58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not
be allowed. It is counter-productive and ultimately subversive of the nations thrust
towards a better economy which will ultimately benefit the majority of our
people.
59

Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic
60
when it availed of the tax
amnesty under RA 9480 on December 10, 2007. It paidP5,127,149.08 representing
5% of its net worth as of the year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to
immunity from payment of taxes as well as additions thereto, and the appurtenant
civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.
61

Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in
2005 and the preceding years.
In view of petitioners availment of the benefits of *RA 9840+, and without
conceding the merits of this case as discussed above, respondent concedes that
such tax amnesty extinguishes the tax liabilities of petitioner. This admission,
however, is not meant to preclude a revocation of the amnesty granted in case it is
found to have been granted under circumstances amounting to tax fraud under
Section 10 of said amnesty law.
62
(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the
tax amnesty program under RA 9480.
63
There is no other conclusion to draw than
that petitioners liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration:
whether this Court is bound by the ruling of the CA
64
in CIR v. Philippine National
Bank
65
that a health care agreement of Philamcare Health Systems is not an
insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of
this Court dismissing the appeal in Philippine National Bank (G.R. No.
148680).
66
Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA
ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final.
67
When a minute resolution denies or
dismisses a petition for failure to comply with formal and substantive requirements,
the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.
68
But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.
69
However, if other parties or another subject
matter (even with the same parties and issues) is involved, the minute resolution is
not binding precedent. Thus, in CIR v. Baier-Nickel,
70
the Court noted that a previous
case, CIR v. Baier-Nickel
71
involving the same parties and the same issues, was
previously disposed of by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous
case "ha(d) no bearing" on the latter case because the two cases involved different
subject matters as they were concerned with the taxable income of different
taxable years.
72

Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph
of Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court
by authority of the justices, unlike a decision. It does not require the certification of
the Chief Justice. Moreover, unlike decisions, minute resolutions are not published
in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of
a decision.
73
Indeed, as a rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly signed by the members of the
Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since
petitioners liability for DST on its health care agreement was not the subject matter
of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in
that case (which is not even binding precedent) in its favor. Nonetheless, in view of
the reasons already discussed, this does not detract in any way from the fact that
petitioners health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never any legislative intent to impose the
same on HMOs like petitioner, the same should not be arbitrarily and unjustly
included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate
medical services at a cost which the average wage earner can afford. HMOs
arrange, organize and manage health care treatment in the furtherance of the goal
of providing a more efficient and inexpensive health care system made possible by
quantity purchasing of services and economies of scale. They offer advantages over
the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their
members from exposure to the high cost of hospitalization and other medical
expenses brought about by a fluctuating economy. Accordingly, they play an
important role in society as partners of the State in achieving its constitutional
mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.
74
Its imposition will elevate the cost of health care services. This will in
turn necessitate an increase in the membership fees, resulting in either placing
health services beyond the reach of the ordinary wage earner or driving the
industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004
decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting
the said tax.











G.R. No. 166245 April 9, 2008
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
D E C I S I O N
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to
reverse and set aside the November 26, 2004 Decision
1
of the Court of Appeals (CA)
in CA-G.R. CV No. 57810 is the query: May the inaction of the insurer on the
insurance application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company
(Philamlife) entered into an agreement denominated as Creditor Group Life Policy
No. P-1920
2
with petitioner Eternal Gardens Memorial Park Corporation (Eternal).
Under the policy, the clients of Eternal who purchased burial lots from it on
installment basis would be insured by Philamlife. The amount of insurance coverage
depended upon the existing balance of the purchased burial lots. The policy was to
be effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65
years of age, is indebted to the Assured for the unpaid balance of his loan
with the Assured, and is accepted for Life Insurance coverage by the
Company on its effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to
P50,000.00. However, a declaration of good health shall be required for all
Lot Purchasers as part of the application. The Company reserves the right
to require further evidence of insurability satisfactory to the Company in
respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the
amount of the unpaid balance of his loan (including arrears up to but not
exceeding 2 months) as reported by the Assured to the Company or the
sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the
Assured if the Lot Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date
he contracts a loan with the Assured. However, there shall be no insurance
if the application of the Lot Purchaser is not approved by the Company.
3

Eternal was required under the policy to submit to Philamlife a list of all new lot
purchasers, together with a copy of the application of each purchaser, and the
amounts of the respective unpaid balances of all insured lot purchasers. In relation
to the instant petition, Eternal complied by submitting a letter dated December 29,
1982,
4
containing a list of insurable balances of its lot buyers for October 1982. One
of those included in the list as "new business" was a certain John Chuang. His
balance of payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 1984
5
to Philamlife, which served as an
insurance claim for Chuangs death. Attached to the claim were the following
documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating
that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984,
6
requiring Eternal
to submit the following documents relative to its insurance claim for Chuangs
death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate
(with form attached); (3) Application for Insurance accomplished and signed by the
insured, Chuang, while still living; and (4) Statement of Account showing the unpaid
balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14,
1984,
7
which was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the
latters insurance claim. This prompted Eternal to demand from Philamlife the
payment of the claim for PhP 100,000 on April 25, 1986.
8

In response to Eternals demand, Philamlife denied Eternals insurance claim in a
letter dated May 20, 1986,
9
a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and
9529 with Eternal Gardens Memorial Park in October 1982 for the total
maximum insurable amount of P100,000.00 each. No application for Group
Insurance was submitted in our office prior to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under
Evidence of Insurability provision, "a declaration of good health shall be
required for all Lot Purchasers as party of the application." We cite further
the provision on Effective Date of Coverage under the policy which states
that "there shall be no insurance if the application is not approved by the
Company." Since no application had been submitted by the
Insured/Assured, prior to his death, for our approval but was submitted
instead on November 15, 1984, after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to point out that Eternal Gardens
being the Assured was a party to the Contract and was therefore aware of
these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our
approval per se of the insurance coverage but are held by us in trust for
the payor until the prerequisites for insurance coverage shall have been
met. We will however, return all the premiums which have been paid in
behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC)
for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial
court decided in favor of Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the
Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until
fully paid; and, to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he
accomplished before his death, as testified to by Eternals witness and evidenced by
the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life
Insurance Application Forms & Cert."
10
It further ruled that due to Philamlifes
inaction from the submission of the requirements of the group insurance on
December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes
acceptance of the premiums during the same period, Philamlife was deemed to
have approved Chuangs application. The RTC said that since the contract is a group
life insurance, once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil
Case No. 57810 is REVERSED and SET ASIDE, and the complaint
is DISMISSED. No costs.
SO ORDERED.
11

The CA based its Decision on the factual finding that Chuangs application was not
enclosed in Eternals letter dated December 29, 1982. It further ruled that the non-
accomplishment of the submitted application form violated Section 26 of the
Insurance Code. Thus, the CA concluded, there being no application form, Chuang
was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not
therefore determined by this Honorable Court, or has decided it in a way
not in accord with law or with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to
respondent PhilamLife before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial
Court dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual
issues raised before the CA and first level courts, considering their findings of facts
are conclusive and binding on this Court. However, such rule is subject to
exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd
or impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its findings the [CA] went beyond
the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings [of the CA] are
contrary to the trial court; (8) when the findings are conclusions without
citation of specific evidence on which they are based; (9) when the facts
set forth in the petition as well as in the petitioners main and reply briefs
are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the
evidence on record; and (11) when the Court of Appeals manifestly
overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.
12
(Emphasis
supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus,
this Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before
his death. In Eternals letter dated December 29, 1982, a list of insurable interests
of buyers for October 1982 was attached, including Chuang in the list of new
businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in
the letter that was apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance application which was
signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife
received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife
stamped as received, states that the insurance forms for the attached list of burial
lot buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is
an admission by Philamlife against its own interest.
13
The burden of evidence has
shifted to Philamlife, which must prove that the letter did not contain Chuangs
insurance application. However, Philamlife failed to do so; thus, Philamlife is
deemed to have received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a
transmittal letter is stamped as received, the contents of the letter are correct and
accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability
due to inconsistencies is groundless. The trial court is in the best position to
determine the reliability and credibility of the witnesses, because it has the
opportunity to observe firsthand the witnesses demeanor, conduct, and attitude.
Findings of the trial court on such matters are binding and conclusive on the
appellate court, unless some facts or circumstances of weight and substance have
been overlooked, misapprehended, or misinterpreted,
14
that, if considered, might
affect the result of the case.
15

An examination of the testimonies of the witnesses mentioned by Philamlife,
however, reveals no overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original
insurance application of Chuang was, as shown by the testimony of Edilberto
Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of
new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two
copies of this form and the original of this is submitted to Philamlife
together with the monthly remittances and the second copy is remained or
retained with the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is
merely asking for the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I
submitted with that payment together with the new clients all the originals
I see to it before I sign the transmittal letter the originals are attached
therein.
16

In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as
an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on
whether one or two insurance application forms were accomplished and the
testimony of Mendoza on who actually filled out the application form, these are
minor inconsistencies that do not affect the credibility of the witnesses. Thus, we
ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as
these negate any suspicion that the testimonies have been rehearsed.
17

We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity
of the prosecutions evidence as a whole or reflect on the witnesses
honesty. The test is whether the testimonies agree on essential facts and
whether the respective versions corroborate and substantially coincide
with each other so as to make a consistent and coherent whole.
18

In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by
Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss
without approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date
he contracts a loan with the Assured. However, there shall be no insurance
if the application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two
sentences. The first sentence appears to state that the insurance coverage of the
clients of Eternal already became effective upon contracting a loan with Eternal
while the second sentence appears to require Philamlife to approve the insurance
contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which
must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with
the general rule of resolving any ambiguity therein in favor of the insured,
where the contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other words, it should
be construed liberally in favor of the insured and strictly against the
insurer. Limitations of liability should be regarded with extreme jealousy
and must be construed in such a way as to preclude the insurer from
noncompliance with its obligations.
19
(Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the insurer from
non-compliance with his obligation. Being a contract of adhesion, the
terms of an insurance contract are to be construed strictly against the
party which prepared the contract, the insurer. By reason of the exclusive
control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the
insurer and liberally in favor of the insured, especially to avoid forfeiture.
20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920
dated December 10, 1980, must be construed in favor of the insured and in favor of
the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to
mean that upon a partys purchase of a memorial lot on installment from Eternal,
an insurance contract covering the lot purchaser is created and the same is
effective, valid, and binding until terminated by Philamlife by disapproving the
insurance application. The second sentence of Creditor Group Life Policy No. P-1920
on the Effective Date of Benefit is in the nature of a resolutory condition which
would lead to the cessation of the insurance contract. Moreover, the mere inaction
of the insurer on the insurance application must not work to prejudice the insured;
it cannot be interpreted as a termination of the insurance contract. The termination
of the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on
equal footing is inaccurate at best. Insurance contracts are wholly prepared by the
insurer with vast amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must
be considered whenever the rights and obligations of the insurer and the insured
are to be delineated. Hence, in order to protect the interest of insurance applicants,
insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor
the application as a valid, binding, and effective insurance contract.
21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-
G.R. CV No. 57810 isREVERSED and SET ASIDE. The May 29, 1996 Decision of the
Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of
the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum
of PhP 100,000 from the time of extra-judicial demand by Eternal until
Philamlifes receipt of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per
annum of PhP 100,000 from June 17, 1996 until full payment of this award;
and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs.































G.R. No. L-8151 December 16, 1955
VIRGINIA CALANOC, petitioner,
vs.
COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE
CO., respondents.

BAUTISTA ANGELO, J.:
This suit involves the collection of P2,000 representing the value of a supplemental
policy covering accidental death which was secured by one Melencio Basilio from
the Philippine American Life Insurance Company. The case originated in the
Municipal Court of Manila and judgment being favorable to the plaintiff it was
appealed to the court of first instance. The latter court affirmed the judgment but
on appeal to the Court of Appeals the judgment was reversed and the case is now
before us on a petition for review.
Melencio Basilio was a watchman of the Manila Auto Supply located at the corner
of Avenida Rizal and Zurbaran. He secured a life insurance policy from the Philippine
American Life Insurance Company in the amount of P2,000 to which was attached a
supplementary contract covering death by accident. On January 25, 1951, he died
of a gunshot wound on the occasion of a robbery committed in the house of Atty.
Ojeda at the corner of Oroquieta and Zurbaan streets. Virginia Calanoc, the widow,
was paid the sum of P2,000, face value of the policy, but when she demanded the
payment of the additional sum of P2,000 representing the value of the
supplemental policy, the company refused alleging, as main defense, that the
deceased died because he was murdered by a person who took part in the
commission of the robbery and while making an arrest as an officer of the law
which contingencies were expressly excluded in the contract and have the effect of
exempting the company from liability.
The pertinent facts which need to be considered for the determination of the
questions raised are those reproduced in the decision of the Court of Appeals as
follows:
The circumstances surrounding the death of Melencio Basilio show that
when he was killed at about seven o'clock in the night of January 25, 1951,
he was on duty as watchman of the Manila Auto Supply at the corner of
Avenida Rizal and Zurbaran; that it turned out that Atty. Antonio Ojeda
who had his residence at the corner of Zurbaran and Oroquieta, a block
away from Basilio's station, had come home that night and found that his
house was well-lighted, but with the windows closed; that getting
suspicious that there were culprits in his house, Atty. Ojeda retreated to
look for a policeman and finding Basilio in khaki uniform, asked him to
accompany him to the house with the latter refusing on the ground that he
was not a policeman, but suggesting that Atty. Ojeda should ask the traffic
policeman on duty at the corner of Rizal Avenue and Zurbaran; that Atty.
Ojeda went to the traffic policeman at said corner and reported the
matter, asking the policeman to come along with him, to which the
policeman agreed; that on the way to the Ojeda residence, the policeman
and Atty. Ojeda passed by Basilio and somehow or other invited the latter
to come along; that as the tree approached the Ojeda residence and stood
in front of the main gate which was covered with galvanized iron, the fence
itself being partly concrete and partly adobe stone, a shot was fired; that
immediately after the shot, Atty. Ojeda and the policeman sought cover;
that the policeman, at the request of Atty. Ojeda, left the premises to look
for reinforcement; that it turned out afterwards that the special watchman
Melencio Basilio was hit in the abdomen, the wound causing his
instantaneous death; that the shot must have come from inside the yard of
Atty. Ojeda, the bullet passing through a hole waist-high in the galvanized
iron gate; that upon inquiry Atty. Ojeda found out that the savings of his
children in the amount of P30 in coins kept in his aparador contained in
stockings were taken away, the aparador having been ransacked; that a
month thereafter the corresponding investigation conducted by the police
authorities led to the arrest and prosecution of four persons in Criminal
Case No. 15104 of the Court of First Instance of Manila for 'Robbery in an
Inhabited House and in Band with Murder'.
It is contended in behalf of the company that Basilio was killed which "making an
arrest as an officer of the law" or as a result of an "assault or murder" committed in
the place and therefore his death was caused by one of the risks excluded by the
supplementary contract which exempts the company from liability. This contention
was upheld by the Court of Appeals and, in reaching this conclusion, made the
following comment:
From the foregoing testimonies, we find that the deceased was a
watchman of the Manila Auto Supply, and, as such, he was not boud to
leave his place and go with Atty. Ojeda and Policeman Magsanoc to see the
trouble, or robbery, that occurred in the house of Atty. Ojeda. In fact,
according to the finding of the lower court, Atty. Ojeda finding Basilio in
uniform asked him to accompany him to his house, but the latter refused
on the ground that he was not a policeman and suggested to Atty. Ojeda to
ask help from the traffic policeman on duty at the corner of Rizal Avenue
and Zurbaran, but after Atty. Ojeda secured the help of the traffic
policeman, the deceased went with Ojeda and said traffic policeman to the
residence of Ojeda, and while the deceased was standing in front of the
main gate of said residence, he was shot and thus died. The death,
therefore, of Basilio, although unexpected, was not caused by an accident,
being a voluntary and intentional act on the part of the one wh robbed, or
one of those who robbed, the house of Atty. Ojeda. Hence, it is out
considered opinion that the death of Basilio, though unexpected, cannot
be considered accidental, for his death occurred because he left his post
and joined policeman Magsanoc and Atty. Ojeda to repair to the latter's
residence to see what happened thereat. Certainly, when Basilio joined
Patrolman Magsanoc and Atty. Ojeda, he should have realized the danger
to which he was exposing himself, yet, instead of remaining in his place, he
went with Atty. Ojeda and Patrolman Magsanoc to see what was the
trouble in Atty. Ojeda's house and thus he was fatally shot.
We dissent from the above findings of the Court of Appeals. For one thing, Basilio
was a watchman of the Manila Auto Supply which was a block away from the house
of Atty. Ojeda where something suspicious was happening which caused the latter
to ask for help. While at first he declied the invitation of Atty. Ojeda to go with him
to his residence to inquire into what was going on because he was not a regular
policeman, he later agreed to come along when prompted by the traffic policeman,
and upon approaching the gate of the residence he was shot and died. The
circumstance that he was a mere watchman and had no duty to heed the call of
Atty. Ojeda should not be taken as a capricious desire on his part to expose his life
to danger considering the fact that the place he was in duty-bound to guard was
only a block away. In volunteering to extend help under the situation, he might
have thought, rightly or wrongly, that to know the truth was in the interest of his
employer it being a matter that affects the security of the neighborhood. No doubt
there was some risk coming to him in pursuing that errand, but that risk always
existed it being inherent in the position he was holding. He cannot therefore be
blamed solely for doing what he believed was in keeping with his duty as a
watchman and as a citizen. And he cannot be considered as making an arrest as an
officer of the law, as contended, simply because he went with the traffic policeman,
for certainly he did not go there for that purpose nor was he asked to do so by the
policeman.
Much less can it be pretended that Basilio died in the course of an assault or
murder considering the very nature of these crimes. In the first place, there is no
proof that the death of Basilio is the result of either crime for the record is barren of
any circumstance showing how the fatal shot was fired. Perhaps this may be
clarified in the criminal case now pending in court as regards the incident but
before that is done anything that might be said on the point would be a mere
conjecture. Nor can it be said that the killing was intentional for there is the
possibility that the malefactor had fired the shot merely to scare away the people
around for his own protection and not necessarily to kill or hit the victim. In any
event, while the act may not excempt the triggerman from liability for the damage
done, the fact remains that the happening was a pure accident on the part of the
victim. The victim could have been either the policeman or Atty. Ojeda for it cannot
be pretended that the malefactor aimed at the deceased precisely because he
wanted to take his life.
We take note that these defenses are included among the risks exluded in the
supplementary contract which enumerates the cases which may exempt the
company from liability. While as a general rule "the parties may limit the coverage
of the policy to certain particular accidents and risks or causes of loss, and may
expressly except other risks or causes of loss therefrom" (45 C. J. S. 781-782),
however, it is to be desired that the terms and phraseology of the exception clause
be clearly expressed so as to be within the easy grasp and understanding of the
insured, for if the terms are doubtful or obscure the same must of necessity be
interpreted or resolved aganst the one who has caused the obscurity. (Article 1377,
new Civil Code) And so it has bene generally held that the "terms in an insurance
policy, which are ambiguous, equivacal, or uncertain . . . are to be construed strictly
and most strongly against the insurer, and liberally in favor of the insured so as to
effect the dominant purpose of indemnity or payment to the insured, especially
where a forfeiture is involved" (29 Am. Jur., 181), and the reason for this rule is that
he "insured usually has no voice in the selection or arrangement of the words
employed and that the language of the contract is selected with great care and
deliberation by experts and legal advisers employed by, and acting exclusively in the
interest of, the insurance company." (44 C. J. S., p. 1174.)
Insurance is, in its nature, complex and difficult for the layman to
understand. Policies are prepared by experts who know and can anticipate
the bearings and possible complications of every contingency. So long as
insurance companies insist upon the use of ambiguous, intricate and
technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance,
construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L.
Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)lawphi1.net
An insurer should not be allowed, by the use of obscure phrases and
exceptions, to defeat the very purpose for which the policy was procured.
(Moore vs. Aetna Life Insurance Co., LRA 1915D, 264.)
We are therefore persuaded to conclude that the circumstances unfolded in the
present case do not warrant the finding that the death of the unfortunate victim
comes within the purview of the exception clause of the supplementary policy and,
hence, do not exempt the company from liability.
Wherefore, reversing the decision appealed from, we hereby order the company to
pay petitioner-appellant the amount of P2,000, with legal interest from January 26,
1951 until fully paid, with costs.





















































G.R. No. L-25579 March 29, 1972
EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN
and GRACIA T. BIAGTAN,plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.

MAKALINTAL, J.:p
This is an appeal from the decision of the Court of First Instance of Pangasinan in its
Civil Case No. D-1700.
The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife
Assurance Company under Policy No. 398075 for the sum of P5,000.00 and, under a
supplementary contract denominated "Accidental Death Benefit Clause, for an
additional sum of P5,000.00 if "the death of the Insured resulted directly from
bodily injury effected solely through external and violent means sustained in an
accident ... and independently of all other causes." The clause, however,expressly
provided that it would not apply where death resulted from an injury"intentionally
inflicted by another party."
On the night of May 20, 1964, or during the first hours of the following day a band
of robbers entered the house of the insured Juan S. Biagtan. What happened then is
related in the decision of the trial court as follows:
...; that on the night of May 20, 1964 or the first hours of May 21,
1964, while the said life policy and supplementary contract were
in full force and effect, the house of insured Juan S. Biagtan was
robbed by a band of robbers who were charged in and convicted
by the Court of First Instance of Pangasinan for robbery with
homicide; that in committing the robbery, the robbers, on
reaching the staircase landing on the second floor, rushed
towards the door of the second floor room, where they suddenly
met a person near the door of oneof the rooms who turned out to
be the insured Juan S. Biagtan who received thrusts from their
sharp-pointed instruments, causing wounds on the body of said
Juan S. Biagtan resulting in his death at about 7 a.m. on the same
day, May 21, 1964;
Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The
insurance company paid the basic amount of P5,000.00 but refused to pay the
additional sum of P5,000.00 under the accidental death benefit clause, on the
ground that the insured's death resulted from injuries intentionally inflicted by third
parties and therefore was not covered. Plaintiffs filed suit to recover, and after due
hearing the court a quo rendered judgment in their favor. Hence the present appeal
by the insurer.
The only issue here is whether under the facts are stipulated and found by the trial
court the wounds received by the insured at the hands of the robbers nine in all,
five of them mortal and four non-mortal were inflicted intentionally. The court,
in ruling negatively on the issue, stated that since the parties presented no evidence
and submitted the case upon stipulation, there was no "proof that the act of
receiving thrust (sic) from the sharp-pointed instrument of the robbers was
intended to inflict injuries upon the person of the insured or any other person or
merely to scare away any person so as to ward off any resistance or obstacle that
might be offered in the pursuit of their main objective which was robbery."
The trial court committed a plain error in drawing the conclusion it did from the
admitted facts. Nine wounds were inflicted upon the deceased, all by means of
thrusts with sharp-pointed instruments wielded by the robbers. This is a physical
fact as to which there is no dispute. So is the fact that five of those wounds caused
the death of the insured. Whether the robbers had the intent to kill or merely to
scare the victim or to ward off any defense he might offer, it cannot be denied that
the act itself of inflicting the injuries was intentional. It should be noted that the
exception in the accidental benefit clause invoked by the appellant does not speak
of the purpose whether homicidal or not of a third party in causing the
injuries, but only of the fact that such injuries have been "intentionally" inflicted
this obviously to distinguish them from injuries which, although received at the
hands of a third party, are purely accidental. This construction is the basic idea
expressed in the coverage of the clause itself, namely, that "the death of the
insured resulted directly from bodily injury effected solely through external and
violent means sustained in an accident ... and independently of all other causes." A
gun which discharges while being cleaned and kills a bystander; a hunter who
shoots at his prey and hits a person instead; an athlete in a competitive game
involving physical effort who collides with an opponent and fatally injures him as a
result: these are instances where the infliction of the injury is unintentional and
therefore would be within the coverage of an accidental death benefit clause such
as thatin question in this case. But where a gang of robbers enter a house and
coming face to face with the owner, even if unexpectedly, stab him repeatedly, it is
contrary to all reason and logic to say that his injuries are not intentionally inflicted,
regardless of whether they prove fatal or not. As it was, in the present case they did
prove fatal, and the robbers have been accused and convicted of the crime of
robbery with homicide.
The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court
in support of its decision. The facts in that case, however, are different from those
obtaining here. The insured there was a watchman in a certain company, who
happened to be invited by a policeman to come along as the latter was on his way
to investigate a reported robbery going on in a private house. As the two of them,
together with the owner of the house, approached and stood in front of the main
gate, a shot was fired and it turned out afterwards that the watchman was hit in the
abdomen, the wound causing his death. Under those circumstances this Court held
that it could not be said that the killing was intentional for there was the possibility
that the malefactor had fired the shot to scare people around for his own
protection and not necessarrily to kill or hit the victim. A similar possibility is clearly
ruled out by the facts in the case now before Us. For while a single shot fired from a
distance, and by a person who was not even seen aiming at the victim, could indeed
have been fired without intent to kill or injure, nine wounds inflicted with bladed
weapons at close range cannot conceivably be considered as innocent insofar as
such intent is concerned. The manner of execution of the crime permits no other
conclusion.
Court decisions in the American jurisdiction, where similar provisions in accidental
death benefit clauses in insurance policies have been construed, may shed light on
the issue before Us. Thus, it has been held that "intentional" as used in an accident
policy excepting intentional injuries inflicted by the insured or any other person,
etc., implies the exercise of the reasoning faculties, consciousness and
volition.
1
Where a provision of the policy excludes intentional injury, it is the
intention of the person inflicting the injury that is controlling.
2
If the injuries
suffered by the insured clearly resulted from the intentional act of a third person
the insurer is relieved from liability as stipulated.
3

In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am.
St. Rep. 484, the insured was waylaid and assassinated for the purpose of robbery.
Two (2) defenses were interposed to the action to recover indemnity, namely: (1)
that the insured having been killed by intentional means, his death was not
accidental, and (2) that the proviso in the policy expressly exempted the insurer
from liability in case the insured died from injuries intentionally inflicted by another
person. In rendering judgment for the insurance company the Court held that while
the assassination of the insured was as to him an unforeseen event and therefore
accidental, "the clause of the proviso that excludes the (insurer's) liability, in case
death or injury is intentionally inflicted by another person, applies to this case."
In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the
insured was shot three times by a person unknown late on a dark and stormy night,
while working in the coal shed of a railroad company. The policy did not cover
death resulting from "intentional injuries inflicted by the insured or any other
person." The inquiry was as to the question whether the shooting that caused the
insured's death was accidental or intentional; and the Court found that under the
facts, showing that the murderer knew his victim and that he fired with intent to
kill, there could be no recovery under the policy which excepted death from
intentional injuries inflicted by any person.
WHEREFORE, the decision appealed from is reversed and the complaint dismissed,
without pronouncement as to costs.
























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

CRUZ, J.:
The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face
value of P200,000.00. Two months later, he was dead with a bullet wound in his
head. As beneficiary, his wife Nerissa Lim sought payment on the policy but her
claim was rejected. The petitioner agreed that there was no suicide. It argued,
however that there was no accident either.
Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on
October 6, 1982, at about 10 o'clock in the evening, after his mother's birthday
party. According to Nalagon, Lim was in a happy mood (but not drunk) and was
playing with his handgun, from which he had previously removed the magazine. As
she watched television, he stood in front of her and pointed the gun at her. She
pushed it aside and said it might he loaded. He assured her it was not and then
pointed it to his temple. The next moment there was an explosion and Lim slumped
to the floor. He was dead before he fell.
1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and
was sustained.
2
The petitioner was sentenced to pay her P200,000.00, representing
the face value of the policy, with interest at the legal rate; P10,000.00 as moral
damages; P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory
damages; and P5,000.00 as attorney's fees, plus the costs of the suit. This decision
was affirmed on appeal, and the motion for reconsideration was denied.
3
The
petitioner then came to this Court to fault the Court of Appeals for approving the
payment of the claim and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical
signification in law, and when used in an insurance contract are to be construed and
considered according to the ordinary understanding and common usage and speech
of people generally. In-substance, the courts are practically agreed that the words
"accident" and "accidental" mean that which happens by chance or fortuitously,
without intention or design, and which is unexpected, unusual, and unforeseen. The
definition that has usually been adopted by the courts is that an accident is an
event that takes place without one's foresight or expectation an event that
proceeds from an unknown cause, or is an unusual effect of a known case, and
therefore not expected.
4

An accident is an event which happens without any human agency or, if happening
through human agency, an event which, under the circumstances, is unusual to and
not expected by the person to whom it happens. It has also been defined as an
injury which happens by reason of some violence or casualty to the injured without
his design, consent, or voluntary co-operation.
5

In light of these definitions, the Court is convinced that the incident that resulted in
Lim's death was indeed an accident. The petitioner, invoking the case of De la Cruz
v. Capital Insurance,
6
says that "there is no accident when a deliberate act is
performed unless some additional, unexpected, independent and unforeseen
happening occurs which produces or brings about their injury or death." There was
such a happening. This was the firing of the gun, which was the additional
unexpected and independent and unforeseen occurrence that led to the insured
person's death.
The petitioner also cites one of the four exceptions provided for in the insurance
contract and contends that the private petitioner's claim is barred by such
provision. It is there stated:
Exceptions
The company shall not be liable in respect of
1. Bodily injury
xxx xxx xxx
b. consequent upon
i) The insured person attempting to commit suicide or willfully
exposing himself to needless peril except in an attempt to save
human life.
To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the
petitioner contends that the insured willfully exposed himself to needless peril and
thus removed himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril
are in pari materia because they both signify a disregard for one's life. The only
difference is in degree, as suicide imports a positive act of ending such life whereas
the second act indicates a reckless risking of it that is almost suicidal in intent. To
illustrate, a person who walks a tightrope one thousand meters above the ground
and without any safety device may not actually be intending to commit suicide, but
his act is nonetheless suicidal. He would thus be considered as "willfully exposing
himself to needless peril" within the meaning of the exception in question.
The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim
had willfully exposed himself to needless peril and so came under the exception.
The theory is that a gun is per se dangerous and should therefore be handled
cautiously in every case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had
removed the magazine from the gun and believed it was no longer dangerous. He
expressly assured her that the gun was not loaded. It is submitted that Lim did not
willfully expose himself to needless peril when he pointed the gun to his temple
because the fact is that he thought it was not unsafe to do so. The act was precisely
intended to assure Nalagon that the gun was indeed harmless.
The contrary view is expressed by the petitioner thus:
Accident insurance policies were never intended to reward the
insured for his tendency to show off or for his miscalculations.
They were intended to provide for contingencies. Hence, when I
miscalculate and jump from the Quezon Bridge into the Pasig
River in the belief that I can overcome the current, I have wilfully
exposed myself to peril and must accept the consequences of my
act. If I drown I cannot go to the insurance company to ask them
to compensate me for my failure to swim as well as I thought I
could. The insured in the case at bar deliberately put the gun to
his head and pulled the trigger. He wilfully exposed himself to
peril.
The Court certainly agrees that a drowned man cannot go to the insurance
company to ask for compensation. That might frighten the insurance people to
death. We also agree that under the circumstances narrated, his beneficiary would
not be able to collect on the insurance policy for it is clear that when he braved the
currents below, he deliberately exposed himself to a known peril.
The private respondent maintains that Lim did not. That is where she says the
analogy fails. The petitioner's hypothetical swimmer knew when he dived off the
Quezon Bridge that the currents below were dangerous. By contrast, Lim did not
know that the gun he put to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it
should not prevent his widow from recovering from the insurance policy he
obtained precisely against accident. There is nothing in the policy that relieves the
insurer of the responsibility to pay the indemnity agreed upon if the insured is
shown to have contributed to his own accident. Indeed, most accidents are caused
by negligence. There are only four exceptions expressly made in the contract to
relieve the insurer from liability, and none of these exceptions is applicable in the
case at bar. **
It bears noting that insurance contracts are as a rule supposed to be interpreted
liberally in favor of the assured. There is no reason to deviate from this rule,
especially in view of the circumstances of this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the
petitioner. The basic issue raised in this case is, as the petitioner correctly observed,
one of first impression. It is evident that the petitioner was acting in good faith then
it resisted the private respondent's claim on the ground that the death of the
insured was covered by the exception. The issue was indeed debatable and was
clearly not raised only for the purpose of evading a legitimate obligation. We hold
therefore that the award of moral and exemplary damages and of attorney's fees is
unjust and so must be disapproved.
In order that a person may be made liable to the payment of
moral damages, the law requires that his act be wrongful. The
adverse result of an action does not per se make the act wrongful
and subject the act or to the payment of moral damages. The law
could not have meant to impose a penalty on the right to litigate;
such right is so precious that moral damages may not be charged
on those who may exercise it erroneously. For these the law taxes
costs.
7

The fact that the results of the trial were adverse to Barreto did
not alone make his act in bringing the action wrongful because in
most cases one party will lose; we would be imposing an unjust
condition or limitation on the right to litigate. We hold that the
award of moral damages in the case at bar is not justified by the
facts had circumstances as well as the law.
If a party wins, he cannot, as a rule, recover attorney's fees and
litigation expenses, since it is not the fact of winning alone that
entitles him to recover such damages of the exceptional
circumstances enumerated in Art. 2208. Otherwise, every time a
defendant wins, automatically the plaintiff must pay attorney's
fees thereby putting a premium on the right to litigate which
should not be so. For those expenses, the law deems the award of
costs as sufficient. 8
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far
as it holds the petitioner liable to the private respondent in the sum of P200,000.00
representing the face value of the insurance contract, with interest at the legal rate
from the date of the filing of the complaint until the full amount is paid, but
MODIFIED with the deletion of all awards for damages, including attorney's fees,
except the costs of the suit.




















































G.R. No. L-15895 November 29, 1920
RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma.
Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

MALCOLM, J.:
This is an action brought by the plaintiff ad administrator of the estate of the late
Joaquin Ma. Herrer to recover from the defendant life insurance company the sum
of pesos 6,000 paid by the deceased for a life annuity. The trial court gave judgment
for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made
application to the Sun Life Assurance Company of Canada through its office in
Manila for a life annuity. Two days later he paid the sum of P6,000 to the manager
of the company's Manila office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela
Renta Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen
medico y aprobacion de la Oficina Central de la Compaia.
The application was immediately forwarded to the head office of the company at
Montreal, Canada. On November 26, 1917, the head office gave notice of
acceptance by cable to Manila. (Whether on the same day the cable was received
notice was sent by the Manila office of Herrer that the application had been
accepted, is a disputed point, which will be discussed later.) On December 4, 1917,
the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A.
Torres wrote to the Manila office of the company stating that Herrer desired to
withdraw his application. The following day the local office replied to Mr. Torres,
stating that the policy had been issued, and called attention to the notification of
November 26, 1917. This letter was received by Mr. Torres on the morning of
December 21, 1917. Mr. Herrer died on December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer
received notice of acceptance of his application. To resolve this question, we
propose to go directly to the evidence of record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at
the time of the trial testified that he prepared the letter introduced in evidence as
Exhibit 3, of date November 26, 1917, and handed it to the local manager, Mr. E. E.
White, for signature. The witness admitted on cross-examination that after
preparing the letter and giving it to he manager, he new nothing of what became of
it. The local manager, Mr. White, testified to having received the cablegram
accepting the application of Mr. Herrer from the home office on November 26,
1917. He said that on the same day he signed a letter notifying Mr. Herrer of this
acceptance. The witness further said that letters, after being signed, were sent to
the chief clerk and placed on the mailing desk for transmission. The witness could
not tell if the letter had every actually been placed in the mails. Mr. Tuason, who
was the chief clerk, on November 26, 1917, was not called as a witness. For the
defense, attorney Manuel Torres testified to having prepared the will of Joaquin
Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a life
annuity, and that he said that the only document relating to the transaction in his
possession was the provisional receipt. Rafael Enriquez, the administrator of the
estate, testified that he had gone through the effects of the deceased and had
found no letter of notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November
26, 1917, notifying Mr. Herrer that his application had been accepted, was prepared
and signed in the local office of the insurance company, was placed in the ordinary
channels for transmission, but as far as we know, was never actually mailed and
thus was never received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the
law which should be applied to the facts. In order to reach our legal goal, the
obvious signposts along the way must be noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines
were found in the Code of Commerce and the Civil Code. In the Code of the
Commerce, there formerly existed Title VIII of Book III and Section III of Title III of
Book III, which dealt with insurance contracts. In the Civil Code there formerly
existed and presumably still exist, Chapters II and IV, entitled insurance contracts
and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915,
there was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act expressly repealed Title VIII of Book II
and Section III of Title III of Book III of the code of Commerce. The law of insurance
is consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to
the methods to be followed in order that there may be a contract of insurance. On
the other hand, the Civil Code, in article 1802, not only describes a contact of life
annuity markedly similar to the one we are considering, but in two other articles,
gives strong clues as to the proper disposition of the case. For instance, article 16 of
the Civil Code provides that "In matters which are governed by special laws, any
deficiency of the latter shall be supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that the special law on the subject of
insurance is deficient in enunciating the principles governing acceptance, the
subject-matter of the Civil code, if there be any, would be controlling. In the Civil
Code is found article 1262 providing that "Consent is shown by the concurrence of
offer and acceptance with respect to the thing and the consideration which are to
constitute the contract. An acceptance made by letter shall not bind the person
making the offer except from the time it came to his knowledge. The contract, in
such case, is presumed to have been entered into at the place where the offer was
made." This latter article is in opposition to the provisions of article 54 of the Code
of Commerce.
If no mistake has been made in announcing the successive steps by which we reach
a conclusion, then the only duty remaining is for the court to apply the law as it is
found. The legislature in its wisdom having enacted a new law on insurance, and
expressly repealed the provisions in the Code of Commerce on the same subject,
and having thus left a void in the commercial law, it would seem logical to make use
of the only pertinent provision of law found in the Civil code, closely related to the
chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making
the offer only from the date it came to his knowledge, may not be the best
expression of modern commercial usage. Still it must be admitted that its
enforcement avoids uncertainty and tends to security. Not only this, but in order
that the principle may not be taken too lightly, let it be noticed that it is identical
with the principles announced by a considerable number of respectable courts in
the United States. The courts who take this view have expressly held that an
acceptance of an offer of insurance not actually or constructively communicated to
the proposer does not make a contract. Only the mailing of acceptance, it has been
said, completes the contract of insurance, as the locus poenitentiae is ended when
the acceptance has passed beyond the control of the party. (I Joyce, The Law of
Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second
paragraph of article 1262 of the Civil Code providing that an acceptance made by
letter shall not bind the person making the offer except from the time it came to his
knowledge. The pertinent fact is, that according to the provisional receipt, three
things had to be accomplished by the insurance company before there was a
contract: (1) There had to be a medical examination of the applicant; (2) there had
to be approval of the application by the head office of the company; and (3) this
approval had in some way to be communicated by the company to the applicant.
The further admitted facts are that the head office in Montreal did accept the
application, did cable the Manila office to that effect, did actually issue the policy
and did, through its agent in Manila, actually write the letter of notification and
place it in the usual channels for transmission to the addressee. The fact as to the
letter of notification thus fails to concur with the essential elements of the general
rule pertaining to the mailing and delivery of mail matter as announced by the
American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have been transmitted to him in the
ordinary course of the mails. But if any one of these elemental facts fails to appear,
it is fatal to the presumption. For instance, a letter will not be presumed to have
been received by the addressee unless it is shown that it was deposited in the post-
office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp.
458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected
because it has not been proved satisfactorily that the acceptance of the application
ever came to the knowledge of the applicant.lawph!l.net
Judgment is reversed, and the plaintiff shall have and recover from the defendant
the sum of P6,000 with legal interest from November 20, 1918, until paid, without
special finding as to costs in either instance. So ordered.


















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.

DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the Resolution of this
Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in
both cases seek similar relief, through these petitions for certiorari by way of
appeal, from the amended decision of respondent Court of Appeals which affirmed
in toto the decision of the Court of First Instance of Cebu, ordering "the defendants
(herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly
and severally to pay plaintiff (herein private respondent Ngo Hing) the amount of
P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific
Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life
of his one-year old daughter Helen Go. Said respondent supplied the essential data
which petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in
Cebu City wrote on the corresponding form in his own handwriting (Exhibit I-M).
Mondragon finally type-wrote the data on the application form which was signed by
private respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as
his commission for being a duly authorized agebt of Pacific Life. Upon the payment
of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to
private respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the
bottom of the back page of the application form his strong recommendation for the
approval of the insurance application. Then on April 30, 1957, Mondragon received
a letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The
letter stated that the said life insurance application for 20-year endowment plan is
not available for minors below seven years old, but Pacific Life can consider the
same under the Juvenile Triple Action Plan, and advised that if the offer is
acceptable, the Juvenile Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead,
on May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending
the approval of the 20-year endowment insurance plan to children, pointing out
that since 1954 the customers, especially the Chinese, were asking for such
coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of
influenza with complication of bronchopneumonia. Thereupon, private respondent
sought the payment of the proceeds of the insurance, but having failed in his effort,
he filed the action for the recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier refered to against both
petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt
(Exhibit E) constituted a temporary contract of the life insurance in question; and
(2) whether private respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is
considered a BINDING RECEIPT. These conditions state that:
A. If the Company or its agent, shan have received the premium
deposit ... and the insurance application, ON or PRIOR to the date
of medical examination ... said insurance shan be in force and in
effect from the date of such medical examination, for such period
as is covered by the deposit ...,PROVIDED the company shall be
satisfied that on said date the applicant was insurable on standard
rates under its rule for the amount of insurance and the kind of
policy requested in the application.
D. If the Company does not accept the application on standard
rate for the amount of insurance and/or the kind of policy
requested in the application but issue, or offers to issue a policy
for a different plan and/or amount ..., the insurance shall not be in
force and in effect until the applicant shall have accepted the
policy as issued or offered by the Company and shall have paid the
full premium thereof. If the applicant does not accept the policy,
the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition A
above, and the Company declines to approve the application the
insurance applied for shall not have been in force at any time and
the sum paid be returned to the applicant upon the surrender of
this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit
receipt is intended to be merely a provisional or temporary insurance contract and
only upon compliance of the following conditions: (1) that the company shall be
satisfied that the applicant was insurable on standard rates; (2) that if the company
does not accept the application and offers to issue a policy for a different plan, the
insurance contract shall not be binding until the applicant accepts the policy
offered; otherwise, the deposit shall be reftmded; and (3) that if the applicant is not
ble according to the standard rates, and the company disapproves the application,
the insurance applied for shall not be in force at any time, and the premium paid
shall be returned to the applicant.
Clearly implied from the aforesaid conditions is that the binding deposit receipt in
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis of whether or not the
applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved
the insurance application of respondent Ngo Hing, the binding deposit receipt in
question had never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement
is made between the applicant and the agent, no liability shall attach until the
principal approves the risk and a receipt is given by the agent. The acceptance is
merely conditional and is subordinated to the act of the company in approving or
rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt"
does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil.
264).
It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to
children less than seven years of age. What it offered instead is another plan known
as the Juvenile Triple Action, which private respondent failed to accept. In the
absence of a meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life insurance in the amount of
P50,000.00 in favor of the latter's one-year old daughter, and with the non-
compliance of the abovequoted conditions stated in the disputed binding deposit
receipt, there could have been no insurance contract duly perfected between thenl
Accordingly, the deposit paid by private respondent shall have to be refunded by
Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person
or by their agents ... The contract, to be binding from the date of the application,
must have been a completed contract, one that leaves nothing to be dione, nothing
to be completed, nothing to be passed upon, or determined, before it shall take
effect. There can be no contract of insurance unless the minds of the parties have
met in agreement."
We are not impressed with private respondent's contention that failure of
petitioner Mondragon to communicate to him the rejection of the insurance
application would not have any adverse effect on the allegedly perfected temporary
contract (Respondent's Brief, pp. 13-14). In this first place, there was no contract
perfected between the parties who had no meeting of their minds. Private
respondet, being an authorized insurance agent of Pacific Life at Cebu branch office,
is indubitably aware that said company does not offer the life insurance applied for.
When he filed the insurance application in dispute, private respondent was,
therefore, only taking the chance that Pacific Life will approve the recommendation
of Mondragon for the acceptance and approval of the application in question along
with his proposal that the insurance company starts to offer the 20-year
endowment insurance plan for children less than seven years. Nonetheless, the
record discloses that Pacific Life had rejected the proposal and recommendation.
Secondly, having an insurable interest on the life of his one-year old daughter, aside
from being an insurance agent and an offense associate of petitioner Mondragon,
private respondent Ngo Hing must have known and followed the progress on the
processing of such application and could not pretend ignorance of the Company's
rejection of the 20-year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of
then Appellate Associate Justice Ruperto G. Martin who later came up to this Court,
from his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum
of rejection (Exhibit 3-M) nor the reply thereto of appellant
Mondragon reiterating the desire for applicant's father to have
the application considered as one for a 20-year endowment plan
was ever duly communicated to Ngo; Hing, father of the minor
applicant. I am not quite conninced that this was so. Ngo Hing, as
father of the applicant herself, was precisely the "underwriter
who wrote this case" (Exhibit H-1). The unchallenged statement of
appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M),
specifically admits that said Ngo Hing was "our associate" and that
it was the latter who "insisted that the plan be placed on the 20-
year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the
application was not brought home to his knowledge. He must
have been duly apprised of the rejection of the application for a
20-year endowment plan otherwise Mondragon would not have
asserted that it was Ngo Hing himself who insisted on the
application as originally filed, thereby implictly declining the offer
to consider the application under the Juvenile Triple Action Plan.
Besides, the associate of Mondragon that he was, Ngo Hing
should only be presumed to know what kind of policies are
available in the company for minors below 7 years old. What he
and Mondragon were apparently trying to do in the premises was
merely to prod the company into going into the business of
issuing endowment policies for minors just as other insurance
companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have
been bound at all under the binding slip for a plan of insurance
that it could not have, by then issued at all. (Amended Decision,
Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm
belief that private respondent had deliberately concealed the state of health and
piysical condition of his daughter Helen Go. Wher private regpondeit supplied the
required essential data for the insurance application form, he was fully aware that
his one-year old daughter is typically a mongoloid child. Such a congenital physical
defect could never be ensconced nor disguished. Nonetheless, private respondent,
in apparent bad faith, withheld the fact materal to the risk to be assumed by the
insurance compary. As an insurance agent of Pacific Life, he ought to know, as he
surely must have known. his duty and responsibility to such a material fact. Had he
diamond said significant fact in the insurance application fom Pacific Life would
have verified the same and would have had no choice but to disapprove the
application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good
faith, absolute and perfect candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not
for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda
de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a
partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether
intentional or unintentional the concealment entitles the insurer to rescind the
contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105
Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316).
Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected between
the parties with the noncompliance of the conditions provided in the binding
receipt, and concealment, as legally defined, having been comraitted by herein
private respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof,
one is hereby entered absolving petitioners Lapulapu D. Mondragon and Great
Pacific Life Assurance Company from their civil liabilities as found by respondent
Court and ordering the aforesaid insurance company to reimburse the amount of
P1,077.75, without interest, to private respondent, Ngo Hing. Costs against private
respondent.



























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: +.wph!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: +.wph!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: +.wph!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: +.wph!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: +.wph!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
thanjudicial 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.










































G.R. No. 181132 June 5, 2009
HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA
PANGILINAN MARAMAG,Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL
BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE
ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, Respondents.
D E C I S I O N
NACHURA, J.:
This is a petition
1
for review on certiorari under Rule 45 of the Rules, seeking to
reverse and set aside the Resolution
2
dated January 8, 2008 of the Court of Appeals
(CA), in CA-G.R. CV No. 85948, dismissing petitioners appeal for lack of jurisdiction.
The case stems from a petition
3
filed against respondents with the Regional Trial
Court, Branch 29, for revocation and/or reduction of insurance proceeds for being
void and/or inofficious, with prayer for a temporary restraining order (TRO) and a
writ of preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of
Loreto Maramag (Loreto), while respondents were Loretos illegitimate family; (2)
Eva de Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the
killing of the latter, thus, she is disqualified to receive any proceeds from his
insurance policies from Insular Life Assurance Company, Ltd. (Insular)
4
and Great
Pacific Life Assurance Corporation (Grepalife);
5
(3) the illegitimate children of
LoretoOdessa, Karl Brian, and Trisha Angeliewere entitled only to one-half of
the legitime of the legitimate children, thus, the proceeds released to Odessa and
those to be released to Karl Brian and Trisha Angelie were inofficious and should be
reduced; and (4) petitioners could not be deprived of their legitimes, which should
be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners
alleged, among others, that part of the insurance proceeds had already been
released in favor of Odessa, while the rest of the proceeds are to be released in
favor of Karl Brian and Trisha Angelie, both minors, upon the appointment of their
legal guardian. Petitioners also prayed for the total amount of P320,000.00 as
actual litigation expenses and attorneys fees.
In answer,
6
Insular admitted that Loreto misrepresented Eva as his legitimate wife
and Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they
filed their claims for the insurance proceeds of the insurance policies; that when it
ascertained that Eva was not the legal wife of Loreto, it disqualified her as a
beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie,
as the remaining designated beneficiaries; and that it released Odessas share as
she was of age, but withheld the release of the shares of minors Karl Brian and
Trisha Angelie pending submission of letters of guardianship. Insular alleged that
the complaint or petition failed to state a cause of action insofar as it sought to
declare as void the designation of Eva as beneficiary, because Loreto revoked her
designation as such in Policy No. A001544070 and it disqualified her in Policy No.
A001693029; and insofar as it sought to declare as inofficious the shares of Odessa,
Karl Brian, and Trisha Angelie, considering that no settlement of Loretos estate had
been filed nor had the respective shares of the heirs been determined. Insular
further claimed that it was bound to honor the insurance policies designating the
children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance
Code.
In its own answer
7
with compulsory counterclaim, Grepalife alleged that Eva was
not designated as an insurance policy beneficiary; that the claims filed by Odessa,
Karl Brian, and Trisha Angelie were denied because Loreto was ineligible for
insurance due to a misrepresentation in his application form that he was born on
December 10, 1936 and, thus, not more than 65 years old when he signed it in
September 2001; that the case was premature, there being no claim filed by the
legitimate family of Loreto; and that the law on succession does not apply where
the designation of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known
to petitioners, summons by publication was resorted to. Still, the illegitimate family
of Loreto failed to file their answer. Hence, the trial court, upon motion of
petitioners, declared them in default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the
issues raised in their respective answers be resolved first. The trial court ordered
petitioners to comment within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife
was purely legal whether the complaint itself was proper or not and that the
designation of a beneficiary is an act of liberality or a donation and, therefore,
subject to the provisions of Articles 752
8
and 772
9
of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies, not to the estate or to the
heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was legally married to Vicenta
Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion
of which reads
WHEREFORE, the motion to dismiss incorporated in the answer of defendants
Insular Life and Grepalife is granted with respect to defendants Odessa, Karl Brian
and Trisha Maramag. The action shall proceed with respect to the other defendants
Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.
10

In so ruling, the trial court ratiocinated thus
Art. 2011 of the Civil Code provides that the contract of insurance is governed by
the (sic) special laws. Matters not expressly provided for in such special laws shall
be regulated by this Code. The principal law on insurance is the Insurance Code, as
amended. Only in case of deficiency in the Insurance Code that the Civil Code may
be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the
insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person
in whose name or for whose benefit it is made, unless otherwise specified in the
policy. Since the defendants are the ones named as the primary beneficiary (sic) in
the insurances (sic) taken by the deceased Loreto C. Maramag and there is no
showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the beneficiary
has a vested right to the indemnity, unless the insured reserves the right to change
the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect
the insurance indemnity. The beneficiary in a contract of insurance is not the donee
spoken in the law of donation. The rules on testamentary succession cannot apply
here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which
can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern
Luzon Employees Association v. Juanita Golpeo, et al., the Honorable Supreme
Court made the following pronouncements[:]
"With the finding of the trial court that the proceeds to the Life Insurance Policy
belongs exclusively to the defendant as his individual and separate property, we
agree that the proceeds of an insurance policy belong exclusively to the beneficiary
and not to the estate of the person whose life was insured, and that such proceeds
are the separate and individual property of the beneficiary and not of the heirs of
the person whose life was insured, is the doctrine in America. We believe that the
same doctrine obtains in these Islands by virtue of Section 428 of the Code of
Commerce x x x."
In [the] light of the above pronouncements, it is very clear that the plaintiffs has
(sic) no sufficient cause of action against defendants Odessa, Karl Brian and Trisha
Angelie Maramag for the reduction and/or declaration of inofficiousness of
donation as primary beneficiary (sic) in the insurances (sic) of the late Loreto C.
Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag
is his concubine Eva Verna De Guzman. Any person who is forbidden from receiving
any donation under Article 739 cannot be named beneficiary of a life insurance
policy of the person who cannot make any donation to him, according to said article
(Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the
insurance contract will still remain valid, but the indemnity must go to the legal
heirs and not to the concubine, for evidently, what is prohibited under Art. 2012 is
the naming of the improper beneficiary. In such case, the action for the declaration
of nullity may be brought by the spouse of the donor or donee, and the guilt of the
donor and donee may be proved by preponderance of evidence in the same action
(Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the
designation of defendant Eva Verna de Guzman as one of the primary beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art.
739 of the Civil Code, the insurance indemnity that should be paid to her must go to
the legal heirs of the deceased which this court may properly take cognizance as the
action for the declaration for the nullity of a void donation falls within the general
jurisdiction of this Court.
11

Insular
12
and Grepalife
13
filed their respective motions for reconsideration, arguing,
in the main, that the petition failed to state a cause of action. Insular further
averred that the proceeds were divided among the three children as the remaining
named beneficiaries. Grepalife, for its part, also alleged that the premiums paid had
already been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that
whether the complaint may be dismissed for failure to state a cause of action must
be determined solely on the basis of the allegations in the complaint, such that the
defenses of Insular and Grepalife would be better threshed out during
trial.1avvphi1
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing disquisitions, the Motions for
Reconsideration filed by defendants Grepalife and Insular Life are hereby GRANTED.
Accordingly, the portion of the Resolution of this Court dated 21 September 2004
which ordered the prosecution of the case against defendant Eva Verna De
Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case against them is
hereby ordered DISMISSED.
SO ORDERED.
14

In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in
one policy and that Insular disqualified her as a beneficiary in the other policy such
that the entire proceeds would be paid to the illegitimate children of Loreto with
Eva pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases
where there are no beneficiaries designated, or when the only designated
beneficiary is disqualified, that the proceeds should be paid to the estate of the
insured. As to the claim that the proceeds to be paid to Loretos illegitimate
children should be reduced based on the rules on legitime, the trial court held that
the distribution of the insurance proceeds is governed primarily by the Insurance
Code, and the provisions of the Civil Code are irrelevant and inapplicable. With
respect to the Grepalife policy, the trial court noted that Eva was never designated
as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the
dismissal of the case as to the illegitimate children. It further held that the matter of
Loretos misrepresentation was premature; the appropriate action may be filed
only upon denial of the claim of the named beneficiaries for the insurance proceeds
by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the
appeal for lack of jurisdiction, holding that the decision of the trial court dismissing
the complaint for failure to state a cause of action involved a pure question of law.
The appellate court also noted that petitioners did not file within the reglementary
period a motion for reconsideration of the trial courts Resolution, dated September
21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie;
thus, the said Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause
of action, may the Court consider matters which were not alleged in the
Complaint, particularly the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to
state a cause of action, did not the Regional Trial Court engage in the
examination and determination of what were the facts and their probative
value, or the truth thereof, when it premised the dismissal on allegations of the
defendants in their answer which had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of
the insurance for the concubine?
15

In essence, petitioners posit that their petition before the trial court should not
have been dismissed for failure to state a cause of action because the finding that
Eva was either disqualified as a beneficiary by the insurance companies or that her
designation was revoked by Loreto, hypothetically admitted as true, was raised only
in the answers and motions for reconsideration of both Insular and Grepalife. They
argue that for a motion to dismiss to prosper on that ground, only the allegations in
the complaint should be considered. They further contend that, even assuming
Insular disqualified Eva as a beneficiary, her share should not have been distributed
to her children with Loreto but, instead, awarded to them, being the legitimate
heirs of the insured deceased, in accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial courts finding that the
petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the
Rules of Court, which reads
SECTION 1. Grounds. Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of
the following grounds:
x x x x
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of
another.
16
A complaint states a cause of action when it contains the three (3)
elements of a cause of action(1) the legal right of the plaintiff; (2) the correlative
obligation of the defendant; and (3) the act or omission of the defendant in
violation of the legal right. If any of these elements is absent, the complaint
becomes vulnerable to a motion to dismiss on the ground of failure to state a cause
of action.
17

When a motion to dismiss is premised on this ground, the ruling thereon should be
based only on the facts alleged in the complaint. The court must resolve the issue
on the strength of such allegations, assuming them to be true. The test of
sufficiency of a cause of action rests on whether, hypothetically admitting the facts
alleged in the complaint to be true, the court can render a valid judgment upon the
same, in accordance with the prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no
hypothetical admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear
unfounded; or
5. there is evidence which has been presented to the court by stipulation of the
parties or in the course of the hearings related to the case.
18

In this case, it is clear from the petition filed before the trial court that, although
petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries
in the insurance policies issued by Insular and Grepalife. The basis of petitioners
claim is that Eva, being a concubine of Loreto and a suspect in his murder, is
disqualified from being designated as beneficiary of the insurance policies, and that
Evas children with Loreto, being illegitimate children, are entitled to a lesser share
of the proceeds of the policies. They also argued that pursuant to Section 12 of the
Insurance Code,
19
Evas share in the proceeds should be forfeited in their favor, the
former having brought about the death of Loreto. Thus, they prayed that the share
of Eva and portions of the shares of Loretos illegitimate children should be
awarded to them, being the legitimate heirs of Loreto entitled to their respective
legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a
favorable judgment in light of Article 2011 of the Civil Code which expressly
provides that insurance contracts shall be governed by special laws, i.e., the
Insurance Code. Section 53 of the Insurance Code states
SECTION 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the insured is
already deceased, upon the maturation of the policy.
20
The exception to this rule is
a situation where the insurance contract was intended to benefit third persons who
are not parties to the same in the form of favorable stipulations or indemnity. In
such a case, third parties may directly sue and claim from the insurer.
21

Petitioners are third parties to the insurance contracts with Insular and Grepalife
and, thus, are not entitled to the proceeds thereof. Accordingly, respondents
Insular and Grepalife have no legal obligation to turn over the insurance proceeds
to petitioners. The revocation of Eva as a beneficiary in one policy and her
disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loretos insurance policies
remains valid. Because no legal proscription exists in naming as beneficiaries the
children of illicit relationships by the insured,
22
the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition on donations
under Article 739 of the Civil Code or by the insurers themselves for reasons based
on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of petitioners. It is only in cases where the
insured has not designated any beneficiary,
23
or when the designated beneficiary is
disqualified by law to receive the proceeds,
24
that the insurance policy proceeds
shall redound to the benefit of the estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be
upheld. In the same light, the Decision of the CA dated January 8, 2008 should be
sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the
appeal; the issue of failure to state a cause of action is a question of law and not of
fact, there being no findings of fact in the first place. WHEREFORE, the petition is
DENIED for lack of merit. Costs against petitioners. SO ORDERED.






G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.

PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to
set aside a decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS),
as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. . . . The LESSEE shall not insure against fire the chattels, merchandise,
textiles, goods and effects placed at any stall or store or space in the
leased premises without first obtaining the written consent and approval
of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the
consent of the LESSOR then the policy is deemed assigned and transferred
to the LESSOR for its own benefit; . . .
1

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses
insured against loss by fire the merchandise inside the leased premises for Five
Hundred Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter
United) without the written consent of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without
its consent), it wrote the insurer (United) a demand letter asking that the proceeds
of the insurance contract (between the Cha spouses and United) be paid directly to
CKS, based on its lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a
decision * ordering therein defendant United to pay CKS the amount of
P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary damages,
P20,000.00 as attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a
decision ** dated 11 January 1996, affirming the trial court decision, deleting
however the awards for exemplary damages and attorney's fees. A motion for
reconsideration by United was denied on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court
of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT
THE STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR
BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN
FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF
AN INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID
POLICY IN CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF
AN INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID
FOR BEING WITHOUT CONSIDERATION AND FOR BEING TOTALLY
DEPENDENT ON THE WILL OF THE RESPONDENT CORPORATION.
2

The core issue to be resolved in this case is whether or not the aforequoted
paragraph 18 of the lease contract entered into between CKS and the Cha spouses
is valid insofar as it provides that any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the leased premises is deemed
assigned or transferred to the lessor (CKS) if said policy is obtained without the
prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a
contract cannot be contrary to law, morals, good customs, public order or public
policy.
3

Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable
except for the benefit of some person having an insurable interest in the
property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-
spouses over their merchandise is primarily a contract of indemnity. Insurable
interest in the property insured must exist at the time the insurance takes effect
and at the time the loss occurs.
4
The basis of such requirement of insurable interest
in property insured is based on sound public policy: to prevent a person from taking
out an insurance policy on property upon which he has no insurable interest and
collecting the proceeds of said policy in case of loss of the property. In such a case,
the contract of insurance is a mere wager which is void under Section 25 of the
Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss,
whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the
goods and merchandise inside the leased premises under the provisions of Section
17 of the Insurance Code which provide:
Sec. 17. The measure of an insurable interest in property is the extent to
which the insured might be damnified by loss of injury thereof.
Therefore, respondent CKS cannot, under the Insurance Code a special law be
validly a beneficiary of the fire insurance policy taken by the petitioner-spouses
over their merchandise. This insurable interest over said merchandise remains with
the insured, the Cha spouses. The automatic assignment of the policy to CKS under
the provision of the lease contract previously quoted is void for being contrary to
law and/or public policy. The proceeds of the fire insurance policy thus rightfully
belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The
insurer (United) cannot be compelled to pay the proceeds of the fire insurance
policy to a person (CKS) who has no insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the
Cha spouses obtained a fire insurance policy over their own merchandise, without
the consent of CKS, is a separate and distinct issue which we do not resolve in this
case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET
ASIDE and a new decision is hereby entered, awarding the proceeds of the fire
insurance policy to petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.














[G.R. No. 128834. April 20, 1998]
RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF
APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES
GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.
[G.R. No. 128866. April 20, 1998]
MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.
D EC I S I O N
MELO, J.:
The issues relevant to the herein three consolidated petitions revolve around the
fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan
Insurance Company, Inc. (MICO) in connection with the mortgage contracts entered
into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commencing July 27, 1992. RCBC was
ordered to pay actual and compensatory damages in the amount of P5,000,000.00.
MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary
damages and P1,500,000.00 for attorneys fees. GOYUs obligation to RCBC was
fixed at P68,785,069.04 as of April 1992, without any interest, surcharges, and
penalties. RCBC and MICO appealed separately but, in view of the common facts
and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo
Branch. After due evaluation, RCBC Binondo Branch, through its key officers,
petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs application for
approval by RCBCs executive committee. A credit facility in the amount of P30
million was initially granted. Upon GOYUs application and Uys and Laos
recommendation, RCBCs executive committee increased GOYUs credit facility to
P50 million, then to P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC, which were registered with
the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four
mortgage contracts, GOYU committed itself to insure the mortgaged property with
an insurance company approved by RCBC, and subsequently, to endorse and deliver
the insurance policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February
1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained
the Malayan insurance policies, issued nine endorsements in favor of RCBC
seemingly upon instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire.
Consequently, GOYU submitted its claim for indemnity on account of the loss
insured against. MICO denied the claim on the ground that the insurance policies
were either attached pursuant to writs of attachments/garnishments issued by
various courts or that the insurance proceeds were also claimed by other creditors
of GOYU alleging better rights to the proceeds than the insured. GOYU filed a
complaint for specific performance and damages which was docketed at the
Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as
Civil Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the same
reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the
Regional Trial Court of Manila (Branch 3), confirmed that GOYUs other creditors,
namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained
their respective writs of attachments from various courts, covering an aggregate
amount of P14,938,080.23, and ordered that the proceeds of the ten insurance
policies be deposited with the said court minus the aforementioned
P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed down by another
Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit 22-
Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,
disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking
Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58
less the amount of P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by way of interest for the duration of the delay
since July 27, 1992 (ninety days after defendant insurers receipt of the required
proof of loss and notice of loss) at the rate of twice the ceiling prescribed by the
Monetary Board, on the following amounts:
1) P50,000,000.00 from July 27, 1992 up to the time said amount was
deposited with this Court on January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up to the time when the writs of
attachments were received by defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the amount of
P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorneys fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan
obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the respective promissory
notes (without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered
to release immediately to the plaintiff the amount of P50,000,000.00 deposited
with the Court by defendant Malayan, together with all the interests earned
thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was
unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed the
trial courts findings of liability on their part. The Court of Appeals partly granted
GOYUs appeal, but sustained the findings of the trial court with respect to MICO
and RCBCs liabilities, thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby
modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58
less the amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court
and damages by way of interest commencing July 27, 1992 until the time Goyu
receives the said amount at the rate of thirty-seven (37%) percent per annum which
is twice the ceiling prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:
a) To pay the plaintiff actual and compensatory damages in the amount of
P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL
BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorneys fees.
4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its
loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992
without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to
immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R.
No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with all the
interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively,
seeking review and consequent reversal of the above dispositions of the Court of
Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-
48376, which case, by virtue of the Court of Appeals resolution dated August 7,
1996, was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No.
128833). At issue in said petition is RCBCs right to intervene in the action between
Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where the subject
insurance policies were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in
relation to the pertinent and applicable laws, we find merit in the submissions of
RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related
issues which are now submitted in the petitions before us. This Court, however,
discerns one primary and central issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor,
in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to
GOYU, the latter executed several mortgage contracts in favor of RCBC. It was
expressly stipulated in these mortgage contracts that GOYU shall insure the
mortgaged property with any of the insurance companies acceptable to RCBC.
GOYU indeed insured the mortgaged property with MICO, an insurance company
acceptable to RCBC. Based on their stipulations in the mortgage contracts, GOYU
was supposed to endorse these insurance policies in favor of, and deliver them, to
RCBC. Alchester Insurance Agency, Inc., MICOs underwriter from whom GOYU
obtained the subject insurance policies, prepared the nine endorsements (see Exh.
1-Malayan to 9-Malayan; also Exh. 51-RCBC to 59-RCBC), copies of which
were delivered to GOYU, RCBC, and MICO. However, because these endorsements
do not bear the signature of any officer of GOYU, the trial court, as well as the Court
of Appeals, concluded that the endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure
the same property for his own sole benefit. There is no question that GOYU could
insure the mortgaged property for its own exclusive benefit. In the present case,
although it appears that GOYU obtained the subject insurance policies naming itself
as the sole payee, the intentions of the parties as shown by their contemporaneous
acts, must be given due consideration in order to better serve the interest of justice
and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in
favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of
endorsing any specific insurance policy in favor of any particular beneficiary or
payee other than the insured had not such named payee or beneficiary been
specifically disclosed by the insured itself. It is also significant that GOYU voluntarily
and purposely took the insurance policies from MICO, a sister company of RCBC,
and not just from any other insurance company. Alchester would not have found
out that the subject pieces of property were mortgaged to RCBC had not such
information been voluntarily disclosed by GOYU itself. Had it not been for GOYU,
Alchester would not have known of GOYUs intention of obtaining insurance
coverage in compliance with its undertaking in the mortgage contracts with RCBC,
and verily, Alchester would not have endorsed the policies to RCBC had it not been
so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is
constrained to rule in favor of mortgagor RCBC. The basis and purpose of the
doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA
357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public policy, fair dealing,
good faith and justice, and its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to whom they were directed
and who reasonably relied thereon. The doctrine of estoppel springs from
equitable principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It has been
applied by this Court wherever and whenever special circumstances of a case so
demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a
certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine
endorsement documents for GOYUs nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement documents were sent to GOYU,
and the others were sent to RCBC and MICO, while the fourth copies were retained
for Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received
from Alchester the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was
only pursuant to the stipulation in the mortgage contracts. We find such reliance to
be justified under the circumstances of the case. GOYU failed to seasonably
repudiate the authority of the person or persons who prepared such endorsements.
Over and above this, GOYU continued, in the meantime, to enjoy the benefits of the
credit facilities extended to it by RCBC. After the occurrence of the loss insured
against, it was too late for GOYU to disown the endorsements for any imagined or
contrived lack of authority of Alchester to prepare and issue said endorsements. If
there had not been actually an implied ratification of said endorsements by virtue
of GOYUs inaction in this case, GOYU is at the very least estopped from assailing
their operative effects. To permit GOYU to capitalize on its non-confirmation of
these endorsements while it continued to enjoy the benefits of the credit facilities
of RCBC which believed in good faith that there was due endorsement pursuant to
their mortgage contracts, is to countenance grave contravention of public policy,
fair dealing, good faith, and justice. Such an unjust situation, the Court cannot
sanction. Under the peculiar circumstances obtaining in this case, the Court is
bound to recognize RCBCs right to the proceeds of the insurance policies if not for
the actual endorsement of the policies, at least on the basis of the equitable
principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides
that the proceeds of insurance shall exclusively apply to the interest of the person
in whose name or for whose benefit it is made. The peculiarity of the
circumstances obtaining in the instant case presents a justification to take
exception to the strict application of said provision, it having been sufficiently
established that it was the intention of the parties to designate RCBC as the party
for whose benefit the insurance policies were taken out. Consider thus the
following:
1. It is undisputed that the insured pieces of property were the subject of
mortgage contracts entered into between RCBC and GOYU in consideration of and
for securing GOYUs credit facilities from RCBC. The mortgage contracts contained
common provisions whereby GOYU, as mortgagor, undertook to have the
mortgaged property properly covered against any loss by an insurance company
acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged
property from MICO, no less than a sister company of RCBC and definitely an
acceptable insurance company to RCBC.
3. Endorsement documents were prepared by MICOs underwriter, Alchester
Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC.
GOYU did not assail, until of late, the validity of said endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the
credit facilities extended by RCBC which was conditioned upon the endorsement of
the insurance policies to be taken by GOYU to cover the mortgaged properties.
This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the absence of its
written conformity thereto, obviously considered said endorsement to be sufficient
compliance with its obligation under the mortgage contracts since RCBC accordingly
continued to extend the benefits of its credit facilities and GOYU continued to
benefit therefrom. Just as plain too is the intention of the parties to constitute
RCBC as the beneficiary of the various insurance policies obtained by GOYU. The
intention of the parties will have to be given full force and effect in this particular
case. The insurance proceeds may, therefore, be exclusively applied to RCBC, which
under the factual circumstances of the case, is truly the person or entity for whose
benefit the policies were clearly intended.
Moreover, the laws evident intention to protect the interests of the mortgagee
upon the mortgaged property is expressed in Article 2127 of the Civil Code which
states:
ART. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the mortgagor,
or it passes into the hands of a third person.
Significantly, the Court notes that out of the 10 insurance policies subject of this
case, only 8 of them appear to have been subject of the endorsements prepared
and delivered by Alchester for and upon instructions of GOYU as shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number : F-114-07795 None
Issue Date : March 18, 1992
Expiry Date : April 5, 1993
Amount : P9,646,224.92
b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan
Issue Date : January 18, 1992
Expiry Date : February 9, 1993
Amount : P4,307,217.54
c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan
Issue Date : January 18, 1992
Expiry Date : February 15, 1993
Amount : P6,603,586.43
d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan
Issue Date : January 18, 1992
Expiry Date : (not legible)
Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan
Issue Date : January 18, 1992
Expiry Date : February 9, 1993
Amount : P9,457,972.76
f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan
Issue Date : January 13, 1992
Expiry Date : January 13, 1993
Amount : P24,750,000.00
g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan
Issue Date : May 29, 1991
Expiry Date : June 27, 1992
Amount : P6,000,000.00
h. Policy Number : CI/F-128-03341 None
Issue Date : May 3, 1991
Expiry Date : May 3, 1992
Amount : P10,000,000.00
i. Policy Number : F-114-07402 Exhibit 8-Malayan
Issue Date : September 16, 1991
Expiry Date : October 19, 1992
Amount : P32,252,125.20
j. Policy Number : F-114-07525 Exhibit 9-Malayan
Issue Date : November 20, 1991
Expiry Date : December 5, 1992
Amount : P6,603,586.43
(pp. 456-457, Record; Folder of Exhibits for MICO.)
Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was
admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise,
the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above].
Also, one of the endorsement documents, Exhibit 5-Malayan, refers to a certain
insurance policy number ACIA-F-07066, which is not among the insurance policies
involved in the complaint.
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to
P89,974,488.36. Being exclusively payable to RCBC by reason of the endorsement
by Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYUs other
creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor.
Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person
for whose benefit it was made. In this case, to the extent of GOYUs obligation with
RCBC, the interest of GOYU in the subject policies had been transferred to RCBC
effective as of the time of the endorsement. These policies may no longer be
attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R.
No. 128834, which may nonetheless forthwith be dismissed for being moot and
academic in view of the results reached herein. Only the two other policies
amounting to P19,646,224.92 may be validly attached, garnished, and levied upon
by GOYUs other creditors. To the extent of GOYUs outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were endorsed
to RCBC, are, therefore, to be released from attachment, garnishment, and levy by
the other creditors of GOYU.
This brings us to the next relevant issue to be resolved, which is, the extent of
GOYUs outstanding obligation with RCBC which the proceeds of the 8 insurance
policies will discharge and liquidate, or put differently, the actual amount of GOYUs
liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that
GOYUS total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus
sanctioning the trial courts exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of
Promissory Note No. 952-91) on the ground that their execution is highly
questionable for not only are these dated after the fire, but also because the
signatures of either GOYU or any its representative are conspicuously absent.
Accordingly, the Court of Appeals speculated thusly:
Hence, this Court is inclined to conclude that said promissory notes were pre-
signed by plaintiff in blank terms, as averred by plaintiff, in contemplation of the
speedy grant of future loans, for the same practice of procedure has always been
adopted in its previous dealings with the bank.
(Rollo, pp. 181-182.)
The fact that the promissory notes bear dates posterior to the fire does not
necessarily mean that the documents are spurious, for it is presumed that the
ordinary course of business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor and not the
holder of the negotiable instrument has the burden of proof of showing that he no
longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA
351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of
the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by
GOYU as indicated in the testimony of Go Song Hiap when he answered the queries
of the trial court:
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is
correct, Your Honor.
COURT
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of
the 29 promissory notes as hereinabove quoted, GOYU also offered and admitted
to RCBC that its obligation be fixed at P116,301,992.60 as shown in its letter dated
March 9, 1993, which pertinently reads:
We wish to inform you, therefore that we are ready and willing to pay the current
past due account of this company in the amount of P116,301,992.60 as of 21
January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third
Party Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case
at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the
Seaboard and Equitable insurance companies and other legitimate deductions. We
accept and confirm this amount of P116,301,992.60 as stated as true and correct.
(Exhibit BB.)
The Court of Appeals erred in placing much significance on the fact that the
excluded promissory notes are dated after the fire. It failed to consider that said
notes had for their origin transactions consummated prior to the fire. Thus, careful
attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are
mere renewals of Promissory Notes No. 908-91 and 952-91, loans already availed of
by GOYU.
The two courts below erred in failing to see that the promissory notes which they
ruled should be excluded for bearing dates which are after that of the fire, are
mere renewals of previous ones. The proceeds of the loan represented by these
promissory notes were admittedly received by GOYU. There is ample factual and
legal basis for giving GOYUs judicial admission of liability in the amount of
P116,301,992.60 full force and effect
It should, however, be quickly added that whatever amount RCBC may have
recovered from the other insurers of the mortgaged property will, nonetheless,
have to be applied as payment against GOYUs obligation. But, contrary to the
lower courts findings, payments effected by GOYU prior to January 21, 1993 should
no longer be deducted. Such payments had obviously been duly considered by
GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its
past due account totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as
of January 21, 1993, to wit:
Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60
Broken down as follows
Principal Interest
Regular 80,535,946.32
FDU 7,548,025.17
____________ _____________
Total: 108,083,971.49 8,218,021.11
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company: 6,095,145.81
2) Proceeds from
Equitable Insurance
Company: 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
9,055,104.70
NET AMOUNT as of January 21, 1993: P 107,246,887.90
The need for the payment of interest due upon the principal amount of the
obligation, which is the cost of money to RCBC, the primary end and the ultimate
reason for RCBCs existence and being, was duly recognized by the trial court when
it ruled favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation
with RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest
thereon at the rate stipulated in the respective promissory notes (without
surcharges and penalties) per computation, pp. 14-A, 14-B, 14-C (Record, p. 479).
Inexplicably, the Court of Appeals, without even laying down the factual or legal
justification for its ruling, modified the trial courts ruling and ordered GOYU to pay
the principal amount of P68,785,069.04 without any interest, surcharges and
penalties (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much
uncertainty deleted the payment of additional interest, penalties, and charges, in
this manner:
Regarding defendant RCBCs commitment not to charge additional interest,
penalties and surcharges, the same does not require that it be embodied in a
document or some form of writing to be binding and enforceable. The principle is
well known that generally a verbal agreement or contract is no less binding and
effective than a written one. And the existence of such a verbal agreement has
been amply established by the evidence in this case. In any event, regardless of the
existence of such verbal agreement, it would still be unjust and inequitable for
defendant RCBC to charge the plaintiff with surcharges and penalties considering
the latters pitiful situation. (Emphasis supplied.)
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate
and distinct from that of surcharges and penalties. What may justify a court in not
allowing the creditor to charge surcharges and penalties despite express stipulation
therefor in a valid agreement, may not equally justify non-payment of interest. The
charging of interest for loans forms a very essential and fundamental element of
the banking business, which may truly be considered to be at the very core of its
existence or being. It is inconceivable for a bank to grant loans for which it will not
charge any interest at all. We fail to find justification for the Court of Appeals
outright deletion of the payment of interest as agreed upon in the respective
promissory notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of
thumb laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals
(234 SCRA 78 [1994]), shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on Damages of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date of the judgment of the court is made
(at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
(pp. 95-97.)
There being written stipulations as to the rate of interest owing on each specific
promissory note as summarized and tabulated by the trial court in its decision
(pp.470 and 471, Record) such agreed interest rates must be followed. This is very
clear from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs
pitiful situation must be taken into account. We do not agree, however, that
payment of any amount as surcharges and penalties should altogether be deleted.
Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao
and Uy Chun Bing, may have relayed its assurance for assistance to GOYU
immediately after the occurrence of the fire, we cannot accept the lower courts
finding that RCBC had thereby ipso facto effectively waived collection of any
additional interests, surcharges, and penalties from GOYU. Assurances of
assistance are one thing, but waiver of additional interests, surcharges, and
penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake
of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of
the Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall
be equitably reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable,
the Court must consider the circumstances of each case. It should be stressed that
the Court will not make any sweeping ruling that surcharges and penalties imposed
by banks for non-payment of the loans extended by them are generally iniquitous
and unconscionable. What may be iniquitous and unconscionable in one case, may
be totally just and equitable in another. This provision of law will have to be
applied to the established facts of any given case. Given the circumstances under
which GOYU found itself after the occurrence of the fire, the Court rules the
surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of
36%, to be definitely iniquitous and unconscionable. The Court tempers these rates
to 2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the
amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC
refused, we find it more in keeping with justice and equity for RCBC not to charge
additional interest, surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO
liable in damages for denying or withholding the proceeds of the insurance claim to
GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the
insurance policies, RCBC has the right to claim the insurance proceeds, in
substitution of the property lost in the fire. Having assigned its rights, GOYU lost its
standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and
withholding payment of insurance proceeds, the delay must be wanton, oppressive,
or malevolent (Zenith Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It is
generally agreed, however, that an insurer may in good faith and honesty entertain
a difference of opinion as to its liability. Accordingly, the statutory penalty for
vexatious refusal of an insurer to pay a claim should not be inflicted unless the
evidence and circumstances show that such refusal was willful and without
reasonable cause as the facts appear to a reasonable and prudent man (Buffalo Ins.
Co. vs. Bommarito [CCA 8
th
] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101
Ga. 331, 28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143,
281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in
bad faith delayed the release of the proceeds. The problem in the determination of
who is the actual beneficiary of the insurance policies, aggravated by the claim of
various creditors who wanted to partake of the insurance proceeds, not to mention
the importance of the endorsement to RCBC, to our mind, and as now borne out by
the outcome herein, justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC
cannot avail itself of two simultaneous remedies in enforcing the claim of an unpaid
creditor, one for specific performance and the other for foreclosure. In doing so,
said the appellate court, the second action is deemed barred, RCBC having split a
single cause of action (Rollo, pp. 195-199). The Court of Appeals was too
accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R
CV No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the
Court of Appeals pre-empted the resolution of said foreclosure case which is not
before it. This is plain reversible error if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):
It should have been enough, nonetheless, for the appellate court to merely set
aside the questioned orders of the trial court for having been issued by the latter
with grave abuse of discretion. In likewise enjoining permanently herein petitioner
from entering in and interfering with the use or occupation and enjoyment of
petitioners (now private respondent) residential house and compound, the
appellate court in effect, precipitately resolved with finality the case for injunction
that was yet to be heard on the merits by the lower court. Elevated to the
appellate court, it might be stressed, were mere incidents of the principal case still
pending with the trial court. In Municipality of Bian, Laguna vs. Court of Appeals,
219 SCRA 69, we ruled that the Court of Appeals would have no jurisdiction in a
certiorari proceeding involving an incident in a case to rule on the merits of the
main case itself which was not on appeal before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga
Regional Trial Court, since it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the preferential right of
RCBC over the MICO insurance policies. It is basic and fundamental that the first
mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha
Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of
Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of
December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED
and SET ASIDE, and a new one entered:
1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-
65442 before Branch 3 of the Manila Regional Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial
Banking Corporation the proceeds of the insurance policies in the amount of
P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2
and 2-1), less the amount of P50,505,594.60 (per O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including
the interests earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial
Banking Corporation in the principal amount of P107,246,887.90, with interest at
the respective rates stipulated in each promissory note from January 21, 1993 until
finality of this judgment, and surcharges at 2% and penalties at 3% from January 21,
1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc.
and the proceeds of the amount deposited with the trial court and its earned
interest. The total amount due RCBC at the time of the finality of this judgment
shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and
charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court
in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results
herein arrived at. Respondent Sebastians right as attaching creditor must yield to
the preferential rights of Rizal Commercial Banking Corporation over the Malayan
insurance policies as first mortgagee.
SO ORDERED.
Regalado, (Chairman), Puno, Mendoza, and Martinez, JJ., concur.







G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision
1
of the Court of
Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation
versus Armando Geagonia," reversing the decision of the Insurance Commission in
I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia
against private respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San
Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private
respondent fire insurance policy No. F-14622
2
for P100,000.00. The period of the
policy was from 22 December 1989 to 22 December 1990 and covered the
following: "Stock-in-trade consisting principally of dry goods such as RTW's for men
and women wear and other usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE
that Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to
1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized
as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)

P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the Company of any insurance
or insurances already affected, or which may subsequently be
effected, covering any of the property or properties consisting of
stocks in trade, goods in process and/or inventories only hereby
insured, and unless such notice be given and the particulars of
such insurance or insurances be stated therein or endorsed in this
policy pursuant to Section 50 of the Insurance Code, by or on
behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed
forfeited, provided however, that this condition shall not apply
when the total insurance or insurances in force at the time of the
loss or damage is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the
public market of San Francisco, Agusan del Sur. The petitioner's insured stock-in-
trade were completely destroyed prompting him to file with the private respondent
a claim under the policy. On 28 December 1990, the private respondent denied the
claim because it found that at the time of the loss the petitioner's stocks-in-trade
were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144,
for P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance
Co., Inc. (hereinafter PFIC).
3
These policies indicate that the insured was "Messrs.
Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing
Textiles, Cebu City as their interest may appear subject to the
terms of this policy. CO-INSURANCE DECLARED: P100,000.
Phils. First CEB/F 24758.
4

The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.
The petitioner then filed a complaint
5
against the private respondent with the
Insurance Commission (Case No. 3340) for the recovery of P100,000.00 under fire
insurance policy No. F-14622 and for attorney's fees and costs of litigation. He
attached as Annex "AM"
6
thereof his letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two
policies issued by the PFIC were already in existence; however, he had no
knowledge of the provision in the private respondent's policy requiring him to
inform it of the prior policies; this requirement was not mentioned to him by the
private respondent's agent; and had it been mentioned, he would not have
withheld such information. He further asserted that the total of the amounts
claimed under the three policies was below the actual value of his stocks at the
time of loss, which was P1,000,000.00.
In its answer,
7
the private respondent specifically denied the allegations in the
complaint and set up as its principal defense the violation of Condition 3 of the
policy.
In its decision of 21 June 1993,
8
the Insurance Commission found that the
petitioner did not violate Condition 3 as he had no knowledge of the existence of
the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing
Textiles which procured the PFIC policies without informing him or securing his
consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the
stocks. These findings were based on the petitioner's testimony that he came to
know of the PFIC policies only when he filed his claim with the private respondent
and that Cebu Tesing Textile obtained them and paid for their premiums without
informing him thereof. The Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the
respondent company to pay complainant the sum of P100,000.00
with legal interest from the time the complaint was filed until fully
satisfied plus the amount of P10,000.00 as attorney's fees. With
costs. The compulsory counterclaim of respondent is hereby
dismissed.
Its motion for the reconsideration of the decision
9
having been denied by the
Insurance Commission in its resolution of 20 August 1993,
10
the private respondent
appealed to the Court of Appeals by way of a petition for review. The petition was
docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993,
11
the Court of Appeals reversed the decision
of the Insurance Commission because it found that the petitioner knew of the
existence of the two other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No.
28144 that the insurance was taken in the name of private
respondent [petitioner herein]. The policy states that "DISCOUNT
MART (MR. ARMANDO GEAGONIA, PROP)" was the assured and
that "TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by
private respondent, not by the Tesing Textiles which is alleged to
have taken out the other insurance without the knowledge of
private respondent. This is shown by Premium Invoices nos.
46632 and 46630. (Annexes M and N). In both invoices, Tesing
Textiles is indicated to be only the mortgagee of the goods
insured but the party to which they were issued were the
"DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein]
who took out the policies on the same property subject of the
insurance with petitioner. Hence, in failing to disclose the
existence of these insurances private respondent violated
Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the
provisions insurances is belied by his letter to petitioner [of 18
January 1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of
the provision requiring me to inform your office
about my
prior insurance under FGA-28146 and F-CEB-
24758. Your representative did not mention
about said requirement at the time he was
convincing me to insure with you. If he only die
or even inquired if I had other existing policies
covering my establishment, I would have told
him so. You will note that at the time he talked
to me until I decided to insure with your
company the two policies aforementioned were
already in effect. Therefore I would have no
reason to withhold such information and I
would have desisted to part with my hard
earned peso to pay the insurance premiums [if] I
know I could not recover anything.
Sir, I am only an ordinary businessman
interested in protecting my investments. The
actual value of my stocks damaged by the fire
was estimated by the Police Department to be
P1,000,000.00 (Please see xerox copy of Police
Report Annex "A"). My Income Statement as of
December 31, 1989 or five months before the
fire, shows my merchandise inventory was
already some P595,455.75. . . . These will
support my claim that the amount claimed
under the three policies are much below the
value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did
not know that there were other insurances taken on the stock-in-
trade and seriously puts in question his credibility.
His motion to reconsider the adverse decision having been denied, the petitioner
filed the instant petition. He contends therein that the Court of Appeals acted with
grave abuse of discretion amounting to lack or excess of jurisdiction:
A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE
INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED
WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND
WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY
THE COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH
WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR
TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER
HEREIN AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the
petitioner had prior knowledge of the two insurance policies issued by the PFIC
when he obtained the fire insurance policy from the private respondent, thereby,
for not disclosing such fact, violating Condition 3 of the policy, and (b) if he had,
whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the
petitioner's letter of reconsideration of 18 January 1991, is without merit. The
petitioner claims that the said letter was not offered in evidence and thus should
not have been considered in deciding the case. However, as correctly pointed out
by the Court of Appeals, a copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the
complaint.
12
It has attained the status of a judicial admission and since its due
execution and authenticity was not denied by the other party, the petitioner is
bound by it even if it were not introduced as an independent evidence.
13

As to the first issue, the Insurance Commission found that the petitioner had no
knowledge of the previous two policies. The Court of Appeals disagreed and found
otherwise in view of the explicit admission by the petitioner in his letter to the
private respondent of 18 January 1991, which was quoted in the challenged
decision of the Court of Appeals. These divergent findings of fact constitute an
exception to the general rule that in petitions for review under Rule 45, only
questions of law are involved and findings of fact by the Court of Appeals are
conclusive and binding upon this Court.
14

We agree with the Court of Appeals that the petitioner knew of the prior policies
issued by the PFIC. His letter of 18 January 1991 to the private respondent
conclusively proves this knowledge. His testimony to the contrary before the
Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission madeante litem motam. It was, indeed, incredible that he did not
know about the prior policies since these policies were not new or original. Policy
No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had
been renewed twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is
not proscribed by law. Its incorporation in the policy is allowed by Section 75 of the
Insurance Code
15
which provides that "[a] policy may declare that a violation of
specified provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision which invariably
appears in fire insurance policies and is intended to prevent an increase in the
moral hazard. It is commonly known as the additional or "other insurance" clause
and has been upheld as valid and as a warranty that no other insurance exists. Its
violation would thus avoid the
policy.
16
However, in order to constitute a violation, the other insurance must be
upon same subject matter, the same interest therein, and the same risk.
17

As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both interests may be one policy, or
each may take out a separate policy covering his interest, either at the same or at
separate times.
18
The mortgagor's insurable interest covers the full value of the
mortgaged property, even though the mortgage debt is equivalent to the full value
of the property.
19
The mortgagee's insurable interest is to the extent of the debt,
since the property is relied upon as security thereof, and in insuring he is not
insuring the property but his interest or lien thereon. His insurable interest is prima
facie the value mortgaged and extends only to the amount of the debt, not
exceeding the value of the mortgaged property.
20
Thus, separate insurances
covering different insurable interests may be obtained by the mortgagor and the
mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee,
which is the usual practice. The mortgagee may be made the beneficial payee in
several ways. He may become the assignee of the policy with the consent of the
insurer; or the mere pledgee without such consent; or the original policy may
contain a mortgage clause; or a rider making the policy payable to the mortgagee
"as his interest may appear" may be attached; or a "standard mortgage clause,"
containing a collateral independent contract between the mortgagee and insurer,
may be attached; or the policy, though by its terms payable absolutely to the
mortgagor, may have been procured by a mortgagor under a contract duty to
insure for the mortgagee's benefit, in which case the mortgagee acquires an
equitable lien upon the proceeds.
21

In the policy obtained by the mortgagor with loss payable clause in favor of the
mortgagee as his interest may appear, the mortgagee is only a beneficiary under
the contract, and recognized as such by the insurer but not made a party to the
contract himself. Hence, any act of the mortgagor which defeats his right will also
defeat the right of the mortgagee.
22
This kind of policy covers only such interest as
the mortgagee has at the issuing of the policy.
23

On the other hand, a mortgagee may also procure a policy as a contracting party in
accordance with the terms of an agreement by which the mortgagor is to pay the
premiums upon such insurance.
24
It has been noted, however, that although the
mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains on the assurance
that it insures him, the policy is in fact in the form used to insure a mortgagor with
loss payable clause.
25

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

With these principles in mind, we are of the opinion that Condition 3 of the subject
policy is not totally free from ambiguity and must, perforce, be meticulously
analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to
double insurance, and (b) the nullity of the policy shall only be to the extent
exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other
insurance "covering any of the property or properties consisting of stocks in trade,
goods in process and/or inventories only hereby insured," and the portion
regarding the insured's declaration on the subheading CO-INSURANCE that the co-
insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double
insurance exists where the same person is insured by several insurers separately in
respect of the same subject and interest. As earlier stated, the insurable interests of
a mortgagor and a mortgagee on the mortgaged property are distinct and separate.
Since the two policies of the PFIC do not cover the same interest as that covered by
the policy of the private respondent, no double insurance exists. The non-disclosure
then of the former policies was not fatal to the petitioner's right to recover on the
private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply
if the total insurance in force at the time of loss does not exceed P200,000.00, the
private respondent was amenable to assume a co-insurer's liability up to a loss not
exceeding P200,000.00. What it had in mind was to discourage over-insurance.
Indeed, the rationale behind the incorporation of "other insurance" clause in fire
policies is to prevent over-insurance and thus avert the perpetration of fraud. When
a property owner obtains insurance policies from two or more insurers in a total
amount that exceeds the property's value, the insured may have an inducement to
destroy the property for the purpose of collecting the insurance. The public as well
as the insurer is interested in preventing a situation in which a fire would be
profitable to the insured.
32

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. SP No. 31916 is SET ASIDE and the decision of the Insurance
Commission in Case No. 3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.































G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the
Decision
1
dated May 17, 1993, of the Court of Appeals and its Resolution
2
dated
January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto the
judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance
claim filed by private respondent against Great Pacific Life Assurance Co. The
dispositive portion of the trial court's 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, attorney's 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.1wphi1.nt
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.
Mejia's 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 court's 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
PLAINTIFF'S 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 court's 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 mortgagor's interest, and the mortgagor continues to be a party
to the contract. In this type of policy insurance, the mortgagee is simply an
appointee of the insurance fund, such loss-payable clause does not make the
mortgagee a party to the contract.
9

Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects
insurance in his own name providing that the loss shall be payable
to the mortgagee, or assigns a policy of insurance to a mortgagee,
the insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original
contract, and any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same effect, although
the property is in the hands of the mortgagee, but any act which,
under the contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee therein named,
with the same effect as if it had been performed by the
mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or
interests in the insurance, the policy stating that: "In the event of the debtor's
death before his indebtedness with the Creditor [DBP] shall have been fully paid, an
amount to pay the outstanding indebtedness shall first be paid to the creditor and
the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor."
10
When DBP submitted the insurance claim against
petitioner, the latter denied payment thereof, interposing the defense of
concealment committed by the insured. Thereafter, DBP collected the debt from
the mortgagor and took the necessary action of foreclosure on the residential lot of
private respondent.
11
In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co.
12
we
held:
Insured, being the person with whom the contract was made, is
primarily the proper person to bring suit thereon. * * * Subject to
some exceptions, insured may thus sue, although the policy is
taken wholly or in part for the benefit of another person named
or unnamed, and although it is expressly made payable to another
as his interest may appear or otherwise. * * * Although a policy
issued to a mortgagor is taken out for the benefit of the
mortgagee and is made payable to him, yet the mortgagor may
sue thereon in his own name, especially where the mortgagee's
interest is less than the full amount recoverable under the
policy, * * *.
And in volume 33, page 82, of the same work, we read the
following:
Insured may be regarded as the real party in interest, although he
has assigned the policy for the purpose of collection, or has
assigned as collateral security any judgment he may obtain.
13

And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such
person may recover it whatever the insured might have recovered,
14
the widow of
the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner
interposed as its defense to annul the insurance contract. Petitioner contends that
Dr. Leuterio failed to disclose that he had hypertension, which might have caused
his death. Concealment exists where the assured had knowledge of a fact material
to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the
same.
15

Petitioner merely relied on the testimony of the attending physician, Dr. Hernando
Mejia, as supported by the information given by the widow of the decedent.
Grepalife asserts that Dr. Mejia's technical diagnosis of the cause of death of Dr.
Leuterio was a duly documented hospital record, and that the widow's declaration
that her husband had "possible hypertension several years ago" should not be
considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not
conduct an autopsy on the body of the decedent. As the attending physician, Dr.
Mejia stated that he had no knowledge of Dr. Leuterio's any previous hospital
confinement.
16
Dr. Leuterio's death certificate stated that hypertension was only
"the possible cause of death." The private respondent's statement, as to the
medical history of her husband, was due to her unreliable recollection of events.
Hence, the statement of the physician was properly considered by the trial court as
hearsay.
The question of whether there was concealment was aptly answered by the
appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance
application that he was in good health and that he had not
consulted a doctor or any of the enumerated ailments, including
hypertension; when he died the attending physician had certified
in the death certificate that the former died of cerebral
hemorrhage, probably secondary to hypertension. From this
report, the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had concealed
the fact that he had hypertension.
Contrary to appellant's allegations, there was no sufficient proof
that the insured had suffered from hypertension. Aside from the
statement of the insured's widow who was not even sure if the
medicines taken by Dr. Leuterio were for hypertension, the
appellant had not proven nor produced any witness who could
attest to Dr. Leuterio's medical history . . .
xxx xxx xxx
Appellant insurance company had failed to establish that there
was concealment made by the insured, hence, it cannot refuse
payment of the claim.
17

The fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract.
18
Misrepresentation as a defense of the insurer to
avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer.
19
In the case at bar,
the petitioner failed to clearly and satisfactorily establish its defense, and is
therefore liable to pay the proceeds of the insurance.1wphi1.nt
And that brings us to the last point in the review of the case at bar. Petitioner claims
that there was no evidence as to the amount of Dr. Leuterio's outstanding
indebtedness to DBP at the time of the mortgagor's death. Hence, for private
respondent's failure to establish the same, the action for specific performance
should be dismissed. Petitioner's claim is without merit. A life insurance policy is a
valued policy.
20
Unless the interest of a person insured is susceptible of exact
pecuniary measurement, the measure of indemnity under a policy of insurance
upon life or health is the sum fixed in the policy.
21
The mortgagor paid the
premium according to the coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtor's
death during the terms of this insurance, a death benefit in the
amount of P86,200.00 shall be paid.
In the event of the debtor's death before his indebtedness with
the creditor shall have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to the Creditor and
the balance of the Sum Assured, if there is any shall then be paid
to the beneficiary/ies designated by the debtor."
22
(Emphasis
omitted)
However, we noted that the Court of Appeals' decision was promulgated on May
17, 1993. In private respondent's memorandum, she states that DBP foreclosed in
1995 their residential lot, in satisfaction of mortgagor's outstanding loan.
Considering this supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that
DBP should not unjustly enrich itself at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already
foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterio's heirs
represented by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the
Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the
petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's
indebtedness to Development Bank of the Philippines. Costs against
petitioner.1wphi1.nt
SO ORDERED.








































G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

PADILLA, J:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642,
dated 21 March 1979, ordering petitioner Manila Mahogany Manufacturing
Corporation to pay private respondent Zenith Insurance Corporation the sum of
Five Thousand Pesos (P5,000.00) with 6% annual interest from 18 January 1973,
attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and
the resolution of the same Court, dated 8 February 1980, denying petitioner's
motion for reconsideration of it's decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door
sedan with respondent insurance company. On 4 May 1970 the insured vehicle was
bumped and damaged by a truck owned by San Miguel Corporation. For the
damage caused, respondent company paid petitioner five thousand pesos
(P5,000.00) in amicable settlement. Petitioner's general manager executed a
Release of Claim, subrogating respondent company to all its right to action against
San Miguel Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to
demand reimbursement from San Miguel Corporation of the amount it had paid
petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that San
Miguel Corporation had already paid petitioner P4,500.00 for the damages to
petitioner's motor vehicle, as evidenced by a cash voucher and a Release of Claim
executed by the General Manager of petitioner discharging San Miguel Corporation
from "all actions, claims, demands the rights of action that now exist or hereafter
[sic] develop arising out of or as a consequence of the accident."
Respondent insurance company thus demanded from petitioner reimbursement of
the sum of P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence,
respondent company filed suit in the City Court of Manila for the recovery of
P4,500.00. The City Court ordered petitioner to pay respondent P4,500.00. On
appeal the Court of First Instance of Manila affirmed the City Court's decision in
toto, which CFI decision was affirmed by the Court of Appeals, with the modification
that petitioner was to pay respondent the total amount of P5,000.00 that it had
earlier received from the respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more,
P5,000.00 to respondent company as the subrogation in the Release of Claim it
executed in favor of respondent was conditioned on recovery of the total amount
of damages petitioner had sustained. Since total damages were valued by petitioner
at P9,486.43 and only P5,000.00 was received by petitioner from respondent,
petitioner argues that it was entitled to go after San Miguel Corporation to claim
the additional P4,500.00 eventually paid to it by the latter, without having to turn
over said amount to respondent. Respondent of course disputes this allegation and
states that there was no qualification to its right of subrogation under the Release
of Claim executed by petitioner, the contents of said deed having expressed all the
intents and purposes of the parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel
Corporation, petitioner cites Art. 2207 of the Civil Code, which states:
If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of the
insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or
injury.
Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may
exercise his right for the remainder, and he shall be preferred to
the person who has been subrogated in his place in virtue of the
partial payment of the same credit.
We find petitioners arguments to be untenable and without merit. In the absence
of any other evidence to support its allegation that a gentlemen's agreement
existed between it and respondent, not embodied in the Release of Claim, such
ease of Claim must be taken as the best evidence of the intent and purpose of the
parties. Thus, the Court of Appeals rightly stated:
Petitioner argues that the release claim it executed subrogating
Private respondent to any right of action it had against San Miguel
Corporation did not preclude Manila Mahogany from filing a
deficiency claim against the wrongdoer. Citing Article 2207, New
Civil Code, to the effect that if the amount paid by an insurance
company does not fully cover the loss, the aggrieved party shall
be entitled to recover the deficiency from the person causing the
loss, petitioner claims a preferred right to retain the amount
coming from San Miguel Corporation, despite the subrogation in
favor of Private respondent.
Although petitioners right to file a deficiency claim against San
Miguel Corporation is with legal basis, without prejudice to the
insurer's right of subrogation, nevertheless when Manila
Mahogany executed another release claim (Exhibit K) discharging
San Miguel Corporation from "all actions, claims, demands and
rights of action that now exist or hereafter arising out of or as a
consequence of the accident" after the insurer had paid the
proceeds of the policy- the compromise agreement of P5,000.00
being based on the insurance policy-the insurer is entitled to
recover from the insured the amount of insurance money paid
(Metropolitan Casualty Insurance Company of New York vs.
Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and
Insolvency Law with comments and annotations, H.B. Perez 1976,
p. 151). Since petitioner by its own acts released San Miguel
Corporation, thereby defeating private respondents, the right of
subrogation, the right of action of petitioner against the insurer
was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co.,
Ltd., 54 O.G. 391) Otherwise stated: private respondent may
recover the sum of P5,000.00 it had earlier paid to petitioner. 1
As held in Phil. Air Lines v. Heald Lumber Co.,
2

If a property is insured and the owner receives the indemnity
from the insurer, it is provided in [Article 2207 of the New Civil
Code] that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the
insurer does not fully cover the loss, then the aggrieved party is
the one entitled to recover the deficiency. ... Under this legal
provision, the real party in interest with regard to the portion of
the indemnity paid is the insurer and not the insured
3
(Emphasis
supplied)
The decision of the respondent court ordering petitioner to pay respondent
company, not the P4,500.00 as originally asked for, but P5,000.00, the amount
respondent company paid petitioner as insurance, is also in accord with law and
jurisprudence. In disposing of this issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 paid by San
Miguel Corporation under its clear right to file a deficiency claim
for damages incurred, against the wrongdoer, should the
insurance company not fully pay for the injury caused (Article
2207, New Civil Code). However, when petitioner released San
Miguel Corporation from any liability, petitioner's right to retain
the sum of P5,000.00 no longer existed, thereby entitling private
respondent to recover the same. (Emphasis supplied)
As has been observed:
... The right of subrogation can only exist after the insurer has paid
the otherwise the insured will be deprived of his right to full
indemnity. If the insurance proceeds are not sufficient to cover
the damages suffered by the insured, then he may sue the party
responsible for the damage for the the [sic] remainder. To the
extent of the amount he has already received from the insurer
enjoy's [sic] the right of subrogation.
Since the insurer can be subrogated to only such rights as the
insured may have, should the insured, after receiving payment
from the insurer, release the wrongdoer who caused the loss, the
insurer loses his rights against the latter. But in such a case, the
insurer will be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the consent of
the insurer.
4
(Emphasis supplied.)
And even if the specific amount asked for in the complaint is P4,500.00 only and not
P5,000.00, still, the respondent Court acted well within its discretion in awarding
P5,000.00, the total amount paid by the insurer. The Court of Appeals rightly
reasoned as follows:
It is to be noted that private respondent, in its companies, prays
for the recovery, not of P5,000.00 it had paid under the insurance
policy but P4,500.00 San Miguel Corporation had paid to
petitioner. On this score, We believe the City Court and Court of
First Instance erred in not awarding the proper relief. Although
private respondent prays for the reimbursement of P4,500.00
paid by San Miguel Corporation, instead of P5,000.00 paid under
the insurance policy, the trial court should have awarded the
latter, although not prayed for, under the general prayer in the
complaint "for such further or other relief as may be deemed just
or equitable, (Rule 6, Sec. 3, Revised Rules of Court; Rosales vs.
Reyes Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim, 50 Phil. 844;
Baguiro vs. Barrios Tupas, 77 Phil 120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed
from is hereby AFFIRMED with costs against petitioner.









































G.R. No. L-47593 December 29, 1943
THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,
vs.
SERAFIN D. FELICIANO ET AL., respondents.
OZAETA, J.:
In a four-to-three decision promulgated on September 13, 1941,
1
this Court
affirmed the judgment of the Court of Appeals in favor of the respondents and
against the petitioner for the sum of P25,000, representing the value of two
insurance policies issued by the petitioner on the life of Evaristo Feliciano. A motion
to reconsider and set aside said decision has been filed by the petitioner, and both
parties have submitted exhaustive and luminous written arguments in support of
their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions
heretofore handed down by this Court, the salient points of which may be briefly
restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced
pulmonary tuberculosis when he signed his applications for insurance with the
petitioner on October 12, 1934. On that same date Doctor Trepp, who had taken X-
ray pictures of his lungs, informed the respondent Dr. Serafin D. Feliciano, brother
of Evaristo, that the latter "was already in a very serious ad practically hopeless
condition." Nevertheless the question contained in the application "Have you
ever suffered from any ailment or disease of the lungs, pleurisy, pneumonia or
asthma?" appears to have been answered , "No" And above the signature of the
applicant, following the answers to the various questions propounded to him, is the
following printed statement:1awphil.net
I declare on behalf of myself and of any person who shall have or claim any
interest in any policy issued hereunder, that each of the above answers is
full, complete and true, and that to the best of my knowledge and belief I
am a proper subject for life insurance. (Exhibit K.)
The false answer above referred to, as well as the others, was written by the
Company's soliciting agent Romulo M. David, in collusion with the medical examiner
Dr. Gregorio Valdez, for the purpose of securing the Company's approval of the
application so that the policy to be issued thereon might be credited to said agent
in connection with the inter-provincial contest which the Company was then
holding among its soliciting agents to boost the sales of its policies. Agent David
bribed Medical Examiner Valdez with money which the former borrowed from the
applicant's mother by way of advanced payment on the premium, according to the
finding of the Court of Appeals. Said court also found that before the insured signed
the application he, as well as the members of his family, told the agent and the
medical examiner that he had been sick and coughing for some time and that he
had gone three times to the Santol Sanatorium and had X-ray pictures of his lungs
taken; but that in spite of such information the agent and the medical examiner
told them that the applicant was a fit subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract
between the parties hereto. . . . Only the President, or the Manager, acting
jointly with the Secretary or Assistant Secretary (and then only in writing
signed by them) have power in behalf of the Company to issue permits, or
to modify this or any contract, or to extend the same time for making any
premium payment, and the Company shall not be bound by any promise or
representation heretofore or hereafter given by any person other than the
above-named officials, and by them only in writing and signed conjointly as
stated.
The application contains, among others, the following statements:
18. I [the applicant] hereby declare that all the above statements and
answers as well as all those that I may make to the Company's Medical
Examiner in continuation of this application, to be complete, true and
correct to the best of my knowledge and belief, and I hereby agree as
follows:
1. That his declaration, with the answers to be given by me to the Medical
Examiner, shall be the basis of the policy and form part of same.
x x x x x x x x x
3. That the said policy shall not take effect until the first premium has been
paid and the policy has been delivered to and accepted by me, while I am in
good health.
4. That the agent taking this application has no authority to make, modify
or discharge contracts, or to waive any of the Company's rights or
requirements.
5. My acceptance of any policy issued on this application will constitute a
ratification by me of any corrections in or additions to this application
made by the Company in the space provided "For Home Office Corrections
or Additions Only." I agree that photographic copy of this applications as
corrected or added to shall constitute sufficient notice to me of the
changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are null
and void ab initio and that all that the respondents are entitled to is the refund of
the premiums paid thereon. After a careful re-examination of the facts and the law,
we are persuaded that petitioner's contention is correct. To the reasons adduced in
the dissenting opinion heretofore published, we only desire to add the following
considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in blank
and authorized the soliciting agent and/or medical examiner of the Company to
write the answers for him, he made them his own agents for that purpose, and he
was responsible for their acts in that connection. If they falsified the answers for
him, he could not evade the responsibility for he falsification. He was not supposed
to sign the application in blank. He knew that the answers to the questions therein
contained would be "the basis of the policy," and for that every reason he was
required with his signature to vouch for truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the
insured acted in connivance with the soliciting agent and the medical examiner of
the Company in accepting the policies in question. Above the signature of the
applicant is the printed statement or representation: " . . . I am a proper subject for
life insurance." In another sheet of the same application and above another
signature of the applicant was also printed this statement: "That the said policy
shall not take effect until he first premium has been paid and the policy as been
delivered to and accepted by me, while I am in good health." When the applicant
signed the application he was "having difficulty in breathing, . . . with a very high
fever." He had gone three times to the Santol Sanatorium and had X-ray pictures
taken of his lungs. He therefore knew that he was not "a proper subject for life
insurance." When he accepted the policy, he knew that he was not in good health.
Nevertheless, he not only accepted the first policy of P20,000 but then and there
applied for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to
read the answers contained in the photostatic copy of the application attached to
and made a part of the policy before he accepted it and paid the premium thereon.
He must have notice that the answers to the questions therein asked concerning his
clinical history were false, and yet he accepted the first policy and applied for
another. In any event, he obligated himself to read the policy when he subscribed
to this statement: "My acceptance of any policy issued on this application will
constitute a ratification by me of any corrections in or additions to this application
made by the Company . . ." By accepting the policy he became charged with
knowledge of its contents, whether he actually read it or not. He could not ostrich-
like hide his head from it in order to avoid his part of the bargain and at the same
time claim the benefit thereof. He knew, or was chargeable with knowledge, from
the very terms of the two policies sued upon (one of which is printed in English and
the other in Spanish) that the soliciting agent and the medical examiner had no
power to bind the Company by any verbal promise or oral representation. The
insured, therefore, had no right to rely and we cannot believe he relied in good
faith upon the oral representation. The insured, therefore, had no right to rely
and we cannot believe he relied in good faith upon the oral representation of
said agent and medical examiner that he (the applicant) was a fit subject for
insurance notwithstanding that he had been and was still suffering with advanced
pulmonary tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude
that the insured was a coparticipant, and coresponsible with Agent David and
Medical Examiner Valdez, in the fraudulent procurement of the policies in question
and that by reason thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the
Court of Appeals is hereby reversed. Let another judgment be entered in favor of
the respondents and against the petitioner for the refund of the premiums
amounting to P1,389, with legal interest thereon from the date of the complaint,
and without any finding as to costs.







G.R. No. L-47593 September 13, 1941
THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,
vs.
SERAFIN D. FELICIANO and ANGEL, FLORENDA, EUGENIO, HERMINIO and LETICIA,
all surnamed FELICIANO, represented by their guardian ad litem SERAFIN D.
FELICIANO, respondents.
LAUREL, J.:
One Evaristo Feliciano filed an application for insurance with the herein petitioner
upon the solicitation of one of its agents. Two insurance policies to the aggregate
amount of P25,000 were issued to him. Feliciano died on September 29, 1935. The
defendant company refused to pay on the ground that the policies were
fraudulently obtained, the insured having given false answers and statements in the
application as well as in the medical report. The present action was brought to
recover on said policies. The lower court rendered judgment in favor of the
plaintiffs. The lower court found that at the time Feliciano filed his application and
at the time he was subjected to physical examination by the medical examiner of
the herein petitioner, he was already suffering from tuberculosis. This fact appears
in the negative both in the application and in the medical report. The lower court,
after an exhaustive examination of the conflicting testimonies, also found that
Feliciano was made to sign the application and the examiner's report in blank, and
that afterwards the blank spaces therein were filled in by the agent and the medical
examiner, who made it appear therein that Feliciano was a fit subject for insurance.
The lower court also held that neither the insured nor any member of his family
concealed the real state of health of the insured. That as a matter of fact the
insured, as well as the members of his family, told the agent and the medical
examiner that the applicant had been sick and coughing for sometime and that he
had also gone three times to the Santol Sanatarium. On appeal, this finding of facts
of the lower court was sustained by the Court of Appeals. This concludes the
controversy over the facts in so far as this Court is concerned.
The first assignment of error of the petitioner raises the question we are now called
upon to decide:
The Court of Appeals erred in holding that an insurance company has no right to
avoid a policy where its agent knowingly and intentionally wrote down the answers
in the application differing from those made by the insured, in disregard of the
exception that when the agent, instead of serving the interests of his principal, acts
in his own or another's interest and adversely to that of his principal, the said
principal is not bound by said acts of the agent."
On the proposition thus presented, there are two main avenues of approach
indicated: one leading to the validation of a policy where its agent, without fraud,
collusion or bad faith on the part of the insured, falsified the answers given by the
insured; and the other, leading to the avoidance of the policy under the
circumstances. We see no need for an extended discussion of the conflicting
authorities. Whenever courts are given the choice between two conflicting
principles, the determinative fact which should sway them is the conformity of its
contemplated course to reason and to "the common sense of the situation." The
life of the law is not only logic but experience.
The phenomenal growth of insurance from almost nothing a hundred years ago to
its present gigantic proportion is not of the outstanding marvels of present-day
business life. The demand for economic security, the growing need for social
stability, and the clamor for protection against the hazards of cruel-crippling
calamities and sudden economic shocks, have made insurance one of the felt
necessities of modern life. Insurance is no longer a rich man's monopoly. Upon it
are heaped the assured hopes of many families of modest means. It is woven, as it
were, into the very warp and woof of national economy. It touches the holiest and
most sacred ties in the life of man-love of parents, love of wives and love of
children. It is of common knowledge that the selling of insurance today is subjected
to the whilrlwind pressure of modern salesmanship. Insurance companies send
detailed instructions to their agents to solicit and procure applications. These
agents are to be found all over the length and breadth of the land. They are
stimulated to more active efforts by contests and by the keen competition offered
by other rival insurance companies. They are supplied with blank applications and
paid large commissions on the policies secured by them. All transactions are
generally done through these agents. They act, in fact and in theory, as the general
representatives of the insurance companies. They supply all the information ,
prepare and answer the applications, submit the applications to their companies,
conclude the transactions, and otherwise smooth out all difficulties. The agents, in
short, do what the company set them to do.
In the present case, the agent knew all the time the true state of health of the
insured. The insurer's medical examiner approve the application knowing full well
that the applicant was sick. The situation is one in which one of two innocent
parties must bear a loss for his reliance upon a third person. In this case, it was the
insurer who gave the agent authority to deal with the applicant. It was the one who
selected the agent, thus implying that the insured could put his trust on him. It was
the one who drafted and accepted the policy and consummated the contract. It
seems reasonable that as between the two of them, the one who employed and
gave character to the third person as its agent should be the one to bear the loss.
The company received the money of the applicant as the price of the risk to be
taken by it. If the policy should be avoided, it must be because it was void from the
very beginning, and the result would be that the insurer, while it received the
money, never assumed any risk. The result would be, in the language of one of the
cases, "to place every simple or uneducated person seeking insurance at the mercy
of the insurer who could, through its agent, insert in every application, unknown to
the applicant and over his signature, some false statements which would enable
him to avoid all liability while retaining the price paid for the supposes insurance."
(State Insurance Company v. Taylor, 14 Colo. 499, 24 Pac. 333.) The weight of
authority is that if an agent of the insurer, after obtaining from an applicant for
insurance a correct and truthful answer to interrogatories contained in the
application for insurance, without knowledge of the applicant fills in false answers,
either fraudulently or otherwise, the insurer cannot assert the falsity of such
answers as a defense to liability on the policy, and this is true generally without
regard to the subject matter of the answers or the nature of the agent's duties or
limitations on his authority, at least if not brought to the attention of the applicant.
The fact that the insured did not read the application which he signed, is not
indicative of bad faith. It has been held that it is not negligence for the insured to
sign an application without first reading it if the insurer by its conduct in appointing
the agent influenced the insured to place trust and confidence in the agent. (Den
Hartog v. Home Nat. Ins. Asso., 197 Iowa, 143 196 N. W. 944.) As the court said in
the case of Germania L. Ins. Co. v. Lunkebiemer, 127 Ind. 538, 26 N. E. 1082, "Nor
can it be said that the assured, who has fully, frankly, truthfully, and in good faith
answered all the required questions, is guilty of negligence in signing, without
reading, the application which is thereupon prepared by the agent. He is justified in
assuming that the agent has, with equal good faith, truthfully recorded the answers
given him. He may well say to the company: "You accredited this man to me as your
representative and I signed the application thus prepared by him, relying upon the
character which you gave him when you commissioned him to come to me as your
agent. If he acted dishonestly in the matter, you and not I must suffer the
consequences.' ..." In the instant case, it has been proved that the insured could not
read English, the language in which the application was written, and that after the
contract was signed, it was kept by his mother. As a consequence, the insured had
no opportunity to read or correct any misstatement therein. (Bill of Exceptions, pp.
60-61.)
We have not been insensible to the appeal that the course we have followed may
lead to fraud and work hardship on insurance companies, for it would be easy for
insurance agents and applicants to insert false answers in their applicants to insert
false answers in their applications for insurance. This means that it is to the
particular interest of these companies to exercise greater care in the selection of
their agents and examiners. Their protection is still in their own hands and which
may be achieved by other means. Withal, the attainment of a common good may
involve impairment and even sacrifice of beneficial interests of a particular group,
but in life, compromise is inevitable until the hour of doom strikes.
The petition is hereby dismissed and the judgment sought to be reviewed is
affirmed with costs against the petitioner. So ordered.


















G.R. No. 92492 June 17, 1993
THELMA VDA. DE CANILANG, petitioner,
vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, respondents.
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 fro 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."
On 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, 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 plus legal interest and P2,000.00 as attorney's
fees after holding that:
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. 847 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 Appealed 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 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.
Petitioner Thelma Canilang is now before this Court on a Petition for Review
on Certiorari alleging that:
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:
MEDICAL DECLARATION
I hereby declare that:
(1) I have not been confined in any hospital, sanitarium or
infirmary, nor receive any medical or surgical advice/attention
within the last five (5) years.
(2) I have never been treated nor consulted a physician for a heart
condition, high blood pressure, cancer, diabetes, lung, kidney,
stomach disorder, or any other physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
______________________________________________________
__________________________
GENERAL DECLARATION
I hereby declare that all the foregoing answers and statements
are complete, true and correct. I herebyagree that if there be any
fraud or misrepresentation in the above statements material to
the risk, the INSURANCE COMPANY upon discovery within two (2)
years from the effective date of insurance shall have the right to
declare such insurance null and void. That the liabilities of the
Company under the said Policy/TA/Certificate shall accrue and
begin only from the date of commencement of risk stated in the
Policy/TA/Certificate, provided that the first premium is paid and
the Policy/TA/Certificate is delivered to, and accepted by me in
person, when I am in actual good health.
Signed at Manila his 4th day of August, 1992.
Illegible

Signature of Applicant.
12

We note that in addition to the negative statements made by Mr. Canilang in
paragraph 1 and 2 of the medical declaration, he failed to disclose in the
appropriate space, under the caption "Exceptions," that he had twice consulted Dr.
Wilfredo B. Claudio who had found him to be suffering from "sinus tachycardia" and
"acute bronchitis."
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.
xxx xxx xxx
Sec. 28. Each party to a contract of insurance must communicate
to the other, in good faith, all factorswithin 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:
Sec. 31. Materially 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:
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 heart disease, including myocardial infarction, and
heart failure per se. (Henry J.L. Marriot, M.D.,Electrocardiography,
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
prescribed Trazepam, (Philippine Index of Medical
Specialties (PIMS), Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-
anxiety, anti-convulsant, muscle-relaxant; and Aptin, (Idem, p.
36) a cardiac drug, for palpitations and nervous heart. Such
treatment could have been a very material information to the
insurer in determining the action to be take on Canilang's
application for life insurance coverage.
14

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 medicines prescribed by such doctor, in
the insurance application, it may be reasonably assumed that Great Pacific would
have made further inquiries and would have probably refused to issue a non-
medical insurance policy or, at the very least, required a higher premium for the
same coverage.
15
The materiality of the information withheld by Great Pacific did
not depend upon the state of mind of Jaime Canilang. A 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 ensue. Materiality relates rather to the "probable and
reasonable influence of the facts" upon the party to whom the communication
should have been made, in assessing the risk involved in making or omitting to
make further inquiries and in accepting the application for insurance; that
"probable and reasonable influence of the facts" concealed must, of course, be
determined objectively, by the judge ultimately.
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:
. . . if anything, the waiver of medical examination [in a non-
medical insurance contract] renders even more material the
information required of the applicant concerning previous
condition of health and diseases suffered, for such information
necessarily constitutes an important factor which the insurer
takes into consideration in deciding whether to issue the policy or
not . . . .
17
(Emphasis supplied)
The Insurance Commissioner had also ruled that the failure of Great Pacific to
convey certain information to the insurer was not "intentional" in nature, for the
reason that Jaime Canilang believed that he was suffering from minor ailment like a
common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up
to 1985, that is, throughout the time range material for present purposes, provided
that:
Sec. 27. A concealment entitles the injured party to rescind a
contract of insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had
provided:
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:
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 unitentional" 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 his 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."
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.
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 the costs.

























G.R. No. 105135 June 22, 1995
SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
BACANI, respondents.
QUIASON, J.:
This is a petition for review for 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 at
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 disclose 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:
5. Within the past 5 years have you:
a) consulted any doctor or other health
practitioner?
b) submitted to:
EGG?
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:
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question 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 of 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:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and against the defendant, 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 costs
of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts concealed
by the insured were made in good faith and under a belief that they need not be
disclosed. Moreover, it held that the health history of the insured was immaterial
since the insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial
court. The appellate court ruled that petitioner cannot avoid its obligation by
claiming concealment because the cause of death was unrelated to the facts
concealed by the insured. It also sustained the finding of the trial court that matters
relating to the health history of the insured were irrelevant since 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.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are binding
on this Court is not absolute and admits of exceptions, such as when 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:
A neglect to communicate that which a party knows and ought to
communicate, is called concealment.
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, "goad 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. Philippine American Life Insurance Company, 7 SCRA 316 (1963), that
" . . . the waiver of a medical examination [in a non-medical insurance contract]
renders even more material the information required of the applicant concerning
previous condition of health and diseases suffered, for such information necessarily
constitutes an important factor which the insurer takes into consideration in
deciding whether to issue the policy or not . . . "
Moreover, such argument of private respondents would make Section 27 of the
Insurance Code, which allows the injured party to rescind a contract of insurance
where there is concealment, ineffective (See Vda. de Canilang v. Court of
Appeals, supra).
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.































G.R. No. L-20853 May 29, 1967
BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,
vs.
ENRIQUE MORA, ET AL., defendants-appellees.
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,
x x x x x x x x x
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.1wph1.t
x x x x x x x x x
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;
x x x x x x x x x
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 stipulationpour
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.




























































G.R. No. 78848 November 14, 1988
SHERMAN SHAFER, petitioner,
vs.
HON. JUDGE, REGIONAL TRIAL COURT OF OLONGAPO CITY, BRANCH 75, and
MAKATI INSURANCE COMPANY, INC., respondents.
PADILLA, J.:
This is a petition for review on certiorari of the Order * of the Regional Trial Court,
Olongapo City, Branch 75, dated 24 April 1986 dismissing petitioner's third party
complaint filed in Criminal Case No. 381-85, a prosecution for reckless imprudence
resulting in damage to property and serious physical injuries.
1

On 2 January 1985, petitioner Sherman Shafer obtained a private car policy, GA No.
0889,
2
over his Ford Laser car with Plate No. CFN-361 from Makati Insurance
Company, Inc., for third party liability (TPL).<re||an1w> During the effectivity
of the policy, an information
3
for reckless imprudence resulting in damage to
property and serious physical injuries was filed against petitioner. The information
reads as follows:
That on or about the seventeeth (17th) day of May 1985, in the
City of Olongapo, Philippines, and within the jurisdiction of this
Honorable Court, the above-named accused, being then the driver
and in actual physical control of a Ford Laser car bearing Plate No.
CFN-361, did then and there wilfully, unlawfully and criminally
drive, operate and manage the said Ford Laser car in a careless,
reckless and imprudent manner without exercising reasonable
caution, diligence and due care to avoid accident to persons and
damage to property and in disregard of existing traffic rules and
regulations, causing by such carelessness, recklessness and
imprudence the said Ford Laser car to hit and bump a Volkswagen
car bearing Plate No. NJE-338 owned and driven by Felino llano y
Legaspi, thereby causing damage in the total amount of
P12,345.00 Pesos, Philippine Currency, and as a result thereof one
Jovencio Poblete, Sr. who was on board of the said Volkswagen
car sustained physical injuries, to wit:
1. 2 cm. laceration of left side of tongue.
2. 6 cm. laceration with partial transection of muscle (almost full
thickness) left side of face.
3. Full thickness laceration of lower lip and adjacent skin.
which injuries causing [sic] deformity on the face.
4

The owner of the damaged Volkswagen car filed a separate civil action against
petitioner for damages, while Jovencio Poblete, Sr., who was a passenger in the
Volkswagen car when allegedly hit and bumped by the car driven by petitioner, did
not reserve his right to file a separate civil action for damages. Instead, in the
course of the trial in the criminal case, Poblete, Sr. testified on his claim for
damages for the serious physical injuries which he claimed to have sustained as a
result of the accident.
Upon motion, petitioner was granted leave by the former presiding judge of the
trail court to file a third party complaint against the herein private respondent,
Makati Insurance Company, Inc. Said insurance company, however, moved to
vacate the order granting leave to petitioner to file a third party complaint against it
and/or to dismiss the same.
5

On 24 April 1987, the court a quo issued an order dismissing the third party
complaint on the ground that it was premature, based on the premise that unless
the accused (herein petitioner) is found guilty and sentenced to pay the offended
party (Poblete Sr.) indemnity or damages, the third party complaint is without cause
of action. The court further stated that the better procedure is for the accused
(petitioner) to wait for the outcome of the criminal aspect of the case to determine
whether or not the accused, also the third party plaintiff, has a cause of action
against the third party defendant for the enforcement of its third party liability
(TPL) under the insurance contract.
6
Petitioner moved for reconsideration of said
order, but the motion was denied;
7
hence, this petition.
It is the contention of herein petitioner that the dismissal of the third party
complaint amounts to a denial or curtailment of his right to defend himself in the
civil aspect of the case. Petitioner further raises the legal question of whether the
accused in a criminal action for reckless imprudence, where the civil action is jointly
prosecuted, can legally implead the insurance company as third party defendant
under its private car insurance policy, as one of his modes of defense in the civil
aspect of said proceedings.
On the other hand, the insurance company submits that a third party complaint is,
under the rules, available only if the defendant has a right to demand contribution,
indemnity, subrogation or any other relief in respect of plaintiff's claim, to minimize
the number of lawsuits and avoid the necessity of bringing two (2) or more suits
involving the same subject matter. The insurance company further contends that
the contract of motor vehicle insurance, the damages and attorney's fees claimed
by accused/third party plaintiff are matters entirely different from his criminal
liability in the reckless imprudence case, and that petitioner has no cause of action
against the insurer until petitioner's liability shall have been determined by final
judgment, as stipulated in the contract of insurance.
8

Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is
primarily intended to provide compensation for the death or bodily injuries suffered
by innocent third parties or passengers as a result of a negligent operation and use
of motor vehicles.
9
The victims and/or their dependents are assured of immediate
financial assistance, regardless of the financial capacity of motor vehicle owners.
The liability of the insurance company under the Compulsory Motor Vehicle Liability
Insurance is for loss or damage. Where an insurance policy insures directly against
liability, the insurer's liability accrues immediately upon the occurrence of the injury
or event upon which the liability depends, and does not depend on the recovery of
judgment by the injured party against the insured.
10

The injured for whom the contract of insurance is intended can sue directly the
insurer. The general purpose of statutes enabling an injured person to proceed
directly against the insurer is to protect injured persons against the insolvency of
the insured who causes such injury, and to give such injured person a certain
beneficial interest in the proceeds of the policy, and statutes are to be liberally
construed so that their intended purpose may be accomplished. It has even been
held that such a provision creates a contractual relation which inures to the benefit
of any and every person who may be negligently injured by the named insured as if
such injured person were specifically named in the policy.
11

In the event that the injured fails or refuses to include the insurer as party
defendant in his claim for indemnity against the insured, the latter is not prevented
by law to avail of the procedural rules intended to avoid multiplicity of suits. Not
even a "no action" clause under the policy-which requires that a final judgment be
first obtained against the insured and that only thereafter can the person insured
recover on the policy can prevail over the Rules of Court provisions aimed at
avoiding multiplicity of suits.
12

In the instant case, the court a quo erred in dismissing petitioner's third party
complaint on the ground that petitioner had no cause of action yet against the
insurance company (third party defendant). There is no need on the part of the
insured to wait for the decision of the trial court finding him guilty of reckless
imprudence. The occurrence of the injury to the third party immediately gave rise
to the liability of the insurer under its policy.
A third party complaint is a device allowed by the rules of procedure by which the
defendant can bring into the original suit a party against whom he will have a claim
for indemnity or remuneration as a result of a liability established against him in the
original suit.
13
Third party complaints are allowed to minimize the number of
lawsuits and avoid the necessity of bringing two (2) or more actions involving the
same subject matter. They are predicated on the need for expediency and the
avoidance of unnecessary lawsuits. If it appears probable that a second action will
result if the plaintiff prevails, and that this result can be avoided by allowing the
third party complaint to remain, then the motion to dismiss the third party
complaint should be denied.
14

Respondent insurance company's contention that the third party complaint involves
extraneous matter which will only clutter, complicate and delay the criminal case is
without merit. An offense causes two (2) classes of injuries the first is the social
injury produced by the criminal act which is sought to be repaired thru the
imposition of the corresponding penalty, and the second is the personal injury
caused to the victim of the crime, which injury is sought to be compensated thru
indemnity, which is civil in nature.
15

In the instant case, the civil aspect of the offense charged, i.e., serious physical
injuries allegedly suffered by Jovencio Poblete, Sr., was impliedly instituted with the
criminal case. Petitioner may thus raise all defenses available to him insofar as the
criminal and civil aspects of the case are concerned. The claim of petitioner for
payment of indemnity to the injured third party, under the insurance policy, for the
alleged bodily injuries caused to said third party, arose from the offense charged in
the criminal case, from which the injured (Jovencio Poblete, Sr.) has sought to
recover civil damages. Hence, such claim of petitioner against the insurance
company cannot be regarded as not related to the criminal action.
WHEREFORE, the instant petition is GRANTED. The questioned order dated 24 April
1987 is SET ASIDE and a new one entered admitting petitioner's third party
complaint against the private respondent Makati Insurance Company, Inc.








G.R. No. 48049 June 29, 1989
EMILIO TAN, JUANITO TAN, ALBERTO TAN and ARTURO TAN, petitioners,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY, respondents.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the Court of Appeals' decision affirming
the decision of the Insurance Commissioner which dismissed the petitioners'
complaint against respondent Philippine American Life Insurance Company for the
recovery of the proceeds from their late father's policy. The facts of the case as
found by the Court of Appeals are:
Petitioners appeal from the Decision of the Insurance
Commissioner dismissing herein petitioners' complaint against
respondent Philippine American Life Insurance Company for the
recovery of the proceeds of Policy No. 1082467 in the amount of
P 80,000.00.
On September 23,1973, Tan Lee Siong, father of herein
petitioners, applied for life insurance in the amount of P
80,000.00 with respondent company. Said application was
approved and Policy No. 1082467 was issued effective November
6,1973, with petitioners the beneficiaries thereof (Exhibit A).
On April 26,1975, Tan Lee Siong died of hepatoma (Exhibit B).
Petitioners then filed with respondent company their claim for
the proceeds of the life insurance policy. However, in a letter
dated September 11, 1975, respondent company denied
petitioners' claim and rescinded the policy by reason of the
alleged misrepresentation and concealment of material facts
made by the deceased Tan Lee Siong in his application for
insurance (Exhibit 3). The premiums paid on the policy were
thereupon refunded .
Alleging that respondent company's refusal to pay them the
proceeds of the policy was unjustified and unreasonable,
petitioners filed on November 27, 1975, a complaint against the
former with the Office of the Insurance Commissioner, docketed
as I.C. Case No. 218.
After hearing the evidence of both parties, the Insurance
Commissioner rendered judgment on August 9, 1977, dismissing
petitioners' complaint. (Rollo, pp. 91-92)
The Court of Appeals dismissed ' the petitioners' appeal from the Insurance
Commissioner's decision for lack of merit
Hence, this petition.
The petitioners raise the following issues in their assignment of errors, to wit:
A. The conclusion in law of respondent Court that respondent
insurer has the right to rescind the policy contract when insured is
already dead is not in accordance with existing law and applicable
jurisprudence.
B. The conclusion in law of respondent Court that respondent
insurer may be allowed to avoid the policy on grounds of
concealment by the deceased assured, is contrary to the
provisions of the policy contract itself, as well as, of applicable
legal provisions and established jurisprudence.
C. The inference of respondent Court that respondent insurer was
misled in issuing the policy are manifestly mistaken and contrary
to admitted evidence. (Rollo, p. 7)
The petitioners contend that the respondent company no longer had the right to
rescind the contract of insurance as rescission must allegedly be done during the
lifetime of the insured within two years and prior to the commencement of action.
The contention is without merit.
The pertinent section in the Insurance Code provides:
Section 48. Whenever a right to rescind a contract of insurance is
given to the insurer by any provision of this chapter, such right
must be exercised previous to the commencement of an action on
the contract.
After a policy of life insurance made payable on the death of the
insured shall have been in force during the lifetime of the insured
for a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab
initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
According to the petitioners, the Insurance Law was amended and the second
paragraph of Section 48 added to prevent the insurance company from exercising a
right to rescind after the death of the insured.
The so-called "incontestability clause" precludes the insurer from raising the
defenses of false representations or concealment of material facts insofar as health
and previous diseases are concerned if the insurance has been in force for at least
two years during the insured's lifetime. The phrase "during the lifetime" found in
Section 48 simply means that the policy is no longer considered in force after the
insured has died. The key phrase in the second paragraph of Section 48 is "for a
period of two years."
As noted by the Court of Appeals, to wit:
The policy was issued on November 6,1973 and the insured died
on April 26,1975. The policy was thus in force for a period of only
one year and five months. Considering that the insured died
before the two-year period had lapsed, respondent company is
not, therefore, barred from proving that the policy is void ab
initio by reason of the insured's fraudulent concealment or
misrepresentation. Moreover, respondent company rescinded the
contract of insurance and refunded the premiums paid on
September 11, 1975, previous to the commencement of this
action on November 27,1975. (Rollo, pp. 99-100)
xxx xxx xxx
The petitioners contend that there could have been no concealment or
misrepresentation by their late father because Tan Lee Siong did not have to buy
insurance. He was only pressured by insistent salesmen to do so. The petitioners
state:
Here then is a case of an assured whose application was
submitted because of repeated visits and solicitations by the
insurer's agent. Assured did not knock at the door of the insurer
to buy insurance. He was the object of solicitations and visits.
Assured was a man of means. He could have obtained a bigger
insurance, not just P 80,000.00. If his purpose were to
misrepresent and to conceal his ailments in anticipation of death
during the two-year period, he certainly could have gotten a
bigger insurance. He did not.
Insurer Philamlife could have presented as witness its Medical
Examiner Dr. Urbano Guinto. It was he who accomplished the
application, Part II, medical. Philamlife did not.
Philamlife could have put to the witness stand its Agent
Bienvenido S. Guinto, a relative to Dr. Guinto, Again Philamlife did
not. (pp. 138139, Rollo)
xxx xxx xxx
This Honorable Supreme Court has had occasion to denounce the
pressure and practice indulged in by agents in selling insurance. At
one time or another most of us have been subjected to that
pressure, that practice. This court took judicial cognizance of the
whirlwind pressure of insurance selling-especially of the agent's
practice of 'supplying the
information, preparing and answering the
application, submitting the application to their
companies, concluding the transactions and otherwisesmoothing
out all difficulties.
We call attention to what this Honorable Court said in Insular Life v. Feliciano, et al.,
73 Phil. 201; at page 205:
It is of common knowledge that the selling of insurance today is
subjected to the whirlwind pressure of modern salesmanship.
Insurance companies send detailed instructions to their agents to
solicit and procure applications.
These agents are to be found all over the length and breadth of
the land. They are stimulated to more active efforts by contests
and by the keen competition offered by the other rival insurance
companies.
They supply all the information, prepare and answer the
applications, submit the applications to their companies, conclude
the transactions, and otherwise smooth out all difficulties.
The agents in short do what the company set them out to do.
The Insular Life case was decided some forty years ago when the
pressure of insurance salesmanship was not overwhelming as it is
now; when the population of this country was less than one-
fourth of what it is now; when the insurance companies
competing with one another could be counted by the fingers. (pp.
140-142, Rollo)
xxx xxx xxx
In the face of all the above, it would be unjust if, having been
subjected to the whirlwind pressure of insurance salesmanship
this Court itself has long denounced, the assured who dies within
the two-year period, should stand charged of fraudulent
concealment and misrepresentation." (p. 142, Rollo)
The legislative answer to the arguments posed by the petitioners is the
"incontestability clause" added by the second paragraph of Section 48.
The insurer has two years from the date of issuance of the insurance contract or of
its last reinstatement within which to contest the policy, whether or not, the
insured still lives within such period. After two years, the defenses of concealment
or misrepresentation, no matter how patent or well founded, no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by
insurance companies to avoid liability. The petitioners' interpretation would give
rise to the incongruous situation where the beneficiaries of an insured who dies
right after taking out and paying for a life insurance policy, would be allowed to
collect on the policy even if the insured fraudulently concealed material facts.
The petitioners argue that no evidence was presented to show that the medical
terms were explained in a layman's language to the insured. They state that the
insurer should have presented its two medical field examiners as witnesses.
Moreover, the petitioners allege that the policy intends that the medical
examination must be conducted before its issuance otherwise the insurer "waives
whatever imperfection by ratification."
We agree with the Court of Appeals which ruled:
On the other hand, petitioners argue that no evidence was
presented by respondent company to show that the questions
appearing in Part II of the application for insurance were asked,
explained to and understood by the deceased so as to prove
concealment on his part. The same is not well taken. The
deceased, by affixing his signature on the application form,
affirmed the correctness of all the entries and answers appearing
therein. It is but to be expected that he, a businessman, would
not have affixed his signature on the application form unless he
clearly understood its significance. For, the presumption is that a
person intends the ordinary consequence of his voluntary act and
takes ordinary care of his concerns. [Sec. 5(c) and (d), Rule 131,
Rules of Court].
The evidence for respondent company shows that on September
19,1972, the deceased was examined by Dr. Victoriano Lim and
was found to be diabetic and hypertensive; that by January, 1973,
the deceased was complaining of progressive weight loss and
abdominal pain and was diagnosed to be suffering from
hepatoma, (t.s.n. August 23, 1976, pp. 8-10; Exhibit 2). Another
physician, Dr. Wenceslao Vitug, testified that the deceased came
to see him on December 14, 1973 for consolation and claimed to
have been diabetic for five years. (t.s.n., Aug. 23,1976, p. 5;
Exhibit 6) Because of the concealment made by the deceased of
his consultations and treatments for hypertension, diabetes and
liver disorders, respondent company was thus misled into
accepting the risk and approving his application as medically
standard (Exhibit 5- C) and dispensing with further medical
investigation and examination (Exhibit 5-A). For as long as no
adverse medical history is revealed in the application form, an
applicant for insurance is presumed to be healthy and physically
fit and no further medical investigation or examination is
conducted by respondent company. (t.s.n., April 8,1976, pp. 6-8).
(Rollo, pp. 96-98)
There is no strong showing that we should apply the "fine print" or "contract of
adhesion" rule in this case. (Sweet Lines, Inc. v. Teves, 83 SCRA 361 [1978]). The
petitioners cite:
It is a matter of common knowledge that large amounts of money
are collected from ignorant persons by companies and
associations which adopt high sounding titles and print the
amount of benefits they agree to pay in large black-faced type,
following such undertakings by fine print conditions which destroy
the substance of the promise. All provisions, conditions, or
exceptions which in any way tend to work a forfeiture of the
policy should be construed most strongly against those for whose
benefit they are inserted, and most favorably toward those
against whom they are meant to operate. (Trinidad v. Orient
Protective Assurance Assn., 67 Phil. 184)
There is no showing that the questions in the application form for insurance
regarding the insured's medical history are in smaller print than the rest of the
printed form or that they are designed in such a way as to conceal from the
applicant their importance. If a warning in bold red letters or a boxed warning
similar to that required for cigarette advertisements by the Surgeon General of the
United States is necessary, that is for Congress or the Insurance Commission to
provide as protection against high pressure insurance salesmanship. We are limited
in this petition to ascertaining whether or not the respondent Court of Appeals
committed reversible error. It is the petitioners' burden to show that the factual
findings of the respondent court are not based on substantial evidence or that its
conclusions are contrary to applicable law and jurisprudence. They have failed to
discharge that burden.
WHEREFORE, the petition is hereby DENIED for lack of merit. The questioned
decision of the Court of Appeals is AFFIRMED.































G.R. No. 186983 February 22, 2012
MA. LOURDES S. FLORENDO, Petitioner,
vs.
PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE ABCEDE, Respondents.
D E C I S I O N
ABAD, J.:
This case is about an insureds 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.
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, Perlas
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

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584
8
to
Manuel, with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time,
Manuel paid his quarterly premiums.
9

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 under her husbands 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

On May 3, 1999 Philam Plans wrote Lourdes a letter,
12
declining her claim. Philam
Life found that Manuel was on maintenance medicine for his heart and had an
implanted 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
prompting her to file the present action against the pension plan
company before the Regional Trial Court (RTC) of Quezon City.
15

On March 30, 2006 the RTC rendered judgment,
16
ordering Philam Plans, Perla and
Ma. Celeste, solidarily, to pay Lourdes all the benefits from her husbands pension
plan, namely: P997,050.00, the proceeds of his term insurance, and P2,890,000.00
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 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 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

Issues Presented
The issues presented in this case are:
1. Whether or not the CA erred in finding Manuel guilty of concealing his
illness when he kept blank and did not answer questions in his pension
plan application regarding the ailments he suffered from;
2. Whether or not the CA erred in holding that Manuel was bound by the
failure of respondents Perla and Ma. Celeste to declare the condition of
Manuels health in the pension plan application; and
3. Whether or not the CA erred in finding that Philam Plans approval of
Manuels pension plan application and acceptance of his premium
payments precluded it from denying Lourdes claim.
Rulings of the Court
One. Lourdes points out that, seeing the unfilled spaces in Manuels 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 Manuels 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

But Lourdes is shifting to Philam Plans the burden of putting on the pension plan
application the true state of Manuels 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:
x x x x
(c) I have never been treated for heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical
impairment in the last five years.
(d) I am in good health and physical condition.
If your answer to any of the statements above reveal otherwise, please give details
in the space provided for:
Date of confinement : ____________________________
Name of Hospital or Clinic : ____________________________
Name of Attending Physician : ____________________________
Findings : ____________________________
Others: (Please specify) : ____________________________
x x x x.
20
(Emphasis supplied)
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 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 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 of diabetes mellitus, at that time.
22

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 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 Perlas knowledge of Manuels 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, Manuels 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, Perlas 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 all the information stated in it or had someone do it under his direction.
Thus:
APPLICATION FOR PENSION PLAN
(Comprehensive)
I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program
described herein in accordance with the General Provisions set forth in this
application and hereby certify that the date and other information stated herein are
written by me or under my direction. x x x.
29
(Emphasis supplied)
Assuming that it was Perla who filled up the application form, Manuel is still bound
by what it contains since he certified that he authorized her action. Philam Plans
had every right to act on the faith of that certification.
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 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 Manuels 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

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
1wphi1
The above incontestability clause precludes the insurer from disowning liability
under the policy it issued on the ground of concealment or misrepresentation
regarding the health of the insured after a year of its issuance.
Since Manuel died on the eleventh month following the issuance of his plan,
36
the
one year incontestability period has not yet set in. Consequently, Philam Plans was
not barred from questioning Lourdes entitlement to the benefits of her husbands
pension plan.
WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals
in CA-G.R. CV 87085 dated December 18, 2007.
SO ORDERED.

G.R. No. 71360 July 16, 1986
DEVELOPMENT INSURANCE CORPORATION, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, and PHILIPPINE UNION REALTY DEVELOPMENT
CORPORATION,respondents.
CRUZ, J.:
A fire occurred in the building of the private respondent and it sued for recovery of
damages from the petitioner on the basis of an insurance contract between them.
The petitioner allegedly failed to answer on time and was declared in default by the
trial court. A judgment of default was subsequently rendered on the strength of the
evidence submitted ex parte by the private respondent, which was allowed full
recovery of its claimed damages. On learning of this decision, the petitioner moved
to lift the order of default, invoking excusable neglect, and to vacate the judgment
by default. Its motion was denied. It then went to the respondent court, which
affirmed the decision of the trial court in toto. The petitioner is now before us,
hoping presumably that it will fare better here than before the trial court and the
Intermediate Appellate Court. We shall see.
On the question of default, the record argues mightily against it. It is indisputable
that summons was served on it, through its senior vice-president, on June 19,1980.
On July 14, 1980, ten days after the expiration of the original 15-day period to
answer (excluding July 4), its counsel filed an ex parte motion for an extension of
five days within which to file its answer. On July 18, 1980, the last day of the
requested extension-which at the time had not yet been granted-the same counsel
filed a second motion for another 5-day extension, fourteen days after the expiry of
the original period to file its answer. The trial court nevertheless gave it five days
from July 14, 1980, or until July 19, 1980, within which to file its answer. But it did
not. It did so only on July 26, 1980, after the expiry of the original and extended
periods, or twenty-one days after the July 5, deadline. As a consequence, the trial
court, on motion of the private respondent filed on July 28, 1980, declared the
petitioner in default. This was done almost one month later, on August 25, 1980.
Even so, the petitioner made no move at all for two months thereafter. It was only
on October 27, 1980, more than one month after the judgment of default was
rendered by the trial court on September 26, 1980, that it filed a motion to lift the
order of default and vacate the judgment by default.
1

The pattern of inexcusable neglect, if not deliberate delay, is all too clear. The
petitioner has slumbered on its right and awakened too late. While it is true that
in Trajano v. Cruz,
2
which it cites, this Court declared "that judgments by default
are generally looked upon with disfavor," the default judgment in that case was set
aside precisely because there was excusable neglect, Summons in that case was
served through "an employee in petitioners' office and not the person in-charge,"
whereas in the present case summons was served on the vice-president of the
petitioner who however refused to accept it. Furthermore, as Justice Guerrero
noted, there was no evidence showing that the petitioners in Trajano intended to
unduly delay the case.
Besides, the petitioners in Trajano had a valid defense against the complaint filed
against them, and this justified a relaxation of the procedural rules to allow full
hearing on the substantive issues raised. In the instant case, by contrast, the
petitioner must just the same fail on the merits even if the default orders were to
be lifted. As the respondent Court observed, "Nothing would be gained by having
the order of default set aside considering the appellant has no valid defense in its
favor."
3

The petitioner's claim that the insurance covered only the building and not the
elevators is absurd, to say the least. This Court has little patience with puerile
arguments that affront common sense, let alone basic legal principles with which
even law students are familiar. The circumstance that the building insured is seven
stories high and so had to be provided with elevators-a legal requirement known to
the petitioner as an insurance company-makes its contention all the more
ridiculous.
No less preposterous is the petitioner's claim that the elevators were insured after
the occurrence of the fire, a case of shutting the barn door after the horse had
escaped, so to speak.
4
This pretense merits scant attention. Equally undeserving of
serious consideration is its submission that the elevators were not damaged by the
fire, against the report of The arson investigators of the INP
5
and, indeed, its own
expressed admission in its answer
6
where it affirmed that the fire "damaged or
destroyed a portion of the 7th floor of the insured building and more particularly a
Hitachi elevator control panel."
7

There is no reason to disturb the factual findings of the lower court, as affirmed by
the Intermediate Appellate Court, that the heat and moisture caused by the fire
damaged although they did not actually burn the elevators. Neither is this Court
justified in reversing their determination, also factual, of the value of the loss
sustained by the private respondent in the amount of P508,867.00.
The only remaining question to be settled is the amount of the indemnity due to
the private respondent under its insurance contract with the petitioner. This will
require an examination of this contract, Policy No. RY/F-082, as renewed, by virtue
of which the petitioner insured the private respondent's building against fire for
P2,500,000.00.
8

The petitioner argues that since at the time of the fire the building insured was
worth P5,800,000.00, the private respondent should be considered its own insurer
for the difference between that amount and the face value of the policy and should
share pro rata in the loss sustained. Accordingly, the private respondent is entitled
to an indemnity of only P67,629.31, the rest of the loss to be shouldered by it alone.
In support of this contention, the petitioner cites Condition 17 of the policy, which
provides:
If the property hereby insured shall, at the breaking out of any
fire, be collectively of greater value than the sum insured thereon
then the insured shall be considered as being his own insurer for
the difference, and shall bear a ratable proportion of the loss
accordingly. Every item, if more than one, of the policy shall be
separately subject to this condition.
However, there is no evidence on record that the building was worth P5,800,000.00
at the time of the loss; only the petitioner says so and it does not back up its self-
serving estimate with any independent corroboration. On the contrary, the building
was insured at P2,500,000.00, and this must be considered, by agreement of the
insurer and the insured, the actual value of the property insured on the day the fire
occurred. This valuation becomes even more believable if it is remembered that at
the time the building was burned it was still under construction and not yet
completed.
The Court notes that Policy RY/F-082 is an open policy and is subject to the express
condition that:
Open Policy
This is an open policy as defined in Section 57 of the Insurance
Act. In the event of loss, whether total or partial, it is understood
that the amount of the loss shall be subject to appraisal and the
liability of the company, if established, shall be limited to the
actual loss, subject to the applicable terms, conditions, warranties
and clauses of this Policy, and in no case shall exceed the amount
of the policy.
As defined in the aforestated provision, which is now Section 60 of the Insurance
Code, "an open policy is one in which the value of the thing insured is not agreed
upon but is left to be ascertained in case of loss. " This means that the actual loss,
as determined, will represent the total indemnity due the insured from the insurer
except only that the total indemnity shall not exceed the face value of the policy.
The actual loss has been ascertained in this case and, to repeat, this Court will
respect such factual determination in the absence of proof that it was arrived at
arbitrarily. There is no such showing. Hence, applying the open policy clause as
expressly agreed upon by the parties in their contract, we hold that the private
respondent is entitled to the payment of indemnity under the said contract in the
total amount of P508,867.00.
The refusal of its vice-president to receive the private respondent's complaint, as
reported in the sheriff's return, was the first indication of the petitioner's intention
to prolong this case and postpone the discharge of its obligation to the private
respondent under this agreement. That intention was revealed further in its
subsequent acts-or inaction-which indeed enabled it to avoid payment for more
than five years from the filing of the claim against it in 1980. The petitioner has
temporized long enough to avoid its legitimate responsibility; the delay must and
does end now.
WHEREFORE, the appealed decision is affirmed in full, with costs against the
petitioner.
SO ORDERED.











G.R. No. 89741 March 13, 1991
SUN INSURANCE OFFICE, LTD., petitioner,
vs.
COURT OF APPEALS and EMILIO TAN, respondents.
PARAS, J.:p
This is a petition for review on certiorari of the June 20, 1989 decision
1
of the Court
of Appeals in CA-G.R. SP. Case No. 13848 affirming the November 3, 1987 and
January 14, 1988 orders of the Regional Trial Court
2
of Iloilo, Branch 27, in Civil
Case No. 16817, denying the motion to dismiss and the subsequent motion for
reconsideration; and the August 22, 1989 resolution of the same court denying the
motion for reconsideration.
On August 15, 1983, herein private respondent Emilio Tan took from herein
petitioner a P300,000.00 property insurance policy to cover his interest in the
electrical supply store of his brother housed in a building in Iloilo City. Four (4) days
after the issuance of the policy, the building was burned including the insured store.
On August 20, 1983, Tan filed his claim for fire loss with petitioner, but on February
29, 1984, petitioner wrote Tan denying the latter's claim. On April 3, 1984, Tan
wrote petitioner, seeking reconsideration of the denial of his claim. On September
3, 1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3,
1984 request for reconsideration. Petitioner answered the letter on October 11,
1985, advising Tan's counsel that the Insurer's denial of Tan's claim remained
unchanged, enclosing copies of petitioners' letters of February 29, 1984 and May
17, 1985 (response to petition for reconsideration). On November 20, 1985, Tan
filed Civil Case No. 16817 with the Regional Trial Court of Iloilo, Branch 27 but
petitioner filed a motion to dismiss on the alleged ground that the action had
already prescribed. Said motion was denied in an order dated November 3, 1987;
and petitioner's motion for reconsideration was also denied in an order dated
January 14, 1988.
Petitioner went to the Court of Appeals and sought the nullification of the said Nov.
3, 1987 and January 14, 1988 orders, but the Court of Appeals, in its June 20, 1989
decision denied the petition and held that the court a quomay continue until its
final termination.
A motion for reconsideration was filed, but the same was denied by the Court of
Appeals in its resolution of August 22, 1989 (Rollo, pp. 42-43).
Hence, the instant petition.
The Second Division of this Court, in its resolution of December 18, 1989 resolved to
give due course to the petition and to require the parties to submit simultaneous
memoranda (Ibid., p. 56).
Petitioner raised two (2) issues which may be stated in substance, as follows:
I
WHETHER OR NOT THE FILING OF A MOTION FOR
RECONSIDERATION INTERRUPTS THE TWELVE (12) MONTHS
PRESCRIPTIVE PERIOD TO CONTEST THE DENIAL OF THE
INSURANCE CLAIM; and
II
WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE
DEEMED FINAL ONLY IF IT CONTAINS WORDS TO THE EFFECT
THAT THE DENIAL IS FINAL.
The answer to the first issue is in the negative.
While it is a cardinal principle of insurance law that a policy or contract of insurance
is to be construed liberally in favor of the insured and strictly against the insurer
company, yet, 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 (Pacific Banking Corp. v. Court of Appeals,
168 SCRA 1 [1988]).
Condition 27 of the Insurance Policy, which is the subject of the conflicting
contentions of the parties, reads:
27. Action or suit clause If a claim be made and rejected and an
action or suit be not commenced either in the Insurance
Commission or in any court of competent jurisdiction within
twelve (12) months from receipt of notice of such rejection, or in
case of arbitration taking place as provided herein, within twelve
(12) months after due notice of the award made by the arbitrator
or arbitrators or umpire, then the claim shall for all purposes be
deemed to have been abandoned and shall not thereafter be
recoverable hereunder.
As the terms are very clear and free from any doubt or ambiguity whatsoever, it
must be taken and understood in its plain, ordinary and popular sense pursuant to
the above-cited principle laid down by this Court.
Respondent Tan, in his letter addressed to the petitioner insurance company dated
April 3, 1984 (Rollo, pp. 50-52), admitted that he received a copy of the letter of
rejection on April 2, 1984. Thus, the 12-month prescriptive period started to run
from the said date of April 2, 1984, for such is the plain meaning and intention of
Section 27 of the insurance policy.
While the question of whether or not the insured was definitely advised of the
rejection of his claim through the letter (Rollo, pp. 48-49) of petitioner dated
February 29, 1984, may arise, the certainty of the denial of Tan's claim was clearly
manifested in said letter, the pertinent portion of which reads:
We refer to your claim for fire loss of 20th August, 1983 at
Huervana St., La Paz, Iloilo City.
We now have the report of our adjusters and after a thorough
and careful review of the same and the accompanying documents
at hand, we are rejecting, much to our regrets, liability for the
claim under our policies for one or more of the following reasons:
1. xxx xxx xxx
2. xxx xxx xxx
For your information, we have referred all these matters to our
lawyers for their opinion as to the compensability of your claim,
particularly referring to the above violations. It is their opinion
and in fact their strong recomendation to us to deny your claim.
By this letter, we do not intend to waive or relinquish any of our
rights or defenses under our policies of insurance.
It is also important to note the principle laid down by this Court in the case of Ang
v. Fulton Fire Insurance Co., (2 SCRA 945 [1961]), to wit:
The condition contained in an insurance policy that claims must
be presented within one year after rejection is not merely a
procedural requirement but an important matter essential to a
prompt settlement of claims against insurance companies as it
demands that insurance suits be brought by the insured while the
evidence as to the origin and cause of destruction have not yet
disappeared.
In enunciating the above-cited principle, this Court had definitely settled the
rationale for the necessity of bringing suits against the Insurer within one year from
the rejection of the claim. The contention of the respondents that the one-year
prescriptive period does not start to run until the petition for reconsideration had
been resolved by the insurer, runs counter to the declared purpose for requiting
that an action or suit be filed in the Insurance Commission or in a court of
competent jurisdiction from the denial of the claim. To uphold respondents'
contention would contradict and defeat the very principle which this Court had laid
down. Moreover, it can easily be used by insured persons as a scheme or device to
waste time until any evidence which may be considered against them is destroyed.
It is apparent that Section 27 of the insurance policy was stipulated pursuant to
Section 63 of the Insurance Code, which states that:
Sec. 63. A condition, stipulation or agreement in any policy of
insurance, limiting the time for commencing an action thereunder
to a period of less than one year from the time when the cause of
action accrues, is void.
The crucial issue in this case is: When does the cause of action accrue?
In support of private respondent's view, two rulings of this Court have been cited,
namely, the case of Eagle Star Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), where
the Court held:
The right of the insured to the payment of his loss accrues from
the happening of the loss. However, the cause of action in an
insurance contract does not accrue until the insured's claim is
finally rejected by the insurer. This is because before such final
rejection there is no real necessity for bringing suit.
and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151
[1968], holding that:
Since "cause of action" requires as essential elements not only a
legal right of the plaintiff and a correlated obligation of the
defendant in violation of the said legal right, the cause of action
does not accrue until the party obligated (surety) refuses,
expressly or impliedly, to comply with its duty (in this case to pay
the amount of the bond).
Indisputably, the above-cited pronouncements of this Court may be taken to mean
that the insured's cause of action or his right to file a claim either in the Insurance
Commission or in a court of competent jurisdiction commences from the time of
the denial of his claim by the Insurer, either expressly or impliedly.
But as pointed out by the petitioner insurance company, the rejection referred to
should be construed as the rejection, in the first instance, for if what is being
referred to is a reiterated rejection conveyed in a resolution of a petition for
reconsideration, such should have been expressly stipulated.
Thus, to allow the filing of a motion for reconsideration to suspend the running of
the prescriptive period of twelve months, a whole new body of rules on the matter
should be promulgated so as to avoid any conflict that may be brought by it, such
as:
a) whether the mere filing of a plea for reconsideration of a denial
is sufficient or must it be supported by
arguments/affidavits/material evidence;
b) how many petitions for reconsideration should be permitted?
While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final
rejection", the same cannot be taken to mean the rejection of a petition for
reconsideration as insisted by respondents. Such was clearly not the meaning
contemplated by this Court. The Insurance policy in said case provides that the
insured should file his claim, first, with the carrier and then with the insurer. The
"final rejection" being referred to in said case is the rejection by the insurance
company.
PREMISES CONSIDERED, the questioned decision of the Court of Appeals is
REVERSED and SET ASIDE, and Civil Case No. 16817 filed with the Regional Trial
Court is hereby DISMISSED.
SO ORDERED.

























G.R. No. 103883 November 14, 1996
JACQUELINE JIMENEZ VDA. DE GABRIEL, petitioner,
vs.
HON. COURT OF APPEALS and FORTUNE INSURANCE & SURETY COMPANY,
INC., respondents.
VITUG, J.:
The petition for review on certiorari in this case seeks the reversal of the
decision
1
of the Court of Appeals setting aside the judgment of the Regional Trial
Court of Manila, Branch 55, which has ordered private respondent Fortune
Insurance & Surety Company, Inc., to pay petitioner Jacqueline Jimenez vda. de
Gabriel, the surviving spouse and beneficiary in an accident (group) insurance of her
deceased husband, the amount of P100,000.00, plus legal interest.
Marcelino Gabriel, the insured, was employed by Emerald Construction &
Development Corporation ("ECDC") at its construction project in Iraq. He was
covered by a personal accident insurance in the amount of P100,000.00 under a
group policy
2
procured from private respondent by ECDC for its overseas workers.
The insured risk was for "(b)odily injury caused by violent accidental external and
visible means which injury (would) solely and independently of any other
cause"
3
result in death or disability.
On 22 May 1982, within the life of the policy, Gabriel died in Iraq. A year later, or on
12 July 1983, ECDC reported Gabriel's death to private respondent by
telephone.
4
Among the documents thereafter submitted to private respondent
were a copy of the death certificate
5
issued by the Ministry of Health of the
Republic of Iraq which stated
REASON OF DEATH: UNDER EXAMINATION NOW NOT YET
KNOWN
6

and an autopsy report
7
of the National Bureau of Investigation ("NBI") to
the effect that "(d)ue to advanced state of postmortem decomposition,
cause of death (could) not be determined."
8
Private respondent referred
the insurance claim to Mission Adjustment Service, Inc.
Following a series of communications between petitioner and private respondent,
the latter, on 22 September 1983, ultimately denied the claim of ECDC on the
ground of prescription.
9
Petitioner went to the Regional Trial Court of Manila. In
her complaint against ECDC and private respondent, she averred that her husband
died of electrocution while in the performance of his work and prayed for the
recovery of P100,000.00 for insurance indemnification and of various other sums by
way of actual, moral, and exemplary damages, plus attorney's fees and costs of suit.
Private respondent filed its answer, which was not verified, admitting the
genuineness and due execution of the insurance policy; it alleged, however, that
since both the death certificate issued by the Iraqi Ministry of Health and the
autopsy report of the NBI failed to disclose the cause of Gabriel's death, it denied
liability under the policy. In addition, private respondent raised the defense of
"prescription," invoking Section 384
10
of the Insurance Code. Later, private
respondent filed an amended answer, still unverified, reiterating its original
defenses but, this time, additionally putting up a counterclaim and a crossclaim.
The trial court dismissed the case against ECDC for the failure of petitioner to take
steps to cause the service of the fourth alias summons on ECDC. The dismissal was
without prejudice.
The case proceeded against private respondent alone. On 28 May 1987, the trial
court rendered its decision
11
in favor (partly) of petitioner's claim. In arriving at its
conclusion, the trial court held that private respondent was deemed to have waived
the defense, i.e., that the cause of Gabriel's death was not covered by the policy,
when the latter failed to impugn by evidence petitioner's averment on the matter.
With regard to the defense of prescription, the court considered the complaint to
have been timely filed or within one (1) year from private respondent's denial of
the claim.
Petitioner and private respondent both appealed to the Court of Appeals. Petitioner
contended that the lower court should have awarded all the claims she had asked
for. Private respondent asserted, on its part, that the lower court erred in ruling (a)
that the insurer had waived the defense that Gabriel's death was not caused by the
insured peril ("violent accidental external and visible means") specified in the policy
and (b) that the cause of action had not prescribed.
The Court of Appeals, on 18 September 1991, reversed the decision of the lower
court. The appellate court held that petitioner had failed to substantiate her
allegation that her husband's death was caused by a risk insured against. The
appellate court observed that the only evidence presented by petitioner, in her
attempt to show the circumstances that led to the death of the insured, were her
own affidavit and a letter allegedly written by a co-worker of the deceased in Iraq
which, unfortunately for her, were held to be both
hearsay.
12

The motion for reconsideration was denied.
13

Petitioner's recourse to this Court must also fail.
On the issue of "prescription," private respondent correctly invoked Section 384 of
the Insurance Code; viz:
Sec. 384. Any person having any claim upon the policy issued
pursuant to this chapter shall, without any unnecessary delay,
present to the insurance company concerned a written notice of
claim setting forth the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician. Notice of claim
must be filed within six months from date of the accident,
otherwise, the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be brought, in
proper cases, with the Commissioner or the Courts within one
year from denial of the claim, otherwise, the claimant's right of
action shall prescribe.
The notice of death was given to private respondent, concededly, more
than a year after the death of petitioner's husband. Private respondent, in
invoking prescription, was not referring to the one-year period from the
denial of the claim within which to file an action against an insurer but
obviously to the written notice of claim that had to be submitted within six
months from the time of the accident.
Petitioner argues that private respondent must be deemed to have waived its right
to controvert the claim, that is, to show that the cause of death is an excepted peril,
by failing to have its answers (to the Request for Admission sent by petitioner) duly
verified. It is true that a matter of which a written request for admission is made
shall be deemed impliedly admitted "unless, within a period designated in the
request, which shall not be less than ten (10) days after service thereof, or within
such further time as the court may allow on motion and notice, the party to whom
the request is directed serves upon the party requesting the admission a sworn
statement either denying specifically the matters of which an admission is
requested or setting forth in detail the reasons why he cannot truthfully either
admit or deny those matters;"
14
however, the verification, like in most cases
required by the rules of procedure, is a formal, not jurisdictional, requirement, and
mainly intended to secure an assurance that matters which are alleged are done in
good faith or are true and correct and not of mere speculation. When
circumstances warrant, the court may simply order the correction of unverified
pleadings or act on it and waive strict compliance with the rules in order that the
ends of justice may thereby be served.
15
In the case of answers to written requests
for admission particularly, the court can allow the party making the admission,
whether made expressly or deemed to have been made impliedly, "to withdraw or
amend it upon such terms as may be just."
16

The appellate court acted neither erroneously nor with grave abuse of discretion
when it seconded the court a quoand ruled:
As to the allegation of the plaintiff-appellant that the matters
requested by her to be admitted by the defendant-appellant
under the Request for Admission were already deemed admitted
by the latter for its failure to answer it under oath, has already
been properly laid to rest when the lower court in its Order of
May 28, 1987 correctly ruled:
At the outset, it must be stressed that the
defendant indeed filed a written answer to the
request for admission, sans verification. The
case of Motor Service Co., Inc. vs. Yellow Taxicab
Co., Inc., et al. may not therefore be controlling,
or actually opposite. In said case, there was an
absolute failure on the part of the defendant to
answer the request for admission, and thus the
court was justified in rendering a summary
judgment. Here, however, as clearly intimated
elsewhere above, the defendant answered in
writing practically every question posed in the
request for admission. The Court believes, under
the peculiar circumstance, that the more
controlling jurisprudence on the mater would be
those cited by the defendant in its
memorandum, particularly the case of Quimpo
vs. de la Victoria, 46 SCRA 139.
Prescinding from the foregoing, there is absolutely no basis in fact
and in law for the lower court to hold that the appellant insurance
company was deemed to have waived the defense, that the death
of plaintiff-appellant's husband was not caused by violent
accidental external and visible means' as contemplated in the
insurance policy. The Death Certificate (Exh. 9) and the Autopsy
Report (Exh. 10), more than controverted the allegation of the
plaintiff-appellant as to the cause of death of her husband.
17

The insurance policy expressly provided that to be compensable, the injury or death
should be caused by "violent accidental external and visible means." In attempting
to prove the cause of her husband's death, all that petitioner could submit were a
letter sent to her by her husband's co-worker, stating that Gabriel died when he
tried to haul water out of a tank while its submerged motor was still
functioning,
18
and petitioner's sinumpaang
salaysay
19
which merely confirmed the receipt and stated contents of the letter.
Said the appellate court in this regard:
. . . . It must be noted that the only evidence presented by her to
prove the circumstances surrounding her husband's death were
her purported affidavit and the letter allegedly written by the
deceased co-worker in Iraq. The said affidavit however suffers
from procedural infirmity as it was not even testified to or
identified by the affiant (plaintiff-appellant) herself. This self-
serving affidavit therefore is a mere hearsay under the rules, . . . .
xxx xxx xxx
In like manner, the letter allegedly written by the deceased's co-
worker which was never identified to in court by the supposed
author, suffers from the same defect as the affidavit of the
plaintiff-appellant.
20

Not one of the other documents submitted, to wit, the POEA decision,
dated 06 June 1984,
21
the death certificate issued by the Ministry of
Health of Iraq and the NBI autopsy report,
22
could give any probative value
to petitioner's claim. The POEA decision did not make any categorical
holding on the specific cause of Gabriel's death. Neither did the death
certificate issued by the health authorities in Iraq nor the NBI autopsy
report provide any clue on the cause of death. All that appeared to be
clear was the fact of Gabriel's demise on 22 May 1982 in Iraq.
Evidence, in fine, is utterly wanting to establish that the insured suffered from an
accidental death, the risk covered by the policy. In an accident insurance, the
insured's beneficiary has the burden of proof in demonstrating that the cause of
death is due to the covered peril. Once that fact is established, the burden then
shifts to the insurer to show any excepted peril that may have been stipulated by
the parties. An "accident insurance" is not thus to be likened to an ordinary life
insurance where the insured's death, regardless of the cause thereof, would
normally be compensable. The latter is akin in property insurance to an "all risk"
coverage where the insured, on the aspect of burden of proof, has merely to show
the condition of the property insured when the policy attaches and the fact of loss
or damage during the period of the policy and where, thereafter, the burden would
be on the insurer to show any "excluded peril." When, however, the insured risk is
specified, like in the case before us, it lies with the claimant of the insurance
proceeds to initially prove that the loss is caused by the covered peril.
While petitioner did fail in substantiating her allegation that the death of her
husband was due to an accident, considering, however, the uncertainty on the real
cause of death, private respondent might find its way clear into still taking a second
look on the matter and perhaps help ease the load of petitioner's loss.
WHEREFORE, the decision appealed from is AFFIRMED. No costs.
SO ORDERED.















G.R. No. L-67835 October 12, 1987
MALAYAN INSURANCE CO., INC. (MICO), petitioner,
vs.
GREGORIA CRUZ ARNALDO, in her capacity as the INSURANCE COMMISSIONER,
and CORONACION PINCA, respondents.
CRUZ, J.:
When a person's house is razed, the fire usually burns down the efforts of a lifetime
and forecloses hope for the suddenly somber future. The vanished abode becomes
a charred and painful memory. Where once stood a home, there is now, in the
sighing wisps of smoke, only a gray desolation. The dying embers leave ashes in the
heart.
For peace of mind and as a hedge against possible loss, many people now secure
fire insurance. This is an aleatory contract. By such insurance, the insured in effect
wagers that his house will be burned, with the insurer assuring him against the loss,
for a fee. If the house does burn, the insured, while losing his house, wins the
wagers. The prize is the recompense to be given by the insurer to make good the
loss the insured has sustained.
It would be a pity then if, having lost his house, the insured were also to lose the
payment he expects to recover for such loss. Sometimes it is his fault that he cannot
collect, as where there is a defect imputable to him in the insurance contract.
Conversely, the reason may be an unjust refusal of the insurer to acknowledge a
just obligation, as has happened many times.
In the instant case the private respondent has been sustained by the Insurance
Commission in her claim for compensation for her burned property. The petitioner
is now before us to dispute the decision, 1 on the ground that there was no valid
insurance contract at the time of the loss.
The chronology of the relevant antecedent facts is as follows:
On June 7, 1981, the petitioner (hereinafter called (MICO) issued to the private
respondent, Coronacion Pinca, Fire Insurance Policy No. F-001-17212 on her
property for the amount of P14,000.00 effective July 22, 1981, until July 22, 1982.
2

On October 15,1981, MICO allegedly cancelled the policy for non-payment, of the
premium and sent the corresponding notice to Pinca.
3

On December 24, 1981, payment of the premium for Pinca was received by
DomingoAdora, agent of MICO.
4

On January 15, 1982, Adora remitted this payment to MICO,together with other
payments.
5

On January 18, 1982, Pinca's property was completely burned.
6

On February 5, 1982, Pinca's payment was returned by MICO to Adora on the
ground that her policy had been cancelled earlier. But Adora refused to accept it.
7

In due time, Pinca made the requisite demands for payment, which MICO rejected.
She then went to the Insurance Commission. It is because she was ultimately
sustained by the public respondent that the petitioner has come to us for relief.
From the procedural viewpoint alone, the petition must be rejected. It is stillborn.
The records show that notice of the decision of the public respondent dated April 5,
1982, was received by MICO on April 10, 1982.
8
On April 25, 1982, it filed a motion
for reconsideration, which was denied on June 4, 1982.
9
Notice of this denial was
received by MICO on June 13, 1982, as evidenced by Annex "1" duly authenticated
by the Insurance Commission. 10 The instant petition was filed with this Court on
July 2, 1982. 11
The position of the petition is that the petition is governed by Section 416 0f the
Insurance Code giving it thirty days wthin which to appeal by certiorari to this Court.
Alternatively, it also invokes Rule 45 of the Rules of Court. For their part, the public
and private respondents insist that the applicable law is B.P. 129, which they say
governs not only courts of justice but also quasi-judicial bodies like the Insurance
Commission. The period for appeal under this law is also fifteen days, as under Rule
45.
The pivotal date is the date the notice of the denial of the motion for
reconsideration was received by MICO.
MICO avers this was June 18, 1982, and offers in evidence its Annex "B," 12 which is
a copy of the Order of June 14, 1982, with a signed rubber-stamped notation on the
upper left-hand corner that it was received on June 18, 1982, by its legal
department. It does not indicate from whom. At the bottom, significantly, there is
another signature under which are the ciphers "6-13-82," for which no explanation
has been given.
Against this document, the private respodent points in her Annex "1," 13 the
authenticated copy of the same Order with a rubber-stamped notation at the
bottom thereof indicating that it was received for the Malayan Insurance Co., Inc.
by J. Gotladera on "6-13-82." The signature may or may not habe been written by
the same person who signed at the bottom of the petitioner's Annex "B."
Between the two dates, the court chooses to believe June 13, 1982, not only
because the numbers "6-13-82" appear on both annexes but also because it is the
date authenticated by the administrative division of the Insurance Commission.
Annex "B" is at worst self-serving; at best, it might only indicate that it was received
on June 18, 1982, by the legal department of MICO, after it had been received
earlier by some other of its personnel on June 13, 1982. Whatever the reason for
the delay in transmitting it to the legal department need not detain us here.
Under Section 416 of the Insurance Code, the period for appeal is thirty days from
notice of the decision of the Insurance Commission. The petitioner filed its motion
for reconsideration on April 25, 1981, or fifteen days such notice, and the
reglementary period began to run again after June 13, 1981, date of its receipt of
notice of the denial of the said motion for reconsideration. As the herein petition
was filed on July 2, 1981, or nineteen days later, there is no question that it is tardy
by four days.
Counted from June 13, the fifteen-day period prescribed under Rule 45, assuming it
is applicable, would end on June 28, 1982, or also four days from July 2, when the
petition was filed.
If it was filed under B.P. 129, then, considering that the motion for reconsideration
was filed on the fifteenth day after MICO received notice of the decision, only one
more day would have remained for it to appeal, to wit, June 14, 1982. That would
make the petition eighteen days late by July 2.
Indeed, even if the applicable law were still R.A. 5434, governing appeals from
administrative bodies, the petition would still be tardy. The law provides for a fixed
period of ten days from notice of the denial of a seasonable motion for
reconsideration within which to appeal from the decision. Accordingly, that ten-day
period, counted from June 13, 1982, would have ended on June 23, 1982, making
the petition filed on July 2, 1982, nine days late.
Whichever law is applicable, therefore, the petition can and should be dismissed for
late filing.
On the merits, it must also fail. MICO's arguments that there was no payment of
premium and that the policy had been cancelled before the occurence of the loss
are not acceptable. Its contention that the claim was allowed without proof of loss
is also untenable.
The petitioner relies heavily on Section 77 of the Insurance Code providing that:
SEC. 77. An insurer is entitled to payment of the premium as soon
as the thing 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.
The above provision is not applicable because payment of the premium was in fact
eventually made in this case. Notably, the premium invoice issued to Pinca at the
time of the delivery of the policy on June 7, 1981 was stamped "Payment Received"
of the amoung of P930.60 on "12-24-81" by Domingo Adora. 14 This is important
because it suggests an understanding between MICO and the insured that such
payment could be made later, as agent Adora had assured Pinca. In any event, it is
not denied that this payment was actually made by Pinca to Adora, who remitted
the same to MICO.
The payment was made on December 24, 1981, and the fire occured on January 18,
1982. One wonders: suppose the payment had been made and accepted in, say,
August 1981, would the commencement date of the policy have been changed to
the date of the payment, or would the payment have retroacted to July 22, 1981? If
MICO accepted the payment in December 1981 and the insured property had not
been burned, would that policy not have expired just the same on July 22, 1982,
pursuant to its original terms, and not on December 24, 1982?
It would seem from MICO's own theory, that the policy would have become
effective only upon payment, if accepted and so would have been valid only from
December 24, 1981m but only up to July 22, 1981, according to the original terms.
In others words, the policy would have run for only eight months although the
premium paid was for one whole year.
It is not disputed that the preium was actually paid by Pinca to Adora on December
24, 1981, who received it on behalf of MICO, to which it was remitted on January
15, 1982. What is questioned is the validity of Pinca's payment and of Adora's
authority to receive it.
MICO's acknowledgment of Adora as its agent defeats its contention that he was
not authorized to receive the premium payment on its behalf. It is clearly provided
in Section 306 of the Insurance Code that:
SEC. 306. xxx xxx xxx
Any insurance company which delivers to an insurance agant or
insurance broker a policy or contract of insurance shall be
demmed 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.
And it is a well-known principle under the law of agency that:
Payment to an agent having authority to receive or collect
payment is equivalent to payment to the principal himself; such
payment is complete when the money delivered is into the
agent's hands and is a discharge of the indebtedness owing to the
principal. 15
There is the petitioner's argument, however, that Adora was not authorized to
accept the premium payment because six months had elapsed since the issuance by
the policy itself. It is argued that this prohibition was binding upon Pinca, who made
the payment to Adora at her own riskl as she was bound to first check his authority
to receive it. 16
MICO is taking an inconsistent stand. While contending that acceptance of the
premium payment was prohibited by the policy, it at the same time insists that the
policy never came into force because the premium had not been paid. One surely,
cannot have his cake and eat it too.
We do not share MICO's view that there was no existing insurance at the time of
the loss sustained by Pinca because her policy never became effective for non-
payment of premium. Payment was in fact made, rendering the policy operative as
of June 22, 1981, and removing it from the provisions of Article 77, Thereafter, the
policy could be cancelled on any of the supervening grounds enumerated in Article
64 (except "nonpayment of premium") provided the cancellation was made in
accordance therewith and with Article 65.
Section 64 reads as follows:
SEC. 64. No policy of insurance other than life shall be cancelled
by the insurer except upon prior notice thereof to the insured,
and no notice of cancellation shall be effective unless it is based
on the occurrence, after the effective date of the policy, of one or
more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the hazard
insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful, or reckless acts or commissions increasing
the hazard insured against;
(e) physical changes in the property insured which result in the
property becoming uninsurable;or
(f) a determination by the Commissioner that the continuation of
the policy would violate or would place the insurer in violation of
this Code.
As for the method of cancellation, Section 65 provides as follows:
SEC. 65. All notices of cancellation mentioned in the preceding
section shall be in writing, mailed or delivered to the named
insured at the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is relied upon
and (b) that, upon written request of the named insured, the
insurer will furnish the facts on which the cancellation is based.
A valid cancellation must, therefore, require concurrence of the following
conditions:
(1) There must be prior notice of cancellation to the insured; 17
(2) The notice must be based on the occurrence, after the effective date of the
policy, of one or more of the grounds mentioned;18
(3) The notice must be (a) in writing, (b) mailed, or delivered to the named insured,
(c) at the address shown in the policy; 19
(4) It must state (a) which of the grounds mentioned in Section 64 is relied upon
and (b) that upon written request of the insured, the insurer will furnish the facts
on which the cancellation is based.
20

MICO's claims it cancelled the policy in question on October 15, 1981, for non-
payment of premium. To support this assertion, it presented one of its employees,
who testified that "the original of the endorsement and credit memo"
presumably meaning the alleged cancellation "were sent the assured by mail
through our mailing section"
21
However, there is no proof that the notice,
assuming it complied with the other requisites mentioned above, was actually
mailed to and received by Pinca. All MICO's offers to show that the cancellation was
communicated to the insured is its employee's testimony that the said cancellation
was sent "by mail through our mailing section." without more. The petitioner then
says that its "stand is enervated (sic) by the legal presumption of regularity and due
performance of duty."
22
(not realizing perhaps that "enervated" means
"debilitated" not "strengthened").
On the other hand, there is the flat denial of Pinca, who says she never received the
claimed cancellation and who, of course, did not have to prove such denial
Considering the strict language of Section 64 that no insurance policy shall be
cancelled except upon prior notice, it behooved MICO's to make sure that the
cancellation was actually sent to and received by the insured. The presumption
cited is unavailing against the positive duty enjoined by Section 64 upon MICO and
the flat denial made by the private respondent that she had received notice of the
claimed cancellation.
It stands to reason that if Pinca had really received the said notice, she would not
have made payment on the original policy on December 24, 1981. Instead, she
would have asked for a new insurance, effective on that date and until one year
later, and so taken advantage of the extended period. The Court finds that if she did
pay on that date, it was because she honestly believed that the policy issued on
June 7, 1981, was still in effect and she was willing to make her payment retroact to
July 22, 1981, its stipulated commencement date. After all, agent Adora was very
accomodating and had earlier told her "to call him up any time" she was ready with
her payment on the policy earlier issued. She was obviously only reciprocating in
kind when she paid her premium for the period beginning July 22, 1981, and not
December 24, 1981.
MICO's suggests that Pinca knew the policy had already been cancelled and that
when she paid the premium on December 24, 1981, her purpose was "to renew it."
As this could not be done by the agent alone under the terms of the original policy,
the renewal thereof did not legally bind MICO. which had not ratified it. To support
this argument, MICO's cites the following exchange:
Q: Now, Madam Witness, on December 25th you made the
alleged payment. Now, my question is that, did it not come to
your mind that after the lapse of six (6) months, your policy was
cancelled?
A: I have thought of that but the agent told me to call him up at
anytime.
Q: So if you thought that your policy was already intended to
revive cancelled policy?
A: Misleading, Your Honor.
Hearing Officer: The testimony of witness is that, she thought of
that.
Q: I will revise the question. Now, Mrs. Witness, you stated that
you thought the policy was cancelled. Now, when you made the
payment of December 24, 1981, your intention was to revive the
policy if it was already cancelled?
A: Yes, to renew it.
23

A close study of the above transcript will show that Pinca meant to renew the
policy if it had really been already cancelled but not if it was stffl effective. It was all
conditional. As it has not been shown that there was a valid cancellation of the
policy, there was consequently no need to renew it but to pay the premium
thereon. Payment was thus legally made on the original transaction and it could be,
and was, validly received on behalf of the insurer by its agent Adora. Adora.
incidentally, had not been informed of the cancellation either and saw no reason
not to accept the said payment.
The last point raised by the petitioner should not pose much difficulty. The
valuation fixed in fire insurance policy is conclusive in case of total loss in the
absence of fraud,
24
which is not shown here. Loss and its amount may be
determined on the basis of such proof as may be offered by the insured, which
need not be of such persuasiveness as is required in judicial proceedings.
25
If, as in
this case, the insured files notice and preliminary proof of loss and the insurer fails
to specify to the former all the defects thereof and without unnecessary delay, all
objections to notice and proof of loss are deemed waived under Section 90 of the
Insurance Code.
The certification
26
issued by the Integrated National Police, Lao-ang, Samar, as to
the extent of Pinca's loss should be considered sufficient. Notably,MICO submitted
no evidence to the contrary nor did it even question the extent of the loss in its
answer before the Insurance Commission. It is also worth observing that Pinca's
property was not the only building bumed in the fire that razed the commercial
district of Lao-ang, Samar, on January 18, 1982.
27

There is nothing in the Insurance Code that makes the participation of an adjuster
in the assessment of the loss imperative or indespensable, as MICO suggests.
Section 325, which it cites, simply speaks of the licensing and duties of adjusters.
We see in this cases an obvious design to evade or at least delay the discharge of a
just obligation through efforts bordering on bad faith if not plain duplicity, We note
that the motion for reconsideration was filed on the fifteenth day from notice of
the decision of the Insurance Commission and that there was a feeble attempt to
show that the notice of denial of the said motion was not received on June 13,
1982, to further hinder the proceedings and justify the filing of the petition with this
Court fourteen days after June 18, 1982. We also look askance at the alleged
cancellation, of which the insured and MICO's agent himself had no knowledge, and
the curious fact that although Pinca's payment was remitted to MICO's by its agent
on January 15, 1982, MICO sought to return it to Adora only on February 5, 1982,
after it presumably had learned of the occurrence of the loss insured against on
January 18, 1982. These circumstances make the motives of the petitioner highly
suspect, to say the least, and cast serious doubts upon its candor and bona fides.
WHEREFORE, the petition is DENIED. The decision of the Insurance Commission
dated April 10, 1981, and its Order of June 4, 1981, are AFFIRMED in full, with costs
against the petitioner. This decision is immediately executory.




























G.R. No. 95546 November 6, 1992
MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by
American International Underwriters (Phils.), Inc., respondent.
BELLOSILLO, J.:
This case involves a purely legal question: whether payment by installment of the
premiums due on an insurance policy invalidates the contract of insurance, in view
of Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which
provides:
Sec. 77. An insurer is entitled to the payment of the premium as
soon as the thing 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.
Sometime in early 1982, private respondent American Home Assurance Co. (AHAC),
represented by American International Underwriters (Phils.), Inc., 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 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 term
covering 1 March 1983 to 1 March 1984. The premium in the amount of
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.
On 20 January 1984, the policy was again renewed and private respondent 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 installment payments,
both accepted by private respondent, the first on 6 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 premium.
Consequently, private respondent filed an action to recover the unpaid balance of
P314,103.05 for Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the issuance of Insurance
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 the
receipts for the installment payments covering the policy for 1984-85, as well as the
two (2) previous policies, stated the following reservations:
2. Acceptance of this payment shall not waive any of the company
rights to deny liability on any claim under the policy arising before
such payments or 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 not covered.
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.
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 view of the reservation in the receipts ordinarily
issued by the plaintiff on premium payments the only plausible
conclusion is that plaintiff has no right to demand their payment
after the lapse of the term of said policy on March 1, 1985.
Therefore, the defendant was justified in refusing to pay the
same.
1

Both parties appealed from the judgment of the trial court. Thereafter, the Court of
Appeals rendered a decision
2
modifying that of the trial court by ordering herein
petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651,
or P314,103.05 plus legal interest until fully paid, and 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 entire premium. Here, the parties
herein 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 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 a refund of all
premium payments made on the alleged invalid insurance policies.
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. For the 1984 policy, petitioner paid two (2) installments although
it refused to pay the balance.
It appearing from the peculiar circumstances that the parties actually intended to
make three (3) insurance contracts valid, effective and binding, petitioner may not
be allowed to renege on its obligation to pay the balance of 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 appellate court, where the risk is
entire and the contract is indivisible, the insured is not entitled to a refund of the
premiums paid if the insurer was exposed to the risk insured for any period,
however brief or momentary.
WHEREFORE, finding no reversible error in the judgment appealed from, the same
is AFFIRMED. Costs against petitioner.
SO ORDERED.






























G.R. No. 137172 April 4, 2001
UCPB GENERAL INSURANCE CO., INC., petitioner,
vs.
MASAGANA TELAMART, INC., respondent.
R E S O L U T I O N
DAVIDE, JR., C.J.:
In our decision of 15 June 1999 in this case, we reversed and set aside the assailed
decision
1
of the Court of Appeals, which affirmed with modification the judgment
of the trial court (a) allowing Respondent to consign the sum of P225,753.95 as full
payment of the premiums for the renewal of the five insurance policies on
Respondent's properties; (b) declaring the replacement-renewal policies effective
and binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay
Respondent P18,645,000.00 as indemnity for the burned properties covered by the
renewal-replacement policies. The modification consisted in the (1) deletion of the
trial court's declaration that three of the policies were in force from August 1991 to
August 1992; and (2) reduction of the award of the attorney's fees from 25% to 10%
of the total amount due the Respondent.
The material operative facts upon which the appealed judgment was based are
summarized by the Court of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner]
five (5) insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its
properties [in Pasay City and Manila] . . . .
All five (5) policies reflect on their face the effectivity term: "from 4:00
P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992,
plaintiffs properties located at 2410-2432 and 2442-2450 Taft Avenue,
Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and
defendant accepted, five (5) Equitable Bank Manager's Checks in the total
amount of P225,753.45 as renewal premium payments for which Official
Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued
by defendant. On July 14, 1992, Masagana made its formal demand for
indemnification for the burned insured properties. On the same day,
defendant returned the five (5) manager's checks stating in its letter
(Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's claim on
the following grounds:
"a) Said policies expired last May 22, 1992 and were not renewed
for another term;
b) Defendant had put plaintiff and its alleged broker on notice of
non-renewal earlier; and
c) The properties covered by the said policies were burned in a
fire that took place last June 13, 1992, or before tender of
premium payment."
(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of
payment of the premiums on 13 July 1992 did not result in the renewal of the
policies, having been made beyond the effective date of renewal as provided under
Policy Condition No. 26, which states:
26. Renewal Clause. Unless the company at least forty five days in
advance of the end of the policy period mails or delivers to the assured at
the address shown in the policy notice of its intention not to renew the
policy or to condition its renewal upon reduction of limits or elimination of
coverages, the assured shall be entitled to renew the policy upon payment
of the premium due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that
Respondent, which had procured insurance coverage from Petitioner for a number
of years, had been granted a 60 to 90-day credit term for the renewal of the
policies. Such a practice had existed up to the time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991
was issued on May 7, 1990 but premium was paid more than 90 days later
on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire
Insurance Policy No. 34660 for Insurance Risk Coverage from May 22, 1990
to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was
collected by UCPB only on July 13, 1990 or more than 60 days later under
O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire
Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22,
1991 was issued on May 7, 1990 but premium therefor was paid only on
July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance
Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was
issued on May 3, 1990 but premium was paid only on July 19, 1990 under
O.R. No. 46582 (Exhs. "X" and "X-1"). Fire Insurance Policy No. 34688 for
insurance coverage from May 22, 1990 to May 22, 1991 was issued on May
7, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46585
(Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance
risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but
premium therefor was collected only on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408
covering risks from January 12, 1989 to January 12, 1990 was issued to
Intratrade Phils. (Masagana's sister company) dated December 10, 1988
but premium therefor was paid only on February 15, 1989 under O.R. No.
38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was issued
on May 22, 1989 but premium was paid only on July 25, 1989 under O.R.
No. 40800 for insurance coverage from May 22, 1989 to May 22, 1990
(Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May
22, 1989 but premium was paid only on July 17, 1989 under O.R. No.
40682 for insurance risk coverage from May 22, 1989 to May 22, 1990
(Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued
on June 15, 1989 but premium was paid only on February 13, 1990 under
O.R. No. 39233 for insurance coverage from May 22, 1989 to May 22, 1990
(Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on
November 22, 1988 but premium therefor was collected only on March 15,
1989 under O.R. NO. 38573 for insurance risks coverage from December
15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute
preponderant proof that no timely notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p.
350) from Ultramar Reinsurance Brokers that plaintiff's reinsurance facility
had been confirmed up to 67.5% only on April 15, 1992 as indicated on
Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p.
320) was sent not earlier than said date, or within 45 days from the expiry
dates of the policies as provided under Policy Condition No. 26; (2)
Defendant insurer unconditionally accepted, and issued an official receipt
for, the premium payment on July 1[3], 1992 which indicates defendant's
willingness to assume the risk despite only a 67.5% reinsurance cover[age];
and (3) Defendant insurer appointed Esteban Adjusters and Valuers to
investigate plaintiff's claim as shown by the letter dated July 17, 1992
(Exhibit "11", Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be "whether the fire
insurance policies issued by petitioner to the respondent covering the period from
May 22, 1991 to May 22, 1992 . . . had been extended or renewed by an implied
credit arrangement though actual payment of premium was tendered on a later
date and after the occurrence of the (fire) risk insured against." We resolved this
issue in the negative in view of Section 77 of the Insurance Code and our decisions
in Valenzuela v. Court of Appeals;
2
South Sea Surety and Insurance Co., Inc. v. Court
of Appeals;
3
and Tibay v. Court of Appeals.
4
Accordingly, we reversed and set aside
the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse
verdict. It alleges in the motion that we had made in the decision our own findings
of facts, which are not in accord with those of the trial court and the Court of
Appeals. The courts below correctly found that no notice of non-renewal was made
within 45 days before 22 May 1992, or before the expiration date of the fire
insurance policies. Thus, the policies in question were renewed by operation of law
and were effective and valid on 30 June 1992 when the fire occurred, since the
premiums were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree
expressly or impliedly on the extension of credit or time to pay the premium nor
consider a policy binding before actual payment. It urges the Court to take judicial
notice of the fact that despite the express provision of Section 77 of the Insurance
Code, extension of credit terms in premium payment has been the prevalent
practice in the insurance industry. Most insurance companies, including Petitioner,
extend credit terms because Section 77 of the Insurance Code is not a prohibitive
injunction but is merely designed for the protection of the parties to an insurance
contract. The Code itself, in Section 78, authorizes the validity of a policy
notwithstanding non-payment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite
its awareness of Section 77 Petitioner persuaded and induced Respondent to
believe that payment of premium on the 60- to 90-day credit term was perfectly
alright; in fact it accepted payments within 60 to 90 days after the due dates. By
extending credit and habitually accepting payments 60 to 90 days from the effective
dates of the policies, it has implicitly agreed to modify the tenor of the insurance
policy and in effect waived the provision therein that it would pay only for the loss
or damage in case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondent's motion for reconsideration. It
argues that both the trial court and the Court of Appeals overlooked the fact that
on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-
renewal and sent by personal delivery a copy thereof to Respondent's broker,
Zuellig. Both courts likewise ignored the fact that Respondent was fully aware of the
notice of non-renewal. A reading of Section 66 of the Insurance Code readily shows
that in order for an insured to be entitled to a renewal of a non-life policy, payment
of the premium due on the effective date of renewal should first be made.
Respondent's argument that Section 77 is not a prohibitive provision finds no
authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in the
motion for reconsideration and the pleadings filed thereafter by the parties, we
resolved to grant the motion for reconsideration. The following facts, as found by
the trial court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent,
and these policies were annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term
within which to pay the premiums on the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as
there is no proof at all that the notice sent by ordinary mail was received
by Respondent, and the copy thereof allegedly sent to Zuellig was ever
transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of
P225,753.95 were paid by Respondent within the 60- to 90-day credit term
and were duly accepted and received by Petitioner's cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the
Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioner's
advantage despite its practice of granting a 60- to 90-day credit term for the
payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SECTION 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.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code)
promulgated on 18 December 1974. In turn, this Section has its source in Section 72
of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No.
3540, approved on 21 June 1963, which read:
SECTION 72. An insurer is entitled to payment of premium as soon as the
thing insured is exposed to the peril insured against, unless there is clear
agreement to grant the insured credit extension of the premium due. No
policy issued by an insurance company is valid and binding unless and until
the premium thereof has been paid. (Italic supplied)
It can be seen at once that Section 77 does not restate the portion of Section 72
expressly permitting an agreement to extend the period to pay the premium. But
are there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or
industrial life policy whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
SECTION 78. Any 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 premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs.
Court of Appeals,
5
wherein we ruled that Section 77 may not apply if the parties
have agreed to the payment in installments of the premium and partial payment
has been made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid
on installments. The records clearly show that the petitioners 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 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 prepaid
in full.
Not only that. In Tuscany, we also quoted with approval the following
pronouncement of the Court of Appeals in its Resolution denying the motion for
reconsideration of 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, p. 175). So is an understanding to
allow insured to pay premiums in installments not so prescribed. At the
very least, both parties should be deemed in estoppel to question the
arrangement they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of
Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the
insurer may grant credit extension for the payment of the premium. This simply
means that if the insurer has granted the insured a credit term for the payment of
the premium and loss occurs before the expiration of the term, recovery on the
policy should be allowed even though the premium is paid after the loss but within
the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance
contract to provide a credit term within which to pay the premiums. That
agreement is not against the law, morals, good customs, public order or public
policy. The agreement binds the parties. Article 1306 of the Civil Code provides:
ARTICLE 1306. The contracting parties may establish such stipulations
clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public
policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the
policy would not be permitted against Petitioner, which had consistently granted a
60- to 90-day credit term for the payment of premiums despite its full awareness of
Section 77. Estoppel bars it from taking refuge under said Section, since Respondent
relied in good faith on such practice. Estoppel then is the fifth exception to Section
77.
WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED
and SET ASIDE, and a new one is hereby entered DENYING the instant
petition for failure of Petitioner to sufficiently show that a reversible error
was committed by the Court of Appeals in its challenged decision, which is
hereby AFFIRMED in toto.
No pronouncement as to cost.













G.R. No. 107062 February 21, 1994
PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents.
NOCON, J.:
Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid
to get a favorable decision from the Regional Trial Court and then again in the Court
of Appeals.
1
These are non-appearance during the pre-trial despite due notice, and
non-payment of docket fees upon filing of its third-party complaint. Just how strict
should these rules be applied is a crucial issue in this present dispute.
Petitioner, Interworld Assurance Corporation (the company now carries the
corporate name Philippine Pryce Assurance Corporation), was the butt of the
complaint for collection of sum of money, filed on May 13, 1988 by respondent,
Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint
alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and
No. 0037, dated October 7, 1987) in behalf of its principal Sagum General
Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE
MILLION (1,000,000.00) PESOS, respectively.
On June 16, 1988, summons, together with the copy of the complaint, was served
on petitioner. Within the reglementary period, two successive motions were filed
by petitioner praying for a total of thirty (30) days extention within which to file a
responsible pleading.
In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner
admitted having executed the said bonds, but denied liability because allegedly 1)
the checks which were to pay for the premiums bounced and were dishonored
hence there is no contract to speak of between petitioner and its supposed
principal; and 2) that the bonds were merely to guarantee payment of its principal's
obligation, thus, excussion is necessary. After the issues had been joined, the case
was set for pre-trial conference on September 29, 1988. the petitioner received its
notice on September 9, 1988, while the notice addressed to its counsel was
returned to the trial court with the notation "Return to Sender, Unclaimed."
2

On the scheduled date for pre-trial conference, only the counsel for petitioner
appeared while both the representative of respondent and its counsel were
present. The counsel for petitioner manifested that he was unable to contract the
Vice-President for operations of petitioner, although his client intended to file a
third party complaint against its principal. Hence, the pre-trial was re-set to October
14, 1988.
3

On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party
Complaint" with the Third-Party Complaint attached. On this same day, in the
presence of the representative for both petitioner and respondent and their
counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on
November 29, 1988, the court admitted the Third Party Complaint and ordered
service of summons on third party defendants.
4

On scheduled conference in December, petitioner and its counsel did not appear
notwithstanding their notice in open court.
5
The pre-trial was nevertheless re-set
to February 1, 1989. However, when the case was called for pre-trial conference on
February 1, 1989, petitioner was again nor presented by its officer or its counsel,
despite being duly notified. Hence, upon motion of respondent, petitioner was
considered as in default and respondent was allowed to present evidenceex-parte,
which was calendared on February 24, 1989.
6
Petitioner received a copy of the
Order of Default and a copy of the Order setting the reception of respondent's
evidence ex-parte, both dated February 1, 1989, on February 16, 1989.
7

On March 6, 1989, a decision was rendered by the trial court, the dispositive
portion reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendant Interworld Assurance Corporation to
pay the amount of P1,500,000.00 representing the principal of the
amount due, plus legal interest thereon from April 7, 1988, until
date of payment; and P20,000.00 as and for attorney's fees.
8

Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989,
having been denied it elevated its case to the Court of Appeals which however,
affirmed the decision of the trial court as well as the latter's order denying
petitioner's motion for reconsideration.
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely erred in declaring that
the case was already ripe for pre-trial conference when the trial
court set it for the holding thereof.
II. The respondent Court of Appeals gravely erred in affirming the
decision of the trial court by relying on the ruling laid down by this
Honorable Court in the case of Manchester Development
Corporation v. Court of Appeals, 149 SCRA 562, and disregarding
the doctrine laid down in the case of Sun Insurance Office, Ltd.
(SIOL) v. Asuncion, 170 SCRA 274.
III. The respondent Court of Appeals gravely erred in declaring
that it would be useless and a waste of time to remand the case
for further proceedings as defendant-appellant has no
meritorious defense.
We do not find any reversible error in the conclusion reached by the court a quo.
Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the
last pleading, which was supposed to be the third-party defendant's answer has not
been filed, the case is not yet ripe for pre-trial. This argument must fail on three
points. First, the trial court asserted, and we agree, that no answer to the third
party complaint is forthcoming as petitioner never initiated the service of summons
on the third party defendant. The court further said:
. . . Defendant's claim that it was not aware of the Order
admitting the third-party complaint is preposterous. Sec. 8, Rule
13 of the Rules, provides:
Completeness of service . . . Service by
registered mail is complete upon actual receipt
by the addressee, but if he fails to claim his mail
from the post office within five (5) days from the
date of first notice of the postmaster, service
shall take effect at the expiration of such time.
9

Moreover, we observed that all copies of notices and orders issued by the court for
petitioner's counsel were returned with the notation "Return to Sender,
Unclaimed." Yet when he chose to, he would appear in court despite supposed lack
of notice.
Second, in the regular course of events, the third-party defendant's answer would
have been regarded as the last pleading referred to in Sec. 1, Rule 20. However,
petitioner cannot just disregard the court's order to be present during the pre-trial
and give a flimsy excuse, such as that the answer has yet to be filed.
The pre-trial is mandatory in any action, the main objective being to simplify,
abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with
its mandatory character the Rules oblige not only the lawyers but the parties as well
to appear for this purpose before the Court
10
and when a party fails to appear at a
pre-trial conference he may be non-suited or considered as in default.
11

Records show that even at the very start, petitioner could have been declared as in
default since it was not properly presented during the first scheduled pre-trial on
September 29, 1988. Nothing in the record is attached which would show that
petitioner's counsel had a special authority to act in behalf of his client other than
as its lawyer.
We have said that in those instances where a party may not himself be present at
the pre-trial, and another person substitutes for him, or his lawyer undertakes to
appear not only as an attorney but in substitution of the client's person, it is
imperative for that representative or the lawyer to have "special authority" to enter
into agreements which otherwise only the client has the capacity to make.
12

Third, the court of Appeals properly considered the third-party complaint as a mere
scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the
court a quo:
A third-party complaint is one of the pleadings for which Clerks of
court of Regional Trial Courts are mandated to collect docket fees
pursuant to Section 5, Rule 141 of the Rules of Court. The record
is bereft of any showing tha(t) the appellant paid the
corresponding docket fees on its third-party complaint. Unless
and until the corresponding docket fees are paid, the trial court
would not acquire jurisdiction over the third-party complaint
(Manchester Development Corporation vs. Court of Appeals, 149
SCRA 562). The third-party complaint was thus reduced to a mere
scrap of paper not worthy of the trial court's attention. Hence, the
trial court can and correctly set the case for pre-trial on the basis
of the complaint, the answer and the answer to the
counterclaim.
13

It is really irrelevant in the instant case whether the ruling in Sun Insurance Office,
Ltd. (SIOL) v. Asuncion
14
or that in Manchester Development Corp. v. C.A.
15
was
applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential
pronouncements on the effect of non-payment of docket fees.
16
In previous cases,
we have consistently ruled that the court cannot acquire jurisdiction over the
subject matter of a case, unless the docket fees are paid.
Moreover, the principle laid down in Manchester could have very well been applied
in Sun Insurance. We then said:
The principle in Manchester [Manchester Development Corp. v.
C.A., 149 SCRA 562 (1987)] could very well be applied in the
present case. The pattern and the intent to defraud the
government of the docket fee due it is obvious not only in the
filing of the original complaint but also in the filing of the second
amended complaint.
xxx xxx xxx
In the present case, a more liberal interpretation of the rules is
called for considering that, unlike Manchester, private respondent
demonstrated his willingness to abide by the rules by paying the
additional docket fees as required. The promulgation of the
decision in Manchester must have had that sobering influence on
private respondent who thus paid the additional docket fee as
ordered by the respondent court. It triggered his change of stance
by manifesting his willingness to pay such additional docket fees
as may be ordered.
17

Thus, we laid down the rules as follows:
1. It is not simply the filing of the complaint or appropriate
initiatory pleading, but the payment of the prescribed docket fee,
that vests a trial court with jurisdiction over the subject-matter or
nature of the action. Where the filing of the initiatory pleading is
not accompanied by payment of the docket fee, the court may
allow payment of the fee within a reasonable time, but in no case
beyond the applicable prescriptive or reglamentary period.
2. The same rule applies to permissive counterclaims, third-party
claims and similar pleadings, which shall not be considered filed
until and unless the filing fee prescribed therefor is paid. The court
may also allow payment of said fee within a prescriptive or
reglementary period.
3. Where the trial court acquires jurisdiction over a claim by the
filing of the appropriate pleading and payment of the prescribed
filing fee, but subsequently, the judgment awards a claim nor
specified in the pleading, or if specified the same has not been left
for determination by the court, the additional filing fee therefor
shall constitute a lien on the judgment. It shall be the
responsibility of the clerk of court or his duly authorized deputy to
enforce said lien and assess and collect the additional
fee.
18

It should be remembered that both in Manchester and Sun Insurance plaintiffs
therein paid docket fees upon filing of their respective pleadings, although the
amount tendered were found to be insufficient considering the amounts of the
reliefs sought in their complaints. In the present case, petitioner did not and never
attempted to pay the requisite docket fee. Neither is there any showing that
petitioner even manifested to be given time to pay the requisite docket fee, as in
fact it was not present during the scheduled pre-trial on December 1, 1988 and
then again on February 1, 1989. Perforce, it is as if the third-party complaint was
never filed.
Finally, there is reason to believe that partitioner does not really have a good
defense. Petitioner hinges its defense on two arguments, namely: a) that the checks
issued by its principal which were supposed to pay for the premiums, bounced,
hence there is no contract of surety to speak of; and 2) that as early as 1986 and
covering the time of the Surety Bond, Interworld Assurance Company (now Phil.
Pryce) was not yet authorized by the insurance Commission to issue such bonds.
The Insurance Code states that:
Sec. 177. The surety is entitled to payment of the premium as
soon as the contract of suretyship or bond is perfected and
delivered to the obligor. No contract of suretyship or bonding
shall be valid and binding unless and until the premium therefor
has been paid, except where the obligee has accepted the bond,
in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety. . . . (emphasis added)
The above provision outrightly negates petitioner's first defense. In a desperate
attempt to escape liability, petitioner further asserts that the above provision is not
applicable because the respondent allegedly had not accepted the surety bond,
hence could not have delivered the goods to Sagum Enterprises. This statement
clearly intends to muddle the facts as found by the trial court and which are on
record.
In the first place, petitioner, in its answer, admitted to have issued the bonds
subject matter of the original action.
19
Secondly, the testimony of Mr. Leonardo T.
Guzman, witness for the respondent, reveals the following:
Q. What are the conditions and terms of sales
you extended to Sagum General Merchandise?
A. First, we required him to submit to us Surety
Bond to guaranty payment of the spare parts to
be purchased. Then we sell to them on 90 days
credit. Also, we required them to issue post-
dated checks.
Q. Did Sagum General merchandise comply with
your surety bond requirement?
A. Yes. They submitted to us and which we have
accepted two surety bonds.
Q Will you please present to us the aforesaid
surety bonds?
A. Interworld Assurance Corp. Surety Bond No.
0029 for P500,000 dated July 24, 1987 and
Interworld Assurance Corp. Surety Bond No.
0037 for P1,000.000 dated October 7, 1987.
20

Likewise attached to the record are exhibits C to C-18
21
consisting of delivery
invoices addressed to Sagum General Merchandise proving that parts were
purchased, delivered and received.
On the other hand, petitioner's defense that it did not have authority to issue a
Surety Bond when it did is an admission of fraud committed against respondent. No
person can claim benefit from the wrong he himself committed. A representation
made is rendered conclusive upon the person making it and cannot be denied or
disproved as against the person relying thereon.
22

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals
dismissing the petition before them and affirming the decision of the trial court and
its order denying petitioner's Motion for Reconsideration are hereby AFFIRMED.
The present petition is DISMISSED for lack of merit.
SO ORDERED.






















G.R. No. L-36232 December 19, 1974
PIONEER INSURANCE AND SURETY CORPORATION, petitioner-appellant,
vs.
OLIVA YAP, represented by her attorney-in-fact, CHUA SOON POON respondent-
appellee.
FERNANDEZ, J.:p
This is an appeal by certiorari from the decision of the Court of Appeals dated
December 16, 1972, in CA-G.R. No. 36669-R, affirming the judgment of the Court of
First Instance of Manila (Branch VI) in Civil Case No. 54508, which latter court
declared plaintiff Oliva Yap, herein respondent, entitled to recover from defendant
Pioneer Insurance & Surety Corporation, herein petitioner, the full amount of the
damage inquired in Policy No. 4219, which is P25,000.00, plus 12% of said sum from
the date of filing of the complaint until full payment, in addition to the sum of
P6,000.00 for attorney's fees, and costs.
Respondent Oliva Yap was the owner of a store in a two-storey building located at
No. 856 Juan Luna Street, Manila, where in 1962 she sold shopping bags and
footwear, such as shoes, sandals and step-ins. Chua Soon Poon Oliva Yap's son-in-
law, was in charge of the store.
On April 19, 1962, respondent Yap took out Fire Insurance Policy No. 4216 from
petitioner Pioneer Insurance & Surety Corporation with a face value of P25,000.00
covering her stocks, office furniture, fixtures and fittings of every kind and
description. Among the conditions in the policy executed by the parties are the
following:
The Insured shall give notice to the Company of any insurance or
insurances already effected, or which may subsequently be
effected, covering any of the property hereby insured, and unless
such notice be given and the particulars of such insurance or
insurances be stated in, or endorsed on this Policy by or on behalf
of the Company before the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited. (emphasis supplied)
It is understood that, except as may be stated on the face of this
policy there is no other insurance on the property hereby covered
and no other insurance is allowed except by the consent of the
Company endorsed hereon. Any false declaration or breach or this
condition will render this policy null and void.
At the time of the insurance on April 19, 1962 of Policy No. 4219 in favor of
respondent Yap, an insurance policy for P20,000.00 issued by the Great American
Insurance Company covering the same properties was noted on said policy as co-
insurance (Annex "1-E"). Later, on August 29, 1962, the parties executed Exhibit "1-
K", as an endorsement on Policy No. 4219, stating:
It is hereby declared and agreed that the co-insurance existing at
present under this policy is as follows: P20,000.00 Northwest
Ins., and not as originally stated. (emphasis supplied)
Except as varied by this endorsement, all other terms and
conditions remain unchanged.
Still later, or on September 26, 1962, respondent Oliva Yap took out another fire
insurance policy for P20,000.00 covering the same properties, this time from the
Federal Insurance Company, Inc., which new policy was, however, procured without
notice to and the written consent of petitioner Pioneer Insurance & Surety
Corporation and, therefore, was not noted as a co-insurance in Policy No. 4219.
At dawn on December 19, 1962, a fire broke out in the building housing respondent
Yap's above-mentioned store, and the said store was burned. Respondent Yap filed
an insurance claim, but the same was denied in petitioner's letter of May 17, 1963
(Exhibit "G"), on the ground of "breach and/or violation of any and/or all terms and
conditions" of Policy No. 4219.
On July 17, 1963, Oliva Yap filed with the Court of First Instance of Manila the
present complaint, asking, among others, for payment of the face value of her fire
insurance policy. In its answer, petitioner alleged that no property belonging to
plaintiff Yap and covered by the insurance policy was destroyed by the fire; that
Yap's claim was filed out of time; and that Yap took out an insurance policy from
another insurance company without petitioner's knowledge and/or endorsement,
in violation of the express stipulations in Policy No. 4219, hence, all benefits
accruing from the policy were deemed forfeited.
As already stated at the beginning of this opinion, the trial court decided for
plaintiff Oliva Yap; and its judgment was affirmed in full by the Court of Appeals.
The vital issue in this appeal is whether or not petitioner should be absolved from
liability on Fire Insurance Policy No. 4219 on account of any violation by respondent
Yap of the co-insurance clause therein. In resolving this problem, the Court of
Appeals stated in its decision:
5. The plaintiff-appellee has not violated the other insurance
clause (Exhibit 1-F) of the insurance Policy No. 4219 that would
justify the defendant-appellant, as insurer, to avoid its liability
thereunder. It appears on the face of said policy that a co-
insurance in the amount of P20,000.00 was secured from the
Great American Insurance and was declared by the plaintiff-
appellee and recognized by the defendant-appellant. This was
later on substituted for the same amount and secured by the
Federal Insurance Company. Chua Soon Poon on being cross-
examined by counsel for the defendant-appellant, declared that
the Great American Insurance policy was cancelled because of the
difference in the premium and the same was changed for that of
the Federal (t.s.n., hearing of December 1, 1964, pp. 35-36).
Contrary to the assertion of the defendant-appellant, the Great
American Insurance policy was not substituted by the Northwest
Insurance policy. As admitted by the defendant-appellant in its
brief (p. 48), the fire insurance policy issued by the Great
American Insurance Company for P20,000.00 (Exhibit 1-E) was
cancelled on August 29, 1962. On the other hand, the fire
insurance policy issued by the Northwest Insurance & Surety
Company for P20,000.00 (Exhibit 1-K) was taken out on July 23,
1962. How then can the Northwest Insurance policy issued on July
23, 1962, be considered as having substituted the Great American
policy which was cancelled only on August 29, 1962? The
defendant-appellant can be considered to have waived the formal
requirement of indorsing the policy of co-insurance since there
was absolutely no showing that it was not aware of said
substitution and preferred to continue the policy (Gonzales La O
vs. Yek Tong Lin Fire and Marine Insurance Co., 55 Phil. 386). Even
assuming that the defendant-appellant did not indorse the
Federal Insurance policy, there is no question that the same was
only a substitution and did not in any way increase the amount of
the declared co-insurance. In other words, there was no increase
in the risk assumed by the defendant-appellant.
We do not agree with the conclusion of the Court of Appeals.
There was a violation by respondent Oliva Yap of the co-insurance clause contained
in Policy No. 4219 that resulted in the avoidance of petitioner's liability. The
insurance policy for P20,000.00 issued by the Great American Insurance Company
covering the same properties of respondent Yap and duly noted on Policy No. 4219
as c-insurance, ceased, by agreement of the parties (Exhibit "1-L"), to be recognized
by them as a co-insurance policy. The Court of Appeals says that the Great
American Insurance policy was substituted by the Federal Insurance policy for the
same amount, and because it was a mere case of substitution, there was no
necessity for its endorsement on Policy No. 4219. This finding, as well as reasoning,
suffers from several flaws. There is no evidence to establish and prove such a
substitution. If anything was substituted for the Great American Insurance policy, it
could only be the Northwest Insurance policy for the same amount of P20,000.00.
The endorsement (Exhibit "1-K") quoted above shows the clear intention of the
parties to recognize on the date the endorsement was made (August 29, 1962), the
existence of only one co-insurance, and that is the Northwest Insurance policy,
which according to the stipulation of the parties during the hearing, was issued on
August 20, 1962 (t.s.n., January 12, 1965, pp. 3-4) and endorsed only on August 20,
1962. The finding of the Court of Appeals that the Great American Insurance policy
was substituted by the Federal Insurance policy is unsubstantiated by the evidence
of record and indeed contrary to said stipulation and admission of respondent, and
is grounded entirely on speculation, surmises or conjectures, hence, not binding on
the Supreme Court.
1

The Court of Appeals would consider petitioner to have waived the formal
requirement of endorsing the policy of co-insurance "since there was absolutely no
showing that it was not aware of said substitution and preferred to continue the
policy." The fallacy of this argument is that, contrary to Section 1, Rule 131 of the
Revised Rules of Court, which requires each party to prove his own allegations, it
would shift to petitioner, respondent's burden of proving her proposition that
petitioner was aware of the alleged substitution, and with such knowledge
preferred to continue the policy. Respondent Yap cites Gonzales La O vs. Yek Tong
Lin Fire and Marine Insurance Co., Ltd.
2
to justify the assumption but in that case,
unlike here, there was knowledge by the insurer of violations of the contract, to wit:
"If, with the knowledge of the existence of other insurances which the defendant
deemed violations of the contract, it has preferred to continue the policy, its action
amounts to a waiver of the annulment of the contract ..." A waiver must be express.
If it is to be implied from conduct mainly, said conduct must be clearly indicative of
a clear intent to waive such right. Especially in the case at bar where petitioner is
assumed to have waived a valuable right, nothing less than a clear, positive waiver,
made with full knowledge of the circumstances, must be required.
By the plain terms of the policy, other insurance without the consent of petitioner
would ipso facto avoid the contract. It required no affirmative act of election on the
part of the company to make operative the clause avoiding the contract, wherever
the specified conditions should occur. Its obligations ceased, unless, being informed
of the fact, it consented to the additional insurance.
The validity of a clause in a fire insurance policy to the effect that the procurement
of additional insurance without the consent of the insurer renders ipso facto the
policy void is well-settled:
In Milwaukee Mechanids' Lumber Co., vs. Gibson, 199 Ark. 542,
134 S. W. 2d 521, 522, a substantially identical clause was
sustained and enforced, the court saying: "The rule in this state
and practically all of the states is to the effect that a clause in a
policy to the effect that the procurement of additional insurance
without the consent of the insurer renders the policy void is a
valid provision. The earlier cases of Planters Mutual Insurance Co.,
vs. Green, 72 Ark. 305, 80 S.W. 92, are to the same effect." And
see Vance, Insurance, 2nd Ed., 725. (Reach vs. Arkansas Farmers
Mut. Fire Ins. Co., [Ark. Nov. 14, 1949] 224 S. W. 2d 48, 49.)
2. Where a policy contains a clause providing that the policy shall
be void if insured has or shall procure any other insurance on the
property, the procurement of additional insurance without the
consent of the insurer avoids the policy." (Planters' Mut. Ins. Ass'n
vs. Green [Supreme Court of Arkansas, March 19, 1904] 80 S.W.
151.)
3. The policy provided that it should be void in case of other
insurance "without notice and consent of this company. ..." It also
authorized the company to terminate the contract at any time, at
its option, by giving notice and refunding a ratable proportion of
the premium. Held, that additional insurance, unless consented
to, or unless a waiver was shown, ipso facto avoided the contract,
and the fact that the company had not, after notice of such
insurance, cancelled the policy, did not justify the legal conclusion
that it had elected to allow it to continue in force." (Johnson vs.
American Fire Ins., Co., [Supreme Court of Minnesota, Aug. 12,
1889] 43 N.W., 59)
The aforecited principles have been applied in this jurisdiction in General Insurance
& Surety Corporation vs. Ng Hua
3
. There, the policy issued by the General Insurance
& Surety Corporation in favor of respondent Ng Hua contained a provision identical
with the provisions in Policy No. 4219 quoted above.
4
This Court, speaking thru
Justice Cesar P. Bengson, in reversing the judgment of the Court of Appeals and
absolving the insurer from liability under the policy, held:
... And considering the terms of the policy which required the
insured to declare other insurances, the statement in question
must be deemed to be a statement (warranty) binding on both
insurer and insured, that there were no other insurance on the
property. ...
The annotation then, must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof
entitled the insurer to rescind. (Sec. 69, Insurance Act.) Such
misrepresentation is fatal in the light of our views in Santa Ana vs.
Commercial Union Assurance Company, Ltd., 55 Phil. 329. The
materiality of non-disclosure of other insurance policies is not
open to doubt.
Furthermore, even if the annotations were overlooked the
defendant insurer would still be free from liability because there
is no question that the policy issued by General Indemnity has
not been stated in nor endorsed on Policy No. 471 of defendant.
And as stipulated in the above-quoted provisions of such policy
"all benefit under this policy shall be forfeited. (Emphasis
supplied)
The obvious purpose of the aforesaid requirement in the policy is to prevent over-
insurance and thus avert the perpetration of fraud. The public, as well as the
insurer, is interested in preventing the situation in which a fire would be profitable
to the insured. According to Justice Story: "The insured has no right to complain, for
he assents to comply with all the stipulation on his side, in order to entitle himself
to the benefit of the contract, which, upon reason or principle, he has no right to
ask the court to dispense with the performance of his own part of the agreement,
and yet to bind the other party to obligations, which, but for those stipulation
would not have been entered into."
5

In view of the above conclusion, We deem it unnecessary to consider the other
defenses interposed by petitioner.
WHEREFORE, the appealed judgment of the Court of Appeals is reversed and set
aside, and the petitioner absolved from all liability under the policy. Costs against
private respondent.
SO ORDERED.


G.R. No. L-27932 October 30, 1972
UNION MANUFACTURING CO., INC. and the REPUBLIC BANK, plaintiffs, REPUBLIC
BANK, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY CO., INC., defendant-appellee.
FERNANDO, J.:p
In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co.,
Inc., defendant in the lower court and now appellee, was able to avoid liability upon
proof that there was a violation of a warranty. There was no denial thereof from
the insured, Union Manufacturing Co., Inc. With such a legally crippling blow, the
effort of the Republic Bank, the main plaintiff and now the sole appellant, to
recover on such policy as mortgagee, by virtue of the cover note in the insurance
policy providing that it is entitled to the payment of loss or damages as its interest
may appear, was in vain. The defect being legally incurable, its appeal is likewise
futile. We affirm.
As noted in the decision, the following facts are not disputed: "(1) That on January
12, 1962, the Union Manufacturing Co., Inc. obtained certain loans, overdrafts and
other credit accommodations from the Republic Bank in the total sum of
P415,000.00 with interest at 9% per annum from said date and to secure the
payment thereof, said Union Manufacturing Co., Inc. executed a real and chattel
mortgages on certain properties, which are more particularly described and listed
at the back of the mortgage contract ...; (2) That as additional condition of the
mortgage contract, the Union Manufacturing Co., Inc. undertook to secure
insurance coverage over the mortgaged properties for the same amount of
P415,000.00 distributed as follows: (a) Buildings, P30,000.00; (b) Machineries,
P300,000.00; and (c) Merchandise Inventory, P85,000.00, giving a total of
P415,000.00; (3) That as Union Manufacturing Co., Inc. failed to secure insurance
coverage on the mortgaged properties since January 12, 1962, despite the fact that
Cua Tok, its general manager, was reminded of said requirement, the Republic Bank
procured from the defendant, Philippine Guaranty Co., Inc. an insurance coverage
on loss against fire for P500,000.00 over the properties of the Union Manufacturing
Co., Inc., as described in defendant's 'Cover Note' dated September 25, 1962, with
the annotation that loss or damage, if any, under said Cover Note is payable to
Republic Bank as its interest may appear, subject however to the printed conditions
of said defendant's Fire Insurance Policy Form; (4) That on September 27, 1962, Fire
Insurance Policy No. 43170 ... was issued for the sum of P500,000.00 in favor of the
assured, Union Manufacturing Co., Inc., for which the corresponding premium in
the sum of P8,328.12, which was reduced to P6,688.12, was paid by the Republic
Bank to the defendant, Philippine Guaranty Co., Inc. ...; (5) That upon the expiration
of said fire policy on September 25, 1963, the same was renewed by the Republic
Bank upon payment of the corresponding premium in the same amount of
P6,663.52 on September 26, 1963; (6) That in the corresponding voucher ..., it
appears that although said renewal premium was paid by the Republic Bank, such
payment was for the account of Union Manufacturing Co., Inc. and that the cash
voucher for the payment of the first premium was paid also by the Republic Bank
but for the account Union Manufacturing Co., Inc.; (7) That sometime on September
6, 1964, a fire occurred in the premises of the Union Manufacturing Co., Inc.; (8)
That on October 6, 1964, the Union Manufacturing Co., Inc. filed its fire claim with
the defendant Philippine Guaranty Co., Inc., thru its adjuster, H. H. Bayne
Adjustment Co., which was denied by said defendant in its letter dated November
27, 1964 ..., on the following grounds: 'a. Policy Condition No. 3 and/or the 'Other
Insurance Clause' of the policy violated because you did not give notice to us the
other insurance which you had taken from New India for P80,000.00, Sincere
Insurance for P25,000.00 and Manila Insurance for P200,000.00 with the result that
these insurances, of which we became aware of only after the fire, were not
endorsed on our policy; and (b) Policy Condition No. 11 was not complied with
because you have failed to give to our representatives the required documents and
other proofs with respect to your claim and matters touching on our liability, if any,
and the amount of such liability'; (9) That as of September, 1962, when the
defendant Philippine Guaranty Co., issued Fire Insurance Policy No. 43170 ... in the
sum of P500,000.00 to cover the properties of the Union Manufacturing Co., Inc.,
the same properties were already covered by Fire Policy No. 1533 of the Sincere
Insurance Company for P25,000.00 for the period from October 7, 1961 to October
7, 1962 ...; and by insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic
Insurance Agency for the total sum of P300,000.00 and for periods respectively,
from January 27, 1962 to January 27, 1963, and from June 1, 1962 to June 1, 1963;
and (10) That when said defendant's Fire Insurance Policy No. 43170 was already in
full force and effect, the Union Manufacturing Co., Inc. without the consent of the
defendant, Philippine Guaranty Co., Inc., obtained other insurance policies totalling
P305,000.00 over the same properties prior to the fire, to wit: (1) Fire Policy No.
250 of New India Assurance Co., Ltd., for P80,000.00 for the period from May 27,
1964 to May 27, 1965 ...; (2) Fire Policy No. 3702 of the Sincere Insurance Company
for P25,000.00 for the period from October 7, 1963 to October 7, 1964 ...; and (3)
Fire Policy No. 6161 of Manila Insurance Co. for P200,000.00 for the period from
May 15, 1964 to May 15, 1965 ... ."
1
There is in the cover note
2
and in the fire
insurance policy
3
the following warranty: "[Co- Insurance Declared]: Nil."
4

Why the appellant Republic Bank could not recover, as payee, in case of loss as its
"interest may appear subject to the terms and conditions, clauses and warranties"
of the policy was expressed in the appealed decision thus: "However, inasmuch as
the Union Manufacturing Co., Inc. has violated the condition of the policy to the
effect that it did not reveal the existence of other insurance policies over the same
properties, as required by the warranty appearing on the face of the policy issued
by the defendant and that on the other hand said Union Manufacturing Co., Inc.
represented that there were no other insurance policies at the time of the issuance
of said defendant's policy, and it appearing furthermore that while the policy of the
defendant was in full force and effect the Union Manufacturing Co., Inc. secured
other fire insurance policies without the written consent of the defendant endorsed
on the policy, the conclusion is inevitable that both the Republic Bank and Union
Manufacturing Co., Inc. cannot recover from the same policy of the defendant
because the same is null and void."
5
The tone of confidence apparent in the above
excerpts from the lower court decision is understandable. The conclusion reached
by the lower court finds support in authoritative precedents. It is far from easy,
therefore, for appellant Republic Bank to impute to such a decision a failure to
abide by the law. Hence, as noted at the outset, the appeal cannot prosper. An
affirmance is indicated.
It is to Santa Ana v. Commercial Union Assurance Co.,
6
a 1930 decision, that one
turns to for the first explicit formulation as to the controlling principle. As was made
clear in the opinion of this Court, penned by Justice Villa-Real: "Without deciding
whether notice of other insurance upon the same property must be given in
writing, or whether a verbal notice is sufficient to render an insurance valid which
requires such notice, whether oral or written, we hold that in the absolute absence
of such notice when it is one of the conditions specified in the fire insurance policy,
the policy is null and void."
7
The next year, in Ang Giok Chip v. Springfield Fire &
Marine Ins. Co.,
8
the conformity of the insured to the terms of the policy, implied
from the failure to express any disagreement with what is provided for, was
stressed in these words of theponente, Justice Malcolm: "It is admitted that the
policy before us was accepted by the plaintiff. The receipt of this policy by the
insured without objection binds both the acceptor and the insured to the terms
thereof. The insured may not thereafter be heard to say that he did not read the
policy or know its terms, since it is his duty to read his policy and it will be assumed
that he did so." 9 As far back as 1915, in Young v. Midland Textile Insurance
Company,
10
it was categorically set forth that as a condition precedent to the right
of recovery, there must be compliance on the part of the insured with the terms of
the policy. As stated in the opinion of the Court through Justice Johnson: "If the
insured has violated or failed to perform the conditions of the contract, and such a
violation or want of performance has not been waived by the insurer, then the
insured cannot recover. Courts are not permitted to make contracts for the parties.
The function and duty of the courts consist simply in enforcing and carrying out the
contracts actually made. While it is true, as a general rule, that contracts of
insurance are construed most favorably to the insured, yet 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."
11
More specifically, there was a reiteration of this Santa Ana ruling
in a decision by the then Justice, later Chief Justice, Bengzon, in General Insurance &
Surety Corp. v. Ng Hua.
12
Thus: "The annotation then, must be deemed to be a
warranty that the property was not insured by any other policy. Violation thereof
entitles the insurer to rescind. (Sec. 69, Insurance Act) Such misrepresentation is
fatal in the light of our views in Santa Ana v. Commercial Union Assurance
Company, Ltd. ... . The materiality of non-disclosure of other insurance policies is
not open to doubt."
13
As a matter of fact, in a 1966 decision, Misamis Lumber Corp.
v. Capital Ins. & Surety Co., Inc.,
14
Justice J.B.L. Reyes, for this Court, made manifest
anew its adherence to such a principle in the face of an assertion that thereby a
highly unfavorable provision for the insured would be accorded recognition. This is
the language used: "The insurance contract may be rather onerous ('one sided', as
the lower court put it), but that in itself does not justify the abrogation of its
express terms, terms which the insured accepted or adhered to and which is the
law between the contracting parties."
15

There is no escaping the conclusion then that the lower court could not have
disposed of this case in a way other than it did. Had it acted otherwise, it clearly
would have disregarded pronouncements of this Court, the compelling force of
which cannot be denied. There is, to repeat, no justification for a reversal.
WHEREFORE, the decision of the lower court of March 31, 1967 is affirmed. No
costs.










G.R. No. 94052 August 9, 1991
ORIENTAL ASSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.
MELENCIO-HERRERA, J:p
An action to recover on a marine insurance policy, issued by petitioner in favor of
private respondent, arising from the loss of a shipment of apitong logs from
Palawan to Manila.
The facts relevant to the present review disclose that sometime in January 1986,
private respondent Panama Sawmill Co., Inc. (Panama) bought, in Palawan, 1,208
pieces of apitong logs, with a total volume of 2,000 cubic meters. It hired
Transpacific Towage, Inc., to transport the logs by sea to Manila and insured it
against loss for P1-M with petitioner Oriental Assurance Corporation (Oriental
Assurance). There is a claim by Panama, however, that the insurance coverage
should have been for P3-M were it not for the fraudulent act of one Benito Sy Yee
Long to whom it had entrusted the amount of P6,000.00 for the payment of the
premium for a P3-M policy.
Oriental Assurance issued Marine Insurance Policy No. OACM 86/002, which
stipulated, among others:
Name of Insured:
Panama Sawmill, Inc.
Karuhatan, Valenzuela
Metro Manila
Vessel:
MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter apitong Logs
Barge Transpac 1,000-1,000 cubic meter apitong Logs
Voyage or Period of Insurance:
From Palawan-ETD January 16, 1986
To: Manila
Subject matter Insured:
2,000 cubic meters apitong Logs
Agreed Value
Amount Insured Hereunder:
Pesos: One Million Only (P1,000,000.00)
Philippine Currency
Premium P2,500.00 rate 0.250%
Doc. stamps 187.60 Invoice No. 157862
l % P/tax 25.00
TOTAL P2,712.50
CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and
WARRANTIES
Warranted that this Insurance is against TOTAL LOSS ONLY.
Subject to the following clauses:
Civil Code Article 1250 Waiver clause
Typhoon warranty clause
Omnibus clause.
The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs
with a volume of 1,000 cubicmeters; and (2) on Barge TPAC-1000, 598 pieces of
logs, also with a volume of 1,000 cubic meters.
On 28 January 1986, the two barges were towed by one tug-boat, the MT
'Seminole' But, as fate would have it, during the voyage, rough seas and strong
winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of logs
out of the 598 pieces loaded thereon.
Panama demanded payment for the loss but Oriental Assurance refuse on the
ground that its contracted liability was for "TOTAL LOSS ONLY." The rejection was
upon the recommendation of the Tan Gatue Adjustment Company.
Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint
for Damages against Ever Insurance Agency (allegedly, also liable), Benito Sy Lee
Yong and Oriental Assurance, before the Regional Trial Court, Kalookan, Branch
123, docketed as Civil Case No. C-12601.
After trial on the merit, the RTC
1
rendered its Decision, with the following
dispositive portion:
WHEREFORE, upon all the foregoing premises, judgment is hereby
rendered:
1. Ordering the defendant Oriental Assurance Corporation to pay
plaintiff Panama Saw Mill Inc. the amount of P415,000.00 as
insurance indemnity with interest at the rate of 12% per annum
computed from the date of the filing of the complaint;
2. Ordering Panama Saw Mill to pay defendant Ever Insurance
Agency or Antonio Sy Lee Yong, owner thereof, (Ever being a
single proprietorship) for the amount of P20,000.00 as attorney's
fee and another amount of P20,000.00 as moral damages.
3. Dismissing the complaint against defendant Benito Sy Lee Yong.
SO ORDERED.
On appeal by both parties, respondent Appellate Court
2
affirmed the lower Court
judgment in all respects except for the rate of interest, which was reduce from
twelve (12%) to six (6%) per annum.
Both Courts shared the view that the insurance contract should be liberally
construed in order to avoid a denial of substantial justice; and that the logs loaded
in the two barges should be treated separately such that the loss sustained by the
shipment in one of them may be considered as "constructive total loss" and
correspondingly compensable.
In this Petition for Review on Certiorari, Oriental Assurance challenges the aforesaid
dispositions. In its Comment, Panama, in turn, maintains that the constructive total
loss should be based on a policy value of P3-M and not P1-M, and prays that the
award to Ever Insurance Agency or Antonio Sy Lee Yong of damages and attorney's
fees be set aside.
The question for determination is whether or not Oriental Assurance can be held
liable under its marine insurance policy based on the theory of a divisible contract
of insurance and, consequently, a constructive total loss.
Our considered opinion is that no liability attaches.
The terms of the contract constitute the measure of the insurer liability and
compliance therewith is a condition precedent to the insured's right to recovery
from the insurer (Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No.
78860, May 28, 1990, 185 SCRA 741). Whether a contract is entire or severable is a
question of intention to be determined by the language employed by the parties.
The policy in question shows that the subject matter insured was the entire
shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded
on two different barges did not make the contract several and divisible as to the
items insured. The logs on the two barges were not separately valued or separately
insured. Only one premium was paid for the entire shipment, making for only one
cause or consideration. The insurance contract must, therefore, be considered
indivisible.
More importantly, the insurer's liability was for "total loss only." A total loss may be
either actual or constructive (Sec. 129, Insurance Code). An actual total loss is
caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by being
broken up;
(c) Any damage to the thing which renders it valueless to the
owner for the purpose for which he held it; or
(d) Any other event which effectively deprives the owner of the
possession, at the port of destination, of the thing insured.
(Section 130, Insurance Code).
A constructive total loss is one which gives to a person insured a right to abandon,
under Section 139 of the Insurance Code. This provision reads:
SECTION 139. A person insured by a contract of marine insurance
may abandon the thing insured, or any particular portion
thereof separately valued by the policy, or otherwise separately
insured, and recover for a total loss thereof, when the cause of
the loss is a peril injured against,
(a) If more than three-fourths thereof in value is actually lost, or
would have to be expended to recover it from the peril;
(b) If it is injured to such an extent as to reduce its value more
than three-fourths;
xxx xxx xxx
(Emphasis supplied)
Respondent Appellate Court treated the loss as a constructive total loss, and for the
purpose of computing the more than three-fourths value of the logs actually lost,
considered the cargo in one barge as separate from the logs in the other. Thus, it
concluded that the loss of 497 pieces of logs from barge TPAC-1000, mathematically
speaking, is more than three-fourths () of the 598 pieces of logs loaded in that
barge and may, therefore, be considered as constructive total loss.
The basis thus used is, in our opinion, reversible error. The requirements for the
application of Section 139 of the Insurance Code, quoted above, have not been
met. The logs involved, although placed in two barges, were not separately valued
by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000
in relation to the total number of logs loaded on the same barge can not be made
the basis for determining constructive total loss. The logs having been insured as
one inseparable unit, the correct basis for determining the existence of constructive
total loss is the totality of the shipment of logs. Of the entirety of 1,208, pieces of
logs, only 497 pieces thereof were lost or 41.45% of the entire shipment. Since the
cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces of
logs, the shipment can not be said to have sustained a constructive total loss under
Section 139(a) of the Insurance Code.
In the absence of either actual or constructive total loss, there can be no recovery
by the insured Panama against the insurer, Oriental Assurance.
By reason of the conclusions arrived at, Panama's asseverations in its Comment
need no longer be passed upon, besides the fact that no review, in proper form, has
been sought by it.
WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner,
Oriental Assurance Corporation, is hereby ABSOLVED from liability under its marine
insurance policy No. OAC-M-86/002. No costs.
SO ORDERED.



















G.R. No. 85141 November 28, 1989
FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.
REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July
19,1988, the dispositive part of which reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it
orders defendant Filipino Merchants Insurance Company to pay
the plaintiff the sum of P51,568.62 with interest at legal rate from
the date of filing of the complaint, and is modified with respect to
the third party complaint in that (1) third party defendant E.
Razon, Inc. is ordered to reimburse third party plaintiff the sum of
P25,471.80 with legal interest from the date of payment until the
date of reimbursement, and (2) the third-party complaint against
third party defendant Compagnie Maritime Des Chargeurs Reunis
is dismissed.
1

The facts as found by the trial court and adopted by the Court of Appeals are as
follows:
This is an action brought by the consignee of the shipment of
fishmeal loaded on board the vessel SS Bougainville and unloaded
at the Port of Manila on or about December 11, 1976 and seeks to
recover from the defendant insurance company the amount of
P51,568.62 representing damages to said shipment which has
been insured by the defendant insurance company under Policy
No. M-2678. The defendant brought a third party complaint
against third party defendants Compagnie Maritime Des
Chargeurs Reunis and/or E. Razon, Inc. seeking judgment against
the third (sic) defendants in case Judgment is rendered against
the third party plaintiff. It appears from the evidence presented
that in December 1976, plaintiff insured said shipment with
defendant insurance company under said cargo Policy No. M-2678
for the sum of P267,653.59 for the goods described as 600 metric
tons of fishmeal in new gunny bags of 90 kilos each from Bangkok,
Thailand to Manila against all risks under warehouse to
warehouse terms. Actually, what was imported was 59.940 metric
tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in
666 new gunny bags were unloaded from the ship on December
11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and
defendant's surveyor ascertained and certified that in such
discharge 105 bags were in bad order condition as jointly
surveyed by the ship's agent and the arrastre contractor. The
condition of the bad order was reflected in the turn over survey
report of Bad Order cargoes Nos. 120320 to 120322, as Exhibit C-4
consisting of three (3) pages which are also Exhibits 4, 5 and 6-
Razon. The cargo was also surveyed by the arrastre contractor
before delivery of the cargo to the consignee and the condition of
the cargo on such delivery was reflected in E. Razon's Bad Order
Certificate No. 14859, 14863 and 14869 covering a total of 227
bags in bad order condition. Defendant's surveyor has conducted
a final and detailed survey of the cargo in the warehouse for
which he prepared a survey report Exhibit F with the findings on
the extent of shortage or loss on the bad order bags totalling 227
bags amounting to 12,148 kilos, Exhibit F-1. Based on said
computation the plaintiff made a formal claim against the
defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A
formal claim statement was also presented by the plaintiff against
the vessel dated December 21, 1976, Exhibit B, but the defendant
Filipino Merchants Insurance Company refused to pay the claim.
Consequently, the plaintiff brought an action against said
defendant as adverted to above and defendant presented a third
party complaint against the vessel and the arrastre contractor.
2

The court below, after trial on the merits, rendered judgment in favor of private
respondent, the decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby
rendered in favor of the plaintiff and against the defendant
Filipino Merchant's (sic) Insurance Co., ordering the defendants to
pay the plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate from the date of
the filing of the complaint;
On the third party complaint, the third party defendant
Compagnie Maritime Des Chargeurs Reunis and third party
defendant E. Razon, Inc. are ordered to pay to the third party
plaintiff jointly and severally reimbursement of the amounts paid
by the third party plaintiff with legal interest from the date of
such payment until the date of such reimbursement.
Without pronouncement as to costs.
3

On appeal, the respondent court affirmed the decision of the lower court insofar as
the award on the complaint is concerned and modified the same with regard to the
adjudication of the third-party complaint. A motion for reconsideration of the
aforesaid decision was denied, hence this petition with the following assignment of
errors:
1. The Court of Appeals erred in its interpretation and application
of the "all risks" clause of the marine insurance policy when it
held the petitioner liable to the private respondent for the partial
loss of the cargo, notwithstanding the clear absence of proof of
some fortuitous event, casualty, or accidental cause to which the
loss is attributable, thereby contradicting the very precedents
cited by it in its decision as well as a prior decision of the same
Division of the said court (then composed of Justices Cacdac,
Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that the private
respondent had no insurable interest in the subject cargo, hence,
the marine insurance policy taken out by private respondent is
null and void;
3. The Court of Appeals erred in not holding that the private
respondent was guilty of fraud in not disclosing the fact, it being
bound out of utmost good faith to do so, that it had no insurable
interest in the subject cargo, which bars its recovery on the
policy.
4

On the first assignment of error, petitioner contends that an "all risks" marine policy
has a technical meaning in insurance in that before a claim can be compensable it is
essential that there must be "some fortuity, " "casualty" or "accidental cause" to
which the alleged loss is attributable and the failure of herein private respondent,
upon whom lay the burden, to adduce evidence showing that the alleged loss to the
cargo in question was due to a fortuitous event precludes his right to recover from
the insurance policy. We find said contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the
subject-matter insured but shall in no case be deemed to extend
to cover loss, damage, or expense proximately caused by delay or
inherent vice or nature of the subject-matter insured. Claims
recoverable hereunder shall be payable irrespective of
percentage.
5

An "all risks policy" should be read literally as meaning all risks whatsoever and
covering all losses by an accidental cause of any kind. The terms "accident" and
"accidental", as used in insurance contracts, have not acquired any technical
meaning. They are construed by the courts in their ordinary and common
acceptance. Thus, the terms have been taken to mean that which happens by
chance or fortuitously, without intention and design, and which is unexpected,
unusual and unforeseen. An accident is an event that takes place without one's
foresight or expectation; an event that proceeds from an unknown cause, or is an
unusual effect of a known cause and, therefore, not expected.
6

The very nature of the term "all risks" must be given a broad and comprehensive
meaning as covering any loss other than a willful and fraudulent act of the
insured.
7
This is pursuant to the very purpose of an "all risks" insurance to give
protection to the insured in those cases where difficulties of logical explanation or
some mystery surround the loss or damage to property.
8
An "all asks" policy has
been evolved to grant greater protection than that afforded by the "perils clause,"
in order to assure that no loss can happen through the incidence of a cause neither
insured against nor creating liability in the ship; it is written against all losses, that
is, attributable to external causes.
9

The term "all risks" cannot be given a strained technical meaning, the language of
the clause under the Institute Cargo Clauses being unequivocal and clear, to the
effect that it extends to all damages/losses suffered by the insured cargo except (a)
loss or damage or expense proximately caused by delay, and (b) loss or damage or
expense proximately caused by the inherent vice or nature of the subject matter
insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a
covered peril, but under an "all risks" policy the burden is not on the insured to
prove the precise cause of loss or damage for which it seeks compensation. The
insured under an "all risks insurance policy" has the initial burden of proving that
the cargo was in good condition when the policy attached and that the cargo was
damaged when unloaded from the vessel; thereafter, the burden then shifts to the
insurer to show the exception to the coverage.
10
As we held in Paris-Manila
Perfumery Co. vs. Phoenix Assurance Co., Ltd.
11
the basic rule is that the insurance
company has the burden of proving that the loss is caused by the risk excepted and
for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a
special type of insurance which extends coverage to risks not usually contemplated
and avoids putting upon the insured the burden of establishing that the loss was
due to the peril falling within the policy's coverage; the insurer can avoid coverage
upon demonstrating that a specific provision expressly excludes the loss from
coverage.
12
A marine insurance policy providing that the insurance was to be
"against all risks" must be construed as creating a special insurance and extending
to other risks than are usually contemplated, and covers all losses except such as
arise from the fraud of the insured.
13
The burden of the insured, therefore, is to
prove merely that the goods he transported have been lost, destroyed or
deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss
was due to excepted perils. To impose on the insured the burden of proving the
precise cause of the loss or damage would be inconsistent with the broad
protective purpose of "all risks" insurance.
In the present case, there being no showing that the loss was caused by any of the
excepted perils, the insurer is liable under the policy. As aptly stated by the
respondent Court of Appeals, upon due consideration of the authorities and
jurisprudence it discussed
... it is believed that in the absence of any showing that the
losses/damages were caused by an excepted peril, i.e. delay or
the inherent vice or nature of the subject matter insured, and
there is no such showing, the lower court did not err in holding
that the loss was covered by the policy.
There is no evidence presented to show that the condition of the
gunny bags in which the fishmeal was packed was such that they
could not hold their contents in the course of the necessary
transit, much less any evidence that the bags of cargo had burst as
the result of the weakness of the bags themselves. Had there
been such a showing that spillage would have been a certainty,
there may have been good reason to plead that there was no risk
covered by the policy (See Berk vs. Style [1956] cited in Marine
Insurance Claims, Ibid, p. 125). Under an 'all risks' policy, it was
sufficient to show that there was damage occasioned by some
accidental cause of any kind, and there is no necessity to point to
any particular cause.
14

Contracts of insurance are contracts of indemnity upon the terms and conditions
specified in the policy. The agreement has the force of law between the parties. The
terms of the policy constitute the measure of the insurer's liability. If such terms are
clear and unambiguous, they must be taken and understood in their plain, ordinary
and popular sense.
15

Anent the issue of insurable interest, we uphold the ruling of the respondent court
that private respondent, as consignee of the goods in transit under an invoice
containing the terms under "C & F Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every
interest in property, whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify the
insured. In principle, anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction whether he has
or has not any title in, or lien upon or possession of the property y.
16
Insurable
interest in property may consist in (a) an existing interest; (b) an inchoate interest
founded on an existing interest; or (c) an expectancy, coupled with an existing
interest in that out of which the expectancy arises.
17

Herein private respondent, as vendee/consignee of the goods in transit has such
existing interest therein as may be the subject of a valid contract of insurance. His
interest over the goods is based on the perfected contract of sale.
18
The perfected
contract of sale between him and the shipper of the goods operates to vest in him
an equitable title even before delivery or before be performed the conditions of the
sale.
19
The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this
case, is immaterial in the determination of whether the vendee has an insurable
interest or not in the goods in transit. The perfected contract of sale even without
delivery vests in the vendee an equitable title, an existing interest over the goods
sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a
contract of sale, the seller is authorized or required to send the goods to the buyer,
delivery of the goods to a carrier, whether named by the buyer or not, for, the
purpose of transmission to the buyer is deemed to be a delivery of the goods to the
buyer, the exceptions to said rule not obtaining in the present case. The Court has
heretofore ruled that the delivery of the goods on board the carrying vessels
partake of the nature of actual delivery since, from that time, the foreign buyers
assumed the risks of loss of the goods and paid the insurance premium covering
them.
20

C & F contracts are shipment contracts. The term means that the price fixed
includes in a lump sum the cost of the goods and freight to the named
destination.
21
It simply means that the seller must pay the costs and freight
necessary to bring the goods to the named destination but the risk of loss or
damage to the goods is transferred from the seller to the buyer when the goods
pass the ship's rail in the port of shipment.
22

Moreover, the issue of lack of insurable interest was not among the defenses
averred in petitioners answer. It was neither an issue agreed upon by the parties at
the pre-trial conference nor was it raised during the trial in the court below. It is a
settled rule that an issue which has not been raised in the court a quo cannot be
raised for the first time on appeal as it would be offensive to the basic rules of fair
play, justice and due process.
23
This is but a permuted restatement of the long
settled rule that when a party deliberately adopts a certain theory, and the case is
tried and decided upon that theory in the court below, he will not be permitted to
change his theory on appeal because, to permit him to do so, would be unfair to the
adverse party.
24

If despite the fundamental doctrines just stated, we nevertheless decided to indite
a disquisition on the issue of insurable interest raised by petitioner, it was to put at
rest all doubts on the matter under the facts in this case and also to dispose of
petitioner's third assignment of error which consequently needs no further
discussion.
WHEREFORE, the instant petition is DENIED and the assailed decision of the
respondent Court of Appeals is AFFIRMED in toto.






























G.R. No. 127897 November 15, 2001
DELSAN TRANSPORT LINES, INC., petitioner,
vs.
THE HON. COURT OF APPEALS and AMERICAN HOME ASSURANCE
CORPORATION, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision
1
of the Court of
Appeals in CA-G.R. CV No. 39836 promulgated on June 17, 1996, reversing the
decision of the Regional Trial Court of Makati City, Branch 137, ordering petitioner
to pay private respondent the sum of Five Million Ninety-Six Thousand Six Hundred
Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.57) and costs and the
Resolution
2
dated January 21, 1997 which denied the subsequent motion for
reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of
affreightment with the petitioner, Delsan Transport Lines, Inc., for a period of one
year whereby the said common carrier agreed to transport Caltexs industrial fuel
oil from the Batangas-Bataan Refinery to different parts of the country. Under the
contract, petitioner took on board its vessel, MT Maysun 2,277.314 kiloliters of
industrial fuel oil of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga
City. The shipment was insured with the private respondent, American Home
Assurance Corporation.
On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City.
Unfortunately, the vessel sank in the early morning of August 16, 1986 near Panay
Gulf in the Visayas taking with it the entire cargo of fuel oil.
Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six
Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.67)
representing the insured value of the lost cargo. Exercising its right of subrogation
under Article 2207 of the New Civil Code, the private respondent demanded of the
petitioner the same amount it paid to Caltex.1wphi1.nt
Due to its failure to collect from the petitioner despite prior demand, private
respondent filed a complaint with the Regional Trial Court of Makati City, Branch
137, for collection of a sum of money. After the trial and upon analyzing the
evidence adduced, the trial court rendered a decision on November 29, 1990
dismissing the complaint against herein petitioner without pronouncement as to
cost. The trial court found that the vessel, MT Maysum, was seaworthy to
undertake the voyage as determined by the Philippine Coast Guard per Survey
Certificate Report No. M5-016-MH upon inspection during its annual dry-docking
and that the incident was caused by unexpected inclement weather condition
or force majeure, thus exempting the common carrier (herein petitioner) from
liability for the loss of its cargo.
3

The decision of the trial court, however, was reversed, on appeal, by the Court of
Appeals. The appellate court gave credence to the weather report issued by the
Philippine Atmospheric, Geophysical and Astronomical Services Administration
(PAGASA for brevity) which showed that from 2:00 oclock to 8:oo oclock in the
morning on August 16, 1986, the wind speed remained at 10 to 20 knots per hour
while the waves measured from .7 to two (2) meters in height only in the vicinity of
the Panay Gulf where the subject vessel sank, in contrast to herein petitioners
allegation that the waves were twenty (20) feet high. In the absence of any
explanation as to what may have caused the sinking of the vessel coupled with the
finding that the same was improperly manned, the appellate court ruled that the
petitioner is liable on its obligation as common carrier
4
to herein private respondent
insurance company as subrogee of Caltex. The subsequent motion for
reconsideration of herein petitioner was denied by the appellate court.
Petitioner raised the following assignments of error in support of the instant
petition,
5
to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE
REGIONAL TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING
THE LEGAL PRESUMPTION THAT THE VESSEL MT "MAYSUN" WAS
SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE
SUPREME COURT IN THE CASE OF HOME INSURANCE CORPORATION V.
COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the
Insurance Code of the Philippines, which states that in every marine insurance upon
a ship or freight, or freightage, or upon any thin which is the subject of marine
insurance there is an implied warranty by the shipper that the ship is seaworthy.
Consequently, the insurer will not be liable to the assured for any loss under the
policy in case the vessel would later on be found as not seaworthy at the inception
of the insurance. It theorized that when private respondent paid Caltex the value of
its lost cargo, the act of the private respondent is equivalent to a tacit recognition
that the ill-fated vessel was seaworthy; otherwise, private respondent was not
legally liable to Caltex due to the latters breach of implied warranty under the
marine insurance policy that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun
was not seaworthy on the ground that the marine officer who served as the chief
mate of the vessel, Francisco Berina, was allegedly not qualified. Under Section 116
of the Insurance Code of the Philippines, the implied warranty of seaworthiness of
the vessel, which the private respondent admitted as having been fulfilled by its
payment of the insurance proceeds to Caltex of its lost cargo, extends to the
vessels complement. Besides, petitioner avers that although Berina had merely a
2
nd
officers license, he was qualified to act as the vessels chief officer under
Chapter IV(403), Category III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules
and Regulations. In fact, all the crew and officers of MT Maysun were exonerated in
the administrative investigation conducted by the Board of Marine Inquiry after the
subject accident.
6

In any event, petitioner further avers that private respondent failed, for unknown
reason, to present in evidence during the trial of the instant case the subject marine
cargo insurance policy it entered into with Caltex. By virtue of the doctrine laid
down in the case of Home Insurance Corporation vs. CA,
7
the failure of the private
respondent to present the insurance policy in evidence is allegedly fatal to its claim
inasmuch as there is no way to determine the rights of the parties thereto.
Hence, the legal issues posed before the Court are:
I
Whether or not the payment made by the private respondent to Caltex for
the insured value of the lost cargo amounted to an admission that the
vessel was seaworthy, thus precluding any action for recovery against the
petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars
the complaint for recovery of sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost cargo
operates as waiver of its (private respondent) right to enforce the term of the
implied warranty against Caltex under the marine insurance policy. However, the
same cannot be validly interpreted as an automatic admission of the vessels
seaworthiness by the private respondent as to foreclose recourse against the
petitioner for any liability under its contractual obligation as a common carrier. The
fact of payment grants the private respondent subrogatory right which enables it to
exercise legal remedies that would otherwise be available to Caltex as owner of the
lost cargo against the petitioner common carrier.
8
Article 2207 of the New civil
Code provides that:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing
the loss or injury.
The right of subrogation has its roots in equity. It is designed to promote and to
accomplish justice and is the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice and good conscience ought to pay.
9
It is
not dependent upon, nor does it grow out of, any privity of contract or upon
written assignment of claim. It accrues simply upon payment by the insurance
company of the insurance claim.
10
Consequently, the payment made by the private
respondent (insurer) to Caltex (assured) operates as an equitable assignment to the
former of all the remedies which the latter may have against the petitioner.
From the nature of their business and for reasons of public policy, common carriers
are bound to observe extraordinary diligence in the vigilance over the goods and for
the safety of passengers transported by them, according to all the circumstance of
each case.
11
In the event of loss, destruction or deterioration of the insured goods,
common carriers shall be responsible unless the same is brought about, among
others, by flood, storm, earthquake, lightning or other natural disaster or
calamity.
12
In all other cases, if the goods are lost, destroyed or deteriorated,
common carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence.
13

In order to escape liability for the loss of its cargo of industrial fuel oil belonging to
Caltex, petitioner attributes the sinking of MT Maysun to fortuitous even or force
majeure. From the testimonies of Jaime Jarabe and Francisco Berina, captain and
chief mate, respectively of the ill-fated vessel, it appears that a sudden and
unexpected change of weather condition occurred in the early morning of August
16, 1986; that at around 3:15 oclock in the morning a squall ("unos") carrying
strong winds with an approximate velocity of 30 knots per hour and big waves
averaging eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun
causing it to tilt, take in water and eventually sink with its cargo.
14
This tale of
strong winds and big waves by the said officers of the petitioner however, was
effectively rebutted and belied by the weather report
15
from the Philippine
Atmospheric, Geophysical and Astronomical Services Administration (PAGASA), the
independent government agency charged with monitoring weather and sea
conditions, showing that from 2:00 oclock to 8:00 oclock in the morning on August
16, 1986, the wind speed remained at ten (10) to twenty (20) knots per hour while
the height of the waves ranged from .7 to two (2) meters in the vicinity of Cuyo East
Pass and Panay Gulf where the subject vessel sank. Thus, as the appellate court
correctly ruled, petitioners vessel, MT Maysun, sank with its entire cargo for the
reason that it was not seaworthy. There was no squall or bad weather or extremely
poor sea condition in the vicinity when the said vessel sank.
The appellate court also correctly opined that the petitioners witnesses, Jaime
Jarabe and Francisco Berina, ship captain and chief mate, respectively, of the said
vessel, could not be expected to testify against the interest of their employer, the
herein petitioner common carrier.
Neither may petitioner escape liability by presenting in evidence certificates
16
that
tend to show that at the time of dry-docking and inspection by the Philippine Coast
Guard, the vessel MT Maysun, was fit for voyage. These pieces of evidence do not
necessarily take into account the actual condition of the vessel at the time of the
commencement of the voyage. As correctly observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit.
The certificates issued, however, do not negate the presumption of
unseaworthiness triggered by an unexplained sinking. Of certificates issued
in this regard, authorities are likewise clear as to their probative value,
(thus):
Seaworthiness relates to a vessels actual condition. Neither the
granting of classification or the issuance of certificates established
seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec. 62).
And also:
Authorities are clear that diligence in securing certificates of
seaworthiness does not satisfy the vessel owners obligation. Also
securing the approval of the shipper of the cargo, or his surveyor,
of the condition of the vessel or her stowage does not establish
due diligence if the vessel was in fact unseaworthy, for the cargo
owner has no obligation in relation to seaworthiness. (Ibid.)
17

Additionally, the exoneration of MT Maysuns officers and crew by the Board of
Marine Inquiry merely concerns their respective administrative liabilities. It does
not in any way operate to absolve the petitioner common carrier from its civil
liabilities. It does not in any way operate to absolve the petitioner common carrier
from its civil liability arising from its failure to observe extraordinary diligence in the
vigilance over the goods it was transporting and for the negligent acts or omissions
of its employees, the determination of which properly belongs to the courts.
18
In
the case at bar, petitioner is liable for the insured value of the lost cargo of
industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault
or negligence as common carrier
19
occasioned by the unexplained sinking of its
vessel, MT Maysun, while in transit.
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 before the insurer
may recover from the common carrier the insured value of the lost cargo in the
exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of herein private respondent as insurer and
Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the
amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim.
20

The presentation of the insurance policy was necessary in the case of Home
Insurance Corporation v. CA
21
(a case cited by petitioner) because the shipment
therein (hydraulic engines) passed through several stages with different parties
involved in each stage. First, from the shipper to the port of departure; second,
from the port of departure to the M/S Oriental Statesman; third, from the M/S
Oriental Statesman to the M/S Pacific Conveyor; fourth, from the M/S Pacific
Conveyor to the port or arrival; fifth, from the port of arrival to the 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 stipulations to the contrary,
the hauler can be liable only for any damage that occurred from the time it received
the cargo until it finally delivered it to the consignee. Ordinarily, it cannot be held
responsible for the handling of the cargo before it actually received it. The
insurance contract, which was not presented in evidence in that case would have
indicated the scope of the insurers liability, if any, since no evidence was adduced
indicating at what stage in the handling process the damage to the cargo was
sustained.
Hence, our ruling on the presentation of the insurance policy in the said case of
Home Insurance Corporation is not applicable to the case at bar. In contrast, there
is no doubt that the cargo of industrial fuel oil belonging to Caltex, in the case at
bar, was lost while on board petitioners vessel, MT Maysun, which sank while in
transit in the vicinity of Panay Gulf and Cuyo East Pass in the early morning of
August 16, 1986.
WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of
the Court of Appeals in CA-G.R. CV No. 39836 is AFFIRMED. Costs against the
petitioner.
SO ORDERED.



































G.R. No. L-66935 November 11, 1985
ISABELA ROQUE, doing busines under the name and style of Isabela Roque Timber
Enterprises and ONG CHIONG, petitioners,
vs.
HON. INTERMEDIATE APPELATE COURT and PIONEER INSURANCE AND SURETY
CORPORATION,respondent.
GUTIERREZ, JR., J.:
This petition for certiorari asks for the review of the decision of the Intermediate
Appellate Court which absolved the respondent insurance company from liability on
the grounds that the vessel carrying the insured cargo was unseaworthy and the
loss of said cargo was caused not by the perils of the sea but by the perils of the
ship.
On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay), a
common carrier, entered into a contract with the petitioners whereby the former
would load and carry on board its barge Mable 10 about 422.18 cubic meters of
logs from Malampaya Sound, Palawan to North Harbor, Manila. The petitioners
insured the logs against loss for P100,000.00 with respondent Pioneer Insurance
and Surety Corporation (Pioneer).
On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at
Malampaya Sound, Palawan for carriage and delivery to North Harbor, Port of
Manila, but the shipment never reached its destination because Mable 10 sank with
the 811 pieces of logs somewhere off Cabuli Point in Palawan on its way to Manila.
As alleged by the petitioners in their complaint and as found by both the trial and
appellate courts, the barge where the logs were loaded was not seaworthy such
that it developed a leak. The appellate court further found that one of the hatches
was left open causing water to enter the barge and because the barge was not
provided with the necessary cover or tarpaulin, the ordinary splash of sea waves
brought more water inside the barge.
On March 8, 1972, the petitioners wrote a letter to Manila Bay demanding payment
of P150,000.00 for the loss of the shipment plus P100,000.00 as unrealized profits
but the latter ignored the demand. Another letter was sent to respondent Pioneer
claiming the full amount of P100,000.00 under the insurance policy but respondent
refused to pay on the ground that its hability depended upon the "Total loss by
Total Loss of Vessel only". Hence, petitioners commenced Civil Case No. 86599
against Manila Bay and respondent Pioneer.
After hearing, the trial court found in favor of the petitioners. The dispositive
portion of the decision reads:
FOR ALL THE FOREGOING, the Court hereby rendered judgment as
follows:
(a) Condemning defendants Manila Bay Lighterage Corporation
and Pioneer Insurance and Surety Corporation to pay plaintiffs,
jointly and severally, the sum of P100,000.00;
(b) Sentencing defendant Manila Bay Lighterage Corporation to
pay plaintiff, in addition, the sum of P50,000.00, plus P12,500.00,
that the latter advanced to the former as down payment for
transporting the logs in question;
(c) Ordering the counterclaim of defendant Insurance against
plaintiffs, dismissed, for lack of merit, but as to its cross-claim
against its co-defendant Manila Bay Lighterage Corporation, the
latter is ordered to reimburse the former for whatever amount it
may pay the plaintiffs as such surety;
(d) Ordering the counterclaim of defendant Lighterage against
plaintiffs, dismissed for lack of merit;
(e) Plaintiffs' claim of not less than P100,000.00 and P75,000.00 as
exemplary damages are ordered dismissed, for lack of merits;
plaintiffs' claim for attorney's fees in the sum of P10,000.00 is
hereby granted, against both defendants, who are, moreover
ordered to pay the costs; and
(f) The sum of P150,000.00 award to plaintiffs, shall bear interest
of six per cent (6%) from March 25, 1975, until amount is fully
paid.
Respondent Pioneer appealed to the Intermediate Appellate Court. Manila Bay did
not appeal. According to the petitioners, the transportation company is no longer
doing business and is without funds.
During the initial stages of the hearing, Manila Bay informed the trial court that it
had salvaged part of the logs. The court ordered them to be sold to the highest
bidder with the funds to be deposited in a bank in the name of Civil Case No. 86599.
On January 30, 1984, the appellate court modified the trial court's decision and
absolved Pioneer from liability after finding that there was a breach of implied
warranty of seaworthiness on the part of the petitioners and that the loss of the
insured cargo was caused by the "perils of the ship" and not by the "perils of the
sea". It ruled that the loss is not covered by the marine insurance policy.
After the appellate court denied their motion for reconsideration, the petitioners
filed this petition with the following assignments of errors:
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT
IN CASES OF MARINE CARGO INSURANCE, THERE IS A WARRANTY
OF SEAWORTHINESS BY THE CARGO OWNER.
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT
THE LOSS OF THE CARGO IN THIS CASE WAS CAUSED BY "PERILS
OF THE SHIP" AND NOT BY "PERILS OF THE SEA."
THE INTERMEDIATE APPELLATE COURT ERRED IN NOT ORDERING
THE RETURN TO PETITIONER OF THE AMOUNT OF P8,000.00
WHICH WAS DEPOSITED IN THE TRIAL COURT AS SALVAGE VALUE
OF THE LOGS THAT WERE RECOVERED.
In their first assignment of error, the petitioners contend that the implied warranty
of seaworthiness provided for in the Insurance Code refers only to the responsibility
of the shipowner who must see to it that his ship is reasonably fit to make in safety
the contemplated voyage.
The petitioners state that a mere shipper of cargo, having no control over the ship,
has nothing to do with its seaworthiness. They argue that a cargo owner has no
control over the structure of the ship, its cables, anchors, fuel and provisions, the
manner of loading his cargo and the cargo of other shippers, and the hiring of a
sufficient number of competent officers and seamen. The petitioners' arguments
have no merit.
There is no dispute over the liability of the common carrier Manila Bay. In fact, it
did not bother to appeal the questioned decision. However, the petitioners state
that Manila Bay has ceased operating as a firm and nothing may be recovered from
it. They are, therefore, trying to recover their losses from the insurer.
The liability of the insurance company is governed by law. Section 113 of the
Insurance Code provides:
In every marine insurance upon a ship or freight, or freightage, or
upon any thing which is the subject of marine insurance, a
warranty is implied that the ship is seaworthy.
Section 99 of the same Code also provides in part.
Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes,
merchandise, ...
From the above-quoted provisions, there can be no mistaking the fact that the term
"cargo" can be the subject of marine insurance and that once it is so made, the
implied warranty of seaworthiness immediately attaches to whoever is insuring the
cargo whether he be the shipowner or not.
As we have ruled in the case of Go Tiaoco y Hermanos v. Union Insurance Society of
Canton (40 Phil. 40):
The same conclusion must be reached if the question be
discussed with reference to the seaworthiness of the ship. It is
universally accepted that in every contract of insurance upon
anything which is the subject of marine insurance, a warranty is
implied that the ship shall be seaworthy at the time of the
inception of the voyage. This rule is accepted in our own
Insurance Law (Act No. 2427, sec. 106). ...
Moreover, the fact that the unseaworthiness of the ship was unknown to the
insured is immaterial in ordinary marine insurance and may not be used by him as a
defense in order to recover on the marine insurance policy.
As was held in Richelieu and Ontario Nav. Co. v. Boston Marine, Inc., Co. (136 U.S.
406):
There was no look-out, and both that and the rate of speed were
contrary to the Canadian Statute. The exception of losses
occasioned by unseaworthiness was in effect a warranty that a
loss should not be so occasioned, and whether the fact of
unseaworthiness were known or unknown would be immaterial.
Since the law provides for an implied warranty of seaworthiness in every contract of
ordinary marine insurance, it becomes the obligation of a cargo owner to look for a
reliable common carrier which keeps its vessels in seaworthy condition. The shipper
of cargo may have no control over the vessel but he has full control in the choice of
the common carrier that will transport his goods. Or the cargo owner may enter
into a contract of insurance which specifically provides that the insurer answers not
only for the perils of the sea but also provides for coverage of perils of the ship.
We are constrained to apply Section 113 of the Insurance Code to the facts of this
case. As stated by the private respondents:
In marine cases, the risks insured against are "perils of the sea"
(Chute v. North River Ins. Co., Minn214 NW 472, 55 ALR 933).
The purpose of such insurance is protection against contingencies
and against possible damages and such a policy does not cover a
loss or injury which must inevitably take place in the ordinary
course of things. There is no doubt that the term 'perils of the sea'
extends only to losses caused by sea damage, or by the violence
of the elements, and does not embrace all losses happening at
sea. They insure against losses from extraordinary
occurrences only, such as stress of weather, winds and waves,
lightning, tempests, rocks and the like. These are understood to
be the "perils of the sea" referred in the policy, and not those
ordinary perils which every vessel must encounter. "Perils of the
sea" has been said to include only such losses as are
of extraordinarynature, or arise from some overwhelming power,
which cannot be guarded against by the ordinary exertion of
human skill and prudence. Damage done to a vessel by perils of
the sea includes every species of damages done to a vessel at sea,
as distinguished from the ordinary wear and tear of the voyage,
and distinct from injuries suffered by the vessel in consequence of
her not being seaworthy at the outset of her voyage (as in this
case). It is also the general rule that everything which happens
thru the inherent vice of the thing, or by the act of the owners,
master or shipper, shall not be reputed a peril, if not otherwise
borne in the policy. (14 RCL on Insurance, Sec. 384, pp. 1203-
1204; Cia. de Navegacion v. Firemen's Fund Ins. Co., 277 US 66, 72
L. ed. 787, 48 S. Ct. 459).
With regard to the second assignment of error, petitioners maintain, that the loss of
the cargo was caused by the perils of the sea, not by the perils of the ship because
as found by the trial court, the barge was turned loose from the tugboat east of
Cabuli Point "where it was buffeted by storm and waves." Moreover, petitioners
also maintain that barratry, against which the cargo was also insured, existed when
the personnel of the tugboat and the barge committed a mistake by turning loose
the barge from the tugboat east of Cabuli Point. The trial court also found that the
stranding and foundering of Mable 10 was due to improper loading of the logs as
well as to a leak in the barge which constituted negligence.
On the contention of the petitioners that the trial court found that the loss was
occasioned by the perils of the sea characterized by the "storm and waves" which
buffeted the vessel, the records show that the court ruled otherwise. It stated:
xxx xxx xxx
... The other affirmative defense of defendant Lighterage, 'That
the supposed loss of the logs was occasioned by force majeure...
"was not supported by the evidence. At the time Mable 10 sank,
there was no typhoon but ordinary strong wind and waves, a
condition which is natural and normal in the open sea. The
evidence shows that the sinking of Mable 10 was due to improper
loading of the logs on one side so that the barge was tilting on
one side and for that it did not navigate on even keel; that it was
no longer seaworthy that was why it developed leak; that the
personnel of the tugboat and the barge committed a mistake
when it turned loose the barge from the tugboat east of Cabuli
point where it was buffeted by storm and waves, while the
tugboat proceeded to west of Cabuli point where it was protected
by the mountain side from the storm and waves coming from the
east direction. ..."
In fact, in the petitioners' complaint, it is alleged that "the barge Mable 10 of
defendant carrier developed a leak which allowed water to come in and that one of
the hatches of said barge was negligently left open by the person in charge thereof
causing more water to come in and that "the loss of said plaintiffs' cargo was due to
the fault, negligence, and/or lack of skill of defendant carrier and/or defendant
carrier's representatives on barge Mable 10."
It is quite unmistakable that the loss of the cargo was due to the perils of the ship
rather than the perils of the sea. The facts clearly negate the petitioners' claim
under the insurance policy. In the case of Go Tiaoco y Hermanos v. Union Ins.
Society of Canton, supra, we had occasion to elaborate on the term "perils of the
ship." We ruled:
It must be considered to be settled, furthermore, that a loss
which, in the ordinary course of events, results from the natural
and inevitable action of the sea, from the ordinary wear and tear
of the ship, or from the negligent failure of the ship's owner to
provide the vessel with proper equipment to convey the cargo
under ordinary conditions, is not a peril of the sea. Such a loss is
rather due to what has been aptly called the "peril of the ship."
The insurer undertakes to insure against perils of the sea and
similar perils, not against perils of the ship. As was well said
by Lord Herschell in Wilson, Sons & Co. v. Owners of Cargo per the
Xantho ([1887], 12 A. C., 503, 509), there must, in order to make
the insurer liable, be some casualty, something which could not
be foreseen as one of the necessary incidents of the adventure.
The purpose of the policy is to secure an indemnity against
accidents which may happen, not against events which must
happen.
In the present case the entrance of the sea water into the ship's
hold through the defective pipe already described was not due to
any accident which happened during the voyage, but to the
failure of the ship's owner properly to repair a defect of the
existence of which he was apprised. The loss was therefore more
analogous to that which directly results from simple
unseaworthiness than to that which result from the perils of the
sea.
xxx xxx xxx
Suffice it to say that upon the authority of those cases there is no
room to doubt the liability of the shipowner for such a loss as
occurred in this case. By parity of reasoning the insurer is not
liable; for generally speaking, the shipowner excepts the perils of
the sea from his engagement under the bill of lading, while this is
the very perils against which the insurer intends to give
protection. As applied to the present case it results that the
owners of the damaged rice must look to the shipowner for
redress and not to the insurer.
Neither can petitioners allege barratry on the basis of the findings showing
negligence on the part of the vessel's crew.
Barratry as defined in American Insurance Law is "any willful misconduct on the
part of master or crew in pursuance of some unlawful or fraudulent purpose
without the consent of the owners, and to the prejudice of the owner's interest."
(Sec. 171, U.S. Insurance Law, quoted in Vance, Handbook on Law of Insurance,
1951, p. 929.)
Barratry necessarily requires a willful and intentional act in its commission. No
honest error of judgment or mere negligence, unless criminally gross, can be
barratry. (See Vance on Law of Insurance, p. 929 and cases cited therein.)
In the case at bar, there is no finding that the loss was occasioned by the willful or
fraudulent acts of the vessel's crew. There was only simple negligence or lack of
skill. Hence, the second assignment of error must likewise be dismissed.
Anent the third assignment of error, we agree with the petitioners that the amount
of P8,000.00 representing the amount of the salvaged logs should have been
awarded to them. However, this should be deducted from the amounts which have
been adjudicated against Manila Bay Lighterage Corporation by the trial court.
WHEREFORE, the decision appealed from is AFFIRMED with the modification that
the amount of P8,000.00 representing the value of the salvaged logs which was
ordered to be deposited in the Manila Banking Corporation in the name of Civil
Case No. 86599 is hereby awarded and ordered paid to the petitioners. The liability
adjudged against Manila Bay Lighterage Corporation in the decision of the trial
court is accordingly reduced by the same amount.










G.R. No. 95529 August 22, 1991
MAGELLAN MANUFACTURING MARKETING CORPORATION, * petitioner,
vs.
COURT OF APPEALS, ORIENT OVERSEAS CONTAINER LINES and F.E. ZUELLIG,
INC. respondents.
REGALADO, J.:p
Petitioner, via this petition for review on certiorari, seeks the reversal of the
judgment of respondent Court of Appeals in CA-G.R. CV No. 18781,
1
affirming in
part the decision of the trial court,
2
the dispositive portion of which reads:
Premises considered, the decision appealed from is affirmed
insofar as it dismisses the complaint. On the counter-claim,
however, appellant is ordered to pay appellees the amount of
P52,102.45 with legal interest from date of extra-judicial demand.
The award of attorney's fees is deleted.
3

The facts as found by respondent appellate court are as follows:
On May 20, 1980, plaintiff-appellant Magellan Manufacturers
Marketing Corp. (MMMC) entered into a contract with Choju Co.
of Yokohama, Japan to export 136,000 anahaw fans for and in
consideration of $23,220.00. As payment thereof, a letter of
credit was issued to plaintiff MMMC by the buyer. Through its
president, James Cu, MMMC then contracted F.E. Zuellig, a
shipping agent, through its solicitor, one Mr. King, to ship the
anahaw fans through the other appellee, Orient Overseas
Container Lines, Inc., (OOCL) specifying that he needed an on-
board bill of lading and that transhipment is not allowed under
the letter of credit (Exh. B-1). On June 30, 1980, appellant MMMC
paid F.E. Zuellig the freight charges and secured a copy of the bill
of lading which was presented to Allied Bank. The bank then
credited the amount of US$23,220.00 covered by the letter of
credit to appellant's account. However, when appellant's
president James Cu, went back to the bank later, he was informed
that the payment was refused by the buyer allegedly because
there was no on-board bill of lading, and there was a
transhipment of goods. As a result of the refusal of the buyer to
accept, upon appellant's request, the anahaw fans were shipped
back to Manila by appellees, for which the latter demanded from
appellant payment of P246,043.43. Appellant abandoned the
whole cargo and asked appellees for damages.
In their Partial Stipulation of Facts, the parties admitted that a
shipment of 1,047 cartons of 136,000 pieces of Anahaw Fans
contained in 1 x 40 and 1 x 20 containers was loaded at Manila on
board the MV 'Pacific Despatcher' freight prepaid, and duly
covered by Bill of Lading No. MNYK201T dated June 27, 1980
issued by OOCL; that the shipment was delivered at the port of
discharge on July 19, 1980, but was subsequently returned to
Manila after the consignee refused to accept/pay the same.
4

Elaborating on the above findings of fact of respondent court and without being
disputed by herein private respondents, petitioner additionally avers that:
When petitioner informed private respondents about what
happened, the latter issued a certificate stating that its bill of
lading it issued is an on board bill of lading and that there was no
actual transhipment of the fans. According to private respondents
when the goods are transferred from one vessel to another which
both belong to the same owner which was what happened to the
Anahaw fans, then there is (no) transhipment. Petitioner sent this
certification to Choju Co., Ltd., but the said company still refused
to accept the goods which arrived in Japan on July 19, 1980.
Private respondents billed petitioner in the amount of P16,342.21
for such shipment and P34,928.71 for demurrage in Japan from
July 26 up to August 31, 1980 or a total of P51,271.02. In a letter
dated March 20, 1981, private respondents gave petitioner the
option of paying the sum of P51,271.02 or to abandon the
Anahaw fans to enable private respondents to sell them at public
auction to cover the cost of shipment and demurrages. Petitioner
opted to abandon the goods. However, in a letter dated June 22,
1981 private respondents demanded for payment of P298,150.93
from petitioner which represents the freight charges from Japan
to Manila, demurrage incurred in Japan and Manila from October
22, 1980 up to May 20, 1981; and charges for stripping the
container van of the Anahaw fans on May 20, 1981.
On July 20, 1981 petitioner filed the complaint in this case praying
that private respondents be ordered to pay whatever petitioner
was not able to earn from Choju Co., Ltd., amounting to
P174,150.00 and other damages like attorney's fees since private
respondents are to blame for the refusal of Choju Co., Ltd. to
accept the Anahaw fans. In answer thereto the private
respondents alleged that the bill of lading clearly shows that there
will be a transhipment and that petitioner was well aware that
MV (Pacific) Despatcher was only up to Hongkong where the
subject cargo will be transferred to another vessel for Japan.
Private respondents also filed a counterclaim praying that
petitioner be ordered to pay freight charges from Japan to Manila
and the demurrages in Japan and Manila amounting to
P298,150.93.
The lower court decided the case in favor of private respondents.
It dismissed the complaint on the ground that petitioner had
given its consent to the contents of the bill of lading where it is
clearly indicated that there will be transhipment. The lower court
also said that petitioner is liable to pay to private respondent the
freight charges from Japan to Manila and demurrages since it was
the former which ordered the reshipment of the cargo from Japan
to Manila.
On appeal to the respondent court, the finding of the lower
(court) that petitioner agreed to a transhipment of the goods was
affirmed but the finding that petitioner is liable for P298,150.93
was modified. It was reduced to P52,102.45 which represents the
freight charges and demurrages incurred in Japan but not for the
demurrages incurred in Marta. According to the respondent
(court) the petitioner can not be held liable for the demurrages
incurred in Manila because Private respondents did not timely
inform petitioner that the goods were already in Manila in
addition to the fact that private respondent had given petitioner
the option of abandoning the goods in exchange for the
demurrages.
5

Petitioner, being dissatisfied with the decision of respondent court and the motion
for reconsideration thereof having been denied, invokes the Court's review powers
for the resolution of the issues as to whether or not respondent court erred (1) in
affirming the decision of the trial court which dismissed petitioner's complaint; and
(2) in holding petitioner liable to private respondents in the amount of P52,102.45.
6

I. Petitioner obstinately faults private respondents for the refusal of its buyer, Choju
Co., Ltd., to take delivery of the exported anahaw fans resulting in a loss of
P174,150.00 representing the purchase price of the said export items because of
violation of the terms and conditions of the letter of credit issued in favor of the
former which specified the requirement for an on board bill of lading and the
prohibition against transhipment of goods, inasmuch as the bill of lading issued by
the latter bore the notation "received for shipment" and contained an entry
indicating transhipment in Hongkong.
We find no fault on the part of private respondents. On the matter of transhipment,
petitioner maintains that "... while the goods were transferred in Hongkong from
MV Pacific Despatcher, the feeder vessel, to MV Oriental Researcher, a mother
vessel, the same cannot be considered transhipment because both vessels belong
to the same shipping company, the private respondent Orient Overseas Container
Lines, Inc."
7
Petitioner emphatically goes on to say: "To be sure, there was no
actual transhipment of the Anahaw fans. The private respondents have executed a
certification to the effect that while the Anahaw fans were transferred from one
vessel to another in Hong Kong, since the two vessels belong to one and the same
company then there was no transhipment.
8

Transhipment, in maritime law, is defined as "the act of taking cargo out of one ship
and loading it in another,"
9
or "the transfer of goods from the vessel stipulated in
the contract of affreightment to another vessel before the place of destination
named in the contract has been reached,"
10
or "the transfer for further
transportation from one ship or conveyance to another."
11
Clearly, either in its
ordinary or its strictly legal acceptation, there is transhipment whether or not the
same person, firm or entity owns the vessels. In other words, the fact of
transhipment is not dependent upon the ownership of the transporting ships or
conveyances or in the change of carriers, as the petitioner seems to suggest, but
rather on the fact of actual physical transfer of cargo from one vessel to another.
That there was transhipment within this contemplation is the inescapable
conclusion, as there unmistakably appears on the face of the bill of lading the entry
"Hong Kong" in the blank space labeled "Transhipment," which can only mean that
transhipment actually took place.
12
This fact is further bolstered by the
certification
13
issued by private respondent F.E. Zuellig, Inc. dated July 19, 1980,
although it carefully used the term "transfer" instead of transhipment. Nonetheless,
no amount of semantic juggling can mask the fact that transhipment in truth
occurred in this case.
Petitioner insists that "(c)onsidering that there was no actual transhipment of the
Anahaw fans, then there is no occasion under which the petitioner can agree to the
transhipment of the Anahaw fans because there is nothing like that to agree to"
and "(i)f there is no actual transhipment but there appears to be a transhipment in
the bill of lading, then there can be no possible reason for it but a mistake on the
part of the private respondents.
14

Petitioner, in effect, is saying that since there was a mistake in documentation on
the part of private respondents, such a mistake militates against the conclusiveness
of the bill of lading insofar as it reflects the terms of the contract between the
parties, as an exception to the parol evidence rule, and would therefore permit it to
explain or present evidence to vary or contradict the terms of the written
agreement, that is, the bill of lading involved herein.
It is a long standing jurisprudential rule that a bill of lading operates both as a
receipt and as a contract. It is a receipt for the goods shipped and a contract to
transport and deliver the same as therein stipulated. As a contract, it names the
parties, which includes the consignee, fixes the route, destination, and freight rates
or charges, and stipulates the rights and obligations assumed by the
parties.
15
Being a contract, it is the law between the parties who are bound by its
terms and conditions provided that these are not contrary to law, morals, good
customs, public order and public policy.
16
A bill of lading usually becomes effective
upon its delivery to and acceptance by the shipper. It is presumed that the
stipulations of the bill were, in the absence of fraud, concealment or improper
conduct, known to the shipper, and he is generally bound by his acceptance
whether he reads the bill or not.
17

The holding in most jurisdictions has been that a shipper who receives a bill of
lading without objection after an opportunity to inspect it, and permits the carrier
to act on it by proceeding with the shipment is presumed to have accepted it as
correctly stating the contract and to have assented to its terms. In other words, the
acceptance of the bill without dissent raises the presumption that all the terms
therein were brought to the knowledge of the shipper and agreed to by him and, in
the absence of fraud or mistake, he is estopped from thereafter denying that he
assented to such terms. This rule applies with particular force where a shipper
accepts a bill of lading with full knowledge of its contents and acceptance under
such circumstances makes it a binding contract.
18

In the light of the series of events that transpired in the case at bar, there can be no
logical conclusion other than that the petitioner had full knowledge of, and actually
consented to, the terms and conditions of the bill of lading thereby making the
same conclusive as to it, and it cannot now be heard to deny having assented
thereto. As borne out by the records, James Cu himself, in his capacity as president
of MMMC, personally received and signed the bill of lading. On practical
considerations, there is no better way to signify consent than by voluntarry signing
the document which embodies the agreement. As found by the Court of Appeals
Contrary to appellant's allegation that it did not agree to the
transhipment, it could be gleaned from the record that the
appellant actually consented to the transhipment when it
received the bill of lading personally at appellee's (F.E. Zuellig's)
office. There clearly appears on the face of the bill of lading under
column "PORT OF TRANSHIPMENT" an entry "HONGKONG'
(Exhibits'G-l'). Despite said entries he still delivered his voucher
(Exh. F) and the corresponding check in payment of the freight
(Exhibit D), implying that he consented to the transhipment
(Decision, p. 6, Rollo).
19

Furthermore and particularly on the matter of whether or not there was
transhipment, James Cu, in his testimony on crossexamination, categorically stated
that he knew for a fact that the shipment was to be unloaded in Hong Kong from
the MV Pacific Despatcher to be transferred to a mother vessel, the MV Oriental
Researcher in this wise:
Q Mr. Cu, are you not aware of the fact that
your shipment is to be transferred or
transhipped at the port of Hongkong?
A I know. It's not transport, they relay, not
trans... yes, that is why we have an agreement if
they should not put a transhipment in
Hongkong, that's why they even stated in the
certification.
xxx xxx xxx
Q In layman's language, would you agree with
me that transhipment is the transfer of a cargo
from one vessel to the other?
A As a layman, yes.
Q So, you know for a fact that your shipment is
going to be unloaded in Hongkong from M. V.
Dispatcher (sic) and then transfer (sic) to
another vessel which was the Oriental
Dispatcher, (sic) you know that for a fact?
A Yes, sir. (Emphasis supplied.)
20

Under the parol evidence rule,
21
the terms of a contract are rendered conclusive
upon the parties, and evidence aliundeis not admissible to vary or contradict a
complete and enforceable agreement embodied in a document, subject to well
defined exceptions which do not obtain in this case. The parol evidence rule is
based on the consideration that when the parties have reduced their agreement on
a particular matter into writing, all their previous and contemporaneous
agreements on the matter are merged therein. Accordingly, evidence of a prior or
contemporaneous verbal agreement is generally not admissible to vary, contradict
or defeat the operation of a valid instrument.
22
The mistake contemplated as an
exception to the parol evidence rule is one which is a mistake of fact mutual to the
parties.
23
Furthermore, the rules on evidence, as amended, require that in order
that parol evidence may be admitted, said mistake must be put in issue by the
pleadings, such that if not raised inceptively in the complaint or in the answer, as
the case may be, a party can not later on be permitted to introduce parol evidence
thereon.
24
Needless to say, the mistake adverted to by herein petitioner, and by its
own admission, was supposedly committed by private respondents only and was
raised by the former rather belatedly only in this instant petition. Clearly then, and
for failure to comply even only with the procedural requirements thereon, we
cannot admit evidence to prove or explain the alleged mistake in documentation
imputed to private respondents by petitioner.
Petitioner further argues that assuming that there was transhipment, it cannot be
deemed to have agreed thereto even if it signed the bill of lading containing such
entry because it had made known to private respondents from the start that
transhipment was prohibited under the letter of credit and that, therefore, it had
no intention to allow transhipment of the subject cargo. In support of its stand,
petitioner relies on the second paragraph of Article 1370 of the Civil Code which
states that "(i)f the words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former," as wen as the supposed ruling
in Caltex Phil., Inc. vs. Intermediate Appellate Court, et al.
25
that "where the literal
interpretation of a contract is contrary to the evident intention of the parties, the
latter shall prevail."
As between such stilted thesis of petitioner and the contents of the bill of lading
evidencing the intention of the parties, it is irremissible that the latter must prevail.
Petitioner conveniently overlooks the first paragraph of the very article that he cites
which provides that "(i)f the terms of the contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of the stipulations
shall control." In addition, Article 1371 of the same Code provides that "(i)n order to
judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered."
The terms of the contract as embodied in the bill of lading are clear and thus
obviates the need for any interpretation. The intention of the parties which is the
carriage of the cargo under the terms specified thereunder and the wordings of the
bill of lading do not contradict each other. The terms of the contract being
conclusive upon the parties and judging from the contemporaneous and
subsequent actuations of petitioner, to wit, personally receiving and signing the bill
of lading and paying the freight charges, there is no doubt that petitioner must
necessarily be charged with full knowledge and unqualified acceptance of the terms
of the bill of lading and that it intended to be bound thereby.
Moreover, it is a well-known commercial usage that transhipment of freight
without legal excuse, however competent and safe the vessel into which the
transfer is made, is a violation of the contract and an infringement of the right of
the shipper, and subjects the carrier to liability if the freight is lost even by a cause
otherwise excepted.
26
It is highly improbable to suppose that private respondents,
having been engaged in the shipping business for so long, would be unaware of
such a custom of the trade as to have undertaken such transhipment without
petitioner's consent and unnecessarily expose themselves to a possible liability.
Verily, they could only have undertaken transhipment with the shipper's
permission, as evidenced by the signature of James Cu.
Another ground for the refusal of acceptance of the cargo of anahaw fans by Choju
Co., Ltd. was that the bill of lading that was issued was not an on board bill of
lading, in clear violation of the terms of the letter of credit issued in favor of
petitioner. On cross-examination, it was likewise established that petitioner,
through its aforesaid president, was aware of this fact, thus:
Q If the container van, the loaded container van,
was transported back to South Harbor on June
27, 1980, would you tell us, Mr. Cu, when the
Bill of Lading was received by you?
A I received on June 30, 1980. I received at the
same time so then I gave the check.
xxx xxx xxx
Q So that in exchange of the Bill of Lading you
issued your check also dated June 30, 1980?
A Yes, sir.
Q And June 27, 1980 was the date of the Bill of
Lading, did you notice that the Bill of Lading
states: 'Received for shipment'only? .
A Yes, sir.
Q What did you say?
A I requested to issue me on board bill of lading.
Q When?
A In the same date of June 30.
Q What did they say?
A They said, they cannot.
xxx xxx xxx
Q Do you know the difference between a
"received for shipment bill of lading" and "on
board bill of lading"?
A Yes, sir.
Q What's the difference?
A Received for shipment, you can receive the
cargo even you don't ship on board, that is
placed in the warehouse; while on-board bill of
lading means that is loaded on the vessel, the
goods.
xxx xxx xxx
Q In other words, it was not yet on board the
vessel?
A During that time, not yet.
xxx xxx xxx
Q Do you know, Mr. Cu, that under the law, if
your shipment is received on board a vessel you
can demand an on-board bill of lading not only a
received for shipment bill of lading.?
A Yes sir.
Q And did you demand from F.E. Zuellig the
substitution of that received for shipment bill of
lading with an on-board bill of lading?
A Of course, instead they issue me a
certification.
Q They give you a ... ?
A ... a certification that it was loaded on board
on June 30.
xxx xxx xxx
Q Mr. Cu, are you aware of the conditions of the
Letter of Credit to the effect that there should
be no transhipment and that it should also get
an on board bill of lading.?
A Yes sir.
27

Undoubtedly, at the outset, petitioner knew that its buyer, Choju Co., Ltd.,
particularly required that there be an on board bill of lading, obviously due to the
guaranty afforded by such a bill of lading over any other kind of bill of lading. The
buyer could not have insisted on such a stipulation on a pure whim or caprice, but
rather because of its reliance on the safeguards to the cargo that having an on
board bill of lading ensured. Herein petitioner cannot feign ignorance of the
distinction between an "on board" and a "received for shipment" bill of lading, as
manifested by James Cu's testimony. It is only to be expected that those long
engaged in the export industry should be familiar with business usages and
customs.
In its petition, MMMC avers that "when petitioner teamed of what happened, it
saw private respondent F.E. Zuellig which, in turn, issued a certification that as of
June 30, 1980, the Anahaw fans were already on board MV Pacific Despatcher
(which means that the bill of lading is an on- board-bill of lading or 'shipped' bill of
lading as distinguished from a 'received for shipment'bill of lading as governed by
Sec. 3, par. 7, Carriage of Goods by Sea Act) ...."
28
What the petitioner would
suggest is that said certification issued by F.E. Zuellig, Inc., dated July 19, 1980, had
the effect of converting the original "received for shipment only" bill of lading into
an "on board" bill of lading as required by the buyer and was, therefore, by
substantial compliance, not violative of the contract.
An on board bill of lading is one in which it is stated that the goods have been
received on board the vessel which is to carry the goods, whereas a received for
shipment bill of lading is one in which it is stated that the goods have been received
for shipment with or without specifying the vessel by which the goods are to be
shipped. Received for shipment bills of lading are issued whenever conditions are
not normal and there is insufficiency of shipping space.
29
An on board bill of lading
is issued when the goods have been actually placed aboard the ship with every
reasonable expectation that the shipment is as good as on its way.
30
It is, therefore,
understandable that a party to a maritime contract would require an on board bill
of lading because of its apparent guaranty of certainty of shipping as well as the
seaworthiness of the vessel which is to carry the goods.
It cannot plausibly be said that the aforestated certification of F.E. Zuellig, Inc. can
qualify the bill of lading, as originally issued, into an on board bill of lading as
required by the terms of the letter of credit issued in favor of petitioner. For one,
the certification was issued only on July 19, 1980, way beyond the expiry date of
June 30, 1980 specified in the letter of credit for the presentation of an on board
bill of lading. Thus, even assuming that by a liberal treatment of the certification it
could have the effect of converting the received for shipment bill of lading into an
on board of bill of lading, as petitioner would have us believe, such an effect may be
achieved only as of the date of its issuance, that is, on July 19, 1980 and onwards.
The fact remains, though, that on the crucial date of June 30, 1980 no on board bill
of lading was presented by petitioner in compliance with the terms of the letter of
credit and this default consequently negates its entitlement to the proceeds
thereof. Said certification, if allowed to operate retroactively, would render illusory
the guaranty afforded by an on board bill of lading, that is, reasonable certainty of
shipping the loaded cargo aboard the vessel specified, not to mention that it would
indubitably be stretching the concept of substantial compliance too far.
Neither can petitioner escape hability by adverting to the bill of lading as a contract
of adhesion, thus warranting a more liberal consideration in its favor to the extent
of interpreting ambiguities against private respondents as allegedly being the
parties who gave rise thereto. The bill of lading is clear on its face. There is no
occasion to speak of ambiguities or obscurities whatsoever. All of its terms and
conditions are plainly worded and commonly understood by those in the business.
It will be recalled that petitioner entered into the contract with Choju Co., Ltd. way
back on May 20,1980 or over a month before the expiry date of the letter of credit
on June 30, 1980, thus giving it more than ample time to find a carrier that could
comply with the requirements of shipment under the letter of credit. It is conceded
that bills of lading constitute a class of contracts of adhesion. However, as ruled in
the earlier case of Ong Yiu vs. Court of Appeals, et al.
31
and reiterated in Servando,
et al. vs. Philippine Steam Navigation Co.,
32
plane tickets as well as bills of lading
are contracts not entirely prohibited. The one who adheres to the contract is in
reality free to reject it entirely; if he adheres, he gives his consent. The respondent
court correctly observed in the present case that "when the appellant received the
bill of lading, it was tantamount to appellant's adherence to the terms and
conditions as embodied therein.
33

In sum, petitioner had full knowledge that the bill issued to it contained terms and
conditions clearly violative of the requirements of the letter of credit. Nonetheless,
perhaps in its eagerness to conclude the transaction with its Japanese buyer and in
a race to beat the expiry date of the letter of credit, petitioner took the risk of
accepting the bill of lading even if it did not conform with the indicated
specifications, possibly entertaining a glimmer of hope and imbued with a touch of
daring that such violations may be overlooked, if not disregarded, so long as the
cargo is delivered on time. Unfortunately, the risk did not pull through as hoped for.
Any violation of the terms and conditions of the letter of credit as would defeat its
right to collect the proceeds thereof was, therefore, entirely of the petitioner's
making for which it must bear the consequences. As finally averred by private
respondents, and with which we agree, "... the questions of whether or not there
was a violation of the terms and conditions of the letter of credit, or whether or not
such violation was the cause or motive for the rejection by petitioner's Japanese
buyer should not affect private respondents therein since they were not privies to
the terms and conditions of petitioner's letter of credit and cannot therefore be
held liable for any violation thereof by any of the parties thereto."
34

II. Petitioner contends that respondent court erred in holding it liable to private
respondents for P52,102.45 despite its exercise of its option to abandon the cargo.
It will be recalled that the trial court originally found petitioner liable for
P298,150.93, which amount consists of P51,271.02 for freight, demurrage and
other charges during the time that the goods were in Japan and for its reshipment
to Manila, P831.43 for charges paid to the Manila International Port Terminal, and
P246,043.43 for demurrage in Manila from October 22, 1980 to June 18, 1981. On
appeal, the Court of Appeals limited petitioner's liability to P52,102.45 when it
ruled:
As regards the amount of P51,271.02, which represents the
freight charges for the return shipment to Manila and the
demurrage charges in Japan, the same is supported by appellant's
own letter request (Exh. 2) for the return of the shipment to
Manila at its (appellant's) expense, and hence, it should be held
liable therefor. The amount of P831.43 was paid to the Manila
International Port Terminal upon arrival of the shipment in Manila
for appellant's account. It should properly be charged to said
appellant.
35

However, respondent court modified the trial court's decision by excluding the
award for P246,043.43 for demurrage in Manila from October 22, 1980 to June 18,
1981.
Demurrage, in its strict sense, is the compensation provided for in the contract of
affreightment for the detention of the vessel beyond the time agreed on for loading
and unloading. Essentially, demurrage is the claim for damages for failure to accept
delivery. In a broad sense, every improper detention of a vessel may be considered
a demurrage. Liability for demurrage, using the word in its strictly technical sense,
exists only when expressly stipulated in the contract. Using the term in its broader
sense, damages in the nature of demurrage are recoverable for a breach of the
implied obligation to load or unload the cargo with reasonable dispatch, but only by
the party to whom the duty is owed and only against one who is a party to the
shipping contract.
36
Notice of arrival of vessels or conveyances, or of their
placement for purposes of unloading is often a condition precedent to the right to
collect demurrage charges.
Private respondents, admittedly, have adopted the common practice of requiring
prior notice of arrival of the goods shipped before the shipper can be held liable for
demurrage, as declared by Wilfredo Hans, head of the accounting department of
F.E. Zuellig, Inc., on cross-examination as a witness for private respondents:
Q ... you will agree with me that before one
could be charged with demurrage the shipper
should be notified of the arrival of the
shipment?
A Yes sir.
Q Without such notification, there is no way by
which the shipper would know (of) such arrival?
A Yes.
Q And no charges of demurrage before the
arrival of the cargo?
A Yes sir.
37

Accordingly, on this score, respondent court ruled:
However, insofar as the demurrage charges of P246,043.43 from
October up to May 1980, arriv(al) in Manila, are concerned, We
are of the view that appellant should not be made to shoulder the
same, as it was not at fault nor was it responsible for said
demurrage charges. Appellee's own witness (Mabazza) testified
that while the goods arrived in Manila in October 1980, appellant
was notified of said arrival only in March 1981. No explanation
was given for the delay in notifying appellant. We agree with
appellant that before it could be charged for demurrage charges it
should have been notified of the arrival of the goods first.
Without such notification it could not- be so charged because
there was no way by which it would know that the goods had
already arrived for it to take custody of them. Considering that it
was only in March 1981 (Exh. K) that appellant was notified of the
arrival of the goods, although the goods had actually arrived in
October 1980 (tsn, Aug. 14, 1986, pp. 10-14), appellant cannot be
charged for demurrage from October 1980 to March 1981. ...
38

While being satisfied with the exclusion of demurrage charges in Manila for the
period from October 22,1980 to June 18,1981, petitioner nevertheless assails the
Court of Appeals' award of P52,102.43 in favor of private respondents, consisting of
P51,271.01 as freight and demurrage charges in Japan and P831.43 for charges paid
at the Manila International Port Termninal.
Petitioner asserts that by virtue of the exercise of its option to abandon the goods
so as to allow private respondents to sell the same at a public auction and to apply
the proceeds thereof as payment for the shipping and demurrage charges, it was
released from liability for the sum of P52,102.43 since such amount represents the
shipping and demurrage charges from which it is considered to have been released
due to the abandonment of goods. It further argues that the shipping and
demurrage charges from which it was released by the exercise of the option to
abandon the goods in favor of private respondents could not have referred to the
demurrage charges in Manila because respondent court ruled that the same were
not chargeable to petitioner. Private respondents would rebut this contention by
saying in their memorandum that the abandonment of goods by petitioner was too
late and made in bad faith.
39

On this point, we agree with petitioner. Ordinarily, the shipper is liable for
freightage due to the fact that the shipment was made for its benefit or under its
direction and, correspondingly, the carrier is entitled to collect charges for its
shipping services. This is particularly true in this case where the reshipment of the
goods was made at the instance of petitioner in its letter of August 29, 1980.
40

However, in a letter dated March 20, 1981,
41
private respondents belatedly
informed petitioner of the arrival of its goods from Japan and that if it wished to
take delivery of the cargo it would have to pay P51,271.02, but with the last
paragraph thereof stating as follows:
Please can you advise within 15 days of receipt of this letter
whether you intend to take delivery of this shipment, as
alternatively we will have to take legal proceedings in order to
have the cargo auctioned to recover the costs involved, as well as
free the container which are (sic) urgently required for export
cargoes.
Clearly, therefore, private respondents unequivocally offered petitioner the option
of paying the shipping and demurrage charges in order to take delivery of the goods
or of abandoning the same so that private respondents could sell them at public
auction and thereafter apply the proceeds in payment of the shipping and other
charges.
Responding thereto, in a letter dated April 3, 1981, petitioner seasonably
communicated its decision to abandon to the goods in favor of private respondents
with the specific instruction that any excess of the proceeds over the legal costs and
charges be turned over to petitioner. Receipt of said letter was acknowledged by
private respondents, as revealed by the testimony of Edwin Mabazza, a claim officer
of F.E. Zuellig, Inc., on cross-examination.
42

Despite petitioner's exercise of the option to abandon the cargo, however, private
respondents sent a demand letter on June 22, 1981
43
insisting that petitioner
should pay the entire amount of P298,150.93 and, in another letter dated Apiril 30,
1981,
44
they stated that they win not accept the abandonment of the goods and
demanded that the outstanding account be settled. The testimony of said Edwin
Mabazza definitely admits and bears this out.
45

Now, there is no dispute that private respondents expressly and on their own
volition granted petitioner an option with respect to the satisfaction of freightage
and demurrage charges. Having given such option, especially since it was accepted
by petitioner, private respondents are estopped from reneging thereon. Petitioner,
on its part, was well within its right to exercise said option. Private respondents, in
giving the option, and petitioner, in exercising that option, are concluded by their
respective actions. To allow either of them to unilaterally back out on the offer and
on the exercise of the option would be to countenance abuse of rights as an order
of the day, doing violence to the long entrenched principle of mutuality of
contracts.
It will be remembered that in overland transportation, an unreasonable delay in the
delivery of transported goods is sufficient ground for the abandonment of goods. By
analogy, this can also apply to maritime transportation. Further, with much more
reason can petitioner in the instant case properly abandon the goods, not only
because of the unreasonable delay in its delivery but because of the option which
was categorically granted to and exercised by it as a means of settling its liability for
the cost and expenses of reshipment. And, said choice having been duly
communicated, the same is binding upon the parties on legal and equitable
considerations of estoppel.
WHEREFORE, the judgment of respondent Court of Appeals is AFFIRMED with the
MODIFICATION that petitioner is likewise absolved of any hability and the award of
P52,102.45 with legal interest granted by respondent court on private respondents'
counterclaim is SET ASIDE, said counterclaim being hereby DISMISSED, without
pronouncement as to costs.
SO ORDERED.









G.R. No. L-9374 February 16, 1915
FRANCISCO DEL VAL, ET AL., plaintiffs-appellants,
vs.
ANDRES DEL VAL, defendant-appellee.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the city of Manila
dismissing the complaint with costs.
The pleadings set forth that the plaintiffs and defendant are brother and sisters;
that they are the only heirs at law and next of kin of Gregorio Nacianceno del Val,
who died in Manila on August 4, 1910, intestate; that an administrator was
appointed for the estate of the deceased, and, after a partial administration, it was
closed and the administrator discharged by order of the Court of First Instance
dated December 9, 1911; that during the lifetime of the deceased he took out
insurance on his life for the sum of P40,000 and made it payable to the defendant
as sole beneficiary; that after his death the defendant collected the face of the
policy; that of said policy he paid the sum of P18,365.20 to redeem certain real
estate which the decedent had sold to third persons with a right to repurchase; that
the redemption of said premises was made by the attorney of the defendant in the
name of the plaintiff and the defendant as heirs of the deceased vendor; that the
redemption of said premises they have had the use and benefit thereof; that during
that time the plaintiffs paid no taxes and made no repairs.
It further appears from the pleadings that the defendant, on the death of the
deceased, took possession of most of his personal property, which he still has in his
possession, and that he has also the balance on said insurance policy amounting to
P21,634.80.
Plaintiffs contend that the amount of the insurance policy belonged to the estate of
the deceased and not to the defendant personally; that, therefore, they are entitled
to a partition not only of the real and personal property, but also of the P40,000 life
insurance. The complaint prays a partition of all the property, both real and
personal, left by the deceased; that the defendant account for P21,634.80, and that
that sum be divided equally among the plaintiffs and defendant along with the
other property of deceased.
The defendant denies the material allegations of the complaint and sets up as
special defense and counterclaim that the redemption of the real estate sold by his
father was made in the name of the plaintiffs and himself instead of in his name
alone without his knowledge or consent; and that it was not his intention to use the
proceeds of the insurance policy for the benefit of any person but himself, he
alleging that he was and is the sole owner thereof and that it is his individual
property. He, therefore, asks that he be declared the owner of the real estate
redeemed by the payment of the P18,365.20, the owner of the remaining
P21,634.80, the balance of the insurance policy, and that the plaintiff's account for
the use and occupation of the premises so redeemed since the date of the
redemption.
The learned trial court refused to give relief to either party and dismissed the
action.
It says in its opinion: "This purports to be an action for partition, brought against an
heir by his coheirs. The complaint, however, fails to comply with Code Civ., Pro. sec.
183, in that it does not 'contain an adequate description of the real property of
which partition is demanded.' Because of this defect (which has not been called to
our attention and was discovered only after the cause was submitted) it is more
than doubtful whether any relief can be awarded under the complaint, except by
agreement of all the parties."
This alleged defect of the complaint was made one of the two bases for the
dismissal of the action.
We do not regard this as sufficient reason for dismissing the action. It is the
doctrine of this court, set down in several decisions, Lizarraga Hermanos vs. Yap
Tico, 24 Phil. Rep., 504, that, even though the complaint is defective to the extent
of failing in allegations necessary to constitute a cause of action, if, on the trial of
the cause, evidence is offered which establishes the cause of action which the
complaint intended to allege, and such evidence is received without objection, the
defect is thereby cured and cannot be made the ground of a subsequent objection.
If, therefore, evidence was introduced on the trial in this case definitely and clearly
describing the real estate sought to be partitioned, the defect in the complaint was
cured in that regard and should not have been used to dismiss the action. We do
not stop to inquire whether such evidence was or was not introduced on the trial,
inasmuch as this case must be turned for a new trial with opportunity to both
parties to present such evidence as is necessary to establish their respective claims.
The court in its decision further says: "It will be noticed that the provision above
quoted refers exclusively to real estate. . . . It is, in other words, an exclusive real
property action, and the institution thereof gives the court no jurisdiction over
chattels. . . . But no relief could possibly be granted in this action as to any property
except the last (real estate), for the law contemplated that all the personal property
of an estate be distributed before the administration is closed. Indeed, it is only in
exceptional cases that the partition of the real estate is provided for, and this too is
evidently intended to be effected as a part of the administration, but here the
complaint alleges that the estate was finally closed on December 9, 1911, and we
find upon referring to the record in that case that subsequent motion to reopen the
same were denied; so that the matter of the personal property at least must be
considered res judicata (for the final judgment in the administration proceedings
must be treated as concluding not merely what was adjudicated, but what might
have been). So far, therefore, as the personal property at least is concerned,
plaintiffs' only remedy was an appeal from said order."
We do not believe that the law is correctly laid down in this quotation. The courts of
the Islands have jurisdiction to divide personal property between the common
owners thereof and that power is as full and complete as is the power to partition
real property. If an actual partition of personal property cannot be made it will be
sold under the direction of the court and the proceeds divided among the owners
after the necessary expenses have been deducted.
The administration of the estate of the decedent consisted simply, so far as the
record shows, in the payment of the debts. No division of the property, either real
or personal, seems to have been made. On the contrary, the property appears,
from the record, to have been turned over to the heirs in bulk. The failure to
partition the real property may have been due either to the lack of request to the
court by one or more of the heirs to do so, as the court has no authority to make a
partition of the real estate without such request; or it may have been due to the
fact that all the real property of decedent had been sold under pacto de retro and
that, therefore, he was not the owner of any real estate at the time of his death. As
to the personal property, it does not appear that it was disposed of in the manner
provided by law. (Sec. 753, Code of Civil Procedure.) So far as this action is
concerned, however, it is sufficient for us to know that none of the property was
actually divided among the heirs in the administration proceeding and that they
remain coowners and tenants-in- common thereof at the present time. To maintain
an action to partition real or personal property it is necessary to show only that it is
owned in common.
The order finally closing the administration and discharging the administrator,
referred to in the opinion of the trial court, has nothing to do with the division of
either the real or the personal property. The heirs have the right to ask the probate
court to turn over to them both the real and personal property without division;
and where that request is unanimous it is the duty of the court to comply with it,
and there is nothing in section 753 of the Code of Civil Procedure which prohibits it.
In such case an order finally settling the estate and discharging the administrator
would not bar a subsequent action to require a division of either the real or
personal property. If, on the other hand, an order had been made in the
administration proceedings dividing the personal or the real property, or both,
among the heirs, then it is quite possible that, to a subsequent action brought by
one of the heirs for a partition of the real or personal property, or both, there could
have been interposed a plea of res judicata based on such order. As the matter now
stands, however, there is no ground on which to base such a plea. Moreover, no
such plea has been made and no evidence offered to support it.
With the finding of the trial court that the proceeds of the life-insurance policy
belong exclusively to the defendant as his individual and separate property, we
agree. That the proceeds of an insurance policy belong exclusively to the
beneficiary and not to the estate of the person whose life was insured, and that
such proceeds are the separate and individual property of the beneficiary, and not
of the heirs of the person whose life was insured, is the doctrine in America. We
believe that the same doctrine obtains in these Islands by virtue of section 428 of
the Code of Commerce, which reads:
The amount which the underwriter must deliver to the person insured, in
fulfillment of the contract, shall be the property of the latter, even against
the claims of the legitimate heirs or creditors of any kind whatsoever of
the person who effected the insurance in favor of the former.
It is claimed by the attorney for the plaintiffs that the section just quoted is
subordinate to the provisions of the Civil Code as found in article 1035. This article
reads:
An heir by force of law surviving with others of the same character to a
succession must bring into the hereditary estate the property or securities
he may have received from the deceased during the life of the same, by
way of dowry, gift, or for any good consideration, in order to compute it in
fixing the legal portions and in the account of the division.
Counsel also claim that the proceeds of the insurance policy were a donation or gift
made by the father during his lifetime to the defendant and that, as such, its
ultimate destination is determined by those provisions of the Civil Code which
relate to donations, especially article 819. This article provides that "gifts made to
children which are not betterments shall be considered as part of their legal
portion."
We cannot agree with these contentions. The contract of life insurance is a special
contract and the destination of the proceeds thereof is determined by special laws
which deal exclusively with that subject. The Civil Code has no provisions which
relate directly and specifically to life- insurance contracts or to the destination of
life insurance proceeds. That subject is regulated exclusively by the Code of
Commerce which provides for the terms of the contract, the relations of the parties
and the destination of the proceeds of the policy.
The proceeds of the life-insurance policy being the exclusive property of the
defendant and he having used a portion thereof in the repurchase of the real estate
sold by the decedent prior to his death with right to repurchase, and such
repurchase having been made and the conveyance taken in the names of all of the
heirs instead of the defendant alone, plaintiffs claim that the property belongs to
the heirs in common and not to the defendant alone.
We are not inclined to agree with this contention unless the fact appear or be
shown that the defendant acted as he did with the intention that the other heirs
should enjoy with him the ownership of the estate in other words, that he
proposed, in effect, to make a gift of the real estate to the other heirs. If it is
established by the evidence that that was his intention and that the real estate was
delivered to the plaintiffs with that understanding, then it is probable that their
contention is correct and that they are entitled to share equally with the defendant
therein. If, however, it appears from the evidence in the case that the conveyances
were taken in the name of the plaintiffs without his knowledge or consent, or that it
was not his intention to make a gift to them of the real estate, then it belongs to
him. If that facts are as stated, he has two remedies. The one is to compel the
plaintiffs to reconvey to him and the other is to let the title stand with them and to
recover from them the sum he paid on their behalf.
For the complete and proper determination of the questions at issue in this case,
we are of the opinion that the cause should be returned to the trial court with
instructions to permit the parties to frame such issues as will permit the settlement
of all the questions involved and to introduce such evidence as may be necessary
for the full determination of the issues framed. Upon such issues and evidence
taken thereunder the court will decide the questions involved according to the
evidence, subordinating his conclusions of law to the rules laid down in this opinion.
We do not wish to be understood as having decided in this opinion any question of
fact which will arise on the trial and be there in controversy. The trial court is left
free to find the facts as the evidence requires. To the facts as so found he will apply
the law as herein laid down.
The judgment appealed from is set aside and the cause returned to the Court of
First Instance whence it came for the purpose hereinabove stated. So ordered.























G.R. No. L-34583 October 22, 1931
THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late
Adolphe Oscar Schuetze,plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.
VILLA-REAL, J.:
The Bank of the Philippine Islands, as administrator of the estate of the deceased
Adolphe Oscar Schuetze, has appealed to this court from the judgment of the Court
of First Instance of Manila absolving the defendant Juan Posadas, Jr., Collector of
Internal Revenue, from the complaint filed against him by said plaintiff bank, and
dismissing the complaint with costs.
The appellant has assigned the following alleged errors as committed by the trial
court in its judgment, to wit:
1. The lower court erred in holding that the testimony of Mrs. Schuetze
was inefficient to established the domicile of her husband.
2. The lower court erred in holding that under section 1536 of the
Administrative Code the tax imposed by the defendant is lawful and valid.
3. The lower court erred in not holding that one-half () of the proceeds of
the policy in question is community property and that therefore no
inheritance tax can be levied, at least on one-half () of the said proceeds.
4. The lower court erred in not declaring that it would be unconstitutional
to impose an inheritance tax upon the insurance policy here in question as
it would be a taking of property without due process of law.
The present complaint seeks to recover from the defendant Juan Posadas, Jr.,
Collector of Internal Revenue, the amount of P1,209 paid by the plaintiff under
protest, in its capacity of administrator of the estate of the late Adolphe Oscar
Schuetze, as inheritance tax upon the sum of P20,150, which is the amount of an
insurance policy on the deceased's life, wherein his own estate was named the
beneficiary.
At the hearing, in addition to documentary and parol evidence, both parties
submitted the following agreed statement of facts of the court for consideration:
It is hereby stipulated and agreed by and between the parties in the above-
entitled action through their respective undersigned attorneys:
1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late
Adolphe Oscar Schuetze, is of legal age, a native of Manila, Philippine
Islands, and is and was at all times hereinafter mentioned a resident of
Germany, and at the time of the death of her husband, the late Adolphe
Oscar Schuetze, she was actually residing and living in Germany;
2. That the Bank of the Philippine Islands, is and was at all times
hereinafter mentioned a banking institution duly organized and existing
under and by virtue of the laws of the Philippine Islands;
3. That on or about August 23, 1928, the herein plaintiff before notary
public Salvador Zaragoza, drew a general power appointing the above-
mentioned Bank of the Philippine Islands as her attorney-in-fact, and
among the powers conferred to said attorney-in-fact was the power to
represent her in all legal actions instituted by or against her;
4. That the defendant, of legal age, is and at all times hereinafter
mentioned the duly appointed Collector of Internal Revenue with offices at
Manila, Philippine Islands;
5. That the deceased Adolphe Oscar Schuetze came to the Philippine
Islands for the first time of March 31, 1890, and worked in the several
German firms as a mere employee and that from the year 1903 until the
year 1918 he was partner in the business of Alfredo Roensch;
6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the
habit of making various trips to Europe;
7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming
from Java, and with the intention of going to Bremen, landed in the
Philippine Islands where he met his death on February 2, 1928;
8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in
Germany, executed a will, in accordance with its law, wherein plaintiff was
named his universal heir;
9. That the Bank of the Philippine Islands by order of the Court of First
Instance of Manila under date of May 24, 1928, was appointed
administrator of the estate of the deceased Adolphe Oscar Schuetze;
10. That, according to the testamentary proceedings instituted in the Court
of First Instance of Manila, civil case No. 33089, the deceased at the time
of his death was possessed of not only real property situated in the
Philippine Islands, but also personal property consisting of shares of stock
in nineteen (19) domestic corporations;
11. That the fair market value of all the property in the Philippine Islands
left by the deceased at the time of his death in accordance with the
inventory submitted to the Court of First Instance of Manila, civil case No.
33089, was P217,560.38;
12. That the Bank of the Philippine Islands, as administrator of the estate
of the deceased rendered its final account on June 19, 1929, and that said
estate was closed on July 16, 1929;
13. That among the personal property of the deceased was found life-
insurance policy No. 194538 issued at Manila, Philippine Islands, on
January 14, 1913, for the sum of $10,000 by the Sun Life Assurance
Company of Canada, Manila branch, a foreign corporation duly organized
and existing under and by virtue of the laws of Canada, and duly
authorized to transact business in the Philippine Islands;
14. That in the insurance policy the estate of the said Adolphe Oscar
Schuetze was named the beneficiary without any qualification whatsoever;
15. That for five consecutive years, the deceased Adolphe Oscar Schuetze
paid the premiums of said policy to the Sun Life Assurance Company of
Canada, Manila branch;
16. That on or about the year 1918, the Sun Life Assurance Company of
Canada, Manila branch, transferred said policy to the Sun Life Assurance
Company of Canada, London branch;
17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to
the time of his death paid the premiums of said policy to the Sun Life
Assurance Company of Canada, London Branch;
18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is
his widow, the plaintiff herein;
19. That at the time of the death of the deceased and at all times
thereafter including the date when the said insurance policy was paid, the
insurance policy was not in the hands or possession of the Manila office of
the Sun Life Assurance Company of Canada, nor in the possession of the
herein plaintiff, nor in the possession of her attorney-in-fact the Bank of
the Philippine Islands, but the same was in the hands of the Head Office of
the Sun Life Assurance Company of Canada, at Montreal, Canada;
20. That on July 13, 1928, the Bank of the Philippine Islands as
administrator of the decedent's estate received from the Sun Life
Assurance Company of Canada, Manila branch, the sum of P20,150
representing the proceeds of the insurance policy, as shown in the
statement of income and expenses of the estate of the deceased
submitted on June 18, 1929, by the administrator to the Court of First
Instance of Manila, civil case No. 33089;
21. That the Bank of the Philippine Islands delivered to the plaintiff herein
the said sum of P20,150;
22. That the herein defendant on or about July 5, 1929, imposed an
inheritance tax upon the transmission of the proceeds of the policy in
question in the sum of P20,150 from the estate of the late Adolphe Oscar
Schuetze to the sole heir of the deceased, or the plaintiff herein, which
inheritance tax amounted to the sum of P1,209;
23. That the Bank of the Philippine Islands as administrator of the
decedent's estate and as attorney-in-fact of the herein plaintiff, having
been demanded by the herein defendant to pay inheritance tax amounting
to the sum of P1,209, paid to the defendant under protest the above-
mentioned sum;
24. That notwithstanding the various demands made by plaintiff to the
defendant, said defendant has refused and refuses to refund to plaintiff
the above mentioned sum of P1,209;
25. That plaintiff reserves the right to adduce evidence as regards the
domicile of the deceased, and so the defendant, the right to present
rebuttal evidence;
26. That both plaintiff and defendant submit this stipulation of facts
without prejudice to their right to introduce such evidence, on points not
covered by the agreement, which they may deem proper and necessary to
support their respective contentions.
In as much as one of the question raised in the appeal is whether an insurance
policy on said Adolphe Oscar Schuetze's life was, by reason of its ownership, subject
to the inheritance tax, it would be well to decide first whether the amount thereof
is paraphernal or community property.
According to the foregoing agreed statement of facts, the estate of Adolphe Oscar
Schuetze is the sole beneficiary named in the life-insurance policy for $10,000,
issued by the Sun Life Assurance Company of Canada on January 14, 1913. During
the following five years the insured paid the premiums at the Manila branch of the
company, and in 1918 the policy was transferred to the London branch.
The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-
appellant Rosario Gelano on January 16, 1914.
With the exception of the premium for the first year covering the period from
January 14, 1913 to January 14, 1914, all the money used for paying the premiums,
i. e., from the second year, or January 16, 1914, or when the deceased Adolphe
Oscar Schuetze married the plaintiff-appellant Rosario Gelano, until his death on
February 2, 1929, is conjugal property inasmuch as it does not appear to have
exclusively belonged to him or to his wife (art. 1407, Civil Code). As the sum of
P20,150 here in controversy is a product of such premium it must also be deemed
community property, because it was acquired for a valuable consideration, during
said Adolphe Oscar Schuetze's marriage with Rosario Gelano at the expense of the
common fund (art. 1401, No. 1, Civil Code), except for the small part corresponding
to the first premium paid with the deceased's own money.
In his Commentaries on the Civil Code, volume 9, page 589, second edition,
Manresa treats of life insurance in the following terms, to wit:
The amount of the policy represents the premiums to be paid, and the
right to it arises the moment the contract is perfected, for at the moment
the power of disposing of it may be exercised, and if death occurs payment
may be demanded. It is therefore something acquired for a valuable
consideration during the marriage, though the period of its fulfillment,
depend upon the death of one of the spouses, which terminates the
partnership. So considered, the question may be said to be decided by
articles 1396 and 1401: if the premiums are paid with the exclusive
property of husband or wife, the policy belongs to the owner; if with
conjugal property, or if the money cannot be proved as coming from one
or the other of the spouses, the policy is community property.
The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex.
Civ. A., 509) laid down the following doctrine:
COMMUNITY PROPERTY LIFE INSURANCE POLICY. A husband took out
an endowment life insurance policy on his life, payable "as directed by
will." He paid the premiums thereon out of community funds, and by his
will made the proceeds of the policy payable to his own estate. Held, that
the proceeds were community estate, one-half of which belonged to the
wife.
In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down
the following doctrine:
A testator, after marriage, took out an insurance policy, on which he paid
the premiums from his salary. Held that the insurance money was
community property, to one-half of which, the wife was entitled as
survivor.
In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following
doctrine:
A decedent paid the first third of the amount of the premiums on his life-
insurance policy out of his earnings before marriage, and the remainder
from his earnings received after marriage. Held, that one-third of the
policy belonged to his separate estate, and the remainder to the
community property.
Thus both according to our Civil Code and to the ruling of those North American
States where the Spanish Civil Code once governed, the proceeds of a life-insurance
policy whereon the premiums were paid with conjugal money, belong to the
conjugal partnership.
The appellee alleges that it is a fundamental principle that a life-insurance policy
belongs exclusively to the beneficiary upon the death of the person insured, and
that in the present case, as the late Adolphe Oscar Schuetze named his own estate
as the sole beneficiary of the insurance on his life, upon his death the latter became
the sole owner of the proceeds, which therefore became subject to the inheritance
tax, citing Del Val vs. Del Val (29 Phil., 534), where the doctrine was laid down that
an heir appointed beneficiary to a life-insurance policy taken out by the deceased,
becomes the absolute owner of the proceeds of such policy upon the death of the
insured.
The estate of a deceased person cannot be placed on the same footing as an
individual heir. The proceeds of a life-insurance policy payable to the estate of the
insured passed to the executor or administrator of such estate, and forms part of its
assets (37 Corpus Juris, 565, sec. 322); whereas the proceeds of a life-insurance
policy payable to an heir of the insured as beneficiary belongs exclusively to said
heir and does not form part of the deceased's estate subject to administrator. (Del
Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323, and articles 419 and 428 of the
Code of Commerce.)
Just as an individual beneficiary of a life-insurance policy taken out by a married
person becomes the exclusive owner of the proceeds upon the death of the insured
even if the premiums were paid by the conjugal partnership, so, it is argued, where
the beneficiary named is the estate of the deceased whose life is insured, the
proceeds of the policy become a part of said estate upon the death of the insured
even if the premiums have been paid with conjugal funds.
In a conjugal partnership the husband is the manager, empowered to alienate the
partnership property without the wife's consent (art. 1413, Civil Code), a third
person, therefore, named beneficiary in a life-insurance policy becomes the
absolute owner of its proceeds upon the death of the insured even if the premiums
should have been paid with money belonging to the community property. When a
married man has his life insured and names his own estate after death, beneficiary,
he makes no alienation of the proceeds of conjugal funds to a third person, but
appropriates them himself, adding them to the assets of his estate, in contravention
of the provisions of article 1401, paragraph 1, of the Civil Code cited above, which
provides that "To the conjugal partnership belongs" (1) Property acquired for a
valuable consideration during the marriage at the expense of the common fund,
whether the acquisition is made for the partnership or for one of the spouses only."
Furthermore, such appropriation is a fraud practised upon the wife, which cannot
be allowed to prejudice her, according to article 1413, paragraph 2, of said Code.
Although the husband is the manager of the conjugal partnership, he cannot of his
own free will convert the partnership property into his own exclusive property.
As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar
Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the
proceeds of the policy, excluding the proportional part corresponding to the first
premium, constitute community property, notwithstanding the fact that the policy
was made payable to the deceased's estate, so that one-half of said proceeds
belongs to the estate, and the other half to the deceased's widow, the plaintiff-
appellant Rosario Gelano Vda. de Schuetze.
The second point to decide in this appeal is whether the Collector of Internal
Revenue has authority, under the law, to collect the inheritance tax upon one-half
of the life-insurance policy taken out by the late Adolphe Oscar Schuetze, which
belongs to him and is made payable to his estate.
According to the agreed statement of facts mentioned above, the plaintiff-
appellant, the Bank of the Philippine Islands, was appointed administrator of the
late Adolphe Oscar Schuetze's testamentary estate by an order dated March 24,
1928, entered by the Court of First Instance of Manila. On July 13, 1928, the Sun
Life Assurance Company of Canada, whose main office is in Montreal, Canada, paid
Rosario Gelano Vda. de Schuetze upon her arrival at Manila, the sum of P20,150,
which was the amount of the insurance policy on the life of said deceased, payable
to the latter's estate. On the same date Rosario Gelano Vda. de Schuetze delivered
the money to said Bank of the Philippine Islands, as administrator of the deceased's
estate, which entered it in the inventory of the testamentary estate, and then
returned the money to said widow.
Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835
and section 1 of Act No. 3031, contains the following relevant provision:
SEC. 1536. Conditions and rate of taxation. Every transmission by virtue
of inheritance, devise, bequest, gift mortis causa or advance in anticipation
of inheritance, devise, or bequest of real property located in the Philippine
Islands and real rights in such property; of any franchise which must be
exercised in the Philippine Islands; of any shares, obligations, or bonds
issued by any corporation or sociedad anonima organized or constituted in
the Philippine Islands in accordance with its laws; of any shares or rights in
any partnership, business or industry established in the Philippine Islands
or of any personal property located in the Philippine Islands shall be
subject to the following tax:
x x x x x x x x x
In as much as the proceeds of the insurance policy on the life of the late Adolphe
Oscar Schuetze were paid to the Bank of the Philippine Islands, as administrator of
the deceased's estate, for management and partition, and as such proceeds were
turned over to the sole and universal testamentary heiress Rosario Gelano Vda. de
Schuetze, the plaintiff-appellant, here in Manila, the situs of said proceeds is the
Philippine Islands.
In his work "The Law of Taxation," Cooley enunciates the general rule governing the
levying of taxes upon tangible personal property, in the following words:
GENERAL RULE. The suits of tangible personal property, for purposes of
taxation may be where the owner is domiciled but is not necessarily so.
Unlike intangible personal property, it may acquire a taxation situs in a
state other than the one where the owner is domiciled, merely because it
is located there. Its taxable situs is where it is more or less permanently
located, regardless of the domicile of the owner. It is well settled that the
state where it is more or less permanently located has the power to tax it
although the owner resides out of the state, regardless of whether it has
been taxed for the same period at the domicile of the owner, provided
there is statutory authority for taxing such property. It is equally well
settled that the state where the owner is domiciled has no power to tax it
where the property has acquired an actual situs in another state by reason
of its more or less permanent location in that state. ... (2 Cooley, The Law
of Taxation, 4th ed., p. 975, par. 451.)
With reference to the meaning of the words "permanent" and "in transit," he has
the following to say:
PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. In order to acquire
a situs in a state or taxing district so as to be taxable in the state or district
regardless of the domicile of the owner and not taxable in another state or
district at the domicile of the owner, tangible personal property must be
more or less permanently located in the state or district. In other words,
the situs of tangible personal property is where it is more or less
permanently located rather than where it is merely in transit or
temporarily and for no considerable length of time. If tangible personal
property is more or less permanently located in a state other than the one
where the owner is domiciled, it is not taxable in the latter state but is
taxable in the state where it is located. If tangible personal property
belonging to one domiciled in one state is in another state merely in
transitu or for a short time, it is taxable in the former state, and is not
taxable in the state where it is for the time being. . . . .
Property merely in transit through a state ordinarily is not taxable there.
Transit begins when an article is committed to a carrier for transportation
to the state of its destination, or started on its ultimate passage. Transit
ends when the goods arrive at their destination. But intermediate these
points questions may arise as to when a temporary stop in transit is such
as to make the property taxable at the place of stoppage. Whether the
property is taxable in such a case usually depends on the length of time
and the purpose of the interruption of transit. . . . .
. . . It has been held that property of a construction company, used in
construction of a railroad, acquires a situs at the place where used for an
indefinite period. So tangible personal property in the state for the
purpose of undergoing a partial finishing process is not to be regarded as
in the course of transit nor as in the state for a mere temporary purpose.
(2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988, par. 452.)
If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar
Schuetze and made payable to his estate, were delivered to the Bank of the
Philippine Islands for administration and distribution, they were not in transit but
were more or less permanently located in the Philippine Islands, according to the
foregoing rules. If this be so, half of the proceeds which is community property,
belongs to the estate of the deceased and is subject to the inheritance tax, in
accordance with the legal provision quoted above, irrespective of whether or not
the late Adolphe Oscar Schuetze was domiciled in the Philippine Islands at the time
of his death.
By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a
life-insurance policy payable to the insured's estate, on which the premiums were
paid by the conjugal partnership, constitute community property, and belong one-
half to the husband and the other half to the wife, exclusively; (2) that if the
premiums were paid partly with paraphernal and partly conjugal funds, the
proceeds are likewise in like proportion paraphernal in part and conjugal in part;
and (3) that the proceeds of a life-insurance policy payable to the insured's estate
as the beneficiary, if delivered to the testamentary administrator of the former as
part of the assets of said estate under probate administration, are subject to the
inheritance tax according to the law on the matter, if they belong to the assured
exclusively, and it is immaterial that the insured was domiciled in these Islands or
outside.1awphil.net
Wherefore, the judgment appealed from is reversed, and the defendant is ordered
to return to the plaintiff the one-half of the tax collected upon the amount of
P20,150, being the proceeds of the insurance policy on the life of the late Adolphe
Oscar Schuetze, after deducting the proportional part corresponding to the first
premium, without special pronouncement of costs. So ordered.







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.
FERNAN, C.J.:p
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 refusal or withholding of payment on petitioner's claim. In fact,
respondent court had this to say on EASCO's refusal to settle the claim of petitioner:
... 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 negate any assertion
that in refusing to pay, it acted unjustifiably.
xxx xxx xxx
The case posed some genuine issues of interpretation of the
terms of the policy as to which persons may honestly differ. This is
the reason the trial court did not say EASCO's refusal was
unjustified.
3

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.
WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.
SO ORDERED.







G.R. No. 138060 September 1, 2004
WILLIAM TIU, doing business under the name and style of "D Rough Riders," and
VIRGILIO TE LAS PIAS petitioners,
vs.
PEDRO A. ARRIESGADO, BENJAMIN CONDOR, SERGIO PEDRANO and PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC., respondents.
D E C I S I O N
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from
the Decision
1
of the Court of Appeals in CA-G.R. CV No. 54354 affirming with
modification the Decision
2
of the Regional Trial Court, 7th Judicial Region, Cebu
City, Branch 20, in Civil Case No. CEB-5963 for breach of contract of carriage,
damages and attorneys fees, and the Resolution dated February 26, 1999 denying
the motion for reconsideration thereof.
The following facts are undisputed:
At about 10:00 p.m. of March 15, 1987, the cargo truck marked "Condor
Hollow Blocks and General Merchandise" bearing plate number GBP-675
was loaded with firewood in Bogo, Cebu and left for Cebu City. Upon
reaching Sitio Aggies, Poblacion, Compostela, Cebu, just as the truck
passed over a bridge, one of its rear tires exploded. The driver, Sergio
Pedrano, then parked along the right side of the national highway and
removed the damaged tire to have it vulcanized at a nearby shop, about
700 meters away.
3
Pedrano left his helper, Jose Mitante, Jr. to keep watch
over the stalled vehicle, and instructed the latter to place a spare tire six
fathoms away
4
behind the stalled truck to serve as a warning for oncoming
vehicles. The trucks tail lights were also left on. It was about 12:00 a.m.,
March 16, 1987.
At about 4:45 a.m., D Rough Riders passenger bus with plate number PBP-724
driven by Virgilio Te Laspias was cruising along the national highway of Sitio
Aggies, Poblacion, Compostela, Cebu. The passenger bus was also bound for Cebu
City, and had come from Maya, Daanbantayan, Cebu. Among its passengers were
the Spouses Pedro A. Arriesgado and Felisa Pepito Arriesgado, who were seated at
the right side of the bus, about three (3) or four (4) places from the front seat.
As the bus was approaching the bridge, Laspias saw the stalled truck, which was
then about 25 meters away.
5
He applied the breaks and tried to swerve to the left to
avoid hitting the truck. But it was too late; the bus rammed into the trucks left rear.
The impact damaged the right side of the bus and left several passengers injured.
Pedro Arriesgado lost consciousness and suffered a fracture in his right colles.
6
His
wife, Felisa, was brought to the Danao City Hospital. She was later transferred to
the Southern Island Medical Center where she died shortly thereafter.
7

Respondent Pedro A. Arriesgado then filed a complaint for breach of contract of
carriage, damages and attorneys fees before the Regional Trial Court of Cebu City,
Branch 20, against the petitioners, D Rough Riders bus operator William Tiu and his
driver, Virgilio Te Laspias on May 27, 1987. The respondent alleged that the
passenger bus in question was cruising at a fast and high speed along the national
road, and that petitioner Laspias did not take precautionary measures to avoid the
accident.
8
Thus:
6. That the accident resulted to the death of the plaintiffs wife, Felisa
Pepito Arriesgado, as evidenced by a Certificate of Death, a xerox copy of
which is hereto attached as integral part hereof and marked as ANNEX
"A", and physical injuries to several of its passengers, including plaintiff
himself who suffered a "COLLES FRACTURE RIGHT," per Medical Certificate,
a xerox copy of which is hereto attached as integral part hereof and
marked as ANNEX "B" hereof.
7. That due to the reckless and imprudent driving by defendant Virgilio Te
Laspias of the said Rough Riders passenger bus, plaintiff and his wife,
Felisa Pepito Arriesgado, failed to safely reach their destination which was
Cebu City, the proximate cause of which was defendant-drivers failure to
observe utmost diligence required of a very cautious person under all
circumstances.
8. That defendant William Tiu, being the owner and operator of the said
Rough Riders passenger bus which figured in the said accident, wherein
plaintiff and his wife were riding at the time of the accident, is therefore
directly liable for the breach of contract of carriage for his failure to
transport plaintiff and his wife safely to their place of destination which
was Cebu City, and which failure in his obligation to transport safely his
passengers was due to and in consequence of his failure to exercise the
diligence of a good father of the family in the selection and supervision of
his employees, particularly defendant-driver Virgilio Te Laspias.
9

The respondent prayed that judgment be rendered in his favor and that the
petitioners be condemned to pay the following damages:
1). To pay to plaintiff, jointly and severally, the amount of P30,000.00 for
the death and untimely demise of plaintiffs wife, Felisa Pepito Arriesgado;
2). To pay to plaintiff, jointly and severally, the amount of P38,441.50,
representing actual expenses incurred by the plaintiff in connection with
the death/burial of plaintiffs wife;
3). To pay to plaintiff, jointly and severally, the amount of P1,113.80,
representing medical/hospitalization expenses incurred by plaintiff for the
injuries sustained by him;
4). To pay to plaintiff, jointly and severally, the amount of P50,000.00 for
moral damages;
5). To pay to plaintiff, jointly and severally, the amount of P50,000.00 by
way of exemplary damages;
6). To pay to plaintiff, jointly and severally, the amount of P20,000.00 for
attorneys fees;
7). To pay to plaintiff, jointly and severally, the amount of P5,000.00 for
litigation expenses.
PLAINTIFF FURTHER PRAYS FOR SUCH OTHER RELIEFS AND REMEDIES IN
LAW AND EQUITY.
10

The petitioners, for their part, filed a Third-Party Complaint
11
on August 21, 1987
against the following: respondent Philippine Phoenix Surety and Insurance, Inc.
(PPSII), petitioner Tius insurer; respondent Benjamin Condor, the registered owner
of the cargo truck; and respondent Sergio Pedrano, the driver of the truck. They
alleged that petitioner Laspias was negotiating the uphill climb along the national
highway of Sitio Aggies, Poblacion, Compostela, in a moderate and normal speed. It
was further alleged that the truck was parked in a slanted manner, its rear portion
almost in the middle of the highway, and that no early warning device was
displayed. Petitioner Laspias promptly applied the brakes and swerved to the left
to avoid hitting the truck head-on, but despite his efforts to avoid damage to
property and physical injuries on the passengers, the right side portion of the bus
hit the cargo trucks left rear. The petitioners further alleged, thus:
5. That the cargo truck mentioned in the aforequoted paragraph is owned
and registered in the name of the third-party defendant Benjamin Condor
and was left unattended by its driver Sergio Pedrano, one of the third-
party defendants, at the time of the incident;
6. That third-party defendant Sergio Pedrano, as driver of the cargo truck
with marked (sic) "Condor Hollow Blocks & General Merchandise," with
Plate No. GBP-675 which was recklessly and imprudently parked along the
national highway of Compostela, Cebu during the vehicular accident in
question, and third-party defendant Benjamin Condor, as the registered
owner of the cargo truck who failed to exercise due diligence in the
selection and supervision of third-party defendant Sergio Pedrano, are
jointly and severally liable to the third-party plaintiffs for whatever liability
that may be adjudged against said third-party plaintiffs or are directly
liable of (sic) the alleged death of plaintiffs wife;
7. That in addition to all that are stated above and in the answer which are
intended to show reckless imprudence on the part of the third-party
defendants, the third-party plaintiffs hereby declare that during the
vehicular accident in question, third-party defendant was clearly violating
Section 34, par. (g) of the Land Transportation and Traffic Code

10. That the aforesaid passenger bus, owned and operated by third-party
plaintiff William Tiu, is covered by a common carrier liability insurance with
Certificate of Cover No. 054940 issued by Philippine Phoenix Surety and
Insurance, Inc., Cebu City Branch, in favor of third-party plaintiff William
Tiu which covers the period from July 22, 1986 to July 22, 1987 and that
the said insurance coverage was valid, binding and subsisting during the
time of the aforementioned incident (Annex "A" as part hereof);
11. That after the aforesaid alleged incident, third-party plaintiff notified
third-party defendant Philippine Phoenix Surety and Insurance, Inc., of the
alleged incident hereto mentioned, but to no avail;
12. That granting, et arguendo et arguendi, if herein third-party plaintiffs
will be adversely adjudged, they stand to pay damages sought by the
plaintiff and therefore could also look up to the Philippine Phoenix Surety
and Insurance, Inc., for contribution, indemnification and/or
reimbursement of any liability or obligation that they might [be] adjudged
per insurance coverage duly entered into by and between third-party
plaintiff William Tiu and third-party defendant Philippine Phoenix Surety
and Insurance, Inc.;
12

The respondent PPSII, for its part, admitted that it had an existing contract with
petitioner Tiu, but averred that it had already attended to and settled the claims of
those who were injured during the incident.
13
It could not accede to the claim of
respondent Arriesgado, as such claim was way beyond the scheduled indemnity as
contained in the contract of insurance.
14

After the parties presented their respective evidence, the trial court ruled in favor
of respondent Arriesgado. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in
favor of plaintiff as against defendant William Tiu ordering the latter to pay
the plaintiff the following amounts:
1 - The sum of FIFTY THOUSAND PESOS (P50,000.00) as moral
damages;
2 - The sum of FIFTY THOUSAND PESOS (P50,000.00) as exemplary
damages;
3 - The sum of THIRTY-EIGHT THOUSAND FOUR HUNDRED FORTY-
ONE PESOS (P38,441.00) as actual damages;
4 - The sum of TWENTY THOUSAND PESOS (P20,000.00) as
attorneys fees;
5 - The sum of FIVE THOUSAND PESOS (P5,000.00) as costs of suit;
SO ORDERED.
15

According to the trial court, there was no dispute that petitioner William Tiu was
engaged in business as a common carrier, in view of his admission that D Rough
Rider passenger bus which figured in the accident was owned by him; that he had
been engaged in the transportation business for 25 years with a sole proprietorship;
and that he owned 34 buses. The trial court ruled that if petitioner Laspias had not
been driving at a fast pace, he could have easily swerved to the left to avoid hitting
the truck, thus, averting the unfortunate incident. It then concluded that petitioner
Laspias was negligent.
The trial court also ruled that the absence of an early warning device near the place
where the truck was parked was not sufficient to impute negligence on the part of
respondent Pedrano, since the tail lights of the truck were fully on, and the vicinity
was well lighted by street lamps.
16
It also found that the testimony of petitioner Tiu,
that he based the selection of his driver Laspias on efficiency and in-service
training, and that the latter had been so far an efficient and good driver for the past
six years of his employment, was insufficient to prove that he observed the
diligence of a good father of a family in the selection and supervision of his
employees.
After the petitioners motion for reconsideration of the said decision was denied,
the petitioners elevated the case to the Court of Appeals on the following issues:
I WHETHER THIRD PARTY DEFENDANT SERGIO PEDRANO WAS RECKLESS
AND IMPRUDENT WHEN HE PARKED THE CARGO TRUCK IN AN OBLIQUE
MANNER;
II WHETHER THE THIRD PARTY DEFENDANTS ARE JOINTLY AND SEVERALLY
LIABLE DIRECTLY TO PLAINTIFF-APPELLEE OR TO DEFENDANTS-APPELLANTS
FOR WHATEVER LIABILITY THAT MAY BE ADJUDGED TO THE SAID
DEFENDANTS-APPELLANTS;
III WHETHER DEFENDANT-APPELLANT VIRGILIO TE LASPIAS WAS GUILTY
OF GROSS NEGLIGENCE;
IV WHETHER DEFENDANT-APPELLANT WILLIAM TIU HAD EXERCISED THE
DUE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE SELECTION AND
SUPERVISION OF HIS DRIVERS;
V GRANTING FOR THE SAKE OF ARGUMENT THAT DEFENDANT-APPELLANT
WILLIAM TIU IS LIABLE TO PLAINTIFF-APPELLEE, WHETHER THERE IS LEGAL
AND FACTUAL BASIS IN AWARDING EXCESSIVE MORAL DAMAGES,
EX*E+MPLARY DAMAGES, ATTORNEYS FEES AND LITIGATION EXPENSES TO
PLAINTIFF-APPELLEE;
VI WHETHER THIRD PARTY DEFENDANT PHILIPPINE PHOENIX SURETY AND
INSURANCE, INC. IS LIABLE TO DEFENDANT- APPELLANT WILLIAM TIU.
17

The appellate court rendered judgment affirming the trial courts decision with the
modification that the awards for moral and exemplary damages were reduced
to P25,000. The dispositive portion reads:
WHEREFORE, the appealed Decision dated November 6, 1995 is hereby
MODIFIED such that the awards for moral and exemplary damages are
each reduced to P25,000.00 or a total of P50,000.00 for both. The
judgment is AFFIRMED in all other respects.
SO ORDERED.
18

According to the appellate court, the action of respondent Arriesgado was based
not on quasi-delict but on breach of contract of carriage. As a common carrier, it
was incumbent upon petitioner Tiu to prove that extraordinary diligence was
observed in ensuring the safety of passengers during transportation. Since the latter
failed to do so, he should be held liable for respondent Arriesgados claim. The CA
also ruled that no evidence was presented against the respondent PPSII, and as
such, it could not be held liable for respondent Arriesgados claim, nor for
contribution, indemnification and/or reimbursement in case the petitioners were
adjudged liable.
The petitioners now come to this Court and ascribe the following errors committed
by the appellate court:
I. THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING
RESPONDENTS BENJAMIN CONDOR AND SERGIO PEDRANO GUILTY OF
NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A. ARRIESGADO
OR TO PETITIONERS FOR WHATEVER LIABILITY THAT MAY BE ADJUDGED
AGAINST THEM.
II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS
GUILTY OF NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A.
ARRIESGADO.
III. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONER
WILLIAM TIU LIABLE FOR EXEMPLARY DAMAGES, ATTORNEYS FEES AND
LITIGATION EXPENSES.
IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING
RESPONDENT PHILIPPINE PHOENIX SURETY AND INSURANCE, INC. LIABLE
TO RESPONDENT PEDRO A. ARRIESGADO OR TO PETITIONER WILLIAM
TIU.
19

According to the petitioners, the appellate court erred in failing to appreciate the
absence of an early warning device and/or built-in reflectors at the front and back
of the cargo truck, in clear violation of Section 34, par. (g) of the Land
Transportation and Traffic Code. They aver that such violation is only a proof of
respondent Pedranos negligence, as provided under Article 2185 of the New Civil
Code. They also question the appellate courts failure to take into account that the
truck was parked in an oblique manner, its rear portion almost at the center of the
road. As such, the proximate cause of the incident was the gross recklessness and
imprudence of respondent Pedrano, creating the presumption of negligence on the
part of respondent Condor in supervising his employees, which presumption was
not rebutted. The petitioners then contend that respondents Condor and Pedrano
should be held jointly and severally liable to respondent Arriesgado for the payment
of the latters claim.
The petitioners, likewise, aver that expert evidence should have been presented to
prove that petitioner Laspias was driving at a very fast speed, and that the CA
could not reach such conclusion by merely considering the damages on the cargo
truck. It was also pointed out that petitioner Tiu presented evidence that he had
exercised the diligence of a good father of a family in the selection and supervision
of his drivers.
The petitioners further allege that there is no legal and factual basis to require
petitioner Tiu to pay exemplary damages as no evidence was presented to show
that the latter acted in a fraudulent, reckless and oppressive manner, or that he had
an active participation in the negligent act of petitioner Laspias.
Finally, the petitioners contend that respondent PPSII admitted in its answer that
while it had attended to and settled the claims of the other injured passengers,
respondent Arriesgados claim remained unsettled as it was beyond the scheduled
indemnity under the insurance contract. The petitioners argue that said respondent
PPSII should have settled the said claim in accordance with the scheduled indemnity
instead of just denying the same.
On the other hand, respondent Arriesgado argues that two of the issues raised by
the petitioners involved questions of fact, not reviewable by the Supreme Court:
the finding of negligence on the part of the petitioners and their liability to him; and
the award of exemplary damages, attorneys fees and litigation expenses in his
favor. Invoking the principle of equity and justice, respondent Arriesgado pointed
out that if there was an error to be reviewed in the CA decision, it should be geared
towards the restoration of the moral and exemplary damages toP50,000 each, or a
total of P100,000 which was reduced by the Court of Appeals to P25,000 each, or a
total of only P50,000.
Respondent Arriesgado also alleged that respondents Condor and Pedrano, and
respondent Phoenix Surety, are parties with whom he had no contract of carriage,
and had no cause of action against. It was pointed out that only the petitioners
needed to be sued, as driver and operator of the ill-fated bus, on account of their
failure to bring the Arriesgado Spouses to their place of destination as agreed upon
in the contract of carriage, using the utmost diligence of very cautious persons with
due regard for all circumstances.
Respondents Condor and Pedrano point out that, as correctly ruled by the Court of
Appeals, the proximate cause of the unfortunate incident was the fast speed at
which petitioner Laspias was driving the bus owned by petitioner Tiu. According to
the respondents, the allegation that the truck was not equipped with an early
warning device could not in any way have prevented the incident from happening.
It was also pointed out that respondent Condor had always exercised the due
diligence required in the selection and supervision of his employees, and that he
was not a party to the contract of carriage between the petitioners and respondent
Arriesgado.
Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner
Tiu, it settled all the claims of those injured in accordance with the insurance
contract. It further avers that it did not deny respondent Arriesgados claim, and
emphasizes that its liability should be within the scheduled limits of indemnity
under the said contract. The respondent concludes that while it is true that
insurance contracts are contracts of indemnity, the measure of the insurers liability
is determined by the insureds compliance with the terms thereof.
The Courts Ruling
At the outset, it must be stressed that this Court is not a trier of facts.
20
Factual
findings of the Court of Appeals are final and may not be reviewed on appeal by this
Court, except when the lower court and the CA arrived at diverse factual
findings.
21
The petitioners in this case assail the finding of both the trial and the
appellate courts that petitioner Laspias was driving at a very fast speed before the
bus owned by petitioner Tiu collided with respondent Condors stalled truck. This is
clearly one of fact, not reviewable by the Court in a petition for review under Rule
45.
22

On this ground alone, the petition is destined to fail.
However, considering that novel questions of law are likewise involved, the Court
resolves to examine and rule on the merits of the case.
Petitioner Laspias
Was negligent in driving
The Ill-fated bus
In his testimony before the trial court, petitioner Laspias claimed that he was
traversing the two-lane road at Compostela, Cebu at a speed of only forty (40) to
fifty (50) kilometers per hour before the incident occurred.
23
He also admitted that
he saw the truck which was parked in an "oblique position" at about 25 meters
before impact,
24
and tried to avoid hitting it by swerving to the left. However, even
in the absence of expert evidence, the damage sustained by the truck
25
itself
supports the finding of both the trial court and the appellate court, that the D
Rough Rider bus driven by petitioner Laspias was traveling at a fast pace. Since he
saw the stalled truck at a distance of 25 meters, petitioner Laspias had more than
enough time to swerve to his left to avoid hitting it; that is, if the speed of the bus
was only 40 to 50 kilometers per hour as he claimed. As found by the Court of
Appeals, it is easier to believe that petitioner Laspias was driving at a very fast
speed, since at 4:45 a.m., the hour of the accident, there were no oncoming
vehicles at the opposite direction. Petitioner Laspias could have swerved to the
left lane with proper clearance, and, thus, could have avoided the truck.
26
Instinct,
at the very least, would have prompted him to apply the breaks to avert the
impending disaster which he must have foreseen when he caught sight of the
stalled truck. As we had occasion to reiterate:
A man must use common sense, and exercise due reflection in all his acts;
it is his duty to be cautious, careful and prudent, if not from instinct, then
through fear of recurring punishment. He is responsible for such results as
anyone might foresee and for acts which no one would have performed
except through culpable abandon. Otherwise, his own person, rights and
property, and those of his fellow beings, would ever be exposed to all
manner of danger and injury.
27

We agree with the following findings of the trial court, which were affirmed by the
CA on appeal:
A close study and evaluation of the testimonies and the documentary
proofs submitted by the parties which have direct bearing on the issue of
negligence, this Court as shown by preponderance of evidence that
defendant Virgilio Te Laspias failed to observe extraordinary diligence as
a driver of the common carrier in this case. It is quite hard to accept his
version of the incident that he did not see at a reasonable distance ahead
the cargo truck that was parked when the Rough Rider [Bus] just came out
of the bridge which is on an (sic) [more] elevated position than the place
where the cargo truck was parked. With its headlights fully on, defendant
driver of the Rough Rider was in a vantage position to see the cargo truck
ahead which was parked and he could just easily have avoided hitting and
bumping the same by maneuvering to the left without hitting the said
cargo truck. Besides, it is (sic) shown that there was still much room or
space for the Rough Rider to pass at the left lane of the said national
highway even if the cargo truck had occupied the entire right lane thereof.
It is not true that if the Rough Rider would proceed to pass through the left
lane it would fall into a canal considering that there was much space for it
to pass without hitting and bumping the cargo truck at the left lane of said
national highway. The records, further, showed that there was no
incoming vehicle at the opposite lane of the national highway which would
have prevented the Rough Rider from not swerving to its left in order to
avoid hitting and bumping the parked cargo truck. But the evidence
showed that the Rough Rider instead of swerving to the still spacious left
lane of the national highway plowed directly into the parked cargo truck
hitting the latter at its rear portion; and thus, the (sic) causing damages not
only to herein plaintiff but to the cargo truck as well.
28

Indeed, petitioner Laspias negligence in driving the bus is apparent in the records.
By his own admission, he had just passed a bridge and was traversing the highway
of Compostela, Cebu at a speed of 40 to 50 kilometers per hour before the collision
occurred. The maximum speed allowed by law on a bridge is only 30 kilometers per
hour.
29
And, as correctly pointed out by the trial court, petitioner Laspias also
violated Section 35 of the Land Transportation and Traffic Code, Republic Act No.
4136, as amended:1avvphil.net
Sec. 35. Restriction as to speed. (a) Any person driving a motor vehicle on
a highway shall drive the same at a careful and prudent speed, not greater
nor less than is reasonable and proper, having due regard for the traffic,
the width of the highway, and or any other condition then and there
existing; and no person shall drive any motor vehicle upon a highway at
such speed as to endanger the life, limb and property of any person, nor at
a speed greater than will permit him to bring the vehicle to a stop within
the assured clear distance ahead.
30

Under Article 2185 of the Civil Code, a person driving a vehicle is presumed
negligent if at the time of the mishap, he was violating any traffic regulation.
31

Petitioner Tiu failed to
Overcome the presumption
Of negligence against him as
One engaged in the business
Of common carriage
The rules which common carriers should observe as to the safety of their
passengers are set forth in the Civil Code, Articles 1733,
32
1755
33
and 1756.
34
In this
case, respondent Arriesgado and his deceased wife contracted with petitioner Tiu,
as owner and operator of D Rough Riders bus service, for transportation from
Maya, Daanbantayan, Cebu, to Cebu City for the price of P18.00.
35
It is undisputed
that the respondent and his wife were not safely transported to the destination
agreed upon. In actions for breach of contract, only the existence of such contract,
and the fact that the obligor, in this case the common carrier, failed to transport his
passenger safely to his destination are the matters that need to be proved.
36
This is
because under the said contract of carriage, the petitioners assumed the express
obligation to transport the respondent and his wife to their destination safely and
to observe extraordinary diligence with due regard for all circumstances.
37
Any
injury suffered by the passengers in the course thereof is immediately attributable
to the negligence of the carrier.
38
Upon the happening of the accident, the
presumption of negligence at once arises, and it becomes the duty of a common
carrier to prove that he observed extraordinary diligence in the care of his
passengers.
39
It must be stressed that in requiring the highest possible degree of
diligence from common carriers and in creating a presumption of negligence against
them, the law compels them to curb the recklessness of their drivers.
40

While evidence may be submitted to overcome such presumption of negligence, it
must be shown that the carrier observed the required extraordinary diligence,
which means that the carrier must show the utmost diligence of very cautious
persons as far as human care and foresight can provide, or that the accident was
caused by fortuitous event.
41
As correctly found by the trial court, petitioner Tiu
failed to conclusively rebut such presumption. The negligence of petitioner Laspias
as driver of the passenger bus is, thus, binding against petitioner Tiu, as the owner
of the passenger bus engaged as a common carrier.
42

The Doctrine of
Last Clear Chance
Is Inapplicable in the
Case at Bar
Contrary to the petitioners contention, the principle of last clear chance is
inapplicable in the instant case, as it only applies in a suit between the owners and
drivers of two colliding vehicles. It does not arise where a passenger demands
responsibility from the carrier to enforce its contractual obligations, for it would be
inequitable to exempt the negligent driver and its owner on the ground that the
other driver was likewise guilty of negligence.
43
The common law notion of last
clear chance permitted courts to grant recovery to a plaintiff who has also been
negligent provided that the defendant had the last clear chance to avoid the
casualty and failed to do so. Accordingly, it is difficult to see what role, if any, the
common law of last clear chance doctrine has to play in a jurisdiction where the
common law concept of contributory negligence as an absolute bar to recovery by
the plaintiff, has itself been rejected, as it has been in Article 2179 of the Civil
Code.
44

Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgados
wife due to the negligence of petitioner Laspias, his employee, on this score.
Respondents Pedrano and
Condor were likewise
Negligent
In Phoenix Construction, Inc. v. Intermediate Appellate Court,
45
where therein
respondent Dionisio sustained injuries when his vehicle rammed against a dump
truck parked askew, the Court ruled that the improper parking of a dump truck
without any warning lights or reflector devices created an unreasonable risk for
anyone driving within the vicinity, and for having created such risk, the truck driver
must be held responsible. In ruling against the petitioner therein, the Court
elucidated, thus:
In our view, Dionisios negligence, although later in point of time than
the truck drivers negligence, and therefore closer to the accident, was not
an efficient intervening or independent cause. What the petitioners
describe as an "intervening cause" was no more than a foreseeable
consequence of the risk created by the negligent manner in which the
truck driver had parked the dump truck. In other words, the petitioner
truck driver owed a duty to private respondent Dionisio and others
similarly situated not to impose upon them the very risk the truck driver
had created. Dionisios negligence was not that of an independent and
overpowering nature as to cut, as it were, the chain of causation in fact
between the improper parking of the dump truck and the accident, nor to
sever the juris vinculum of liability.

We hold that private respondent Dionisios negligence was "only
contributory," that the "immediate and proximate cause" of the injury
remained the truck drivers "lack of due care."
46

In this case, both the trial and the appellate courts failed to consider that
respondent Pedrano was also negligent in leaving the truck parked askew without
any warning lights or reflector devices to alert oncoming vehicles, and that such
failure created the presumption of negligence on the part of his employer,
respondent Condor, in supervising his employees properly and adequately. As we
ruled in Poblete v. Fabros:
47

It is such a firmly established principle, as to have virtually formed part of
the law itself, that the negligence of the employee gives rise to the
presumption of negligence on the part of the employer. This is the
presumed negligence in the selection and supervision of employee. The
theory of presumed negligence, in contrast with the American doctrine of
respondeat superior, where the negligence of the employee is conclusively
presumed to be the negligence of the employer, is clearly deducible from
the last paragraph of Article 2180 of the Civil Code which provides that the
responsibility therein mentioned shall cease if the employers prove that
they observed all the diligence of a good father of a family to prevent
damages.
48

The petitioners were correct in invoking respondent Pedranos failure to observe
Article IV, Section 34(g) of the Rep. Act No. 4136, which provides:1avvphil.net
(g) Lights when parked or disabled. Appropriate parking lights or flares
visible one hundred meters away shall be displayed at a corner of the
vehicle whenever such vehicle is parked on highways or in places that are
not well-lighted or is placed in such manner as to endanger passing traffic.
The manner in which the truck was parked clearly endangered oncoming traffic on
both sides, considering that the tire blowout which stalled the truck in the first
place occurred in the wee hours of the morning. The Court can only now surmise
that the unfortunate incident could have been averted had respondent Condor, the
owner of the truck, equipped the said vehicle with lights, flares, or, at the very least,
an early warning device.
49
Hence, we cannot subscribe to respondents Condor and
Pedranos claim that they should be absolved from liability because, as found by the
trial and appellate courts, the proximate cause of the collision was the fast speed at
which petitioner Laspias drove the bus. To accept this proposition would be to
come too close to wiping out the fundamental principle of law that a man must
respond for the foreseeable consequences of his own negligent act or omission.
Indeed, our law on quasi-delicts seeks to reduce the risks and burdens of living in
society and to allocate them among its members. To accept this proposition would
be to weaken the very bonds of society.
50

The Liability of
Respondent PPSII
as Insurer
The trial court in this case did not rule on the liability of respondent PPSII, while the
appellate court ruled that, as no evidence was presented against it, the insurance
company is not liable.
A perusal of the records will show that when the petitioners filed the Third-Party
Complaint against respondent PPSII, they failed to attach a copy of the terms of the
insurance contract itself. Only Certificate of Cover No. 054940
51
issued in favor of
"Mr. William Tiu, Lahug, Cebu City" signed by Cosme H. Boniel was appended to the
third-party complaint. The date of issuance, July 22, 1986, the period of insurance,
from July 22, 1986 to July 22, 1987, as well as the following items, were also
indicated therein:
SCHEDULED VEHICLE
MODEL MAKE
Isuzu Forward
TYPE OF
BODY
Bus
COLOR
blue mixed
BLT FILE NO.
PLATE
NO.
PBP-
724
SERIAL/CHASSIS
NO.
SER450-
1584124
MOTOR
NO.
677836
AUTHORIZED
CAPACITY
50
UNLADEN
WEIGHT
6 Cyls. Kgs.
SECTION 1/11 *LIMITS OF LIABILITY
P50,000.00
PREMIUMS
PAID
P540.00
52

A. THIRD PARTY LIABILITY
B. PASSENGER LIABILITY Per Person
P12,000.00
Per Accident
P50,000
In its Answer
53
to the Third-Party Complaint, the respondent PPSII admitted the
existence of the contract of insurance, in view of its failure to specifically deny the
same as required under then Section 8(a), Rule 8 of the Rules of Court,
54
which
reads:
Sec. 8. How to contest genuineness of such documents. When an action or
defense is founded upon a written instrument copied in or attached to the
corresponding pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be deemed
admitted unless the adverse party, under oath, specifically denies them,
and sets forth what he claims to be the facts; but the requirement of an
oath does not apply when the adverse party does not appear to be a party
to the instrument or when compliance with an order for inspection of the
original instrument is refused.
In fact, respondent PPSII did not dispute the existence of such contract, and
admitted that it was liable thereon. It claimed, however, that it had attended to and
settled the claims of those injured during the incident, and set up the following as
special affirmative defenses:
Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby
reiterates and incorporates by way of reference the preceding paragraphs
and further states THAT:-
8. It has attended to the claims of Vincent Canales, Asuncion
Batiancila and Neptali Palces who sustained injuries during the
incident in question. In fact, it settled financially their claims per
vouchers duly signed by them and they duly executed Affidavit[s]
of Desistance to that effect, xerox copies of which are hereto
attached as Annexes 1, 2, 3, 4, 5, and 6 respectively;
9. With respect to the claim of plaintiff, herein answering third
party defendant through its authorized insurance adjuster
attended to said claim. In fact, there were negotiations to that
effect. Only that it cannot accede to the demand of said claimant
considering that the claim was way beyond the scheduled
indemnity as per contract entered into with third party plaintiff
William Tiu and third party defendant (Philippine Phoenix Surety
and Insurance, Inc.). Third party Plaintiff William Tiu knew all
along the limitation as earlier stated, he being an old hand in the
transportation business;
55

Considering the admissions made by respondent PPSII, the existence of the
insurance contract and the salient terms thereof cannot be dispatched. It must be
noted that after filing its answer, respondent PPSII no longer objected to the
presentation of evidence by respondent Arriesgado and the insured petitioner Tiu.
Even in its Memorandum
56
before the Court, respondent PPSII admitted the
existence of the contract, but averred as follows:
Petitioner Tiu is insisting that PPSII is liable to him for contribution,
indemnification and/or reimbursement. This has no basis under the
contract. Under the contract, PPSII will pay all sums necessary to discharge
liability of the insured subject to the limits of liability but not to exceed the
limits of liability as so stated in the contract. Also, it is stated in the
contract that in the event of accident involving indemnity to more than
one person, the limits of liability shall not exceed the aggregate amount so
specified by law to all persons to be indemnified.
57

As can be gleaned from the Certificate of Cover, such insurance contract was issued
pursuant to the Compulsory Motor Vehicle Liability Insurance Law. It was expressly
provided therein that the limit of the insurers liability for each person was P12,000,
while the limit per accident was pegged at P50,000. An insurer in an indemnity
contract for third party liability is directly liable to the injured party up to the extent
specified in the agreement but it cannot be held solidarily liable beyond that
amount.
58
The respondent PPSII could not then just deny petitioner Tius claim; it
should have paid P12,000 for the death of Felisa Arriesgado,
59
and respondent
Arriesgados hospitalization expenses of P1,113.80, which the trial court found to
have been duly supported by receipts. The total amount of the claims, even when
added to that of the other injured passengers which the respondent PPSII claimed
to have settled,
60
would not exceed the P50,000 limit under the insurance
agreement.
Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is
primarily intended to provide compensation for the death or bodily injuries suffered
by innocent third parties or passengers as a result of the negligent operation and
use of motor vehicles. The victims and/or their dependents are assured of
immediate financial assistance, regardless of the financial capacity of motor vehicle
owners.
61
As the Court, speaking through Associate Justice Leonardo A.
Quisumbing, explained in Government Service Insurance System v. Court of
Appeals:
62

However, although the victim may proceed directly against the insurer for
indemnity, the third party liability is only up to the extent of the insurance
policy and those required by law. While it is true that where the insurance
contract provides for indemnity against liability to third persons, and such
persons can directly sue the insurer, the direct liability of the insurer under
indemnity contracts against third party liability does not mean that the
insurer can be held liable in solidum with the insured and/or the other
parties found at fault. For the liability of the insurer is based on contract;
that of the insured carrier or vehicle owner is based on tort.
Obviously, the insurer could be held liable only up to the extent of what
was provided for by the contract of insurance, in accordance with the
CMVLI law. At the time of the incident, the schedule of indemnities for
death and bodily injuries, professional fees and other charges payable
under a CMVLI coverage was provided for under the Insurance
Memorandum Circular (IMC) No. 5-78 which was approved on November
10, 1978. As therein provided, the maximum indemnity for death was
twelve thousand (P12,000.00) pesos per victim. The schedules for medical
expenses were also provided by said IMC, specifically in paragraphs (C) to
(G).
63

Damages to be
Awarded
The trial court correctly awarded moral damages in the amount of P50,000 in favor
of respondent Arriesgado. The award of exemplary damages by way of example or
correction of the public good,
64
is likewise in order. As the Court ratiocinated in
Kapalaran Bus Line v. Coronado:
65

While the immediate beneficiaries of the standard of extraordinary
diligence are, of course, the passengers and owners of cargo carried by a
common carrier, they are not the only persons that the law seeks to
benefit. For if common carriers carefully observed the statutory standard
of extraordinary diligence in respect of their own passengers, they cannot
help but simultaneously benefit pedestrians and the passengers of other
vehicles who are equally entitled to the safe and convenient use of our
roads and highways. The law seeks to stop and prevent the slaughter and
maiming of people (whether passengers or not) on our highways and
buses, the very size and power of which seem to inflame the minds of their
drivers. Article 2231 of the Civil Code explicitly authorizes the imposition of
exemplary damages in cases of quasi-delicts "if the defendant acted with
gross negligence."
66

The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa
Arriesgado, is entitled to indemnity in the amount of P50,000.00.
67

The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano
are jointly and severally liable for said amount, conformably with the following
pronouncement of the Court in Fabre, Jr. vs. Court of Appeals:
68

The same rule of liability was applied in situations where the negligence of
the driver of the bus on which plaintiff was riding concurred with the
negligence of a third party who was the driver of another vehicle, thus
causing an accident. In Anuran v. Buo, Batangas Laguna Tayabas Bus Co.
v. Intermediate Appellate Court, and Metro Manila Transit Corporation v.
Court of Appeals, the bus company, its driver, the operator of the other
vehicle and the driver of the vehicle were jointly and severally held liable
to the injured passenger or the latters heirs. The basis of this allocation of
liability was explained in Viluan v. Court of Appeals, thus:
"Nor should it make difference that the liability of petitioner [bus
owner] springs from contract while that of respondents [owner
and driver of other vehicle] arises from quasi-delict. As early as
1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177,
that in case of injury to a passenger due to the negligence of the
driver of the bus on which he was riding and of the driver of
another vehicle, the drivers as well as the owners of the two
vehicles are jointly and severally liable for damages. Some
members of the Court, though, are of the view that under the
circumstances they are liable on quasi-delict."
69

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
Decision of the Court of Appeals is AFFIRMED with MODIFICATIONS:
(1) Respondent Philippine Phoenix Surety and Insurance, Inc. and
petitioner William Tiu are ORDERED to pay, jointly and severally,
respondent Pedro A. Arriesgado the total amount of P13,113.80;
(2) The petitioners and the respondents Benjamin Condor and Sergio
Pedrano are ORDERED to pay, jointly and severally, respondent Pedro A.
Arriesgado P50,000.00 as indemnity; P26,441.50 as actual
damages; P50,000.00 as moral damages; P50,000.00 as exemplary
damages; and P20,000.00 as attorneys fees.
SO ORDERED.
































G.R. No. L-49699 August 8, 1988
PERLA COMPANIA de SEGUROS, INC., petitioner,
vs.
HON. CONSTANTE A. ANCHETA, Presiding Judge of the Court of First instance of
Camarines Norte, Branch III, ERNESTO A. RAMOS and GOYENA ZENAROSA-
RAMOS, for themselves and as Guardian Ad Litem for Minors JOBET, BANJO,
DAVID and GRACE all surnamed RAMOS, FERNANDO M. ABCEDE, SR., for himself
and Guardian Ad Litem for minor FERNANDO G. ABCEDE, JR., MIGUEL JEREZ
MAGO as Guardian Ad Litem for minors ARLEEN R. MAGO, and ANACLETA J.
ZENAROSA., respondents.
CORTES, J.:
The instant petition for certiorari and prohibition with preliminary injunction
concerns the ability of insurers under the "no fault indemnity" provision of the
Insurance Code. *
On December 27, 1977, in a collision between the IH Scout in which private
respondents were riding and a Superlines bus along the national highway in Sta.
Elena, Camarines Norte, private respondents sustained physics injuries in varying
degrees of gravity. Thus, they filed with the Court of First Instance of Camarines
Norte on February 23,1978 a complaint for damages against Superlines, the bus
driver and petitioner, the insurer of the bus [Rollo, pp. 27-39.] The bus was insured
with petitioner for the amount of P50,000.00 as and for passenger liability and
P50,000.00 as and for third party liability. The vehicle in which private respondents
were riding was insured with Malayan Insurance Co.
Even before summons could be served, respondent judge issued an order dated
March 1, 1978 [Rollo, pp. 40-41], the pertinent portion of which stated:
The second incident is the prayer for an order of this court for the
Insurance Company, Perla Compania de Seguros, Inc., to pay
immediately the P5,000.00 under the "no fault clause" as
provided for under Section 378 of the Insurance Code, and finding
that the requisite documents to be attached in the record, the
said Insurance Company is therefore directed to pay the plaintiffs
(private respondents herein) within five (5) days from receipt of
this order.
Petitioner denied in its Answer its alleged liability under the "no fault indemnity"
provision [Rollo, p. 44] and likewise moved for the reconsideration of the order.
Petitioner held the position that under Sec. 378 of the Insurance Code, the insurer
liable to pay the P5,000.00 is the insurer of the vehicle in which private respondents
were riding, not petitioner, as the provision states that "[i]n the case of an occupant
of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is
riding, mounting or dismounting from." Respondent judge, however, denied
reconsideration. A second motion for reconsideration was filed by petitioner.
However, in an order dated January 3, 1979, respondent judge denied the second
motion for reconsideration and ordered the issuance of a writ of execution [Rollo,
p. 69.] Hence, the instant petition praying principally for the annulment and setting
aside of respondent judge's orders dated March 1, 1978 and January 3, 1979.
The Court issued a temporary restraining order on January 24,1979 [Rollo pp. 73-
74.]
The sole issue raised in this petition is whether or not petitioner is the insurer liable
to indemnify private respondents under Sec. 378 of the Insurance Code.
The key to the resolution of the issue is of courts e Sec. 378, which provides:
Sec. 378. Any claim for death or injury to any passenger or third
party pursuant to the provision of this chapter shall be paid
without the necessity of proving fault or negligence of any kind.
Provided, That for purposes of this section
(i) The indemnity in respect of any one person shall not exceed
five thousand pesos;
(ii) The following proofs of loss, when submitted under oath, shall
be sufficient evidence to substantiate the claim:
(a) Police report of accident, and
(b) Death certificate and evidence sufficient to
establish the proper payee, or
(c) Medical report and evidence of medical or
hospital disbursement in respect of which
refund is claimed;
(iii) Claim may be made against one motor vehicle only. In the case
of an occupant of a vehicle, claim shall lie against the insurer of
the vehicle in which the occupant is riding, mounting or
dismounting from. In any other case, claim shall lie against the
insurer of the directly offending vehicle. In all cases, the right of
the party paying the claim to recover against the owner of the
vehicle responsible for the accident shall be maintained. [Emphasis
supplied.]
From a reading of the provision, which is couched in straight-forward and
unambiguous language, the following rules on claims under the "no fault
indemnity" provision, where proof of fault or negligence is not necessary for
payment of any claim for death Or injury to a passenger or a third party, are
established:
1. A claim may be made against one motor vehicle only.
2. If the victim is an occupant of a vehicle, the claim shall lie against the insurer of
the vehicle. in which he is riding, mounting or dismounting from.
3. In any other case (i.e. if the victim is not an occupant of a vehicle), the claim shall
lie against the insurer of the directly offending vehicle.
4. In all cases, the right of the party paying the claim to recover against the owner
of the vehicle responsible for the accident shall be maintained.
The law is very clear the claim shall lie against the insurer of the vehicle in which
the "occupant" ** is riding, and no other. The claimant is not free to choose from
which insurer he will claim the "no fault indemnity," as the law, by using the word
"shall, makes it mandatory that the claim be made against the insurer of the vehicle
in which the occupant is riding, mounting or dismounting from.
That said vehicle might not be the one that caused the accident is of no moment
since the law itself provides that the party paying the claim under Sec. 378 may
recover against the owner of the vehicle responsible for the accident. This is
precisely the essence of "no fault indemnity" insurance which was introduced to
and made part of our laws in order to provide victims of vehicular accidents or their
heirs immediate compensation, although in a limited amount, pending final
determination of who is responsible for the accident and liable for the
victims'injuries or death. In turn, the "no fault indemnity" provision is part and
parcel of the Insurance Code provisions on compulsory motor vehicle ability
insurance [Sec. 373-389] and should be read together with the requirement for
compulsory passenger and/or third party liability insurance [Sec. 377] which was
mandated in order to ensure ready compensation for victims of vehicular accidents.
Irrespective of whether or not fault or negligence lies with the driver of the
Superlines bus, as private respondents were not occupants of the bus, they cannot
claim the "no fault indemnity" provided in Sec. 378 from petitioner. The claim
should be made against the insurer of the vehicle they were riding. This is very clear
from the law. Undoubtedly, in ordering petitioner to pay private respondents the
'no fault indemnity,' respondent judge gravely abused his discretion in a manner
that amounts to lack of jurisdiction. The issuance of the corrective writ of certiorari
is therefore warranted.
WHEREFORE, the petition is GRANTED and respondent judge's order dated March 1,
1978, requiring petitioner to pay private respondents the amount of P5,000.00 as
"no fault indemnity' under Sec. 378 of the Insurance Code, and that of January 3,
1979, denying the second motion for reconsideration and issuing a writ of
execution, are ANNULLED and SET ASIDE. The temporary restraining order issued by
the Court on January 24, 1979 is made permanent.
SO ORDERED.













G.R. No. L-36480 May 31, 1988
ANDREW PALERMO, plaintiff-appellee,
vs.
PYRAMID INSURANCE CO., INC., defendant- appellant.
GRIO-AQUINO, J:
The Court of Appeals certified this case to Us for proper disposition as the only
question involved is the interpretation of the provision of the insurance contract
regarding the "authorized driver" of the insured motor vehicle.
On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the
Court of First Instance of Negros Occidental against Pyramid Insurance Co., Inc., for
payment of his claim under a Private Car Comprehensive Policy MV-1251 issued by
the defendant (Exh. A).
In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it disallowed
the claim because at the time of the accident, the insured was driving his car with
an expired driver's license.
After the trial, the court a quo rendered judgment on October 29, 1969 ordering
the defendant "to pay the plaintiff the sum of P20,000.00, value of the insurance of
the motor vehicle in question and to pay the costs."
On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution
Pending Appeal." It was opposed by the defendant, but was granted by the trial
court on December 15, 1969.
The trial court found the following facts to be undisputed:
On October 12,1968, after having purchased a brand new Nissan
Cedric de Luxe Sedan car bearing Motor No. 087797 from the Ng
Sam Bok Motors Co. in Bacolod City, plaintiff insured the same
with the defendant insurance company against any loss or
damage for P 20,000.00 and against third party liability for P
10,000.00. Plaintiff paid the defendant P 361.34 premium for one
year, March 12, 1968 to March 12, 1969, for which defendant
issued Private Car Comprehensive Policy No. MV-1251, marked
Exhibit "A."
The automobile was, however, mortgaged by the plaintiff with the
vendor, Ng Sam Bok Motors Co., to secure the payment of the
balance of the purchase price, which explains why the registration
certificate in the name of the plaintiff remains in the hands of the
mortgagee, Ng Sam Bok Motors Co.
On April 17, 1968, while driving the automobile in question, the
plaintiff met a violent accident. The La Carlota City fire engine
crashed head on, and as a consequence, the plaintiff sustained
physical injuries, his father, Cesar Palermo, who was with am in
the car at the time was likewise seriously injured and died shortly
thereafter, and the car in question was totally wrecked.
The defendant was immediately notified of the occurrence, and
upon its orders, the damaged car was towed from the scene of
the accident to the compound of Ng Sam Bok Motors in Bacolod
City where it remains deposited up to the present time.
The insurance policy, Exhibit "A," grants an option unto the
defendant, in case of accident either to indemnify the plaintiff for
loss or damage to the car in cash or to replace the damaged car.
The defendant, however, refused to take either of the above-
mentioned alternatives for the reason as alleged, that the insured
himself had violated the terms of the policy when he drove the
car in question with an expired driver's license. (Decision, Oct. 29,
1969, p. 68, Record on Appeal.)
Appellant alleges that the trial court erred in interpreting the following provision of
the Private Car Comprehensive Policy MV-1251:
AUTHORIZED DRIVER:
Any of the following:
(a) The Insured.
(b) Any person driving on the Insured's order or with his
permission. Provided that the person driving is permitted in
accordance with the licensing or other laws or regulations to drive
the Motor Vehicle and is not disqualified from driving such motor
vehicle by order of a Court of law or by reason of any enactment
or regulation in that behalf. (Exh. "A.")
There is no merit in the appellant's allegation that the plaintiff was not authorized
to drive the insured motor vehicle because his driver's license had expired. The
driver of the insured motor vehicle at the time of the accident was, the insured
himself, hence an "authorized driver" under the policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on
the highway without a license or with an expired license, an infraction of the Motor
Vehicle Law on the part of the insured, is not a bar to recovery under the insurance
contract. It however renders him subject to the penal sanctions of the Motor
Vehicle Law.
The requirement that the driver be "permitted in accordance with the licensing or
other laws or regulations to drive the Motor Vehicle and is not disqualified from
driving such motor vehicle by order of a Court of Law or by reason of any
enactment or regulation in that behalf," applies only when the driver" is driving on
the insured's order or with his permission." It does not apply when the person
driving is the insured himself.
This view may be inferred from the decision of this Court in Villacorta vs. Insurance
Commission, 100 SCRA 467, where it was held that:
The main purpose of the "authorized driver" clause, as may be
seen from its text, is that a person other than the insured owner,
who drives the car on the insured's order, such as his regular
driver, or with his permission, such as a friend or member of the
family or the employees of a car service or repair shop, must be
duly licensed drivers and have no disqualification to drive a motor
vehicle.
In an American case, where the insured herself was personally operating her
automobile but without a license to operate it, her license having expired prior to
the issuance of the policy, the Supreme Court of Massachusetts was more explicit:
... Operating an automobile on a public highway without a license,
which act is a statutory crime is not precluded by public policy
from enforcing a policy indemnifying her against liability for bodily
injuries The inflicted by use of the automobile." (Drew C.
Drewfield McMahon vs. Hannah Pearlman, et al., 242 Mass. 367,
136 N.E. 154, 23 A.L.R. 1467.)
WHEREFORE, the appealed decision is affirmed with costs against the defendant-
appellant.
SO ORDERED.





















G.R. No. L-54171 October 28, 1980
JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA, petitioner,
vs.
THE INSURANCE COMMISSION and EMPIRE INSURANCE COMPANY, respondents.
TEEHANKEE, Acting C.J.:
The Court sets aside respondent Insurance Commission's dismissal of petitioner's
complaint and holds that where the insured's car is wrongfully taken without the
insured's consent from the car service and repair shop to whom it had been
entrusted for check-up and repairs (assuming that such taking was for a joy ride, in
the course of which it was totally smashed in an accident), respondent insurer is
liable and must pay insured for the total loss of the insured vehicle under the theft
clause of the policy.
The undisputed facts of the case as found in the appealed decision of April 14, 1980
of respondent insurance commission are as follows:
Complainant [petitioner] was the owner of a Colt Lancer, Model
1976, insured with respondent company under Private Car Policy
No. MBI/PC-0704 for P35,000.00 Own Damage; P30,000.00
Theft; and P30,000.00 Third Party Liability, effective May 16,
1977 to May 16, 1978. On May 9, 1978, the vehicle was brought
to the Sunday Machine Works, Inc., for general check-up and
repairs. On May 11, 1978, while it was in the custody of the
Sunday Machine Works, the car was allegedly taken by six (6)
persons and driven out to Montalban, Rizal. While travelling along
Mabini St., Sitio Palyasan, Barrio Burgos, going North at
Montalban, Rizal, the car figured in an accident, hitting and
bumping a gravel and sand truck parked at the right side of the
road going south. As a consequence, the gravel and sand truck
veered to the right side of the pavement going south and the car
veered to the right side of the pavement going north. The driver,
Benito Mabasa, and one of the passengers died and the other four
sustained physical injuries. The car, as well, suffered extensive
damage. Complainant, thereafter, filed a claim for total loss with
the respondent company but claim was denied. Hence,
complainant, was compelled to institute the present action.
The comprehensive motor car insurance policy for P35,000.00 issued by respondent
Empire Insurance Company admittedly undertook to indemnify the petitioner-
insured against loss or damage to the car (a) by accidental collision or overturning,
or collision or overturning consequent upon mechanical breakdown or consequent
upon wear and tear; (b) by fire, external explosion, self-ignition or lightning or
burglary, housebreaking or theft; and (c) by malicious act.
Respondent insurance commission, however, dismissed petitioner's complaint for
recovery of the total loss of the vehicle against private respondent, sustaining
respondent insurer's contention that the accident did not fall within the provisions
of the policy either for the Own Damage or Theft coverage, invoking the policy
provision on "Authorized Driver" clause.
1

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

The main purpose of the "authorized driver" clause, as may be seen from its
text, supra, is that a person other than the insured owner, who drives the car on the
insured's order, such as his regular driver, or with his permission, such as a friend or
member of the family or the employees of a car service or repair shop must be duly
licensed drivers and have no disqualification to drive a motor vehicle.
A car owner who entrusts his car to an established car service and repair shop
necessarily entrusts his car key to the shop owner and employees who are
presumed to have the insured's permission to drive the car for legitimate purposes
of checking or road-testing the car. The mere happenstance that the employee(s) of
the shop owner diverts the use of the car to his own illicit or unauthorized purpose
in violation of the trust reposed in the shop by the insured car owner does not
mean that the "authorized driver" clause has been violated such as to bar recovery,
provided that such employee is duly qualified to drive under a valid driver's license.
The situation is no different from the regular or family driver, who instead of
carrying out the owner's order to fetch the children from school takes out his girl
friend instead for a joy ride and instead wrecks the car. There is no question of his
being an "authorized driver" which allows recovery of the loss although his trip was
for a personal or illicit purpose without the owner's authorization.
Secondly, and independently of the foregoing (since when a car is unlawfully taken,
it is the theft clause, not the "authorized driver" clause, that applies), where a car is
admittedly as in this case unlawfully and wrongfully taken by some people, be they
employees of the car shop or not to whom it had been entrusted, and taken on a
long trip to Montalban without the owner's consent or knowledge, such taking
constitutes or partakes of the nature of theft as defined in Article 308 of the
Revised Penal Code, viz. "Who are liable for theft. Theft is committed by any
person who, with intent to gain but without violence against or intimidation of
persons nor force upon things, shall take personal property of another without the
latter's consent," for purposes of recovering the loss under the policy in question.
The Court rejects respondent commission's premise that there must be an intent on
the part of the taker of the car "permanently to deprive the insured of his car" and
that since the taking here was for a "joy ride" and "merely temporary in nature," a
"temporary taking is held not a taking insured against."
The evidence does not warrant respondent commission's findings that it was a
mere "joy ride". From the very investigator's report cited in its comment,
3
the
police found from the waist of the car driver Benito Mabasa Bartolome who
smashed the car and was found dead right after the incident "one cal. 45 Colt. and
one apple type grenade," hardly the materials one would bring along on a "joy
ride". Then, again, it is equally evident that the taking proved to be quite
permanent rather than temporary, for the car was totally smashed in the fatal
accident and was never returned in serviceable and useful condition to petitioner-
owner.
Assuming, despite the totally inadequate evidence, that the taking was "temporary"
and for a "joy ride", the Court sustains as the better view that which holds that
when a person, either with the object of going to a certain place, or learning how to
drive, or enjoying a free ride, takes possession of a vehicle belonging to another,
without the consent of its owner, he is guilty of theft because by taking possession
of the personal property belonging to another and using it, his intent to gain is
evident since he derives therefrom utility, satisfaction, enjoyment and pleasure.
Justice Ramon C. Aquino cites in his work Groizard who holds that the use of a thing
constitutes gain and Cuello Calon who calls it "hurt de uso. "
4

The insurer must therefore indemnify the petitioner-owner for the total loss of the
insured car in the sum of P35,000.00 under the theft clause of the policy, subject to
the filing of such claim for reimbursement or payment as it may have as subrogee
against the Sunday Machine Works, Inc.
ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered
sentencing private respondent to pay petitioner the sum of P35,000.00 with legal
interest from the filing of the complaint until full payment is made and to pay the
costs of suit.
SO ORDERED.
G.R. No. 173773 November 28, 2012
PARAMOUNT INSURANCE CORPORATION, Petitioner,
vs.
SPOUSES YVES and MARIA TERESA REMONDEULAZ, Respondents.
D E C I S I O N
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking the reversal and setting aside of the Decision
1
dated April 12, 2005 and
Resolution
2
dated July 20, 2006 of the Court of Appeals in CA-G.R. CV No. 61490.
The undisputed facts follow.
On May 26, 1994, respondents insured with petitioner their 1994
Toyota Corolla sedan under a comprehensive motor vehicle insurance policy for one
year.
During the effectivity of said insurance, respondents car was unlawfully taken.
Hence, they immediately reported the theft to the Traffic Management Command
of the PNP who made them accomplish a complaint sheet. In said complaint sheet,
respondents alleged that a certain Ricardo Sales (Sales) took possession of the
subject vehicle to add accessories and improvements thereon, however, Sales failed
to return the subject vehicle within the agreed three-day period.
As a result, respondents notified petitioner to claim for the reimbursement of their
lost vehicle. However, petitioner refused to pay.
Accordingly, respondents lodged a complaint for a sum of money against petitioner
before the Regional Trial Court of Makati City (trial court) praying for the payment
of the insured value of their car plus damages on April 21, 1995.
After presentation of respondents evidence, petitioner filed a Demurrer to
Evidence.
Acting thereon, the trial court dismissed the complaint filed by respondents. The
full text of said Order
3
reads:
Before the Court is an action filed by the plaintiffs, spouses Yves and Maria Teresa
Remondeulaz against the defendant, Paramount Insurance Corporation, to recover
from the defendant the insured value of the motor vehicle.
It appears that on 26 May 1994, plaintiffs insured their vehicle, a 1994 Toyota
Corolla XL with chassis number EE-100-9524505, with defendant under Private Car
Policy No. PC-37396 for Own Damage, Theft, Third-Party Property Damage and
Third-Party Personal Injury, for the period commencing 26 May 1994 to 26 May
1995. Then on 1 December 1994, defendants received from plaintiff a demand
letter asking for the payment of the proceeds in the amount of PhP409,000.00
under their policy. They alleged the loss of the vehicle and claimed the same to be
covered by the policys provision on "Theft." Defendant disagreed and refused to
pay.
It appears, however, that plaintiff had successfully prosecuted and had been
awarded the amount claimed in this action, in another action (Civil Case No. 95-
1524 entitled Sps. Yves and Maria Teresa Remondeulaz versus Standard Insurance
Company, Inc.), which involved the loss of the same vehicle under the same
circumstances although under a different policy and insurance company. This,
considered with the principle that an insured may not recover more than its
interest in any property subject of an insurance, leads the court to dismiss this
action.
SO ORDERED.
4

Not in conformity with the trial courts Order, respondents interposed an appeal to
the Court of Appeals (appellate court).
In its Decision dated April 12, 2005, the appellate court reversed and set aside the
Order issued by the trial court, to wit:
Indeed, the trial court erred when it dismissed the action on the ground of double
recovery since it is clear that the subject car is different from the one insured with
another insurance company, the Standard Insurance Company. In this case,
defendant-appellee herein petitioner denied the reimbursement for the lost vehicle
on the ground that the said loss could not fall within the concept of the "theft
clause" under the insurance policy x x x
x x x x
WHEREFORE, the October 7, 1998 Order of the Regional Trial Court of Makati City,
Branch 63, is hereby REVERSED and SET ASIDE
x x x.
SO ORDERED.
5

Petitioner, thereafter, filed a motion for reconsideration against said Decision, but
the same was denied by the appellate court in a Resolution dated July 20, 2006.
Consequently, petitioner filed a petition for review on certiorari before this Court
praying that the appellate courts Decision and Resolution be reversed and set
aside.
In its petition, petitioner raises this issue for our resolution:
Whether or not the Court of Appeals decided the case a quo in a way not in accord
with law and/or applicable jurisprudence when it promulgated in favor of the
respondents Remondeulaz, making Paramount liable for the alleged "theft" of
respondents vehicle.
6

Essentially, the issue is whether or not petitioner is liable under the insurance policy
for the loss of respondents vehicle.
Petitioner argues that the loss of respondents vehicle is not a peril covered by the
policy. It maintains that it is not liable for the loss, since the car cannot be classified
as stolen as respondents entrusted the possession thereof to another person.
We do not agree.
Adverse to petitioners claim, respondents policy clearly undertook to indemnify
the insured against loss of or damage to the scheduled vehicle when caused by
theft, to wit:
SECTION III LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify the insured against
loss of or damage to the Scheduled 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;
(b) by fire, external explosion, self-ignition or lightning or burglary,
housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the process of loading and unloading)
incidental to such transit by road, rail, inland waterway, lift or elevator.
7

Apropos, we now resolve the issue of whether the loss of respondents vehicle falls
within the concept of the "theft clause" under the insurance policy.
In People v. Bustinera,
8
this Court had the occasion to interpret the "theft clause" of
an insurance policy. In this case, the Court explained that when one takes the motor
vehicle of another without the latters consent even if the motor vehicle is later
returned, there is theft there being intent to gain as the use of the thing
unlawfully taken constitutes gain.
Also, in Malayan Insurance Co., Inc. v. Court of Appeals,
9
this Court held that the
taking of a vehicle by another person without the permission or authority from the
owner thereof is sufficient to place it within the ambit of the word theft as
contemplated in the policy, and is therefore, compensable.
Moreover, the case of Santos v. People
10
is worthy of note. Similarly in Santos, the
owner of a car entrusted his vehicle to therein petitioner Lauro Santos who owns a
repair shop for carburetor repair and repainting. However, when the owner tried to
retrieve her car, she was not able to do so since Santos had abandoned his shop. In
the said case, the crime that was actually committed was Qualified Theft. However,
the Court held that because of the fact that it was not alleged in the information
that the object of the crime was a car, which is a qualifying circumstance, the Court
found that Santos was only guilty of the crime of Theft and merely considered the
qualifying circumstance as an aggravating circumstance in the imposition of the
appropriate penalty. The Court therein clarified the distinction between the crime
of Estafa and Theft, to wit:
x x x The principal distinction between the two crimes is that in theft the thing is
taken while in estafa the accused receives the property and converts it to his own
use or benefit. However, there may be theft even if the accused has possession of
the property. If he was entrusted only with the material or physical (natural) or de
facto possession of the thing, his misappropriation of the same constitutes theft,
but if he has the juridical possession of the thing his conversion of the same
constitutes embezzlement or estafa.
11

In the instant case, Sales did not have juridical possession over the vehicle. Hence, it
is apparent that the taking of repondents vehicle by Sales is without any consent or
authority from the former.
Records would show that respondents entrusted possession of their vehicle only to
the extent that Sales will introduce repairs and improvements thereon, and not to
permanently deprive them of possession thereof. Since, Theft can also be
committed through misappropriation, the fact that Sales failed to return the subject
vehicle to respondents constitutes Qualified Theft. Hence, since repondents car is
undeniably covered by a Comprehensive Motor Vehicle Insurance Policy that allows
for recovery in cases of theft, petitioner is liable under the policy for the loss of
respondents vehicle under the "theft clause."
All told, Sales act of depriving respondents of their motor vehicle at, or soon after
the transfer of physical possession of the movable property, constitutes theft under
the insurance policy, which is compensable.
12

WHEREFORE, the instant petition is DENIED. The Decision dated April 12, 2005 and
Resolution dated July 20, 2006 of the Court of Appeals are hereby AFFIRMED in
toto.
SO ORDERED.































G.R. No. 198174 September 2, 2013
ALPHA INSURANCE AND SURETY CO., PETITIONER,
vs.
ARSENIA SONIA CASTOR, RESPONDENT.
D E C I S I O N
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision
1
dated May 31, 2011 and Resolution
2
dated August 10, 2011
of the Court of Appeals (CA) in CA-G.R. CV No. 93027.
The facts follow.
On February 21, 2007, respondent entered into a contract of insurance, Motor Car
Policy No. MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota
Revo DLX DSL. The contract of insurance obligates the petitioner to pay the
respondent the amount of Six Hundred Thirty Thousand Pesos (P630,000.00) in case
of loss or damage to said vehicle during the period covered, which is from February
26, 2007 to February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel
Salazar Lanuza (Lanuza), to bring the above-described vehicle to a nearby auto-shop
for a tune-up. However, Lanuza no longer returned the motor vehicle to respondent
and despite diligent efforts to locate the same, said efforts proved futile.
Resultantly, respondent promptly reported the incident to the police and
concomitantly notified petitioner of the said loss and demanded payment of the
insurance proceeds in the total sum of P630,000.00.
In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent,
stating among others, thus:
Upon verification of the documents submitted, particularly the Police Report and
your Affidavit, which states that the culprit, who stole the Insure[d] unit, is
employed with you. We would like to invite you on the provision of the Policy under
Exceptions to Section-III, which we quote:
1.) The Company shall not be liable for:
x x x x
(4) Any malicious damage caused by the Insured, any member of his family or by "A
PERSON IN THE INSUREDS SERVICE."
In view [of] the foregoing, we regret that we cannot act favorably on your claim.
In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim
and argued that the exception refers to damage of the motor vehicle and not to its
loss. However, petitioners denial of respondents insured claim remains firm.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against
petitioner before the Regional Trial Court (RTC) of Quezon City on September 10,
2007.
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of
respondent in this wise:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendant ordering the latter as follows:
To pay plaintiff the amount of P466,000.00 plus legal interest of 6% per annum
from the time of demand up to the time the amount is fully settled;
To pay attorneys fees in the sum of P65,000.00; and
To pay the costs of suit.
All other claims not granted are hereby denied for lack of legal and factual basis.
3

Aggrieved, petitioner filed an appeal with the CA.
On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon
Citys decision. The fallo reads:
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the
Decision, dated December 19, 2008, of Branch 215 of the Regional Trial Court of
Quezon City, in Civil Case No. Q-07-61099, is hereby AFFIRMED in toto.
SO ORDERED.
4

Petitioner filed a Motion for Reconsideration against said decision, but the same
was denied in a Resolution dated August 10, 2011.
Hence, the present petition wherein petitioner raises the following grounds for the
allowance of its petition:
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
GROSSLY OR GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF
THE PRIVATE RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT
EXCEPTION DOES NOT COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF
THE INSURANCE POLICY ARE [AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH
THAT THE PARTIES THEMSELVES DISAGREE ABOUT THE MEANING OF PARTICULAR
PROVISIONS, THE POLICY WILL BE CONSTRUED BY THE COURTS LIBERALLY IN FAVOR
OF THE ASSURED AND STRICTLY AGAINST THE INSURER.
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE
JUDGMENT OF THE TRIAL COURT.
5

Simply, the core issue boils down to whether or not the loss of respondents vehicle
is excluded under the insurance policy.
We rule in the negative.
Significant portions of Section III of the Insurance Policy states:
SECTION III LOSS OR DAMAGE
The Company will, subject to the Limits of Liability, indemnify the Insured against
loss of or damage to the Schedule 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;
(b)
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or
theft;
(c)
by malicious act;
(d)
whilst in transit (including the processes of loading and unloading) incidental to
such transit by road, rail, inland waterway, lift or elevator.
x x x x
EXCEPTIONS TO SECTION III
The Company shall not be liable to pay for:
Loss or Damage in respect of any claim or series of claims arising out of one event,
the first amount of each and every loss for each and every vehicle insured by this
Policy, such amount being equal to one percent (1.00%) of the Insureds estimate of
Fair Market Value as shown in the Policy Schedule with a minimum deductible
amount of Php3,000.00;
Consequential loss, depreciation, wear and tear, mechanical or electrical
breakdowns, failures or breakages;
Damage to tires, unless the Schedule Vehicle is damaged at the same time;
Any malicious damage caused by the Insured, any member of his family or by a
person in the Insureds service.
6

In denying respondents claim, petitioner takes exception by arguing that the word
"damage," under paragraph 4 of "Exceptions to Section III," means loss due to injury
or harm to person, property or reputation, and should be construed to cover
malicious "loss" as in "theft." Thus, it asserts that the loss of respondents vehicle as
a result of it being stolen by the latters driver is excluded from the policy.
We do not agree.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that
theft perpetrated by the driver of the insured is not an exception to the coverage
from the insurance policy, since Section III thereof did not qualify as to who would
commit the theft. Thus:
Theft perpetrated by a driver of the insured is not an exception to the coverage
from the insurance policy subject of this case. This is evident from the very
provision of Section III "Loss or Damage." The insurance company, subject to the
limits of liability, is obligated to indemnify the insured against theft. Said provision
does not qualify as to who would commit the theft. Thus, even if the same is
committed by the driver of the insured, there being no categorical declaration of
exception, the same must be covered. As correctly pointed out by the plaintiff,
"(A)n insurance contract should be interpreted as to carry out the purpose for
which the parties entered into the contract which is to insure against risks of loss or
damage to the goods. Such interpretation should result from the natural and
reasonable meaning of language in the policy. Where restrictive provisions are open
to two interpretations, that which is most favorable to the insured is adopted." The
defendant would argue that if the person employed by the insured would commit
the theft and the insurer would be held liable, then this would result to an absurd
situation where the insurer would also be held liable if the insured would commit
the theft. This argument is certainly flawed. Of course, if the theft would be
committed by the insured himself, the same would be an exception to the coverage
since in that case there would be fraud on the part of the insured or breach of
material warranty under Section 69 of the Insurance Code.
7

Moreover, 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.
8
Accordingly, in interpreting the
exclusions in an insurance contract, the terms used specifying the excluded classes
therein are to be given their meaning as understood in common speech.
9

Adverse to petitioners claim, the words "loss" and "damage" mean different things
in common ordinary usage. The word "loss" refers to the act or fact of losing, or
failure to keep possession, while the word "damage" means deterioration or injury
to property.1wphi1
Therefore, petitioner cannot exclude the loss of respondents vehicle under the
insurance policy under paragraph 4 of "Exceptions to Section III," since the same
refers only to "malicious damage," or more specifically, "injury" to the motor
vehicle caused by a person under the insureds service. Paragraph 4 clearly does not
contemplate "loss of property," as what happened in the instant case.
Further, the CA aptly ruled that "malicious damage," as provided for in the subject
policy as one of the exceptions from coverage, is the damage that is the direct
result from the deliberate or willful act of the insured, members of his family, and
any person in the insureds service, whose clear plan or purpose was to cause
damage to the insured vehicle for purposes of defrauding the insurer, viz.:
This interpretation by the Court is bolstered by the observation that the subject
policy appears to clearly delineate between the terms "loss" and "damage" by using
both terms throughout the said policy. x x x
x x x x
If the intention of the defendant-appellant was to include the term "loss" within the
term "damage" then logic dictates that it should have used the term "damage"
alone in the entire policy or otherwise included a clear definition of the said term as
part of the provisions of the said insurance contract. Which is why the Court finds it
puzzling that in the said policys provision detailing the exceptions to the policys
coverage in Section III thereof, which is one of the crucial parts in the insurance
contract, the insurer, after liberally using the words "loss" and "damage" in the
entire policy, suddenly went specific by using the word "damage" only in the
policys exception regarding "malicious damage." Now, the defendant-appellant
would like this Court to believe that it really intended the word "damage" in the
term "malicious damage" to include the theft of the insured vehicle.
The Court does not find the particular contention to be well taken.
True, it is a basic rule in the interpretation of contracts that the terms of a contract
are to be construed according to the sense and meaning of the terms which the
parties thereto have used. In the case of property insurance policies, the evident
intention of the contracting parties, i.e., the insurer and the assured, determine the
import of the various terms and provisions embodied in the policy. However, when
the terms of the insurance policy are ambiguous, equivocal or uncertain, such that
the parties themselves disagree about the meaning of particular provisions, the
policy will be construed by the courts liberally in favor of the assured and strictly
against the insurer.
10

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the
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.
Thus, in Eternal Gardens Memorial Park Corporation v. Philippine American Life
Insurance Company,
11
this Court ruled
It must be remembered that an insurance contract is a contract of adhesion which
must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity therein should be resolved
against the insurer; in other words, it should be construed liberally in favor of the
insured and strictly against the insurer. Limitations of liability should be regarded
with extreme jealousy and must be construed in such a way as to preclude the
insurer from non-compliance with its obligations.
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.
12

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is
DENIED. Accordingly, the Decision dated May 31, 2011 and Resolution dated August
10, 2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.

































G.R. No. L-60887 November 13, 1991
PERLA COMPANIA DE SEGUROS, INC., petitioner,
vs.
HON. JOSE R. RAMOLETE, PRIMITIVA Y. PALMES, HONORATO BORBON, SR.,
OFFICE OF THE PROVINCIAL SHERIFF, PROVINCE OF CEBU, respondents.
FELICIANO, J.:p
The present Petition for Certiorari seeks to annul: (a) the Order dated 6 August
1979 1 which ordered the Provincial Sheriff to garnish the third-party liability
insurance policy issued by petitioner Perla Compania de Seguros, Inc. ("Perla") in
favor of Nelia Enriquez, judgment debtor in Civil Case No. R-15391; (b) the Order
dated 24 October 1979 2 which denied the motion for reconsideration of the 6
August 1979 Order; and (c) the Order dated 8 April 1980 3 which ordered the
issuance of an alias writ of garnishment against petitioner.
In the afternoon of 1 June 1976, a Cimarron PUJ owned and registered in the name
of Nelia Enriquez, and driven by Cosme Casas, was travelling from Cebu City to
Danao City. While passing through Liloan, Cebu, the Cimarron PUJ collided with a
private jeep owned by the late Calixto Palmes (husband of private respondent
Primitiva Palmes) who was then driving the private jeep. The impact of the collision
was such that the private jeep was flung away to a distance of about thirty (30) feet
and then fell on its right side pinning down Calixto Palmes. He died as a result of
cardio-respiratory arrest due to a crushed chest. 4 The accident also caused physical
injuries on the part of Adeudatus Borbon who was then only two (2) years old.
On 25 June 1976, private respondents Primitiva Palmes (widow of Calixto Palmes)
and Honorato Borbon, Sr. (father of minor Adeudatus Borbon) filed a
complaint 5 against Cosme Casas and Nelia Enriquez (assisted by her husband
Leonardo Enriquez) before the then Court of First Instance of Cebu, Branch 3,
claiming actual, moral, nominal and exemplary damages as a result of the accident.
The claim of private respondent Honorato Borbon, Sr., being distinct and separate
from that of co-plaintiff Primitiva Palmes, and the amount thereof falling properly
within the jurisdiction of the inferior court, respondent Judge Jose R. Ramolete
ordered the Borbon claim excluded from the complaint, without prejudice to its
being filed with the proper inferior court.
On 4 April 1977, the Court of First Instance rendered a Decision 6 in favor of private
respondent Primitiva Palmes, ordering common carrier Nelia Enriquez to pay her
P10,000.00 as moral damages, P12,000.00 as compensatory damages for the death
of Calixto Palmes, P3,000.00 as exemplary damages, P5,000.00 as actual damages,
and P1,000.00 as attorney's fees.
The judgment of the trial court became final and executory and a writ of execution
was thereafter issued. The writ of execution was, however, returned unsatisfied.
Consequently, the judgment debtor Nelia Enriquez was summoned before the trial
court for examination on 23 July 1979. She declared under oath that the Cimarron
PUJ registered in her name was covered by a third-party liability insurance policy
issued by petitioner Perla.
Thus, on 31 July 1979, private respondent Palmes filed a motion for
garnishment 7 praying that an order of garnishment be issued against the insurance
policy issued by petitioner in favor of the judgment debtor. On 6 August 1979,
respondent Judge issued an Order 8 directing the Provincial Sheriff or his deputy to
garnish the third-party liability insurance policy.
Petitioner then appeared before the trial court and moved for reconsideration of
the 6 August 1979 Order and for quashal of the writ of garnishment, 9 alleging that
the writ was void on the ground that it (Perla) was not a party to the case and that
jurisdiction over its person had never been acquired by the trial court by service of
summons or by any process. The trial court denied petitioner's motion.10 An Order
for issuance of an alias writ of garnishment was subsequently issued on 8 April
1980. 11
More than two (2) years later, the present Petition for Certiorari and Prohibition
was filed with this Court on 25 June 1982 alleging grave abuse of discretion on the
part of respondent Judge Ramolete in ordering garnishment of the third-party
liability insurance contract issued by petitioner Perla in favor of the judgment
debtor, Nelia Enriquez. The Petition should have been dismissed forthwith for
having been filed way out of time but, for reasons which do not appear on the
record, was nonetheless entertained.
In this Petition, petitioner Perla reiterates its contention that its insurance contract
cannot be subjected to garnishment or execution to satisfy the judgment in Civil
Case No. R-15391 because petitioner was not a party to the case and the trial court
did not acquire jurisdiction over petitioner's person. Perla further argues that the
writ of garnishment had been issued solely on the basis of the testimony of the
judgment debtor during the examination on 23 July 1979 to the effect that the
Cimarron PUJ was covered by a third-party liability insurance issued by Perla,
without granting it the opportunity to set up any defenses which it may have under
the insurance contract; and that the proceedings taken against petitioner are
contrary to the procedure laid down in Economic Insurance Company, Inc. v. Torres,
et al., 12 which held that under Rule 39, Section 45, the Court "may only authorize"
the judgment creditor to institute an action against a third person who holds
property belonging to the judgment debtor.
We find no grave abuse of discretion or act in excess of or without jurisdiction on
the part of respondent Judge Ramolete in ordering the garnishment of the
judgment debtor's third-party liability insurance.
Garnishment has been defined as a species of attachment for reaching any property
or credits pertaining or payable to a judgment debtor. 13 In legal contemplation, it
is a forced novation by the substitution of creditors: 14 the judgment debtor, who is
the original creditor of the garnishee is, through service of the writ of garnishment,
substituted by the judgment creditor who thereby becomes creditor of the
garnishee. Garnishment has also been described as a warning to a person having in
his possession property or credits of the judgment debtor, not to pay the money or
deliver the property to the latter, but rather to appear and answer the plaintiff's
suit. 15
In order that the trial court may validly acquire jurisdiction to bind the person of the
garnishee, it is not necessary that summons be served upon him. The garnishee
need not be impleaded as a party to the case. All that is necessary for the trial court
lawfully to bind the person of the garnishee or any person who has in his possession
credits belonging to the judgment debtor is service upon him of the writ of
garnishment.
The Rules of Court themselves do not require that the garnishee be served with
summons or impleaded in the case in order to make him liable.
Rule 39, Section 15 provides:
Sec. 15. Execution of money judgments. The officer must
enforce an execution of a money judgment by levying on all the
property, real or personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor
not exempt from execution . . .
Real property, stocks, shares, debts, credits, and other personal
property, or any interest in either real or personal property, may
be levied on in like manner and with like effect as under a writ of
attachment. (Emphasis supplied).
Rule 57, Section 7(e) in turn reads:
Sec. 7. Attachment of real and personal property; recording
thereof. Properties shall be attached by the officer executing
the order in the following manner:
xxx xxx xxx
(e) Debts and credits, and other personal property not capable of
manual delivery, by leaving with the person owing such debts, or
having his possession or under his control such credits or other
personal property, or with his agent, a copy of the order, and
notice that the debts owing by him to the party against whom
attachment is issued, and the credits and other personal
property in his possession, or under his control, belonging to said
party, are attached in pursuance of such order;
xxx xxx xxx
(Emphasis supplied)
Through service of the writ of garnishment, the garnishee becomes a "virtual party"
to, or a "forced intervenor" in, the case and the trial court thereby acquires
jurisdiction to bind him to compliance with all orders and processes of the trial
court with a view to the complete satisfaction of the judgment of the court.
In Bautista v. Barredo, 16 the Court, through Mr. Justice Bautista Angelo, held:
While it is true that defendant Jose M. Barredo was not a party in
Civil Case No. 1636 when it was instituted by appellant against the
Philippine Ready Mix Concrete Company, Inc.,
however, jurisdiction was acquired over him by the court and he
became a virtual party to the case when, after final judgment was
rendered in said case against the company, the sheriff served upon
him a writ of garnishment in behalf of appellant. Thus, as held by
this Court in the case of Tayabas Land Company vs. Sharruf, 41
Phil. 382, the proceeding by garnishment is a species of
attachment for reaching credits belonging to the judgment debtor
and owing to him from a stranger to the litigation. By means of
the citation, the stranger becomes a forced intervenor; and the
court, having acquired jurisdiction over him by means of the
citation, requires him to pay his debt, not to his former creditor,
but to the new creditor, who is creditor in the main litigation.
(Emphasis supplied).
In Rizal Commercial Banking Corporation v. De Castro, 17 the Court stressed that
the asset or credit garnished is thereupon subjected to a specific lien:
The garnishment of property to satisfy a writ of execution
operates as an attachment and fastens upon the property a lien by
which the property is brought under the jurisdiction of the court
issuing the writ. It is brought into custodia legis, under the sole
control of such
court. 18 (Emphasis supplied)
In the present case, there can be no doubt, therefore, that the trial court actually
acquired jurisdiction over petitioner Perla when it was served with the writ of
garnishment of the third-party liability insurance policy it had issued in favor of
judgment debtor Nelia Enriquez. Perla cannot successfully evade liability thereon by
such a contention.
Every interest which the judgment debtor may have in property may be subjected
to execution.19 In the instant case, the judgment debtor Nelia Enriquez clearly had
an interest in the proceeds of the third-party liability insurance contract. In a third-
party liability insurance contract, the insurer assumes the obligation of paying the
injured third party to whom the insured is liable. 20 The insurer becomes liable as
soon as the liability of the insured to the injured third person attaches. Prior
payment by the insured to the injured third person is not necessary in order that
the obligation of the insurer may arise. From the moment that the insured became
liable to the third person, the insured acquired an interest in the insurance
contract, which interest may be garnished like any other credit. 21
Petitioner also contends that in order that it may be held liable under the third-
party liability insurance, a separate action should have been commenced by private
respondents to establish petitioner's liability. Petitioner invokesEconomic Insurance
Company, Inc. vs. Torres, 22 which stated:
It is clear from Section 45, Rule 39 that if a persons alleged to have
property of the judgment debtor or to be indebted to him claims
an interest in the property adverse to him or denies the debt, the
court may only authorize the judgment creditor to institute an
action against such person for the recovery of such interest or
debt. Said section does not authorize the court to make a finding
that the third person has in his possession property belonging to
the judgment debtor or is indebted to him and to order said third
person to pay the amount to the judgment creditor.
It has been held that the only power of the court in proceedings
supplemental to execution is to niake an order authorizing the
creditor to sue in the proper court to recover an indebtedness due
to the judgment debtor. The court has no jurisdiction to try
summarily the question whether the third party served with
notice of execution and levy is indebted to defendant when such
indebtedness is denied. To make an order in relation to property
which the garnishee claimed to own in his own right, requiring its
application in satisfaction of judgment of another, would be to
deprive the garnishee of property upon summary proceeding and
without due process of law. (Emphasis supplied)
But reliance by petitioner on the case of Economic Insurance Company, Inc. v.
Torres (supra) is misplaced. The Court there held that a separate action needs to be
commenced when the garnishee "claims an interest in the property adverse to him
(judgment debtor) or denies the debt." In the instant case, petitioner Perla did not
deny before the trial court that it had indeed issued a third-party liability insurance
policy in favor of the judgment debtor. Petitioner moreover refrained from setting
up any substantive defense which it might have against the insured-judgment
debtor. The only ground asserted by petitioner in its "Motion for Reconsideration of
the Order dated August 6, 1979 and to Quash Notice of Garnishment" was lack of
jurisdiction of the trial court for failure to implead it in the case by serving it with
summons. Accordingly, Rule 39, Section 45 of the Rules of Court is not applicable in
the instant case, and we see no need to require a separate action against Perla: a
writ of garnishment suffices to hold petitioner answerable to the judgment creditor.
If Perla had any substantive defenses against the judgment debtor, it is properly
deemed to have waived them by laches.
WHEREFORE, the Petition for Certiorari and Prohibition is hereby DISMISSED for
having been filed out of time and for lack of merit. The assailed Orders of the trial
court are hereby AFFIRMED. Costs against petitioner. This Decision is immediately
executory.
SO ORDERED.




G.R. No. 81026 April 3, 1990
PAN MALAYAN INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.
CORTES, J.:
Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a
decision of the Court of Appeals which upheld an order of the trial court dismissing
for no cause of action PANMALAY's complaint for damages against private
respondents Erlinda Fabie and her driver.
The principal issue presented for resolution before this Court is whether or not the
insurer PANMALAY may institute an action to recover the amount it had paid its
assured in settlement of an insurance claim against private respondents as the
parties allegedly responsible for the damage caused to the insured vehicle.
On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of
Makati against private respondents Erlinda Fabie and her driver. PANMALAY
averred the following: that it insured a Mitsubishi Colt Lancer car with plate No.
DDZ-431 and registered in the name of Canlubang Automotive Resources
Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness,
recklessness, and imprudence" of the unknown driver of a pick-up with plate no.
PCR-220, the insured car was hit and suffered damages in the amount of
P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and,
therefore, was subrogated to the rights of CANLUBANG against the driver of the
pick-up and his employer, Erlinda Fabie; and that, despite repeated demands,
defendants, failed and refused to pay the claim of PANMALAY.
Private respondents, thereafter, filed a Motion for Bill of Particulars and a
supplemental motion thereto. In compliance therewith, PANMALAY clarified,
among others, that the damage caused to the insured car was settled under the
"own damage", coverage of the insurance policy, and that the driver of the insured
car was, at the time of the accident, an authorized driver duly licensed to drive the
vehicle. PANMALAY also submitted a copy of the insurance policy and the Release
of Claim and Subrogation Receipt executed by CANLUBANG in favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to Dismiss alleging that
PANMALAY had no cause of action against them. They argued that payment under
the "own damage" clause of the insurance policy precluded subrogation under
Article 2207 of the Civil Code, since indemnification thereunder was made on the
assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder,
the RTC issued an order dated June 16, 1986 dismissing PANMALAY's complaint for
no cause of action. On August 19, 1986, the RTC denied PANMALAY's motion for
reconsideration.
On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals
on November 27, 1987. Consequently, PANMALAY filed the present petition for
review.
After private respondents filed its comment to the petition, and petitioner filed its
reply, the Court considered the issues joined and the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings, the Court finds
merit in the petition.
PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance
policy, it had indemnified CANLUBANG for the damage to the insured car resulting
from a traffic accident allegedly caused by the negligence of the driver of private
respondent, Erlinda Fabie. PANMALAY contended, therefore, that its cause of action
against private respondents was anchored upon Article 2207 of the Civil Code,
which reads:
If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. . . .
PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled principle of
subrogation. If the insured property is destroyed or damaged through the fault or
negligence of a party other than the assured, then the insurer, upon payment to the
assured, will be subrogated to the rights of the assured to recover from the
wrongdoer to the extent that the insurer has been obligated to pay. Payment by the
insurer to the assured operates as an equitable assignment to the former of all
remedies which the latter may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not dependent upon, nor
does it grow out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by the insurer [Compania
Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30,
1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc.,
G.R. No. L-27427, April 7, 1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance, if the assured by
his own act releases the wrongdoer or third party liable for the loss or damage,
from liability, the insurer's right of subrogation is defeated [Phoenix Ins. Co. of
Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886);
Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d
705 (1956)]. Similarly, where the insurer pays the assured the value of the lost
goods without notifying the carrier who has in good faith settled the assured's claim
for loss, the settlement is binding on both the assured and the insurer, and the
latter cannot bring an action against the carrier on his right of subrogation
[McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)]. And where the
insurer pays the assured for a loss which is not a risk covered by the policy, thereby
effecting "voluntary payment", the former has no right of subrogation against the
third party liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee
Gan, G. R. No. L-22146, September 5, 1967, 21 SCRA 12].
None of the exceptions are availing in the present case.
The lower court and Court of Appeals, however, were of the opinion that
PANMALAY was not legally subrogated under Article 2207 of the Civil Code to the
rights of CANLUBANG, and therefore did not have any cause of action against
private respondents. On the one hand, the trial court held that payment by
PANMALAY of CANLUBANG's claim under the "own damage" clause of the
insurance policy was an admission by the insurer that the damage was caused by
the assured and/or its representatives. On the other hand, the Court of Appeals in
applying theejusdem generis rule held that Section III-1 of the policy, which was the
basis for settlement of CANLUBANG's claim, did not cover damage arising from
collision or overturning due to the negligence of third parties as one of the
insurable risks. Both tribunals concluded that PANMALAY could not now invoke
Article 2207 and claim reimbursement from private respondents as alleged
wrongdoers or parties responsible for the damage.
The above conclusion is without merit.
It must be emphasized that the lower court's ruling that the "own damage"
coverage under the policy impliesdamage to the insured car caused by the assured
itself, instead of third parties, proceeds from an incorrect comprehension of the
phrase "own damage" as used by the insurer. When PANMALAY utilized the phrase
"own damage" a phrase which, incidentally, is not found in the insurance policy
to define the basis for its settlement of CANLUBANG's claim under the policy, it
simply meant that it had assumed to reimburse the costs for repairing the damage
to the insured vehicle [See PANMALAY's Compliance with Supplementary Motion for
Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own
damage" coverage under Section III of the insurance policy is differentiated from
Sections I and IV-1 which refer to "Third Party Liability" coverage (liabilities arising
from the death of, or bodily injuries suffered by, third parties) and from Section IV-2
which refer to "Property Damage" coverage (liabilities arising from damage caused
by the insured vehicle to the properties of third parties).
Neither is there merit in the Court of Appeals' ruling that the coverage of insured
risks under Section III-1 of the policy does not include to the insured vehicle arising
from collision or overturning due to the negligent acts of the third party. Not only
does it stem from an erroneous interpretation of the provisions of the section, but
it also violates a fundamental rule on the interpretation of property insurance
contracts.
It is a basic rule in the interpretation of contracts that the terms of a contract are to
be construed according to the sense and meaning of the terms which the parties
thereto have used. In the case of property insurance policies, the evident intention
of the contracting parties, i.e., the insurer and the assured, determine the import of
the various terms and provisions embodied in the policy. It is only when the terms
of the policy are ambiguous, equivocal or uncertain, such that the parties
themselves disagree about the meaning of particular provisions, that the courts will
intervene. In such an event, the policy will be construed by the courts liberally in
favor of the assured and strictly against the insurer [Union Manufacturing Co., Inc.
v. Philippine Guaranty Co., Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271;
National Power Corporation v. Court of Appeals, G.R. No. L-43706, November 14,
1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-
41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].
Section III-1 of the insurance policy which refers to the conditions under which the
insurer PANMALAY is liable to indemnify the assured CANLUBANG against damage
to or loss of the insured vehicle, reads as follows:
SECTION III LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify
the Insured against loss of or damage to the Scheduled 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;
(b) by fire, external explosion, self ignition or
lightning or burglary, housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of
loading and unloading) incidental to such transit
by road, rail, inland, waterway, lift or elevator.
xxx xxx xxx
[Annex "A-1" of PANMALAY's Compliance with Supplementary
Motion for Bill of Particulars; Record, p. 34; Emphasis supplied].
PANMALAY contends that the coverage of insured risks under the above section,
specifically Section III-1(a), is comprehensive enough to include damage to the
insured vehicle arising from collision or overturning due to the fault or negligence of
a third party. CANLUBANG is apparently of the same understanding. Based on a
police report wherein the driver of the insured car reported that after the vehicle
was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20],
CANLUBANG filed its claim with PANMALAY for indemnification of the damage
caused to its car. It then accepted payment from PANMALAY, and executed a
Release of Claim and Subrogation Receipt in favor of latter.
Considering that the very parties to the policy were not shown to be in
disagreement regarding the meaning and coverage of Section III-1, specifically sub-
paragraph (a) thereof, it was improper for the appellate court to indulge in contract
construction, to apply the ejusdem generis rule, and to ascribe meaning contrary to
the clear intention and understanding of these parties.
It cannot be said that the meaning given by PANMALAY and CANLUBANG to the
phrase "by accidental collision or overturning" found in the first paint of sub-
paragraph (a) is untenable. Although the terms "accident" or "accidental" as used in
insurance contracts have not acquired a technical meaning, the Court has on
several occasions defined these terms to mean that which takes place "without
one's foresight or expectation, an event that proceeds from an unknown cause, or
is an unusual effect of a known cause and, therefore, not expected" [De la Cruz v.
The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA
559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141,
November 28, 1989]. Certainly, it cannot be inferred from jurisprudence that these
terms, without qualification, exclude events resulting in damage or loss due to the
fault, recklessness or negligence of third parties. The concept "accident" is not
necessarily synonymous with the concept of "no fault". It may be utilized simply to
distinguish intentional or malicious acts from negligent or careless acts of man.
Moreover, a perusal of the provisions of the insurance policy reveals that damage
to, or loss of, the insured vehicle due to negligent or careless acts of third parties is
not listed under the general and specific exceptions to the coverage of insured risks
which are enumerated in detail in the insurance policy itself [See Annex "A-1" of
PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by
PANMALAY regarding the coverage of Section III-1(a) of the policy is undeniably
more beneficial to CANLUBANG than that insisted upon by respondents herein. By
arguing that this section covers losses or damages due not only to malicious, but
also to negligent acts of third parties, PANMALAY in effect advocates for a more
comprehensive coverage of insured risks. And this, in the final analysis, is more in
keeping with the rationale behind the various rules on the interpretation of
insurance contracts favoring the assured or beneficiary so as to effect the dominant
purpose of indemnity or payment [SeeCalanoc v. Court of Appeals, 98 Phil. 79
(1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-
16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529,
July 16, 1984, 130 SCRA 327].
Parenthetically, even assuming for the sake of argument that Section III-1(a) of the
insurance policy does not cover damage to the insured vehicle caused by negligent
acts of third parties, and that PANMALAY's settlement of CANLUBANG's claim for
damages allegedly arising from a collision due to private respondents' negligence
would amount to unwarranted or "voluntary payment", dismissal of PANMALAY's
complaint against private respondents for no cause of action would still be a grave
error of law.
For even if under the above circumstances PANMALAY could not be deemed
subrogated to the rights of its assured under Article 2207 of the Civil Code,
PANMALAY would still have a cause of action against private respondents. In the
pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra.,
the Court ruled that the insurer who may have no rights of subrogation due to
"voluntary" payment may nevertheless recover from the third party responsible for
the damage to the insured property under Article 1236 of the Civil Code.
In conclusion, it must be reiterated that in this present case, the insurer PANMALAY
as subrogee merely prays that it be allowed to institute an action to recover from
third parties who allegedly caused damage to the insured vehicle, the amount
which it had paid its assured under the insurance policy. Having thus shown from
the above discussion that PANMALAY has a cause of action against third parties
whose negligence may have caused damage to CANLUBANG's car, the Court holds
that there is no legal obstacle to the filing by PANMALAY of a complaint for
damages against private respondents as the third parties allegedly responsible for
the damage. Respondent Court of Appeals therefore committed reversible error in
sustaining the lower court's order which dismissed PANMALAY's complaint against
private respondents for no cause of action. Hence, it is now for the trial court to
determine if in fact the damage caused to the insured vehicle was due to the
"carelessness, recklessness and imprudence" of the driver of private respondent
Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's
complaint for damages against private respondents is hereby REINSTATED. Let the
case be remanded to the lower court for trial on the merits.
SO ORDERED.



































G.R. No. 76452 July 26, 1994
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS
REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and
RAMON MONTILLA PATERNO, JR., respondents.
QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of
Court, with preliminary injunction or temporary restraining order, to annul and set
aside the Order dated November 6, 1986 of the Insurance Commissioner and the
entire proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M.
Paterno, Jr. dated April 17, 1986, to respondent Commissioner, alleging certain
problems encountered by agents, supervisors, managers and public consumers of
the Philippine American Life Insurance Company (Philamlife) as a result of certain
practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner
Rodrigo de los Reyes, in his capacity as Philamlife's president, to comment on
respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los
Reyes suggested that private respondent "submit some sort of a 'bill of particulars'
listing and citing actual cases, facts, dates, figures, provisions of law, rules and
regulations, and all other pertinent data which are necessary to enable him to
prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the
Insurance Commissioner to private respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private
respondent maintaining that his letter-complaint of April 17, 1986 was sufficient in
form and substance, and requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6,
1986, reiterated his claim that private respondent's letter of May 16, 1986 did not
supply the information he needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner
on the validity of the Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to
specify the provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent
Commissioner dated July 31, 1986, reiterating his letter of April 17, 1986 and
praying that the provisions on charges and fees stated in the Contract of Agency
executed between Philamlife and its agents, as well as the implementing provisions
as published in the agents' handbook, agency bulletins and circulars, be declared as
null and void. He also asked that the amounts of such charges and fees already
deducted and collected by Philamlife in connection therewith be reimbursed to the
agents, with interest at the prevailing rate reckoned from the date when they were
deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter
alia that:
(1) Private respondent's letter of August 11, 1986 does not
contain any of the particular information which Philamlife was
seeking from him and which he promised to submit.
(2) That since the Commission's quasi-judicial power was being
invoked with regard to the complaint, private respondent must
file a verified formal complaint before any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption
of the hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April
17, 1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant
Vice-President and Executive Assistant to the President, asked that respondent
Commission first rule on the questions of the jurisdiction of the Insurance
Commissioner over the subject matter of the letters-complaint and the legal
standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of
the case on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the
following grounds;
1. The Subpoena/Notice has no legal basis and is premature
because:
(1) No complaint sufficient in form and contents
has been filed;
(2) No summons has been issued nor
received by the respondent De los
Reyes, and hence, no jurisdiction has
been acquired over his person;
(3) No answer has been filed, and
hence, the hearing scheduled on
November 5, 1986 in the
Subpoena/Notice, and wherein the
respondent is required to appear, is
premature and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action;
and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the
Motion to Quash. The dispositive portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru
counsel tenable and considering the fact that the instant case is
an informal administrative litigation falling outside the operation
of the aforecited memorandum circular but cognizable by this
Commission, the hearing officer, in open session ruled as it is
hereby ruled to deny the Motion to Quash Subpoena/Notice for
lack of merit (Rollo, p. 109).
Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the
Contract of Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to
take cognizance of the complaint in the exercise of its quasi-judicial powers. The
Solicitor General, upholding the jurisdiction of the Insurance Commissioner, claims
that under Sections 414 and 415 of the Insurance Code, the Commissioner has
authority to nullify the alleged illegal provisions of the Contract of Agency.
III
The general regulatory authority of the Insurance Commissioner is described in
Section 414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all
laws relating to insurance, insurance companies and other
insurance matters, mutual benefit associations and trusts for
charitable uses are faithfully executed and to perform the duties
imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in
this Code, the Insurance Commissioner is hereby authorized, at
his discretion, to impose upon insurance companies, their
directors and/or officers and/or agents, for any willful failure or
refusal to comply with, or violation of any provision of this Code,
or any order, instruction, regulation or ruling of the Insurance
Commissioner, or any commission of irregularities, and/or
conducting business in an unsafe and unsound manner as may be
determined by the the Insurance Commissioner, the following:
(a) fines not in excess of five hundred pesos a
day; and
(b) suspension, or after due
hearing, removal of directors
and/or officers and/or agents.
A plain reading of the above-quoted provisions show that the Insurance
Commissioner has the authority to regulate the business of insurance, which is
defined as follows:
(2) The term "doing an insurance business" or "transacting an
insurance business," within the meaning of this Code, shall include
(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. (Insurance Code,
Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not
included within the meaning of an insurance business, Section 2 of the Insurance
Code cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the
Insurance Commissioner under Section 416 of the Insurance Code applies in his
case, we likewise rule in the negative. Section 416 of the Code in pertinent part,
provides:
The Commissioner shall have the power to adjudicate claims and
complaints involving any loss, damage or liability for which an
insurer may be answerable under any kind of policy or contract of
insurance, or for which such insurer may be liable under a
contract of suretyship, or for which a reinsurer may be used under
any contract or reinsurance it may have entered into, or for which
a mutual benefit association may be held liable under the
membership certificates it has issued to its members, where the
amount of any such loss, damage or liability, excluding interest,
costs and attorney's fees, being claimed or sued upon any kind of
insurance, bond, reinsurance contract, or membership certificate
does not exceed in any single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance
Commissioner is limited by law "to claims and complaints involving any loss,
damage or liability for which an insurer may be answerable under any kind of policy
or contract of insurance, . . ." Hence, this power does not cover the relationship
affecting the insurance company and its agents but is limited to adjudicating claims
and complaints filed by the insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV,
Title I of the Insurance Code, the provisions of said Chapter speak only of the
licensing requirements and limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between
insurance companies and their agents. It follows that the Insurance Commissioner
cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over
controversies between the insurance companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180
SCRA 445 (1989), andInvestment Planning Corporation of the Philippines v. Social
Security Commission, 21 SCRA 904 (1962), that an insurance company may have
two classes of agents who sell its insurance policies: (1) salaried employees who
keep definite hours and work under the control and supervision of the company;
and (2) registered representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its
agents is governed by the Contract of Employment and the provisions of the Labor
Code, while under the second category, the same is governed by the Contract of
Agency and the provisions of the Civil Code on the Agency. Disputes involving the
latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the
Insurance Commission is SET ASIDE.
SO ORDERED.






G.R. No. 200784 August 7, 2013
MALAYAN INSURANCE COMPANY, INC., PETITIONER,
vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.
D E C I S I O N
MENDOZA, J.:
Challenged in this petition for review on certiorari under Rule 45 of the Rules of
Court is the October 27, 2011 Decision
1
of the Court of Appeals (CA), which affirmed
with modification the September 17, 2009 Decision
2
of the Regional Trial Court,
Branch 15, Manila (RTC), and its February 24, 2012 Resolution
3
denying the motion
for reconsideration filed by petitioner Malayan Insurance Company., Inc. (Malayan).
The Facts
The undisputed factual antecedents were succinctly summarized by the CA as
follows:
On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance
Policy No. F-00227-000073 to PAP Co., Ltd. (PAP Co.) for the latters machineries
and equipment located at Sanyo Precision Phils. Bldg., Phase III, Lot 4, Block 15,
PEZA, Rosario, Cavite (Sanyo Building). The insurance, which was for Fifteen Million
Pesos (?15,000,000.00) and effective for a period of one (1) year, was procured by
PAP Co. for Rizal Commercial Banking Corporation (RCBC), the mortgagee of the
insured machineries and equipment.
After the passage of almost a year but prior to the expiration of the insurance
coverage, PAP Co. renewed the policy on an "as is" basis. Pursuant thereto, a
renewal policy, Fire Insurance Policy No. F-00227-000079, was issued by Malayan to
PAP Co. for the period May 13, 1997 to May 13, 1998.
On October 12, 1997 and during the subsistence of the renewal policy, the insured
machineries and equipment were totally lost by fire. Hence, PAP Co. filed a fire
insurance claim with Malayan in the amount insured.
In a letter, dated December 15, 1997, Malayan denied the claim upon the ground
that, at the time of the loss, the insured machineries and equipment were
transferred by PAP Co. to a location different from that indicated in the policy.
Specifically, that the insured machineries were transferred in September 1996 from
the Sanyo Building to the Pace Pacific Bldg., Lot 14, Block 14, Phase III, PEZA,
Rosario, Cavite (Pace Pacific). Contesting the denial, PAP Co. argued that Malayan
cannot avoid liability as it was informed of the transfer by RCBC, the party duty-
bound to relay such information. However, Malayan reiterated its denial of PAP
Co.s claim. Distraught, PAP Co. filed the complaint below against Malayan.
4

Ruling of the RTC
On September 17, 2009, the RTC handed down its decision, ordering Malayan to
pay PAP Company Ltd (PAP) an indemnity for the loss under the fire insurance
policy as well as for attorneys fees. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff. Defendant is hereby ordered:
a)
To pay plaintiff the sum of FIFTEEN MILLION PESOS (P15,000,000.00) as and for
indemnity for the loss under the fire insurance policy, plus interest thereon at the
rate of 12% per annum from the time of loss on October 12, 1997 until fully paid;
b)
To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (PhP500,000.00) as
and by way of attorneys fees; *and,+
c)
To pay the costs of suit.
SO ORDERED.
5

The RTC explained that Malayan is liable to indemnify PAP for the loss under the
subject fire insurance policy because, although there was a change in the condition
of the thing insured as a result of the transfer of the subject machineries to another
location, said insurance company failed to show proof that such transfer resulted in
the increase of the risk insured against. In the absence of proof that the alteration
of the thing insured increased the risk, the contract of fire insurance is not affected
per Article 169 of the Insurance Code.
The RTC further stated that PAPs notice to Rizal Commercial Banking Corporation
(RCBC) sufficiently complied with the notice requirement under the policy
considering that it was RCBC which procured the insurance. PAP acted in good faith
in notifying RCBC about the transfer and the latter even conducted an inspection of
the machinery in its new location.
Not contented, Malayan appealed the RTC decision to the CA basically arguing that
the trial court erred in ordering it to indemnify PAP for the loss of the subject
machineries since the latter, without notice and/or consent, transferred the same
to a location different from that indicated in the fire insurance policy.
Ruling of the CA
On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC
decision but deleted the attorneys fees. The decretal portion of the CA decision
reads:
WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan
Insurance Company must indemnify PAP Co. Ltd the amount of Fifteen Million
Pesos (PhP15,000,000.00) for the loss under the fire insurance policy, plus interest
thereon at the rate of 12% per annum from the time of loss on October 12, 1997
until fully paid. However, the Five Hundred Thousand Pesos (PhP500,000.00)
awarded to PAP Co., Ltd. as attorneys fees is DELETED. With costs.
SO ORDERED.
6

The CA wrote that Malayan failed to show proof that there was a prohibition on the
transfer of the insured properties during the efficacy of the insurance policy.
Malayan also failed to show that its contractual consent was needed before
carrying out a transfer of the insured properties. Despite its bare claim that the
original and the renewed insurance policies contained provisions on transfer
limitations of the insured properties, Malayan never cited the specific provisions.
The CA further stated that even if there was such a provision on transfer restrictions
of the insured properties, still Malayan could not escape liability because the
transfer was made during the subsistence of the original policy, not the renewal
policy. PAP transferred the insured properties from the Sanyo Factory to the Pace
Pacific Building (Pace Factory) sometime in September 1996. Therefore, Malayan
was aware or should have been aware of such transfer when it issued the renewal
policy on May 14, 1997. The CA opined that since an insurance policy was a contract
of adhesion, any ambiguity must be resolved against the party that prepared the
contract, which, in this case, was Malayan.
Finally, the CA added that Malayan failed to show that the transfer of the insured
properties increased the risk of the loss. It, thus, could not use such transfer as an
excuse for not paying the indemnity to PAP. Although the insurance proceeds were
payable to RCBC, PAP could still sue Malayan to enforce its rights on the policy
because it remained a party to the insurance contract.
Not in conformity with the CA decision, Malayan filed this petition for review
anchored on the following
GROUNDS
I
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN
ACCORDANCE WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE
COURT WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT AND THUS RULING
IN THE QUESTIONED DECISION AND RESOLUTION THAT PETITIONER MALAYAN IS
LIABLE UNDER THE INSURANCE CONTRACT BECAUSE:
CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER
MALAYAN WAS ABLE TO PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF THE
RENEWAL POLICY ISSUED TO RESPONDENT PAP CO., THERE IS AN AFFIRMATIVE
WARRANTY OR A REPRESENTATION MADE BY THE INSURED THAT THE "LOCATION
OF THE RISK" WAS AT THE SANYO BUILDING. IT IS LIKEWISE UNDISPUTED THAT
WHEN THE RENEWAL POLICY WAS ISSUED TO RESPONDENT PAP CO., THE INSURED
PROPERTIES WERE NOT AT THE SANYO BUILDING BUT WERE AT A DIFFERENT
LOCATION, THAT IS, AT THE PACE FACTORY AND IT WAS IN THIS DIFFERENT
LOCATION WHEN THE LOSS INSURED AGAINST OCCURRED. THESE SET OF
UNDISPUTED FACTS, BY ITSELF ALREADY ENTITLES PETITIONER MALAYAN TO
CONSIDER THE RENEWAL POLICY AS AVOIDED OR RESCINDED BY LAW, BECAUSE OF
CONCEALMENT, MISREPRESENTATION AND BREACH OF AN AFFIRMATIVE
WARRANTY UNDER SECTIONS 27, 45 AND 74 IN RELATION TO SECTION 31 OF THE
INSURANCE CODE, RESPECTIVELY.
RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT COMMIT
CONCEALMENT, MISREPRESENTATION OR BREACH OF AN AFFIRMATIVE WARRANTY
WHEN IT FAILED TO PROVE THAT IT INFORMED PETITIONER MALAYAN THAT THE
INSURED PROPERTIES HAD BEEN TRANSFERRED TO A LOCATION DIFFERENT FROM
WHAT WAS INDICATED IN THE INSURANCE POLICY.
IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE
CONDITIONS AND LIMITATIONS TO THE RENEWAL POLICY WHICH ARE THE
REASONS WHY ITS CLAIM WAS DENIED IN THE FIRST PLACE. IN FACT, THE BEST
PROOF THAT RESPONDENT PAP CO. RECOGNIZES THESE CONDITIONS AND
LIMITATIONS IS THE FACT THAT ITS ENTIRE EVIDENCE FOCUSED ON ITS FACTUAL
ASSERTION THAT IT SUPPOSEDLY NOTIFIED PETITIONER MALAYAN OF THE
TRANSFER AS REQUIRED BY THE INSURANCE POLICY.
MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE WAS AN
INCREASE IN RISK BECAUSE OF THE UNILATERAL TRANSFER OF THE INSURED
PROPERTIES. IN FACT, THIS PIECE OF EVIDENCE WAS UNREBUTTED BY RESPONDENT
PAP CO.
II
THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND
ESTABLISHED DECISIONS OF THE HONORABLE COURT WHEN IT IMPOSED INTEREST
AT THE RATE OF TWELVE PERCENT (12%) INTEREST FROM THE TIME OF THE LOSS
UNTIL FULLY PAID.
JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY IS NOT A
LOAN OR FORBEARANCE OF MONEY FROM WHICH A BREACH ENTITLES A PLAINTIFF
TO AN AWARD OF INTEREST AT THE RATE OF TWELVE PERCENT (12%) PER ANNUM.
MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE SHOULD
NOT HAVE BEEN APPLIED BY THE COURT OF APPEALS BECAUSE THERE WAS NEVER
ANY FINDING THAT PETITIONER MALAYAN UNJUSTIFIABLY REFUSED OR WITHHELD
THE PROCEEDS OF THE INSURANCE POLICY BECAUSE IN THE FIRST PLACE, THERE
WAS A LEGITIMATE DISPUTE OR DIFFERENCE IN OPINION ON WHETHER
RESPONDENT PAP CO. COMMITTED CONCEALMENT, MISREPRESENTATION AND
BREACH OF AN AFFIRMATIVE WARRANTY WHICH ENTITLES PETITIONER MALAYAN
TO RESCIND THE INSURANCE POLICY AND/OR TO CONSIDER THE CLAIM AS VOIDED.
III
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN
ACCORDANCE WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE
COURT WHEN IT AGREED WITH THE TRIAL COURT AND HELD IN THE QUESTIONED
DECISION THAT THE PROCEEDS OF THE INSURANCE CONTRACT IS PAYABLE TO
RESPONDENT PAP CO. DESPITE THE EXISTENCE OF A MORTGAGEE CLAUSE IN THE
INSURANCE POLICY.
IV
THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND
JURISPRUDENCE WHEN IT HELD IN THE QUESTIONED DECISION AND RESOLUTION
THAT THE INTERPRETATION MOST FAVORABLE TO THE INSURED SHALL BE
ADOPTED.
7

Malayan basically argues that it cannot be held liable under the insurance contract
because PAP committed concealment, misrepresentation and breach of an
affirmative warranty under the renewal policy when it transferred the location of
the insured properties without informing it. Such transfer affected the correct
estimation of the risk which should have enabled Malayan to decide whether it was
willing to assume such risk and, if so, at what rate of premium. The transfer also
affected Malayans ability to control the risk by guarding against the increase of the
risk brought about by the change in conditions, specifically the change in the
location of the risk.
Malayan claims that PAP concealed a material fact in violation of Section 27 of the
Insurance Code
8
when it did not inform Malayan of the actual and new location of
the insured properties. In fact, before the issuance of the renewal policy on May 14,
1997, PAP even informed it that there would be no changes in the renewal policy.
Malayan also argues that PAP is guilty of breach of warranty under the renewal
policy in violation of Section 74 of the Insurance Code
9
when, contrary to its
affirmation in the renewal policy that the insured properties were located at the
Sanyo Factory, these were already transferred to the Pace Factory. Malayan adds
that PAP is guilty of misrepresentation upon a material fact in violation of Section
45 of the Insurance Code
10
when it informed Malayan that there would be no
changes in the original policy, and that the original policy would be renewed on an
"as is" basis.
Malayan further argues that PAP failed to discharge the burden of proving that the
transfer of the insured properties under the insurance policy was with its
knowledge and consent. Granting that PAP informed RCBC of the transfer or change
of location of the insured properties, the same is irrelevant and does not bind
Malayan considering that RCBC is a corporation vested with separate and distinct
juridical personality. Malayan did not consent to be the principal of RCBC. RCBC did
not also act as Malayans representative.
With regard to the alleged increase of risk, Malayan insists that there is evidence of
an increase in risk as a result of the unilateral transfer of the insured properties.
According to Malayan, the Sanyo Factory was occupied as a factory of
automotive/computer parts by the assured and factory of zinc & aluminum die cast
and plastic gear for copy machine by Sanyo Precision Phils., Inc. with a rate of
0.449% under 6.1.2 A, while Pace Factory was occupied as factory that repacked
silicone sealant to plastic cylinders with a rate of 0.657% under 6.1.2 A.
PAPs position
On the other hand, PAP counters that there is no evidence of any
misrepresentation, concealment or deception on its part and that its claim is not
fraudulent. It insists that it can still sue to protect its rights and interest on the
policy notwithstanding the fact that the proceeds of the same was payable to RCBC,
and that it can collect interest at the rate of 12% per annum on the proceeds of the
policy because its claim for indemnity was unduly delayed without legal
justification.
The Courts Ruling
The Court agrees with the position of Malayan that it cannot be held liable for the
loss of the insured properties under the fire insurance policy.
As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP
obtained a ?15,000,000.00 fire insurance policy from Malayan covering its
machineries and equipment effective for one (1) year or until May 13, 1997; that
the policy expressly stated that the insured properties were located at "Sanyo
Precision Phils. Building, Phase III, Lots 4 & 6, Block 15, EPZA, Rosario, Cavite"; that
before its expiration, the policy was renewed
11
on an "as is" basis for another year
or until May 13, 1998; that the subject properties were later transferred to the Pace
Factory also in PEZA; and that on October 12, 1997, during the effectivity of the
renewal policy, a fire broke out at the Pace Factory which totally burned the insured
properties.
The policy forbade the removal of the insured properties unless sanctioned by
Malayan
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as
regards the property affected unless the insured, before the occurrence of any loss
or damage, obtains the sanction of the company signified by endorsement upon the
policy, by or on behalf of the Company:
x x x x x x x x x
(c) If property insured be removed to any building or place other than in that which
is herein stated to be insured.
12

Evidently, by the clear and express condition in the renewal policy, the removal of
the insured property to any building or place required the consent of Malayan. Any
transfer effected by the insured, without the insurers consent, would free the
latter from any liability.
The respondent failed to notify, and to obtain the consent of, Malayan regarding
the removal
The records are bereft of any convincing and concrete evidence that Malayan was
notified of the transfer of the insured properties from the Sanyo factory to the Pace
factory. The Court has combed the records and found nothing that would show that
Malayan was duly notified of the transfer of the insured properties.
What PAP did to prove that Malayan was notified was to show that it relayed the
fact of transfer to RCBC, the entity which made the referral and the named
beneficiary in the policy. Malayan and RCBC might have been sister companies, but
such fact did not make one an agent of the other. The fact that RCBC referred PAP
to Malayan did not clothe it with authority to represent and bind the said insurance
company. After the referral, PAP dealt directly with Malayan.
The respondent overlooked the fact that during the November 9, 2006 hearing,
13
its
counsel stipulated in open court that it was Malayans authorized insurance agent,
Rodolfo Talusan, who procured the original policy from Malayan, not RCBC. This
was the reason why Talusans testimony was dispensed with.
Moreover, in the previous hearing held on November 17, 2005,
14
PAPs hostile
witness, Alexander Barrera, Administrative Assistant of Malayan, testified that he
was the one who procured Malayans renewal policy, not RCBC, and that RCBC
merely referred fire insurance clients to Malayan. He stressed, however, that no
written referral agreement exists between RCBC and Malayan. He also denied that
PAP notified Malayan about the transfer before the renewal policy was issued. He
added that PAP, through Maricar Jardiniano (Jardiniano), informed him that the fire
insurance would be renewed on an "as is basis."
15

Granting that any notice to RCBC was binding on Malayan, PAPs claim that it
notified RCBC and Malayan was not indubitably established. At best, PAP could only
come up with the hearsay testimony of its principal witness, Branch Manager
Katsumi Yoneda (Mr. Yoneda), who testified as follows:
Q
What did you do as Branch Manager of Pap Co. Ltd.?
A
What I did I instructed my Secretary, because these equipment was bank loan and
because of the insurance I told my secretary to notify.
Q
To notify whom?
A
I told my Secretary to inform the bank.
Q
You are referring to RCBC?
A
Yes, sir.
x x x x
Q
After the RCBC was informed in the manner you stated, what did you do regarding
the new location of these properties at Pace Pacific Bldg. insofar as Malayan
Insurance Company is concerned?
A
After that transfer, we informed the RCBC about the transfer of the equipment and
also Malayan Insurance but we were not able to contact Malayan Insurance so I
instructed again my secretary to inform Malayan about the transfer.
Q
Who was the secretary you instructed to contact Malayan Insurance, the defendant
in this case?
A
Dory Ramos.
Q
How many secretaries do you have at that time in your office?
A
Only one, sir.
Q
Do you know a certain Maricar Jardiniano?
A
Yes, sir.
Q
Why do you know her?
A
Because she is my secretary.
Q
So how many secretaries did you have at that time?
A
Two, sir.
Q
What happened with the instruction that you gave to your secretary Dory Ramos
about the matter of informing the defendant Malayan Insurance Co of the new
location of the insured properties?
A
She informed me that the notification was already given to Malayan Insurance.
Q
Aside from what she told you how did you know that the information was properly
relayed by the said secretary, Dory Ramos, to Malayan Insurance?
A
I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.
Q
Now after you were told by your secretary, Dory Ramos, that she was able to
inform Malayan Insurance Company about the transfer of the properties insured to
the new location, do you know what happened insofar this information was given
to the defendant Malayan Insurance?
A
I heard that someone from Malayan Insurance came over to our company.
Q
Did you come to know who was that person who came to your place at Pace
Pacific?
A
I do not know, sir.
Q
How did you know that this person from Malayan Insurance came to your place?
A
It is according to the report given to me.
Q
Who gave that report to you?
A
Dory Ramos.
Q
Was that report in writing or verbally done?
A
Verbal.
16
[Emphases supplied]
The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no
personal knowledge of the notice to either Malayan or RCBC. PAP should have
presented his secretaries, Dory Ramos and Maricar Jardiniano, at the witness stand.
His testimony alone was unreliable.
Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the
insured properties were transferred to a different location only after the renewal of
the fire insurance policy.
COURT
Q
When did you transfer the machineries and equipments before the renewal or after
the renewal of the insurance?
A
After the renewal.
COURT
Q
You understand my question?
A
Yes, Your Honor.
17
[Emphasis supplied]
This enfeebles PAPs position that the subject properties were already transferred
to the Pace factory before the policy was renewed.
The transfer from the Sanyo Factory to the PACE Factory increased the risk.
The courts below held that even if Malayan was not notified thereof, the transfer of
the insured properties to the Pace Factory was insignificant as it did not increase
the risk.
Malayan argues that the change of location of the subject properties from the
Sanyo Factory to the Pace Factory increased the hazard to which the insured
properties were exposed. Malayan wrote:
With regards to the exposure of the risk under the old location, this was occupied
as factory of automotive/computer parts by the assured, and factory of zinc &
aluminum die cast, plastic gear for copy machine by Sanyo Precision Phils., Inc. with
a rate of 0.449% under 6.1.2 A. But under Pace Pacific Mfg. Corporation this was
occupied as factory that repacks silicone sealant to plastic cylinders with a rate of
0.657% under 6.1.2 A. Hence, there was an increase in the hazard as indicated by
the increase in rate.
18

The Court agrees with Malayan that the transfer to the Pace Factory exposed the
properties to a hazardous environment and negatively affected the fire rating
stated in the renewal policy. The increase in tariff rate from 0.449% to 0.657% put
the subject properties at a greater risk of loss. Such increase in risk would
necessarily entail an increase in the premium payment on the fire policy.
Unfortunately, PAP chose to remain completely silent on this very crucial point.
Despite the importance of the issue, PAP failed to refute Malayans argument on
the increased risk.
Malayan is entitled to rescind the insurance contract
Considering that the original policy was renewed on an "as is basis," it follows that
the renewal policy carried with it the same stipulations and limitations. The terms
and conditions in the renewal policy provided, among others, that the location of
the risk insured against is at the Sanyo factory in PEZA. The subject insured
properties, however, were totally burned at the Pace Factory. Although it was also
located in PEZA, Pace Factory was not the location stipulated in the renewal policy.
There being an unconsented removal, the transfer was at PAPs own risk.
Consequently, it must suffer the consequences of the fire. Thus, the Court agrees
with the report of Cunningham Toplis Philippines, Inc., an international loss adjuster
which investigated the fire incident at the Pace Factory, which opined that "[g]iven
that the location of risk covered under the policy is not the location affected, the
policy will, therefore, not respond to this loss/claim."
19

It can also be said that with the transfer of the location of the subject properties,
without notice and without Malayans consent, after the renewal of the policy, PAP
clearly committed concealment, misrepresentation and a breach of a material
warranty. Section 26 of the Insurance Code provides:
Section 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party
to rescind a contract of insurance."
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to
rescind the insurance contract in case of an alteration in the use or condition of the
thing insured. Section 168 of the Insurance Code provides, as follows:
Section 68. An alteration in the use or condition of a thing insured from that to
which it is limited by the policy made without the consent of the insurer, by means
within the control of the insured, and increasing the risks, entitles an insurer to
rescind a contract of fire insurance.
Accordingly, an insurer can exercise its right to rescind an insurance contract when
the following conditions are present, to wit:
1) the policy limits the use or condition of the thing insured;
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insureds control; and
5) the alteration increases the risk of loss.
20

In the case at bench, all these circumstances are present. It was clearly established
that the renewal policy stipulated that the insured properties were located at the
Sanyo factory; that PAP removed the properties without the consent of Malayan;
and that the alteration of the location increased the risk of loss.
WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby
REVERSED and SET ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby
declared NOT liable for the loss of the insured machineries and equipment suffered
by PAP Co., Ltd.
SO ORDERED.