G.R. No.

76145 June 30, 1987

CATHAY INSURANCE CO., petitioner,
vs.
HON. COURT OF APPEALS, and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.
PARAS, J.:
This petition seeks the review of the decision of the Court of Appeals

1 in CA-G.R. CV No. 06559 affirming the decision of the Regional Trial Court

National Capital Region (NCR) Manila, Branch 38 and the Resolution of the said appellate court denying petitioner's motion
for reconsideration.
(RTC), 2

Originally, this was a complaint filed by private respondent corporation against petitioner (then defendant) company
seeking collection of the sum of P868,339.15 representing private respondent's losses and damages incurred in a
shipment of seamless steel pipes under an insurance contract in favor of the said private respondent as the insured,
consignee or importer of aforesaid merchandise while in transit from Japan to the Philippines on board vessel SS
"Eastern Mariner." The total value of the shipment was P2,894,463.83 at the prevailing rate of P7.95 to a dollar in
June and July 1984, when the shipment was made.
The trial court decided in favor of private respondent corporation by ordering petitioner to pay it the sum of
P866,339.15 as its recoverable insured loss equivalent to 30% of the value of the seamless steel pipes; ordering
petitioner to pay private respondent interest on the aforecited amount at the rate of 34% or double the ceiling
prescribed by the Monetary Board per annum from February 3, 1982 or 90 days from private respondent's
submission of proof of loss to petitioner until paid as provided in the settlement of claim provision of the policy; and
ordering petitioner to pay private respondent certain amounts for marine surveyor's fee, attorney's fees and costs of
the suit.
Respondent in its comment on the petition, contends that:
1. Coverage of private respondent's loss under the insurance policy issued by petitioner is unmistakable.
2. Alleged contractual limitations contained in insurance policies are regarded with extreme caution by courts and are
to be strictly construed against the insurer; obscure phrases and exceptions should not be allowed to defeat the very
purpose for which the policy was procured.
3. Rust is not an inherent vice of the seamless steel pipes without interference of external factors.
4. No matter how petitioner might want it otherwise, the 15-day clause of the policy had been foreclosed in the pretrial order and it was not even raised in petitioner's answer to private respondent's complaint.
5. The decision was correct in not holding that the heavy rusting of the seamless steel pipes did not occur during the
voyage of 7 days from July 1 to July 7, 1981.
6. The alleged lack of supposed bad order survey from the arrastre capitalized on by petitioner was more than
clarified by no less than 2 witnesses.
7. The placing of notation "rusty" in the way bills is not only private respondent's right but a natural and spontaneous
reaction of whoever received the seamless steel pipes in a rusty condition at private respondent's bodega.
8. The Court of Appeals did not engage in any guesswork or speculation in concluding a loss allowance of 30% in the
amount of P868,339.15.

9. The rate of 34% per annum double the ceiling prescribed by the Monetary Board is the rate of interest fixed by the
Insurance Policy itself and the Insurance Code.
The petitioner however maintains that:
(1) Private respondent does not dispute the fact that, contrary to the finding of the respondent Court (the petitioner
has failed "to present any evidence of any viable exeption to the application of the policy") there is in fact an express
exeption to the application of the policy.
(2) As adverted to in the Petition for Review, private respondent has admitted that the question shipment in not
covered bya " square provision of the contract," but private respondent claims implied coverage from the phrase "
perils of the sea" mentioned in the opening sentenced of the policy.
(3) The insistence of private respondent that rusting is a peril of the sea is erroneous.
(4) Private respondent inaccurately invokes the rule of strict construction against insurer under the guise of
construction in order to impart a non-existing ambiguity or doubt into the policy so as to resolve it against the insurer.
(5) Private respondent while impliedly admitting that a loss occasioned by an inherent defect or vice in the insured
article is not within the terms of the policy, erroneously insists that rusting is not an inherent vice or in the nature of
steel pipes.
(6) Rusting is not a risk insured against, since a risk to be insured against should be a casualty or some casualty,
something which could not be foreseen as one of the necessary incidents of adventure.
(7) A fact capable of unquestionable demonstration or of public knowledge needs no evidence. This fact of
unquestionable demonstration or of public knowledge is that heavy rusting of steel or iron pipes cannot occur within a
period of a seven (7) day voyage. Besides, petitioner had introduced the clear cargo receipts or tally sheets indicating
that there was no damage on the steel pipes during the voyage.
(8) The evidence of private respondent betrays the fact that the account of P868,339.15 awarded by the respondent
Court is founded on speculation, surmises or conjectures and the amount of less has not been proven by competent,
satisfactory and clear evidence.
We find no merit in this petition.
There is no question that the rusting of steel pipes in the course of a voyage is a "peril of the sea" in view of the toll
on the cargo of wind, water, and salt conditions. At any rate if the insurer cannot be held accountable therefor, We
would fail to observe a cardinal rule in the interpretation of contracts, namely, that any ambiguity therein should be
construed against the maker/issuer/drafter thereof, namely, the insurer. Besides the precise purpose of insuring cargo
during a voyage would be rendered fruitless. Be it noted that any attack of the 15-day clause in the policy was
foreclosed right in the pre-trial conference.
Finally, it is a cardinal rule that save for certain exceptions, findings of facts of the appellate tribunal are binding on
Us. Not one of said exceptions can apply to this case.
WHEREFORE, this petition is hereby DENIED, and the assailed decision of the Court of Appeals is hereby
AFFIRMED.
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:
I
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT IN CASES OF MARINE
CARGO INSURANCE, THERE IS A WARRANTY OF SEAWORTHINESS BY THE CARGO
OWNER.
II
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."
III
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.
SO ORDERED.
G.R. No. 94052 August 9, 1991
ORIENTAL ASSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.

Alejandro P. Ruiz, Jr. for petitioner.

Federico R. Reyes for private respondent.
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. 200784

August 7, 2013

MALAYAN INSURANCE COMPANY, INC., PETITIONER,

vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.
DECISION
MENDOZA, J.:
Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court is the October 27, 2011
Decision1 of the Court of Appeals (CA), which affirmed with modification the September 17, 2009 Decision2 of the
Regional Trial Court, Branch 15, Manila (RTC), and its February 24, 2012 Resolution3 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 Code8 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
Code9 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 Code10 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:

xxx

xxx

xxx

(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.
xxxx
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.