Insurance VII

VOL. 47, OCTOBER 30, 1972

271
Union Manufacturing Co., Inc. vs. Philippine Guaranty Co., Inc.
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.
Insurance Law; Property insurance against fire; Failure to give notice of existence of
other policies thereon, effect of.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.
(Santa Ana vs. Commercial Union Ass. Co., 55 Phil. 128).
Same; Same; Same.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 functions and duty of the courts consist simply in
enforcing and carrying out the contracts actually made.
Same; Same; Same; Interpretation of insurance contracts.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 unambiguousthey must be taken and
understood in their plain, ordinary and popular sense.
Same; Same; Same; Nature of annotation on existence of other insurance on
insured property.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. xxx The materiality of non-disclosure of other insurance policies is not open
to doubt.
Same; Insurance contract law between the parties even if terms onerous.The
insurance contract may be rather onerous, 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.
APPEAL from a decision of the Court of First Instance of Manila, Solidum, J.
The facts are stated in the opinion of the Court,
Armando L. Abad, Sr. for plaintiff-appellant.
Gamelo, Francisco & Aquino for defendant-appellee.
FERNANDO, J.:

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 ef f ort
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
andother 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 waspaid also by the Republic Bank but
for the account of 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 was 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 theperiod 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
note2 and in the fire insurance policy3 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 f ace of the policy issued
by the def endant 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 the ponente, 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 f or 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 areconstrued 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 specif ically, 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.
Concepcion, C.J., Zaldivar, Barredo, Makasiar, Antonio and Esguerra,, JJ., concur.
Castro and Teehankee, JJ., reserve their votes.
Makalintal, J., is on official leave.
Decision affirmed.
Notes.a) A concealment, whether intentional or unintentional entitles the insurer
to rescind the contract of insurance, concealment being defined as "negligence to
communicate that which a party knows and ought to communicate." (Saturnino vs.
Philippine American Life Ins. Co., 7 SCRA 316.)
b) In order to form the basis for the cancellation of a policy, notice to the insured
need not be in any particular form, in the absence of a statute or policy provision
prescribing such form, and it is sufficient, so long as it positively and unequivocably
indicates to the insured, that it is the intention of the company that the policy shall
cease to be binding. (Saura Import & Export Co., Inc. vs. Philippine International
Surety Co., Inc., 8 SCRA 143). But even where a policy contains no provision that a
certain number of days of notice of its cancellation shall be given, a reasonable
notice and opportunity to obtain other insurance must be given in order to prevent
the cancellation without allowing the insured ample opportunity to negotiate for
other insurance in its stead. (Ibid.).
c) In fire insurance policies, risk attaches upon the issuance and delivery of the
policy to the insured, despite non-payment of premium due. (Philippine Phoenix
Surety & Ins., Inc. vs. Woodwork, 20 SCRA 1270.)
d) Where the language used in insurance contract or application for such insurance
is such as to create an ambiguity, the same should be resolved against the party
responsible therefor, i.e., the insurance company which prepared the contract.
(Landicho vs. GSIS, 44 SCRA 7).
Union Manufacturing Co., Inc. vs. Philippine Guaranty Co., Inc., 47
SCRA 271, No. L-27932 October 30, 1972

VOL. 202, SEPTEMBER 30, 1991

119
Tio Khe Chio vs. Court of Appeals
G.R. Nos. 76101-02. September 30, 1991.*
TIO KHE CHIO, petitioner, vs. THE HONORABLE COURT OF APPEALS and EASTERN
ASSURANCE AND SURETY CORPORATION, respondents.
Civil Law; Interest; The legal rate of interest in the case at bar is six (6%) per cent
per annum as correctly held by the Appellate Court.We rule for respondent
EASCO. The legal rate of interest in the case at bar is six (6%) per cent per annum
as correctly held by the Appellate Court.
Same; Same; Sections 243 and 244 of the Insurance Code apply only when the
court finds an unreasonable delay or refusal in the payment of the claims.SimpIy
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.
Same; Same; The adjusted rate mentioned in Circular No. 416 of the Central Bank
refers only to loans or for bearances 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.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 contended 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.
Same; Same; Same; Rates under the Usury Law 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.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.
PETITION for certiorari and prohibition to review the judgment of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Rodolfo M. Morelos for petitioner,
Ferrer, Mariano, Sangalang & Gatdula for private respondent.
FERNAN, C.J.:

The issue in this petition for certiorari and prohibition is the legal rate of interest to
be imposed in actions for damages arising from unpaid insurance claims. Petitioner
Tio Khe Chio claims that it should be twelve (12%) per cent pursuant to Articles 243
and 244 of the Insurance Code while private respondent Eastern Assurance and
Surety Corporation (EASCO) claims that it should be six (6%) per cent under Article
2209 of the Civil Code.
The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported
one thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, 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 ofFirst Instance of Cebu, Branch II for damages.
EASCO, as the insurer, filed a counterclaim against the petitioner for the recovery of
P1 8,387.86 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 itis 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:
"x x x. 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.
"x x x xxx xxx x x x.
'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
contended 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.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
Petition denied.
Note.The proper rate of interest in this case is 12% per annum which is the rate
expressly agreed upon by the parties in their agreement. (Solid Homes Inc. vs.
Court of Appeals, 170 SCRA 63.)
o0o

Tio Khe Chio vs. Court of Appeals, 202 SCRA 119, G.R. Nos. 76101-02 September
30, 1991

398
SUPREME COURT REPORTS ANNOTATED
Zenith Insurance Corporation vs. Court of Appeals
G.R. No. 85296. May 14, 1990.*
ZENITH INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and
LAWRENCE FERNANDEZ, respondents.
Damages; Basis for award of moral damages.The purpose of moral damages is
essentially indemnity or reparation, not punishment or correction. Moral damages
are emphatically not intended to enrich a complainant at the expense of a
defendant, they are awarded only to enable the injured party to obtain means,
diversions or amusements that will serve to alleviate the moral suffering he has
undergone by reason of the defendants culpable action. (J. Cezar S. Sangco,
Philippine Law on Torts and Damages, Revised Edition, p. 539) (See also R and B
Surety & Insurance Co., Inc. v. IAC, G.R. No. 64515, June 22, 1984; 129 SCRA 745).
While it is true that no proof of pecuniary loss is necessary in order that moral
damages may be adjudicated, the assessment of which is left to the discretion of
the court according to the circumstances of each case (Art. 2216, New Civil Code), it
is equally true that in awarding moral damages in case of breach of contract, there
must be a showing that the breach was wanton and deliberately injurious or the one
responsible acted fraudulently or in bad faith (Perez v. Court of Appeals, G.R. No. L-
20238, January 30, 1965; 13 SCRA 137; Solis v. Salvador, G.R. No. L-17022, August
14, 1965; 14 SCRA 887). In the instant case, there was a finding that private
respondent was given a run-around for two months, which is the basis for the
award of the damages granted under the Insurance Code for unreasonable delay in
the payment of the claim. However, the act of petitioner of delaying payment for
two months cannot be considered as so wanton or malevolent to justify an award of
P20,000.00 as moral damages, taking into consideration also the fact that the
actual damage on the car was only P3,460. In the pre-trial of the case, it was shown
that there was no total disclaimer by respondent. The reason for petitioners failure
to indemnify private respondent within the two-month period was that the parties
could not come to an agreement as regards the amount of the actual damage on
the car. The amount of P10,000.00 prayed for by private respondent as moral
damages is equitable.
Same; Basis for award of exemplary damages.On the other hand, exemplary or
corrective damages are imposed by way of example or correction for the public
good (Art. 2229, New Civil Code ofthe Philippines). In the case of Noda v. Cruz-
Arnaldo, G.R. No. 57322, June 22, 1987; 151 SCRA 227, exemplary damages were
not awarded as the insurance company had not acted in wanton, oppressive or
malevolent manner. The same is true in the case at bar.
Same; Insurance Law; Deduction of deductible franchise and 20% depreciation on
parts are not allowed in motor vehicle insurance claims.As regards the actual
damages incurred by private respondent, the amount of P3,640.00 had been
established before the trial court and affirmed by the appellate court. Respondent
appellate court correctly ruled that the deductions of P250.00 and P274.00 as
deductible franchise and 20% depreciation on parts, respectively claimed by
petitioners as agreed upon in the contract, had no basis.
PETITION to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Vicente R. Layawen for petitioner.
Lawrence L. Fernandez & Associates for private respondent.
MEDIALDEA, J.:

Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No.
13498 entitled, Lawrence L. Fernandez, plaintiff-appellee v. Zenith Insurance Corp.,
defendant-appellant which affirmed in toto the decision of the Regional Trial Court
of Cebu, Branch XX in Civil Case No. CEB-1215 and the denial of petitioners Motion
for Reconsideration.
The antecedent facts are as follows:
On January 25, 1983, private respondent Lawrence Fernandez insured his car for
own damage under private car Policy No. 50459 with petitioner Zenith Insurance
Corporation. On July 6, 1983, the car figured in an accident and suffered actual
damages in the amount of P3,640.00. After allegedly being given a run around by
Zenith for two (2) months, Fernandez filed a complaint with the Regional Trial Court
of Cebu for sum of money and damages resulting from the refusal of Zenith to pay
the amount claimed. The complaint was docketed as Civil Case No. CEB-1215. Aside
from actual damages and interests, Fernandez also prayed for moral damages in the
amount of P10,000.00, exemplary damages of P5,000.00, attorneys fees
ofP3,000.00 and litigation expenses of P3,000.00.
On September 28, 1983, Zenith filed an answer alleging that it offered to pay the
claim of Fernandez pursuant to the terms and conditions of the contract which, the
private respondent rejected. After the issues had been joined, the pre-trial was
scheduled on October 17, 1983 but the same was moved to November 4, 1983
upon petitioners motion, allegedly to explore ways to settle the case although at an
amount lower than private respondents claim. On November 14, 1983, the trial
court terminated the pre-trial. Subsequently, Fernandez presented his evidence.
Petitioner Zenith, however, failed to present its evidence in view of its failure to
appear in court, without justifiable reason, on the day scheduled for the purpose.
The trial court issued an order on August 23, 1984 submitting the case for decision
without Zeniths evidence (pp. 10-11, Rollo). Petitioner filed a petition for certiorari
with the Court of Appeals assailing the order of the trial court submitting the case
for decision without petitioners evidence. The petition was docketed as C.A.-G.R.
No. 04644. However, the petition was denied due course on April 29, 1986 (p. 56,
Rollo).
On June 4, 1986, a decision was rendered by the trial court in favor of private
respondent Fernandez. The dispositive portion of the trial courts decision provides:
WHEREFORE, defendant is hereby ordered to pay to the plaintiff:
1. The amount of P3,640.00 representing the damage incurred plus interest at the
rate of twice the prevailing interest rates;
2. The amount of P20,000.00 by way of moral damages;
3. The amount of P20,000.00 by way of exemplary damages;
4. The amount of P5,000.00 as attorneys fees;
5. The amount of P3,000.00 as litigation expenses; and
6. Costs. (p. 9, Rollo)
Upon motion of Fernandez and before the expiration of the period to appeal, the
trial court, on June 20, 1986, ordered the execution of the decision pending appeal.
The order was assailed by petitioner in a petition for certiorari with the Court of
Appeals on October 23, 1986 in C.A. G.R. No. 10420 but which petition was also
dismissed on December 24, 1986 (p. 69, Rollo).
On June 10, 1986, petitioner filed a notice of appeal before thetrial court. The notice
of appeal was granted in the same order granting private respondents motion for
execution pending appeal. The appeal to respondent court assigned the following
errors:
I. The lower court erred in denying defendant appellant to adduce evidence in its
behalf.
II. The lower court erred in ordering Zenith Insurance Corporation to pay the amount
of P3,640.00 in its decision.
III. The lower court erred in awarding moral damages, attorneys fees and
exemplary damages, the worst is that, the court awarded damages more than what
are prayed for in the complaint. (p. 12, Rollo)
On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the
decision of the trial court. It also ruled that the matter of the trial courts denial of
Fernandezs right to adduce evidence is a closed matter in view of its (CA) ruling in
AC-G.R. 04644 wherein Zeniths petition questioning the trial courts order
submitting the case for decision without Zeniths evidence, was dismissed.
The Motion for Reconsideration of the decision of the Court of Appeals dated August
17, 1988 was denied on September 29, 1988, for lack of merit. Hence, the instant
petition was filed by Zenith on October 18, 1988 on the allegation that respondent
Court of Appeals decision and resolution ran counter to applicable decisions of this
Court and that they were rendered without or in excess of jurisdiction. The issues
raised by petitioners in this petition are:
a) The legal basis of respondent Court of Appeals in awarding moral damages,
exemplary damages and attorneys fees in an amount more than that prayed for in
the complaint.
b) The award of actual damages of P3,460.00 instead of only P1,927.50 which was
arrived at after deducting P250.00 and P274.00 as deductible franchise and 20%
depreciation on parts as agreed upon in the contract of insurance.
Petitioner contends that while the complaint of private respondent prayed for
P10,000.00 moral damages, the lower court awarded twice the amount, or
P20,000.00 without factual orlegal basis; while private respondent prayed for
P5,000.00 exemplary damages, the trial court awarded P20,000.00; and while
private respondent prayed for P3,000.00 attorneys fees, the trial court awarded
P5,000.00.
The propriety of the award of moral damages, exemplary damages and attorneys
fees is the main issue raised herein by petitioner.
The award of damages in case of unreasonable delay in the payment of insurance
claims is governed by the Philippine Insurance Code, which provides:
SEC. 244. In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the case may
be, to make a finding as to whether the payment of the claim of the insured has
been unreasonably denied or withheld; and in the affirmative case, the insurance
company shall be adjudged to pay damages which shall consist of attorneys fees
and other expenses incurred by the insured person by reason of such unreasonable
denial or withholding of payment plus interest of twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the insured, from the date following
the time prescribed in section two hundred forty-two or in section two hundred
forty-three, as the case may be, until the claim is fully satisfied; Provided, That the
failure to pay any such claim within the time prescribed in said sections shall be
considered prima facie evidence of unreasonable delay in payment.
It is clear that under the Insurance Code, in case of unreasonable delay in the
payment of the proceeds of an insurance policy, the damages that may be awarded
are: 1) attorneys fees; 2) other expenses incurred by the insured person by reason
of such unreasonable denial or withholding of payment; 3) interest at twice the
ceiling prescribed by the Monetary Board of the amount of the claim due the
injured; and 4) the amount of the claim.
As regards the award of moral and exemplary damages, the rules under the Civil
Code of the Philippines shall govern.
The purpose of moral damages is essentially indemnity or reparation, not
punishment or correction. Moral damages are emphatically not intended to enrich a
complainant at the expense of a defendant, they are awarded only to enable
theinjured party to obtain means, diversions or amusements that will serve to
alleviate the moral suffering he has undergone by reason of the defendants
culpable action. (J. Cezar S. Sangco, Philippine Law on Torts and Damages, Revised
Edition, p. 539) (See also R and B Surety & Insurance Co., Inc. v. IAC, G.R. No.
64515, June 22, 1984; 129 SCRA 745). While it is true that no proof of pecuniary loss
is necessary in order that moral damages may be adjudicated, the assessment of
which is left to the discretion of the court according to the circumstances of each
case (Art. 2216, New Civil Code), it is equally true that in awarding moral damages
in case of breach of contract, there must be a showing that the breach was wanton
and deliberately injurious or the one responsible acted fraudently or in bad faith
(Perez v. Court of Appeals, G.R. No. L-20238, January 30, 1965; 13 SCRA 137; Solis v.
Salvador, G.R. No. L-17022, August 14, 1965; 14 SCRA 887). In the instant case,
there was a finding that private respondent was given a run-around for two
months, which is the basis for the award of the damages granted under the
Insurance Code for unreasonable delay in the payment of the claim. However, the
act of petitioner of delaying payment for two months cannot be considered as so
wanton or malevolent to justify an award of P20,000.00 as moral damages, taking
into consideration also the fact that the actual damage on the car was only P3,460.
In the pre-trial of the case, it was shown that there was no total disclaimer by
respondent. The reason for petitioners failure to indemnify private respondent
within the two-month period was that the parties could not come to an agreement
as regards the amount of the actual damage on the car. The amount of P10,000.00
prayed for by private respondent as moral damages is equitable.
On the other hand, exemplary or corrective damages are imposed by way of
example or correction for the public good (Art. 2229, New Civil Code of the
Philippines). In the case of Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22, 1987; 151
SCRA 227, exemplary damages were not awarded as the insurance company had
not acted in wanton, oppressive or malevolent manner. The same is true in the case
at bar.
The amout of P5,000.00 awarded as attorneys fees is justified under the
circumstances of this case considering that there were other petitions filed and
defended by private respondentin connection with this case.
As regards the actual damages incurred by private respondent, the amount of
P3,640.00 had been established before the trial court and affirmed by the appellate
court. Respondent appellate court correctly ruled that the deductions of P250.00
and P274.00 as deductible franchise and 20% depreciation on parts, respectively
claimed by petitioners as agreed upon in the contract, had no basis. Respondent
court ruled:
Under its second assigned error, defendant-appellant puts forward two arguments,
both of which are entirely without merit. It is contented that the amount recoverable
under the insurance policy defendant-appellant issued over the car of plaintiff-
appellee is subject to deductible franchise, and x x x.
The policy (Exhibit G, pp. 4-9, Record), does not mention any deductible franchise,
x x x. (p. 13, Rollo)
Therefore, the award of moral damages is reduced to P10,000.00 and the award of
exemplary damages is hereby deleted. The awards due to private respondent
Fernandez are as follows:
1) P3,640.00 as actual claim plus interest of twice the ceiling prescribed by the
Monetary Board computed from the time of submission of proof of loss;
2) P10,000.00 as moral damages;
3) P5,000.00 as attorneys fees;
4) P3,000.00 as litigation expenses; and
5) Costs.
ACCORDINGLY, the appealed decision is MODIFIED as above stated.
SO ORDERED.
Narvasa (Chairman), Cruz and Grio-Aquino, JJ., concur.
Gancayco, J., On leave.
Decision modified.
Notes.What we call moral damages are treated in American Law as
contemporary damages for mental pain resulting
405

VOL. 185, MAY 14, 1990

405
People vs. Sagun, Jr.
from a wrong. (Bagumbayan Corp. vs. Intermediate Appellate Court, 132 SCRA 441.)
There is no legal basis for the award of speculative damages for likely partnership
profits. (Moran, Jr. vs. Court of Appeals, 133 SCRA 88.)
o0o Zenith Insurance Corporation vs. Court of Appeals, 185 SCRA 398,
G.R. No. 85296 May 14, 1990

VOL. 66, AUGUST 7, 197

571
Evangelista vs. Government Service Insurance System
No. L-21161. August 7, 1975.*
PACIFICA EVANGELISTA, plaintiff-appellant, vs. GOVERNMENT SERVICE INSURANCE
SYSTEM, defendant-appellee.
Government Service Insurance System; Insurance; Agency; It is the duty of the
GSIS, thru its agents, viz., the City Treasurer of Pasay City, to inform its members of
their right to exercise the option or take advantage of any changes given by law in
the matter of insurance coverage.In the light of the foregoing circumstances, We
cannot but conclude that the insured Evangelista was lulled into complacency by
the acts of the Pasay City Treasurer as agent of the insurer G.S.I.S. and by the
Insurer, itself, into the firm belief that the deductions from his monthly salary for
payment of premiums on his life insurance policy were legal, proper and adequate;
that his right under the policy was not prejudiced because during his lifetime he
never knew that there was a change in the status of his policy from compulsory to
optional upon the effectivity of R.A. 541. In short, the insured was never given a
chance to exercise the option given him by Sec. 8 of R.A. 541 and the insurer
G.S.I.S., acting by itself and through its agent, the Pasay City Treasurer, led the
insured Evangelista up to the time of his death to believe that the premiums being
deducted from his monthly salary by the agent of the insurer were fully adequate to
keepthe insurance policy alive. It is but logical to run of inadequate payment of
premium, such failure to pay the full premium because of the conversion of the
insurance from compulsory to optional under Sec. 8, of R.A. 541, on June 17, 1950,
is attributable to insurers fault as explained above. x x x Therefore, said insurance
policy was effective until May 30, 1951, and with the 31 days grace period, it would
have been in force until July 1, 1951, or for 27 days after the death of the insured.
Same; Same; Deceased insured not entitled to double indemnity where he did not
pay premiums therefor and same was given only after insured had been long dead.
On the claim for double indemnity, x x x suffice it to say that at the time of the
insureds death on June 4, 1951, he did not pay additional premiums to entitle him
to double indemnity, and that said double indemnity free of charge was only given
on September 30, 1955, long after the insureds accidental death.
Damages; Unreasonable obstinacy and desistance to pay legitimate insurance claim
entitles insureds heirs to moral damages even if such obstinacy and desistance
were not made in bad faith.Taking into consideration the circumstances of this
case, although We do not with exactitude declare the persistent denial of plaintiffs
claim by the Insurer GSIS as acts done in bad faith, because the acts done by the
Insurers officials and employees are presumed done in the ordinary course of
business and in good faith, We, nevertheless recognize, based on the general
principles of equity, fairness, and justice that said persistent acts of denial
amounting to unreasonable obstinacy caused damage to the plaintiff, for which
defendant must be declared liable. Said claim for damages in the sum of P5,000.00
for moral, actual, and consequential damages is hereby declared proven and
reasonable and the same is allowed.
APPEAL from a decision of the Court of First Instance of Manila. Narvasa, J.

The facts are stated in the opinion of the Court.

Zosimo D. de Mesa for plaintiff-appellant.
Monasterial & Parayno for defendant-appellee.
ESGUERRA, J.:
Appeal from a decision of the Court of First Instance of Manila, Branch V in its Civil
Case No. 32508, entitled Pacifica Evangelista vs. Government Service Insurance
System, which dismissed the complaint of plaintiff Evangelista wherein she
seeks to recover from the defendant, Government Service Insurance System, the
proceeds of the insurance policy of her deceased brother, Pablo A. Evangelista, a
former member of the Pasay City Police Department, together with damages and
costs. The Court of Appeals where the appeal was elevated as C.A.-G.R. No. 23151-R
concluding that the plaintiff raises the question regarding the constitutionality of
Republic Act No. 541, the determination of which falls within the exclusive appellate
jurisdiction of the Supreme Court, certified and forwarded the case to Us per its
Resolution of March 14, 1963.
The undisputed facts according to the findings of the Appellate Court are as follows:
The late Pablo Evangelista was appointed detective in the Police Department,
Pasay City, effective November 17, 1949. He discharged the duties of said office
until June 4, 1951, when he was killed in line of duty. Said Evangelista was
considered automatically insured, effective May 31, 1950, in accordance with
Section 4, Commonwealth Act No. 186. The premium paid by him for his insurance
amounted to P36.00, personal share, and P6.00, Government share.
On June 17, 1970, Republic Act No. 541 (An Act to provide life pensions for
uniformed officers, sergeants, corporals, patrolmen and detectives of the Police
Department as well as uniformed officers and firemen of the Fire Department of the
chartered cities), took effect, providing pertinently as follows:
Sec. 8. Upon approval of this Act, any person entitled to its benefits and who is
already insured with the Government Service Insurance System, is given the option
to continue such insurance: Provided, That he will assume full payment of the
premium of the said insurance including the contribution of the Government:
Provided further, that his contribution to the pension fund under this Act be made
compulsory and any deduction made from his monthly pay or salary be noted in the
monthly or semi-monthly payrolls of the Police Department or Fire Department, as
the case may be; And, Provided, lastly, that no person entitled to the benefit of this
Act shall be entitled to any benefit provided for in other Acts.
The Court a quo in dismissing plaintiffs complaint found as follows:
The insurance policy issued to the deceased Pablo Evangelista as of May 31, 1950,
was compulsory by virtue of Section 4, of Commonwealth Act No. 186. However, it
became optional by operation of Republic Act No. 541, which took effect on June 17,
1950, as already above stated. The policy of the deceased having become optional,
the P3.00 which he caused to
be remitted each month to the defendant System represented only one-half of what
was due from him because an optional policy, as already seen, calls for the payment
of premiums in full by the insured. Hence, the total premium remitances of the
deceased were only enough to make his policy in force or active up to the end of
March 1951. Said policy, not having been in force for one year, had not earned any
cash value which could be applied to his premiums in arrears, pursuant to the
automatic premium loan provision thereof.
It is the principal and crucial contention of plaintiff-appellant that the lower court
erred in holding that the insurance policy of the deceased Detective Pablo
Evangelista with the defendant-appellee was converted to an optional insurance by
the passage of Republic Act No. 541 and that the legislature could not, by the
passage of said law (R.A. No. 541) effectuate a unilateral change in the deceaseds
automatic and compulsory contract of insurance under Commonwealth Act No. 186,
without violating Article III, Sec. 1, Clause 10 of the 1935 Constitution which
provides that no law impairing the obligation of contracts shall be passed.
We fully concur with the observations of the Appellate Court that:
If the insurance policy of the deceased (Pablo Evangelista) was not converted to
optional by Republic Act No. 541, but remained automatic or compulsory whereby,
under Commonwealth Act No. 186, Sections 5 and 6, the monthly premiums would
consist of the membership contributions of the insured and the government
contributions in equal shares, the payments made by the deceased as his personal
share of the premiums would have made the policy effective until May 30, 1951.
With the 31 days grace period, it would have been in force until July 1, 1951, or for
27 days after the death of the insured. On this score, the proceeds of the policy
would be payable to the beneficiary or heirs, but if the conversion (from compulsory
to optional insurance) was valid and does no violence to the constitutional guaranty
against impairment of the obligation of contracts, such right would not be
available.
I

Without passing upon the constitutional question raised by the plaintiff-appellant as

it is not absolutely necessary to the determination of this appeal, We believe that
the primary question is whether there was automatic conversion of the insurance
policy of the deceased insured, Pablo Evangelista, from compulsory under Sections
5 and 6 of Commonwealth ActNo. 186 to optional under Section 8 of Republic Act
541 upon the effectivity of the latter law on June 17, 1950, in the light of the proven
circumstances. Stated otherwise, was there an automatic novation of the insurance
contract from compulsory to optional by the mere passage of Sec. 8 of Republic Act
541, without taking into consideration the acts of both the insured and insurer
subsequent to the approval of Republic Act 541?
It seems fairly clear that Pablo Evangelista was automatically insured (compulsory
insurance) under Secs. 5 and 6 of Commonwealth Act No. 186, on May 31, 1950
that the sum of P36.00 personal share and P6.00 government share was paid to
insurer G.S.I.S. as premium for said insurance policy; that said premiums were
deducted from the monthly salary of the insured by the City Treasurer of Pasay City
as agent of the insurer G.S.I.S.; that the insured was never informed of the change
of his insurance policy from compulsory to optional as brought about by the
effectivity of R.A. 541 on June 17, 1950; that the Treasurer of Pasay City as agent of
insurer G.S.I.S. never took the initiative of notifying the insured as to the change in
the nature of his life insurance policy from compulsory to optional, nor to the need
for the insured to defray alone the full amount of the premium including the
government share; that said treasurer as agent of the insurer G.S.I.S. never
deducted the full amount of the premiums from the monthly salary of the insured
notwithstanding his knowledge of the effectivity of R.A. 541 and its possible adverse
effects on the life insurance policy of the insured; that the insurer G.S.I.S., itself,
also never notified the insured of the effectivity of R.A. 541 and of the increase of
his premiums as he will have to bear the government share, nor of the change in
the status of the insurance policy from compulsory to optional.
In the light of the foregoing circumstances, We cannot but conclude that the insured
Evangelista was lulled into complacency by the acts of the Pasay City Treasurer as
agent of the insurer G.S.I.S. and by the Insurer, itself, into the firm belief that the
deductions from his monthly salary for payment of premiums on his life insurance
policy were legal, proper, and adequate; that his right under the policy was not
prejudiced because during his lifetime he never knew that there was a change in
the status of his policy from compulsory to optional upon the effectivity of R.A. 541.
In short, the insured was never given a chance to exercise the option given him by
Sec. 8 of R.A.
541 and the insurer G.S.I.S., acting by itself and through its agent, the Pasay City
Treasurer, led the insured Evangelista up to the time of his death to believe that he
was protected by the mantle of compulsory insurance, and that the premiums being
deducted from his monthly salary by the agent of the insurer were fully adequate to
keep the insurance policy alive. It is but logical to rule that if the insurance policy of
the insured lapsed because of inadequate payment of premium, such failure to pay
the full premium because of the conversion of the insurance from compulsory to
optional under Sec. 8, of R.A. 541, on June 17, 1950, is attributable to insurers fault
as explained above. We, therefore, come to the inevitable conclusion that due to
insurer G.S.I.S.s fault the compulsory insurance of the insured was never converted
to optional insurance because the insured was not given the chance to exercise the
option given him by Sec. 8 of R.A. 541. Therefore, said insurance policy was
effective until May 30, 1951, and with the 31 days grace period, it would have been
in force until July 1, 1951, or for 27 days after the death of the insured.
II

On the claim of plaintiff-appellant for double indemnity (accidental death benefit)

because the deceased insured Pablo Evangelista was shot to death while in the
performance of his duties as detective of the Pasay City Police Force, suffice it to say
that at the time of the insureds death on June 4, 1951, he did not pay additional
premiums to entitle him to double indemnity, and that said double indemnity
(accidental death benefit) free of charge was only given on September 30, 1955,
long after the insureds accidental death (Exh. 22).
III
As a basis for plaintiffs claim of moral, actual and consequential damages in the
amount of P5,000.00, she alleges the grave inconveniences and annoyances
caused to her by reason of the attitude and acts of the defendant-appellee in
treating her claim; the defendant-appellees inclination to deny the plaintiff-
appellants claim with all inconveniences and annoyances imposed on her;
expenses incurred in the preparation of all the papers necessary to her claim; and
she had to abandon her store just to attend to this claim.
An examination of the record of his case reveals the persistent tendency of the
defendant G.S.I.S. to resist the claim of the plaintiff, on the ground that insured
Pablo Evangelista had a temporary appointment pending receipt of medical
certificate; that deceased Evangelista did not submit the medical certificate; that he
was not able to pass a medical and physical examination for purposes of
membership with the insurer G.S.I.S.; and that all premiums paid by said deceased
Evangelista were only refundable to his legal heirs with interest. When the plaintiff
was able to hurdle successfully the obstacles of temporary appointment and lack
of medical and physical examination by convincing the insurer G.S.I.S. that the
insured Evangelista complied with those requirements, the Insurer continued
denying the claim, this time on the ground that the insurance policy of the
deceased Evangelista lapsed on April 1, 1951, after allowing a grace period of 31
days or long before the insureds death on June 4, 1951, because of the inadequate
premiums paid.
There is very little doubt in Our mind that the plaintiff must really have undergone
an ordeal in effort, time and expenses to justify her claim for 1952 to 1957 when
she finally had to resort to the courts of justice for redress because of the persistent
denial of her claim interposed by the insurer G.S.I.S. Plaintiff had to hurdle one legal
obstacle after another to justify her claim, and she had to follow up papers not only
in the Pasay City Treasurers and Insurers office but also in the Civil Service
Commission to establish the permanent status of her late brothers appointment.
Considering that her claim then was only for P1,200 or P2,400 for double indemnity,
if the latter is legally applicable, and her very apparent need for legal guidance from
counsel, it is immediately discernable that she must have spent more in following
up what she believed to be a very legitimate claim than what she could ever expect
to receive if she turned out successful in the pursuit of her claim. We can also
surmise, if not presume, that to the mind of plaintiff who is not a lawyer, she must
really have suffered mental anguish and anxiety when her claim was persistently
turned down by the insurer G.S.I.S. because she could not comprehend why the
insurance proceeds of her late brother who have his life unselfishly in upholding the
cause of peace and order was being denied to a lawful claimant, notwithstanding
that the amount thereof is relatively insignificant compared to the enormity ofthe
supreme sacrifice made by the deceased insured for a noble purpose.
On the part of the defendant G.S.I.S., We understand the zeal of its officials and
employees in trying to protect its interest as Insurer, but those acts of persistent
denial in the light of claimants successful hurdling of the legal obstacles placed on
the path of her claim, may amount to overzealousness, if overdone, and easily fall
within the orbit of bad faith or malicious interference in the rightful claim of another
person.
Taking into consideration the circumstances of this case, although We do not with
exactitude declare the persistent denial of plaintiffs claim by the Insurer G.S.I.S. as
acts done in bad faith, because the acts done by the Insurers officials and
employees are presumed done in the ordinary course of business and in good faith,
We, nevertheless recognize, based on the general principles of equity, fairness, and
justice that said persistent acts of denial amounting to unreasonable obstinacy
caused damage to the plaintiff, for which defendant must be declared liable. Said
claim for damages in the sum of P5,000.00 for moral, actual, and consequential
damages is hereby declared proven and reasonable and the same is allowed.
WHEREFORE, the decision of the trial court dismissing the complaint is set aside,
and a new decision is rendered declaring the compulsory insurance policy issued by
defendant G.S.I.S. in favor of the deceased insured, Pablo Evangelista, in full force
and effect at the time of the insureds death on June 4, 1951; ordering the
defendant G.S.I.S. to pay plaintiff the full amount of the proceeds of the policy of the
deceased, Pablo Evangelista, minus whatever sum that would have been due from
him as a result of the conversion of his policy from compulsory to optional so as to
complete the 6% premium thereon, with legal interest at 6% per annum on the
balance of the proceeds of the policy from May 8, 1957, time of judicial demand,
until the amount is fully paid; plus P5,000.00 as actual, moral, and consequential
damages.
Costs against defendant-appellee.
SO ORDERED.
Castro (Chairman), Makasiar, Muoz Palma and Martin, JJ., concur.
Decision set aside.
Notes.In life insurance policies issued by the Government Service Insurance
System in favor of government employees, the proceeds shall be liable to
attachment, garnishment and other legal processes, when obligations or
indebtedness to the Government Service Insurance System and the employer are
concerned. (Picar vs. G.S.I.S., 33 SCRA 324).
The Government Service Insurance System has the right to require the beneficiaries
to submit the necessary clearance from money and property accountabilities of the
deceased government employee whose insurance policy is involved, before paying
them the proceeds of the policy concerned. (Picar vs. G.S.I.S., 33 SCRA 324).
The G.S.I.S. Board may lodge in the General Manager the authority to act on any
matter the Board deems proper, but such act of the latter may still be subject to
final approval of the former. (Beronilla vs. G.S.I.S., 36 SCRA 44).
The life and retirement insurance, which are two distinct systems of benefits, are
paid out from two distinct and separate funds that are maintained by the G.S.I.S.
(Vda. de. Consuegra vs. G.S.I.S., 37 SCRA 316).
As in the case of life insurance provided for in the Insurance Act, the beneficiary in a
life insurance under the G.S.I.S. may not be necessarily an heir of the insured.
Likewise if the employee failed to state the beneficiary of his retirement insurance,
the benefits therefore will accrue to his estate and will be given to his legal heirs.
(Vda. de Consuegra vs. G.S.I.S., 37 SCRA 316).
o0o Evangelista vs. Government Service Insurance System, 66 SCRA 71, No.
L-21161 August 7, 1975

710
SUPREME COURT REPORTS ANNOTATED
Cathay Insurance Co. vs. Court of Appeals
No. L-76145. June 30, 1987.*
CATHAY INSURANCE CO., petitioner, vs. HON. COURT OF APPEALS, and REMINGTON
INDUSTRIAL SALES CORPORATION, respondents.
Commercial Law; Insurance; Perils of the sea; Rusting of steel pipes in the course of
a voyage is a peril of the sea.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.
Remedial Law; Civil Procedure; Judgments; Cardinal rule that the findings of facts of
the appellate tribunal are binding on theSupreme Court; Exceptions to the rule do
not apply in case at bar.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.
PETITION to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

PARAS, J.:

This petition seeks the review of the decision of the Court of Appeals1 in CA-G.R. CV
No. 06559 affirming the decision of the Regional Trial Court (RTC),2 National Capital
Region (NCR) Manila, Branch 38 and the Resolution of the said appellate court
denying petitioners motion for reconsideration.
Originally, this was a complaint filed by private respondent corporation against
petitioner (then defendant) company seek-ing collection of the sum of P868,339.15
representing private respondents 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 respondents 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 surveyors fee,
attorneys fees and costs of the suit.
Respondent in its comment on the petition, contends that:
1. Coverage of private respondents 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 pre-trial order and it was not even raised in petitioners
answer to private respondents 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 respondents
right but a natural and spontaneous reaction of whoever received the seamless
steel pipes in a rusty condition at private respondents 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 (that petitioner has failed to present any evidence of any viable
exception tothe application of the policy) there is in fact an express exception to
the application of the policy.
(2) As adverted to in the Petition for Review, private respondent has admitted that
the questioned shipment is not covered by a square provision of the contract, but
private respondent claims implied coverage from the phrase perils of the sea
mentioned in the opening sentence 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 onthe 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.
Fernan (Chairman), Gutierrez, Jr., and Corts, JJ., concur.
Padilla, J., no part: senior partner of petitioners counsel is related to me.
Bidin, J., no part. I participated in the appealed decision of the Court of Appeals.
Petition denied. Decision affirmed.
o0o Cathay Insurance Co. vs. Court of Appeals, 151 SCRA 710, No. L-
76145 June 30, 1987

VOL. 20, AUGUST 17, 1967

1043
Guingon vs. Del Monte
No. L-22042. August 17, 1967.
DIONISIA, EULOGIO, MARINA, GUILLERMO and NORBERTO all surnamed GUINGON,
plaintiffs-appellees, vs. ILUMINADO DEL MONTE, JULIO AGUILAR and CAPITAL
INSURANCE & SURETY Co., INC., defendants. CAPITAL INSURANCE & SURETY Co.,
INC., defendant-appellant.
Insurance; Right of injured person to sue insurer of party at fault; Condition.The
right of the person injured to sue the insurer of the party at fault (insured) depends
on whether the contract of insurance is intended to benefit third persons also or
only the insured. The test applied is this: Where the contract provides for indemnity
against liability to third persons, then third persons to whom the insured is liable.
can sue the insurer. Where the contract is for indemnity against actual loss or
payment, then third persons cannot proceed against the insurer, the contract being
solely to reimburse the insured for liability actually discharged by him through
payment to third persons, said third persons' recourse being thus limited to the
insured alone.
Same; Pleading and Practice; Joinder of parties; When "no action" clause in
insurance policy cannot prevail over procedural rule as to joinder of parties.Where
the insurer agreed to indemnify the insured "against all sums x x x which the
Insured shall become legally liable to pay in respect of: a death of or bodily injury to
any person", the insurance is one for indemnity against liability, From the f act then
that the insured is liable to the third-person, such third-person is entitled to sue the
insurer. The "no action" clause in the policy of insurance cannot prevail over the
Rules of Court provision aimed at avoiding multiplicity of suits.
APPEAL from a judgment of the Court of First Instance of Manila.
The facts are stated in the opinion of the Court.
Generoso Almario & Associates for plaintiffs-appellees.
Achacoso & Associates for defendant-appellant.
BENGZON, J.P., J.:

Julio Aguilar owned and operated several jeepneys in the City of Manila among
which was one with plate number PUJ-206-Manila, 1961. He entered into a contract
with the Capital Insurance & Surety Co., Inc. insuring the operation of his jeepneys
against accidents with third-party liability. As a consequence thereof an insurance
policy was executed by the Capital Insurance & Surety Co., Inc., the pertinent
provisions of which in so far as this case is concerned contains the following:
"Section IILIABILITY TO THE PUBLIC
"1. The Company, will, subject to the limits of liability, indemnify the Insured in the
event of accident caused by or arising out of the use of the Motor Vehicle/s or in
connection with the loading or unloading of the Motor Vehicle/s, against all sums
including claimant's costs and expenses which the Insured shall become legally
liable to pay in respect of:
"a. death of or bodily injury to any person
"b. damage to property"
During the effectivity of such insurance policy on February 20, 1961 Iluminado del
Monte, one of the drivers of the jeepneys operated by Aguilar, while driving along
the intersection of Juan Luna and Moro streets, City of Manila, bumped with the
jeepney abovementioned one Gervacio Guingon who had just alighted from another
jeepney and as a consequence the latter died some days thereafter.
A corresponding information for homicide thru reckless imprudence was filed
against Iluminado del Monte, who pleaded guilty. A penalty of four months
imprisonment was imposed on him.
As a corollary to such action, the heirs of Gervacio Guingon filed an action for
damages praying that the sum of P82,771.80 be paid to them jointly and severally
by the defendants, driver Iluminado del Monte, owner and operator Julio Aguilar,
and the Capital Insurance & Surety Co., Inc. For failure to answer the complaint, Del
Monte and Aguilar were declared in default. Capital Insurance & Surety Co., Inc.
answered, alleging that the plaintiff has no cause of action against it. During the
trial the following facts were stipulated:
'COURT: The Court wants to find if there is a stipulation in the policy whereby the
insured is insured against liability to third persons who are not passengers of jeeps.
"ALMARIO: As far as I know, in my honest belief, there is no particularization as to
the passengers, whether the passengers of the jeep insured or a passenger of
another jeep or whether it is a pedestrian. With those, we can submit the
stipulation.
"SIMBULAN: I admit that." (T.s.n., p. 21, Jan. 23, 1962; p. 65 Rec. on Appeal)
On August 27, 1962, the Court of First Instance of Manila rendered its judgment with
the following dispositive portion:
"WHEREFORE, judgment is rendered sentencing Iluminado del Monte and Julio
Aguilar jointly and severally to pay plaintiffs the sum of P8,572.95 as damages for
the death of their father, plus P1,000.00 for attorney's fees plus costs. "The
defendant Capital Insurance and Surety Co., Inc. is hereby sentenced to pay the
plaintiffs the sum of Five Thousand (P5,000.00) Pesos plus Five Hundred (P500.00)
Pesos as attorney's fees and costs. These sums of P5,000.00 and P500.00 adjudged
against Capital Insurance and Surety Co., Inc. shall be applied in partial satisfaction
of the judgment rendered against Iluminado del Monte and Julio Aguilar in this case.
"SO ORDERED."
The case was appealed to the Court of Appeals which appellate court on September
30, 1963 certified the case to Us because the appeal raises purely questions of law.
The issues raised before Us in this appeal are (1) As the company agreed to
indemnify the insured Julio Aguilar, is it only the insured to whom it is liable? (2)
Must Julio Aguilar first show himself to be entitled to indemnity before the insurance
company may be held liable 'for the same? (3) Plaintiffs not being parties to the
insurance contract, do they have a cause of action against the company; and (4)
Does the fact that the insured is liable to the plaintiffs necessarily mean that the
insurer is liable to the insured?
In the discussion of the points thus raised, what is paramount is the interpretation of
the insurance contract with the aim in view of attaining the objectives for which the
insurance was taken. The Rules of Court provide that parties may be joined either as
plaintiffs or defendants,as the right to relief in respect to or arising out of the same
transactions is alleged to exist (Sec. 6, Rule 3). The policy, on the other hand,
contains a clause stating:
"E. Action Against Company
No action shall lie against the Company unless, as a condition precedent thereto,
the Insured shall have fully complied with all of the terms of this Policy, nor until the
amount of the Insured's obligation to pay shall have been finally determined either
by judgment against the Insured after actual trial or by written agreement of the
Insured, the claimant, and the Company.
Any person or organization or the legal representative thereof who has secured such
judgment or written agreement shall thereafter be entitled to recover under this
policy to the extent of the insurance afforded by the Policy. Nothing contained in this
policy shall give any person or organization any right to join the Company as a co-
defendant in any action against the Insured to determine the Insured's liability.
Bankruptcy or insolvency of the Insured or of the Insured's estate shall not relieve
the Company of any of its obligations hereunder."
Appellant contends that the "no action'' clause in the policy closes the avenue to
any third party which may be injured in an accident wherein the jeepney of the
insured might have been the cause of the injury of third persons, alleging the
freedom of contracts. Will the mere fact that such clause was agreed upon by the
parties in an insurance policy prevail over the Rules of Court which authorizes the
joining of parties plaintiffs or defendants?
The foregoing issues raise two principal questions: (1) Can plaintiffs sue the insurer
at all? (2) If so, can plaintiffs sue the insurer jointly with the insured?
The policy in the present case, as aforequoted, is one whereby the insurer agreed to
indemnify the insured "against all sums x x x which the Insured shall become legally
Iiable to pay in respect of: a. death of or bodily injury to any person x x x." Clearly,
therefore, it is one for indemnity against liability;1 from the fact then that
theinsured is liable to the third person, such third person is entitled to sue the
insurer.
The right of the person injured to sue the insurer of the party at fault (insured),
depends on whether the contract of insurance is intended to benefit third persons
also or only the insured. And the test applied has been this: Where the contract
provides for indemnity against liability to third persons, then third persons to whom
the insured is liable, can sue the insurer. Where the contract is for indemnity against
actual loss or payment, then third persons cannot proceed against the insurer, the
contract being solely to reimburse the insured for liability actually discharged by
him thru payment to third persons, said third persons' recourse being thus limited to
the insured alone.2
The next question is on the right of the third person to sue the insurer jointly with
the insured, The policy requires, as afore-stated, that suit and final judgment be first
obtained against the insured; that only "thereafter" can the person injured recover
on the policy; it expressly disallows suing the insurer as a co-defendant of the
insured in a suit to determine the latter's liability. As adverted to before, the query is
which procedure to followthat of the insurance policy or the Rules of Court.
The "no action" clause in the policy of insurance cannot prevail over the Rules of
Court provision aimed at avoiding multiplicity of suits. In a case squarely on the
point, American Automobile Ins. Co. vs. Struwe, 218 SW 534 (Texas CCA), it was
held that a "no action" clause in a policy of insurance cannot override procedural
rules aimed at avoidance of multiplicity of suits. We quote:
"Appellants filed a plea in abatement on the grounds that the suit had been
prematurely brought against the insurance company, and that it had been
improperly joined with Zunker, as said insurance company, under the terms of the
policy, was only liable after judgment had been awarded against Zunker. xxx
"x x x That plea was properly overruled, because under the laws of Texas a dual suit
will always be avoided wheneverall parties can have a fair trial when joined in one
suit. Appellee, had he so desired, could have prosecuted his claim to judgment as
against Zunker and then have sued on that judgment against the insurance
company, but the law does not make it imperative that he should do so, but would
permit him to dispose of the whole matter in one suit.
"The rule has often been announced in Texas that when two causes of action are
connected with each other, or grow out of the same transaction, they may be
properly joined, and in such suit all parties against whom the plaintiff asserts a
common or an alternative liability may be joined as defendants. xxx Even if
appellants had presented any plea in abatement as to joinder of damages arising
from a tort with those arising from a contract, it could not, under the facts of this
case, be sustained, for the rule is that a suit may include an action for breach of
contract and one for tort, provided they are connected with each other or grew out
of the same transaction."
Similarly, in the instant suit, Sec, 5 of Rule 2 on ''Joinder of causes of action" and
Sec. 6 of Rule 3 on "Permissive joinder of parties" cannot be superseded, at least
with respect to third persons not a party to the contract, as herein, by a "no action"
clause in the contract of insurance. Wherefore, the judgment appealed from is
affirmed in toto. Costs against appellant, So ordered.
Reyes, J.B.L., Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
Concepcion, C.J., and Dizon, J., are on official leave.
Judgment affirmed.
oOo Guingon vs. Del Monte, 20 SCRA 1043, No. L-22042 August 17, 1967

ANG V FULTON, SUPRA

SUPREME COURT REPORTS ANNOTATED

Coquia vs. Fieldmen's Insurance Co., Inc.
No. L-23276. November 29, 1968.
MELECIO COQUIA, MARIA ESPANUEVA and MANILA YELLOW TAXICAB Co., INC.,
plaintiffs-appellees, vs. FIELDMEN'S INSURANCE Co., INC., defendant-appellant.
Pleading and practice; Parties; Cause of action; Only parties to a contract may bring
an action thereon; Exception; Contracts pour autrui.Although, in general, only
parties to a contract may bring an action based thereon, this rule is subject to
exceptions, one of which is .found in the second paragraph of Article 1311 of the
Civil Code of the Philippines, reading: "// a contract should contain some stipulation
in favor of a third person, he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person."
This is but the restatement of a well-known principle concerning contracts pour
autrui, the enforcement of which may be demanded by a third party for whose
benefit it was made, although not a party to the contract, before the stipulation in
his favor has been revoked by the contracting parties.
Insurance law; Where an insurance policy is typical of a contract pour autrui; Case
at bar.In the case at bar, the insurance policy contains stipulations pursuant to
which the insurance company "will indemnify any authorized Driver who is driving
the Motor Vehicle" of the Insured and, in the event of death of said driver, the
Company shall, likewise, "indemnify his personal representatives," and the
Company "may, at its option, make indemnity payable directly to the claimants or
heirs of claimants x x x it being the true intention of this Policy to protect x x x the
liabilities of the Insured towards the passengers of the Motor Vehicle and the Public"
in other words, third parties.
Thus, the policy under consideration is typical of contracts pour autrui, this
character being made more manifest by the fact that the deceased driver paid fifty
percent (50%) of the corresponding premiums, which were deducted from his
weekly commissions. Under these conditions, it is clear that the Coquiaswho,
admittedly, are the sole heirs of the deceasedhave a direct cause of action
against the Company (Uy Tam v. Leonard, 30 Phil. 471, 485-486; Kauffman v.
Philippine National Bank, 42 Phil. 182, 187, 189), and, since they could have
maintained this action by themselves, without the assistance of the insured it goes
without saying that they could and did properly join the latter in filing the complaint
herein (Guingon v. Capital Insurance & Surety Co., Inc., L-22042, Aug. 17, 1967).
Same; Where a condition in the policy concerning reference of dispute to an
arbitrator, as a condition precedent to a right of action or suit upon a policy, was
deemed waived; Case at bar.Section 17 of the policy under consideration reads:
"If any difference or dispute shall arise with respect to the amount of the Company's
liability under this Policy, the same shall be referred to the decision of a single
arbitrator to be agreed upon by both parties or failing such agreement of a single
arbitrator, to the decision of two arbitrators, one to be appointed in writing by each
of the parties within one calendar month after having been required in writing so to
do by either of the parties and in case of disagreement between the arbitrators, to
the decision of an umpire who shall have been appointed in writing by the
arbitrators. before entering on the reference and the costs of and incidental ,to the
reference shall be dealt with in the Award. And it is hereby expressly stipulated and
declared that it shall be a condition precedent to any right of action or suit upon this
Policy that the award by such arbitrator, arbitratorsor umpire of the amount of the
Company's liability hereunder if disputed shall be first obtained."
The record shows, however, that none of the parties to the contract invoked this
section, or made any reference to arbitration, during the negotiations preceding the
institution of the present case. In fact, counsel for both parties stipulated, in the trial
court, that none of them had, at any time during said negotiations, even suggested
the settlement of the issue between them by arbitration, as provided in said section.
Their aforementioned acts or omissions had the effect of a waiver of their respective
right to demand an arbitration (Kahnweiler v. Phenix Insurance Co. of Brooklyn, 67
Fed. 483; Independent School District No. 35, St. Louis County v. A. Hedenberg &
Co., Inc., 7 NW 2nd, 511).
APPEAL from a decision of the Court of First Instance of Manila. Nietes, J.

The facts are stated in the opinion of the Court.

Antonio de Venecia for plaintiffs-appellees.
Rufino Javier for defendant-appellant.
CONCEPCION, C.J.:

This is an appeal from a decision of the Court of First Instance of Manila, certified to
us by the Court of Appeals, only questions of law being involved therein. Indeed, the
pertinent facts have been stipulated and/or, admitted by the parties at the hearing
of the case in the trial court, to dispense with the presentation of evidence therein.
It appears that on December 1, 1961, appellant Fieldmen's Insurance Company, Inc.
hereinafter referred to as the Companyissued, in favor of the Manila Yellow
Taxicab Co., Inc.hereinafter referred to as the Insureda common carrier accident
insurance policy, covering the period from December 1, 1961 to December 1, 1962.
It was stipulated in said policy that:
"The Company will, subject to the Limits of Liability and under the Terms. of this
Policy, indemnify the Insured in the event of accident caused by or arising out of the
use of Motor Vehicle against all sums which the Insured will become legally liable to
pay in respect of: Death or bodily injury to any farepaying passenger including the
Driver. Conductor and/or Inspector who is riding in the Motor Vehicle insured at the
time of accident or injury."1
While the policy was in force, or on February 10, 1962, a taxicab of the Insured,
driven by Carlito Coquia, met a vehicular accident at Magaldan, Pangasinan, in
consequence of which Carlito died. The Insured filed therefor a claim for P5,000.00
to which the Company replied with an offer to pay P2,000.00, by way of
compromise. The Insured rejected the same and made a counter-offer for
P4,000.00, but the Company did not accept it. Hence, on September 18, 1962, the
Insured and Carlito's parents, namely, Melecio Coquia and Maria Espanueva
hereinafter referred to as the Coquiasfiled a complaint against the Company to
collect the proceeds of the aforementioned policy. In its answer, the Company
admitted the existence thereof, but pleaded lack of cause of action on the part of
the plaintiffs.
After appropriate proceedings, the trial court rendered a decision sentencing the
Company to pay to the plaintiffs the sum of P4,000.00 and the costs. Hence, this
appeal by the Company, which contends that plaintiffs have no cause of action
because: 1) the Coquias have no contractual relation with the Company; and 2) the
Insured has not complied with the provisions of the policy concerning arbitration.
As regards the first defense, it should be noted that, although, in general, only
parties to a contract may bring an action based thereon, this rule is subject to
exceptions, one of which is found in the second paragraph of Article 1311 of the
Civil Code of the Philippines, reading:
"If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person."2
This is but the restatement of a well-known principle concerning contracts pour
autrui, the enforcement of which may be demanded by a third party for whose
benefit it was made, although not a party to the contract, before the stipulation in
his favor has been revoked by the contracting parties. Does the policy in question
belong to such class of contracts pour autrui?
In this connection, said policy provides, inter alia:
"Section ILiability to Passengers. 1. The Company will, subject to the Limits of
Liability and under the Terms of this Policy, indemnify the Insured in the event of
accident caused by or arising out of the use of Motor Vehicle against all sums which
the Insured will become legally liable to pay in respect of: Death or bodily injury to
any fare-paying passenger including the Driver x x x who is riding in the Motor
Vehicle insured at the time of accident or injury.
"Section IILiability to the Public
xxx xxx xxx
"3. In terms of and subject to the limitations of and for the purposes of this Section,
the Company will indemnify any authorized Driver who is driving the Motor Vehicle x
x x."
"Conditions
xxx xxx xxx
"7. In the event of death of any person entitled to indemnity under this Policy, the
Company will, in respect of the liability incurred by such person, indemnify his
personal representatives in terms of and subject to the limitations of this Policy,
provided, that such representatives shall, as though they were the Insured, observe,
fulfill and be subject to the Terms of this Policy insofar as. they can apply.
"8. The Company may, at its option, make indemnity payable directly to the
claimants or heirs of claimants, with or without securing the consent of or prior
notification to the Insured, it being the true intention of this Policy to protect, to the
extent herein specified and subject always to the Terms of this Policy, the liabilities
of the Insured towards the passengers of the Motor Vehicle and the Public."
Pursuant to these stipulations, the Company "will indemnify any authorized Driver
who is driving the Motor Vehicle" of the Insured and, in the event of death of said
driver, the Company shall, likewise, "indemnify his personal representatives." In
fact, the Company "may, at its option, make indemnity payable directly to the
claimants or heirs of claimants x x x it being the true intention of this Policy to
protect x x x the liabilities of the Insured towards the passengers of the Motor
Vehicle and the Public"in other words, third parties.
Thus, the policy under consideration is typical of contracts pour autriu, this
character being made more manifest by the fact that the deceased driver paid fifty
percent (50%) of the corresponding premiums, which were deducted from his
weekly commissions. Under these conditions, it is clear that the Coquiaswho,
admittedly, are the sole heirs of the deceasedhave a direct cause of action
against the Company,3 and, since they could have maintained this action by
themselves, without the assistance of the Insured, it goes without saying that they
could and did properly join the latter in filing the complaint herein.4
The second defense set up by the Company is based upon Section 17 of the policy
reading:
"If any difference or dispute shall arise with respect to the amount of the Company's
liability under this Policy, the same shall be referred to the decision of a single
arbitrator to be agreed upon by both parties or failing such agreement of a single
arbitrator, to the decision of two arbitrators, one to be appointed in writing by each
of the parties within one calendar month after having been required in writing so to
do by either of the parties and in case of disagreement between the arbitrators, to
the decision of an umpire who shall have been appointed in writing by the
arbitrators before entering on the reference and the costs of and incidental to the
reference shall be dealt with in the Award. And it is hereby expressly stipulated and
declared that it shall be a condition precedent to any right of action or suit upon this
Policy that the award by such arbitrator, arbitrators or umpire of the amount of the
Company's liability hereunder if disputed shall be first obtained."
The record shows, however, that none of the parties to the contract invoked this
section, or made any reference to arbitration, during the negotiations preceding the
institution of the present case. In fact, counsel for both parties stipulated, in the trial
court, that none of them had, at any time during said negotiations, even suggested
the settlement of the issue between them by arbitration, as provided in said section.
Their aforementioned acts or omissions had the effect of a waiver of their respective
right to demand an arbitration. Thus, in Kahnweiler vs. PhenixIns. Co. of Brooklyn,5
it was held:
"Another well-settled rule for interpretation of all contracts is that the court will lean
to that interpretation of a contract which will make it reasonable and just. Bish.
Cont. Sec. 400. Applying these rules to the tenth clause of this policy, its proper
interpretation seems quite clear. When there is a difference between the company
and the insured as to the amount of the loss the policy declares: 'The same shall
then be submitted to competent and impartial arbitrators, one to be selected by
each party x x x'. It will be observed that the obligation to procure or demand an
arbitration is not, by this clause, in terms imposed on either party. It is not said that
either- the company or the insured shall take the initiative in setting the arbitration
on foot. The company has no more right to say the insured must do it than the
insured has to say the company must do it. The contract in this respect is neither
unilateral nor self-executing. To procure a reference to arbitrators, the joint and
concurrent action of both parties to the contract is indispensable. The right it gives
and the obligation it creates to refer the differences between the parties to
arbitrators. are mutual. One party to the contract cannot bring about an arbitration.
Each party is entitled to demand a reference, but neither can compel it, and neither
has the right to insist that the other shall first demand it, and shall forfeit any right
by not doing so. If the company demands it, and the insured refuses to arbitrate, his
right of action is suspended until he consents to an arbitration; and if the insured
demands an arbitration, and the company refuses to accede to the demand, the
insured may maintain a suit on the policy, notwithstanding the language of the
twelfth section of the policy, and, where neither party demands an arbitration, both
parties thereby waive it."6
To the same effect was the decision of the Supreme Court of Minnesota in
Independent School Dist. No. 35, St. Louis County vs. A. Hedenberg & Co., Inc.7
from which we quote:
"This rule is not new in our state. In Meyer v. Berlandi, 53 Minn. 59, 54 N.W. 937,
decided in 1893, this court held that the parties to a construction contract, having
proceeded throughout the entire course of their dealings with each other in entire
disregard of the provision of the contract regarding the mode of determining by
arbitration the value of the extras, thereby waived such provision."
xxx xxx xxx
"The test for determining whether there has been a waiver in a particular case is
stated by the author of an exhaustive annotation in 117 A.L.R. p. 304, as follows:
'Any conduct ofthe parties inconsistent with the notion that they treated the
arbitration provision as in effect, or any conduct which might be reasonably
construed as showing that they did not intend to avail themselves of such provision,
may amount to a waiver thereof and estop the party charged with such conduct
from claiming its benefits'."
xxx xxx xxx
"The decisive facts here are that both parties from the inception of their dispute
proceeded in entire disregard of the provisions of the contract relating to arbitration
and that neither at any stage of such dispute, either before or after commencement
of the action, demanded arbitration, either by oral or written demand, pleading, or
otherwise. Their conduct was as effective a rejection of the right to arbitrate as if, in
the best Coolidge tradition, ,they had said, 'We do not choose to arbitrate'. As
arbitration under the express provisions of article 40 was 'at the choice of either
party/ and was chosen by neither, a waiver by both of the right to arbitration
followed as a matter of law."
WHEREFORE, the decision appealed from should be as it is hereby affirmed in toto,
with costs against the herein defendant-appellant, Fieldmen's Insurance Co., Inc. It
is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando and
Capistrano, JJ., concur.
Decision affirmed.
Notes.The general rule is that a contract affects only the parties and privies
thereto (Bank of P.I. v. V. Concepcion e Hijos, Inc., 50 Phil. 806).
The exception is what is called a stipulation pour autrui, which is recognized under
the second paragraph of Article 1311 of the Civil Code. In order to constitute a valid
stipulation pour autrui, it must be the purpose and intent of the parties to benefit a
third person, it not being sufficient that the third person may be incidentally
benefited by the stipulation (Bank of P.I. v. V. Concepcion e Hijos, Inc., supra, citing
Uy Tam vs. Leonard, 30 Phil. 471; Kauffman vs. Philippine National Bank, 42 Phil.
182). For a case where the stipulation was held to be pour autrui, see Kauffman vs.
Philippine National Bank, supra. For cases where the contract was held not to be
pour autrui, see Uy Tam vs. Leonard, supra, and Bank of P.I vs. V. Concepcion e
Hijos, Inc., supra.
Coquia vs. Fieldmen's Insurance Co., Inc., 26 SCRA 178, No. L-23276. November 29,
1968

VOL. 23, APRIL 25, 1968

205
Rizal Surety & Insurance Co. vs. Manila Railroad Company
No. L-24043. April 25, 1968.
RIZAL SURETY & INSURANCE COMPANY, plaintiff-appellant, vs. MANILA RAILROAD
COMPANY and MANILA PORT SERVICE, defendants-appellees.
Insurance; Property; Subrogation; Insurer is subrogated only to the rights of the
insured.Insurer after paying the claim of the insured for damages under the
insurance is subrogated merely to the rights of the insured and therefore can
necessarily recover only that to what was recoverable by the insured.
Damages; Where property is insured; Article 2207 of the Civil Code construed.
Under Article 2207 of the Civil Code, the insurance company cannot recover in full
the amount it paid to the insured. The literal language of Article 2207 makes it clear
that the insurance company that has paid the indemnity for the injury or loss
sustained by the property insured, shall be subrogated to the rights of the insured
against the wrong-doer or the person who has violated the contract.
APPEAL from a decision of the Court of First Instance of Manila. Reyes, J.
The facts are stated in the opinion of the Court.
Gil R. Carlos & Associates for plaintiff-appellant.
D.F. Macaranas & M.C. Gonzales for defendantsappellees.
FERNANDO, J.:

In this suit for the recovery of the amount paid by the plaintiff, Rizal Surety and
Insurance Company, to the consignee based on the applicable Civil Code provision,1
______________

1Art. 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 wrong-doer 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.
which speak to the effect that the Insurance Company shall be subrogated to the
rights of the insured, it is its contention that it is entitled ot the amount paid by it
in full, by virtue of the insurance contract. The lower court, however, relying on the
limited liability clause on a management contract with the defendants, could not go
along with such a theory. Hence, this appeal.
The facts were stipulated. The more pertinent follows: That on or about November
29, 1960, the vessel, SS Flying Trader, loaded on board at Genoa, Italy for shipment
to Manila, Philippines, among other cargoes, 6 cases OMH, Special Single Colour
Offset Press Machine, for which Bill of Lading No. 1 was issued, consigned to Suter,
Inc.; that such vessel arrived at the Port of Manila, Philippines on or about January
16, 1961 and subsequently discharged complete and in good order the
aforamentioned shipment into the custody of defendant Manila Port Service as
arrastre operator; that in the course of the handling, one of the six cases identified
as Case No. 2143 containing the OMH, Special Single Colour Offset Press, while the
same was being lifted and loaded by the crane of the Manila Port Service into the
consignees truck, it was dropped by the crane and as a consequence, the machine
was heavily damaged for which plaintiff as insurer paid to the consignee, Suter, Inc.
the amount of P16,500.00, representing damages by way of costs of replacement
parts and repairs to put the machine in working condition, plus the sum of P180.70
which plaintiff paid to the International Adjustment Bureau as adjusters fee for the
survey conducted on the damaged cargo or a total of P16,680.70 representing
plaintiffs liability under the insurance contract; and that the arrastre charges in this
particular shipment was paid on the weight or measurement basis whichever is
higher, and not on the value thereof.2
Clause 15 of the management contract which as admitted by the plaintiff, appeared
at the dorsal part of the Delivery Permit and was used in taking delivery of the
subject shipment from the defendants (Manila Port Service and Manila Railroad Co.)
custody and control, issued
in the name of consignees broker, contained what was referred to as an
important notice. Such permit is presented subject to all the terms and conditions
of the Management Contract between the Bureau of Customs and Manila Port
Service and amendments thereto or alterations thereof, particularly but not limited
to paragraph 15 thereof limiting the Company liability to P500.00 per package,
unless the value of the goods is otherwise, specified, declared or manifested and
the corresponding arrastre charges have been paid. x x x.3
On the above facts and relying on Bernabe & Co. v. Delgado Brothers, Inc.,4 the
lower court rendered the judgment ordering defendants, jointly and severally, to
pay plaintiff the amount of Five Hundred Pesos (P500.00), with legal interest thereon
from January 13, 1962, the date of the filing of the complaint, with costs against
said defendants.5
As noted at the outset, in this appeal, the point is pressed that under the applicable
Civil Code provision, plaintiffappellant Insurance Company could recover in full. The
literal language of Article 2207, however, does not warrant such an interpretation. It
is there made clear that in the event that the property has been insured and the
Insurance Company has paid the indemnity for the injury or loss sustained, it shall
be subrogated to the rights of the insured against the wrong-doer or the person who
has violated the contract.
Plaintiff-appellant Insurance Company, therefore, cannot recover from defendants
an amount greater than that to which the consignee could lawfully lay claim. The
management contract is clear. The amount is limited to Five Hundred Pesos
(P500.00). Such a stipulation has invariably received the approval of this Court from
the leading case of Bernabe & Co. v. Delgado Bros., Inc.6 Such a decision was
quoted with approval in the following subsequent cases: Atlantic Mutual Insurance
Co. v. Manila Port
Service,7 Insurance Service Co. of North America v. Manila Port Service,8 Insurance
Company of North America v. U.S. Lines, Co.,9 and Insurance Company of North
America v. Manila Port Service.10
In one of them, Atlantic Mutual Insurance Company v. Manila Port Service, this
Court, through the then Justice, now Chief Justice, Concepcion, restated the doctrine
thus: Plaintiff maintains that, not being a party to the management contract, the
consigneeinto whose shoes plaintiff had stepped in consequence of said payment
is not subject to the provisions of said stipulation, and that the same is
furthermore invalid. The lower court correctly rejected this pretense because,
having taken delivery of the shipment aforementioned by virtue of a delivery
permit, incorporating thereto, by reference, the provisions of said management
contract, particularly paragraph 15 thereof, the gist of which was set forth in the
permit, the consignee became bound by said provisions, and because it could have
avoided the application of said maximum limit of P500.00 per package by stating
the true value thereof in its claim for delivery of the goods in question, which,
admittedly, the consignee failed to do x x x.11
Plaintiff-appellant Rizal Surety and Insurance Company, having been subrogated
merely to the rights of the consignee, its recovery necessarily should be limited to
what was recoverable by the insured. The lower court therefore did not err when in
the decision appealed from, it limited the amount which defendants were jointly and
severally topay plaintiff-appellant to Five Hundred Pesos (P500.00) with legal
interest thereon from January 31, 1962, the date of the filing of the complaint, x x
x.
WHEREFORE, the decision appealed from is affirmed. With costs against Rizal Surety
and Insurance Company.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro
and Angeles, JJ., concur.
Decision affirmed.
________________ Rizal Surety & Insurance Co. vs. Manila Railroad Company, 23 SCRA
205, No. L-24043 April 25, 1968

262
SUPREME COURT REPORTS ANNOTATED
Philippine American General Insurance Co., Inc. vs. Court of Appeals
G.R. No. 116940. June 11, 1997.*
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner, vs.
COURT OF APPEALS and FELMAN SHIPPING LINES, respondents.
Ships and Shipping; It is settled that carrying a deck cargo raises the presumption of
unseaworthiness unless it can be shown that the deck cargo will not interfere with
the proper management of the ship.We subscribe to the findings of the Elite
Adjusters, Inc., and the Court of Appeals that the proximate cause of the sinking of
MV Asilda was its being top-heavy. Contrary to the ship captains allegations,
evidence shows that approximately 2,500 cases of soft-drink bottles were stowed on
deck. Several days after MV Asilda sank, an estimated 2,500 empty Coca-Cola
plastic cases were recovered near the vicinity of the sinking. Considering that the
ships hatches were properly secured, the empty Coca-Cola cases recovered could
have come only from the vessels deck cargo. It is settled that carrying a deck cargo
raises the presumption of unseaworthiness unless it can be shown that the deck
cargo will not interfere with the proper management of the ship. However, in this
case it was established that MV Asilda was not designed to carry substantial
amount of cargo on deck. The inordinate loading of cargo on deck resulted in the
decrease of the vessels metacentric height thus making it unstable. The strong
winds and waves encountered by the vessel are but the ordinary vicissitudes of a
sea voyage and as such merely contributed to its already unstable and unseaworthy
condition.
Same; Common Carriers; Code of Commerce; Abandonment; The international rule
is to the effect that the right of abandonment of vessels, as a legal limitation of a
shipowners liability, does not apply to cases where the injury or average was
occasioned by the shipowners own fault; Where the shipowner is likewise to be
blamed, Art. 587 of the Code of Commerce will not apply, and such situation will be
covered by the provision of the Civil Code on common carriers.On the second
issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. Simply
put, the ship agent is liable for the negligent acts of the captain in the care of goods
loaded on the vessel. This liability however can be limited through abandonment of
the vessel, its equipment and freightage as provided in Art. 587. Nonetheless, there
are exceptional circumstances wherein the ship agent could still be held answerable
despite the abandonment, as where the loss or injury was due to the fault of the
shipowner and the captain. The international rule is to the effect that the right of
abandonment of vessels, as a legal limitation of a shipowners liability, does not
apply to cases where the injury or average was occasioned by the shipowners own
fault. It must be stressed at this point that Art. 587 speaks only of situations where
the fault or negligence is committed solely by the captain. Where the shipowner is
likewise to be blamed, Art. 587 will not apply, and such situation will be covered by
the provision of the Civil Code on common carriers.
Same; Same; Same; Same; Presumptions; In the event of loss of goods, common
carriers are presumed to have acted negligently.Under Art. 1733 of the Civil Code,
(c)ommon carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance over the goods
and for the safety of the passengers transported by them, according to all the
circumstances of each case x x x x In the event of loss of goods, common carriers
are presumed to have acted negligently. FELMAN, the shipowner, was not able to
rebut this presumption.
Same; Same; Insurance; Marine Insurance; In every marine insurance policy the
assured impliedly warrants to the assurer that the vessel is seaworthy and such
warranty is as much a term of the contract as if expressly written on the face of the
policy; It becomes the obligation of the cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy condition.It is generally held that in
every marine insurance policy the assured impliedly warrants to the assurer that
the vessel is seaworthy and such warrantyis as much a term of the contract as if
expressly written on the face of the policy. Thus Sec. 113 of the Insurance Code
provides that (i)n every marine insurance upon a ship or freight, or freightage, or
upon anything which is the subject of marine insurance, a warranty is implied that
the ship is seaworthy. Under Sec. 114, a ship is seaworthy when reasonably fit to
perform the service, and to encounter the ordinary perils of the voyage,
contemplated by the parties to the policy. Thus, it becomes the obligation of the
cargo owner to look for a reliable common carrier which keeps its vessels in
seaworthy condition. He may have no control over the vessel but he has full control
in the selection of the common carrier that will transport his goods. He also has full
discretion in the choice of assurer that will underwrite a particular venture.
Same; Same; Same; Same; In policies where the law will generally imply a warranty
of seaworthiness, such warranty can only be excluded by terms in writing in the
policy in the clearest language.We need not belabor the alleged breach of
warranty of seaworthiness by the assured as painstakingly pointed out by FELMAN
to stress that subrogation will not work in this case. In policies where the law will
generally imply a warranty of seaworthiness, it can only be excluded by terms in
writing in the policy in the clearest language. And where the policy stipulates that
the seaworthiness of the vessel as between the assured and the assurer is
admitted, the question of seaworthiness cannot be raised by the assurer without
showing concealment or misrepresentation by the assured.
Same; Same; Same; Same; The result of the admission of seaworthiness by the
assurer may mean one or two things(a) that the warranty of the seaworthiness is
to be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed by the
insurance company.The result of the admission of seaworthiness by the assurer
PHILAMGEN may mean one or two things: (a) that the warranty of the
seaworthiness is to be taken as fulfilled; or, (b) that the risk of unseaworthiness is
assumed by the insurance company. The insertion of such waiver clauses in cargo
policies is in recognition of the realistic fact that cargo owners cannot control the
state of the vessel. Thus it can be said that with such categorical waiver,
PHILAMGEN has accepted the risk of unseaworthiness so that if the ship should sink
by unseaworthiness, as what occurred in this case, PHILAMGEN is liable.
Same; Same; Same; Same; Subrogation; The right of subrogation is not dependent
upon, nor does it grow out of any privity of contract or upon payment by the
insurance company of the insurance claimit accrues simply upon payment by the
insurance company of the insurance claim.In Pan Malayan Insurance Corporation
v. Court of Appeals, we said that payment by the assurer to the assured operates as
an equitable assignment to the assurer of all the remedies which the assured 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 payment by the insurance company of the insurance claim. It
accrues simply upon payment by the insurance company of the insurance claim.
Same; Same; Same; Same; Equity; The doctrine of subrogation has its roots in
equityit is designed to promote and to accomplish justice and is the mode by
which equity adopts to compel the ultimate payment of a debt by one who in
justice, equity and good conscience ought to pay.The doctrine 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, equity and good conscience ought to pay. Therefore, the payment made by
PHILAMGEN to Coca-Cola Bottlers Philippines, Inc., gave the former the right to
bring an action as subrogee against FELMAN. Having failed to rebut the presumption
of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola
softdrink bottles is inevitable.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Fajardo Law Offices for petitioner.
Florido & Associates for private respondent.
BELLOSILLO, J.:

This case deals with the liability, if any, of a shipowner for loss of cargo due to its
failure to observe the extraordinary diligence required by Art. 1733 of the Civil Code
as well as the right of the insurer to be subrogated to the rights of the insured upon
payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board MV Asilda, a
vessel owned and operated by respondent Felman Shipping Lines (FELMAN for
brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles to be transported from
Zamboanga City to Cebu City for consignee Coca-Cola Bottlers Philippines, Inc.,
Cebu.1 The shipment was insured with petitioner Philippine American General
Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-
PAG.
MV Asilda left the port of Zamboanga in fine weather at eight oclock in the
evening of the same day. At around eight forty-five the following morning, 7 July
1983, the vessel sank in the waters of Zamboanga del Norte bringing down her
entire cargo with her including the subject 7,500 cases of 1-liter Coca-Cola softdrink
bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed
a claim with respondent FELMAN for recovery of damages it sustained as a result of
the loss of its softdrink bottles that sank with MV Asilda. Respondent denied the
claim thus prompting the consignee to file an insurance claim with PHILAMGEN
which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse against respondent
FELMAN which disclaimed any liability for the loss. Consequently, on 29 November
1983 PHILAMGEN sued the shipowner for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total loss of MV Asilda
and its cargo were due to the vessels unseaworthiness as she was put to sea in an
unstable condition. It further alleged that the vessel was improperly manned and
that its officers were grossly negligent in failing to take appropriate measures to
proceed to a nearby port or beach after the vessel started to list.
On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative
defense that no right of subrogation in favor of PHILAMGEN was transmitted by the
shipper, and that, in any event, FELMAN had abandoned all its rights, interests and
ownership over MV Asilda together with her freight and appurtenances for the
purpose of limiting and extinguishing its liability under Art. 587 of the Code of
Commerce.2
On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On
appeal the Court of Appeals set aside the dismissal and remanded the case to the
lower court for trial on the merits. FELMAN filed a petition for certiorari with this
Court but it was subsequently denied on 13 February 1989.
On 28 February 1992 the trial court rendered judgment in favor of FELMAN.3 It ruled
that MV Asilda was seaworthy when it left the port of Zamboanga as confirmed by
certificates issued by the Philippine Coast Guard and the shipowners surveyor
attesting to its seaworthiness. Thus the loss of the vessel and its entire shipment
could only be attributed to either a fortuitous event, in which case, no liability
should attach unless there was a stipulation to the contrary, or to the negligence of
the captain and his crew, in which case, Art. 587 of the Code of Commerce should
apply.
The lower court further ruled that assuming MV Asilda was unseaworthy, still
PHILAMGEN could not recover from FELMAN since the assured (Coca-Cola Bottlers
Philippines, Inc.) had breached its implied warranty on the vessels seaworthiness.
Resultantly, the payment made by PHILAMGENto the assured was an undue, wrong
and mistaken payment. Since it was not legally owing, it did not give PHILAMGEN
the right of subrogation so as to permit it to bring an action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29
August 1994 respondent appellate court rendered judgment finding MV Asilda
unseaworthy for being top-heavy as 2,500 cases of Coca-Cola softdrink bottles were
improperly stowed on deck. In other words, while the vessel possessed the
necessary Coast Guard certification indicating its seaworthiness with respect to the
structure of the ship itself, it was not seaworthy with respect to the cargo.
Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that
the assureds implied warranty of seaworthiness was not complied with.
Perfunctorily, PHILAMGEN was not properly subrogated to the rights and interests of
the shipper. Furthermore, respondent court held that the filing of notice of
abandonment had absolved the shipowner/agent from liability under the limited
liability rule.
The issues for resolution in this petition are: (a) whether MV Asilda was seaworthy
when it left the port of Zamboanga; (b) whether the limited liability under Art. 587
of the Code of Commerce should apply; and, (c) whether PHILAMGEN was properly
subrogated to the rights and legal actions which the shipper had against FELMAN,
the shipowner.
MV Asilda was unseaworthy when it left the port of Zamboanga. In a joint
statement, the captain as well as the chief mate of the vessel confirmed that the
weather was fine when they left the port of Zamboanga. According to them, the
vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles, 300 sacks of
seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes
for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-
Cola bottles on deck.4 The ship captain stated that around four oclock in the
morning of 7 July 1983 he was awakened by the officer on duty to inform him that
the vessel had hit afloating log. At that time he noticed that the weather had
deteriorated with strong southeast winds inducing big waves. After thirty minutes
he observed that the vessel was listing slightly to starboard and would not correct
itself despite the heavy rolling and pitching. He then ordered his crew to shift the
cargo from starboard to portside until the vessel was balanced. At about seven
oclock in the morning, the master of the vessel stopped the engine because the
vessel was listing dangerously to portside. He ordered his crew to shift the cargo
back to the starboard. The shifting of cargo took about an hour afterwhich he rang
the engine room to resume full speed.
At around eight forty-five, the vessel suddenly listed to portside and before the
captain could decide on his next move, some of the cargo on deck were thrown
overboard and seawater entered the engine room and cargo holds of the vessel. At
that instance, the master of the vessel ordered his crew to abandon ship. Shortly
thereafter, MV Asilda capsized and sank. He ascribed the sinking to the entry of
seawater through a hole in the hull caused by the vessels collision with a partially
submerged log.5
The Elite Adjusters, Inc., submitted a report regarding the sinking of MV Asilda.
The report, which was adopted by the Court of Appeals, reads
We found in the course of our investigation that a reasonable explanation for the
series of lists experienced by the vessel that eventually led to her capsizing and
sinking, was that the vessel was top-heavy which is to say that while the vessel may
not have been overloaded, yet the distribution or stowage of the cargo on board
was done in such a manner that the vessel was in top-heavy condition at the time of
her departure and which condition rendered her unstable and unseaworthy for that
particular voyage.
In this connection, we wish to call attention to the fact that this vessel was designed
as a fishing vessel x x x x and it was not designed to carry a substantial amount or
quantity of cargo on deck. Therefore, we believe strongly that had her cargo been
confined tothose that could have been accommodated under deck, her stability
would not have been affected and the vessel would not have been in any danger of
capsizing, even given the prevailing weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy cargo on its deck,
the vessel was rendered unseaworthy for the purpose of carrying the type of cargo
because the weight of the deck cargo so decreased the vessels metacentric height
as to cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered big waves, it must
be pointed out that ships are precisely designed to be able to navigate safely even
during heavy weather and frequently we hear of ships safely and successfully
weathering encounters with typhoons and although they may sustain some amount
of damage, the sinking of ship during heavy weather is not a frequent occurrence
and is not likely to occur unless they are inherently unstable and unseaworthy x x x
x
We believe, therefore, and so hold that the proximate cause of the sinking of the
M/V Asilda was her condition of unseaworthiness arising from her having been
top-heavy when she departed from the Port of Zamboanga. Her having capsized
and eventually sunk was bound to happen and was therefore in the category of an
inevitable occurrence (italics supplied).6
We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals
that the proximate cause of the sinking of MV Asilda was its being top-heavy.
Contrary to the ship captains allegations, evidence shows that approximately 2,500
cases of softdrink bottles were stowed on deck. Several days after MV Asilda sank,
an estimated 2,500 empty Coca-Cola plastic cases were recovered near the vicinity
of the sinking. Considering that the ships hatches were properly secured, the empty
Coca-Cola cases recovered could have come only from the vessels deck cargo. It is
settled that carrying a deck cargo raises the presumption of unseaworthiness unless
it can be shown that the deck cargo will not interfere with the proper management
of the ship. However, in this case it was established that MV Asilda was not
designed to carry substantial amount of cargo on deck. The inordinate loading of
cargo on deck resulted in the decrease of the vessels metacentric height7 thus
making it unstable. The strong winds and waves encountered by the vessel are but
the ordinary vicissitudes of a sea voyage and as such merely contributed to its
already unstable and unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not applicable to the case
at bar.8 Simply put, the ship agent is liable for the negligent acts of the captain in
the care of goods loaded on the vessel. This liability however can be limited through
abandonment of the vessel, its equipment and freightage as provided in Art. 587.
Nonetheless, there are exceptional circumstances wherein the ship agent could still
be held answerable despite the abandonment, as where the loss or injury was due
to the fault of the shipowner and the captain.9 The international rule is to the effect
that the right of abandonment of vessels, as a legal limitation of a shipowners
liability, does not apply to cases where the injury or average was occasioned by the
shipowners own fault.10 It must be stressed at this point that Art. 587 speaks only
of situations where the fault or negligence is committed solely by the captain.
Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such
situation will be covered by the provisions of the Civil Code on common carrier.11
It was already established at the outset that the sinking of MV Asilda was due to
its unseaworthiness even at the time of its departure from the port of Zamboanga.
It was top-heavyas an excessive amount of cargo was loaded on deck. Closer
supervision on the part of the shipowner could have prevented this fatal
miscalculation. As such, FELMAN was equally negligent. It cannot therefore escape
liability through the expedient of filing a notice of abandonment of the vessel by
virtue of Art. 587 of the Code of Commerce.
Under Art. 1733 of the Civil Code, (c)ommon carriers, from the nature of their
business and for reasons of public policy, are bound to observe extraordinary
diligence in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case x x x x In the
event of loss of goods, common carriers are presumed to have acted negligently.
FELMAN, the shipowner, was not able to rebut this presumption.
In relation to the question of subrogation, respondent appellate court found MV
Asilda unseaworthy with reference to the cargo and therefore ruled that there was
breach of warranty of seaworthiness that rendered the assured not entitled to the
payment of its claim under the policy. Hence, when PHILAMGEN paid the claim of
the bottling firm there was in effect a voluntary payment and no right of
subrogation accrued in its favor. In other words, when PHILAMGEN paid it did so at
its own risk.
It is generally held that in every marine insurance policy the assured impliedly
warrants to the assurer that the vessel is seaworthy and such warranty is as much a
term of the contract as if expressly written on the face of the policy.12 Thus Sec.
113 of the Insurance Code provides that (i)n every marine insurance upon a ship or
freight, or freightage, or upon anything which is the subject of marine insurance, a
warranty is implied that the ship is seaworthy. Under Sec. 114, a ship is seaworthy
when reasonably fit to perform the service, and to encounter the ordinary perils of
the voyage, contemplated by the parties to the policy. Thus it becomes the
obligation of the cargo owner to look for a reliable commoncarrier which keeps its
vessels in seaworthy condition. He may have no control over the vessel but he has
full control in the selection of the common carrier that will transport his goods. He
also has full discretion in the choice of assurer that will underwrite a particular
venture.
We need not belabor the alleged breach of warranty of seaworthiness by the
assured as painstakingly pointed out by FELMAN to stress that subrogation will not
work in this case. In policies where the law will generally imply a warranty of
seaworthiness, it can only be excluded by terms in writing in the policy in the
clearest language.13 And where the policy stipulates that the seaworthiness of the
vessel as between the assured and the assurer is admitted, the question of
seaworthiness cannot be raised by the assurer without showing concealment or
misrepresentation by the assured.14
The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least
two (2) instances has dispensed with the usual warranty of worthiness. Paragraph
15 of the Marine Open Policy No. 100367-PAG reads (t)he liberties as per Contract
of Affreightment the presence of the Negligence Clause and/or Latent Defect Clause
in the Bill of Lading and/or Charter Party and/or Contract of Affreightment as
between the Assured and the Company shall not prejudice the insurance. The
seaworthiness of the vessel as between the Assured and the Assurers is hereby
admitted.15
The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the
policy which states (t)he seaworthiness of the vessel as between the Assured and
Underwriters is hereby admitted x x x x16
The result of the admission of seaworthiness by the assurer PHILAMGEN may mean
one or two things: (a) that the warranty of the seaworthiness is to be taken as
fulfilled; or, (b)that the risk of unseaworthiness is assumed by the insurance
company.17 The insertion of such waiver clauses in cargo policies is in recognition
of the realistic fact that cargo owners cannot control the state of the vessel. Thus it
can be said that with such categorical waiver, PHILAMGEN has accepted the risk of
unseaworthiness so that if the ship should sink by unseaworthiness, as what
occurred in this case, PHILAMGEN is liable.
Having disposed of this matter, we move on to the legal basis for subrogation.
PHILAMGENs action against FELMAN is squarely sanctioned by Art. 2207 of the Civil
Code which provides:
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.
In Pan Malayan Insurance Corporation v. Court of Appeals,18 we said that payment
by the assurer to the assured operates as an equitable assignment to the assurer of
all the remedies which the assured 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 payment by
the insurance company of the insurance claim. It accrues simply upon payment by
the insurance company of the insurance claim.
The doctrine of subrogation has its roots in equity. It is designed to promote and to
accomplish justice and is the modewhich equity adopts to compel the ultimate
payment of a debt by one who in justice, equity and good conscience ought to
pay.19 Therefore, the payment made by PHILAMGEN to Coca-Cola Bottlers
Philippines, Inc., gave the former the right to bring an action as subrogee against
FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for
the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.
WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is
ordered to pay petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC.,
Seven Hundred Fifty-five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus
legal interest thereon counted from 29 November 1983, the date of judicial demand,
pursuant to Arts. 2212 and 2213 of the Civil Code.20
SO ORDERED.
Vitug, Kapunan and Hermosisima, Jr., JJ., concur.
Padilla (Chairman) J., On leave.
Petition granted.
Note.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. (Coastwise Lighterage Corporation vs. Court of Appeals, 245 SCRA 796 [1995])
o0o Philippine American General Insurance Co., Inc. vs. Court of Appeals,
273 SCRA 262, G.R. No. 116940 June 11, 1997