PACIFIC TIMBER EXPORT CORPORATION vs.

COURT OF APPEALS [112 SCRA 199; February 25, 1982]

This petition seeks the review of the decision of the Court of Appeals reversing the decision of the Court of First
Instance of Manila in favor of petitioner and against private respondent which ordered the latter to pay the sum of
Pll,042.04 with interest at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the complete
payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby dismissing petitioner s complaint with
costs. 2

The findings of the of fact of the Court of Appeals, which are generally binding upon this Court, Except as shall be
indicated in the discussion of the opinion of this Court the substantial correctness of still particular finding having
been disputed, thereby raising a question of law reviewable by this Court 3 are as follows:

March 19, l963, the plaintiff secured temporary insurance from the defendant for its exportation of
1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan. Bay,
Quezon Province to Okinawa and Tokyo, Japan. The defendant issued on said date Cover Note No.
1010, insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of the
WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and approved by
the Office of the Insurance Commissioner (Exhibit A).

The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2,
1963. The two marine policies bore the numbers 53 HO 1032 and 53 HO 1033 (Exhibits B and C,
respectively). Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces of logs equivalent to 499,950
board feet. Policy No. 53 H0 1033 was for 853 pieces of logs equivalent to 695,548 board feet (Exhibit
C). The total cargo insured under the two marine policies accordingly consisted of 1,395 logs, or the
equivalent of 1,195.498 bd. ft.

After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine
policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to be exported were lost during
loading operations in the Diapitan Bay. The logs were to be loaded on the 'SS Woodlock' which
docked about 500 meters from the shoreline of the Diapitan Bay. The logs were taken from the log
pond of the plaintiff and from which they were towed in rafts to the vessel. At about 10:00 o'clock a.
m. on March 29, 1963, while the logs were alongside the vessel, bad weather developed resulting in
75 pieces of logs which were rafted together co break loose from each other. 45 pieces of logs were
salvaged, but 30 pieces were verified to have been lost or washed away as a result of the accident.

In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of 'appropriately 32 pieces of log's
during loading of the 'SS Woodlock'. The said letter (Exhibit F) reads as follows:

April 4, 1963

Workmen's Insurance Company, Inc. Manila, Philippines

Gentlemen:

This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft. Philippine
Lauan and Apitong Logs. We would like to inform you that we have received advance preliminary
report from our Office in Diapitan, Quezon that we have lost approximately 32 pieces of logs during
loading of the SS Woodlock.

We will send you an accurate report all the details including values as soon as same will be reported
to us.

Thank you for your attention, we wish to remain.

Very respectfully yours,

 PACIFIC TIMBER EXPORT CORPORATION

(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.

Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15,
1963, as shown by the stamp impression appearing on the left bottom corner of said letter. The
plaintiff subsequently submitted a 'Claim Statement demanding payment of the loss under Policies
Nos. 53 HO 1032 and 53 HO 1033, in the total amount of P19,286.79 (Exhibit G).

On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect the
loss and assess the damage. The adjustment company submitted its 'Report on August 23, 1963
(Exhibit H). In said report, the adjuster found that 'the loss of 30 pieces of logs is not covered by
Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the actual number of logs
loaded on board the 'SS Woodlock' However, the loss of 30 pieces of logs is within the 1,250,000 bd.
ft. covered by Cover Note 1010 insured for $70,000.00.

On September 14, 1963, the adjustment company submitted a computation of the defendant's
probable liability on the loss sustained by the shipment, in the total amount of Pl1,042.04 (Exhibit 4).

On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on the ground they
defendant's investigation revealed that the entire shipment of logs covered by the two marines
policies No. 53 110 1032 and 713 HO 1033 were received in good order at their point of destination.
It was further stated that the said loss may be considered as covered under Cover Note No. 1010
because the said Note had become 'null and void by virtue of the issuance of Marine Policy Nos. 53
HO 1032 and 1033'(Exhibit J-1). The denial of the claim by the defendant was brought by the plaintiff
to the attention of the Insurance Commissioner by means of a letter dated March 21, 1964 (Exhibit
K). In a reply letter dated March 30, 1964, Insurance Commissioner Francisco Y. Mandanas observed
that 'it is only fair and equitable to indemnify the insured under Cover Note No. 1010', and advised
early settlement of the said marine loss and salvage claim (Exhibit L).

On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their
attorneys, the claim of the plaintiff is being denied on the ground that the cover note is null and void
for lack of valuable consideration (Exhibit M). 4

Petitioner assigned as errors of the Court of Appeals, the following:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND VOID FOR LACK OF VALUABLE
CONSIDERATION BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT PREMIUMS FOR THE
COMPREHENSIVE INSURANCE COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT
INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO SEPARATE PREMIUMS ARE COLLECTED BY
PRIVATE RESPONDENT ON ALL ITS COVER NOTES.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS RELEASED FROM LIABILITY UNDER
THE COVER NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED
THE PROVEN FACT THAT PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM ON
THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND, CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE
WAIVED UNDER SECTION 84 OF THE INSURANCE ACT. 5

1. Petitioner contends that the Cover Note was issued with a consideration when, by express stipulation, the cover
note is made subject to the terms and conditions of the marine policies, and the payment of premiums is one of the
terms of the policies. From this undisputed fact, We uphold petitioner's submission that the Cover Note was not
without consideration for which the respondent court held the Cover Note as null and void, and denied recovery
therefrom. The fact that no separate premium was paid on the Cover Note before the loss insured against occurred,
does not militate against the validity of petitioner's contention, for no such premium could have been paid, since by
the nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the shipment that
would serve as basis for the computation of the premiums. As a logical consequence, no separate premiums are
intended or required to be paid on a Cover Note. This is a fact admitted by an official of respondent company, Juan
Jose Camacho, in charge of issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965).

At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement issued by
private respondent after the issuance of the two regular marine insurance policies, thereby leaving no account
unpaid by petitioner due on the insurance coverage, which must be deemed to include the Cover Note. If the Note is
to be treated as a separate policy instead of integrating it to the regular policies subsequently issued, the purpose
and function of the Cover Note would be set at naught or rendered meaningless, for it is in a real sense a contract,
not a mere application for insurance which is a mere offer. 6

It may be true that the marine insurance policies issued were for logs no longer including those which had been lost
during loading operations. This had to be so because the risk insured against is not for loss during operations
anymore, but for loss during transit, the logs having already been safely placed aboard. This would make no
difference, however, insofar as the liability on the cover note is concerned, for the number or volume of logs lost can
be determined independently as in fact it had been so ascertained at the instance of private respondent itself when
it sent its own adjuster to investigate and assess the loss, after the issuance of the marine insurance policies.

The adjuster went as far as submitting his report to respondent, as well as its computation of respondent's liability on
the insurance coverage. This coverage could not have been no other than what was stipulated in the Cover Note, for
no loss or damage had to be assessed on the coverage arising from the marine insurance policies. For obvious
reasons, it was not necessary to ask petitioner to pay premium on the Cover Note, for the loss insured against having
already occurred, the more practical procedure is simply to deduct the premium from the amount due the petitioner
on the Cover Note. The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose
what is due it as if there had been payment of premium, for non-payment by it was not chargeable against its fault.
Had all the logs been lost during the loading operations, but after the issuance of the Cover Note, liability on the note
would have already arisen even before payment of premium. This is how the cover note as a "binder" should legally
operate otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine
that where a policy is delivered without requiring payment of the premium, the presumption is that a credit was
intended and policy is valid. 7

2. The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The law requires
this ground of delay to be promptly and specifically asserted when a claim on the insurance agreement is made. The
undisputed facts show that instead of invoking the ground of delay in objecting to petitioner's claim of recovery on
the cover note, it took steps clearly indicative that this particular ground for objection to the claim was never in its
mind. The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took
place, so that it could determine whether delay would be a valid ground upon which to object to a claim against it.

As already stated earlier, private respondent's reaction upon receipt of the notice of loss, which was on April 15,
1963, was to set in motion from July 1963 what would be necessary to determine the cause and extent of the loss,
with a view to the payment thereof on the insurance agreement. Thus it sent its adjuster to investigate and assess
the loss in July, 1963. The adjuster submitted his report on August 23, 1963 and its computation of respondent's
liability on September 14, 1963. From April 1963 to July, 1963, enough time was available for private respondent to
determine if petitioner was guilty of delay in communicating the loss to respondent company. In the proceedings that
took place later in the Office of the Insurance Commissioner, private respondent should then have raised this ground
of delay to avoid liability. It did not do so. It must be because it did not find any delay, as this Court fails to find a real
and substantial sign thereof. But even on the assumption that there was delay, this Court is satisfied and convinced
that as expressly provided by law, waiver can successfully be raised against private respondent. Thus Section 84 of
the Insurance Act provides:

Section 84.—Delay in the presentation to an insurer of notice or proof of loss is waived if caused by
any act of his or if he omits to take objection promptly and specifically upon that ground.

From what has been said, We find duly substantiated petitioner's assignments of error.

ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is reinstated in toto
with the affirmance of this Court. No special pronouncement as to costs. SO ORDERED.
GREAT PACIFIC LIFE ASSURANCE COMPANY vs. COURT OF APPEALS [89 SCRA 543; April 30, 1979]

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

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

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

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

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

1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT.
These conditions state that:

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

D. If the Company does not accept the application on standard rate for the amount of insurance
and/or the kind of policy requested in the application but issue, or offers to issue a policy for a
different plan and/or amount ..., the insurance shall not be in force and in effect until the applicant
shall have accepted the policy as issued or offered by the Company and shall have paid the full
premium thereof. If the applicant does not accept the policy, the deposit shall be refunded.
 E. If the applicant shall not have been insurable under Condition A above, and the Company declines
to approve the application the insurance applied for shall not have been in force at any time and the
sum paid be returned to the applicant upon the surrender of this receipt. (Emphasis Ours).

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

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

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

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

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

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

Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the
reply thereto of appellant Mondragon reiterating the desire for applicant's father to have the
application considered as one for a 20-year endowment plan was ever duly communicated to Ngo;
Hing, father of the minor applicant. I am not quite conninced that this was so. Ngo Hing, as father of
the applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-1). The
unchallenged statement of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M),
specifically admits that said Ngo Hing was "our associate" and that it was the latter who "insisted
that the plan be placed on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was not brought home to his
knowledge. He must have been duly apprised of the rejection of the application for a 20-year
endowment plan otherwise Mondragon would not have asserted that it was Ngo Hing himself who
insisted on the application as originally filed, thereby implictly declining the offer to consider the
application under the Juvenile Triple Action Plan. Besides, the associate of Mondragon that he was,
Ngo Hing should only be presumed to know what kind of policies are available in the company for
minors below 7 years old. What he and Mondragon were apparently trying to do in the premises was
merely to prod the company into going into the business of issuing endowment policies for minors
just as other insurance companies allegedly do. Until such a definite policy is however, adopted by
the company, it can hardly be said that it could have been bound at all under the binding slip for a
plan of insurance that it could not have, by then issued at all. (Amended Decision, Rollo, pp- 52-53).

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

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

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

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

SO ORDERED.

ASIAN TERMINALS, INC. vs. FIRST LEPANTO-TAISHO INSURANCE CORPORATION [G.R. No. 185964; June 16, 2014]
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to annul and set aside the
Decision2 dated October 10, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99021 which adjudged petitioner
Asian Terminals, Inc. (ATI) liable to pay the money claims of respondent First Lepanto-Taisho Insurance Corporation
(FIRST LEPANTO).

The Undisputed Facts

On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags complete and in good
condition were loaded and received on board M/V "Da Feng" owned by China Ocean Shipping Co. (COSCO) in favor of
consignee, Grand Asian Sales, Inc. (GASI). Based on a Certificate of Insurance 4 dated August 24, 1995, it appears that
the shipment was insured against all risks by GASI with FIRST LEPANTO for ₱7,959,550.50 under Marine Open Policy
No. 0123.

The shipment arrived in Manila on July 18, 1996 and was discharged into the possession and custody of ATI, a
domestic corporation engaged in arrastre business. The shipment remained for quite some time at ATI’s storage area
until it was withdrawn by broker, Proven Customs Brokerage Corporation (PROVEN), on August 8 and 9, 1996 for
delivery to the consignee. Upon receipt of the shipment, 5 GASI subjected the same to inspection and found that the
delivered goods incurred shortages of 8,600 kilograms and spillage of 3,315 kg for a total of11,915 kg of loss/damage
valued at ₱166,772.41.

GASI sought recompense from COSCO, thru its Philippine agent Smith Bell Shipping Lines, Inc. (SMITH BELL), 6ATI7 and
PROVEN8 but was denied. Hence, it pursued indemnification from the shipment’s insurer. 9

After the requisite investigation and adjustment, FIRST LEPANTO paid GASI the amount of ₱165,772.40 as insurance
indemnity.10

Thereafter, GASI executed a Release of Claim11 discharging FIRST LEPANTO from any and all liabilities pertaining to the
lost/damaged shipment and subrogating it to all the rights of recovery and claims the former may have against any
person or corporation in relation to the lost/damaged shipment.

As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping agency in the Philippines, SMITH BELL,
PROVEN and ATI, reimbursement of the amount it paid to GASI. When FIRST LEPANTO’s demands were not heeded, it
filed on May 29, 1997 a Complaint 12 for sum of money before the Metropolitan Trial Court (MeTC) of Manila, Branch
3. FIRST LEPANTO sought that it be reimbursed the amount of 166,772.41, twenty-five percent (25%) thereof as
attorney’s fees, and costs of suit.

ATI denied liability for the lost/damaged shipment and claimed that it exercised due diligence and care in handling
the same.13 ATI averred that upon arrival of the shipment, SMITH BELL requested for its inspection 14 and it was
discovered that one jumbo bag thereof sustained loss/damage while in the custody of COSCO as evidenced by Turn
Over Survey of Bad Order Cargo No. 47890 dated August 6, 1996 15 jointly executed by the respective representatives
of ATI and COSCO. During the withdrawal of the shipment by PROVEN from ATI’s warehouse, the entire shipment was
re-examined and it was found to be exactly in the same condition as when it was turned over to ATI such that one
jumbo bag was damaged. To bolster this claim, ATI submitted Request for Bad Order Survey No. 40622 dated August
9, 199616 jointly executed by the respective representatives of ATI and PROVEN. ATI also submitted various Cargo
Gate Passes17 showing that PROVEN was able to completely withdraw all the shipment from ATI’s warehouse in good
order condition except for that one damaged jumbo bag.

In the alternative, ATI asserted that even if it is found liable for the lost/damaged portion of the shipment, its
contract for cargo handling services limits its liability to not more than ₱5,000.00 per package. ATI interposed a
counterclaim of ₱20,000.00 against FIRST LEPANTO as and for attorney’s fees. It also filed a cross-claim against its co-
defendants COSCO and SMITH BELL in the event that it is made liable to FIRST LEPANTO. 18

PROVEN denied any liability for the lost/damaged shipment and averred that the complaint alleged no specific acts
or omissions that makes it liable for damages. PROVEN claimed that the damages in the shipment were sustained
before they were withdrawn from ATI’s custody under which the shipment was left in an open area exposed to the
elements, thieves and vandals. PROVEN contended that it exercised due diligence and prudence in handling the
shipment. PROVEN also filed a counterclaim for attorney’s fees and damages. 19

Despite receipt of summons on December 4, 1996, 20 COSCO and SMITH BELL failed to file an answer to the
complaint. FIRST LEPANTO thus moved that they be declared in default 21 but the motion was denied by the MeTC on
the ground that under Rule 9, Section 3 of the Rules of Civil Procedure, "when a pleading asserting a claim states a
common cause of action against several defending parties, some of whom answer and the other fail to do so, the
Court shall try the case against all upon the answers thus filed, and render judgment upon the evidence presented." 22

Ruling of the MeTC

In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and PROVEN from any liability and instead found COSCO
to be the party at fault and hence liable for the loss/damage sustained by the subject shipment. However, the MeTC
ruled it has no jurisdiction over COSCO because it is a foreign corporation. Also, it cannot enforce judgment upon
SMITH BELL because no evidence was presented establishing that it is indeed the Philippine agent of COSCO. There is
also no evidence attributing any fault to SMITH BELL. Consequently, the complaint was dismissed in this wise:

WHEREFORE, in light of the foregoing, judgment is hereby rendered DISMISSING the instant case for failure of [FIRST
LEPANTO] to sufficiently establish its cause o faction against [ATI, COSCO, SMITH BELL, and PROVEN].

The counterclaims of [ATI and PROVEN] are likewise dismissed for lack of legal basis.

No pronouncement as to cost.

SO ORDERED.24

Ruling of the Regional Trial Court

On appeal, the Regional Trial Court (RTC) reversed the MeTC’s findings. In its Decision 25 dated January 26, 2007, the
RTC of Manila, Branch 21, in Civil Case No. 06-116237, rejected the contentions of ATI upon its observation that the
same is belied by its very own documentary evidence. The RTC remarked that, if, as alleged by ATI, one jumbo bag
was already in bad order condition upon its receipt of the shipment from COSCO on July 18, 1996, then how come
that the Request for Bad Order Survey and the Turn Over Survey of Bad Order Cargo were prepared only weeks
thereafter or on August 9, 1996 and August 6, 1996, respectively. ATI was adjudged unable to prove that it exercised
due diligence while in custody of the shipment and hence, negligent and should be held liable for the damages
caused to GASI which, in turn, is subrogated by FIRST LEPANTO.

The RTC rejected ATI’s contention that its liability is limited only to ₱5,000.00 per package because its Management
Contract with the Philippine Ports Authority (PPA) purportedly containing the same was not presented as evidence.
More importantly, FIRST LEPANTO or GASI cannot be deemed bound thereby because they were not parties thereto.
Lastly, the RTC did not give merit to ATI’s defense that any claim against it has already prescribed because GASI failed
to file any claim within the 15-day period stated in the gate pass issued by ATI to GASI’s broker, PROVEN. Accordingly,
the RTC disposed thus:

WHEREFORE, in light of the foregoing, the judgment on appeal is hereby REVERSED.

[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of [P]165,772.40 with legal interest until fully paid,
to pay [FIRST LEPANTO] 10% of the amount due the latter as and for attorney’s fees plus the costs of suit.

The complaint against [COSCO/SMITH BELL and PROVEN] are DISMISSED for lack of evidence against them. The
counterclaim and cross[-]claim of [ATI] are likewise DISMISSED for lack of merit.

SO ORDERED.26

Ruling of the CA
ATI sought recourse with the CA challenging the RTC’s finding that FIRST LEPANTO was validly subrogated to the rights
of GASI with respect to the lost/damaged shipment. ATI argued that there was no valid subrogation because
FIRSTLEPANTO failed to present a valid, existing and enforceable Marine Open Policy or insurance contract. ATI
reasoned that the Certificate of Insurance or Marine Cover Note submitted by FIRST LEPANTO as evidence is not the
same as an actual insurance contract.

In its Decision27 dated October 10, 2008, the CA dismissed the appeal and held that the Release of Claim and the
Certificate of Insurance presented by FIRST LEPANTO sufficiently established its relationship with the consignee and
that upon proof of payment of the latter’s claim for damages, FIRST LEPANTO was subrogated to its rights against
those liable for the lost/damaged shipment.

The CA also affirmed the ruling of the RTC that the subject shipment was damaged while in the custody of ATI. Thus,
the CA disposed as follows:

WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED and the instant petition is DENIED for
lack of merit.

SO ORDERED.28

ATI moved for reconsideration but the motion was denied in the CA Resolution 29 dated January 12, 2009. Hence, this
petition arguing that:

(a) The presentation of the insurance policy is indispensable in proving the right of FIRST LEPANTO to be subrogated
to the right of the consignee pursuant to the ruling in Wallem Philippines Shipping, Inc. v. Prudential Guarantee and
Assurance Inc.;30

(b) ATI cannot be barred from invoking the defense of prescription as provided for in the gate passes in consonance
with the ruling in International Container Terminal Services, Inc. v. Prudential Guarantee and Assurance Co, Inc. 31

Ruling of the Court

The Court denies the petition.

ATI failed to prove that it exercised

due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.

It must be emphasized that factual questions pertaining to ATI’s liability for the loss/damage sustained by GASI has
already been settled in the uniform factual findings of the RTC and the CA that: ATI failed to prove by preponderance
of evidence that it exercised due diligence in handling the shipment.

Such findings are binding and conclusive upon this Court since a review thereof is proscribed by the nature of the
present petition. Only questions of law are allowed in petitions for review on certiorari under Rule 45 of the Rules of
Court. It is not the Court’s duty to review, examine, and evaluate or weigh all over again the probative value of the
evidence presented, especially where the findings of the RTC are affirmed by the CA, as in this case. 32

There are only specific instances when the Court deviates from the rule and conducts a review of the courts a quo’s
factual findings, such as when: (1) the inference made is manifestly mistaken, absurd or impossible; (2) there is grave
abuse of discretion;(3) the findings are grounded entirely on speculations, surmises or conjectures; (4) the judgment
of the CA is based on misapprehension of facts; (5) the CA, in making its findings, went beyond the issues of the case
and the same is contrary to the admissions of both appellant and appellee; (6) the findings of fact are conclusions
without citation of specific evidence on which they are based; (7) the CA manifestly overlooked certain relevant facts
not disputed by the parties and which, if properly considered, would justify a different conclusion; and (8) the
findings of fact of the CA are premised on the absence of evidence and are contradicted by the evidence on record. 33
None of these instances, however, are present in this case. Moreover, it is unmistakable that ATI has already
conceded to the factual findings of RTC and CA adjudging it liable for the shipment’s loss/damage considering the
absence of arguments pertaining to such issue in the petition at bar.

These notwithstanding, the Court scrutinized the records of the case and found that indeed, ATI is liable as the
arrastre operator for the lost/damaged portion of the shipment.

The relationship between the consignee and the arrastre operator is akin to that existing between the consignee
and/or the owner of the shipped goods and the common carrier, or that between a depositor and a warehouseman.
Hence, in the performance of its obligations, an arrastre operator should observe the same degree of diligence as
that required of a common carrier and a warehouseman. Being the custodian of the goods discharged from a vessel,
an arrastre operator’s duty is to take good care of the goods and to turn them over to the party entitled to their
possession.34

In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance with the obligation
to deliver the goods to the appropriate party devolves upon the arrastre operator. Since the safekeeping of the goods
is its responsibility, it must prove that the losses were not due to its negligence or to that of its employees. To avoid
liability, the arrastre operator must prove that it exercised diligence and due care in handling the shipment. 35

ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on the basis of the
Request for Bad Order Survey dated August 9, 1996 purportedly showing that when ATI received the shipment, one
jumbo bag thereof was already in damaged condition.

The RTC and CA were both correct in concluding that ATI’s contention was improbable and illogical. As judiciously
discerned by the courts a quo, the date of the document was too distant from the date when the shipment was
actually received by ATI from COSCO on July 18, 1996. In fact, what the document established is that when the
loss/damage was discovered, the shipment has been in ATI’s custody for at least two weeks. This circumstance,
coupled with the undisputed declaration of PROVEN’s witnesses that while the shipment was in ATI’s custody, it was
left in an open area exposed to the elements, thieves and vandals, 36 all generate the conclusion that ATI failed to
exercise due care and diligence while the subject shipment was under its custody, control and possession as arrastre
operator.

To prove the exercise of diligence in handling the subject cargoes, an arrastre operator must do more than merely
show the possibility that some other party could be responsible for the loss or the damage. 37 It must prove that it
used all reasonable means to handle and store the shipment with due care and diligence including safeguarding it
from weather elements, thieves or vandals.

Non-presentation of the insurance

contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.

It is conspicuous from the records that ATI put in issue the submission of the insurance contract for the first time
before the CA. Despite opportunity to study FIRST LEPANTO’s complaint before the MeTC, ATI failed to allege in its
answer the necessity of the insurance contract. Neither was the same considered during pre-trial as one of the
decisive matters in the case. Further, ATI never challenged the relevancy or materiality of the Certificate of Insurance
presented by FIRST LEPANTO as evidence during trial as proof of its right to be subrogated in the consignee’s stead.
Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO will have to prove its subrogation rights
by presenting a copy of the insurance contract, ATI is barred from pleading the absence of such contract in its appeal.
It is imperative for the parties to disclose during pre-trial all issues they intend to raise during the trial because, they
are bound by the delimitation of such issues. The determination of issues during the pre-trial conference bars the
consideration of other questions, whether during trial or on appeal. 38

A faithful adherence to the rule by litigants is ensured by the equally settled principle that a party cannot change his
theory on appeal as such act violates the basic rudiments of fair play and due process. As stressed in Jose v.
Alfuerto:39
[A] party cannot change his theory ofthe case or his cause of action on appeal. Points of law, theories, issues and
arguments not brought to the attention of the lower court will not be considered by the reviewing court. The
defenses not pleaded in the answer cannot, on appeal, change fundamentally the nature of the issue in the case. To
do so would be unfair to the adverse party, who had no opportunity to present evidence in connection with the new
theory; this would offend the basic rules of due process and fair play. 40 (Citation omitted)

While the Court may adopt a liberal stance and relax the rule, no reasonable explanation, however, was introduced
to justify ATI’s failure to timely question the basis of FIRST LEPANTO’s rights as a subrogee.

The fact that the CA took cognizance of and resolved the said issue did not cure or ratify ATI’s faux pas. "[A] judgment
that goes beyond the issues and purports to adjudicate something on which the court did not hear the parties, is not
only irregular but also extrajudicial and invalid." 41 Thus, for resolving an issue not framed during the pre-trial and on
which the parties were not heard during the trial, that portion of the CA’s judgment discussing the necessity of
presenting an insurance contract was erroneous.

At any rate, the non-presentation of the insurance contract is not fatal to FIRST LEPANTO’s right to collect
reimbursement as the subrogee of GASI.

"Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so
that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or
securities."42 The right of subrogation springs from Article 2207 of the Civil Code which states:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the 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.

As a general rule, the marine insurance policy needs to be presented in evidence before the insurer may recover the
insured value of the lost/damaged cargo in the exercise of its subrogatory right. In Malayan Insurance Co., Inc. v.Regis
Brokerage Corp.,43 the Court stated that the presentation of the contract constitutive of the insurance relationship
between the consignee and insurer is critical because it is the legal basis of the latter’s right to subrogation. 44

In Home Insurance Corporation v. CA,45 the Court also held that the insurance contract was necessary to prove that it
covered the hauling portion of the shipment and was not limited to the transport of the cargo while at sea. The
shipment in that case passed through six stages with different parties involved in each stage until it reached the
consignee. The insurance contract, which was not presented in evidence, was necessary to determine the scope of
the insurer’s liability, if any, since no evidence was adduced indicating at what stage in the handling process the
damage to the cargo was sustained.46

An analogous disposition was arrived at in the Wallem 47 case cited by ATI wherein the Court held that the insurance
contract must be presented in evidence in order to determine the extent of its coverage. It was further ruled therein
that the liability of the carrier from whom reimbursement was demanded was not established with certainty because
the alleged shortage incurred by the cargoes was not definitively determined. 48

Nevertheless, the rule is not inflexible. In certain instances, the Court has admitted exceptions by declaring that a
marine insurance policy is dispensable evidence in reimbursement claims instituted by the insurer.

In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of subrogation accrues simply upon payment by
the insurance company of the insurance claim. Hence, presentation in evidence of the marine insurance policy is not
indispensable before the insurer may recover from the common carrier the insured value of the lost cargo in the
exercise of its subrogatory right. The subrogation receipt, by itself, was held sufficient to establish not only the
relationship between the insurer and consignee, but also the amount paid to settle the insurance claim. The
presentation of the insurance contract was deemed not fatal to the insurer’s cause of action because the loss of the
cargo undoubtedly occurred while on board the petitioner’s vessel. 50
The same rationale was the basis of the judgment in International Container Terminal Services, Inc. v. FGU Insurance
Corporation,51 wherein the arrastre operator was found liable for the lost shipment despite the failure of the
insurance company to offer in evidence the insurance contract or policy. As in Delsan, it was certain that the loss of
the cargo occurred while in the petitioner’s custody. 52

Based on the attendant facts of the instant case, the application of the exception is warranted.1âwphi1 As discussed
above, it is already settled that the loss/damage to the GASI’s shipment occurred while they were in ATI’s custody,
possession and control as arrastre operator. Verily, the Certificate of Insurance 53 and the Release of Claim54presented
as evidence sufficiently established FIRST LEPANTO’s right to collect reimbursement as the subrogee of the consignee,
GASI.

With ATI’s liability having been positively established, to strictly require the presentation of the insurance contract
will run counter to the principle of equity upon which the doctrine of subrogation is premised. Subrogation 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. 55

The payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies
which the insured 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. 56

ATI cannot invoke prescription

ATI argued that the consignee, thru its insurer, FIRST LEPANTO is barred from seeking payment for the lost/damaged
shipment because the claim letter of GASI to ATI was served only on September 27, 1996 or more than one month
from the date the shipment was delivered to the consignee’s warehouse on August 9, 1996. The claim of GASI was
thus filed beyond the 15-day period stated in ATI’s Management Contract with PPA which in turn was reproduced in
the gate passes issued to the consignee’s broker, PROVEN, as follows:

Issuance of this Gate Pass Constitutes delivery to and receipt by consignee of the goods as described above in good
order and condition unless an accompanying x x x certificates duly issued and noted on the face of this Gate Pass
appeals. [sic]

This Gate pass is subject to all terms and conditions defined in the Management Contract between the Philippine
Port[s] Authority and Asian Terminals, Inc. and amendment thereto and alterations thereof particularly but not
limited to the [A]rticle VI thereof, limiting the contractor’s liability to [P]5,000.00 per package unless the importation
is otherwise specified or manifested or communicated in writing together with the invoice value and supported by a
certified packing list to the contractor by the interested party or parties before the discharge of the goods and
corresponding arrastre charges have been paid providing exception or restrictions from liability releasing the
contractor from liability among others unless a formal claim with the required annexes shall have been filed with the
contractor within fifteen (15) days from date of issuance by the contractors or certificate of loss, damages, injury, or
Certificate of non-delivery.57

The contention is bereft of merit. As clarified in Insurance Company of North America v. Asian Terminals,
Inc.,58substantial compliance with the 15-day time limitation is allowed provided that the consignee has made a
provisional claim thru a request for bad order survey or examination report, viz:

Although the formal claim was filed beyond the 15-day period from the issuance of the examination report on the
request for bad order survey, the purpose of the time limitations for the filing of claims had already been fully
satisfied by the request of the consignee’s broker for a bad order survey and by the examination report of the
arrastre operator on the result thereof, as the arrastre operator had become aware of and had verified the facts
giving rise to its liability. Hence, the arrastre operator suffered no prejudice by the lack of strict compliance with the
15-day limitation to file the formal complaint. 59 (Citations omitted)

In the present case, ATI was notified of the loss/damage to the subject shipment as early as August 9, 1996 thru a
Request for Bad Order Survey60 jointly prepared by the consignee’s broker, PROVEN, and the representatives of ATI.
For having submitted a provisional claim, GASI is thus deemed to have substantially complied with the notice
requirement to the arrastre operator notwithstanding that a formal claim was sent to the latter only on September
27, 1996. ATI was not deprived the best opportunity to probe immediately the veracity of such claims. Verily then,
GASI, thru its subrogee FIRST LEPANTO, is not barred by filing the herein action in court.

ATI cannot rely on the ruling in Prudentiat 61 because the consignee therein made no provisional claim thru request
for bad order survey and instead filed a claim for the first time after four months from receipt of the shipment.

Attorney's fees and interests

All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65, 772.40 representing the insurance indemnity paid
by the latter to GASI. Pursuant to Nacar v. Gallery Frames, 62 the said amount shall earn a legal interest at the rate of
six percent (6%) per annum from the date of finality of this judgment until its full satisfaction.

As correctly imposed by the RTC and the CA, ten percent (10%) of the judgment award is reasonable as and for
attorney's fees considering the length of time that has passed in prosecuting the claim. 63

WHEREFORE, premises considered, the petition is hereby DENIED. The Decision dated October 10, 2008 of the Court
of Appeals in CA-G.R. SP No. 99021 is hereby AFFIRMED insofar as it adjudged liable and ordered Asian Terminals,
Inc., to pay First Lepanto-Taisho Insurance Corp., the amount of ₱165,772.40, ten percent (10%) thereof as and for
attorney's fees, plus costs of suit. The said amount shall earn legal interest at the rate of six percent ( 6%) per annum
from the date of finality of this judgment until its full satisfaction.

SO ORDERED.

MAKATI TUSCANY CONDOMINIUM CORPORATION vs. COURT OF APPEALS [215 SCRA 462; November 6, 1992]

This case involves a purely legal question: whether payment by installment of the premiums due on an insurance
policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as
amended, which provides:
 Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium thereof
has been paid, except in the case of a life or an industrial life policy whenever the grace period
provision applies.

Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by American
International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany Condominium Corporation
(TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1
March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The premium was paid on installments
on 12 March 1982, 20 May 1982, 21 June 1982 and 16 November 1982, all of which were accepted by private
respondent.

On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-9210596, which replaced
and renewed the previous policy, for a term covering 1 March 1983 to 1 March 1984. The premium in the amount of
P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9 September 1983, and 21
November 1983. All payments were likewise accepted by private respondent.

On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance Policy No.
AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy, petitioner made two
installment payments, both accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the
second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the premium.

Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for Insurance Policy
No. AH-CPP-9210651.

In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-9210651. It
explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its favor
and the receipts for the installment payments covering the policy for 1984-85, as well as the two (2) previous
policies, stated the following reservations:

2. Acceptance of this payment shall not waive any of the company rights to deny liability on any
claim under the policy arising before such payments or after the expiration of the credit clause of the
policy; and

3. Subject to no loss prior to premium payment. If there be any loss such is not covered.

Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then
pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with amended
counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85.

After some incidents, petitioner and private respondent moved for summary judgment.

On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following findings:

While it is true that the receipts issued to the defendant contained the aforementioned reservations,
it is equally true that payment of the premiums of the three aforementioned policies (being sought
to be refunded) were made during the lifetime or term of said policies, hence, it could not be said,
inspite of the reservations, that no risk attached under the policies. Consequently, defendant's
counterclaim for refund is not justified.

As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view of the reservation
in the receipts ordinarily issued by the plaintiff on premium payments the only plausible conclusion is
that plaintiff has no right to demand their payment after the lapse of the term of said policy on
March 1, 1985. Therefore, the defendant was justified in refusing to pay the same. 1
Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a
decision 2modifying that of the trial court by ordering herein petitioner to pay the balance of the premiums due on
Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the denial of the
counterclaim. The appellate court thus explained —

The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the entire
premium. Here, the parties herein agreed to make the premiums payable in installments, and there
is no pretense that the parties never envisioned to make the insurance contract binding between
them. It was renewed for two succeeding years, the second and third policies being a
renewal/replacement for the previous one. And the insured never informed the insurer that it was
terminating the policy because the terms were unacceptable.

While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make
the insurance contract valid and binding without payment of premiums, there is nothing in said
section which suggests that the parties may not agree to allow payment of the premiums in
installment, or to consider the contract as valid and binding upon payment of the first premium.
Otherwise, we would allow the insurer to renege on its liability under the contract, had a loss
incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance
of partial payments, a result eschewed by a basic considerations of fairness and equity.

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

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

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

We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show
that petitioner and private respondent intended subject insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly,
basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not
prepared in full.

We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and conclusion of the
appellate court contained in its Resolution denying the motion to reconsider its Decision —

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to
the validity of the contract, We are not prepared to rule that the request to make installment
payments duly approved by the insurer, would prevent the entire contract of insurance from going
into effect despite payment and acceptance of the initial premium or first installment. Section 78 of
the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making
an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment
 so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77
merely precludes the parties from stipulating that the policy is valid even if premiums are not paid,
but does not expressly prohibit an agreement granting credit extension, and such an agreement is
not contrary to morals, good customs, public order or public policy (De Leon, the Insurance Code, at
p. 175). So is an understanding to allow insured to pay premiums in installments not so proscribed.
At the very least, both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted. 4

The reliance by petitioner on Arce vs. Capital Surety and Insurance

Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar. In Arce, no
payment was made by the insured at all despite the grace period given. In the case before Us, petitioner paid the
initial installment and thereafter made staggered payments resulting in full payment of the 1982 and 1983 insurance
policies. For the 1984 policy, petitioner paid two (2) installments although it refused to pay the balance.

It appearing from the peculiar circumstances that the parties actually intended to make three (3) insurance contracts
valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the balance of the
premium after the expiration of the whole term of the third policy (No. AH-CPP-9210651) in March 1985. Moreover,
as correctly observed by the appellate court, where the risk is entire and the contract is indivisible, the insured is not
entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief
or momentary.

WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED. Costs against
petitioner.

SO ORDERED.

UCPB GENERAL INSURANCE CO., INC. vs. MASAGANA TELAMART, INC. [G.R. No. 137172; June 15, 1999]

The case is an appeal via certiorari seeking to set aside the decision of the Court of Appeals, 1 affirming with
modification that of the Regional Trial Court, Branch 58, Makati, ordering petitioner to pay respondent the sum of
P18,645,000.00, as the proceeds of the insurance coverage of respondent's property razed by fire; 25% of the total
amount due as attorney's fees and P25,000.00 as litigation expenses, and costs.
The facts are undisputed and may be related as follows:

On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's various property described
therein against fire, for the period from May 22, 1991 to May 22, 1992.

In March 1992, petitioner evaluated the policies and decided not to renew them upon expiration of their terms on
May 22, 1992. Petitioner advised respondent's broker, Zuellig Insurance Brokers, Inc. of its intention not to renew the
policies.

On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the policies at the address
stated in the policies.

On June 13, 1992, fire razed respondent's property covered by three of the insurance policies petitioner issued.

On July 13, 1992, respondent presented to petitioner's cashier at its head office five (5) manager's checks in the total
amount of P225,753.95, representing premium for the renewal of the policies from May 22, 1992 to May 22, 1993.
No notice of loss was filed by respondent under the policies prior to July 14, 1992.

On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of the insured property razed
by fire.

On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager's checks that it tendered, and
at the same time rejected respondent's claim for the reasons (a) that the policies had expired and were not renewed,
and (b) that the fire occurred on June 13, 1992, before respondent's tender of premium payment.

On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati City, a civil complaint against
petitioner for recovery of P18,645,000.00, representing the face value of the policies covering respondent's insured
property razed by fire, and for attorney's fees. 2

On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an answer to the complaint. It
alleged that the complaint "fails to state a cause of action"; that petitioner was not liable to respondent for insurance
proceeds under the policies because at the time of the loss of respondent's property due to fire, the policies had long
expired and were not renewed. 3

After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati, rendered decision, the dispositive
portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant, as follows:
(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of P225,753.95 (refused by
the defendant) as full payment of the corresponding premiums for the replacement-renewal policies for
Exhibits A, B, C, D and E;
(2) Declaring plaintiff to have fully complied with its obligation to pay the premium thereby rendering the
replacement-renewal policy of Exhibits A, B, C, D and E effective and binding for the duration May 22, 1992
until May 22, 1993; and, ordering defendant to deliver forthwith to plaintiff the said replacement-renewal
policies;
(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992 and August 9, 1991 to August
9, 1992, respectively; and
(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00 representing the latter's claim for
indemnity under Exhibits A, B & C and/or its replacement-renewal policies; (b) 25% of the total amount due as
and for attorney's fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the costs of suit.
All other claims and counterclaims asserted by the parties are denied and/or dismissed, including plaintiff's
claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.
 ZOSIMO Z. ANGELES.
Judge.4

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

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

The Court of Appeals held that following previous practise, respondent was allowed a sixty (60) to ninety (90) day
credit term for the renewal of its policies, and that the acceptance of the late premium payment suggested an
understanding that payment could be made later.

Hence, this appeal.

By resolution adopted on March 24, 1999, we required respondent to comment on the petition, not to file a motion
to dismiss within ten (10) days from notice. 8 On April 22, 1999, respondent filed its comment. 9

Respondent submits that the Court of Appeals correctly ruled that no timely notice of non-renewal was sent. The
notice of non-renewal sent to broker Zuellig which claimed that it verbally notified the insurance agency but not
respondent itself did not suffice. Respondent submits further that the Court of Appeals did not err in finding that
there existed a sixty (60) to ninety (90) days credit agreement between UCPB and Masagana, and that, finally, the
Supreme Court could not review factual findings of the lower court affirmed by the Court of Appeals. 10

We give due course to the appeal.

The basic issue raised is whether the fire insurance policies issued by petitioner to the respondent covering the
period May 22, 1991 to May 22, 1992, had expired on the latter date or had been extended or renewed by an implied
credit arrangement though actual payment of premium was tendered on a later date after the occurrence of the risk
(fire) insured against.

The answer is easily found in the Insurance Code. No, an insurance policy, other than life, issued originally or on
renewal, is not valid and binding until actual payment of the premium. Any agreement to the contrary is void. 11 The
parties may not agree expressly or impliedly on the extension of creditor time to pay the premium and consider the
policy binding before actual payment.

The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by the Court of Appeals, is not applicable. In that
case, payment of the premium was in fact actually made on December 24, 1981, and the fire occurred on January 18,
1982. Here, the payment of the premium for renewal of the policies was tendered on July 13, 1992, a month after
the fire occurred on June 13, 1992. The assured did not even give the insurer a notice of loss within a reasonable
time after occurrence of the fire.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals in CA-G.R. CV No.
42321. In lieu thereof the Court renders judgment dismissing respondent's complaint and petitioner's counterclaims
thereto filed with the Regional Trial Court, Branch 58, Makati City, in Civil Case No. 92-2023. Without
costs.1âwphi1.nêt

SO ORDERED.

UCPB GENERAL INSURANCE CO., INC. vs. MASAGANA TELAMART, INC. [G.R. No. 137172; April 4, 2001]

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the Court of Appeals,
which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum of
P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondent's
properties; (b) declaring the replacement-renewal policies effective and binding from 22 May 1992 until 22 May
1993; and (c) ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties covered
by the renewal-replacement policies. The modification consisted in the (1) deletion of the trial court's declaration
that three of the policies were in force from August 1991 to August 1992; and (2) reduction of the award of the
attorney's fees from 25% to 10% of the total amount due the Respondent.

The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals
in its assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits
"A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila] . . . .

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22
May 1992." On June 13, 1992, plaintiffs properties located at 2410-2432 and 2442-2450 Taft Avenue, Pasay
City were razed by fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank
Manager's Checks in the total amount of P225,753.45 as renewal premium payments for which Official
Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992,
Masagana made its formal demand for indemnification for the burned insured properties. On the same day,
defendant returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record, p. 192) that it
was rejecting Masagana's claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;

b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and

c) The properties covered by the said policies were burned in a fire that took place last June 13,
1992, or before tender of premium payment."

(Record, p. 5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the premiums on 13
July 1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as
provided under Policy Condition No. 26, which states:

26. Renewal Clause. — Unless the company at least forty five days in advance of the end of the policy period
mails or delivers to the assured at the address shown in the policy notice of its intention not to renew the
policy or to condition its renewal upon reduction of limits or elimination of coverages, the assured shall be
entitled to renew the policy upon payment of the premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured
insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the
renewal of the policies. Such a practice had existed up to the time the claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was
paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No.
34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but
premium was collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and
"V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991
was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and
"W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990
but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X-1"). Fire Insurance Policy No. 34688
for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid only on
July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance risks from
May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but premium therefor was collected only on July 25,
1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from
January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December 10,
1988 but premium therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire
 Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No.
40800 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No.
29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk
coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued
on June 15, 1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage from
May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on November 22,
1988 but premium therefor was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks coverage
from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").

Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof that no
timely notice of non-renewal was made by Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar Reinsurance
Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as
indicated on Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not
earlier than said date, or within 45 days from the expiry dates of the policies as provided under Policy
Condition No. 26; (2) Defendant insurer unconditionally accepted, and issued an official receipt for, the
premium payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk despite only
a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban Adjusters and Valuers to
investigate plaintiff's claim as shown by the letter dated July 17, 1992 (Exhibit "11", Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies issued by
petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 . . . had been extended or
renewed by an implied credit arrangement though actual payment of premium was tendered on a later date and
after the occurrence of the (fire) risk insured against." We resolved this issue in the negative in view of Section 77 of
the Insurance Code and our decisions in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v.
Court of Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the Court of
Appeals.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we
had made in the decision our own findings of facts, which are not in accord with those of the trial court and the
Court of Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22
May 1992, or before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by
operation of law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid
within the 60- to 90-day credit term.

Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension
of credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take
judicial notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit
terms in premium payment has been the prevalent practice in the insurance industry. Most insurance companies,
including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but
is merely designed for the protection of the parties to an insurance contract. The Code itself, in Section 78, authorizes
the validity of a policy notwithstanding non-payment of premiums.

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77
Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term
was perfectly alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and
habitually accepting payments 60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify
the tenor of the insurance policy and in effect waived the provision therein that it would pay only for the loss or
damage in case the same occurred after payment of the premium.

Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the trial court and
the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice
of non-renewal and sent by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise
ignored the fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the
Insurance Code readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of
the premium due on the effective date of renewal should first be made. Respondent's argument that Section 77 is
not a prohibitive provision finds no authoritative support.

Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and
the pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts,
as found by the trial court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually
renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on
the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the
notice sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent to Zuellig was
ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by
Respondent within the 60- to 90-day credit term and were duly accepted and received by Petitioner's cashier.

The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No.
1460) must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for
the payment of premiums.

Section 77 of the Insurance Code of 1978 provides:

SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever the grace period provision applies.

This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December 1974.
In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended
by R.A. No. 3540, approved on 21 June 1963, which read:

SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril
insured against, unless there is clear agreement to grant the insured credit extension of the premium due. No
policy issued by an insurance company is valid and binding unless and until the premium thereof has been
paid. (Italic supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement
to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the
grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it
shall not be binding until premium is actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, 5 wherein we
ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and
partial payment has been made at the time of loss. We said therein, thus:
 We hold that the subject policies are valid even if the premiums were paid on installments. The records
clearly show that the petitioners and private respondent intended subject insurance policies to be binding
and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered
into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment
payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it
issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue
collecting and accepting the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.

Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision:

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule that the request to make installment payments duly
approved by the insurer would prevent the entire contract of insurance from going into effect despite
payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect
allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance
policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite
the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the
policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De
Leon, The Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments
not so prescribed. At the very least, both parties should be deemed in estoppel to question the arrangement
they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth
exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This
simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss
occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid
after the loss but within the credit term.

Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term
within which to pay the premiums. That agreement is not against the law, morals, good customs, public order or
public policy. The agreement binds the parties. Article 1306 of the Civil Code provides:

ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against
Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full
awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith
on such practice. Estoppel then is the fifth exception to Section 77.

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new one is
hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a reversible
error was committed by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in toto.

No pronouncement as to cost.

SO ORDERED.

AMERICAN HOME ASSURANCE COMPANY vs. ANTONIO CHUA [G.R. No. 130421; June 28, 1999]
In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, petitioner seeks the
reversal of the decision1 of the Court of Appeals in CA-G.R. CV No. 40751, which affirmed in toto the decision of the
Regional Trial Court, Makati City, Branch 150 (hereafter trial court), in Civil Case No. 91-1009.

Petitioner is a domestic corporation engaged in the insurance business. Sometime in 1990, respondent obtained
from petitioner a fire insurance covering the stock-in-trade of his business, Moonlight Enterprises, located at
Valencia, Bukidnon. The insurance was due to expire on 25 March 1990.

On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of P2,983.50 to petitioner's agent,
James Uy, as payment for the renewal of the policy. In turn, the latter delivered Renewal Certificate No. 00099047 to
respondent. The check was drawn against a Manila bank and deposited in petitioner's bank account in Cagayan de
Oro City. The corresponding official receipt was issued on 10 April. Subsequently, a new insurance policy, Policy No.
206-4234498-7, was issued, whereby petitioner undertook to indemnify respondent for any damage or loss arising
from fire up to P200,000 for the period 25 March 1990 to 25 March 1991.

On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was estimated between P4,000,000
and P5,000,000. Respondent filed an insurance claim with petitioner and four other co-insurers, namely, Pioneer
Insurance and Surety Corporation, Prudential Guarantee and Assurance, Inc., Filipino Merchants Insurance Co. and
Domestic Insurance Company of the Philippines. Petitioner refused to honor the claim notwithstanding several
demands by respondent, thus, the latter filed an action against petitioner before the trial court.

In its defense, petitioner claimed there was no existing insurance contract when the fire occurred since respondent
did not pay the premium. It also alleged that even assuming there was a contract, respondent violated several
conditions of the policy, particularly: (1) his submission of fraudulent income tax return and financial statements; (2)
his failure to establish the actual loss, which petitioner assessed at P70,000; and (3) his failure to notify to petitioner
of any insurance already effected to cover the insured goods. These violations, petitioner insisted, justified the denial
of the claim.

The trial court ruled in favor of respondent. It found that respondent paid by way of check a day before the fire
occurred. The check, which was deposited in petitioner's bank account, was even acknowledged in the renewal
certificate issued by petitioner's agent. It declared that the alleged fraudulent documents were limited to the
disparity between the official receipts issued by the Bureau of Internal Revenue (BIR) and the income tax returns for
the years 1987 to 1989. All the other documents were found to be genuine. Nonetheless, it gave credence to the BIR
certification that respondent paid the corresponding taxes due for the questioned years.

As to respondent's failure to notify petitioner of the other insurance contracts covering the same goods, the trial
court held that petitioner failed to show that such omission was intentional and fraudulent. Finally, it noted that
petitioner's investigation of respondent's claim was done in collaboration with the representatives of other insurance
companies who found no irregularity therein. In fact, Pioneer Insurance and Surety Corporation and Prudential
Guarantee and Assurance, Inc. promptly paid the claims filed by respondent.

The trial court decreed as follows:

WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the [petitioner]
ordering the latter to pay the former the following:

1. P200,000.00, representing the amount of the insurance, plus legal interest from
the date of filing of this case;

2. P200,000.00 as moral damages;

3. P200,000.00 as loss of profit;

4. P100,000.00 as exemplary damages;

5. P50,000.00 as attorney's fees; and

 6. Cost of suit.

On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court of Appeals found that
respondent's claim was substantially proved and petitioner's unjustified refusal to pay the claim entitled respondent
to the award of damages.

Its motion for reconsideration of the judgment having been denied, petitioner filed the petition in this case.
Petitioner reiterates its stand that there was no existing insurance contract between the parties. It invokes Section 77
of the Insurance Code, which provides:

An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been
paid, except in the case of life or an industrial life policy whenever the grace period provision applies.

and cites the case of Arce v. Capital Insurance & Surety Co., Inc.,2 where we ruled that unless and until the
premium is paid there is no insurance.

Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract was not yet subsisting
pursuant to Article 12493 of the Civil Code, which recognizes that a check can only effect payment once it has been
cashed. Although respondent testified that he gave the check on 5 April to a certain James Uy, the check, drawn
against a Manila bank and deposited in a Cagayan de Oro City bank, could not have been cleared by 6 April, the date
of the fire. In fact, the official receipt issued for respondent's check payment was dated 10 April 1990, four days after
the fire occurred.

Citing jurisprudence,4 petitioner also contends that respondent's non-disclosure of the other insurance contracts
rendered the policy void. It underscores the trial court's neglect in considering the Commission on Audit's
certification that the BIR receipts submitted by respondent were, in effect, fake since they were issued to other
persons. Finally, petitioner argues that the award of damages was excessive and unreasonable considering that it did
not act in bad faith in denying respondent's claim.

Respondent counters that the issue of non-payment of premium is a question of fact which can no longer be assailed.
The trial court's finding on the matter, which was affirmed by the Court of Appeals, is conclusive.

Respondent refutes the reason for petitioner's denial of his claim. As found by the trial court, petitioner's loss
adjuster admitted prior knowledge of respondent's existing insurance contracts with the other insurance companies.
Nonetheless, the loss adjuster recommended the denial of the claim, not because of the said contracts, but because
he was suspicious of the authenticity of certain documents which respondent submitted in filing his claim.

To bolster his argument, respondent cites Section 66 of the Insurance Code, 5 which requires the insurer to give a
notice to the insured of its intention to terminate the policy forty-five days before the policy period ends. In the
instant case, petitioner opted not to terminate the policy. Instead, it renewed the policy by sending its agent to
respondent, who was issued a renewal certificate upon delivery of his check payment for the renewal of premium. At
this precise moment the contract of insurance was executed and already in effect. Respondent also claims that it is
standard operating procedure in the provinces to pay insurance premiums by check when collected by insurance
agents.

On the issue of damages, respondent maintains that the amounts awarded were reasonable. He cites numerous trips
he had to make from Cagayan de Oro City to Manila to follow up his rightful claim. He imputes bad faith on petitioner
who made enforcement of his claim difficult in the hope that he would eventually abandon it. He further emphasizes
that the adjusters of the other insurance companies recommended payment of his claim, and they complied
therewith.

In its reply, petitioner alleges that the petition questions the conclusions of law made by the trial court and the Court
of Appeals.
Petitioner invokes respondent's admission that his check for the renewal of the policy was received only on 10 April
1990, taking into account that the policy period was 25 March 1990 to 25 March 1991. The official receipt was dated
10 April 1990. Anent respondent's testimony that the check was given to petitioner's agent, a certain James Uy, the
latter points out that even respondent was not sure if Uy was indeed its agent. It faults respondent for not producing
Uy as his witness and not taking any receipt from him upon presentment of the check. Even assuming that the check
was received a day before the concurrence of the fire, there still could not have been payment until the check was
cleared.

Moreover, petitioner denies respondent's allegation that it intended a renewal of the contract for the renewal
certificate clearly specified the following conditions:

Subject to the payment by the assured of the amount due prior to renewal date, the policy shall be
renewed for the period stated.

Any payment tendered other than in cash is received subject to actual cash collection.

Subject to no loss prior to premium and payment. If there be any loss, is not covered [sic].

Petitioner asserts that an insurance contract can only be enforced upon the payment of the premium, which
should have been made before the renewal period.

Finally, in assailing the excessive damages awarded to respondent petitioner stresses that the policy in issue was
limited to a liability of P200,000; but the trial court granted the following monetary awards: P200,000 as actual
damages; P200,000 as moral damages; P100,000 as exemplary damages; and P50,000 as attorney's fees.

The following issues must be resolved: first, whether there was a valid payment of premium, considering that
respondent's check was cashed after the occurrence of the fire; second, whether respondent violated the policy by
his submission of fraudulent documents and non-disclosure of the other existing insurance contracts; and finally,
whether respondent is entitled to the award of damages.

The general rule in insurance laws is that unless the premium is paid the insurance policy is not valid and binding. The
only exceptions are life and industrial life insurance. 6 Whether payment was indeed made is a question of fact which
is best determined by the trial court. The trial court found, as affirmed by the Court of Appeals, that there was a valid
check payment by respondent to petitioner. Well-settled is the rule that the factual findings and conclusions of the
trial court and the Court of Appeals are entitled to great weight and respect, and will not be disturbed on appeal in
the absence of any clear showing that the trial court overlooked certain facts or circumstances which would
substantially affect the disposition of the case.7 We see no reason to depart from this ruling.

According to the trial court the renewal certificate issued to respondent contained the acknowledgment that
premium had been paid. It is not disputed that the check drawn by respondent in favor of petitioner and delivered to
its agent was honored when presented and petitioner forthwith issued its official receipt to respondent on 10 April
1990. Section 306 of the Insurance Code provides that any insurance company which delivers a policy or contract of
insurance to an insurance agent or insurance broker shall be deemed to have authorized such agent or broker to
receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time of its
issuance or delivery or which becomes due thereon. 8 In the instant case, the best evidence of such authority is the
fact that petitioner accepted the check and issued the official receipt for the payment. It is, as well, bound by its
agent's acknowledgment of receipt of payment.

Sec. 78 of the Insurance Code explicitly provides:

An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive

evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until the premium is actually paid.

This Section establishes a legal fiction of payment and should be interpreted as an exception to Section 77. 9
Is respondent guilty of the policy violations imputed against him? We are not convinced by petitioner's arguments.
The submission of the alleged fraudulent documents pertained to respondent's income tax returns for 1987 to 1989.
Respondent, however, presented a BIR certification that he had paid the proper taxes for the said years. The trial
court and the Court of Appeals gave credence to the certification and it being a question of fact, we hold that said
finding is conclusive.

Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers, non-disclosure
thereof is a violation that entitles the insurer to avoid the policy. This condition is common in fire insurance policies
and is known as the "other insurance clause." The purpose for the inclusion of this clause is to prevent an increase in
the moral hazard. We have ruled on its validity and the case of Geagonia v. Court of Appeals 10 clearly illustrates such
principle. However, we see an exception in the instant case.

Citing Section 29 11 of the Insurance Code, the trial court reasoned that respondent's failure to disclose was not
intentional and fraudulent. The application of Section 29 is misplaced. Section 29 concerns concealment which is
intentional. The relevant provision is Section 75, which provides that:

A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the
breach of an immaterial provision does not avoid the policy.

To constitute a violation the other existing insurance contracts must be upon the same subject matter and with the
same interest and risk. 12 Indeed, respondent acquired several co-insurers and he failed to disclose this information to
petitioner. Nonetheless, petitioner is estopped from must invoking this argument. The trial court cited the testimony
of petitioner's loss adjuster who admitted previous knowledge of the co-insurers. Thus,

COURT:

Q The matter of additional insurance of other companies, was that ever discussed in
your investigation?

A Yes, sir.

Q In other words, from the start, you were aware the insured was insured with other
companies like Pioneer and so on?

A Yes, Your Honor.

Q But in your report you never recommended the denial of the claim simply because
of the non-disclosure of other insurance? [sic]

A Yes, Your Honor.

Q In other words, to be emphatic about this, the only reason you recommended the
denial of the claim, you found three documents to be spurious. That is your only
basis?

A Yes, Your Honor. 13 [Emphasis supplied]

Indubitably, it cannot be said that petitioner was deceived by respondent by the latter's non-disclosure of the other
insurance contracts when petitioner actually had prior knowledge thereof. Petitioner's loss adjuster had known all
along of the other existing insurance contracts, yet, he did not use that as basis for his recommendation of denial.
The loss adjuster, being an employee of petitioner, is deemed a representative of the latter whose awareness of the
other insurance contracts binds petitioner. We, therefore, hold that there was no violation of the "other insurance"
clause by respondent.
Petitioner is liable to pay its share of the loss. The trial court and the Court of Appeals were correct in awarding
P200,000 for this. There is, however, merit in petitioner's grievance against the damages and attorney's fees
awarded.

There is no legal and factual basis for the award of P200,000 for loss of profit. It cannot be denied that the fire totally
gutted respondent's business; thus, respondent no longer had any business to operate. His loss of profit cannot be
shouldered by petitioner whose obligation is limited to the object of insurance, which was the stock-in-trade, and not
the expected loss in income or profit.

Neither can we approve the award of moral and exemplary damages. At the core of this case is petitioner's alleged
breach of its obligation under a contract of insurance. Under Article 2220 of the Civil Code, moral damages may be
awarded in breaches of contracts where the defendant acted fraudulently or in bad faith. We find no such fraud or
bad faith. It must again be stressed that moral damages are emphatically not intended to enrich a plaintiff at the
expense of the defendant. Such damages are awarded only to enable the injured party to obtain means, diversion or
amusements that will serve to obviate the moral suffering he has undergone, by reason of the defendant's culpable
action. Its award is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and it
must be proportional to the suffering inflicted. 14 When awarded, moral damages must not be palpably and
scandalously excessive as to indicate that it was the result of passion, prejudice or corruption on the part of the trial
court judge. 15

The law 16 is likewise clear that in contracts and quasi-contracts the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Nothing thereof can be
attributed to petitioner which merely tried to resist what it claimed to be an unfounded claim for enforcement of the
fire insurance policy.

As to attorney's fees, the general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate. 17 In short, the grant of attorney's fees as part of
damages is the exception rather than the rule; counsel's fees are not awarded every time a party prevails in a suit. It
can be awarded only in the cases enumerated in Article 2208 of the Civil Code, and in all cases it must be
reasonable. 18 Thereunder, the trial court may award attorney's fees where it deems just and equitable that it be so
granted. While we respect the trial court's exercise of its discretion in this case, the award of P50,000 is unreasonable
and excessive. It should be reduced to P10,000.

WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the Court of Appeals in CA-G.R. No.
40751 is hereby MODIFIED by a) deleting the awards of P200,000 for loss of profit, P200,000 as moral damages and
P100,000 as exemplary damages, and b) reducing the award of attorney's fees from P50,000 to P10,000.

No pronouncement as to costs.
SPS. ANTONIO and VIOLETA TIBAY vs. COURT OF APPEALS [257 SCRA 126; May 24, 1996]

May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?

On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE) issued Fire Insurance
Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their two-storey residential building located
at 5855 Zobel Street, Makati City, together with all their personal effects therein. The insurance was for P600,000.00
covering the period from 23 January 1987 to 23 January 1988. On 23 January 1987, of the total premium of
P2,983.50, petitioner Violeta Tibay only paid P600.00 thus leaving a considerable balance unpaid.

On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10 March 1987 Violeta
Tibay paid the balance of the premium. On the same day, she filed with FORTUNE a claim on the fire insurance policy.
Her claim was accordingly referred to its adjuster, Goodwill Adjustment Services, Inc. (GASI), which immediately
wrote Violeta requesting her to furnish it with the necessary documents for the investigation and processing of her
claim. Petitioner forthwith complied. On 28 March 1987 she signed a non-waiver agreement with GASI to the effect
that any action taken by the companies or their representatives in investigating the claim made by the claimant for
his loss which occurred at 5855 Zobel Roxas, Makati on March 8, 1987, or in the investigating or ascertainment of the
amount of actual cash value and loss, shall not waive or invalidate any condition of the policies of such companies
held by said claimant, nor the rights of either or any of the parties to this agreement, and such action shall not be, or
be claimed to be, an admission of liability on the part of said companies or any of them.1

In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition No. 2 and of Sec.
77 of the Insurance Code. Efforts to settle the case before the Insurance Commission proved futile. On 3 March 1988
Violets and the other petitioners sued FORTUNE for damages in the amount of P600,000.00 representing the total
coverage of the fire insurance policy plus 12% interest per annum, P100,000.00 moral damages, and attorney's fees
equivalent to 20% of the total claim.

On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value of the insured
building and personal properties in the amount of P600,000.00 plus interest at the legal rate of 6% per annum from
the filing of the complaint until full payment, and attorney's fees equivalent to 20% of the total amount claimed plus
costs of suit.2

On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be liable to plaintiff-
appellees therein but ordering defendant-appellant to return to the former the premium of P2,983.50 plus 12%
interest from 10 March 1987 until full payment. 3

Hence this petition for review with petitioners contending mainly that contrary to the conclusion of the appellate
court, FORTUNE remains liable under the subject fire insurance policy in spite of the failure of petitioners to pay their
premium in full.

We find no merit in the petition; hence, we affirm the Court of Appeals.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. 4 The consideration is the premium, which must be paid at the
time and in the way and manner specified in the policy, and if not so paid, the policy will lapse and be forfeited by its
own terms.5

The pertinent provisions in the Policy on premium read —

THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the Company in accordance
with Policy Condition No. 2 of the total premiums by the insured as stipulated above for the period
aforementioned for insuring against Loss or Damage by Fire or Lightning as herein appears, the
Property herein described . . .

2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the
premium has been fully paid to and duly receipted by the Company in the manner provided herein.
 Any supplementary agreement seeking to amend this condition prepared by agent, broker or
Company official, shall be deemed invalid and of no effect.

xxx xxx xxx

Except only in those specific cases where corresponding rules and regulations which are or may
hereafter be in force provide for the payment of the stipulated premiums in periodic installments at
fixed percentage, it is hereby declared, agreed and warranted that this policy shall be deemed
effective, valid and binding upon the Company only when the premiums therefor have actually been
paid in full and duly acknowledged in a receipt signed by any authorized official or
representative/agent of the Company in such manner as provided herein. (emphasis supplied). 6

Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only been partially
paid and the balance paid only after the peril insured against has occurred, the insurance contract did not take effect
and the insured cannot collect at all on the policy. This is fully supported by Sec. 77 of the Insurance Code which
provides —

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to
the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium thereof
has been paid, except in the case of a life or an industrial life policy whenever the grace period
provision applies (emphasis supplied).

Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has been paid." This
leads us to the manner of payment envisioned by the law to make the insurance policy operative and binding. For
whatever judicial construction may be accorded the disputed phrase must ultimately yield to the clear mandate of
the law. The principle that where the law does not distinguish the court should neither distinguish assumes that the
legislature made no qualification on the use of a general word or expression. In Escosura v. San Miguel Brewery,
Inc.,7 the Court through Mr. Justice Jesus G. Barrera, interpreting the phrase "with pay" used in connection with
leaves of absence with pay granted to employees, ruled —

. . . the legislative practice seems to be that when the intention is to distinguish between full and
partial payment, the modifying term is used . . .

Citing C.A. No. 647 governing maternity leaves of married women in government, R. A. No. 679 regulating
employment of women and children, R.A. No. 843 granting vacation and sick leaves to judges of municipal
courts and justices of the peace, and finally, Art. 1695 of the New Civil Code providing that every househelp
shall be allowed four (4) days vacation each month, which laws simply stated "with pay," the Court concluded
that it was undisputed that in all these laws the phrase "with pay" used without any qualifying adjective
meant that the employee was entitled to full compensation during his leave of absence.

Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial payment of the premium
due and the express stipulation thereof to the contrary, petitioners rely heavily on the 1967 case of Philippine
Phoenix and Insurance Co., Inc. v. Woodworks, Inc.8 where the Court through Mr. Justice Arsenio P. Dizon sustained
the ruling of the trial court that partial payment of the premium made the policy effective during the whole period of
the policy. In that case, the insurance company commenced action against the insured for the unpaid balance on a
fire insurance policy. In its defense the insured claimed that nonpayment of premium produced the cancellation of
the insurance contract. Ruling otherwise the Court held —

It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by appellee and
delivered to appellant, and that on September 22 of the same year, the latter paid to the former the
sum of P3,000.00 on account of the total premium of P6,051.95 due thereon. There is, consequently,
no doubt at all that, as between the insurer and the insured, there was not only a perfected contract
of insurance but a partially performed one as far as the payment of the agreed premium was
concerned. Thereafter the obligation of the insurer to pay the insured the amount, for which the
policy was issued in case the conditions therefor had been complied with, arose and became binding
 upon it, while the obligation of the insured to pay the remainder of the total amount of the premium
due became demandable.

The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the factual scenario is
different. In Phoenix it was the insurance company that sued for the balance of the premium, i.e., it recognized and
admitted the existence of an insurance contract with the insured. In the case before us, there is, quite unlike in
Phoenix, a specific stipulation that (t)his policy . . . is not in force until the premium has been fully paid and duly
receipted by the Company . . . Resultantly, it is correct to say that in Phoenix a contract was perfected upon partial
payment of the premium since the parties had not otherwise stipulated that prepayment of the premium in full was
a condition precedent to the existence of a contract.

In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the premium
without any other precondition to its enforceability as in the instant case, the insurer in effect had shown its
intention to continue with the existing contract of insurance, as in fact it was enforcing its right to collect premium, or
exact specific performance from the insured. This is not so here. By express agreement of the parties, no vinculum
juris or bond of law was to be established until full payment was effected prior to the occurrence of the risk insured
against.

In Makati Tuscany Condominium Corp. v. Court of Appeals9 the parties mutually agreed that the premiums could be
paid in installments, which in fact they did for three (3) years, hence, this Court refused to invalidate the insurance
policy. In giving effect to the policy, the Court quoted with approval the Court of Appeals —

The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire
premium. Here, the parties . . . agreed to make the premiums payable in installments, and there is no
pretense that the parties never envisioned to make the insurance contract binding between them. It
was renewed for two succeeding years, the second and third policies being a renewal/replacement
for the previous one. And the insured never informed the insurer that it was terminating the policy
because the terms were unacceptable.

While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make
the insurance contract valid and binding without payment of premiums, there is nothing in said
section which suggests that the parties may not agree to allow payment of the premiums in
installment, or to consider the contract as valid and binding upon
payment of the first premium. Otherwise we would allow the insurer to renege on its liability under
the contract, had a loss incurred (sic) before completion of payment of the entire premium, despite
its voluntary acceptance of partial payments, a result eschewed by basic considerations of fairness
and equity . . .

These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or implied, of
prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in Phoenix, and expressly, by
agreeing to make premiums payable in installments as in Tuscany. But contrary to the stance taken by petitioners,
there is no waiver express or implied in the case at bench. Precisely, the insurer and the insured expressly stipulated
that (t)his policy including any renewal thereof and/or any indorsement thereon is not in force until the premium has
been fully paid to and duly receipted by the Company . . . and that this policy shall be deemed effective, valid and
binding upon the Company only when the premiums therefor have actually been paid in full and duly acknowledged.

Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77 of the Insurance
Code the payment of partial premium by the assured in this particular instance should not be considered the
payment required by the law and the stipulation of the parties. Rather, it must be taken in the concept of a deposit to
be held in trust by the insurer until such time that the full amount has been tendered and duly receipted for. In other
words, as expressly agreed upon in the contract, full payment must be made before the risk occurs for the policy to
be considered effective and in force.

Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever resulted
from the fractional payment of premium. The insurance contract itself expressly provided that the policy would be
effective only when the premium was paid in full. It would have been altogether different were it not so stipulated.
Ergo, petitioners had absolute freedom of choice whether or not to be insured by FORTUNE under the terms of its
policy and they freely opted to adhere thereto.

Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is the intention
of the parties as expressed in the
policy. 10 Courts have no other function but to enforce the same. The rule that contracts of insurance will be
construed in favor of the insured and most strongly against the insurer should not be permitted to have the effect of
making a plain agreement ambiguous and then construe it in favor of the insured. 11 Verily, it is elemental law that
the payment of premium is requisite to keep the policy of insurance in force. If the premium is not paid in the
manner prescribed in the policy as intended by the parties the policy is ineffective. Partial payment even when
accepted as a partial payment will not keep the policy alive even for such fractional part of the year as the part
payment bears to the whole
payment.12

Applying further the rules of statutory construction, the position maintained by petitioners becomes even more
untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court Of Appeals, 13 speaks only of two (2)
statutory exceptions to the requirement of payment of the entire premium as a prerequisite to the validity of the
insurance contract. These exceptions are: (a) in case the insurance coverage relates to life or industrial life (health)
insurance when a grace period applies, and (b) when the insurer makes a written acknowledgment of the receipt of
premium, this acknowledgment being declared by law to be then conclusive evidence of the premium payment. 14

A maxim of recognized practicality is the rule that the expressed exception or exemption excludes others. Exceptio
firmat regulim in casibus non exceptis. The express mention of exceptions operates to exclude other exceptions;
conversely, those which are not within the enumerated exceptions are deemed included in the general rule. Thus,
under Sec. 77, as well as Sec. 78, until the premium is paid, and the law has not expressly excepted partial payments,
there is no valid and binding contract. Hence, in the absence of clear waiver of prepayment in full by the insurer, the
insured cannot collect on the proceeds of the policy.

In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is
primarily a risk distributing device, a mechanism by which all members of a group exposed to a particular risk
contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to exposure to
the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled upon the happening
of the contingency to pay the entire sum agreed upon, and the insured, that of parting with the amount required as
premium, without receiving anything therefor in case the contingency does not happen. To ensure payment for these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those claiming under
their policies. 15 It should be understood that the integrity of this fund cannot be secured and maintained if by judicial
fiat partial offerings of premiums were to be construed as a legal nexus between the applicant and the insurer
despite an express agreement to the contrary. For what could prevent the insurance applicant from deliberately or
wilfully holding back full premium payment and wait for the risk insured against to transpire and then conveniently
pass on the balance of the premium to be deducted from the proceeds of the insurance? Worse, what if the insured
makes an initial payment of only 10%, or even 1%, of the required premium, and when the risk occurs simply points
to the proceeds from where to source the balance? Can an insurance company then exist and survive upon the
payment of 1%, or even 10%, of the premium stipulated in the policy on the basis that, after all, the insurer can
deduct from the proceeds of the insurance should the risk insured against occur?

Interpreting the contract of insurance stringently against the insurer but liberally in favor of the insured despite
clearly defined obligations of the parties to the policy can be carried out to extremes that there is the danger that we
may, so to speak, "kill the goose that lays the golden egg." We are well aware of insurance companies falling into the
despicable habit of collecting premiums promptly yet resorting to all kinds of excuses to deny or delay payment of
just insurance claims. But, in this case, the law is manifestly on the side of the insurer. For as long as the current
Insurance Code remains unchanged and partial payment of premiums is not mentioned at all as among the
exceptions provided in Sees. 77 and 78, no policy of insurance can ever pretend to be efficacious or effective until
premium has been fully paid.

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business because by law
the insurer must maintain a legal reserve fund to meet its contingent obligations to the public, hence, the imperative
need for its prompt payment and full satisfaction. 16 It must be emphasized here that all actuarial calculations and
various tabulations of probabilities of losses under the risks insured against are based on the sound hypothesis of
prompt payment of premiums. Upon this bedrock insurance firms are enabled to offer the assurance of security to
the public at favorable rates. But once payment of premium is left to the whim and caprice of the insured, as when
the courts tolerate the payment of a mere P600.00 as partial undertaking out of the stipulated total premium of
P2,983.50 and the balance to be paid even after the risk insured against has occurred, as petitioners have done in
this case, on the principle that the strength of the vinculum juris is not measured by any specific amount of premium
payment, we will surely wreak havoc on the business and set to naught what has taken actuarians centuries to devise
to arrive at a fair and equitable distribution of risks and benefits between the insurer and the insured.

The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of statutory
prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and to
impose whatever conditions they deem best upon their obligations not inconsistent with public policy. 17 The validity
of these limitations is by law passed upon by the Insurance Commissioner who is empowered to approve all forms of
policies, certificates or contracts of insurance which insurers intend to issue or deliver. That the policy contract in the
case at bench was approved and allowed issuance simply reaffirms the validity of such policy, particularly the
provision in question.

WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24 March 1995 is
AFFIRMED.

SO ORDERED.
PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY vs. WOODWORKS, INC. [92 SCRA 419; August 6, 1979]

This case was certified to this Tribunal by the Court of Appeals in its Resolution of October 4, 1965 on a pure question
of law and "because the issues raised are practically the same as those in CA-G.R. No. 32017-R" between the same
parties, which case had been forwarded to us on April 1, 1964. The latter case, "Philippine Phoenix Surety &
Insurance Inc. vs. Woodworks, Inc.," docketed in this Court as L-22684, was decided on August 31, 1967 and has been
reported in 20 SCRA 1270.

Specifically, this action is for recovery of unpaid premium on a fire insurance policy issued by plaintiff, Philippine
Phoenix Surety & Insurance Company, in favor of defendant Woodworks, Inc.

The following are the established facts:

On July 21, 1960, upon defendant's application, plaintiff issued in its favor Fire Insurance Policy No. 9749 for
P500,000.00 whereby plaintiff insured defendant's building, machinery and equipment for a term of one year from
July 21, 1960 to July 21, 1961 against loss by fire. The premium and other charges including the margin fee surcharge
of P590.76 and the documentary stamps in the amount of P156.60 affixed on the Policy, amounted to P10,593.36.

It is undisputed that defendant did not pay the premium stipulated in the Policy when it was issued nor at any time
thereafter.

On April 19, 1961, or before the expiration of the one-year term, plaintiff notified defendant, through its Indorsement
No. F-6963/61, of the cancellation of the Policy allegedly upon request of defendant. 1 The latter has denied having
made such a request. In said Indorsement, plaintiff credited defendant with the amount of P3,110.25 for the
unexpired period of 94 days, and claimed the balance of P7,483.11 representing ,learned premium from July 21,
1960 to 18th April 1961 or, say 271 days." On July 6, 1961, plaintiff demanded in writing for the payment of said
amount. 2 Defendant, through counsel, disclaimed any liability in its reply- letter of August 15, 1961, contending, in
essence, that it need not pay premium "because the Insurer did not stand liable for any indemnity during the period
the premiums were not paid." 3

On January 30, 1962, plaintiff commenced action in the Court of First Instance of Manila, Branch IV (Civil Case No.
49468), to recover the amount of P7,483.11 as "earned premium." Defendant controverted basically on the theory
that its failure "to pay the premium after the issuance of the policy put an end to the insurance contract and
rendered the policy unenforceable." 4

On September 13, 1962, judgment was rendered in plaintiff's favor "ordering defendant to pay plaintiff the sum of
P7,483.11, with interest thereon at the rate of 6%, per annum from January 30, 1962, until the principal shall have
been fully paid, plus the sum of P700.00 as attorney's fees of the plaintiff, and the costs of the suit." From this
adverse Decision, defendant appealed to the Court of Appeals which, as heretofore stated, certified the case to us on
a question of law.

The errors assigned read:

1. The lower court erred in sustaining that Fire Insurance Policy, Exhibit A, was a binding contract
even if the premium stated in the policy has not been paid.

2. That the lower court erred in sustaining that the premium in Insurance Policy, Exhibit B, became an
obligation which was demandable even after the period in the Policy has expired.

3. The lower court erred in not deciding that a premium not paid is not a debt enforceable by action
of the insurer.

We find the appeal meritorious.

Insurance is "a contract whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event." 5 The consideration is the "premium". "The premium must be
paid at the time and in the way and manner specified in the policy and, if not so paid, the policy will lapse and be
forfeited by its own terms." 6

The provisions on premium in the subject Policy read:

THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of — MESSRS. WOODWORKS, INC.

— hereinafter called the Insured, paying to the PHILIPPINE PHOENIX SURETY AND INSURANCE, INC.,
hereinafter called the Company, the sum of — PESOS NINE THOUSAND EIGHT HUNDRED FORTY SIX
ONLY — the Premium for the first period hereinafter mentioned. ...

xxx xxx xxx

THE COMPANY HEREBY AGREES with the Insured ... that if the Property above described, or any part
thereof, shall be destroyed or damaged by Fire or Lightning after payment of Premium, at any time
between 4:00 o'clock in the afternoon of the TWENTY FIRST day of JULY One Thousand Nine Hundred
and SIXTY and 4:00 o'clock in the afternoon of the TWENTY FIRST day of JULY One Thousand Nine
Hundred and SIXTY ONE. ... (Emphasis supplied)

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

2. No payment in respect of any premium shall be deemed to be payment to the Company unless a
printed form of receipt for the same signed by an Official or duly-appointed Agent of the Company
shall have been given to the Insured.

Paragraph "10" of the Policy also provided:

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

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

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

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

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

Since the premium had not been paid, the policy must be deemed to have lapsed.
 The non-payment of premiums does not merely suspend but put, an end to an insurance contract,
since the time of the payment is peculiarly of the essence of the contract. 11

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

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

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

Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting premiums and invalid for the
purpose of indemnity." 14

The foregoing findings are buttressed by section 77 of the Insurance Code (Presidential Decree No. 612, promulgated
on December 18, 1974), which now provides that no contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, notwithstanding any agreement to the contrary.

WHEREFORE, the judgment appealed from is reversed, and plaintiff's complaint hereby dismissed.