UNIVERSIDAD DE MANILA

College of Law
A.J. Villegas Street, Mehan Gardens, Ermita, Manila

Compliance in

COMMERCIAL LAW REVIEW

by:
Joly Mae R. Mendoza
10-MJD-024
COLLATERAL SOURCE RULE

Collateral Source Rule provides that “if an injured

person receives compensation for his injuries from a source
wholly independent of the tortfeasor, the payment should
not be deducted from the damages which he would
otherwise collect from the tortfeasor”.1

In our jurisprudence, the collateral source rule is not

applicable in the case of Mitsubishi Motors Philippines
Salaried Employees Union v. Mitsubishi Motors Philippines
Corp. (MMPC)2 wherein the dispute was on whether an
insured may recover from an insurance clause in a
Collective Bargaining Agreement (CBA) the full amount of
hospital bills that was already paid by a Health
Maintenance Organization (HMO) or by an insurance
company offering health insurance. The collateral source
rule was invoked to justify a second recovery from the
insurance clause of the CBA.
The Supreme Court ruled that the collateral source
rule applies in order to place the responsibility for losses
on the party causing them. Its application is justified so
that "'the wrongdoer should not benefit from the
expenditures made by the injured party or take advantage
of contracts or other relations that may exist between the
injured party and third persons.” Thus, it finds no
application to cases involving no-fault insurances under
which the insured is indemnified for losses by insurance
companies, regardless of who was at fault in the incident
generating the losses. Here, it is clear that MMPC is a no-
fault insurer. Hence, it cannot be obliged to pay the
hospitalization expenses of the dependents of its employees
which had already been paid by separate health insurance
providers of said dependents.

1
Black’s Law Dictionary, 6th Edition.
2
G.R. No. 175773, June 17, 2013.
 The conditions set forth in the CBA implied an
intention of the parties to limit MMPC’s liability only to the
extent of the expenses actually incurred by their
dependents which excludes the amounts shouldered by
other health insurance companies. The condition that
payment should be direct to the hospital and doctor implies
that MMPC is only liable to pay medical expenses actually
shouldered by the employees’ dependents. It follows that
MMPC’s liability is limited, that is, it does not include the
amounts paid by other health insurance providers. This
condition is obviously intended to thwart not only
fraudulent claims but also double claims for the same loss
of the dependents of covered employees.
The Supreme Court further stated that since the
subject CBA provision is an insurance contract, the rights
and obligations of the parties must be determined in
accordance with the general principles of insurance law.
Being in the nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA provision
obligates MMPC to indemnify the covered employees’
medical expenses incurred by their dependents but only up
to the extent of the expenses actually incurred. This is
consistent with the principle of indemnity which proscribes
the insured from recovering greater than the loss. Indeed,
to profit from a loss will lead to unjust enrichment and
therefore should not be countenanced.

Moreover, the Supreme Court cited several cases as

discussed in Mitsubishi Motors Philippines Salaried
employees Union vs. Mitsubishi Motors Philippines
Corporation to illustrate when the collateral source rule will
be applicable:
In a recent Decision by the Illinois Supreme Court,
the rule has been described as “an established exception to the
general rule that damages in negligence actions must be
compensatory.”3 The Court went on to explain that although
3
Wills v. Foster Jr., 229 Ill. 2d 393, 2008.
the rule appears to allow a double recovery, the collateral
source will have a lien or subrogation right to prevent such
a double recovery. In Mitchell v. Haldar, the collateral
source rule was rationalized by the Supreme Court of
Delaware:

The collateral source rule is ‘predicated on the theory that a

tortfeasor has no interest in, and therefore no right to benefit
from monies received by the injured person from sources
unconnected with the defendant’. According to the collateral
source rule, ‘a tortfeasor has no right to any mitigation of
damages because of payments or compensation received by the
injured person from an independent source.’ The rationale for
the collateral source rule is based upon the quasi-punitive nature
of tort law liability. It has been explained as follows:

The collateral source rule is designed to strike a balance between

two competing principles of tort law: (1) a plaintiff is entitled to
compensation sufficient to make him whole, but no more; and (2) a
defendant is liable for all damages that proximately result from his
wrong. A plaintiff who receives a double recovery for a single tort
enjoys a windfall; a defendant who escapes, in whole or in part, liability
for his wrong enjoys a windfall. Because the law must sanction one
windfall and deny the other, it favors the victim of the wrong rather than
the wrongdoer.
Thus, the tortfeasor is required to bear the cost for the full value of
his or her negligent conduct even if it results in a windfall for the
innocent plaintiff.

OTHER INSURANCE CLAUSE

"Other Insurance" clause in fire insurance policies

is to prevent over-insurance and thus avert the
perpetration of fraud. When a property owner obtains
insurance policies from two or more insurers in a total
amount that exceeds the property's value, the insured may
have an inducement to destroy the property for the purpose
of collecting the insurance. The public as well as the
insurer is interested in preventing a situation in which a
fire would be profitable to the insured.4
In interpreting the "other insurance clause" in
Geagonia, the Court ruled that the prohibition applies only
in case of double insurance. The Court ruled that in order
to constitute a violation of the clause, the other insurance
must be upon same subject matter, the same interest
therein, and the same risk. Thus, even though the multiple
insurance policies involved were all issued in the name of
the same assured, over the same subject matter and
covering the same risk, it was ruled that there was no
violation of the "other insurance clause" since there was no
double insurance.5
Most property insurance policies include a provision
known as the “Other Insurance” clause. An example reads
like this:

Other Insurance
If a loss covered by this policy is also covered by other insurance,
we will pay only the proportion of the loss that the Limit of
Liability that applies under this policy bears to the total amount of
insurance covering the loss.

In practice, it limits the amount the policy will pay to

a proportion of total coverage. As an example, assume a
homeowner has two insurance policies that specifically
cover fire losses. Policy A has a limit of $100,000, and
Policy B has a limit of $300,000. If the homeowner suffers
a fire loss in the amount of $100,000, Policy A will pay ¼
of the loss ($25,000) and Policy B will pay ¾ of the loss
($75,000).6

4
Geagonia vs. Court of Appeals, G.R. No. 114427, February 6, 1995.
5
Malayan Insurance Co., Inc., Petitioner, v. Philippines First Insurance Co., Inc. And Reputable
Forwarder Services, Inc., G.R. NO. 184300 - July 11, 2012
6
Property Insurance Coverage Law Blog, The Policy Holder’s Advocate.
 Although there are exceptions, insurance policies
frequently contain language that limits the insurer’s
liability in the event that there is other insurance that
covers the same loss. Such provisions are commonly
referred to as “other insurance” clauses. The purpose
behind an “other insurance” clause is to control if and how
an insurer will cover a loss in the event that there is more
than one policy that provides coverage. The interplay
between other insurance clauses is only relevant if the
policies insure the same loss and either policy would cover
the loss if the other policy did not.

Where multiple insurers are obligated to provide

coverage with respect to a loss and the policies contain an
“other insurance” clause, a dispute often arises regarding
the obligations of the various insurers. Other insurance
clauses typically fall into one of two categories: excess other
insurance clauses and pro-rata other insurance clauses.

An excess other insurance clause provides that, if

there is other insurance, the insurer’s liability is limited to
the amount of loss that exceeds the other valid and
collectible insurance. Under a pro-rata other insurance
clause, if there is other insurance each insurer is liable for
a percentage of the total loss equal to the ratio of each
insurer’s policy limit to the sum of the policy limits of all
the policies that cover the loss.

When there are multiple policies, each of which

contains an excess other insurance clause, if interpreted
literally and the clauses in each policy were given effect, the
insured would be left without any primary coverage. To
avoid this outcome, in Michigan where the policies contain
conflicting excess other insurance clauses purporting to
limit the insurer’s liability to the amount of loss in excess
of the coverage provided by the other insurer(s), the liability
of the insurers will be pro-rated based on the ratio of their
respective limits of liability to the total limits available. Mary
Free Bed Hosp. & Rehabilitation Center v Inc. Co. of North America, 131 Mich
In other words, the court will effectively
App 105 (1983).
overlook the excess clauses and apply a pro-rata rule.

If, on the other hand, one policy contains an excess

clause and the other policy contains a pro-rata clause
purporting to limit the insurer’s liability to a proportionate
percentage of all the insurance covering the claim, the
insurer with the pro-rata clause will be required to cover all
losses up to its policy limits while the insurer with the
excess clause will only be obligated to cover losses in excess
of that amount. St. Paul Fire & Marine Insurance Co. v. American Home
Assurance Co., 444 Mich 560, 573 (1994). The pro-rata policy is
treated as a primary policy and the policy with the excess
clause is treated as an excess policy. This is often referred
to as “coincidental excess” coverage.7

Rules in Case of Over Insurance

by Double Insurance

The rules in case of over insurance by double

insurance is stated in Section 94 of the Insurance Code of
the Philippines, to wit:
Section 94. Where the insured is over-
insured by double insurance:
(a) The insured, unless the policy otherwise provides, may
claim payment from the insurers in such order as he may
select, up to the amount for which the insurers are
severally liable under their respective contracts;

7
The Interplay Between “Other Insurance” Clauses by Julie Chenot Mayer.
 (b) Where the policy under which the insured claims is a
valued policy, the insured must give credit as against the
valuation for any sum received by him under any other
policy without regard to the actual value of the subject
matter insured;
(c) Where the policy under which the insured claims is an
unvalued policy he must give credit, as against the full
insurable value, for any sum received by him under any
other policy;
(d) Where the insured receives any sum in excess of the
valuation in the case of valued policies, or of the insurable
value in the case of unvalued policies, he must hold such
sum in trust for the insurers, according to their right of
contribution among themselves;
(e) Each insurer is bound, as between himself and the
other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under his
contract.

As the contract of insurance is a contract of indemnity

(Sec. 18.), the insured can recover no more than the
amount of his insurable interest whether the insurance is
contained in one policy or in several policies. The rules
provided in Section 94 enunciate the principle of
contribution which requires each insurer to contribute
ratably to the loss or damage considering that the several
insurances cover the same subject matter and interest
against the same peril. They apply only where there is over
insurance by double insurance, that is, the insurance is
contained in several policies the total amount of which is
in excess of the insurable interest of the insured.

In double insurance, there is co-insurance by two or

more insurers; hence, it is also known as "co-insurance."
Double insurance is different from over-insurance.
(1) There is over-insurance when the amount of the
insurance is beyond the value of the insured's insurable
interest. In double insurance, there may be no over-
insurance as when the sum total of the amounts of the
policies issued does not exceed the insurable interest of the
insured.
(2) While in double insurance there are always several
insurers, in over-insurance there may be only one insurer
involved.
From the above explanation, double insurance and
over insurance may exist at the same time or neither may
exist at all. Double insurance is the term used instead of
"co-insurance" when the sums insured exceed the
insurable interest. In such case, there is "over-insurance"
by "double insurance."
In case there is over-insurance because of
double/multiple insurance, the insurers are not required to
pay for the whole loss. Their obligation is only pro-rata. The
insured, on the other hand, isn't allowed to recover more than
his insurable interest.

CARRIAGE OF GOODS BY SEA ACT (COGSA)

The COGSA is the applicable law for all contracts for

carriage of goods by sea to and from Philippine ports in
foreign trade.

The following are important features of the Carriage of

Goods by Sea Act:

1.) It acts as a supplement to the Civil Code and applies to

all contracts of carriage of goods coming to or from
Philippine ports in foreign trade.

2.) When there is damage to the goods, notice must be given

by the recipient to the carrier or his agent upon receipt of
the goods. But if the damage is apparent/externally visible,
notice must be given within 3 days from receipt of the
goods.

3.) Failure of the recipient to notify the carrier will not

prevent the filing of a suit for the loss/damage of the goods.

4.) The maximum liability is US$500.00 per

package/customary freight unit unless the shipper or
owner of the goods declares a higher value. It may be
lowered by agreement put down in the bill of lading.

The purpose of limiting the common carrier's liability

is to protect it from fraud, such as by allowing it to take
insurance to protect itself. If, for example, the shipper or
consignee/recipient understated the value of the goods, it
not only violates a valid contractual stipulation; it has also
committed fraud against the common carrier by trying to
make it liable for an amount greater that what was
stipulated in the bill of lading (Cokaliong Shipping Lines vs.
UCPB General Insurance Co., GR 146018, June 25, 2003.)

Prescriptive Period

The prescriptive period is one (1) year from date of

delivery or the date when they should have been delivered.

1.) Delivery is to the arrastre operator not the recipient

2.) It won't apply if the goods were delivered to

the wrong person

3.) An extra-judicial claim/demand from the recipient won't

interrupt the prescriptive period

It will apply only to goods damaged/lost in transit,

which is why prescription begins when the goods are
handed over to the arrastre operator. If the arrastre service
was responsible for damaging the goods, another law will
apply.

The Supreme Court has been known to bend the rules

on the prescriptive period, especially if certain unfortunate
things would take place. If, for instance, a case was
dismissed for lack of jurisdiction and the prescriptive
period expired, it ruled that the recipient could file a new
case within 1 year from the dismissal of the previous case
(Stevens & Co vs. Nordeutscher Lloyd, 6 SCRA 180.) If, however, the
case was filed against the wrong party, the prescriptive
period won't be interrupted.

The prescriptive period is interrupted by the following

instances:

1.) An action has been filed in court

2.) There is an express agreement that extra-judicial

claims/demands for damages will suspend the running of
the prescriptive period.

If the goods were delivered to the wrong person, the

recipient of the goods has 10 years to file an action (for
breach of contract) or 4 years (for a quasi-delict.)

SUPERCARGOES

Persons who discharges administrative duties

assigned to him by ship agent or shippers, keeping an
account and record of transaction as required in the
accounting book of the captain. (Art. 649)

The duties of a supercargo are defined by admiralty

law and include managing the cargo owner's trade, selling
the merchandise in ports to which the vessel is sailing, and
buying and receiving goods to be carried on the return
voyage. He has control of the cargo unless limited by his
contract or other agreement.