G.R. No.

L-47447-47449 October 29, 1941

TEODORO R. YANGCO, ETC., petitioner,

vs.
MANUEL LASERNA, ET AL., respondents.

Claro M. Recto for petitioner.

Powell & Vega for respondents.

MORAN, J.:

At about one o'clock in the afternoon of May 26, 1927, the steamer S.S. Negros, belonging to petitioner here, Teodoro R. Yangco, left
the port of Romblon on its retun trip to Manila. Typhoon signal No. 2 was then up, of which fact the captain was duly advised and his
attention thereto called by the passengers themselves before the vessel set sail. The boat was overloaded as indicated by the loadline
which was 6 to 7 inches below the surface of the water. Baggage, trunks and other equipments were heaped on the upper deck, the
hold being packed to capacity. In addition, the vessel carried thirty sacks of crushed marble and about one hundred sacks of copra and
some lumber. The passengers, numbering about 180, were overcrowded, the vessel's capacity being limited to only 123 passengers.
After two hours of sailing, the boat encountered strong winds and rough seas between the islands of Banton and Simara, and as the
waves splashed the ladies' dresses, the awnings were lowered. As the sea became increasingly violent, the captain ordered the vessel
to turn left, evidently to return to port, but in the manuever, the vessel was caught sidewise by a big wave which caused it to capsize
and sink. Many of the passengers died in the mishap, among them being Antolin Aldaña and his son Victorioso, husband and son,
respectively, of Emilia Bienvenida who, together with her other children and a brother-in-law, are respondents in G.R. No. 47447;
Casiana Laserna, the daughter of respondents Manuel Laserna and P.A. de Laserna in G.R. 47448; and Genaro Basaña, son of
Filomeno Basaña, respondent in G.R. No. 47449. These respondents instituted in the Court of First Instance of Capiz separate civil
actions against petitioner here to recover damages for the death of the passengers aforementioned. The court awarded the heirs of
Antolin and Victorioso Aldana the sum of P2,000; the heirs of Casiana Laserna, P590; and those of Genaro Basana, also P590. After
the rendition of the judgment to this effcet, petitioner, by a verified pleading, sought to abandon th evessel to the plainitffs in the three
cases, together with all its equipments, without prejudice to his right to appeal. The abandonment having been denied, an appeal was
taken to the Court of Appeals, wherein all the judgmnets were affirmed except that which sums was increased to P4,000. Petitioner,
now deceased, appealed and is here represented by his legal representative.

Brushing aside the incidental issues, the fundamental question here raised is: May the shipowner or agent, notwithstanding the total
loss of the vessel as a result of the negligence of its captain, be properly held liable in damages for the consequent death of its
passengers? We are of the opinion and so hold that this question is controlled by the provisions of article 587 of the Code of
Commerce. Said article reads:

The agent shall also be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in
the care of the goods which the vessel carried; but he may exempt himself therefrom by abandoning the vessel with all her
equipments and the freight he may have earned during the voyage.

The provisions accords a shipowner or agent the right of abandonment; and by necessary implication, his liability is confined to that
which he is entitled as of right to abandon — "the vessel with all her equipments and the freight it may have earned during the voyage."
It is true that the article appears to deal only with the limited liability of shipowners or agents for damages arising from the misconduct of
the captain in the care of the goods which the vessel carries, but this is a mere deficiency of language and in no way indicates the true
extent of such liability. The consensus of authorities is to the effect that notwithstanding the language of the aforequoted provision, the
benefit of limited liability therein provided for, applies in all cases wherein the shipowner or agent may properly be held liable for the
negligent or illicit acts of the captain. Dr. Jose Ma. Gonzalez de Echavarri y Vivanco, commenting on said article, said:

La letra del Codigo, en el articulo 587, presenta una gravisima cuestion. El derecho de abandono, si se atiende a lo escrito,
solo se refiere a las indemnizaciones a que dierQe lugar la conducta del Capitan en la custodia de los efectos que cargo en el
buque.

¿Es ese el espiritu del legislador? No; ¿habra derecho de abandono en las responsabilidades nacidas de obligaciones
contraidas por el Capitan y de otros actos de este? Lo reputamos evidente y, para fortalecer nuestra opinion, basta copiar el
siguiente parrafo de la Exposicion de motivos:

"El proyecto, al aplicar estos principios, se inspira tambien en los intereses del comercio maritimo, que quedaran mas
asegurados ofreciendo a todo el que contrata con el naviero o Capitan del buque, la garantia real del mismo,
cualesquiera que sean las facultades o atribuciones de que se hallen investidos." (Echavarri, Codigo de Comercio,
Tomo 4, 2. a ed., pags. 483-484.)

A cursory examination will disclose that the principle of liomited liability of a shipowner or agent is provided for in but three articles of the
Code of Commerce — article 587 aforequoted and article 590 and 837. Article 590 merely reiterates the principle embodied in article
587, applies the same principle in cases of collision, and it has been observed that said article is but "a necessary consequences of the
right to abandon the vessel given to the shipowner in article 587 of the Code, and it is one of the many superfluities contained in the
Code." (Lorenzo Benito, Lecciones 352, quoted in Philippine Shipping Co. vs. Garcia, 6 Phil. 281, 282.) In effect, therefore, only articles
587 and 590 are the provisions conatined in our Code of Commerce on the matter, and the framers of said code had intended those
provisions to embody the universal principle of limited liability in all cases. Thus, in the "Exposicon de Motivos" of the Code of
Commerce, we read:

The present code (1829) does not determine the juridical status of the agent where such agent is not himself the owner of the
vessel. This omission is supplied by the proposed code, which provides in accordance with the principles of maritime law that
by agent it is to be understood the person intrusted with the provisioning of the vessel, or the one who represents her in the
port in which she happens to be. This person is the only one who represents the vessel — that is to say, the only one who
represents the interests of the owner of the vessel. This provision has therefore cleared the doubt which existed as to the
extent of the liability, both of the agent and of the owner of the vessel. Such liability is limited by the proposed code to
the value of the vessel and other things appertaining thereto.

In Philippine Shipping Co. vs. Garcia (6 Phil., 281, 284-286), we have expressed ourselves in such a comprehensive manner as to
leave no room for doubt on the applicability of our ratio decidendi not only to cases of collision but also to those of shipwrecks, etc. We
said:

This is the difference which exists between the lawful acts and lawful obligations of the captain and the liability which he incurs
on account of any unlawful act committed by him. In the first case, the lawful acts and obligations of the captain beneficial to
the vessel may be enforced as against the agent for the reason that such obligations arise from te the contract of agency
(provided, however, that the captain does not exceed his authority), while as to any liability incurred by the captain through his
unlawful acts, the ship agent is simply subsidiarily civilly liable. This liability of the agent is limited to the vessel and it does not
extend further. For this reason the Code of Commerce makes the agent liable to the extent of the value of the vessel, as the
codes of the principal maritime nations provide with the vessel, and not individually. Such is also the spirit of our Code.

The spirit of our code s accurately set forth in a treatise on maritime law, from which we deem proper to quote the following as
the basis of this decision:lawphil.net

"That which distinguishes the maritime from the civil law and even from the mercantile law in general is the real and
hypothecary nature of the former, and the many securities of a real nature that maritime customs from time
immemorial, the laws, the codes, and the later jurisprudence, have provided for the protection of the various and
conflicting interests which are ventured and risked in maritime expeditions, such as the interests of the vessel and of
the agent, those of the owners of the cargo and consignees, those who salvage the ship, those who make loans upon
the cargo, those of the sailors and members of the crew as to their wages, and those of a constructor as to repairs
made to the vessel.

"As evidence of this real nature of the maritime law we have (1) the limitation of the liability of the agents to the actual
value of the vessel and the freight money, and (2) the right to retain the cargo and the embargo and detention of the
vessel even in cases where the ordinary civil law would not allow more than a personal action against the debtor or
person liable. It will be observed that these rights are correlative, and naturally so, because if the agent can exempt
himself from liability by abandoning the vessel and freight money, thus avoiding the possibility of risking his whole
fortune in the business, it is also just that his maritime creditor may for any reason attach the vessel itself to secure
his claim without waiting for a settlement of his rights by a final judgment, even to the prejudice of a third person.

"This repeals the civil law to such an extent that, in certain cases, where the mortgaged property is lostno personal
action lies against the owner or agent of the vessel. For instance, where the vessel is lost the sailors and members of
the crew cannot recover their wages; in case of collision, the liability of the agent is limited as aforesaid, and in case
of shipwreck, those who loan their money on the vessel and cargo lose all their rights and cannot claim
reimbursement under the law.

"There are two reasons why it is impossible to do away with these privileges, to wit: (1) The risk to which the thing is
exposed, and (2) the real nature of the maritime law, exclusively real, according to which the liability of the parties is
limited to a thing which is at the mercy of the waves. If the agent is only liable with the vessel and freight money and
both may be lost through the accidents of navigation it is only just that the maritime creditor have some means to
obviating this precarious nature of his rights by detaining the ship, his only security, before it is lost.

"The liens, tacit or legal, which may exist upon the vessel and which a purchaser of the same would be obliged to
respect and recognize are — in addition to those existing in favor of the State by virtue of the privileges which are
granted to it by all the laws — pilot, tonnate, and port dues and other similar charges, the wages of the crew earned
during the last voyage as provided in article 646 of the Code of Commerce, salvage dues under article 842, the
indemnification due to the captain of the vessel in case his contract is terminated on account of the voluntary sale of
the ship and the insolvency of the owner as provided in article 608, and all other liabilities arising from collisions
under articles 837 and 838."
We are shared in this conclusion by the eminent commentators on the subject. Agustin Vicente y Gella, asserting, in his "Introduccion al
Derecho Mercantil Comparado" 1929 (pages 374-375), the like principle of limited liability of shipowners or agent in cases of accidents,
collisions, shipwrecks, etc., said:

De las responsabilities que pueden resultar como consequencia del comercio maritimo, y no solo por hechos propios sino
tambien por las que se ocasionen por los del capitan y la tripulacion, responde frente a tercero el naviero que representa el
buque; pero el derecho maritimo es sobre todo tradicional y siguiendo un viejo principio de la Edad Media la responsabilidad
del naviero se organiza de un modo especifico y particularisimo que no encuentra similar en el derecho general de las
obligaciones.

Una forma corrientisima de verificarse el comercio maritimo durante la epoca medieval, era prestar un propietario su navio
para que cargase en el mercancias determinada persona, y se hiciese a la mar, yendo al frente de la expedicion un patron del
buque, que llegado al puerto de destino se encargaba de venderlas y retornaba al de salida despues de adquirir en aquel
otros efectos que igualmente revendia a su regreso, verificado lo cual los beneficios de la expedicion se repartian entre el
dueño del buque, el cargador y el capitan y tripulantes en la proporcion estipulada. El derecho maritimo empezo a considerar
la asociacion asi formada como una verdadera sociedad mercantil, de responsabilidad limitada, y de acuerdo con los
principios que gobiernan aquella en los casos de accidentes, abordajes, naufragios, etc., se resolvia que el dueño del buque
perdia la nave, el cargador las mercancias embarcadas y el capitan y la tripulacion su trabajo, sin que en ningun caso el tercer
acreedor pudiese reclamar mayor cantidad de ninguno de ellos, porque su responsabilidad quedaba limitada a lo que cada
uno aporto a la sociedad. Recogidas estas ideas en el derecho comercial de tiempos posteriores, la responsabilidad del
naviero se edifico sobre aquellos principios, y derogando la norma general civil de que del cumplimiento de sus obligaciones
responde el deudor con todos sus bienes presentes y futuros, la responsabilidad maritima se considero siempre limitada ipso
jure al patrimonio de mar. Y este es el origen de la regla trascendental de derecho maritimo segun la cual el naviero se libera
de toda responsabilidad abandonando el buque y el flete a favor de los acreedores.

From the Enciclopedia Juridica Española, Vol. 23, p. 347, we read:

Ahora bien: ¿hasta donde se extiende esta responsabilidad del naviero? ¿sobre que bienes pueden los acreedores
resarcirse? Esta es otra especialidad del Derecho maritimo; en el Derecho comun la responsabilidad es limitada; tambien lo
era en el antiguo Derecho maritimo romano; es daba la actio exercitoria contra el exercitor navis sin ninguna restriccion, pero
en la Edad Media una idea nueva se introdujo en los usos maritimos. Las cargas resultantes de las expediciones maritimas se
consideraron limitadas por los propietarios de las naves a los valores comprometidos por ellos en cada expedicion; se separo
ficticiamente el patrimonio de los navieros en dos partes que todavia se designan de una manera bastante exacta; fortuna de
tierra y fortuna de mar o flotante; y se admitio la teoria de que esta era la que respondia solo de las deudas provinientes de
los actos del capitan o de la tripulacion, es decir, que el conjunto del patrimonio del naviero escaparia a estas cargas desde el
momento en que abandonara la nave y los fletes a los acreedores. . . .

Escriche in his Diccionario de la Legislacion y Jurisprudencia, Vol. 1, p. 38, observes:

La responsabilidad del naviero, en el caso expuesto, se funda en el principio de derecho comun de ser responsable todo el
que pone al frente de un establecimiento a una persona, de los daños o perjuicios que ocasionare esta desempeñando su
cometido, y en que estando facultado el naviero para la eleccion de capitan de la nave, viene a tener indirectamente culpa en
la negligencia o actos de este que o casionaron daños o perjuicios, puesto que no se aseguro de su pericia o buena fe.
Limitase, sin embargo, la responsabilidad del naviero a la perdida de la nave, sus aparejos, y fletes devengados durante el
viaje; porque no pudiendo vigilar de un modo directo e inmediato la conducta del capitan, hubiera sido duro hacerla extensiva
a todos sus bienes que podria comprometer el capitan con sus faltas o delitos.

The views of these learned commentators, including those of Estasen (Derecho Mercantil, Vol. 4, 259) and Supino (Derecho Mercantil,
pp. 463-464), leave nothing to be desired and nothing to be doubted on the principle. It only remains to be noted that the rule of limited
liability provided for in our Code of Commerce reflects merely, or is but a restatement, imperfect though it is, of the almost universal
principle on the subject. While previously under the civil or common law, the owner of a vessel was liable to the full amount for
damages caused by the misconduct of the master, by the general maritime law of modern Europe, the liability of the shipowner was
subsequently limited to his interest in the vessel. (Norwich & N. Y. Trans. Co. v. Wright, 80 U. S. 104, 20 Law. ed. 585.) A similar
limitation was placed by the British Parliament upon the liability of Englosh shipowners through a series of statutes beginning in 1734
with the Act of 7 George II, chapter 15. The legislatures of Massachusetts and Maine followed suit in 1818 and 1821, and finally,
Congress enacted the Limited Liability Act of March 3, 1851, embodying most of the provisions contained in the British Statutes (see 24
R. C. L. pp. 1387-1389). Section 4283 of the Revised Statutes (sec. 183, Tit. 46, Code of Laws of U. S. A.) reads:

LIABILITY OF OWNER NOT TO EXCEED INTEREST. — The liability of the owner of any vessel, for any embezzlement, loss,
or destruction, by any person, of any property, goods, or merchandise, shipped or put on board of such vessel, or for any loss,
damage, or injury by collision, or for any act, matter or thing, loss, damage, or forfeiture, done, occasioned, or incurred without
the privity, or knowledge of such owner or owners, shall in no case exceed the amount or value of the interest of such owner in
such vessel, and her freight then pending.

The policy which the rule is designed to promote is the encouragement of shipbuilding and investment in maritime commerce. (Vide:
Norwich & N. Y. Trans. Co. v. Wright, supra; The Main v. Williams, 152 U. S. 122; 58 C. J. 634.) And it is in that spirit that the American
courts construed the Limited Liability Act of Congress whereby the immunities of the Act were applied to claims not only for lost goods
but also for injuries and "loss of life of passengers, whether arising under the general law of admiralty, or under Federal or State
statutes." (The City of Columbus, 22 Fed. 460; The Longfellow, 104 Fed. 360; Butler v. Boston & Savannah Steamship Co., 32 Law. ed.
1017; Craig v. Continental Insurance Co., 35 Law. ed. 836.) The Supreme Court of the United States in Norwich & N. Y. Trans. Co. v.
Wright, 80 U. S. 104, 20 Law. ed. 585, 589-590, accounting for the history of the principle, clinches our exposition of the supporting
authorities:

The history of the limitation of liability of shipowners is matter of common knowledge. The learned opinion of Judge Ware in
the case of The Rebecca, 1 Ware, 187-194, leaves little to be desired on the subject. He shows that it originated in the
maritime law of modern Europe; that whilst the civil, as well as the common law, made the owner responsible to the whole
extent of damage caused by the wrongful act or negligence of the matter or crew, the maritime law only made then liable (if
personally free from blame) to the amount of their interest in the ship. So that, if they surrendered the ship, they were
discharged.

Grotius, in his law of War and Peace, says that men would be deterred from investing in ships if they thereby incurred the
apprehension of being rendered liable to an indefinite amount by the acts of the master and, therefore, in Holland, they had
never observed the Roman Law on that subject, but had a regulation that the ship owners should be bound no farther than the
value of their ship and freight. His words are: Navis et eorum quae in navi sunt," "the ship and goods therein." But he is
speaking of the owner's interest; and this, as to the cargo, is the freight thereon, and in that sense he is understood by the
commentators. Boulay Paty, Droit Maritime, tit. 3, sec. 1, p. 276; Book II, c. XI, sec. XIII. The maritime law, as codified in the
celebrated French Ordonance de la Marine, in 1681, expressed the rule thus: 'The proprietors of vessels shall be responsible
for the acts of the master, but they shall be discharged by abandoning the ship and freight.' Valin, in his commentary on this
passage, lib. 2, tit. 8, art. 2, after specifying certain engagements of the master which are binding on the owners, without any
limit of responsibility, such as contracts for the benefit of the vessel, made during the voyage (except contracts of bottomry)
says: "With these exceptions it is just that the owner should not be bound for the acts of the master, except to the amount of
the ship and freight. Otherwise he would run the risk of being ruined by the bad faith or negligence of his captain, and the
apprehension of this would be fatal to the interests of navigation. It is quite sufficient that he be exposed to the loss of his ship
and of the freight, to make it his interest, independently of any goods he may have on board to select a reliable captain."
Pardessus says: 'The owner is bound civilly for all delinquencies committed by the captain within the scope of his authority, but
he may discharge himself therefrom by abandoning the ship and freight; and, if they are lost, it suffices for his discharge, to
surrender all claims in respect of the ship and its freight," such as insurance, etc. Droit Commercial, part 3, tit. 2, c. 3, sec. 2.

The same general doctrine is laid down by many other writers on maritime law. So that it is evident that, by this law, the
owner's liability was coextensive with his interest in the vessel and its freight, and ceased by his abandonment and surrender
of these to the parties sustaining loss.

In the light of all the foregoing, we therefore hold that if the shipowner or agent may in any way be held civilly liable at all for injury to or
death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive
with his interest in the vessel such that a total loss thereof results in its extinction. In arriving at this conclusion, we have not been
unmindful of the fact that the ill-fated steamship Negros, as a vessel engaged in interisland trade, is a common carrier (De
Villata v. Stanely, 32 Phil., 541), and that the as a vessel engaged in interisland trade, is a common carrier (De Villata v. Stanely, 32
Phil., 541), and that the relationship between the petitioner and the passengers who died in the mishap rests on a contract of carriage.
But assuming that petitioner is liable for a breach of contract of carriage, the exclusively "real and hypothecary nature" of maritime law
operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that
the vessel was insured.

Whether the abandonment of the vessel sought by the petitioner in the instant case was in accordance with law of not, is immaterial.
The vessel having totally perished, any act of abandonment would be an idle ceremony.

G.R. No. L-9534. September 29, 1956.]

MANILA STEAMSHIP CO., INC., Petitioner, vs. INSA ABDULHAMAN (MORO) and LIM HONG TO, Respondents.

DECISION
REYES, J. B. L., J.:
This case was begun in the Court of First Instance of Zamboanga (Civil Case No. 170) by Insa Abdulhaman against the Manila Steamship Co., owner
of the M/S “Bowline Knot”, and Lim Hong To, owner of the M/L “Consuelo V”, to recover damages for the death of his (Plaintiff’s) five children and
loss of personal properties on board the M/L “Consuelo V” as a result of a maritime collision between said vessel and the M/S “Bowline Knot” on
May 4, 1948, a few kilometers distant from San Ramon Beach, Zamboanga City.
On appeal, the Court of Appeals found the following facts to have been established:chanroblesvirtuallawlibrary
“From 7:chanroblesvirtuallawlibrary00 to 8:chanroblesvirtuallawlibrary00 o’clock in the evening of May 4, 1948, the M/L “Consuelo V”, laden with
cargoes and passengers left the port of Zamboanga City bound for Siokon under the command of Faustino Macrohon. She was then towing a kumpit,
named “Sta. Maria Bay”. The weather was good and fair. Among her passengers were the Plaintiff Insa Abdulhaman, his wife Carimla Mora and their
five children already mentioned. The Plaintiff and his wife paid their fare before the voyage started.
On that same night the M/S “Bowline Knot” was navigating from Maribojoc towards Zamboanga.
Between 9:chanroblesvirtuallawlibrary30 to 10:chanroblesvirtuallawlibrary00 in the evening the dark clouds bloated with rain began to fall and the
gushing strong wind began to blow steadily harder, lashing the waves into a choppy and roaring sea. Such weather lasted for about an hour and then
it became fair although it was showering and the visibility was good enough.
When some of the passengers of the M/L “Consuelo V” were then sleeping and some were lying down awake, all of a sudden they felt the shocking
collision of the M/L “Consuelo V” and a big motorship, which later on was identified as the M/V “Bowline Knot”.
Because the M/L “Consuelo V” capsized, her crew and passengers, before realizing what had happened, found themselves swimming and floating on
the crest of the waves and as a result of which nine (9) passengers were dead and missing and all the cargoes carried on said boat, including those of
the Plaintiff as appear in the list, Exhibit “A”, were also lost.
Among the dead passengers found were Maria, Amlasa, Bidoaya and Bidalla, all surnamed Inasa, while the body of the child Abdula Inasa of 6 years
of age was never recovered. Before the collision, none of the passengers were warned or informed of the impending danger as the collision was so
sudden and unexpected. All those rescued at sea were brought by the M/V “Bowline Knot” to Zamboanga City.” (Decision of C. A., pp. 5-6).
As the cause of the collision, the Court of Appeals affirmed the findings of the Board of Marine Inquiry, that the commanding officer of the colliding
vessels had both been negligent in operating their respective vessels. Wherefore, the Court held the owners of both vessels solidarily liable
to Plaintiff for the damages caused to him by the collision, under Article 827 of the Code of Commerce; chan roblesvirtualawlibrarybut
exempted Defendant Lim Hong To from liability by reason of the sinking and total loss of his vessel, the M/L “Consuelo V”, while the other Defendant,
the Manila Steamship Co., owner of the M/S “Bowline Knot”, was ordered to pay all of Plaintiff’s damages in the amount of P20,784.00 plus one-half
of the costs. It is from this judgment that Defendant Manila Steamship Co. had appealed to this Court.
Petitioner Manila Steamship Co. pleads that it is exempt from any liability to Plaintiff under Article 1903 of the Civil Code because it had exercised
the diligence of a good father of a family in the selection of its employees, particularly Third Mate Simplicio Ilagan, the officer in command of its
vessels, the M/S “Bowline Knot”, at the time of the collision. This defense is untenable. While it is true that Plaintiff’s action against Petitioner is
based on a tort or quasi-delict, the tort in question is not a civil tort under the Civil Code but a maritime tort resulting in a collision at sea, governed
by Articles 826-939 of the Code of Commerce. Under Article 827 of the Code of Commerce, in case of collision between two vessels imputable to
both of them, each vessel shall suffer her own damage and both shall be solidarily liable for the damages occasioned to their cargoes. The
characteristic language of the law in making the “vessels” solidarily liable for the damages due to the maritime collision emphasizes the direct nature
of the responsibilities on account of the collision incurred by the shipowner under maritime law, as distinguished from the civil law and mercantile
law in general. This direct responsibility is recognized in Article 618 of the Code of Commerce under which the captain shall be civilly liable to the
ship agent, and the latter is the one liable to third persons, as pointed out in the collision case of Yueng Sheng Exchange & Trading Co. vs. Urrutia &
Co., 12 Phil. 747, 753:chanroblesvirtuallawlibrary
“The responsibility involved in the present action is that derived from the management of the vessel, which was defective on account of lack of skill,
negligence, or fault, either of the captain or of the crew, for which the captain is responsible to the agent, who in his turn is responsible to the third
party prejudiced or damaged. (Article 618, Code of Commerce).”
In fact, it is a general principle, well established maritime law and custom, that shipowners and ship agents are civilly liable for the acts of the captain
(Code of Commerce, Article 586) and for the indemnities due the third persons (Article 587); chan roblesvirtualawlibraryso that injured parties may
immediately look for reimbursement to the owner of the ship, it being universally recognized that the ship master or captain is primarily the
representative of the owner (Standard Oil Co. vs. Lopez Castelo, 42 Phil. 256, 260). This direct liability, moderated and limited by the owner’s right of
abandonment of the vessel and earned freight (Article 587), has been declared to exist, not only in case of breached contracts, but also in cases of
tortious negligence (Yu Biao Sontua vs. Osorio, 43 Phil. 511, 515):chanroblesvirtuallawlibrary
“In the second assignment of error, the Appellant contends that the Defendant ought not to be held liable for the negligence of his agents and
employees.
It is proven that the agents and employees, through whose negligence the explosion and fire in question occurred, were agents, employees and
mandatories of the Defendant. Where the vessel is one of freight, a public concern or public utility, its owner or agents is liable for the tortious acts
of his agents (Articles 587, 613, and 618 Code of Commerce; chan roblesvirtualawlibraryand Article 1902, 1903, 1908, Civil Code). This principle has
been repeatedly upheld in various decisions of this court.
The doctrines cited by the Appellant in support of his theory have reference to the relations between principal and agent in general, but not to the
relations between ship agent and his agents and employees; chan roblesvirtualawlibraryfor this reason they cannot be applied in the present case.”
It is easy to see that to admit the defense of due diligence of a bonus paterfamilias (in the selection and vigilance of the officers and crew) as
exempting the shipowner from any liability for their faults, would render nugatory the solidary liability established by Article 827 of the Code of
Commerce for the greater protection of injured parties. Shipowners would be able to escape liability in practically every case, considering that the
qualifications and licensing of ship masters and officers are determined by the State, and that vigilance is practically impossible to exercise over
officers and crew of vessels at sea. To compel the parties prejudiced to look to the crew for indemnity and redress would be an illusory remedy for
almost always its members are, from captains down, mere wage earners.
We, therefore, find no reversible error in the refusal of the Court of Appeals to consider the defense of the Manila Steamship Co., that it is exempt
from liability for the collision with the M/L “Consuelo V” due to absence of negligence on its parts in the selection and supervision of the officers and
crew of the M/S “Bowline Knot”.
The case of Walter S. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55 Phil. 517, invoked by Petitioner, is not the point. Said case treated of a civil
tort, in that the vessel of the Defendant, allegedly negligently managed by its captain in the course of its maneuvers to moor at Plaintiff’s wharf,
struck the same and partially demolished it, causing damage to Plaintiff. Because the tort allegedly committed was civil, the provisions of Article 1903
of the Civil Code were correctly applied. The present case, on the other hand, involves tortious conduct resulting in a maritime collision; chan
roblesvirtualawlibrarywherefore, the liability of the shipowner is, as already stated, governed by the provisions of the Code of Commerce and not by
the Civil Code.
We agree, however, with Petitioner-Appellant, that the Court of Appeals was in error in declaring the Respondent Lim Hong To, owner of the M/L
“Consuelo V”, exempt from liability to the original Plaintiff, Abdulhaman, in view of the total loss of his own vessel, that sank as a result of the
collision. It is to be noted that both the master and the engineer of the motor launch “Consuelo V” were not duly licensed as such (Exh. 2). In applying
for permission to operate, despite the lack of properly trained and experienced, crew, Respondent Lim Hong To gave as a reason —
“that the income derived from the vessel is insufficient to pay licensed officers who demand high salaries”,
and expressly declared:chanroblesvirtuallawlibrary
“That in case of any accident, damage or loss, I shall assume full risk and responsibility for all the consequences thereof.” (Exhibit 2).
His permit to operate, in fact, stipulated —
“that in case of any accident, damage or loss, the registered owner thereof shall assume full risk and responsibility for all the consequences thereof,
and that said vessel shall be held answerable for any negligence, disregard or violation of any of the conditions herein imposed and for any
consequence arising from such negligence, disregard or violations.” (Exhibit 3.)
The Court of Appeals held that neither the letter (Exhibit 2) nor the permit (Exhibit 3) contained any waiver of the right of Respondent Lim Hong To
to limit his liability to the value of his motor launch and that he did not lose the statutory right to limit his liability by abandonment of the vessel, as
conferred by Article 587 of the Code of Commerce.
We find the ruling untenable. Disregarding the question whether mere inability to meet the salary demands of duly licensed masters and engineers
constitutes non-availability thereof that would excuse noncompliance with the law and authorize operation without licensed officers under Act 3553,
the fact remains that by operating with an unlicensed master, Lim Hong To deliberately increased the risk to which the passengers and shippers of
cargo aboard the “Consuelo V” would be subjected. In his desire to reap greater benefits in the maritime trade, Lim Hong To willfully augmented the
dangers and hazards to his vessel’s unwarry passengers, who would normally assume that the launch officers possessed the necessary skill and
experience to evade the perils of the sea. Hence, the liability of said Respondent cannot be the identical to that of a shipowner who bears in mind
the safety of the passengers and cargo by employing duly licensed officers. To hold, as the Court of Appeals has done, that Lim Hong To may limit his
liability to the value of his vessels, is to erase all difference between compliance with law and the deliberate disregard thereof. To such proposition
we cannot assent.
The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner’s liability, does not apply to cases
where the injury or the average is due to shipowner’s own fault. Fariña (Derecho Comercial Maritimo, Vol. I, pp. 122-123), on the authority of judicial
precedents from various nations, sets the rule to be as follows:chanroblesvirtuallawlibrary
“Esta generalmente admitido que el propietario del buque no tiene derecho a la limitacion legal de responsibilidad si los daños o averias que dan
origen a la limitacion provienen de sus propias culpas. El Convenio de Bruselas de 25 de agosto de 1924 tambien invalida la limitacion en el caso de
culpa personal en los accidentes o averías sobrevenidos (Art. 2°).”
To the same effect, a noted French author states:chanroblesvirtuallawlibrary
“La limitacion de la responsabilidad maritima ha sido admitida para proteger a los armadores contra los actos abusivos de sus encargados y no dejar
su patrimonio entero a la discrecion del personal de sus buques, porque este personal cumple sus obligaciones en condiciones especiales; chan
roblesvirtualawlibrarypero los armadores no tienen por sobre los demas derecho a ser amparados contra ellos mismos ni a ser protegidos contra sus
propios actos.”
(Danjon, Derecho Maritimo, Vol. 2, p. 332). (Emphasis supplied.)
That Lim Hong To understood that he would incur greater liability than that normally borne by shipowners, is clear from his assumption of “ full” risk
and responsibility for all the consequences” of the operation of the M/L “Consuelo V”; chan roblesvirtualawlibrarya responsibility expressly assumed
in his letter Exhibit 2, and imposed in his special permit, in addition to the vessel itself being held answerable. This express assumption of “full risk
and responsibility” would be meaningless unless intended to broaden the liability of Respondent Lim Hong To beyond the value of his vessel.
In resume, we hold:chanroblesvirtuallawlibrary
(1) That the Manila Steamship Co., owner of the M/S “Bowline Knot”, is directly and primarily responsible in tort for the injuries caused to
the Plaintiff by the collision of said vessel with the launch “Consuelo V”, through the negligence of the crews of both vessels, and it may not escape
liability on the ground that it exercised due diligence in the selection and supervision of the officers and crew of the “Bowline Knot”;
(2) That Lim Hong To, as owner of the motor launch “Consuelo V”, having caused the same to sail without licensed officers, is liable for the injuries
caused by the collision over and beyond the value of said launch;
(3) That both vessels being at fault, the liability of Lim Hong To and Manila Steamship Co. to the Plaintiff herein is in solidum, as prescribed by Article
827 of the Code of Commerce.
In view of the foregoing, the decision of the Court of Appeals is modified, and that of the Court of First Instance affirmed, in the sense of declaring
both original Defendants solidarily liable to Plaintiff Insa Abdulhaman in the sum of P20,784.00 and the cost of the litigation, without prejudice to
the right of the one who should pay the judgment in full to demand contribution from his co-Defendant.

G.R. No. 74811 September 30, 1988

CHUA YEK HONG, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, MARIANO GUNO, and DOMINADOR OLIT, respondents.

Francisco D. Estrada for petitioner.

Purita Hontanosas-Cortes for private respondents.

MELENCIO-HERRERA, J.:

In this Petition for Review on certiorari petitioner seeks to set aside the Decision of respondent Appellate Court in AC G.R. No. 01375
entitled "Chua Yek Hong vs. Mariano Guno, et al.," promulgated on 3 April 1986, reversing the Trial Court and relieving private
respondents (defendants below) of any liability for damages for loss of cargo.

The basic facts are not disputed:

Petitioner is a duly licensed copra dealer based at Puerta Galera, Oriental Mindoro, while private respondents are the owners of the
vessel, "M/V Luzviminda I," a common carrier engaged in coastwise trade from the different ports of Oriental Mindoro to the Port of
Manila.

In October 1977, petitioner loaded 1,000 sacks of copra, valued at P101,227.40, on board the vessel "M/V Luzviminda I" for shipment
from Puerta Galera, Oriental Mindoro, to Manila. Said cargo, however, did not reach Manila because somewhere between Cape
Santiago and Calatagan, Batangas, the vessel capsized and sank with all its cargo.

On 30 March 1979, petitioner instituted before the then Court of First Instance of Oriental Mindoro, a Complaint for damages based on
breach of contract of carriage against private respondents (Civil Case No. R-3205).

In their Answer, private respondents averred that even assuming that the alleged cargo was truly loaded aboard their vessel, their
liability had been extinguished by reason of the total loss of said vessel.

On 17 May 1983, the Trial Court rendered its Decision, the dispositive portion of which follows:

WHEREFORE, in view of the foregoing considerations, the court believes and so holds that the preponderance of
evidence militates in favor of the plaintiff and against the defendants by ordering the latter, jointly and severally, to
pay the plaintiff the sum of P101,227.40 representing the value of the cargo belonging to the plaintiff which was lost
while in the custody of the defendants; P65,550.00 representing miscellaneous expenses of plaintiff on said lost
cargo; attorney's fees in the amount of P5,000.00, and to pay the costs of suit. (p. 30, Rollo).

On appeal, respondent Appellate Court ruled to the contrary when it applied Article 587 of the Code of Commerce and the doctrine in
Yangco vs. Lasema (73 Phil. 330 [1941]) and held that private respondents' liability, as ship owners, for the loss of the cargo is merely
co-extensive with their interest in the vessel such that a total loss thereof results in its extinction. The decretal portion of that
Decision 1 reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby REVERSED, and
another one entered dismissing the complaint against defendants-appellants and absolving them from any and all
liabilities arising from the loss of 1,000 sacks of copra belonging to plaintiff-appellee. Costs against appellee.
(p. 19, Rollo).

Unsuccessful in his Motion for Reconsideration of the aforesaid Decision, petitioner has availed of the present recourse.

The basic issue for resolution is whether or not respondent Appellate Court erred in applying the doctrine of limited liability under Article
587 of the Code of Commerce as expounded in Yangco vs. Laserna, supra.
Article 587 of the Code of Commerce provides:

Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from
the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself
therefrom by abandoning the vessel with all the equipments and the freight it may have earned during the voyage.

The term "ship agent" as used in the foregoing provision is broad enough to include the ship owner (Standard Oil Co. vs. Lopez
Castelo, 42 Phil. 256 [1921]). Pursuant to said provision, therefore, both the ship owner and ship agent are civilly and directly liable for
the indemnities in favor of third persons, which may arise from the conduct of the captain in the care of goods transported, as well as for
the safety of passengers transported Yangco vs. Laserna, supra; Manila Steamship Co., Inc. vs. Abdulhaman et al., 100 Phil. 32
[1956]).

However, under the same Article, this direct liability is moderated and limited by the ship agent's or ship owner's right of abandonment
of the vessel and earned freight. This expresses the universal principle of limited liability under maritime law. The most fundamental
effect of abandonment is the cessation of the responsibility of the ship agent/owner (Switzerland General Insurance Co., Ltd. vs.
Ramirez, L-48264, February 21, 1980, 96 SCRA 297). It has thus been held that by necessary implication, the ship agent's or ship
owner's liability is confined to that which he is entitled as of right to abandon the vessel with all her equipment and the freight it may
have earned during the voyage," and "to the insurance thereof if any" (Yangco vs. Lasema, supra). In other words, the ship owner's or
agent's liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. "No vessel, no
liability" expresses in a nutshell the limited liability rule. The total destruction of the vessel extinguishes maritime liens as there is no
longer any res to which it can attach (Govt. Insular Maritime Co. vs. The Insular Maritime, 45 Phil. 805, 807 [1924]).

As this Court held:

If the ship owner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from
the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest
in the vessel such that a total loss thereof results in its extinction. (Yangco vs. Laserna, et al., supra).

The rationale therefor has been explained as follows:

The real and hypothecary nature of the liability of the ship owner or agent embodied in the provisions of the Maritime
Law, Book III, Code of Commerce, had its origin in the prevailing conditions of the maritime trade and sea voyages
during the medieval ages, attended by innumerable hazards and perils. To offset against these adverse conditions
and to encourage ship building and maritime commerce, it was deemed necessary to confine the liability of the owner
or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if any, so that if the
ship owner or agent abandoned the ship, equipment, and freight, his liability was extinguished. (Abueg vs. San Diego,
77 Phil. 730 [1946])

—0—

Without the principle of limited liability, a ship owner and investor in maritime commerce would run the risk of being
ruined by the bad faith or negligence of his captain, and the apprehension of this would be fatal to the interest of
navigation." Yangco vs. Lasema, supra).

—0—

As evidence of this real nature of the maritime law we have (1) the limitation of the liability of the agents to the actual
value of the vessel and the freight money, and (2) the right to retain the cargo and the embargo and detention of the
vessel even in cases where the ordinary civil law would not allow more than a personal action against the debtor or
person liable. It will be observed that these rights are correlative, and naturally so, because if the agent can exempt
himself from liability by abandoning the vessel and freight money, thus avoiding the possibility of risking his whole
fortune in the business, it is also just that his maritime creditor may for any reason attach the vessel itself to secure
his claim without waiting for a settlement of his rights by a final judgment, even to the prejudice of a third person.
(Phil. Shipping Co. vs. Vergara, 6 Phil. 284 [1906]).

The limited liability rule, however, is not without exceptions, namely: (1) where the injury or death to a passenger is due either to the
fault of the ship owner, or to the concurring negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs.
Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen's compensation claims Abueg vs. San Diego, supra). In this
case, there is nothing in the records to show that the loss of the cargo was due to the fault of the private respondent as shipowners, or
to their concurrent negligence with the captain of the vessel.

What about the provisions of the Civil Code on common carriers? Considering the "real and hypothecary nature" of liability under
maritime law, these provisions would not have any effect on the principle of limited liability for ship owners or ship agents. As was
expounded by this Court:
 In arriving at this conclusion, the fact is not ignored that the illfated, S.S. Negros, as a vessel engaged in interisland
trade, is a common carrier, and that the relationship between the petitioner and the passengers who died in the
mishap rests on a contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the
exclusively 'real and hypothecary nature of maritime law operates to limit such liability to the value of the vessel, or to
the insurance thereon, if any. In the instant case it does not appear that the vessel was insured. (Yangco vs. Laserila,
et al., supra).

Moreover, Article 1766 of the Civil Code provides:

Art. 1766. In all matters not regulated by this Code, the rights and obligations of common carriers shall be governed
by the Code of Commerce and by special laws.

In other words, the primary law is the Civil Code (Arts. 17321766) and in default thereof, the Code of Commerce and other special laws
are applied. Since the Civil Code contains no provisions regulating liability of ship owners or agents in the event of total loss or
destruction of the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that govern in this case.

In sum, it will have to be held that since the ship agent's or ship owner's liability is merely co-extensive with his interest in the vessel
such that a total loss thereof results in its extinction (Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited
liability being present, the liability of private respondents for the loss of the cargo of copra must be deemed to have been extinguished.
There is no showing that the vessel was insured in this case.

WHEREFORE, the judgment sought to be reviewed is hereby AFFIRMED. No costs.

SO ORDERED.

G..R. No. 156978 May 2, 2006

ABOITIZ SHIPPING CORPORATION, Petitioner,

vs.
NEW INDIA ASSURANCE COMPANY, LTD., Respondent.

DECISION

QUISUMBING, J.:

For review on certiorari are the Decision1 dated August 29, 2002 of the Court of Appeals in CA-G.R. CV No. 28770 and its
Resolution2 dated January 23, 2003 denying reconsideration. The Court of Appeals affirmed the Decision 3dated November 20, 1989 of
the Regional Trial Court of Manila in Civil Case No. 82-1475, in favor of respondent New India Assurance Company, Ltd.

This petition stemmed from the action for damages against petitioner, Aboitiz Shipping Corporation, arising from the sinking of its
vessel, M/V P. Aboitiz, on October 31, 1980.

The pertinent facts are as follows:

Societe Francaise Des Colloides loaded a cargo of textiles and auxiliary chemicals from France on board a vessel owned by Franco-
Belgian Services, Inc. The cargo was consigned to General Textile, Inc., in Manila and insured by respondent New India Assurance
Company, Ltd. While in Hongkong, the cargo was transferred to M/V P. Aboitiz for transshipment to Manila.4

Before departing, the vessel was advised by the Japanese Meteorological Center that it was safe to travel to its destination. 5 But while
at sea, the vessel received a report of a typhoon moving within its general path. To avoid the typhoon, the vessel changed its course.
However, it was still at the fringe of the typhoon when its hull leaked. On October 31, 1980, the vessel sank, but the captain and his
crew were saved.

On November 3, 1980, the captain of M/V P. Aboitiz filed his "Marine Protest", stating that the wind force was at 10 to 15 knots at the
time the ship foundered and described the weather as "moderate breeze, small waves, becoming longer, fairly frequent white horses." 6

Thereafter, petitioner notified7 the consignee, General Textile, of the total loss of the vessel and all of its cargoes. General Textile,
lodged a claim with respondent for the amount of its loss. Respondent paid General Textile and was subrogated to the rights of the
latter.8
Respondent hired a surveyor, Perfect, Lambert and Company, to investigate the cause of the sinking. In its report, 9the surveyor
concluded that the cause was the flooding of the holds brought about by the vessel’s questionable seaworthiness. Consequently,
respondent filed a complaint for damages against petitioner Aboitiz, Franco-Belgian Services and the latter’s local agent, F.E. Zuellig,
Inc. (Zuellig). Respondent alleged that the proximate cause of the loss of the shipment was the fault or negligence of the master and
crew of the vessel, its unseaworthiness, and the failure of defendants therein to exercise extraordinary diligence in the transport of the
goods. Hence, respondent added, defendants therein breached their contract of carriage. 101avvphil.net

Franco-Belgian Services and Zuellig responded, claiming that they exercised extraordinary diligence in handling the shipment while it
was in their possession; its vessel was seaworthy; and the proximate cause of the loss of cargo was a fortuitous event. They also filed a
cross-claim against petitioner alleging that the loss occurred during the transshipment with petitioner and so liability should rest with
petitioner.

For its part, petitioner also raised the same defense that the ship was seaworthy. It alleged that the sinking of M/V P. Aboitiz was due to
an unforeseen event and without fault or negligence on its part. It also alleged that in accordance with the real and hypothecary nature
of maritime law, the sinking of M/V P. Aboitiz extinguished its liability on the loss of the cargoes.11

Meanwhile, the Board of Marine Inquiry (BMI) conducted its own investigation to determine whether the captain and crew were
administratively liable. However, petitioner neither informed respondent nor the trial court of the investigation. The BMI exonerated the
captain and crew of any administrative liability; and declared the vessel seaworthy and concluded that the sinking was due to the
vessel’s exposure to the approaching typhoon.

On November 20, 1989, the trial court, citing the Court of Appeals decision in General Accident Fire and Life Assurance Corporation v.
Aboitiz Shipping Corporation12 involving the same incident, ruled in favor of respondent. It held petitioner liable for the total value of the
lost cargo plus legal interest, thus:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of New India and against Aboitiz ordering the latter to
pay unto the former the amount of P142,401.60, plus legal interest thereon until the same is fully paid, attorney’s fees equivalent to
fifteen [percent] (15%) of the total amount due and the costs of suit.

The complaint with respect to Franco and Zuellig is dismissed and their counterclaim against New India is likewise dismissed

SO ORDERED.131avvphil.net

Petitioner elevated the case to the Court of Appeals and presented the findings of the BMI. However, on August 29, 2002, the appellate
court affirmed in toto the trial court’s decision. It held that the proceedings before the BMI was only for the administrative liability of the
captain and crew, and was unilateral in nature, hence not binding on the courts. Petitioner moved for reconsideration but the same was
denied on January 23, 2003.

Hence, this petition for review, alleging that the Court of Appeals gravely erred in:

I.

x x x DISREGARDING THE RULINGS OF THE HONORABLE SUPREME COURT ON THE APPLICATION OF THE RULE ON
LIMITED LIABILITY UNDER ARTICLE 587, 590 AND 837 OF THE CODE OF COMMERCE TO CASES INVOLVING THE SINKING
OF THE M/V "P. ABOITIZ;

A.

x x x NOT APPLYING THE RULINGS IN THE CASES OF MONARCH INSURANCE CO., INC. ET AL. V. COURT OF APPEALS ET
AL. AND ABOITIZ SHIPPING CORPORATION V. GENERAL ACCIDENT FIRE AND LIFE ASSURANCE CORPORATION, LTD.;

B.

x x x RULING THAT THE ISSUE ON THE APPLICATION OF THE RULE ON LIMITED LIABILITY UNDER ARTICLES 587, 590 AND
837 OF THE CODE OF COMMERCE HAD BEEN CONSIDERED AND PASSED UPON IN ITS DECISION;

II.

x x x NOT LIMITING THE AWARD OF DAMAGES TO RESPONDENT TO ITS PRO-RATA SHARES IN THE INSURANCE
PROCEEDS FROM THE SINKING OF THE M/V "P. ABOITIZ".14

Stated simply, we are asked to resolve whether the limited liability doctrine, which limits respondent’s award of damages to its pro-rata
share in the insurance proceeds, applies in this case.
Petitioner, citing Monarch Insurance Co. Inc. v. Court of Appeals, 15 contends that respondent’s claim for damages should only be
against the insurance proceeds and limited to its pro-rata share in view of the doctrine of limited liability.

Respondent counters that the doctrine of real and hypothecary nature of maritime law is not applicable in the present case because
petitioner was found to have been negligent. Hence, according to respondent, petitioner should be held liable for the total value of the
lost cargo.

It bears stressing that this Court has variedly applied the doctrine of limited liability to the same incident – the sinking of M/V P.
Aboitiz on October 31, 1980. Monarch, the latest ruling, tried to settle the conflicting pronouncements of this Court relative to the sinking
of M/V P. Aboitiz. In Monarch, we said that the sinking of the vessel was not due to force majeure, but to its unseaworthy
condition.16 Therein, we found petitioner concurrently negligent with the captain and crew. 17 But the Court stressed that the
circumstances therein still made the doctrine of limited liability applicable.18

Our ruling in Monarch may appear inconsistent with the exception of the limited liability doctrine, as explicitly stated in the earlier part of
the Monarch decision. An exception to the limited liability doctrine is when the damage is due to the fault of the shipowner or to the
concurrent negligence of the shipowner and the captain. In which case, the shipowner shall be liable to the full-extent of the
damage.19 We thus find it necessary to clarify now the applicability here of the decision in Monarch.

From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary diligence over
the goods they transport according to all the circumstances of each case. 20 In the event of loss, destruction or deterioration of the
insured goods, common carriers are responsible, unless they can prove that the loss, destruction or deterioration was brought about by
the causes specified in Article 1734 of the Civil Code.21 In all other cases, common carriers are presumed to have been at fault or to
have acted negligently, unless they prove that they observed extraordinary diligence.22 Moreover, where the vessel is found
unseaworthy, the shipowner is also presumed to be negligent since it is tasked with the maintenance of its vessel. Though this duty can
be delegated, still, the shipowner must exercise close supervision over its men. 23

In the present case, petitioner has the burden of showing that it exercised extraordinary diligence in the transport of the goods it had on
board in order to invoke the limited liability doctrine. Differently put, to limit its liability to the amount of the insurance proceeds,
petitioner has the burden of proving that the unseaworthiness of its vessel was not due to its fault or negligence. Considering the
evidence presented and the circumstances obtaining in this case, we find that petitioner failed to discharge this burden. It initially
attributed the sinking to the typhoon and relied on the BMI findings that it was not at fault. However, both the trial and the appellate
courts, in this case, found that the sinking was not due to the typhoon but to its unseaworthiness. Evidence on record showed that the
weather was moderate when the vessel sank. These factual findings of the Court of Appeals, affirming those of the trial court are not to
be disturbed on appeal, but must be accorded great weight. These findings are conclusive not only on the parties but on this Court as
well.24

In contrast, the findings of the BMI are not deemed always binding on the courts. 25 Besides, exoneration of the vessel’s officers and
crew by the BMI merely concerns their respective administrative liabilities. 26 It does not in any way operate to absolve the common
carrier from its civil liabilities arising from its failure to exercise extraordinary diligence, the determination of which properly belongs to
the courts.27

Where the shipowner fails to overcome the presumption of negligence, the doctrine of limited liability cannot be applied. 28 Therefore, we
agree with the appellate court in sustaining the trial court’s ruling that petitioner is liable for the total value of the lost cargo.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated August 29, 2002 and Resolution dated January 23, 2003 of
the Court of Appeals in CA-G.R. CV No. 28770 are AFFIRMED.

G.R. No. 76452 July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON MONTILLA PATERNO, JR., respondents.

Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.

Oscar Z. Benares for private respondent.

QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with preliminary injunction or temporary
restraining order, to annul and set aside the Order dated November 6, 1986 of the Insurance Commissioner and the entire proceedings
taken in I.C. Special Case No. 1-86.

We grant the petition.

The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr. dated April 17, 1986, to respondent
Commissioner, alleging certain problems encountered by agents, supervisors, managers and public consumers of the Philippine
American Life Insurance Company (Philamlife) as a result of certain practices by said company.

In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los Reyes, in his capacity as Philamlife's
president, to comment on respondent Paterno's letter.

In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested that private respondent "submit some
sort of a 'bill of particulars' listing and citing actual cases, facts, dates, figures, provisions of law, rules and regulations, and all other
pertinent data which are necessary to enable him to prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the
Insurance Commissioner to private respondent for his comments thereon.

On May 16, 1986, respondent Commissioner received a letter from private respondent maintaining that his letter-complaint of April 17,
1986 was sufficient in form and substance, and requested that a hearing thereon be conducted.

Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated his claim that private respondent's
letter of May 16, 1986 did not supply the information he needed to enable him to answer the letter-complaint.

On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the validity of the Contract of Agency
complained of by private respondent.

In said hearing, private respondent was required by respondent Commissioner to specify the provisions of the agency contract which he
claimed to be illegal.

On August 4, private respondent submitted a letter of specification to respondent Commissioner dated July 31, 1986, reiterating his
letter of April 17, 1986 and praying that the provisions on charges and fees stated in the Contract of Agency executed between
Philamlife and its agents, as well as the implementing provisions as published in the agents' handbook, agency bulletins and circulars,
be declared as null and void. He also asked that the amounts of such charges and fees already deducted and collected by Philamlife in
connection therewith be reimbursed to the agents, with interest at the prevailing rate reckoned from the date when they were deducted.

Respondent Commissioner furnished petitioner De los Reyes with a copy of private respondent's letter of July 31, 1986, and requested
his answer thereto.

Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:

(1) Private respondent's letter of August 11, 1986 does not contain any of the particular information which Philamlife
was seeking from him and which he promised to submit.

(2) That since the Commission's quasi-judicial power was being invoked with regard to the complaint, private
respondent must file a verified formal complaint before any further proceedings.

In his letter dated September 9, 1986, private respondent asked for the resumption of the hearings on his complaint.

On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986, and July 31, 1986.

In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President and Executive Assistant to the
President, asked that respondent Commission first rule on the questions of the jurisdiction of the Insurance Commissioner over the
subject matter of the letters-complaint and the legal standing of private respondent.

On October 27, respondent Commissioner notified both parties of the hearing of the case on November 5, 1986.

On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following grounds;

1. The Subpoena/Notice has no legal basis and is premature because:

(1) No complaint sufficient in form and contents has been filed;

 (2) No summons has been issued nor received by the
respondent De los Reyes, and hence, no jurisdiction has been
acquired over his person;

(3) No answer has been filed, and hence, the hearing

scheduled on November 5, 1986 in the Subpoena/Notice, and
wherein the respondent is required to appear, is premature and
lacks legal basis.

II. The Insurance Commission has no jurisdiction over;

(1) the subject matter or nature of the action; and

(2) over the parties involved (Rollo, p. 102).

In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash. The dispositive portion of said Order
reads:

NOW, THEREFORE, finding the position of complainant thru counsel tenable and considering the fact that the instant
case is an informal administrative litigation falling outside the operation of the aforecited memorandum circular but
cognizable by this Commission, the hearing officer, in open session ruled as it is hereby ruled to deny the Motion to
Quash Subpoena/Notice for lack of merit (Rollo, p. 109).

Hence, this petition.

II

The main issue to be resolved is whether or not the resolution of the legality of the Contract of Agency falls within the jurisdiction of the
Insurance Commissioner.

Private respondent contends that the Insurance Commissioner has jurisdiction to take cognizance of the complaint in the exercise of its
quasi-judicial powers. The Solicitor General, upholding the jurisdiction of the Insurance Commissioner, claims that under Sections 414
and 415 of the Insurance Code, the Commissioner has authority to nullify the alleged illegal provisions of the Contract of Agency.

III

The general regulatory authority of the Insurance Commissioner is described in Section 414 of the Insurance Code, to wit:

The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance companies and
other insurance matters, mutual benefit associations and trusts for charitable uses are faithfully executed and to
perform the duties imposed upon him by this Code, . . .

On the other hand, Section 415 provides:

In addition to the administrative sanctions provided elsewhere in this Code, the Insurance Commissioner is hereby
authorized, at his discretion, to impose upon insurance companies, their directors and/or officers and/or agents, for
any willful failure or refusal to comply with, or violation of any provision of this Code, or any order, instruction,
regulation or ruling of the Insurance Commissioner, or any commission of irregularities, and/or conducting business in
an unsafe and unsound manner as may be determined by the the Insurance Commissioner, the following:

(a) fines not in excess of five hundred pesos a day; and

(b) suspension, or after due hearing, removal of directors

and/or officers and/or agents.

A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to regulate the business of
insurance, which is defined as follows:

(2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of this Code,
shall include
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to
 any other legitimate business or activity of the surety; (c) doing any kind of business, including a reinsurance
business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code. (Insurance Code, Sec. 2[2]; Emphasis supplied).

Since the contract of agency entered into between Philamlife and its agents is not included within the meaning of an insurance
business, Section 2 of the Insurance Code cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.

With regard to private respondent's contention that the quasi-judicial power of the Insurance Commissioner under Section 416 of the
Insurance Code applies in his case, we likewise rule in the negative. Section 416 of the Code in pertinent part, provides:

The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage or liability
for which an insurer may be answerable under any kind of policy or contract of insurance, or for which such insurer
may be liable under a contract of suretyship, or for which a reinsurer may be used under any contract or reinsurance
it may have entered into, or for which a mutual benefit association may be held liable under the membership
certificates it has issued to its members, where the amount of any such loss, damage or liability, excluding interest,
costs and attorney's fees, being claimed or sued upon any kind of insurance, bond, reinsurance contract, or
membership certificate does not exceed in any single claim one hundred thousand pesos.

A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner is limited by law "to claims and
complaints involving any loss, damage or liability for which an insurer may be answerable under any kind of policy or contract of
insurance, . . ." Hence, this power does not cover the relationship affecting the insurance company and its agents but is limited to
adjudicating claims and complaints filed by the insured against the insurance company.

While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance Code, the provisions of said
Chapter speak only of the licensing requirements and limitations imposed on insurance agents and brokers.

The Insurance Code does not have provisions governing the relations between insurance companies and their agents. It follows that
the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over controversies between the
insurance companies and their agents.

We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989), and Investment Planning
Corporation of the Philippines v. Social Security Commission, 21 SCRA 904 (1962), that an insurance company may have two classes
of agents who sell its insurance policies: (1) salaried employees who keep definite hours and work under the control and supervision of
the company; and (2) registered representatives, who work on commission basis.

Under the first category, the relationship between the insurance company and its agents is governed by the Contract of Employment
and the provisions of the Labor Code, while under the second category, the same is governed by the Contract of Agency and the
provisions of the Civil Code on the Agency. Disputes involving the latter are cognizable by the regular courts.

WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance Commission is SET ASIDE.

SO ORDERED.

G.R. No. 23703 September 28, 1925

HILARIO GERCIO, plaintiff-appellee,

vs.
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.

Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.

MALCOLM, J.:

The question of first impression in the law of life insurance to be here decided is whether the insured — the husband — has the power
to change the beneficiary — the former wife — and to name instead his actual wife, where the insured and the beneficiary have been
divorced and where the policy of insurance does not expressly reserve to the insured the right to change the beneficiary. Although the
authorities have been exhausted, no legal situation exactly like the one before us has been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the insurer, and Andrea Zialcita, the beneficiary, are
the defendants. The complaint is in the nature of mandamus. Its purpose is to compel the defendant Sun Life Assurance Co. of Canada
to change the beneficiary in the policy issued by the defendant company on the life of the plaintiff Hilario Gercio, with one Andrea
Zialcita as beneficiary.

A default judgment was taken in the lower court against the defendant Andrea Zialcita. The other defendant, the Sun Life Assurance
Co. of Canada, first demurred to the complaint and when the demurrer was overruled, filed an answer in the nature of a general denial.
The case was then submitted for decision on an agreed statement of facts. The judgment of the trial court was in favor of the plaintiff
without costs, and ordered the defendant company to eliminate from the insurance policy the name of Andrea Zialcita as beneficiary
and to substitute therefor such name as the plaintiff might furnish to the defendant for that purpose.

The Sun Life Assurance Co. of Canada has appealed and has assigned three errors alleged to have been committed by the lower
court. The appellee has countered with a motion which asks the court to dismiss the appeal of the defendant Sun Life Assurance Co. of
Canada, with costs.

As the motion presented by the appellee and the first two errors assigned by the appellant are preliminary in nature, we will pass upon
the first. Appellee argues that the "substantial defendant" was Andrea Zialcita, and that since she was adjudged in default, the Sun Life
Assurance Co. of Canada has no interest in the appeal. It will be noticed, however, that the complaint prays for affirmative relief against
the insurance company. It will be noticed further that it is stipulated that the insurance company has persistently refused to change the
beneficiary as desired by the plaintiff. As the rights of Andrea Zialcita in the policy are rights which are enforceable by her only against
the insurance company, the defendant insurance company will only be fully protected if the question at issue is conclusively
determined. Accordingly, we have decided not to accede to the motion of the appellee and not to order the dismissal of the appeal of
the appellant.

This brings us to the main issue. Before, however, discussing its legal aspects, it is advisable to have before us the essential facts. As
they are stipulated, this part of the decision can easily be accomplished.

On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No. 161481 on the life of Hilario Gercio. The
policy was what is known as a twenty-year endowment policy. By its terms, the insurance company agreed to insure the life of Hilario
Gercio for the sum of P/2,000, to be paid him on February 1, 1930, or if the insured should die before said date, then to his wife, Mrs.
Andrea Zialcita, should she survive him; otherwise to the executors, administrators, or assigns of the insured. The policy also contained
a schedule of reserves, amounts in cash, paid-up policies, and renewed insurance, guaranteed. The policy did not include any provision
reserving to the insured the right to change the beneficiary.

On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio. Towards the end of the year 1919, she was
convicted of the crime of adultery. On September 4, 1920, a decree of divorce was issued in civil case no. 17955, which had the effect
of completely dissolving the bonds of matrimony contracted by Hilario Gercio and Andrea Zialcita.

On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of Canada that he had revoked his donation in favor of
Andrea Zialcita, and that he had designated in her stead his present wife, Adela Garcia de Gercio, as the beneficiary of the policy.
Gercio requested the insurance company to eliminate Andrea Zialcita as beneficiary. This, the insurance company has refused and still
refuses to do.

With all of these introductory matters disposed of and with the legal question to the forefront, it becomes our first duty to determine what
law should be applied to the facts. In this connection, it should be remembered that the insurance policy was taken out in 1910, that the
Insurance Act. No. 2427, became effective in 1914, and that the effort to change the beneficiary was made in 1922. Should the
provisions of the Code of Commerce and the Civil Code in force in 1910, or the provisions of the Insurance Act now in force, or the
general principles of law, guide the court in its decision?

On the supposition, first, that the Code of Commerce is applicable, yet there can be found in it no provision either permitting or
prohibiting the insured to change the beneficiary.

On the supposition, next, that the Civil Code regulates insurance contracts, it would be most difficult, if indeed it is practicable, to test a
life insurance policy by its provisions. Should the insurance contract, whereby the husband names the wife as the beneficiary, be
denominated a donation inter vivos, a donation causa mortis, a contract in favor of a third person, or an aleatory contract? The subject
is further complicated by the fact that if an insurance contract should be considered a donation, a husband may then never insure his
life in favor of his wife and vice versa, inasmuch as article 1334 prohibits all donations between spouses during marriage. It would
seem, therefore, that this court was right when in the case of Del Val vs. Del Val ([1915]), 29 Phil., 534), it declined to consider the
proceeds of the insurance policy as a donation or gift, saying "the contract of life insurance is a special contract and the destination of
the proceeds thereof is determined by special laws which deal exclusively with that subject. The Civil Code has no provisions which
relate directly and specifically to life-insurance contracts or to the destination of life-insurance proceeds. . . ." Some satisfaction is
gathered from the perplexities of the Louisiana Supreme Court, a civil law jurisdiction, where the jurists have disagreed as to the
classification of the insurance contract, but have agreed in their conclusions as will hereafter see. (Re Succession of Leone Desforges
[1914], 52 L.R.A. [N.S.], 689; Lambert vs Penn Mutual Life Insurance Company of Philadelphia and L'Hote & Co. [1898], 50 La. Ann.,
1027.)
On the further supposition that the Insurance Act applies, it will be found that in this Law, there is likewise no provision either permitting
or prohibiting the insured to change the beneficiary.

We must perforce conclude that whether the case be considered as of 1910, or 1914, or 1922, and whether the case be considered in
the light of the Code of Commerce, the Civil Code, or the Insurance Act, the deficiencies in the law will have to be supplemented by the
general principles prevailing on the subject. To that end, we have gathered the rules which follow from the best considered American
authorities. In adopting these rules, we do so with the purpose of having the Philippine Law of Insurance conform as nearly as possible
to the modern Law of Insurance as found in the United States proper.

The wife has an insurable interest in the life of her husband. The beneficiary has an absolute vested interest in the policy from the date
of its issuance and delivery. So when a policy of life insurance is taken out by the husband in which the wife is named as beneficiary,
she has a subsisting interest in the policy. And this applies to a policy to which there are attached the incidents of a loan value, cash
surrender value, an automatic extension by premiums paid, and to an endowment policy, as well as to an ordinary life insurance policy.
If the husband wishes to retain to himself the control and ownership of the policy he may so provide in the policy. But if the policy
contains no provision authorizing a change of beneficiary without the beneficiary's consent, the insured cannot make such change.
Accordingly, it is held that a life insurance policy of a husband made payable to the wife as beneficiary, is the separate property of the
beneficiary and beyond the control of the husband.

As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710, merely provides in section 9 that the decree of
divorce shall dissolve the community property as soon as such decree becomes final. Unlike the statutes of a few jurisdictions, there is
no provision in the Philippine Law permitting the beneficiary in a policy for the benefit of the wife of the husband to be changed after a
divorce. It must follow, therefore, in the absence of a statute to the contrary, that if a policy is taken out upon a husband's life the wife is
named as beneficiary therein, a subsequent divorce does not destroy her rights under the policy.

These are some of the pertinent principles of the Law of Insurance. To reinforce them, we would, even at the expense of clogging the
decision with unnecessary citation of authority, bring to notice certain decisions which seem to us to have controlling influence.

To begin with, it is said that our Insurance Act is mostly taken from the statute of California. It should prove of interest, therefore, to
know the stand taken by the Supreme Court of that State. A California decision oft cited in the Cyclopedias is Yore vs. Booth ([1895]),
110 Cal., 238; 52 Am. St. Rep., 81), in which we find the following:

. . . It seems to be the settled doctrine, with but slight dissent in the courts of this country, that a person who procures a policy
upon his own life, payable to a designated beneficiary, although he pays the premiums himself, and keeps the policy in his
exclusive possession, has no power to change the beneficiary, unless the policy itself, or the charter of the insurance
company, so provides. In policy, although he has parted with nothing, and is simply the object of another's bounty, has
acquired a vested and irrevocable interest in the policy, which he may keep alive for his own benefit by paying the premiums
or assessments if the person who effected the insurance fails or refuses to do so.

As carrying great weight, there should also be taken into account two decisions coming from the Supreme Court of the United States.
The first of these decisions, in point of time, is Connecticut Mutual Life Insurance Company vs Schaefer ([1877]), 94 U.S., 457). There,
Mr. Justice Bradley, delivering the opinion of the court, in part said:

This was an action on a policy of the court, in part said: July 25, 1868, on the joint lives of George F. and Francisca Schaefer,
then husband and wife, payable to the survivor on the death of either. In January, 1870, they were divorced, and alimony was
decreed and paid to the wife, and there was never any issue of the marriage. They both subsequently married again, after
which, in February, 1871, George F. Schaefer died. This action was brought by Francisca, the survivor.

xxx xxx xxx

The other point, relating to the alleged cessation of insurable interest by reason of the divorce of the parties, is entitled to more
serious consideration, although we have very little difficulty in disposing of it.

It will be proper, in the first place, to ascertain what is an insurable interest. It is generally agreed that mere wager policies, that
is, policies in which the insured party has no interest in its loss or destruction, are void, as against public policy. . . . But
precisely what interest is necessary, in order to take a policy out of the category of mere wager, has been the subject of much
discussion. In marine and fire insurance the difficulty is not so great, because there insurance is considered as strictly an
indemnity. But in life insurance the loss can seldom be measured by pecuniary values. Still, an interest of some sort in the
insured life must exist. A man cannot take out insurance on the life of a total stranger, nor on that of one who is not so
connected with him as to make the continuance of the life a matter of some real interest to him.

It is well settled that a man has an insurable interest in his own life and in that of his wife and children; a woman in the life of
her husband; and the creditor in the life of his debtor. Indeed it may be said generally that any reasonable expectation of
pecuniary benefit or advantage from the continued life of another creates an insurable interest in such life. And there is no
doubt that a man may effect an insurance on his own life for the benefit of a relative or fried; or two or more persons, on their
 joint lives, for the benefit of the survivor or survivors. The old tontines were based substantially on this principle, and their
validity has never been called in question.

xxx xxx xxx

The policy in question might, in our opinion, be sustained as a joint insurance, without reference to any other interest, or to the
question whether the cessation of interest avoids a policy good at its inception. We do not hesitate to say, however, that a
policy taken out in good faith and valid at its inception, is not avoided by the cessation of the insurable interest, unless such be
the necessary effect of the provisions of the policy itself. . . .

. . . .In our judgment of life policy, originally valid, does not cease to be so by the cessation of the assured party's interest in the
life insured.

Another controlling decision of the United States Supreme Court is that of the Central National Bank of Washington City vs.
Hume ([1888], 128 U.S., 134). Therein, Mr. Chief Justice Fuller, as the organ of the court, announced the following doctrines:

We think it cannot be doubted that in the instance of contracts of insurance with a wife or children, or both, upon their insurable
interest in the life of the husband or father, the latter, while they are living, can exercise no power of disposition over the same
without their consent, nor has he any interest therein of which he can avail himself; nor upon his death have his personal
representatives or his creditors any interest in the proceeds of such contracts, which belong to the beneficiaries to whom they
are payable.

It is indeed the general rule that a policy, and the money to become due under it, belong, the moment it is issued, to the
person or persons named in it as the beneficiary or beneficiaries, and that there is no power in the person procuring the
insurance, by any act of his, by deed or by will, to transfer to any other person the interest of the person named.

A jurisdiction which found itself in somewhat the same situation as the Philippines, because of having to reconcile the civil law with the
more modern principles of insurance, is Louisiana. In a case coming before the Federal Courts, In re Dreuil & Co. ([1915]), 221 Fed.,
796), the facts were that an endowment insurance policy provided for payment of the amount thereof at the expiration of twenty years to
the insured, or his executors, administrators, or assigns, with the proviso that, if the insured die within such period, payment was to be
made to his wife if she survive him. It was held that the wife has a vested interest in the policy, of which she cannot be deprived without
her consent. Foster, District Judge, announced:

In so far as the law of Louisiana is concerned, it may also be considered settled that where a policy is of the semitontine
variety, as in this case, the beneficiary has a vested right in the policy, of which she cannot be deprived without her consent.
(Lambert vs Penn Mutual Life Ins. Co., 50 La. Ann., 1027; 24 South., 16.) (See in same connection a leading decision of the
Louisiana Supreme Court, Re Succession of Leonce Desforges, [1914], 52 L.R.A. [N.S.], 689.)

Some question has arisen as to the power of the insured to destroy the vested interest of the beneficiary in the policy. That point is well
covered in the case of Entwistle vs. Travelers Insurance Company ([1902], 202 Pa. St., 141). To quote:

. . . The interest of the wife was wholly contingent upon her surviving her husband, and she could convey no greater interest in
the policy than she herself had. The interest of the children of the insured, which was created for them by the contract when
the policy was issued; vested in them at the same time that the interest of the wife became vested in her. Both interests were
contingent. If the wife die before the insured, she will take nothing under the policy. If the insured should die before the wife,
then the children take nothing under the policy. We see no reason to discriminate between the wife and the children. They are
all payees, under the policy, and together constitute the assured.

The contingency which will determine whether the wife, or the children as a class will take the proceeds, has not as yet
happened; all the beneficiaries are living, and nothing has occurred by which the rights of the parties are in any way changed.
The provision that the policy may be converted into cash at the option of the holder does not change the relative rights of the
parties. We agree entirely with the suggestion that "holder" or "holders", as used in this connection, means those who in law
are the owners of the policy, and are entitled to the rights and benefits which may accrue under it; in other words, all the
beneficiaries; in the present case, not only the wife, by the children of the insured. If for any reason, prudence required the
conversion of the policy into cash, a guardian would have no special difficulty in reasonable protecting the interest of his
wards. But however that may be, it is manifest that the option can only be exercised by those having the full legal interest in
the policy, or by their assignee. Neither the husband, nor the wife, nor both together had power to destroy the vested interest
of the children in the policy.

The case most nearly on all fours with the one at bar is that of Wallace vs Mutual Benefit Life Insurance Co.([1906], 97 Minn., 27; 3
L.R.A. [N.S.], 478). The opinion there delivered also invokes added interest when it is noted that it was written by Mr. Justice Elliott, the
author of a text on insurance, later a member of this court. In the Minnesota case cited, one Wallace effected a "twenty-year
endowment" policy of insurance on his life, payable in the event of his death within twenty years to Emma G. Wallace, his wife, but, if he
lived, to himself at the end of twenty years. If Wallace died before the death of his wife, within the twenty years, the policy was payable
to the personal representatives of the insured. During the pendency of divorce proceedings, the parties signed a contract by which
Wallace agreed that, if a divorce was granted to Mrs. Wallace, the court might award her certain specified property as alimony, and
Mrs. Wallace agreed to relinquish all claim to any property arising out of the relation of husband and wife. The divorce was granted. An
action was brought by Wallace to compel Mrs. Wallace to relinquish her interest in the insurance policy. Mr. Justice Elliott said:

As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of which she could not be deprived without
her consent, except under the terms of the contract with the insurance company. No right to change the beneficiary was
reserved. Her interest in the policy was her individual property, subject to be divested only by her death, the lapse of time, or
by the failure of the insured to pay the premiums. She could keep the policy alive by paying the premiums, if the insured did
not do so. It was contingent upon these events, but it was free from the control of her husband. He had no interest in her
property in this policy, contingent or otherwise. Her interest was free from any claim on the part of the insured or his creditors.
He could deprive her of her interest absolutely in but one way, by living more than twenty years. We are unable to see how the
plaintiff's interest in the policy was primary or superior to that of the husband. Both interests were contingent, but they were
entirely separate and distinct, the one from the other. The wife's interest was not affected by the decree of court which
dissolved the marriage contract between the parties. It remains her separate property, after the divorce as before. . .

. . . . The fact that she was his wife at the time the policy was issued may have been, and undoubtedly was, the reason why
she was named as beneficiary in the event of his death. But her property interest in the policy after it was issued did not in any
reasonable sense arise out of the marriage relation.

Somewhat the same question came before the Supreme Court of Kansas in the leading case of Filley vs. Illinois Life Insurance
Company ([1914]), 91 Kansas, 220; L.R.A. [1915 D], 130). It was held, following consideration extending to two motions for rehearing,
as follows:

The benefit accruing from a policy of life insurance upon the life of a married man, payable upon his death to his wife, naming
her, is payable to the surviving beneficiary named, although she may have years thereafter secured a divorce from her
husband, and he was thereafter again married to one who sustained the relation of wife to him at the time of his death.

The rights of a beneficiary in an ordinary life insurance policy become vested upon the issuance of the policy, and can
thereafter, during the life of the beneficiary, be defeated only as provided by the terms of the policy.

If space permitted, the following corroborative authority could also be taken into account: Joyce, The Law of Insurance, second edition,
vol. 2, pp. 1649 et seq.; 37 Corpus Juris, pp. 394 et seq.; 14 R.C.L., pp. 1376 et seq.; Green vs. Green ([1912], 147 Ky., 608; 39 L.R.A.
[N.S.], 370); Washington Life Insurance Co. vs. Berwald ([1903], 97 Tex., 111); Begley vs. Miller ([1907]), 137 Ill., App., 278); Blum vs.
New York L. Ins. Co. ([1906], 197 Mo., 513; 8 L.R.A. [N.S.], 923; Union Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St., 385; 49
L.R.A., 737); Griffith vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs. Conn. Mut. L. Ins. Co. of
Hartford([1902]); 95 Md., 101); Snyder vs. Supreme Ruler of Fraternal Mystic Circle ([1909], 122 Tenn. 248; 45 L.R.A. [N.S.],
209); Lloyd vs. Royal Union Mut. L. Ins. Co. ([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs. Dunham([1878], 46 Conn., 79; 33 Am.
Rep., 14); McKee vs. Phoenix Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep., 129); Supreme Council American Legion of Honor vs. Smith
and Smith ([1889], 45 N.J. Eq., 466); Overhiser vs. Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612; 50 L.R.A., 552); Condon
vs. New York Life Insurance Co. ([1918], 183 Iowa, 658); with which compare Foster vs. Gile ([1880], 50 Wis., 603) and Hatch vs.
Hatch ([1904], 35 Tex. Civ. App., 373).

On the admitted facts and the authorities supporting the nearly universally accepted principles of insurance, we are irresistibly led to the
conclusion that the question at issue must be answered in the negative.

The judgment appealed from will be reversed and the complaint ordered dismissed as to the appellant, without special pronouncement
as to the costs in either instance. So ordered.

G.R. No. L-33637 December 31, 1931

ANG GIOK CHIP, doing business under the name and style of Hua Bee Kong Si, plaintiff-appellee,
vs.
SPRINGFIELD FIRE & MARINE INSURANCE COMPANY, defendant-appellant.

C.A. Sobral for appellant.

Paredes and Buencamino for appellee.
Gibbs and McDonough and Ramon Ozaeta as amici curiae

MALCOLM, J.:

An important question in the law of insurance, not heretofore considered in this jurisdiction and, according to our information, not
directly resolved in California from which State the Philippine Insurance Act was taken, must be decided on this appeal for the future
guidance of trial courts and of insurance companies doing business in the Philippine Islands. This question, flatly stated, is whether a
warranty referred to in the policy as forming part of the contract of insurance and in the form of a rider to the insurance policy, is null
and void because not complying with the Philippine Insurance Act. The court has had the benefit of instructive briefs and memoranda
from the parties and has also been assisted by a well prepared brief submitted on behalf of amici curiae.

The admitted facts are these: Ang Giok Chip doing business under the name and style of Hua Bee Kong Si was formerly the owner of a
warehouse situated at No. 643 Calle Reina Regente, City of Manila. The contents of the warehouse were insured with the three
insurance companies for the total sum of P60,000. One insurance policy, in the amount of P10,000, was taken out with the Springfield
Fire & Marine Insurance Company. The warehouse was destroyed by fire on January 11, 1928, while the policy issued by the latter
company was in force.

Predicated on this policy the plaintiff instituted action in the Court of First Instance of Manila against the defendant to recover a
proportional part of the loss coming to P8,170.59. Four special defenses were interposed on behalf of the insurance company, one
being planted on a violation of warranty F fixing the amount of hazardous goods which might be stored in the insured building. The trial
judge in his decision found against the insurance company on all points, and gave judgment in favor of the plaintiff for the sum of
P8,188.74. From this judgment the insurance company has appealed, and it is to the first and fourth errors assigned that we would
address particular attention.

Considering the result at which we arrive, it is unnecessary for us to discuss three of the four special defenses which were made by the
insurance company. We think, however, that it would be a reasonable deduction to conclude that more than 3 per cent of the total value
of the merchandise contained in the warehouse constituted hazardous goods, and that this per cent reached as high as 39. We place
reliance on the consular invoices and on the testimony of the adjuster, Herridge. Having thus swept to one side all intervening obstacle,
the legal question recurs, as stated in the beginning of this decision, of whether or not warranty F was null and void.

To place this question in its proper light, we turn to the policy issued by the Springfield Fire & Marine Insurance Company in favor of the
plaintiff. The description of the risk in this policy is as follows:lawphil.net

Ten thousand pesos Philippine Currency. — On general non-hazardous merchandise, chiefly consisting of
chucherias, also produce, Cacao, Flour, all the property of the Insured, or held by them in trust, on
commission or on joint account with others, or for which he is responsible, while contained during the
currency of this policy in the godown, situate No. 643 Calle Reina Regent. . . .

This policy is subject to the hereon attached "Ordinary Short Period Rate Scale" Warranties A & F, Co-
insurances Clause "and Three Fourths Loss Clause," which are forming part of same. Co-insurance
declared:

"P20,000. — Sun Insurance Office Ltd. (K & S)." (Emphasis inserted.) Securely pasted on the left hand
margin of the face of the policy are five warranties and special clauses. One of them is warranty F,
specially referred to on the face of the policy, reading in part as follows:

WARRANTY F

It is hereby declared and agreed that during the currency of this policy no hazardous goods be stored in the
Building to which this insurance applies or in any building communicating therewith, provided, always,
however, that the Insured be permitted to stored a small quantity of the hazardous goods specified below,
but not exceeding in all 3 per cent of the total value of the whole of the goods or merchandise contained in
said warehouse, viz; . . . .

The applicable law is found in the Instance Act, Act No. 2427, as amended, section 65 reading:

"Every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument
signed by the insured and referred to in the policy, as making a part of it." As the Philippine law was taken verbatim from the law of
California, in accordance with well settled canons of statutory construction, the court should follow in fundamental points, at least, the
construction placed by California courts on a California law. Unfortunately the researches of counsel reveal no authority coming from
the courts of California which is exactly on all fours with the case before us. However, there are certain consideration lying at the basis
of California law and certain indications in the California decisions which point the way for the decision in this case

Section 65 of the Philippine Insurance Act corresponds to section 2605 of the Civil Cod of California. The comments of the Code
Examiners of California disclose that the language of section 2605 was quite different from that under the Code as adopted in 1872.
That language was found too harsh as to insurance companies. The Code Examiners' notes state: "The amendment restores the law
as it existed previous to the Code: See Parsons on Maritime Law, 106, and Phillips on Insurance, sec. 756." The passage referred to in
Philips on Insurance, was worded by the author as follows:
"Any express warranty or condition is always a part of the policy, but, like any other part of an express contract, may be written in the
margin, or contained in proposals or documents expressly referred to in the policy, and so made a part of it." The annotator of the Civil
Code of California, after setting forth these facts, adds:

. . . The section as it now reads is in harmony with the rule that a warranty may be contained in another instrument than the
policy when expressly referred to in the policy as forming a part thereof: . . . .

What we have above stated has been paraphrased from the decision of the California Court of Appeals in the case of Isaac Upham
Co. vs. United States Fidelity & Guaranty Co. ( [1922], 211 Pac., 809), and thus discloses the attitude of the California courts. Likewise
in the Federal courts, in the case of Conner vs. Manchester Assur. Co. ([1904], 130 Fed., 743), section 2605 of the Civil Code of
California came under observation, and it was said that it "is in effect an affirmance of the generally accepted doctrine applicable to
such contracts."

We, therefore, think it wrong to hold that the California law represents a radical departure from the basic principles governing the law of
insurance. We are more inclined to believe that the codification of the law of California had exactly the opposite purpose, and that in the
language of the Federal court it was but an affirmance of the generally accepted doctrine applicable to such contracts. This being true,
we turn to two of such well recognized doctrines. In the first place, it is well settled that a rider attached to a policy is a part of the
contract, to the same extent and with like effect as it actually embodied therein. (I Couch, Cyclopedia of Insurance Law, sec. 159.) In
the second place, it is equally well settled that an express warranty must appear upon the face of the policy, or be clearly incorporated
therein and made a part thereof by explicit reference, or by words clearly evidencing such intention. (4 Couch, Cyclopedia of Insurance
Law, sec. 862.)

Section 65 of the Insurance Act and its counterpart, section 265 of the Civil Code of California, will bear analysis as tested by reason
and authority. The law says that every express warranty must be "contained in the policy itself." The word "contained," according to the
dictionaries, means "included," inclosed," "embraced," "comprehended," etc. When, therefore, the courts speak of a rider attached to
the policy, and thus "embodied" therein, or of a warranty "incorporated" in the policy, it is believed that the phrase "contained in the
policy itself" must necessarily include such rider and warranty. As to the alternative relating to "another instrument," "instrument" as
here used could not mean a mere slip of paper like a rider, but something akin to the policy itself, which in section 48 of the Insurance
Act is defined as "The written instrument, in which a contract of insurance is set forth." In California, every paper writing is not
necessarily an "instrument" within the statutory meaning of the term. The word "instrument has a well defined definition in California,
and as used in the Codes invariably means some written paper or instrument signed and delivered by one person to another,
transferring the title to, or giving a lien, on property, or giving a right to debt or duty. (Hoag vs. Howard [1880], 55 Cal., 564; People vs.
Fraser[1913], 137 Pac., 276.) In other words, the rider, warranty F, is contained in the policy itself, because by the contract of insurance
agreed to by the parties it is made to form a part of the same, but is not another instrument signed by the insured and referred to in the
policy as forming a part of it.

Again, referring to the jurisprudence of California, another rule of insurance adopted in that State is in point. It is admitted that the policy
before us was accepted by the plaintiff. The receipt of this policy by the insured without objection binds both the acceptor and the
insured to the terms thereof. The insured may not thereafter be heard to say that he did not read the policy or know its terms, since it is
his duty to read his policy and it will be assumed that he did so. In California Jurisprudence, vol. 14, p. 427, from which these
statements are taken with citations to California decisions, it is added that it has been held that where the holder of a policy discovers a
mistake made by himself and the local agent in attaching the wrong rider to his application, elects to retain the policy issued to him, and
neither requests the issuance of a different one nor offers to pay the premium requisite to insure against the risk which he believe the
rider to cover, he thereby accepts the policy.

We are given to understand, and there is no indication to the contrary, that we have here a standard insurance policy. We are further
given to understand, and there is no indication to the contrary, that the issuance of the policy in this case with its attached rider
conforms to well established practice in the Philippines and elsewhere. We are further given to understand, and there is no indication to
the contrary, that there are no less than sixty-nine insurance companies doing business in the Philippine Islands with outstanding
policies more or less similar to the one involved in this case, and that to nullify such policies would place an unnecessary hindrance in
the transaction of insurance business in the Philippines. These are matters of public policy. We cannot believe that it was ever the
legislative intention to insert in the Philippine Law on Insurance an oddity, an incongruity, entirely out of harmony with the law as found
in other jurisdiction, and destructive of good business practice.

We have studied this case carefully and having done so have reached the definite conclusion that warranty F, a rider attached to the
face of the insurance policy, and referred to in contract of insurance, is valid and sufficient under section 65 of the Insurance Act.
Accordingly, sustaining the first and fourth errors assigned, and it being unnecessary to discuss the remaining errors, the result will be
to reverse the judgment appealed from and to order the dismissal of the complaint, without special pronouncement as to costs in either
instance.

PART II

UCPB V. MASAGANA DISSENTING

 Separate Opinions

VITUG, J .:

An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract where the rights and obligations of the
parties correlate and mutually correspond. The insurer assumes the risk of loss which an insured might suffer in consideration of
premium payments under a risk-distributing device. Such assumption of risk is a component of a general scheme to distribute actual
losses among a group of persons, bearing similar risks, who make ratable contributions to a fund from which the losses incurred due to
exposures to the peril insured against are assured and compensated.

It is generally recognized that the business of insurance is one imbued with public interest. 1 For the general good and mutual protection
of all the parties, it is aptly subjected to regulation and control by the State by virtue of an exercise of its police power. 2 The State may
regulate in various respects the relations between the insurer and the insured, including the internal affairs of an insurance company,
without being violative of due process. 3

A requirement imposed by way of State regulation upon insurers is the maintenance of an adequate legal reserve in favor of those
claiming under their policies. 4 The law generally mandates that insurance companies should retain an amount sufficient to guarantee
the security of its policyholders in the remote future, as well as the present, and to cover any contingencies that may arise or may be
fairly anticipated. The integrity of this legal reserve is threatened and undermined if a credit arrangement on the payment of premium
were to be sanctioned. Calculations and estimations of liabilities under the risk insured against are predicated on the basis of the
payment of premiums, the vital element that establishes the juridical relation between the insured and the insurer. By legislative fiat, any
agreement to the contrary notwithstanding, the payment of premium is a condition precedent to, and essential for, the efficaciousness
of the insurance contract, except (a) in case of life or industrial life insurance where a grace period applies, or (b) in case of a written
acknowledgment by the insurer of the receipt of premium, such as by a deposit receipt, the written acknowledgment being conclusive
evidence of the premium payment so far as to make the policy binding. 5

Section 77 of the Insurance Code 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 provision amended Section 72 of the then Insurance Act by deleting the phrase, "unless there is a clear agreement to grant the
insured credit extension of the premium due," and adding at the beginning of the second sentence the phrase, "[n]otwithstanding any
agreement to the contrary." Commenting on the new provision, Dean Hernando B. Perez states:

"Under the former rule, whenever the insured was granted credit extension of the premium due or given a period of time to pay
the premium on the policy issued, such policy was binding although premiums had not been paid (Section 72, Insurance Act; 6
Couch 2d. 67). This rule was changed when the present provision eliminated the portion concerning credit agreement, and
added the phrase 'notwithstanding any agreement to the contrary' which precludes the parties from stipulating that the policy is
valid even if premiums are not paid. Hence, under the present law, the policy is not valid and binding unless and until the
premium is paid (Arce vs. Capital Insurance & Surety Co., Inc., 117 SCRA 63). If the insurer wants to favor the insured by
making the policy binding notwithstanding the non-payment of premium, a mere credit agreement would not be sufficient. The
remedy would be for the insurer to acknowledge in the policy that premiums were paid although they were not, in which case
the policy becomes binding because such acknowledgment is a conclusive evidence of payment of premium (Section 78).
Thus, the Supreme Court took note that under the present law, Section 77 of the Insurance Code of 1978 has deleted the
clause 'unless there is a clear agreement to grant the insured credit extension of the premium due' (Velasco vs. Apostol, 173
SCRA 228)." 6

By weight of authority, estoppel cannot create a contract of insurance, 7 neither can it be successfully invoked to create a primary
liability, 8 nor can it give validity to what the law so proscribes as a matter of public policy. 9 So essential is the premium payment to the
creation of the vinculum juris between the insured and the insurer that it would be doubtful to have that payment validly excused even
for a fortuitous event. 10

The law, however, neither requires for the establishment of the juridical tie, nor measures the strength of such tie by, any specific
amount of premium payment. A part payment of the premium, if accepted by the insurer, can thus perfect the contract and bring the
parties into an obligatory relation. 11 Such a payment puts the contract into full binding force, not merely pro tanto, thereby entitling and
obligating the parties by their agreement. Hence, in case of loss, full recovery less the unpaid portion of the premium (by the operative
act of legal compensation), can be had by the insured and, correlatively, if no loss occurs the insurer can demand the payment of the
unpaid balance of the premium. 12

In the instant case, no juridical tie appears to have been established under any of the situations hereinabove discussed.

WHEREFORE, I vote to deny the motion for reconsideration.

G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health
Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes,
cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care
Agreement No. P010194. Under the agreement, respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary
or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations, preventive
health care and other out-patient services.

Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from
March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability. 2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month
beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care
agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he
was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the
Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April
13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital
where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner
and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her
expenses plus moral damages and attorney’s fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00
plus interest, until the amount is fully paid to plaintiff who paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.

SO ORDERED.3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner
Reverente.4 Petitioner’s motion for reconsideration was denied.5 Hence, petitioner brought the instant petition for review, raising the
primary argument that a health care agreement is not an insurance contract; hence the "incontestability clause" under the Insurance
Code6 does not apply.1âwphi1.nêt

Petitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a member may
immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also points
out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an insurance
contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer, 7 petitioner argues that the incontestability clause does not apply, as the same
requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which is governed by
the Insurance Commission, but a Health Maintenance Organization under the authority of the Department of Health.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the
following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and

5. In consideration of the insurer’s promise, the insured pays a premium. 8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person
having an insurable interest against him, may be insured against. Every person has an insurable interest in the life and health of
himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;

(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or
illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondent’s husband in obtaining the health care agreement was his own health. The
health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. 9 Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for
the same to the extent agreed upon under the contract.

Petitioner argues that respondent’s husband concealed a material fact in his application. It appears that in the application for health
coverage, petitioners required respondent’s husband to sign an express authorization for any person, organization or entity that has any
record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other
medical advice or examination.10 Specifically, the Health Care Agreement signed by respondent’s husband states:

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this
application are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall
be no contract of health care coverage unless and until an Agreement is issued on this application and the full Membership
Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed Members;
that no information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing
in the application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon any question affecting the eligibility for health care
coverage of the Proposed Members and that the acceptance of any Agreement issued on this application shall be a ratification
of any correction in or addition to this application as stated in the space for Home Office Endorsement. 11 (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicant’s medical
history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of
__________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. This authorization is in connection with the application for
health care coverage only. A photographic copy of this authorization shall be as valid as the original. 12 (Underscoring ours)

Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:
 Failure to disclose or misrepresentation of any material information by the member in the application or medical examination,
whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed
material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher
Membership Fee for the benefit or benefits applied for.13

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends
on opinion rather than fact, especially coming from respondent’s husband who was not a medical doctor. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are
untrue.14 Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the
policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is
likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in
such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within
his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud. 15 (Underscoring
ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract. 16 Concealment as a
defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to
answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member is
hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of insurance." The right to
rescind should be exercised previous to the commencement of an action on the contract. 17 In this case, no rescission was made.
Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on
which cancellation is based.18

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

Anent the incontestability of the membership of respondent’s husband, we quote with approval the following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the
date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma,
and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having
expired, the defense of concealment or misrepresentation no longer lie. 23

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

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

G.R. No. 169737 February 12, 2008

BLUE CROSS HEALTH CARE, INC., petitioner,

vs.
NEOMI* and DANILO OLIVARES, respondents.

DECISION

CORONA, J.:

This is a petition for review on certiorari1 of a decision2 and resolution3 of the Court of Appeals (CA) dated July 29, 2005 and September
21, 2005, respectively, in CA-G.R. SP No. 84163 which affirmed the decision of the Regional Trial Court (RTC), Makati City, Branch 61
dated February 2, 2004 in Civil Case No. 03-1153,4 which in turn reversed the decision of the Metropolitan Trial Court (MeTC), Makati
City, Branch 66 dated August 5, 2003 in Civil Case No. 80867. 5

Respondent Neomi T. Olivares applied for a health care program with petitioner Blue Cross Health Care, Inc., a health maintenance
firm. For the period October 16, 2002 to October 15, 2003, 6 she paid the amount of P11,117. For the same period, she also availed of
the additional service of limitless consultations for an additional amount of P1,000. She paid these amounts in full on October 17, 2002.
The application was approved on October 22, 2002. In the health care agreement, ailments due to "pre-existing conditions" were
excluded from the coverage.7

On November 30, 2002, or barely 38 days from the effectivity of her health insurance, respondent Neomi suffered a stroke and was
admitted at the Medical City which was one of the hospitals accredited by petitioner. During her confinement, she underwent several
laboratory tests. On December 2, 2002, her attending physician, Dr. Edmundo Saniel,8 informed her that she could be discharged from
the hospital. She incurred hospital expenses amounting to P34,217.20. Consequently, she requested from the representative of
petitioner at Medical City a letter of authorization in order to settle her medical bills. But petitioner refused to issue the letter and
suspended payment pending the submission of a certification from her attending physician that the stroke she suffered was not caused
by a pre-existing condition.9

She was discharged from the hospital on December 3, 2002. On December 5, 2002, she demanded that petitioner pay her medical bill.
When petitioner still refused, she and her husband, respondent Danilo Olivares, were constrained to settle the bill. 10 They thereafter
filed a complaint for collection of sum of money against petitioner in the MeTC on January 8, 2003. 11 In its answer dated January 24,
2003, petitioner maintained that it had not yet denied respondents' claim as it was still awaiting Dr. Saniel's report.

In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:

This is in response to your letter dated February 13, 2003. [Respondent] Neomi T. Olivares called by phone on January 29,
2003. She stated that she is invoking patient-physician confidentiality. That she no longer has any relationship with [petitioner].
And that I should not release any medical information concerning her neurologic status to anyone without her approval. Hence,
the same day I instructed my secretary to inform your office thru Ms. Bernie regarding [respondent's] wishes.

xxx xxx xxx12

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of cause of action. It held:

xxx the best person to determine whether or not the stroke she suffered was not caused by "pre-existing conditions" is her
attending physician Dr. Saniel who treated her and conducted the test during her confinement. xxx But since the evidence on
record reveals that it was no less than [respondent Neomi] herself who prevented her attending physician from issuing the
required certification, petitioner cannot be faulted from suspending payment of her claim, for until and unless it can be shown
from the findings made by her attending physician that the stroke she suffered was not due to pre-existing conditions could
she demand entitlement to the benefits of her policy.13

On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the MeTC and ordered petitioner to pay respondents
the following amounts: (1) P34,217.20 representing the medical bill in Medical City and P1,000 as reimbursement for consultation fees,
with legal interest from the filing of the complaint until fully paid; (2) P20,000 as moral damages; (3) P20,000 as exemplary damages;
(4) P20,000 as attorney's fees and (5) costs of suit.14 The RTC held that it was the burden of petitioner to prove that the stroke of
respondent Neomi was excluded from the coverage of the health care program for being caused by a pre-existing condition. It was not
able to discharge that burden.15
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in the CA. In a decision promulgated on July 29,
2005, the CA affirmed the decision of the RTC. It denied reconsideration in a resolution promulgated on September 21, 2005. Hence
this petition which raises the following issues: (1) whether petitioner was able to prove that respondent Neomi's stroke was caused by a
pre-existing condition and therefore was excluded from the coverage of the health care agreement and (2) whether it was liable for
moral and exemplary damages and attorney's fees.

The health care agreement defined a "pre-existing condition" as:

x x x a disability which existed before the commencement date of membership whose natural history can be clinically
determined, whether or not the Member was aware of such illness or condition. Such conditions also include disabilities
existing prior to reinstatement date in the case of lapse of an Agreement. Notwithstanding, the following disabilities but not to
the exclusion of others are considered pre-existing conditions including their complications when occurring during the first year
of a Member’s coverage:

I. Tumor of Internal Organs

II. Hemorrhoids/Anal Fistula

III. Diseased tonsils and sinus conditions requiring surgery

IV. Cataract/Glaucoma

V. Pathological Abnormalities of nasal septum or turbinates

VI. Goiter and other thyroid disorders

VII. Hernia/Benign prostatic hypertrophy

VIII. Endometriosis

IX. Asthma/Chronic Obstructive Lung disease

X. Epilepsy

XI. Scholiosis/Herniated disc and other Spinal column abnormalities

XII. Tuberculosis

XIII. Cholecysitis

XIV. Gastric or Duodenal ulcer

XV. Hallux valgus

XVI. Hypertension and other Cardiovascular diseases

XVII. Calculi

XVIII. Tumors of skin, muscular tissue, bone or any form of blood dyscracias

XIX. Diabetes Mellitus

XX. Collagen/Auto-Immune disease

After the Member has been continuously covered for 12 months, this pre-existing provision shall no longer be applicable
except for illnesses specifically excluded by an endorsement and made part of this Agreement. 16

Under this provision, disabilities which existed before the commencement of the agreement are excluded from its coverage if they
become manifest within one year from its effectivity. Stated otherwise, petitioner is not liable for pre-existing conditions if they occur
within one year from the time the agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from submitting his report regarding the medical condition of Neomi. Hence, it
contends that the presumption that evidence willfully suppressed would be adverse if produced should apply in its favor.17

Respondents counter that the burden was on petitioner to prove that Neomi's stroke was excluded from the coverage of their
agreement because it was due to a pre-existing condition. It failed to prove this.18

We agree with respondents.

In Philamcare Health Systems, Inc. v. CA,19 we ruled that a health care agreement is in the nature of a non-life insurance.20 It is an
established rule in insurance contracts that when their terms contain limitations on liability, they should be construed strictly against the
insurer. These are contracts of adhesion the terms of which must be interpreted and enforced stringently against the insurer which
prepared the contract. This doctrine is equally applicable to health care agreements. 21

Petitioner never presented any evidence to prove that respondent Neomi's stroke was due to a pre-existing condition. It merely
speculated that Dr. Saniel's report would be adverse to Neomi, based on her invocation of the doctor-patient privilege. This was a
disputable presumption at best.

Section 3 (e), Rule 131 of the Rules of Court states:

Sec. 3. Disputable presumptions. ― The following presumptions are satisfactory if uncontradicted, but may be contradicted
and overcome by other evidence:

xxx xxx xxx

(e) That evidence willfully suppressed would be adverse if produced.

Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal of both parties; (b) the suppression was not
willful; (c) it is merely corroborative or cumulative and (d) the suppression is an exercise of a privilege.22 Here, respondents' refusal
to present or allow the presentation of Dr. Saniel's report was justified. It was privileged communication between physician and patient.

Furthermore, as already stated, limitations of liability on the part of the insurer or health care provider must be construed in such a way
as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the courts with "extreme
jealousy"23 and "care" and with a "jaundiced eye."24 Since petitioner had the burden of proving exception to liability, it should have
made its own assessment of whether respondent Neomi had a pre-existing condition when it failed to obtain the attending physician's
report. It could not just passively wait for Dr. Saniel's report to bail it out. The mere reliance on a disputable presumption does not meet
the strict standard required under our jurisprudence.

Next, petitioner argues that it should not be held liable for moral and exemplary damages, and attorney's fees since it did not act in bad
faith in denying respondent Neomi's claim. It insists that it waited in good faith for Dr. Saniel's report and that, based on general medical
findings, it had reasonable ground to believe that her stroke was due to a pre-existing condition, considering it occurred only 38 days
after the coverage took effect.25

We disagree.

The RTC and CA found that there was a factual basis for the damages adjudged against petitioner. They found that it was guilty of bad
faith in denying a claim based merely on its own perception that there was a pre-existing condition:

[Respondents] have sufficiently shown that [they] were forced to engage in a dispute with [petitioner] over a legitimate claim
while [respondent Neomi was] still experiencing the effects of a stroke and forced to pay for her medical bills during and after
her hospitalization despite being covered by [petitioner’s] health care program, thereby suffering in the process extreme
mental anguish, shock, serious anxiety and great stress. [They] have shown that because of the refusal of [petitioner] to issue
a letter of authorization and to pay [respondent Neomi's] hospital bills, [they had] to engage the services of counsel for a fee
of P20,000.00. Finally, the refusal of petitioner to pay respondent Neomi's bills smacks of bad faith, as its refusal [was]
merely based on its own perception that a stroke is a pre-existing condition. (emphasis supplied)

This is a factual matter binding and conclusive on this Court. 26 We see no reason to disturb these findings.

WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and September 21, 2005 resolution of the Court of Appeals
in CA-G.R. SP No. 84163 are AFFIRMED.

Treble costs against petitioner.

SO ORDERED.
G.R. No. 167330 June 12, 2008

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CORONA, J.:

Is a health care agreement in the nature of an insurance contract and therefore subject to the documentary stamp tax (DST) imposed
under Section 185 of Republic Act 8424 (Tax Code of 1997)?

This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its August 16, 2004 decision 1 in CA-G.R. SP
No. 70479. Petitioner Philippine Health Care Providers, Inc. believes otherwise and assails the CA decision in this petition for review
under Rule 45 of the Rules of Court.

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health
care plan and to provide for the administrative, legal, and financial responsibilities of the organization." 2 Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided
by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.3

The pertinent part of petitioner's membership or health care agreement 4 provides:

VII BENEFITS

Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for reimbursement] of this Agreement,
Members shall have the following Benefits under this Agreement:

In-Patient Services. In the event that a Member contract[s] sickness or suffers injury which requires confinement in a
participating Hospital[,] the services or benefits stated below shall be provided to the Member free of charge, but in no case
shall [petitioner] be liable to pay more than P75,000.00 in benefits with respect to anyone sickness, injury or related causes. If
a member has exhausted such maximum benefits with respect to a particular sickness, injury or related causes, all accounts in
excess of P75,000.00 shall be borne by the enrollee. It is[,] however, understood that the payment by [petitioner] of the said
maximum in In-Patient Benefits to any one member shall preclude a subsequent payment of benefits to such member in
respect of an unrelated sickness, injury or related causes happening during the remainder of his membership term.

(a) Room and Board

(b) Services of physician and/or surgeon or specialist

(c) Use of operating room and recovery room

(d) Standard Nursing Services

(e) Drugs and Medication for use in the hospital except those which are used to dissolve blood clots in the vascular
systems (i.e., trombolytic agents)

(f) Anesthesia and its administration

(g) Dressings, plaster casts and other miscellaneous supplies

(h) Laboratory tests, x-rays and other necessary diagnostic services

(i) Transfusion of blood and other blood elements

Condition for in-Patient Care. The provision of the services or benefits mentioned in the immediately preceding paragraph
shall be subject to the following conditions:
 (a) The Hospital Confinement must be approved by [petitioner's] Physician, Participating Physician or [petitioner's]
Medical Coordinator in that Hospital prior to confinement.

(b) The confinement shall be in a Participating Hospital and the accommodation shall be in accordance with the
Member[']s benefit classification.

(c) Professional services shall be provided only by the [petitioner's] Physicians or Participating Physicians.

(d) If discharge from the Hospital has been authorized by [petitioner's] attending Physician or Participating Physician
and the Member shall fail or refuse to do so, [petitioner] shall not be responsible for any charges incurred after
discharge has been authorized.

Out-Patient Services. A Member is entitled free of charge to the following services or benefits which shall be rendered or
administered either in [petitioner's] Clinic or in a Participating Hospital under the direction or supervision of [petitioner's]
Physician, Participating Physician or [petitioner's] Medical Coordinator.

(a) Gold Plan Standard Annual Physical Examination on the anniversary date of membership, to be done at
[petitioner's] designated hospital/clinic, to wit:

(i) Taking a medical history

(ii) Physical examination

(iii) Chest x-ray

(iv) Stool examination

(v) Complete Blood Count

(vi) Urinalysis

(vii) Fasting Blood Sugar (FBS)

(viii) SGPT

(ix) Creatinine

(x) Uric Acid

(xi) Resting Electrocardiogram

(xii) Pap Smear (Optional for women 40 years and above)

(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination.

The following tests are to be done as part of the Member[']s Annual check-up program at [petitioner's] designated
clinic, to wit:

1) Routine Physical Examination

2) CBC (Complete Blood Count)

* Hemoglobin * Hematocrit

* Differential * RBC/WBC

3) Chest X-ray

4) Urinalysis
 5) Fecalysis

(c) Preventive Health Care, which shall include:

(i) Periodic Monitoring of Health Problems

(ii) Family planning counseling

(iii) Consultation and advices on diet, exercise and other healthy habits

(iv) Immunization but excluding drugs for vaccines used

(d) Out-Patient Care, which shall include:

(i) Consultation, including specialist evaluation

(ii) Treatment of injury or illness

(iii) Necessary x-ray and laboratory examination

(iv) Emergency medicines needed for the immediate

relief of symptoms

(v) Minor surgery not requiring confinement

Emergency Care. Subject to the conditions and limitations in this Agreement and those specified below, a Member is entitled
to receive emergency care [in case of emergency. For this purpose, all hospitals and all attending physician(s) in the
Emergency Room automatically become accredited. In participating hospitals, the member shall be entitled to the following
services free of charge: (a) doctor's fees, (b) emergency room fees, (c) medicines used for immediate relief and during
treatment, (d) oxygen, intravenous fluids and whole blood and human blood products, (e) dressings, casts and sutures and (f)
x-rays, laboratory and diagnostic examinations and other medical services related to the emergency treatment of the
patient.]5 Provided, however, that in no case shall the total amount payable by [petitioner] for said Emergency, inclusive of
hospital bill and professional fees, exceed P75,000.00.

If the Member received care in a non-participating hospital, [petitioner] shall reimburse [him]6 80% of the hospital bill or the
amount of P5,000.00[,] whichever is lesser, and 50% of the professional fees of non-participating physicians based on
[petitioner's] schedule of fees provided that the total amount[,] inclusive of hospital bills and professional fee shall not exceed
P5,000.00.

On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal demand letter and the corresponding
assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and
1997 in the total amount of P224,702,641.18. The assessment represented the following:

Value Added Tax (VAT) DST

1996 P 45,767,596.23 P 55,746,352.19

1997 54,738,434.03 68,450,258.73

P 100,506,030.26 P 124,196,610.92

The deficiency DST assessment was imposed on petitioner's health care agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code which provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity, employer's liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and
all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing
or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing
 the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person,
company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos
(P4.00), or fractional part thereof, of the premium charged. (emphasis supplied)

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a
petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from
January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20%
interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared
void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.8

Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST assessment. He claimed that petitioner's health care
agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. 10 It held that petitioner's health care agreement was in the nature of a non-life
insurance contract subject to DST:

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set
aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the
same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for
1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.11

Petitioner moved for reconsideration but the CA denied it. Hence, this petition.

Petitioner essentially argues that its health care agreement is not a contract of insurance but a contract for the provision on a prepaid
basis of medical services, including medical check-up, that are not based on loss or damage. Petitioner also insists that it is not
engaged in the insurance business. It is a health maintenance organization regulated by the Department of Health, not an insurance
company under the jurisdiction of the Insurance Commission. For these reasons, petitioner asserts that the health care agreement is
not subject to DST.

We do not agree.

The DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific
legal relationships through the execution of specific instruments. 12 It is an excise upon the privilege, opportunity, or facility offered at
exchanges for the transaction of the business.13 In particular, the DST under Section 185 of the 1997 Tax Code is imposed on the
privilege of making or renewing any policy of insurance (except life, marine, inland and fire insurance), bond or obligation in the
nature of indemnity for loss, damage, or liability.

Under the law, a contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. 14 The event insured against must be designated in the contract and
must either be unknown or contingent.15

Petitioner's health care agreement is primarily a contract of indemnity. And in the recent case of Blue Cross Healthcare, Inc. v.
Olivares,16 this Court ruled that a health care agreement is in the nature of a non-life insurance policy.

Contrary to petitioner's claim, its health care agreement is not a contract for the provision of medical services. Petitioner does not
actually provide medical or hospital services but merely arranges for the same 17 and pays for them up to the stipulated maximum
amount of coverage. It is also incorrect to say that the health care agreement is not based on loss or damage because, under the said
agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional
fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case
of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury
or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of
the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated
contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care
program. This is insurance.

Petitioner's health care agreement is substantially similar to that involved in Philamcare Health Systems, Inc. v. CA.18 The health care
agreement in that case entitled the subscriber to avail of the hospitalization benefits, whether ordinary or emergency, listed therein. It
also provided for "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services.
This Court ruled in Philamcare Health Systems, Inc.:

[T]he insurable interest of [the subscriber] in obtaining the health care agreement was his own health. The health care
agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated contingency, the health care provider
must pay for the same to the extent agreed upon under the contract. 19 (emphasis supplied)

Similarly, the insurable interest of every member of petitioner's health care program in obtaining the health care agreement is his own
health. Under the agreement, petitioner is bound to indemnify any member who incurs hospital, medical or any other expense arising
from sickness, injury or other stipulated contingency to the extent agreed upon under the contract.

Petitioner's contention that it is a health maintenance organization and not an insurance company is irrelevant. Contracts between
companies like petitioner and the beneficiaries under their plans are treated as insurance contracts.20

Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity, or facility offered at exchanges for
the transaction of the business.21 It is an excise on the facilities used in the transaction of the business, separate and apart from
the business itself.22

WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is AFFIRMED.

Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency documentary stamp tax for 1996 and
1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000 until full payment thereof.

Costs against petitioner.

SO ORDERED.

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health consciousness among them.

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

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

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health
care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided
by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of ₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care agreement with the members of its
health care program pursuant to Section 185 of the 1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a
petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to
PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully
paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully
paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and
1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST
from collecting the said DST deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed that
petitioner’s health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement was in the nature of a non-life
insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the
1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED
and SET ASIDE.

Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and
1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248
and 249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We held that petitioner’s health care
agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioner’s contention that it is a health
maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and
the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration,
asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the
business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance
company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CA’s disposition that health
care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the
amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not those contemplated under
Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health insurance is not covered by Section
185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and all prior years. Therefore, the
questioned assessments on the DST are now rendered moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 94807(also known as the
"Tax Amnesty Act of 2007") by fully paying the amount of ₱5,127,149.08 representing 5% of its net worth as of the year ending
December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987.9 It is engaged in
the dispensation of the following medical services to individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and advices on
diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an injury or
sickness on the part of the enrolled member.10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The medical
services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians,
medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services are to be
provided only by petitioner's physicians, i.e. those directly employed by it11 or whose services are contracted by it.12 Petitioner also
provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other
health care providers for the services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual members are required to sign and execute a standard health care
agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the various
health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for
the curative aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered
by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are
treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in the
transaction of the business.15

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

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or bonds or obligations of the
nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public
body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may
be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos
(₱0.50) on each four pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage
or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over
that which makes some words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we
choose the interpretation which gives effect to the whole of the statute – its every word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document
must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker should be transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is "an entity that provides,
offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium." 19 The payments
do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it
was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or
"transacting an insurance business:"

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an
insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the
provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or
transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, 21 have determined that HMOs are
not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are
elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its
business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law supporting the argument that a corporation
(such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is
not engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the District of Columbia Circuit held
that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the
distribution of health care services rather than the assumption of insurance risk.

xxx Although Group Health’s activities may be considered in one aspect as creating security against loss from illness or accident more
truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an
organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not
exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the
unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned
principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the
service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of
living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of
colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To
summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in
cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of
the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused
only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes
faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not
the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to
engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is
involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object
purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan of operation as a whole of the
corporation, it was service rather than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence or
presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly,
is whether, looking at the plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide
scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary,
low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’ 26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to
provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to
indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue
Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to
provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while
the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the
policy.
 xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to
subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporation’s plan, not
only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the
corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such
and rendering itself subject to the more stringent financial requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by
a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly
to the participating provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical
services as needed, with payment made directly to the provider of these services. 29 In short, even if petitioner assumes the risk of
paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered as
being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating
health providers would still be incidental to petitioner’s purpose of providing and arranging for health care services and does not
transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system and
the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical services intended to keep members from
developing medical conditions or diseases. 30 As an HMO, it is its obligation to maintain the good health of its members. Accordingly,
its health care programs are designed to prevent or to minimize thepossibility of any assumption of risk on its part. Thus, its
undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on
the contrary, to provide the health and medical services needed to prevent such loss or damage. 31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these
are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of petitioner’s business is miniscule
compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it
cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not saying that
petitioner’s operations are identical in every respect to those of the HMOs or health providers which were parties to those cases. What
we are stating is that, for the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations
of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the
burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business.
Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be actually engaged
in insurance activities.32

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

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

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of indemnity for loss, damage, or
liability…." In our decision dated June 12, 2008, we ruled that petitioner’s health care agreements are contracts of indemnity and are
therefore insurance contracts:
It is … incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner
assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians).
The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury.

Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury
or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of
the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated
contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care
program. This is insurance.37

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or bonds or obligations of the
nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing
authority.38 This is because taxation is a destructive power which interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the government. 39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided. 40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life
insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead,
they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as
contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our
ruling that Blue Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the
following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk and

5. In consideration of the insurer’s promise, the insured pays a premium. 41

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an
insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance
contract. The primary purpose of the parties in making the contract may negate the existence of an insurance contract. For
example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent
such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of
rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its
own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be
deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the essential purpose of such a contract is not
to render personal services, but to indemnify against loss and damage resulting from the defense of actions for
malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements. To begin with, there is no
loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the
member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the
petitioner’s physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, petitioner
does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any
such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third
party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms "indemnify" or "indemnity"
presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray,
routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not
confined to the happening of a contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health care contracts called for the
defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not make defendant an
insurer. Citing Jordan, the Court determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services." 44 Since indemnity of the insured was not the focal point of the agreement
but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it.
Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to
distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a
reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as
actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated
on the basis of assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its members can be construed as an acceptance of the
risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioner’s objective is to
provide medical services at reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is not an insurance contract within the
context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health care agreements under Section 185 of
the NIRC of 1997 is the provision’s legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and
health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189
(otherwise known as the "Internal Revenue Law of 1904") 46enacted on July 2, 1904 and became effective on August 1, 1904. Except
for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and
indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the
vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or
persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or
renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employer’s
liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine,
inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to
internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30
(l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657
(Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal revenue
laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision
remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section 234.
Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as Section 198. And
under Section 23 of EO47 273 dated July 25, 1987, it was again renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was
retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 9243 48 but Section 185 was
untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in
1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there
are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and
having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a
total enrollment of more than 2 million.49

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

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements
were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the
provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits,
so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency
who is to pay it.51 So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy." 52

Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is way beyond its net worth of ₱259
million.54 Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to
encourage private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

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

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

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot and
academic60 when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net
worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480,
it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative
penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005
and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax involved,
including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not
meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.63 There is no
other conclusion to draw than that petitioner’s liability for DST for the taxable years 1996 and 1997 was totally extinguished by its
availment of the tax amnesty under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the CA64 in CIR
v. Philippine National Bank65 that a health care agreement of Philamcare Health Systems is not an insurance contract for purposes of
the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal in Philippine
National Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the
merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case. When
we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in that case has already
become final.67 When a minute resolution denies or dismisses a petition for failure to comply with formal and substantive requirements,
the challenged decision, together with its findings of fact and legal conclusions, are deemed sustained. 68 But what is its effect on other
cases?

With respect to the same subject matter and the same issues concerning the same parties, it constitutes res judicata.69 However, if
other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the
CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved
different subject matters as they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment is
based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover,
unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks
of a decision.73Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision
duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for DST on its health care agreement
was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not
even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the
fact that petitioner’s health care agreements are not subject to DST.

A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any
legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage
earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more
efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they receive medical services), including
the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the State in achieving its
constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition will elevate the cost of health care
services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the reach of
the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the indispensability
of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.

G.R. No. 132607 May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY, INC., respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a reversal of the decision of the Court
of Appeal1 which affirmed the decision of the trial court of origin finding the petitioner herein, Cebu Shipyard and Engineering Works,
Inc. (CSEW) negligent and liable for damages to the private respondent, William Lines, Inc., and to the insurer, Prudential Guarantee
Assurance Company, Inc.

The antecedent facts that matter are as follows:

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the business of dry-docking and repairing of
marine vessels while the private respondent, Prudential Guarantee and Assurance, Inc. (Prudential), also a domestic corporation is in
the non-life insurance business.

William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V Manila City, a luxury passenger-cargo vessel, which
caught fire and sank on February 16, 1991. At the time of the unfortunate occurrence sued upon, subject vessel was insured with
Prudential for P45,000,000.00 pesos for hull and machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause
covering loss of or damage to the vessel through the negligence of, among others, ship repairmen. The Policy provided as follows:

Subject to the conditions of this Policy, this insurance also covers loss of or damage to Vessel directly caused by the
following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an Assured
hereunder.

xxx xxx xxx

 provided such loss or damage has not resulted from want of due diligence by the Assured, the Owners or Managers
of the Vessel, of any of them Masters, Officers, Crew or Pilots are not to be considered Owners within the meaning of
this Clause should they hold shares in the Vessel. 2

Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairer's Legal Liability Insurance Policy. The policy
was for P10 million only, under the limited liability clause, to wit:

7. Limit of Liability

The limit of liability under this insurance, in respect of any one accident or series of accidents, arising out of one
occurrence, shall be [P10 million], including liability for costs and expense which are either:

(a) incurred with the written consent of the underwriters hereon, or

(b) awarded against the Assured.3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in Lapulapu City for annual dry-
docking and repair.

On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and CSEW to discuss the work to
be undertaken on the M/V Manila City.

The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:

10. The Contractor shall replace at its own work and at its own cost any work or material which can be shown to be
defective and which is communicated in writing within one (1) month of redelivery of the vessel or if the vessel was
not in the Contractor's Possession, the withdrawal of the Contractor's workmen, or at its option to pay a sum equal to
the cost of such replacement at its own works. These conditions shall apply to any such replacements.

11. Save as provided in Clause 10, the Contractor shall not be under any liability to the Customer either in contract or
for delict or quasi-delict or otherwise except for negligence and such liability shall itself be subject to the following
overriding limitations and exceptions, namely:

(a) The total liability of the Contractor to the Customer (over and above the liability to replace under
Clause 10) or of any sub-contractor shall be limited in respect of any defect or event (and a series
of accidents arising out of the same defect or event shall constitute one defect or event) to the sum
of Pesos Philippine Currency One Million only.

(b) In no circumstance whatsoever shall the liability of the Contractor or any Sub-Contractor include
any sum in respect of loss of profit or loss of use of the vessel or damages consequential on such
loss of use

xxx xxx xxx

20. The insurance on the vessel should be maintained by the customer and/or owner of the vessel during the period
the contract is in effect.4

While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW, the master, officers and crew of M/V
Manila City stayed in the vessel using their cabins as living quarters. Other employees hired by William Lines to do repairs and
maintenance work on the vessel were also present during the dry-docking.

On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and sank, resulting to its eventual total
loss.

On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that the fire which broke out in M/V
Manila City was caused by CSEW's negligence and lack of care.

On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the latter had paid William Lines, Inc. the
value of the hull and machinery insurance on the M/V Manila City. As a result of such payment Prudential was subrogated to the claim
of P45 million, representing the value of the said insurance it paid.

On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:
 WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering the latter.

1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the subrogee, the amount of Forty-five Million (P45
million) Pesos, with interest at the legal rate until full payment is made.

2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven Hundred Fifteen Thousand
(P56,715,000.00) Pesos representing loss of income of M/V MANILA CITY, with interest at the legal rate until full
payment is made.

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million) as payment, in addition to what it
received from the insurance company to fully cover the injury or loss, in order to replace the M/V MANILA CITY, with
interest at the legal rate until full payment is made;

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven Thousand Thirty-nine
(P927,039.00) Pesos for the loss of fuel and lub (sic) oil on board the vessel when she was completely gutted by fire
at defendant, Cebu Shipyard's quay, with interest at the legal rate until full payment is made;

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four Thousand Six Hundred Seventy-seven
Pesos and Ninety-five centavos (P3,054.677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full payment is made;

6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand (P500,000 00) Pesos in moral
damages;

7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million (P10,000.000.00) Pesos in attorney's fees; and
to pay the costs of this suit.

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the pendency of the appeal, CSEW and
William Lines presented a "Joint Motion for Partial Dismissal" with prejudice, on the basis of the amicable settlement inked between
Cebu Shipyard and William Lines only.

On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW and William Lines were concerned.

On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling thus:

WHEREFORE, the judgment of the lower court ordering the defendant, Cebu Shipyard and Engineering Works, Inc.
to pay the plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the sum of P45 Million, with interest at
the legal rate until full payment is made, as contained in the decision of Civil Case No. CEB-9935 is hereby
AFFIRMED.

With the denial of its motion for reconsideration by the Court of Appeal's Resolution dated February 13, 1998, CSEW found its way to
this court via the present petition, contending that:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT CSEW HAD
"MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V MANILA CITY AT THE TIME THE FIRE BROKE
OUT.

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE DOCTRINE OF RES
IPSA LOQUITUR AGAINST CSEW.

III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY LIABLE FOR THE LOSS
OF THE M/V MANILA CITY IS BASED FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.

IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEW'S EXPERT EVIDENCE
AS INADMISSIBLE OR OF NO PROBATIVE VALUE.

V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT PRUDENTIAL HAS THE
RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.

VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AND THAT CSEW WAS
NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR CONTRACTS. THE
CONTRACTUAL PROVISIONS LIMITING CSEW'S LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P 1
MILLION IS NOT VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE COURT.
Petitioner's version of the events that led to the fire runs as follows:

On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its grave dock. It was then
transferred to the docking quay of CSEW where the remaining repair to be done was the replating of the top of Water
Ballast Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to JNB General Services. Tank Top No.
12 was at the rear section of the vessel, on level with the flooring of the crew cabins located on the vessel's second
deck.

At around seven o'clock in the morning of February 16, 1991, the JNB workers trimmed and cleaned the tank framing
which involved minor hotworks (welding/cutting works). The said work was completed at about 10:00 a.m. The JNB
workers then proceeded to rig the steel plates, after which they had their lunch break. The rigging was resumed at
1:00 p.m.

While in the process of rigging the second steel plate, the JNB workers noticed smoke coming from the passageway
along the crew cabins. When one of the workers, Mr. Casas, proceeded to the passageway to ascertain the origin of
the smoke, he noticed that smoke was gathering on the ceiling of the passageway but did not see any fire as the
crew cabins on either side of the passageway were locked. He immediately sought out the proprietor of JNB, Mr.
Buenavista, and the Safety officer CSEW, Mr. Aves, who sounded the fire alarm. CSEW's fire brigade immediately
responded as well as the other fire fighting units in Metro Cebu. However, there were no WLI representative, officer
or crew to guide the firemen inside the vessel.

Despite the combined efforts of the firemen of the Lapulapu City Fire Department, Mandaue Fire Cordova Fire
Department, Emergency Rescue Unit Foundation, and fire brigade of CSEW, the fire was not controlled until 2:00
a.m., of the following day, February 17, 1991.

On the early morning of February 17, 1991, gusty winds rekindled the flames on the vessel and fire again broke out.
Then the huge amounts of water pumped into the vessel, coupled with the strong current, caused the vessel to tilt
until it capsized and sank.

When M/V Manila City capsized, steel and angle bars were noticed to have been newly welded along the port side of
the hull of the vessel, at the level of the crew cabins. William Lines did not previously apply for a permit to do
hotworks on the said portion of the ship as it should have done pursuant to its work order with CSEW.5

Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner:

At around eleven o'clock in the morning of February 16, 1991, the Chief Mate of M/V Manila City was inspecting the
various works being done by CSEW on the vessel, when he saw that some workers of CSEW were cropping out steel
plates Tank Top No. 12 using acetylene, oxygen and welding torch. He also observed that the rubber insulation wire
coming out of the air-conditioning unit was already burning, prompting him to scold the workers.

At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank No. 12. The vessel's reeferman
reported such occurence to the Chief Mate who immediately assembled the crew members to put out the fire. When it
was too hot for them to stay on board and seeing that the fire cannot be controlled, the vessel's crew were forced to
withdraw from CSEW's docking quay.

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with Prudential Guarantee,
William Lines filed a claim for constructive loss, and after a thorough investigation of the surrounding circumstances
of the tragedy, Prudential Guaranteed found the said insurance claim to be meritorious and issued a check in favor of
William Lines in the amount of P 45 million pesos representing the total value of M/V Manila City's hull and machinery
insurance.6

The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages for the respondents, William Lines, Inc.,
and Prudential for the loss of M/V Manila City. It is petitioner's submission that the finding of negligence by the Court of Appeals is not
supported by the evidence on record, and contrary to what the Court of Appeals found, petitioner did not have management and control
over M/V Manila City. Although it was brought to the premises of CSEW for annual repair, William Lines, Inc. retained control over the
vessel as the ship captain remained in command and the ship's crew were still present. While it imposed certain rules and regulations
on William Lines, it was in the exercise of due diligence and not an indication of CSEW's exclusive control over subject vessel. Thus,
CSEW maintains that it did not have exclusive control over the M/V Manila City and the trial court and the Court of Appeals erred in
applying the doctrine of res ipsa loquitur.

Time and again, this Court had occasion to reiterate the well-established rule that factual findings by the Court of Appeals are
conclusive on the parties and are not reviewable by this Court. They are entitled to great weight and respect, even finality, especially
when, as in this case, the Court of Appeals affirmed the factual findings arrived at by the trial court. 7 When supported by sufficient
evidence, findings of fact by the Court of Appeals affirming those of the trial court, are not to be disturbed on appeal. The rationale
behind this doctrine is that review of the findings of fact of the Court of Appeals is not a function that the Supreme Court normally
undertakes.8

Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which caused the total loss of subject
M/V Manila City was due to the negligence of the employees and workers of CSEW. Both courts found that the M/V Manila City was
under the custody and control of petitioner CSEW, when the ill-fated vessel caught fire. The decisions of both the lower court and the
Court of Appeals set forth clearly the evidence sustaining their finding of actionable negligence on the part of CSEW. This factual
finding is conclusive on the parties. The court discerns no basis for disturbing such finding firmly anchored on enough evidence. As held
in the case of Roblett Industrial Construction Corporation vs. Court of Appeals, "in the absence of any showing that the trial court failed
to appreciate facts and circumstances of weight and substance that would have altered its conclusion, no compelling reason exists for
the Court to impinge upon matters more appropriately within its province. 9

Furthermore, in petitions for review on certiorari, only questions of law may be put into issue. Questions of fact cannot be entertained.
The finding of negligence by the Court of Appeals is a question which this Court cannot look into as it would entail going into factual
matters on which the finding of negligence was based. Such an approach cannot be allowed by this Court in the absence of clear
showing that the case falls under any of the exceptions 10to the well-established principle.

The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by reason of the negligence of the
workers of CSEW, when the said vessel was under the exclusive custody and control of CSEW is accordingly upheld. Under the
circumstances of the case, the doctrine of res ipsa loquitur applies. For the doctrine of res ipsa loquitur to apply to a given situation, the
following conditions must concur (1) the accident was of a kind which does not ordinarily occur unless someone is negligent; and (2)
that the instrumentality or agency which caused the injury was under the exclusive control of the person charged with negligence.

The facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny. First, the fire that occurred and
consumed M/V Manila City would not have happened in the ordinary course of things if reasonable care and diligence had been
exercised. In other words, some negligence must have occurred. Second, the agency charged with negligence, as found by the trial
court and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu Shipyard and Engineering Works, Inc.,
which had control over subject vessel when it was docketed for annual repairs. So also, as found by the regional trial court, "other
responsible causes, including the conduct of the plaintiff, and third persons, are sufficiently eliminated by the evidence. 11

What is more, in the present case the trial court found direct evidence to prove that the workers and/or employees of CSEW were
remiss in their duty of exercising due diligence in the care of subject vessel. The direct evidence substantiates the conclusion that
CSEW was really negligent. Thus, even without applying the doctrine of res ipsa loquitur, in light of the direct evidence on record, the
ineluctable conclusion is that the petitioner, Cebu Shipyard and Engineering Works, Inc., was negligent and consequently liable for
damages to the respondent, William Lines, Inc.

Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled on the inadmissibility of the expert
testimonies it (petitioner) introduced on the probable cause and origin of the fire. Petitioner maintains that the Court of Appeals erred in
disregarding the testimonies of the fire experts, Messrs. David Grey and Gregory Michael Southeard, who testified on the probable
origin of the fire in M/V Manila City. Petitioner avers that since the said fire experts were one in their opinion that the fire did not
originate in the area of Tank Top No. 12 where the JNB workers were doing hotworks but on the crew accommodation cabins on the
portside No. 2 deck, the trial court and the Court of Appeals should have given weight to such finding based on the testimonies of fire
experts; petitioner argues.

But courts are not bound by the testimonies of expert witnesses. Although they may have probative value, reception in evidence of
expert testimonies is within the discretion of the court. Section 49, Rule 130 of the Revised Rules of Court, provides:

Sec. 49. Opinion of expert witness. — The opinion of a witness on a matter requiring special knowledge, skill,
experience or training which he is shown to possess, may be received in evidence.

The word "may" signifies that the use of opinion of an expert witness as evidence is a prerogative of the courts. It is never
mandatory for judges to give substantial weight to expert testimonies. If from the facts and evidence on record, a conclusion is
readily ascertainable, there is no need for the judge to resort to expert opinion evidence. In the case under consideration, the
testimonies of the fire experts were not the only available evidence on the probable cause and origin of the fire. There were
witnesses who were actually on board the vessel when the fire occurred. Between the testimonies of the fire experts who
merely based their findings and opinions on interviews and the testimonies of those present during the fire, the latter are of
more probative value. Verily, the trial court and the Court of Appeals did not err in giving more weight to said testimonies.

On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the rights of William Lines, Inc.,
theorizing that (1) the fire which gutted M/V Manila City was an excluded risk and (2) it is a co-assured under the Marine Hull Insurance
Policy.
It is petitioner's submission that the loss of M/V Manila City or damage thereto is expressly excluded from the coverage of the insurance
because the same resulted from "want of due diligence by the Assured, Owners or Managers" which is not included in the risks insured
against. Again, this theory of petitioner is bereft of any factual or legal basis. It proceeds from a wrong premise that the fire which gutted
subject vessel was caused by the negligence of the employees of William Lines, Inc. To repeat, the issue of who between the parties
was negligent has already been resolved against Cebu Shipyard and Engineering Works, Inc. Upon proof of payment by Prudential to
William Lines, Inc. the former was subrogated to the right of the latter to indemnification from CSEW. As aptly ruled by the Court of
Appeals, the law on the manner is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury. 12

Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William Lines, Inc., paid the latter the total
amount covered by its insurance policy, it was subrogated to the right of the latter to recover the insured loss from the liable party,
CSEW.

Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured under the subject insurance policy. To
buttress its stance that it is a co-assured, petitioner placed reliance on Clause 20 of the Work Order which states:

20 The insurance on the vessel should be maintained by the customer and/or owner of the vessel during the period
the contract is in effect. 13

According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume the risk of loss of the vessel while
under dry-dock or repair and to such extent, it is benefited and effectively constituted as a co-assured under the policy.

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is clear in the sense that it requires
William Lines to maintain insurance on the vessel during the period of dry-docking or repair. Concededly, such a stipulation works to the
benefit of CSEW as the ship repairer. However, the fact that CSEW benefits from the said stipulation does not automatically make it as
a co-assured of William Lines. The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned
principally from the insurance contract or policy itself and not from any other contract or agreement because the insurance policy
denominates the assured and the beneficiaries of the insurance. The hull and machinery insurance procured by William Lines, Inc. from
Prudential named only "William Lines, Inc." as the assured. There was no manifestation of any intention of William Lines, Inc. to
constitute CSEW as a co-assured under subject policy. It is axiomatic that when the terms of a contract are clear its stipulations
control. 14 Thus, when the insurance policy involved named only William Lines, Inc. as the assured thereunder, the claim of CSEW that
it is a co-assured is unfounded.

Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:

Subject to the conditions of this Policy, this insurance also covers loss of or damage to vessel directly caused by the
following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an Assured
hereunder 15 (emphasis supplied).

As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the policy, it would nullify any claim of
William Lines, Inc. from Prudential for any loss or damage caused by the negligence of CSEW. Certainly, no shipowner would agree to
make a shiprepairer a co-assured under such insurance policy; otherwise, any claim for loss or damage under the policy would be
invalidated. Such result could not have been intended by William Lines, Inc.

Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines Inc., by stipulation in the Contract
or Work Order its liability is limited to One Million (P1,000,000.00) Pesos only, and Prudential a mere subrogee of William Lines, Inc.,
should only be entitled to collect the sum stipulated in the said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as binding as an ordinary contract, the
Court recognizes instances when reliance on such contracts cannot be favored especially where the facts and circumstances warrant
that subject stipulations be disregarded. 16 Thus, in ruling on the validity and applicability of the stipulation limiting the liability of CSEW
for negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of the provision sought to be
enforced should be considered, bearing in mind the principles of equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00) Pesos. To determine the
validity and sustainability of the claim of William Lines, Inc., for a total loss, Prudential conducted its own inquiry. Upon thorough
investigation by its hull surveyor, M/V Manila City was found to be beyond economical salvage and repair. 17 The evaluation of the
average adjuster also reported a constructive total loss. 18The said claim of William Lines, Inc., was then found to be valid and
compensable such that Prudential paid the latter the total value of its insurance claim. Furthermore, it was ascertained that the
replacement cost of the vessel (the price of a vessel similar to M/V Manila City), amounts to Fifty Million (P 50,000,000.00) Pesos.19

Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has been sufficiently proven, it
would indeed be unfair and inequitable to limit the liability of petitioner to One Million Pesos only. As aptly held by the trial court, "it is
rather unconscionable if not overstrained." To allow CSEW to limit its liability to One Million Pesos notwithstanding the fact that the total
loss suffered by the assured and paid for by Prudential amounted to Forty Five Million (P45,000,000.00) Pesos would sanction the
exercise of a degree of diligence short of what is ordinarily required because, then, it would not be difficult for petitioner to escape
liability by the simple expedient of paying an amount very much lower than the actual damage or loss suffered by William Lines, Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3, 1997, and Resolution, dated
February 13, 1998, of the Court of Appeals AFFIRMED. No pronouncement as to costs.1âwphi1.nêt

SO ORDERED.

G.R. No. 98414 February 8, 1993

FIRST QUEZON CITY INSURANCE COMPANY, INC., petitioner,

vs.
THE HON. COURT OF APPEALS and DE DIOS MARIKINA TRANSPORTATION CO., respondents.

Ponciano U. Pitarque for petitioner.

De Dios & Taoingan Law Offices and Ponce Enrile, Cayetano, Reyes for private respondent.

GRIÑO-AQUINO, J.:

Before the Court is a petition filed by the First Quezon City Insurance Company, Inc., seeking to limit to P12,000.00, the amount
specified in the insurance contract, its liability to indemnify the respondent, De Dios Marikina Transportation Company (DMTC, for
short), for the damages suffered by a passenger, Jose V. del Rosario, who accidentally fell off the bus.

The undisputed facts are:

On June 10, 1984, at about 3:00 p.m., after sending off certain seamen at the departure area of then known as
Manila International Airport (MIA), Plaintiff Jose V. del Rosario proceeded to the loading and unloading zone for
public utility bus stop, which was located in front of the MIA, to wait for a passenger bus bound for Quezon City. While
at the bus stop, the plaintiff saw a DMTC bus bearing body No. 236 and plate No. NVU-798 and which, per its
signboard, was plying the Pasay to Quezon City (passing España) route. As it approach the bus stop, the bus slowed
down with all its doors wide open: while moving at a crawling pace, i.e., as slow as an "ordinary walk," it was taking
several passengers, about five or seven of them including the plaintiff, all of whom managed to board the bus while it
was already at the bus stop; plaintiff was the last one to board the bus.

While the plaintiff was still on the bus' running board with his hand on the bus door's handle bar, the slowly moving
bus sped forward at a high speed, as a result of which, the plaintiff lost his balance and fell from the bus. As plaintiff
clung instinctively to the handle bar, he was dragged by the bus along the asphalted road for about two (2) seconds.
Plaintiff screamed of pain and anguished even as the other passengers shouted and the bus' driver, Gil Agpalo, an
employee of defendant and third-party plaintiff DMTC, abruptly stopped the bus. Then, Gil forthwith fled from the
scene, leaving the bus and the injured plaintiff behind.

Thereafter, the plaintiff was brought to the Manila Sanitarium and Hospital where he was given immediate medical
treatment at the emergency ward. The doctors performed a major surgical operation on plaintiff's right leg. This leg
was extensively lacerated: its skin and tissues were exposed and detached from the muscles. Treatment was done
under special anesthesia and consisted of debridement or cleaning repair and suturing of the injured tissue. While at
the hospital, plaintiff was febrile or feverish for about forty (40) days. On July 12, 1984, a second major surgical
operation, i.e., a skin grafting operation, was performed on plaintiff's right leg.
 Plaintiff was confined at the hospital for a total period of forty (40) days, from June 10, 1984 to August 26, 1984.
During his stay at the hospital, plaintiff incurred medical expenses in the total amount of P69,444.41. Plaintiff's
medical expenses were advanced by his employer Maglines but he was required to reimburse Maglines on a
staggered basis by way of salary deductions. Plaintiff was released from the hospital on August 29, 1984. After his
release, he returned to the hospital from time to time for further treatment and checkup. The injuries had left plaintiff
with a huge, ugly scar running almost the entire length of his right leg. Also, the plaintiff incurred lost earning by way
of unearned salaries amounting to P7,500.00 due to said physical injuries and the consequent hospital confinement.

Plaintiff filed on June 26, 1985 the aforesaid complaint against DMTC and its driver, Gil Agpalo. Agpalo was later
dropped as a party defendant because he could not be served with summons. Upon filing its answer on August 20,
1985, defendant DMTC filed a third-party complaint against First Quezon City Insurance Co. Inc. Sometime on
September 17, 1985 this third-party defendant filed its answer to the third-party complaint.

After the trial, the court a quo rendered the appealed decision, the decretal portion of which ordains:

WHEREFORE, the judgment is hereby rendered dismissing defendant De Dios Marikina

Transportation Co. Inc.'s counterclaim for lack of merit and ordering said defendant to pay plaintiff
Jose V. del Rosario: (a) the sum of P76,944.41, as the actual and compensatory damages; (b) the
sum of P15,000.00, as moral and exemplary damages; and (c) the sum of P33,641.50 as attorney's
fees, as well as to pay the cost of suit; and as regards the third-party complaint herein ordering
third-party defendant First Quezon City Insurance Co., Inc. to indemnify third-party plaintiff De Dios
Marikina Transportation Co., Inc. in the sum of P12,000.00 with interest thereon at the legal rate
from date of filing of the third-party complaint on August 20, 1985, until full payment thereof.
Further, there being no satisfactory warrant therefor, the court hereby dismisses the rest of the
claims in the complaint and third-party complaint herein. (pp. 11-13, Rollo.)

The bus company appealed to the Court of Appeals on February 11, 1991. The Court of Appeals modified the dispositive part of the
decision of the trial court as follows:

WHEREFORE, with the following modifications, first in appellee's complaint: that the award of attorney's fees be
reduced to P5,000.00 and that the cost of suit be deleted; and second, as regards the third-party complaint, that the
third-party defendant First Quezon City Insurance Co., Inc., be ordered to indemnify third-party plaintiff DMTC, herein
appellant the sum of P50,090.00 with legal interest thereon from date of filing of the third-party complaint on August
20, 1985 until its full payment, the decision appealed from is AFFIRMED in all other respects. No costs. (p. 19, Rollo.)

The insurance company (now the petitioner) filed a motion for reconsideration which was denied in a resolution dated April 22, 1991.

Hence, this petition for review, assailing the appellate courts' interpretation of the provision of the insurance contract on the limit of the
insurer's liability.

We find merit in the petition.

The insurance company clearly passed the maximum limit of the petitioner's liability for damages arising from death or bodily injury at
P12,000.00 per passenger and its maximum liability per accident at P50,000.00. Since only one passenger was injured in the accident,
the insurer's liability for the damages suffered by said passenger is pegged to the amount of P12,000.00 only. What does the limit of
P50,000.00 per accident mean? It means that the insurer's liability for any single accident will not exceed P50,000.00 regardless of the
number of passengers killed or injured therein. For example, if ten (10) passengers had been injured by the operation of the insured
bus, the insurer's liability for the accident would not be P120,000.00 (at the rate of P12,000.00 per passenger) but would be limited to
only P50,000.00 for the entire accident, as provided in the insurance contract.

The bus company may not recover from the insurance company (herein petitioner) more than P 12,000.00 per passenger killed or
injured, or fifty thousand (P50,000.00) pesos per accident even if under the judgment of the court, the erring bus operator will have to
pay more than P12,000.00 to each injured passenger. The trial court's interpretation of the insurance contract was the correct
interpretation.

WHEREFORE, the petition for review is GRANTED. The decision promulgated on February 11, 1991 by the Court of Appeals in CA-
G.R.
No. 24938, ordering the third-party defendant, First Quezon City Insurance Co., to indemnify the private respondent, De Dios Marikina
Transportation Co. Inc. (DMTC), the sum of P50,000.00 for the damages of the passenger Jose V. Del Rosario, is hereby modified by
reducing the award to P12,000.00 only. Costs against the private respondent, De Dios Marikina Transportation Co., Inc.

SO ORDERED.
G.R. No. 89741 March 13, 1991

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
COURT OF APPEALS and EMILIO TAN, respondents.

Alfonso Felix, Jr., for petitioner.

William B. Devilles for private respondent.

PARAS, J.:

This is a petition for review on certiorari of the June 20, 1989 decision1 of the Court of Appeals in CA-G.R. SP. Case No. 13848
affirming the November 3, 1987 and January 14, 1988 orders of the Regional Trial Court 2 of Iloilo, Branch 27, in Civil Case No. 16817,
denying the motion to dismiss and the subsequent motion for reconsideration; and the August 22, 1989 resolution of the same court
denying the motion for reconsideration.

On August 15, 1983, herein private respondent Emilio Tan took from herein petitioner a P300,000.00 property insurance policy to cover
his interest in the electrical supply store of his brother housed in a building in Iloilo City. Four (4) days after the issuance of the policy,
the building was burned including the insured store. On August 20, 1983, Tan filed his claim for fire loss with petitioner, but on February
29, 1984, petitioner wrote Tan denying the latter's claim. On April 3, 1984, Tan wrote petitioner, seeking reconsideration of the denial of
his claim. On September 3, 1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3, 1984 request for
reconsideration. Petitioner answered the letter on October 11, 1985, advising Tan's counsel that the Insurer's denial of Tan's claim
remained unchanged, enclosing copies of petitioners' letters of February 29, 1984 and May 17, 1985 (response to petition for
reconsideration). On November 20, 1985, Tan filed Civil Case No. 16817 with the Regional Trial Court of Iloilo, Branch 27 but petitioner
filed a motion to dismiss on the alleged ground that the action had already prescribed. Said motion was denied in an order dated
November 3, 1987; and petitioner's motion for reconsideration was also denied in an order dated January 14, 1988.

Petitioner went to the Court of Appeals and sought the nullification of the said Nov. 3, 1987 and January 14, 1988 orders, but the Court
of Appeals, in its June 20, 1989 decision denied the petition and held that the court a quo may continue until its final termination.

A motion for reconsideration was filed, but the same was denied by the Court of Appeals in its resolution of August 22, 1989 (Rollo, pp.
42-43).

Hence, the instant petition.

The Second Division of this Court, in its resolution of December 18, 1989 resolved to give due course to the petition and to require the
parties to submit simultaneous memoranda (Ibid., p. 56).

Petitioner raised two (2) issues which may be stated in substance, as follows:

WHETHER OR NOT THE FILING OF A MOTION FOR RECONSIDERATION INTERRUPTS THE TWELVE (12) MONTHS
PRESCRIPTIVE PERIOD TO CONTEST THE DENIAL OF THE INSURANCE CLAIM; and

II

WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE DEEMED FINAL ONLY IF IT CONTAINS WORDS TO
THE EFFECT THAT THE DENIAL IS FINAL.

The answer to the first issue is in the negative.

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured
and strictly against the insurer company, yet, contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense (Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 [1988]).

Condition 27 of the Insurance Policy, which is the subject of the conflicting contentions of the parties, reads:

27. Action or suit clause — If a claim be made and rejected and an action or suit be not commenced either in the Insurance
Commission or in any court of competent jurisdiction within twelve (12) months from receipt of notice of such rejection, or in
case of arbitration taking place as provided herein, within twelve (12) months after due notice of the award made by the
 arbitrator or arbitrators or umpire, then the claim shall for all purposes be deemed to have been abandoned and shall not
thereafter be recoverable hereunder.

As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be taken and understood in its plain, ordinary and
popular sense pursuant to the above-cited principle laid down by this Court.

Respondent Tan, in his letter addressed to the petitioner insurance company dated April 3, 1984 (Rollo, pp. 50-52), admitted that he
received a copy of the letter of rejection on April 2, 1984. Thus, the 12-month prescriptive period started to run from the said date of
April 2, 1984, for such is the plain meaning and intention of Section 27 of the insurance policy.

While the question of whether or not the insured was definitely advised of the rejection of his claim through the letter (Rollo, pp. 48-49)
of petitioner dated February 29, 1984, may arise, the certainty of the denial of Tan's claim was clearly manifested in said letter, the
pertinent portion of which reads:

We refer to your claim for fire loss of 20th August, 1983 at Huervana St., La Paz, Iloilo City.

We now have the report of our adjusters and after a thorough and careful review of the same and the accompanying
documents at hand, we are rejecting, much to our regrets, liability for the claim under our policies for one or more of the
following reasons:

1. xxx xxx xxx

2. xxx xxx xxx

For your information, we have referred all these matters to our lawyers for their opinion as to the compensability of your claim,
particularly referring to the above violations. It is their opinion and in fact their strong recomendation to us to deny your claim.
By this letter, we do not intend to waive or relinquish any of our rights or defenses under our policies of insurance.

It is also important to note the principle laid down by this Court in the case of Ang v. Fulton Fire Insurance Co., (2 SCRA 945 [1961]), to
wit:

The condition contained in an insurance policy that claims must be presented within one year after rejection is not merely a
procedural requirement but an important matter essential to a prompt settlement of claims against insurance companies as it
demands that insurance suits be brought by the insured while the evidence as to the origin and cause of destruction have not
yet disappeared.

In enunciating the above-cited principle, this Court had definitely settled the rationale for the necessity of bringing suits against the
Insurer within one year from the rejection of the claim. The contention of the respondents that the one-year prescriptive period does not
start to run until the petition for reconsideration had been resolved by the insurer, runs counter to the declared purpose for requiting that
an action or suit be filed in the Insurance Commission or in a court of competent jurisdiction from the denial of the claim. To uphold
respondents' contention would contradict and defeat the very principle which this Court had laid down. Moreover, it can easily be used
by insured persons as a scheme or device to waste time until any evidence which may be considered against them is destroyed.

It is apparent that Section 27 of the insurance policy was stipulated pursuant to Section 63 of the Insurance Code, which states that:

Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time when the cause of action accrues, is void.

The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent's view, two rulings of this Court have been cited, namely, the case of Eagle Star Insurance Co. vs.
Chia Yu (96 Phil. 696 (1955]), where the Court held:

The right of the insured to the payment of his loss accrues from the happening of the loss. However, the cause of action in an
insurance contract does not accrue until the insured's claim is finally rejected by the insurer. This is because before such final
rejection there is no real necessity for bringing suit.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding that:

Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated obligation of the
defendant in violation of the said legal right, the cause of action does not accrue until the party obligated (surety) refuses,
expressly or impliedly, to comply with its duty (in this case to pay the amount of the bond).
Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured's cause of action or his right to file a
claim either in the Insurance Commission or in a court of competent jurisdiction commences from the time of the denial of his claim by
the Insurer, either expressly or impliedly.

But as pointed out by the petitioner insurance company, the rejection referred to should be construed as the rejection, in the first
instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a petition for reconsideration, such should
have been expressly stipulated.

Thus, to allow the filing of a motion for reconsideration to suspend the running of the prescriptive period of twelve months, a whole new
body of rules on the matter should be promulgated so as to avoid any conflict that may be brought by it, such as:

a) whether the mere filing of a plea for reconsideration of a denial is sufficient or must it be supported by
arguments/affidavits/material evidence;

b) how many petitions for reconsideration should be permitted?

While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the same cannot be taken to mean the rejection
of a petition for reconsideration as insisted by respondents. Such was clearly not the meaning contemplated by this Court. The
Insurance policy in said case provides that the insured should file his claim, first, with the carrier and then with the insurer. The "final
rejection" being referred to in said case is the rejection by the insurance company.

PREMISES CONSIDERED, the questioned decision of the Court of Appeals is REVERSED and SET ASIDE, and Civil Case No. 16817
filed with the Regional Trial Court is hereby DISMISSED.

SO ORDERED.

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,

vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is liable under the Money, Security,
and Payroll Robbery policy it issued to the private respondent or whether recovery thereunder is precluded under the general
exceptions clause thereof. Both the trial court and the Court of Appeals held that there should be recovery. The petitioner contends
otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private respondent Producers Bank of
the Philippines (hereinafter Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for
recovery of the sum of P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of Producer's
armored vehicle while it was in transit to transfer the money from its Pasay City Branch to its head office in Makati. The case was
docketed as Civil Case No. 1817 and assigned to Branch 146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following stipulation of facts:

1. The plaintiff was insured by the defendants and an insurance policy was issued, the duplicate
original of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in the sum of
P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its Head
Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said
cash. The robbery took place while the armored car was traveling along Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by Security Guard
Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC Management Systems with the
plaintiff by virtue of an Agreement executed on August 7, 1983, a duplicate original copy of which is
hereto attached as Exhibit "B";
 4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the plaintiff by
virtue of a contract of Security Service executed on October 25, 1982, a duplicate original copy of
which is hereto attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver Magalong and guard
Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe,
with violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City. A copy of
the complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid persons with the said
crime before Branch 112 of the Regional Trial Court of Pasay City. A copy of the said information is
hereto attached as Exhibit "E." The case is still being tried as of this date;

7. Demands were made by the plaintiff upon the defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of the
insurance policy, attached hereto as Exhibit "A," specifically under page 1 thereof, "General
Exceptions" Section (b), which is marked as Exhibit "A-1," and which reads as follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or
any officer, employee, partner, director, trustee or authorized representative of
the Insured whether acting alone or in conjunction with others. . . .

8. The plaintiff opposes the contention of the defendant and contends that Atiga and Magalong are
not its "officer, employee, . . . trustee or authorized representative . . . at the time of the robbery. 1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against defendant, and

(a) orders defendant to pay plaintiff the net amount of P540,000.00 as liability
under Policy No. 0207 (as mitigated by the P40,000.00 special clause deduction
and by the recovered sum of P145,000.00), with interest thereon at the legal rate,
until fully paid;

(b) orders defendant to pay plaintiff the sum of P30,000.00 as and for attorney's
fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong and Atiga, their services
as armored car driver and as security guard having been merely offered by PRC Management and by Unicorn
Security and which latter firms assigned them to plaintiff. The wages and salaries of both Magalong and Atiga are
presumably paid by their respective firms, which alone wields the power to dismiss them. Magalong and Atiga are
assigned to plaintiff in fulfillment of agreements to provide driving services and property protection as such — in a
context which does not impress the Court as translating into plaintiff's power to control the conduct of any assigned
driver or security guard, beyond perhaps entitling plaintiff to request are replacement for such driver guard. The
finding is accordingly compelled that neither Magalong nor Atiga were plaintiff's "employees" in avoidance of
defendant's liability under the policy, particularly the general exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and guard Atiga were the "authorized
representatives" of plaintiff. They were merely an assigned armored car driver and security guard, respectively, for
 the June 29, 1987 money transfer from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly — it was teller
Maribeth Alampay who had "custody" of the P725,000.00 cash being transferred along a specified money route, and
hence plaintiff's then designated "messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No. 32946. In its
decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither employees nor authorized
representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurance
company (New Life Enterprises vs. Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of
Appeals, 211 SCRA 554). Contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular sense (New Life Enterprises Case, supra, p. 676;
Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain, ordinary and simple. No other
interpretation is necessary. The word "employee" must be taken to mean in the ordinary sense.

The Labor Code is a special law specifically dealing with/and specifically designed to protect labor and therefore its
definition as to employer-employee relationships insofar as the application/enforcement of said Code is concerned
must necessarily be inapplicable to an insurance contract which defendant-appellant itself had formulated. Had it
intended to apply the Labor Code in defining what the word "employee" refers to, it must/should have so stated
expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-appellee bank because it has no power
to hire or to dismiss said driver and security guard under the contracts (Exhs. 8 and C) except only to ask for their
replacements from the contractors.5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the Court of Appeals erred in
holding it liable under the insurance policy because the loss falls within the general exceptions clause considering that driver Magalong
and security guard Atiga were Producers' authorized representatives or employees in the transfer of the money and payroll from its
branch office in Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one branch to another, they
effectively and necessarily became its authorized representatives in the care and custody of the money. Assuming that they could not
be considered authorized representatives, they were, nevertheless, employees of Producers. It asserts that the existence of an
employer-employee relationship "is determined by law and being such, it cannot be the subject of agreement." Thus, if there was in
reality an employer-employee relationship between Producers, on the one hand, and Magalong and Atiga, on the other, the provisions
in the contracts of Producers with PRC Management System for Magalong and with Unicorn Security Services for Atiga which state that
Producers is not their employer and that it is absolved from any liability as an employer, would not obliterate the relationship.

Fortune points out that an employer-employee relationship depends upon four standards: (1) the manner of selection and engagement
of the putative employee; (2) the mode of payment of wages; (3) the presence or absence of a power to dismiss; and (4) the presence
and absence of a power to control the putative employee's conduct. Of the four, the right-of-control test has been held to be the
decisive factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and exercised by Producers. Fortune
further insists that PRC Management System and Unicorn Security Services are but "labor-only" contractors under Article 106 of the
Labor Code which provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting where the person supplying workers to an
employer does not have substantial capital or investment in the form of tools, equipment, machineries, work
premises, among others, and the workers recruited and placed by such persons are performing activities which are
directly related to the principal business of such employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be responsible to the workers in the same manner and
extent as if the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling in International Timber
Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is equivalent to a finding that there is an employer-
employee relationship between the owner of the project and the employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had nothing to do with their selection
and engagement, the payment of their wages, their dismissal, and the control of their conduct. Producers argued that the rule
in International Timber Corp. is not applicable to all cases but only when it becomes necessary to prevent any violation or circumvention
of the Labor Code, a social legislation whose provisions may set aside contracts entered into by parties in order to give protection to the
working man.

Producers further asseverates that what should be applied is the rule in American President Lines vs. Clave, 8 to wit:

In determining the existence of employer-employee relationship, the following elements are generally considered,
namely: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal;
and (4) the power to control the employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong as the driver of Producers'
armored car and was responsible for his faithful discharge of his duties and responsibilities, and since Producers paid the monthly
compensation of P1,400.00 per driver to PRC Management Systems and not to Magalong, it is clear that Magalong was not Producers'
employee. As to Atiga, Producers relies on the provision of its contract with Unicorn Security Services which provides that the guards of
the latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance policy which is a form of casualty
insurance. Section 174 of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain
types of loss which by law or custom are considered as falling exclusively within the scope of insurance such as fire
or marine. It includes, but is not limited to, employer's liability insurance, public liability insurance, motor vehicle
liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as
written by non-life insurance companies, and other substantially similar kinds of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other provisions applicable to
casualty insurance or to robbery insurance in particular. These contracts are, therefore, governed by the general provisions applicable
to all types of insurance. Outside of these, the rights and obligations of the parties must be determined by the terms of their contract,
taking into consideration its purpose and always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the insurer — the moral hazard —
is so great that insurers have found it necessary to fill up their policies with countless restrictions, many designed to reduce this hazard.
Seldom does the insurer assume the risk of all losses due to the hazards insured against." 10 Persons frequently excluded under such
provisions are those in the insured's service and employment. 11 The purpose of the exception is to guard against liability should the
theft be committed by one having unrestricted access to the property. 12 In such cases, the terms specifying the excluded classes are to
be given their meaning as understood in common speech. 13 The terms "service" and "employment" are generally associated with the
idea of selection, control, and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the insurer, 15 or it should be
construed liberally in favor of the insured and strictly against the insurer. 16 Limitations of liability should be regarded with extreme
jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without saying then that if the terms of the
contract are clear and unambiguous, there is no room for construction and such terms cannot be enlarged or diminished by judicial
construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is settled that the terms of the
policy constitute the measure of the insurer's liability. 20 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.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as employees or authorized
representatives of Producers under paragraph (b) of the general exceptions clause of the policy which, for easy reference, is again
quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee or authorized representative of the Insured whether
acting alone or in conjunction with others. . . . (emphases supplied)
There is marked disagreement between the parties on the correct meaning of the terms "employee" and "authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from protection and coverage losses
arising from dishonest, fraudulent, or criminal acts of persons granted or having unrestricted access to Producers' money or payroll.
When it used then the term "employee," it must have had in mind any person who qualifies as such as generally and universally
understood, or jurisprudentially established in the light of the four standards in the determination of the employer-employee
relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of the Labor Code which considers the
employees under a "labor-only" contract as employees of the party employing them and not of the party who supplied them to the
employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of Magalong. Notwithstanding such
express assumption of PRC Management Systems and Unicorn Security Services that the drivers and the security guards
each shall supply to Producers are not the latter's employees, it may, in fact, be that it is because the contracts are, indeed,
"labor-only" contracts. Whether they are is, in the light of the criteria provided for in Article 106 of the Labor Code, a question
of fact. Since the parties opted to submit the case for judgment on the basis of their stipulation of facts which are strictly limited
to the insurance policy, the contracts with PRC Management Systems and Unicorn Security Services, the complaint for
violation of P.D. No. 532, and the information therefor filed by the City Fiscal of Pasay City, there is a paucity of evidence as to
whether the contracts between Producers and PRC Management Systems and Unicorn Security Services are "labor-only"
contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC Management Systems and
Unicorn Security Services were truly independent contractors, we are satisfied that Magalong and Atiga were, in respect of the transfer
of Producer's money from its Pasay City branch to its head office in Makati, its "authorized representatives" who served as such with its
teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the money to its
head office, with Alampay to be responsible for its custody in transit; Magalong to drive the armored vehicle which would carry the
money; and Atiga to provide the needed security for the money, the vehicle, and his two other companions. In short, for these particular
tasks, the three acted as agents of Producers. A "representative" is defined as one who represents or stands in the place of another;
one who represents others or another in a special capacity, as an agent, and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 32946 dated 3 May
1994 as well as that of Branch 146 of the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The
complaint in Civil Case No. 1817 is DISMISSED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 91666 July 20, 1990

WESTERN GUARANTY CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, PRISCILLA E. RODRIGUEZ, and DE DIOS TRANSPORTATION CO., INC., respondents.

Narciso E. Ramirez for petitioner.

Alejandro Z. Barin and Carlos C. Fernando for private respondent.

FELICIANO, J.:

At around 4:30 in the afternoon of 27 March 1982, while crossing Airport Road on a pedestrian lane on her way to work, respondent
Priscilla E. Rodriguez was struck by a De Dios passenger bus owned by respondent De Dios Transportation Co., Inc., then driven by
one Walter Saga y Aspero The bus driver disregarded the stop signal given by a traffic policeman to allow pedestrians to cross the
road. Priscilla was thrown to the ground, hitting her forehead. She was treated at the Protacio Emergency Hospital and later on
hospitalized at the San Juan De Dios Hospital. Her face was permanently disfigured, causing her serious anxiety and moral distress.
Respondent bus company was insured with petitioner Western Guaranty Corporation ("Western") under its Master Policy which
provided, among other things, for protection against third party liability, the relevant section reading as follows:
 Section 1. Liability to the Public — Company will, subject to the Limits of Liability, pay all sums necessary to
discharge liability of the insured in respect of —

(a) death of or bodily injury to or damage to property of any passenger as defined herein.

(b) death of or bodily injury or damage to property of any THIRD PARTY as defined herein in any accident caused by
or arising out of the use of the Schedule Vehicle, provided that the liability shall have first been determined. In no
case, however, shall the Company's total payment under both Section I and Section 11 combined exceed the Limits
of Liability set forth herein. With respect to death of or bodily injury to any third party or passenger, the company's
payment per victim in any one accident shall not exceed the limits indicated in the Schedule of indemnities provided
for in this policy excluding the cost of additional medicines, and such other burial and funeral expenses that might
have been incurred. (Emphasis supplied)

Respondent Priscilla Rodriguez filed a complaint for damages before the Regional Trial Court of Makati against De Dios Transportation
Co. and Walter A. Saga Respondent De Dios Transportation Co., in turn, filed a third-party complaint against its insurance carrier,
petitioner Western. On 6 August 1985, the trial court rendered a decision in favor of respondent Priscilla E. Rodriguez, the dispositive
portion of which read:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendants, ordering the latter to pay
the former, jointly and severally, and for the third-party defendant to pay to the plaintiff, by way of contribution,
indemnity or subrogation whatever amount may be left unpaid by the defendant De Dios Transportation Company,
Inc. to the extent of not more than P50,000.00, as follows:

a) The sum of P2,776.00 as actual damages representing doctor's fees, hospitalization and medicines;

b) the sum of P1,500.00 by way of compensation for loss of earning during plaintiffs incapacity to work;

c) the sum of P10,000.00 as and by way of moral damages ;

d) the sum of P10,000.00 as and by way of attorney's fees ;and

e) the cost of suit.

On appeal, the Court of Appeals affirmed in toto the decision of the trial court. Petitioner moved for the reconsideration of the appellate
court's decision. In a Resolution dated 10 January 1990, the Court of Appeals denied the motion for reconsideration petition for lack of
merit.

Petitioner Western is now before us on a Petition for Review alleging that the Court of Appeals erred in holding petitioner liable to pay
beyond the limits set forth in the Schedule of Indemnities and in finding Western liable for loss of earnings, moral damages and
attorney's fees. Succinctly stated, it is petitioner Western's position that it cannot be held liable for loss of earnings, moral damages and
attorney's fees because these items are not among those included in the Schedule of Indemnities set forth in the insurance policy.

Deliberating on the instant Petition for Review, we consider that petitioner Western has failed to show any reversible error on the part of
the Court of Appeals in rendering its Decision dated 26 April 1989 and its Resolution dated 10 January 1990.

An examination of Section 1 entitled "Liability to the Public", quoted above, of the Master Policy issued by petitioner Western shows that
that Section defines the scope of the liability of insurer Western as well as the events which generate such liability. The scope of liability
of Western is marked out in comprehensive terms: "all sums necessary to discharge liability of the insured in respect of [the
precipitating events]—" The precipitating events which generate liability on the part of the insurer, either in favor of a passenger or a
third party, are specified in the following terms: (1) death of, or (2) bodily injury to, or (3) damage to property of, the passenger or the
third party. Where no death, no bodily injury and no damage to property resulted from the casualty ("any accident caused by or arising
out of the use of the Schedule Vehicle"), no liability is created so far as concerns the insurer, petitioner Western.

The "Schedule of Indemnities for Death and/or Bodily Injury" attached to the Master Policy, which petitioner Western invokes, needs to
be quoted in full:

Schedule of Indemnities for Death and/or Bodily Injury:

The following schedule of indemnities should be observed in the settlement of claims for death, bodily injuries of, professional fees and
hospital charges, for services rendered to traffic accident victims under CMVLI coverage:
DEATH P12,000.00
INDEMNITY

PERMANENT
DISABLEMENT
—

DESCRIPTION Amount
OF
DISABLEMENT

Loss of two limbs P6,000.00

Loss of both
hands, or all
fingers and

both thumbs 6,000.00

Loss of both feet 6,000.00

Loss of one hand 6,000.00

and one foot

Loss of sight of 6,000.00

both eyes

Injuries resulting
in being
permanently

bedridden 6,000.00

Any other injury

causing
permanent

total disablement 6,000.00

Loss of arm or 4,200.00

above elbow

Loss of arm 3,000.00

between elbow
and wrist

Loss of hand P2,550.00

Loss of four 2,550.00

fingers and thumb
of one hand

Loss of four 2,100.00

fingers

Loss of leg at or 3,600.00

above knee

Loss of leg below 2,400.00

knee
 Loss of one foot 2,400.00

Loss of toes-all of 900.00

one foot

Loss of thumb 900.00

Loss of index 600.00

finger

Loss of sight of 1,800.00

one eye

Loss of hearing 3,000.00

both ears

Loss of hearing- 450.00

one ear

Total of Accommodation of Professional Attendance

Extended Services Fees or

Rendered Charges

HOSPITAL ROOM Maximum P

of 45 36.00/day
days/year-

Laboratory
fees,
drugs

x-rays, etc.
300.0 0

SURGICAL Major 1,000.00

Operation

EXPENSES Medium 500.00

Operation

Minor 100.00
Operation

ANAESTHESIOLOGIST Major
Operation
300.00

LOGISTS' FEES Medium

Operation
150.00

Minor
Operation
50.00

OPERATING Major 150.00

Operation
 ROOM Medium 100.00
Operation

Minor 40.00
Operation

MEDICAL For daily

visits of

EXPENSES Practitioner 20.00

or

Specialist /day

Total amount
of medical

expenses
must not
exceed

(for single
period of

confinement) 400.00 1

It will be seen that the above quoted Schedule of Indemnities establishes monetary limits which Western may invoke in case of
occurrence of the particular kinds of physical injury there listed, e.g.:

loss of P6,000.00;
both
feet

loss of P2,400.00;
one
foot

loss of P1,800.00;
sight
of one
eye

It must be stressed, however, that the Schedule of Indemnities does not purport to limit, or to enumerate exhaustively, the species of
bodily injury occurrence of which generate liability for petitioner Western. A car accident may, for instance, result in injury to internal
organs of a passenger or third party, without any accompanying amputation or loss of an external member (e.g., a foot or an arm or an
eye). But such internal injuries are surely covered by Section I of the Master Policy, since they certainly constitute bodily injuries.

Petitioner Western in effect contends before this Court, as it did before the Court of Appeals, that because the Schedule of Indemnities
limits the amount payable for certain kinds of expenses —"hospital room", "surgical expenses", "anaesthesiologists' fee", "operating
room" and "medical expenses" that Schedule should be read as excluding liability for any other type of expense or damage or loss even
though actually sustained or incurred by the third party victim. We are not persuaded by Western's contention.

Firstly, the Schedule of Indemnities does not purport to restrict the kinds of damages that may be awarded against Western once
liability has arisen. Section 1, quoted above, does refer to certain "Limits of Liability" which in the case of the third party liability section
of the Master Policy, is apparently P50,000.00 per person per accident. Within this over-all quantitative limit, all kinds of damages
allowable by law" — actual or compensatory damages"; "moral damages'; "nominal damages"; "temperate or moderate damages";
"liquidated damages"; and "exemplary damages" 2 — may be awarded by a competent court against the insurer once liability is shown
to have arisen, and the essential requisites or conditions for grant of each species of damages are present. It appears to us self-evident
that the Schedule of Indemnities was not intended to be an enumeration, much less a closed enumeration, of the specific kinds of
damages which may be awarded under the Master Policy Western has issued. Accordingly, we agree with the Court of Appeals that:
 ... we cannot agree with the movant that the schedule was meant to be an exclusive enumeration of the nature of the
damages for which it would be liable under its policy. As we see it, the schedule was merely meant to set limits to the
amounts the movant would be liable for in cases of claims for death, bodily injuries of, professional services and
hospital charges, for services rendered to traffic accident victims,' and not necessarily exclude claims against the
insurance policy for other kinds of damages, such as those in question.

Secondly, the reading urged by Western of the Schedule of Indemnities comes too close to working fraud upon both the insured and
the third party beneficiary of Section 1, quoted above. For Western's reading would drastically and without warning limit the otherwise
unlimited (save for the over-all quantitative limit of liability of P50,000.00 per person per accident) and comprehensive scope of liability
assumed by the insurer Western under Section 1: "all sums necessary to discharge liability of the insured in respect of [bodily injury to a
third party]". This result- which is not essentially different from taking away with the left hand what had been given with the right hand
we must avoid as obviously repugnant to public policy. If what Western now urges is what Western intended to achieve by its Schedule
of Indemnities, it was incumbent upon Western to use language far more specific and precise than that used in fact by Western, so that
the insured, and potential purchasers of its Master Policy, and the Office of the Insurance Commissioner, may be properly informed and
act accordingly.

Petitioner Western would have us construe the Schedule of Indemnities as comprising contractual limitations of liability which, as
already noted, is comprehensively defined in Section 1 — Liability to the Public" — of the Master Policy. It is wellsettled, however, that
contractual limitations of liability found in insurance contracts should be regarded by courts with a jaundiced eye and extreme care and
should be so construed as to preclude the insurer from evading compliance with its just obligations. 3

Finally, an insurance contract is a contract of adhesion. The rule is well entrenched in our jurisprudence that the terms of such contract
are to be construed strictly against the party which prepared the contract, which in this case happens to be petitioner Western. 4

ACCORDINGLY, the Court Resolved to DENY the Petition for Review for lack of merit Costs against petitioner.

G.R. No. L-4611 December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO., LTD., defendant-
appellant.

Delgado, Flores & Macapagal for appellant.

Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile & Contreras for appellee.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said province, seeking to recover the
proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., upon certain
bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the original case were destroyed during
the liberation of the region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First Instance rendered a
decision in favor of the plaintiff, the dispositive part whereof reads as follows:

Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the former —

(a) Under the first cause of action, the sum of P146,394.48;

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;

(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the Insurance Act from September 26,
1940, until each is paid, with costs against the defendant.

The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on Appeal, 166-167.)
From the decision, the defendant Insurance Company appealed directly to this Court.

The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas Nos. 1 to 4) in
the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in which the appellee dealth
extensively. They had been, with their contents, insured with the defendant Company since 1937, and the lose made payable to the
Philippine National Bank as mortgage of the hemp and crops, to the extent of its interest. On June, 1940, the insurance stood as
follows:

Policy No. Property Insured Amount

2637164 (Exhibit "LL") Bodega No. 1 (Building) P15,000.00

Bodega No. 2 (Building) 10,000.00

Bodega No. 3 (Building) 25,000.00

2637165 (Exhibit "JJ")
Bodega No. 4 (Building) 10,000.00

Hemp Press — moved by steam engine 5,000.00

2637345 (Exhibit "X") Merchandise contents (copra and empty sacks of Bodega No. 1) 150,000.00

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3 150,000.00

2637067 (Exhibit "GG") Merchandise contents (loose hemp) of Bodega No. 4 5,000.00

Total P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and completely
destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren. Plaintiff-appellee informed the insurer by telegram on the
same date; and on the next day, the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and
photograph the premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff having submitted
the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the insurance, P370,000), the Insurance
Company resisted payment, claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been
deliberately caused by the insured or by other persons in connivance with him.

With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother, Qua Chee Pao, and some
employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire to the destroyed
warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit
WW). Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the Court below, with the result
noted at the start of this opinion. The Philippine National Bank's complaint in intervention was dismissed because the appellee had
managed to pay his indebtedness to the Bank during the pendecy of the suit, and despite the fire losses.

In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were avoided for
breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of the policies (Exhibits X, Y,
JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:

Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the premises insured hereby, and it
being declared and understood that there is an ample and constant water supply with sufficient pressure available at all
seasons for the same, it is hereby warranted that the said appliances shall be maintained in efficient working order during the
currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the premium chargeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement of building, protected,
with not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover in convenient places, the
hydrants being supplied with water pressure by a pumping engine, or from some other source, capable of discharging at the
rate of not less than 200 gallons of water per minute into the upper story of the highest building protected, and a trained
brigade of not less than 20 men to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee should have eleven
(11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the municipality of
Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called fire
hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never existed from the very
beginning, the appellant neverthless issued the policies in question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to claims now as void ab initio the
policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire
hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of TAbaco, contrary to the requirements of the
warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises; and the
simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is moreover
rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was entitled, since the
discount depended on the number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which the
policies were expressly made subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29,
pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts
which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in
the contract inconsistent with the facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The
law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to
executed a valid contract in return for the premium received; and when the policy contains a condition which renders it
voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions
and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not,
and to have taken his money without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of
insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid
and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to the
abhorent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the preium on it,
and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold
that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes
and designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened by the fact that after the insured had
incurred the expense of installing the two hydrants, the company collected the premiums and issued him a policy so worded that it gave
the insured a discount much smaller than that he was normaly entitledto. According to the "Scale of Allowances," a policy subject to a
warranty of the existence of one fire hydrant for every 150 feet of external wall entitled the insured to a discount of 7 1/2 per cent of the
premium; while the existence of "hydrants, in compund" (regardless of number) reduced the allowance on the premium to a mere 2 1/2
per cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances reduced the risk of loss. But the
appellant company, in the particular case now before us, so worded the policies that while exacting the greater number of fire hydrants
and appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double benefit.
No reason is shown why appellant's premises, that had been insured with appellant for several years past, suddenly should be
regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of appellant's own scale of allowances. Such
abnormal treatment of the insured strongly points at an abuse of the insurance company's selection of the words and terms of the
contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable to the present case. It is not
a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a
party may be, by reason of inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or
imposition on the insured.

Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment. — It is a well settled rule of law that
an insurer which with knowledge of facts entitling it to treat a policy as no longer in force, receives and accepts a preium on the
policy, estopped to take advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an action to
recover for a loss thereafter occurring and at the same time treat it as valid for the purpose of earning and collecting further
premiums." (29 Am. Jur., 653, p. 657.)

It would be unconscionable to permit a company to issue a policy under circumstances which it knew rendered the policy void
and then to accept and retain premiums under such a void policy. Neither law nor good morals would justify such conduct and
the doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct.
457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly interpreted aganst the prty that caused
them, 1the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the appliances called for in the
insured premises, since its initial expression, "the undernoted appliances for the extinction of fire being kept on the premises insured
hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of the existence of such appliances which appellant
cannot now contradict, should the parol evidence rule apply.

The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally rejected, since the appellant's
argument thereon is based on the assumption that the insured was bound to maintain no less than eleven hydrants (one per 150 feet of
wall), which requirement appellant is estopped from enforcing. The supposed breach of the wter pressure condition is made to rest on
the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring that the
maximum quantity obtainable from the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a minute. The
transcript shows, however, that Serra repeatedly refused and professed inability to estimate the rate of discharge of the water, and only
gave the "5-gallon per 3-second" rate because the insistence of appellant's counsel forced the witness to hazard a guess. Obviously,
the testimony is worthless and insufficient to establish the violation claimed, specially since the burden of its proof lay on appellant.

As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was organized, and drilled, from time to
give, altho not maintained as a permanently separate unit, which the warranty did not require. Anyway, it would be unreasonable to
expect the insured to maintain for his compound alone a fire fighting force that many municipalities in the Islands do not even possess.
There is no merit in appellant's claim that subordinate membership of the business manager (Co Cuan) in the fire brigade, while its
direction was entrusted to a minor employee unders the testimony improbable. A business manager is not necessarily adept at fire
fighting, the qualities required being different for both activities.

Under the second assignment of error, appellant insurance company avers, that the insured violated the "Hemp Warranty" provisions of
Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since appellee admitted that there were 36 cans (latas) of gasoline in
the building designed as "Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that gasoline is not
specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The cause relied upon by the insurer
speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having a flash point below 300o Fahrenheit", and is
decidedly ambiguous and uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or kerosene. And how many
insured, it may well be wondered, are in a position to understand or determine "flash point below 003o Fahrenheit. Here, again, by
reason of the exclusive control of the insurance company over the terms and phraseology of the contract, the ambiguity must be held
strictly against the insurer and liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur.
180).

Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by experts who know and
can anticipate the hearing and possible complications of every contingency. So long as insurance companies insist upon the
use of ambiguous, intricate and technical provisions, which conceal rather than frankly disclose, their own intentions, the
courts must, in fairness to those who purchase insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific
Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)

An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose for which the
policy was procured (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264).

We see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly and unmistakably, in the
language and terms that the general public can readily understand, without resort to obscure esoteric expression (now derisively
termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):

If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy.

This rigid application of the rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore
that nowadays monopolies, cartels and concentrations of capital, endowed with overwhelming economic power, manage to impose
upon parties dealing with them cunningly prepared "agreements" that the weaker party may not change one whit, his participation in the
"agreement" being reduced to the alternative to take it or leave it" labelled since Raymond Baloilles" contracts by adherence" (con
tracts d'adhesion), in contrast to these entered into by parties bargaining on an equal footing, such contracts (of which policies of
insurance and international bills of lading are prime examples) obviously call for greater strictness and vigilance on the part of courts of
justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwarry (New
Civil Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942).

Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad, habra de ser tenido en cuenta que
al seguro es, practicamente un contrato de los llamados de adhesion y por consiguiente en caso de duda sobre la
significacion de las clausulas generales de una poliza — redactada por las compafijas sin la intervencion alguna de sus
clientes — se ha de adoptar de acuerdo con el articulo 1268 del Codigo Civil, la interpretacion mas favorable al asegurado, ya
que la obscuridad es imputable a la empresa aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of
Spain 13 Dec. 1934)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but equally so for the insurer; in fact, it is
mere so for the latter, since its dominant bargaining position carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental to his business, being no more
than a customary 2 day's supply for the five or six motor vehicles used for transporting of the stored merchandise (t. s. n., pp. 1447-
1448). "It is well settled that the keeping of inflammable oils on the premises though prohibited by the policy does not void it if such
keeping is incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to the weight of
authority, even though there are printed prohibitions against keeping certain articles on the insured premises the policy will not be
avoided by a violation of these prohibitions, if the prohibited articles are necessary or in customary use in carrying on the trade or
business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the
"Hemp Warranty" forbade storage only "in the building to which this insurance applies and/or in any building communicating therewith",
and it is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned and where the
gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer the books, vouchers, etc. demanded by them
was found unsubstantiated by the trial Court, and no reason has been shown to alter this finding. The insured gave the insurance
examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and the examiner even kept and photographed some of the examined
books in his possession. What does appear to have been rejected by the insured was the demand that he should submit
"a list of all books, vouchers, receipts and other records" (Age 4, Exhibit 9-c); but the refusal of the insured in this instance was well
justified, since the demand for a list of all the vouchers (which were not in use by the insured) and receipts was positively unreasonable,
considering that such listing was superfluous because the insurer was not denied access to the records, that the volume of Qua Chee
Gan's business ran into millions, and that the demand was made just after the fire when everything was in turmoil. That the
representatives of the insurance company were able to secure all the date they needed is proved by the fact that the adjuster Alexander
Stewart was able to prepare his own balance sheet (Exhibit L of the criminal case) that did not differ from that submitted by the insured
(Exhibit J) except for the valuation of the merchandise, as expressly found by the Court in the criminal case for arson. (Decision, Exhibit
WW).

How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the decision of the arson case (Exhibit
WW) acquiting Qua Choc Gan, appellee in the present proceedings. The decision states (Exhibit WW, p. 11):

Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi como su existencia de copra y
abaca en las bodega al tiempo del incendio durante el periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha
encontrado que Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este
conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que le ha entregado el mismo acusado Que Choc
Gan en relacion con sus libros y lo ha encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que
no estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue
preparado por el mismo testigo.

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer, the Court referred the
controversy to a government auditor, Apolonio Ramos; but the latter reached a different result from the other two. Not only that, but
Ramos reported two different valuations that could be reached according to the methods employed (Exhibit WW, p. 35):

La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promovar el comercio y la finanza, pero
en el caso presente ha resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los
contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado las mismas partidas y los mismos
libros dichos contadores hayan de llegara dos conclusiones que difieron sustancialmente entre si. En otras palabras, no
solamente la comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que, segun este ultimo, su
comprobacion ha dado lugar a dos resultados diferentes dependiendo del metodo que se emplea.

Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer attempted to bolster its case with
alleged photographs of certain pages of the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B)
and allegedly showing abnormal purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained unconvinced
of the authenticity of those photographs, and rejected them, because they were not mentioned not introduced in the criminal case; and
considering the evident importance of said exhibits in establishing the motive of the insured in committing the arson charged, and the
absence of adequate explanation for their omission in the criminal case, we cannot say that their rejection in the civil case constituted
reversible error.

The next two defenses pleaded by the insurer, — that the insured connived at the loss and that the fraudulently inflated the quantity of
the insured stock in the burnt bodegas, — are closely related to each other. Both defenses are predicted on the assumption that the
insured was in financial difficulties and set the fire to defraud the insurance company, presumably in order to pay off the Philippine
National Bank, to which most of the insured hemp and copra was pledged. Both defenses are fatally undermined by the established fact
that, notwithstanding the insurer's refusal to pay the value of the policies the extensive resources of the insured (Exhibit WW) enabled
him to pay off the National Bank in a short time; and if he was able to do so, no motive appears for attempt to defraud the insurer. While
the acquittal of the insured in the arson case is not res judicata on the present civil action, the insurer's evidence, to judge from the
decision in the criminal case, is practically identical in both cases and must lead to the same result, since the proof to establish the
defense of connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that required in order to
convict the insured of the crime of arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in the fire claims,
the insurer's case rests almost exclusively on the estimates, inferences and conclusionsAs to the defense that the burned bodegas
could not possibly have contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost exclusively
on the estimates, inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who examined the premises during and
after the fire. His testimony, however, was based on inferences from the photographs and traces found after the fire, and must yield to
the contradictory testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan Department of the National Bank's
Legaspi branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly before
the fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these witnesses,
and the appellant insurer has failed to substantiate its charges aganst their character. In fact, the insurer's repeated accusations that
these witnesses were later "suspended for fraudulent transactions" without giving any details, is a plain attempt to create prejudice
against them, without the least support in fact.

Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp burned (t. s. n., pp. 1468, 1470),
rebutted appellant's attacks on the refusal of the Court below to accept its inferences from the remains shown in the photographs of the
burned premises. It appears, likewise, that the adjuster's calculations of the maximum contents of the destroyed warehouses rested on
the assumption that all the copra and hemp were in sacks, and on the result of his experiments to determine the space occupied by
definite amounts of sacked copra. The error in the estimates thus arrived at proceeds from the fact that a large amount of the insured's
stock were in loose form, occupying less space than when kept in sacks; and from Stewart's obvious failure to give due allowance for
the compression of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of the overlying stock, as shown by
engineer Bolinas. It is probable that the errors were due to inexperience (Stewart himself admitted that this was the first copra fire he
had investigated); but it is clear that such errors render valueles Stewart's computations. These were in fact twice passed upon and
twice rejected by different judges (in the criminal and civil cases) and their concordant opinion is practically conclusive.

The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the opinions stated therein were
based on ex parte investigations made at the back of the insured; and the appellant did not present at the trial the original testimony
and documents from which the conclusions in the report were drawn.lawphi1.net

Appellant insurance company also contends that the claims filed by the insured contained false and fraudulent statements that avoided
the insurance policy. But the trial Court found that the discrepancies were a result of the insured's erroneous interpretation of the
provisions of the insurance policies and claim forms, caused by his imperfect knowledge of English, and that the misstatements were
innocently made and without intent to defraud. Our review of the lengthy record fails to disclose reasons for rejecting these conclusions
of the Court below. For example, the occurrence of previous fires in the premises insured in 1939, altho omitted in the claims, Exhibits
EE and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously with them), KK and WW.
Considering that all these claims were submitted to the smae agent, and that this same agent had paid the loss caused by the 1939
fire, we find no error in the trial Court's acceptance of the insured's explanation that the omission in Exhibits EE and FF was due to
inadvertance, for the insured could hardly expect under such circumstances, that the 1939 would pass unnoticed by the insurance
agents. Similarly, the 20 per cent overclaim on 70 per cent of the hemo stock, was explained by the insured as caused by his belief that
he was entitled to include in the claim his expected profit on the 70 per cent of the hemp, because the same was already contracted for
and sold to other parties before the fire occurred. Compared with other cases of over-valuation recorded in our judicial annals, the 20
per cent excess in the case of the insured is not by itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins.
Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire Insurance Co.,
43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs.
Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the goods insured were inventoried at O13,113. Certainly, the
insured's overclaim of 20 per cent in the case at bar, duly explained by him to the Court a quo, appears puny by comparison, and can
not be regarded as "more than misstatement, more than inadvertence of mistake, more than a mere error in opinion, more than a slight
exaggeration" (Tan It vs. Sun Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the
overchange of 20 per cent was claimed only on a part (70 per cent) of the hemp stock; had the insured acted with fraudulent intent,
nothing prevented him from increasing the value of all of his copra, hemp and buildings in the same proportion. This also applies to the
alleged fraudulent claim for burned empty sacks, that was likewise explained to our satisfaction and that of the trial Court. The rule is
that to avoid a policy, the false swearing must be wilful and with intent to defraud (29 Am. Jur., pp. 849-851) which was not the cause.
Of course, the lack of fraudulent intent would not authorize the collection of the expected profit under the terms of the polices, and the
trial Court correctly deducte the same from its award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed. Costs against the appellant. So
ordered.

G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner,

vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of Appeals in CA-G.R. SP No. 31916, entitled "Country
Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of the Insurance Commission in I.C. Case No. 3340
which awarded the claim of petitioner Armando Geagonia against private respondent Country Bankers Insurance Corporation.

The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22 December 1989, he
obtained from the private respondent fire insurance policy No. F-146222 for P100,000.00. The period of the policy was from 22
December 1989 to 22 December 1990 and covered the following: "Stock-in-trade consisting principally of dry goods such as RTW's for
men and women wear and other usual to assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was the co-
insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows:

Zenco Sales, Inc. P55,698.00

F. Legaspi Gen. Merchandise 86,432.50

Cebu Tesing Textiles 250,000.00 (on credit)

—————

P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances already affected, or which may
subsequently be effected, covering any of the property or properties consisting of stocks in trade, goods in process
and/or inventories only hereby insured, and unless such notice be given and the particulars of such insurance or
insurances be stated therein or endorsed in this policy pursuant to Section 50 of the Insurance Code, by or on behalf
of the Company before the occurrence of any loss or damage, all benefits under this policy shall be deemed
forfeited, provided however, that this condition shall not apply when the total insurance or insurances in force at the
time of the loss or damage is not more than P200,000.00.

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco, Agusan del Sur. The
petitioner's insured stock-in-trade were completely destroyed prompting him to file with the private respondent a claim under the policy.
On 28 December 1990, the private respondent denied the claim because it found that at the time of the loss the petitioner's stocks-in-
trade were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu
Branch of the Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs. Discount
Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may appear
subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. — Phils. First CEB/F 24758.4

The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.

The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission (Case No. 3340) for the recovery
of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs of litigation. He attached as Annex
"AM"6 thereof his letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the said letter that at the
time he obtained the private respondent's fire insurance policy he knew that the two policies issued by the PFIC were already in
existence; however, he had no knowledge of the provision in the private respondent's policy requiring him to inform it of the prior
policies; this requirement was not mentioned to him by the private respondent's agent; and had it been mentioned, he would not have
withheld such information. He further asserted that the total of the amounts claimed under the three policies was below the actual value
of his stocks at the time of loss, which was P1,000,000.00.

In its answer,7 the private respondent specifically denied the allegations in the complaint and set up as its principal defense the violation
of Condition 3 of the policy.

In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner did not violate Condition 3 as he had no knowledge
of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC
policies without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the
stocks. These findings were based on the petitioner's testimony that he came to know of the PFIC policies only when he filed his claim
with the private respondent and that Cebu Tesing Textile obtained them and paid for their premiums without informing him thereof. The
Insurance Commission then decreed:
 WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant the sum of
P100,000.00 with legal interest from the time the complaint was filed until fully satisfied plus the amount of
P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of respondent is hereby dismissed.

Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in its resolution of 20 August
1993, 10 the private respondent appealed to the Court of Appeals by way of a petition for review. The petition was docketed as CA-G.R.
SP No. 31916.

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance Commission because it found that
the petitioner knew of the existence of the two other policies issued by the PFIC. It said:

It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken in the name
of private respondent [petitioner herein]. The policy states that "DISCOUNT MART (MR. ARMANDO GEAGONIA,
PROP)" was the assured and that "TESING TEXTILES" [was] only the mortgagee of the goods.

In addition, the premiums on both policies were paid for by private respondent, not by the Tesing Textiles which is
alleged to have taken out the other insurance without the knowledge of private respondent. This is shown by
Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be
only the mortgagee of the goods insured but the party to which they were issued were the "DISCOUNT MART (MR.
ARMANDO GEAGONIA)."

In is clear that it was the private respondent [petitioner herein] who took out the policies on the same property subject
of the insurance with petitioner. Hence, in failing to disclose the existence of these insurances private respondent
violated Condition No. 3 of Fire Policy No. 1462. . . .

Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by his letter to
petitioner [of 18 January 1991. The body of the letter reads as follows;]

xxx xxx xxx

Please be informed that I have no knowledge of the provision requiring me to inform your office
about my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not mention about
said requirement at the time he was convincing me to insure with you. If he only die or even
inquired if I had other existing policies covering my establishment, I would have told him so. You
will note that at the time he talked to me until I decided to insure with your company the two policies
aforementioned were already in effect. Therefore I would have no reason to withhold such
information and I would have desisted to part with my hard earned peso to pay the insurance
premiums [if] I know I could not recover anything.

Sir, I am only an ordinary businessman interested in protecting my investments. The actual value of
my stocks damaged by the fire was estimated by the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex "A"). My Income Statement as of December 31,
1989 or five months before the fire, shows my merchandise inventory was already some
P595,455.75. . . . These will support my claim that the amount claimed under the three policies are
much below the value of my stocks lost.

xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know that there were other insurances taken on
the stock-in-trade and seriously puts in question his credibility.

His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He contends therein that the
Court of Appeals acted with grave abuse of discretion amounting to lack or excess of jurisdiction:

A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-

JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION
IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;

B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE

DURING THE HEARING OR TRIAL; AND

C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE
RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior knowledge of the two insurance
policies issued by the PFIC when he obtained the fire insurance policy from the private respondent, thereby, for not disclosing such
fact, violating Condition 3 of the policy, and (b) if he had, whether he is precluded from recovering therefrom.

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of 18 January 1991, is
without merit. The petitioner claims that the said letter was not offered in evidence and thus should not have been considered in
deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It has attained the status of a judicial
admission and since its due execution and authenticity was not denied by the other party, the petitioner is bound by it even if it were not
introduced as an independent evidence. 13

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

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18 January 1991 to the
private respondent conclusively proves this knowledge. His testimony to the contrary before the Insurance Commissioner and which the
latter relied upon cannot prevail over a written admission made ante litem motam. It was, indeed, incredible that he did not know about
the prior policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy
No. GA-28146 had been renewed twice, the previous policy being F-24792.

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its incorporation in the policy is
allowed by Section 75 of the Insurance Code 15 which provides that "[a] policy may declare that a violation of specified provisions
thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy." Such a condition is a provision which
invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is commonly known as the
additional or "other insurance" clause and has been upheld as valid and as a warranty that no other insurance exists. Its violation would
thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject matter, the same interest therein,
and the same risk.17

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests
may be one policy, or each may take out a separate policy covering his interest, either at the same or at separate times. 18 The
mortgagor's insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full
value of the property.19 The mortgagee's insurable interest is to the extent of the debt, since the property is relied upon as security
thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property. 20 Thus, separate
insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The mortgagee may be
made the beneficial payee in several ways. He may become the assignee of the policy with the consent of the insurer; or the mere
pledgee without such consent; or the original policy may contain a mortgage clause; or a rider making the policy payable to the
mortgagee "as his interest may appear" may be attached; or a "standard mortgage clause," containing a collateral independent contract
between the mortgagee and insurer, may be attached; or the policy, though by its terms payable absolutely to the mortgagor, may have
been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an
equitable lien upon the proceeds. 21

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

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

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause which reads:

Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may appear subject to the
terms of this policy.

This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety Corp. vs. Ng
Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:

The insured shall give notice to the company of any insurance or insurances already effected, or which may
subsequently be effected covering any of the property hereby insured, and unless such notice be given and the
particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the Company
before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited.

or in the 1930 case of Santa Ana vs. Commercial Union Assurance

Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects thereby assured must be
declared by the insured in writing and he must cause the company to add or insert it in the policy, without which such policy
shall be null and void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in the private respondent's
policy No. F-14622 does not absolutely declare void any violation thereof. It expressly provides that the condition "shall not
apply when the total insurance or insurances in force at the time of the loss or damage is not more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured and strictly
against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was endeavoring to secure
when he applied for insurance. It is also a cardinal principle of law that forfeitures are not favored and that any construction which would
result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a
manner which would permit recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently, provisions, conditions
or exceptions in policies which tend to work a forfeiture of insurance policies should be construed most strictly against those for whose
benefits they are inserted, and most favorably toward those against whom they are intended to operate. 30 The reason for this is that,
except for riders which may later be inserted, the insured sees the contract already in its final form and has had no voice in the
selection or arrangement of the words employed therein. On the other hand, the language of the contract was carefully chosen and
deliberated upon by experts and legal advisers who had acted exclusively in the interest of the insurers and the technical language
employed therein is rarely understood by ordinary laymen. 31

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from ambiguity and must,
perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to double insurance, and (b)
the nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies obtained.

The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the property or properties
consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the portion regarding the insured's
declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A
double insurance exists where the same person is insured by several insurers separately in respect of the same subject and interest.
As earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since
the two policies of the PFIC do not cover the same interest as that covered by the policy of the private respondent, no double insurance
exists. The non-disclosure then of the former policies was not fatal to the petitioner's right to recover on the private respondent's policy.

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the time of loss does
not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to a loss not exceeding
P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of "other insurance"
clause in fire policies is to prevent over-insurance and thus avert the perpetration of fraud. When a property owner obtains insurance
policies from two or more insurers in a total amount that exceeds the property's value, the insured may have an inducement to destroy
the property for the purpose of collecting the insurance. The public as well as the insurer is interested in preventing a situation in which
a fire would be profitable to the insured.32

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

Costs against private respondent Country Bankers Insurance Corporation.

SO ORDERED.

G.R. No. L-21380 May 20, 1966

MISAMIS LUMBER CORPORATION, plaintiff and appellee,

vs.
CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.

Achacoso, Nera and Ocampo for defendant and appellant.

F. Capistrano, Jr. for plaintiff and appellee.

REYES, J.B.L., J.:

Plaintiff-appellee Misamis Lumber Corporation, under its former name, Lanao Timber Mills, Inc., insured its Ford Falcon motor car for
the amount of P14,000 with the defendant-appellant, Capital Insurance & Surety Company, Inc. The pertinent provisions of the policy
provided, as follows:

1. The Company will subject to the Limits of Liability indemnify the Insured against loss or damage to the Motor Vehicle and its
accessories and spare parts whilst thereon.

2. (a) by accidental collision or overturning or collision or overturning consequent when mechanical breakdown or consequent
upon wear and tear.

xxx xxx xxx

3. At its option, the Company may pay in cash the amount of the loss or damage or may repair, reinstate or replace the Motor
Vehicle or any part thereof or its accessories or spare parts. The liability of the Company shall not exceed the value of the
parts lost or damaged and the reasonable cost of fitting such parts or the value of the Motor Vehicle at the time of the loss or
damage whichever is the loss. The Insured's estimate of value stated in the schedule shall be the maximum amount payable
by the Company in respect of any claim for loss or damage.1äwphï1.ñët

xxx xxx xxx

4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be liable
under this policy provided that:

(a) the estimated cost of such repair does not exceed the authorized Repair Limit.

(b) a detailed estimate of the cost is forwarded to the Company without delay.

and providing also that the authorized repair limit is P150.00.

At around eleven o'clock in the evening of 25 November 1961, and while the above-mentioned insurance policy was in force, the
insured car, while traveling along in Aurora Boulevard in front of the Pepsi-Cola plant in Quezon City, passed over a water hole which
the driver did not see because an oncoming car did not dim its light. The crankcase and flywheel housing of the car broke when it hit a
hollow block lying alongside the water hole. At the instance of the plaintiff-appellee, the car was towed and repaired by Morosi Motors at
its shop at 1906 Taft Avenue Extension at a total cost of P302.27.

On 29 November 1961, when the repairs on the car had already been made, the plaintiff-appellee made a report of the accident to the
defendant-appellant Capital Insurance & Surety Company.

Since the defendant-appellant refused to pay for the total cost of to wage and repairs, suit was filed in the municipal court originally.

The case before Us is now a direct appeal on a point of law from the judgment of the Court of First Instance of Manila finding for the
plaintiff and against the defendant-insurer in its Civil Case No. 51757. Per our resolution on 13 February 1964, it was resolved to
proceed with the case without the appellee's brief, which was filed late.

The defendant-appellant admits liability in the amount of P150, but not for any excess thereof.

The lower court did not exonerate the said appellant for the excess because, according to it, the company's absolution would render the
insurance contract one-sided and that the said insurer had not shown that the cost of repairs in the sum of P302.27 is unreasonable,
excessive or padded, nor had it shown that it could have undertaken the repairs itself at less expense.

The above reasoning is beside the point, because the insurance policy stipulated in paragraph 4 that if the insured authorizes the repair
the liability of the insurer, per its sub-paragraph (a), is limited to P150.00. The literal meaning of this stipulation must control, it being the
actual contract, expressly and plainly provided for in the policy (Art. 1370, Civil Code; Young vs. Midland Textile Ins. Co., 30 Phil. 617;
Ty vs. First Nat. Surety & Assur. Co., Inc., L-16138-45, 29 April 1961).

The lower court's recourse to legal hermeneutics is not called for because paragraph 4 of the policy is clear and specific and leaves no
room for interpretation. The interpretation given is even unjustified because it opposes what was specifically stipulated. Thus, it will be
observed that the policy drew out not only the limits of the insurer's liability but also the mechanics that the insured had to follow to be
entitled to full indemnity of repairs. The option to undertake the repairs is accorded to the insurance company per paragraph 2. The said
company was deprived of the option because the insured took it upon itself to have the repairs made, and only notified the insurer when
the repairs were done. As a consequence, paragraph 4, which limits the company's liability to P150.00, applies.
The insurance contract may be rather onerous ("one-sided", as the lower court put it), but that in itself does not justify the abrogation of
its express terms, terms which the insured accepted or adhered to and which is the law between the contracting parties.

Finally, to require the insurer to prove that the cost of the repairs ordered by the insured is unreasonable, as the appealed decision
does, when the insurer was not given an opportunity to inspect and assess the damage before the repairs were made, strikes Us as
contrary to elementary justice and equity.

For the foregoing reasons, the appealed decision is hereby modified by ordering the defendant-appellant Capital Insurance & Surety
Company, Inc. to pay not more than P150.00 to the plaintiff-appellee Misamis Lumber Corporation. Each party shall bear its own costs
and attorney's fees.

G.R. No. 112360 July 18, 2000

RIZAL SURETY & INSURANCE COMPANY, petitioner,

vs.
COURT OF APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to annul and set aside the July 15, 1993
Decision1 and October 22, 1993 Resolution2 of the Court of Appeals3 in CA-G.R. CV NO. 28779, which modified the Ruling4 of the
Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance Policy No. 45727 in favor of
Transworld Knitting Mills, Inc. (Transworld), initially for One Million (₱1,000,000.00) Pesos and eventually increased to One Million Five
Hundred Thousand (₱1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13, 1981.

Pertinent portions of subject policy on the buildings insured, and location thereof, read:

"‘On stocks of finished and/or unfinished products, raw materials and supplies of every kind and description, the properties of the
Insureds and/or held by them in trust, on commission or on joint account with others and/or for which they (sic) responsible in case of
loss whilst contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings
situate (sic) within own Compound at MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO.
601.’

xxx xxx xxx

‘Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks
and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly
plant, offices, warehouse and caretaker's quarters.

'Bounds in front partly by one-storey concrete building under galvanized iron roof occupied as canteen and guardhouse, partly by
building of two and partly one storey constructed of concrete below, timber above undergalvanized iron roof occupied as garage and
quarters and partly by open space and/or tracking/ packing, beyond which is the aforementioned Magdalo Street; on its right and left by
driveway, thence open spaces, and at the rear by open spaces.'" 5

The same pieces of property insured with the petitioner were also insured with New India Assurance Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of its four-span building and partly gutting
the left and right sections thereof. A two-storey building (behind said four-span building) where fun and amusement machines and
spare parts were stored, was also destroyed by the fire.

Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India Assurance Company but to no avail.

On May 26, 1982, private respondent brought against the said insurance companies an action for collection of sum of money and
damages, docketed as Civil Case No. 46106 before Branch 161 of the then Court of First Instance of Rizal; praying for judgment
ordering Rizal Insurance and New India to pay the amount of ₱2,747, 867.00 plus legal interest, ₱400,000.00 as attorney's fees,
exemplary damages, expenses of litigation of ₱50,000.00 and costs of suit. 6

Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the contents of the four-span building, which
was partly burned, and not the damage caused by the fire on the two-storey annex building.7

On January 4, 1990, the trial court rendered its decision; disposing as follows:

"ACCORDINGLY, judgment is hereby rendered as follows:

(1)Dismissing the case as against The New India Assurance Co., Ltd.;

(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic) Knitting Mills, Inc. the amount of P826,
500.00 representing the actual value of the losses suffered by it; and

(3) Cost against defendant Rizal Surety and Insurance Company.

SO ORDERED."8

Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting Mills, Inc., went to the Court of Appeals,
which came out with its decision of July 15, 1993 under attack, the decretal portion of which reads:

"WHEREFORE, and upon all the foregoing, the decision of the court below is MODIFIED in that defendant New India Assurance
Company has and is hereby required to pay plaintiff-appellant the amount of P1,818,604.19 while the other Rizal Surety has to pay the
plaintiff-appellant P470,328.67, based on the actual losses sustained by plaintiff Transworld in the fire, totalling P2,790,376.00 as
against the amounts of fire insurance coverages respectively extended by New India in the amount of P5,800,000.00 and Rizal Surety
and Insurance Company in the amount of P1,500,000.00.

No costs.

SO ORDERED."9

On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India appealed to this Court theorizing inter alia that the
private respondent could not be compensated for the loss of the fun and amusement machines and spare parts stored at the two-storey
building because it (Transworld) had no insurable interest in said goods or items.

On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New India Assurance Company Ltd. vs. Court of
Appeals).

Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for Reconsideration before the Court of Appeals,
and on October 22, 1993, the Court of Appeals reconsidered its decision of July 15, 1993, as regards the imposition of interest, ruling
thus:

"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the imposition of legal interest is concerned, that, on the
assessment against New India Assurance Company on the amount of P1,818,604.19 and that against Rizal Surety & Insurance
Company on the amount of P470,328.67, from May 26, 1982 when the complaint was filed until payment is made. The rest of the said
decision is retained in all other respects.

SO ORDERED."10

Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the present Petition, contending that:

I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING WHERE THE BULK OF THE
BURNED PROPERTIES WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE INSURANCE POLICY ISSUED
BY RIZAL SURETY TO TRANSWORLD.

II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT CONSIDERING THE PICTURES (EXHS. 3
TO 7-C-RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT THE PREMISES
OCCUPIED BY TRANSWORLD, WHERE THE INSURED PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE
ONLY.
 III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH
AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN NOT ORDERING TRANSWORLD TO
PAY TO RIZAL SURETY MORAL AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND
EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL CODE).11

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon protected only the contents of the main building (four-
span),12 and did not include those stored in the two-storey annex building. On the other hand, the private respondent theorized that the
so called "annex" was not an annex but was actually an integral part of the four-span building13 and therefore, the goods and items
stored therein were covered by the same fire insurance policy.

Resolution of the issues posited here hinges on the proper interpretation of the stipulation in subject fire insurance policy regarding its
coverage, which reads:

"xxx contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings situate
(sic) within own Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit its coverage to what were stored in the
four-span building. As opined by the trial court of origin, two requirements must concur in order that the said fun and amusement
machines and spare parts would be deemed protected by the fire insurance policy under scrutiny, to wit:

"First, said properties must be contained and/or stored in the areas occupied by Transworld and second, said areas must form part of
the building described in the policy xxx"14

'Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks
and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly
plant, offices, ware house and caretaker's quarter.'

The Court is mindful of the well-entrenched doctrine that factual findings by the Court of Appeals are conclusive on the parties and not
reviewable by this Court, and the same carry even more weight when the Court of Appeals has affirmed the findings of fact arrived at by
the lower court.15

In the case under consideration, both the trial court and the Court of Appeals found that the so called "annex " was not an annex
building but an integral and inseparable part of the four-span building described in the policy and consequently, the machines and spare
parts stored therein were covered by the fire insurance in dispute. The letter-report of the Manila Adjusters and Surveyor's Company,
which petitioner itself cited and invoked, describes the "annex" building as follows:

"Two-storey building constructed of partly timber and partly concrete hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the lofty storey building and thence by property fence wall." 16

Verily, the two-storey building involved, a permanent structure which adjoins and intercommunicates with the "first right span of the lofty
storey building",17 formed part thereof, and meets the requisites for compensability under the fire insurance policy sued upon.

So also, considering that the two-storey building aforementioned was already existing when subject fire insurance policy contract was
entered into on January 12, 1981, having been constructed sometime in 1978, 18 petitioner should have specifically excluded the said
two-storey building from the coverage of the fire insurance if minded to exclude the same but if did not, and instead, went on to provide
that such fire insurance policy covers the products, raw materials and supplies stored within the premises of respondent Transworld
which was an integral part of the four-span building occupied by Transworld, knowing fully well the existence of such building adjoining
and intercommunicating with the right section of the four-span building.

After a careful study, the Court does not find any basis for disturbing what the lower courts found and arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt regarding the portions of
the building insured thereby. Article 1377 of the New Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety Insurance Company, whose
lawyer or managers drafted the fire insurance policy contract under scrutiny. Citing the aforecited provision of law in point, the Court
in Landicho vs. Government Service Insurance System,19 ruled:
"This is particularly true as regards insurance policies, in respect of which it is settled that the 'terms in an insurance policy, which are
ambiguous, equivocal, or uncertain x x x are to be construed strictly and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved' (29 Am.
Jur., 181), and the reason for this is that the 'insured usually has no voice in the selection or arrangement of the words employed and
that the language of the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting
exclusively in the interest of, the insurance company.' (44 C.J.S., p. 1174)."" 20

Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company, Inc. vs. Vda. De Songco,21 to wit:

"'This rigid application of the rule on ambiguities has become necessary in view of current business practices.1âwphi1 The courts
cannot ignore that nowadays monopolies, cartels and concentration of capital, endowed with overwhelming economic power, manage
to impose upon parties dealing with them cunningly prepared 'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats [sic] d'adhesion), in contrast to these entered into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are prime example) obviously call for greater strictness and vigilance on the
part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'" 22

The issue of whether or not Transworld has an insurable interest in the fun and amusement machines and spare parts, which entitles it
to be indemnified for the loss thereof, had been settled in G.R. No. L-111118, entitled New India Assurance Company, Ltd., vs. Court of
Appeals, where the appeal of New India from the decision of the Court of Appeals under review, was denied with finality by this Court
on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises, precludes the relitigation of a particular fact or issue in
another action between the same parties based on a different claim or cause of action. "xxx the judgment in the prior action operates as
estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or judgment was
rendered. In fine, the previous judgment is conclusive in the second case, only as those matters actually and directly controverted and
determined and not as to matters merely involved therein."23

Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 24 held that the issue
of negligence of the shipping line, which issue had already been passed upon in a case filed by one of the insurers, is conclusive and
can no longer be relitigated in a similar case filed by another insurer against the same shipping line on the basis of the same factual
circumstances. Ratiocinating further, the Court opined:

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been negligent, or so negligent as to have proximately
caused the collision between them, was an issue that was actually, directly and expressly raised, controverted and litigated in C.A.-G.R.
No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the 'Don Carlos' to have been negligent rather than the 'Yotai
Maru' and, as already noted, that Decision was affirmed by this Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The
Reyes Decision thus became final and executory approximately two (2) years before the Sison Decision, which is assailed in the case
at bar, was promulgated. Applying the rule of conclusiveness of judgment, the question of which vessel had been negligent in the
collision between the two (2) vessels, had long been settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206-R.
Private respondent Go Thong was certainly bound by the ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the Decision of this Court affirming the Reyes Decision." 25

The controversy at bar is on all fours with the aforecited case. Considering that private respondent's insurable interest in, and
compensability for the loss of subject fun and amusement machines and spare parts, had been adjudicated, settled and sustained by
the Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994, the
same can no longer be relitigated and passed upon in the present case. Ineluctably, the petitioner, Rizal Surety Insurance Company, is
bound by the ruling of the Court of Appeals and of this Court that the private respondent has an insurable interest in the aforesaid fun
and amusement machines and spare parts; and should be indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for the amount of P470,328.67, it being the total loss and damage
suffered by Transworld for which petitioner Rizal Insurance is liable. 26

All things studiedly considered and viewed in proper perspective, the Court is of the irresistible conclusion, and so finds, that the Court
of Appeals erred not in holding the petitioner, Rizal Surety Insurance Company, liable for the destruction and loss of the insured
buildings and articles of the private respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993, of the Court of Appeals in CA-G.R. CV
NO. 28779 are AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.
G.R. No. 94052 August 9, 1991

ORIENTAL ASSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.

Alejandro P. Ruiz, Jr. for petitioner.

Federico R. Reyes for private respondent.

MELENCIO-HERRERA, J:

An action to recover on a marine insurance policy, issued by petitioner in favor of private respondent, arising from the loss of a
shipment of apitong logs from Palawan to Manila.

The facts relevant to the present review disclose that sometime in January 1986, private respondent Panama Sawmill Co., Inc.
(Panama) bought, in Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000 cubic meters. It hired Transpacific Towage,
Inc., to transport the logs by sea to Manila and insured it against loss for P1-M with petitioner Oriental Assurance Corporation (Oriental
Assurance). There is a claim by Panama, however, that the insurance coverage should have been for P3-M were it not for the
fraudulent act of one Benito Sy Yee Long to whom it had entrusted the amount of P6,000.00 for the payment of the premium for a P3-M
policy.

Oriental Assurance issued Marine Insurance Policy No. OACM 86/002, which stipulated, among others:

Name of Insured:
Panama Sawmill, Inc.
Karuhatan, Valenzuela
Metro Manila

Vessel:

MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter apitong Logs

Barge Transpac 1,000-1,000 cubic meter apitong Logs
Voyage or Period of Insurance:

From Palawan-ETD January 16, 1986

To: Manila

Subject matter Insured:

2,000 cubic meters apitong Logs

Agreed Value

Amount Insured Hereunder:

Pesos: One Million Only (P1,000,000.00)

Philippine Currency

Premium — P2,500.00 rate — 0.250%

Doc. stamps 187.60 Invoice No. 157862

l % P/tax 25.00

TOTAL P2,712.50

CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES

Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following clauses:
— Civil Code Article 1250 Waiver clause

— Typhoon warranty clause

— Omnibus clause.

The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a volume of 1,000 cubicmeters; and (2) on
Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters.

On 28 January 1986, the two barges were towed by one tug-boat, the MT 'Seminole' But, as fate would have it, during the voyage,
rough seas and strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of logs out of the 598 pieces
loaded thereon.

Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its contracted liability was for "TOTAL LOSS
ONLY." The rejection was upon the recommendation of the Tan Gatue Adjustment Company.

Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for Damages against Ever Insurance Agency
(allegedly, also liable), Benito Sy Lee Yong and Oriental Assurance, before the Regional Trial Court, Kalookan, Branch 123, docketed
as Civil Case No. C-12601.

After trial on the merit, the RTC1 rendered its Decision, with the following dispositive portion:

WHEREFORE, upon all the foregoing premises, judgment is hereby rendered:

1. Ordering the defendant Oriental Assurance Corporation to pay plaintiff Panama Saw Mill Inc. the amount of P415,000.00 as
insurance indemnity with interest at the rate of 12% per annum computed from the date of the filing of the complaint;

2. Ordering Panama Saw Mill to pay defendant Ever Insurance Agency or Antonio Sy Lee Yong, owner thereof, (Ever being a
single proprietorship) for the amount of P20,000.00 as attorney's fee and another amount of P20,000.00 as moral damages.

3. Dismissing the complaint against defendant Benito Sy Lee Yong.

SO ORDERED.

On appeal by both parties, respondent Appellate Court 2 affirmed the lower Court judgment in all respects except for the rate of interest,
which was reduce from twelve (12%) to six (6%) per annum.

Both Courts shared the view that the insurance contract should be liberally construed in order to avoid a denial of substantial justice;
and that the logs loaded in the two barges should be treated separately such that the loss sustained by the shipment in one of them
may be considered as "constructive total loss" and correspondingly compensable.

In this Petition for Review on Certiorari, Oriental Assurance challenges the aforesaid dispositions. In its Comment, Panama, in turn,
maintains that the constructive total loss should be based on a policy value of P3-M and not P1-M, and prays that the award to Ever
Insurance Agency or Antonio Sy Lee Yong of damages and attorney's fees be set aside.

The question for determination is whether or not Oriental Assurance can be held liable under its marine insurance policy based on the
theory of a divisible contract of insurance and, consequently, a constructive total loss.

Our considered opinion is that no liability attaches.

The terms of the contract constitute the measure of the insurer liability and compliance therewith is a condition precedent to the
insured's right to recovery from the insurer (Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No. 78860, May 28, 1990, 185
SCRA 741). Whether a contract is entire or severable is a question of intention to be determined by the language employed by the
parties. The policy in question shows that the subject matter insured was the entire shipment of 2,000 cubic meters of apitong logs. The
fact that the logs were loaded on two different barges did not make the contract several and divisible as to the items insured. The logs
on the two barges were not separately valued or separately insured. Only one premium was paid for the entire shipment, making for
only one cause or consideration. The insurance contract must, therefore, be considered indivisible.

More importantly, the insurer's liability was for "total loss only." A total loss may be either actual or constructive (Sec. 129, Insurance
Code). An actual total loss is caused by:

(a) A total destruction of the thing insured;

 (b) The irretrievable loss of the thing by sinking, or by being broken up;

(c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or

(d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured.
(Section 130, Insurance Code).

A constructive total loss is one which gives to a person insured a right to abandon, under Section 139 of the Insurance Code. This
provision reads:

SECTION 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion
thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of
the loss is a peril injured against,

(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril;

(b) If it is injured to such an extent as to reduce its value more than three-fourths;

xxx xxx xxx

(Emphasis supplied)

Respondent Appellate Court treated the loss as a constructive total loss, and for the purpose of computing the more than three-fourths
value of the logs actually lost, considered the cargo in one barge as separate from the logs in the other. Thus, it concluded that the loss
of 497 pieces of logs from barge TPAC-1000, mathematically speaking, is more than three-fourths (¾) of the 598 pieces of logs loaded
in that barge and may, therefore, be considered as constructive total loss.

The basis thus used is, in our opinion, reversible error.1âwphi1 The requirements for the application of Section 139 of the Insurance
Code, quoted above, have not been met. The logs involved, although placed in two barges, were not separately valued by the policy,
nor separately insured. Resultantly, the logs lost in barge TPAC-1000 in relation to the total number of logs loaded on the same barge
can not be made the basis for determining constructive total loss. The logs having been insured as one inseparable unit, the correct
basis for determining the existence of constructive total loss is the totality of the shipment of logs. Of the entirety of 1,208, pieces of
logs, only 497 pieces thereof were lost or 41.45% of the entire shipment. Since the cost of those 497 pieces does not exceed 75% of
the value of all 1,208 pieces of logs, the shipment can not be said to have sustained a constructive total loss under Section 139(a) of
the Insurance Code.

In the absence of either actual or constructive total loss, there can be no recovery by the insured Panama against the insurer, Oriental
Assurance.

By reason of the conclusions arrived at, Panama's asseverations in its Comment need no longer be passed upon, besides the fact that
no review, in proper form, has been sought by it.

WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental Assurance Corporation, is hereby ABSOLVED
from liability under its marine insurance policy No. OAC-M-86/002. No costs.

SO ORDERED.

G.R. No. L-16215 June 29, 1963

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.

Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee.

K. V. Faylona for defendant-appellant.

PAREDES, J.:

On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc., issued Personal Accident Policy No. 7136 on the life of
Francisco del Rosario, alias Paquito Bolero, son of herein plaintiff-appellee, binding itself to pay the sum of P1,000.00 to P3,000.00, as
indemnity for the death of the insured. The pertinent provisions of the Policy, recite:
 Part I. Indemnity For Death

If the insured sustains any bodily injury which is effected solely through violent, external, visible and accidental means, and
which shall result, independently of all other causes and within sixty (60) days from the occurrence thereof, in the Death of the
Insured, the Company shall pay the amount set opposite such injury:

Section 1. Injury sustained other than those specified below unless

excepted hereinafter. . . . . . . . P1,000.00

Section 2. Injury sustained by the wrecking or disablement of a

railroad passenger car or street railway car in or on which the
Insured is travelling as a farepaying passenger. . . . . . . . P1,500.00

Section 3. Injury sustained by the burning of a church, theatre,

public library or municipal administration building while the Insured
is therein at the commencement of the fire. . . . . . . . P2,000.00

Section 4. Injury sustained by the wrecking or disablement of a

regular passenger elevator car in which the Insured is being
conveyed as a passenger (Elevator in mines excluded) P2,500.00

Section 5. Injury sustained by a stroke of lightning or by a cyclone. .

...... P3,000.00

xxx xxx xxx

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover Death, Disability, Hospital fees, or Loss of Time,
caused to the insured:

. . . (h) By drowning except as a consequence of the wrecking or disablement in the Philippine waters of a passenger steam or
motor vessel in which the Insured is travelling as a farepaying passenger; . . . .

A rider to the Policy contained the following:

IV. DROWNING

It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the policy is hereby waived by the company,
and to form a part of the provision covered by the policy.

On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board the motor launch "ISLAMA" together
with 33 others, including his beneficiary in the Policy, Remedios Jayme, were forced to jump off said launch on account of fire which
broke out on said vessel, resulting in the death of drowning, of the insured and beneficiary in the waters of Jolo. 1äwphï1.ñët

On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim for payment with defendant company,
and on September 13, 1957, defendant company paid to him (plaintiff) the sum of P1,000.00, pursuant to Section 1 of Part I of the
policy. The receipt signed by plaintiff reads —

RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of PESOS — ONE THOUSAND
(P1,000.00) Philippine Currency, being settlement in full for all claims and demands against said Company as a result
of an accident which occurred on February 26, 1957, insured under out ACCIDENT Policy No. 7136, causing the
death of the Assured.

In view of the foregoing, this policy is hereby surrendered and CANCELLED.

LOSS COMPUTATION

Amount of Insurance P1,000.00

__________
vvvvv
On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company acknowledging receipt by his client
(plaintiff herein), of the P1,000.00, but informing said company that said amount was not the correct one. Atty. Francisco claimed —

The amount payable under the policy, I believe should be P1,500.00 under the provision of Section 2, part 1 of the policy,
based on the rule of pari materia as the death of the insured occurred under the circumstances similar to that provided under
the aforecited section.

Defendant company, upon receipt of the letter, referred the matter to the Insurance Commissioner, who rendered an opinion that the
liability of the company was only P1,000.00, pursuant to Section 1, Part I of the Provisions of the policy (Exh. F, or 3). Because of the
above opinion, defendant insurance company refused to pay more than P1,000.00. In the meantime, Atty. Vicente Francisco, in a
subsequent letter to the insurance company, asked for P3,000.00 which the Company refused, to pay. Hence, a complaint for the
recovery of the balance of P2,000.00 more was instituted with the Court of First Instance of Rizal (Pasay City, Branch VII), praying for it
further sum of P10,000.00 as attorney's fees, expenses of litigation and costs.

Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or claim is set forth in the complaint had
already been released, plaintiff having received the full amount due as appearing in policy and as per opinion of the Insurance
Commissioner. An opposition to the motion to dismiss, was presented by plaintiff, and other pleadings were subsequently file by the
parties. On December 28, 1957, the trial court deferred action on the motion to dismiss until termination of the trial of the case, it
appearing that the ground thereof was not indubitable. In the Answer to the complaint, defendant company practically admitted all the
allegations therein, denying only those which stated that under the policy its liability was P3,000.00.

On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions of which read —

xxx xxx xxx

Since the contemporaneous and subsequent acts of the parties show that it was not their intention that the payment of
P1,000.00 to the plaintiff and the signing of the loss receipt exhibit "1" would be considered as releasing the defendant
completely from its liability on the policy in question, said intention of the parties should prevail over the contents of the loss
receipt "1" (Articles 1370 and 1371, New Civil Code).

". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to P3,000.00 as indemnity for the death of
the insured. The insured died of drowning. Death by drowning is covered by the policy the pertinent provisions of which reads
as follows:

xxx xxx xxx

"Part I of the policy fixes specific amounts as indemnities in case of death resulting from "bodily injury which is
effected solely thru violence, external, visible and accidental means" but, Part I of the Policy is not applicable in case
of death by drowning because death by drowning is not one resulting from "bodily injury which is affected solely thru
violent, external, visible and accidental means" as "Bodily Injury" means a cut, a bruise, or a wound and drowning is
death due to suffocation and not to any cut, bruise or wound."

xxx xxx xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for recovery apart from the bodily injury
because death by bodily injury is covered by Part I of the policy while death by drowning is covered by Part VI thereof. But
while the policy mentions specific amounts that may be recovered for death for bodily injury, yet, there is not specific amount
mentioned in the policy for death thru drowning although the latter is, under Part VI of the policy, a ground for recovery
thereunder. Since the defendant has bound itself to pay P1000.00 to P3,000.00 as indemnity for the death of the insured but
the policy does not positively state any definite amount that may be recovered in case of death by drowning, there is an
ambiguity in this respect in the policy, which ambiguity must be interpreted in favor of the insured and strictly against the
insurer so as to allow greater indemnity.

xxx xxx xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid the amount of P1,000.00 to the plaintiff
so that there still remains a balance of P2,000.00 of the amount to which plaintiff is entitled to recover under the policy Exhibit
"A".

The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of litigation. However, since it is evident that the
defendant had not acted in bad faith in refusing to pay plaintiff's claim, the Court cannot award plaintiff's claim for attorney's
fees and expenses of litigation.
 IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its decision dated July 21, 1958 and hereby
renders judgment, ordering the defendant to pay plaintiff the sum of Two Thousand (P2,000.00) Pesos and to pay the costs.

The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a Resolution dated September 29, 1959,
elevated the case to this Court, stating that the genuine issue is purely legal in nature.

All the parties agree that indemnity has to be paid. The conflict centers on how much should the indemnity be. We believe that under
the proven facts and circumstances, the findings and conclusions of the trial court, are well taken, for they are supported by the
generally accepted principles or rulings on insurance, which enunciate that where there is an ambiguity with respect to the terms and
conditions of the policy, the same will be resolved against the one responsible thereof. It should be recalled in this connection, that
generally, the insured, has little, if any, participation in the preparation of the policy, together with the drafting of its terms and
Conditions. The interpretation of obscure stipulations in a contract should not favor the party who cause the obscurity (Art. 1377,
N.C.C.), which, in the case at bar, is the insurance company.

. . . . And so it has been generally held that the "terms in an insurance policy, which are ambiguous, equivocal or uncertain . . .
are to be construed strictly against, the insurer, and liberally in favor of the insured so as to effect the dominant purpose of
indemnity or payment to the insured, especially where a forfeiture is involved," (29 Am. Jur. 181) and the reason for this rule is
that the "insured usually has no voice in the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by expert and legal advisers employed by, and acting exclusively in the
interest of, the insurance company" (44 C.J.S. 1174). Calanoc v. Court of Appeals, et al., G.R. No. L-8151, Dec. 16, 1955.

. . . . Where two interpretations, equally fair, of languages used in an insurance policy may be made, that which allows the
greater indemnity will prevail. (L'Engel v. Scotish Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St.
Rep. 70, 5 Ann. Cas. 749).

At any event, the policy under consideration, covers death or disability by accidental means, and the appellant insurance company
agreed to pay P1,000.00 to P3,000.00. is indemnity for death of the insured.

In view of the conclusions reached, it would seem unnecessary to discuss the other issues raised in the appeal.

The judgment appealed from is hereby affirmed. Without costs.

G.R. No. 92383 July 17, 1992

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:

The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two months later, he was
dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on the policy but her claim was rejected. The
petitioner agreed that there was no suicide. It argued, however that there was no accident either.

Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10 o'clock in the
evening, after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with his
handgun, from which he had previously removed the magazine. As she watched television, he stood in front of her and pointed the gun
at her. She pushed it aside and said it might he loaded. He assured her it was not and then pointed it to his temple. The next moment
there was an explosion and Lim slumped to the floor. He was dead before he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2 The petitioner was sentenced to pay
her P200,000.00, representing the face value of the policy, with interest at the legal rate; P10,000.00 as moral damages; P5,000.00 as
exemplary damages; P5,000.00 as actual and compensatory damages; and P5,000.00 as attorney's fees, plus the costs of the suit.
This decision was affirmed on appeal, and the motion for reconsideration was denied. 3 The petitioner then came to this Court to fault
the Court of Appeals for approving the payment of the claim and the award of damages.

The term "accident" has been defined as follows:

The words "accident" and "accidental" have never acquired any technical signification in law, and when used in an insurance contract
are to be construed and considered according to the ordinary understanding and common usage and speech of people generally. In-
substance, the courts are practically agreed that the words "accident" and "accidental" mean that which happens by chance or
fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen. The definition that has usually been
adopted by the courts is that an accident is an event that takes place without one's foresight or expectation — an event that proceeds
from an unknown cause, or is an unusual effect of a known case, and therefore not expected. 4

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

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was indeed an accident. The petitioner,
invoking the case of De la Cruz v. Capital Insurance, 6 says that "there is no accident when a deliberate act is performed unless some
additional, unexpected, independent and unforeseen happening occurs which produces or brings about their injury or death." There
was such a happening. This was the firing of the gun, which was the additional unexpected and independent and unforeseen
occurrence that led to the insured person's death.

The petitioner also cites one of the four exceptions provided for in the insurance contract and contends that the private petitioner's claim
is barred by such provision. It is there stated:

Exceptions —

The company shall not be liable in respect of

1. Bodily injury

xxx xxx xxx

b. consequent upon

i) The insured person attempting to commit suicide or willfully exposing himself to needless peril except in an attempt
to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that the insured willfully exposed
himself to needless peril and thus removed himself from the coverage of the insurance policy.

It should be noted at the outset that suicide and willful exposure to needless peril are in pari materia because they both signify a
disregard for one's life. The only difference is in degree, as suicide imports a positive act of ending such life whereas the second act
indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand meters
above the ground and without any safety device may not actually be intending to commit suicide, but his act is nonetheless suicidal. He
would thus be considered as "willfully exposing himself to needless peril" within the meaning of the exception in question.

The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully exposed himself to needless peril and
so came under the exception. The theory is that a gun is per se dangerous and should therefore be handled cautiously in every case.

That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the magazine from the gun and believed it
was no longer dangerous. He expressly assured her that the gun was not loaded. It is submitted that Lim did not willfully expose himself
to needless peril when he pointed the gun to his temple because the fact is that he thought it was not unsafe to do so. The act was
precisely intended to assure Nalagon that the gun was indeed harmless.

The contrary view is expressed by the petitioner thus:

Accident insurance policies were never intended to reward the insured for his tendency to show off or for his
miscalculations. They were intended to provide for contingencies. Hence, when I miscalculate and jump from the
Quezon Bridge into the Pasig River in the belief that I can overcome the current, I have wilfully exposed myself to
peril and must accept the consequences of my act. If I drown I cannot go to the insurance company to ask them to
compensate me for my failure to swim as well as I thought I could. The insured in the case at bar deliberately put the
gun to his head and pulled the trigger. He wilfully exposed himself to peril.

The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That might frighten the
insurance people to death. We also agree that under the circumstances narrated, his beneficiary would not be able to collect on the
insurance policy for it is clear that when he braved the currents below, he deliberately exposed himself to a known peril.

The private respondent maintains that Lim did not. That is where she says the analogy fails. The petitioner's hypothetical swimmer
knew when he dived off the Quezon Bridge that the currents below were dangerous. By contrast, Lim did not know that the gun he put
to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from recovering from
the insurance policy he obtained precisely against accident. There is nothing in the policy that relieves the insurer of the responsibility to
pay the indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by
negligence. There are only four exceptions expressly made in the contract to relieve the insurer from liability, and none of these
exceptions is applicable in the case at bar. **

It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured. There is no reason to
deviate from this rule, especially in view of the circumstances of this case as above analyzed.

On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue raised in this case is, as the
petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good faith then it resisted the private
respondent's claim on the ground that the death of the insured was covered by the exception. The issue was indeed debatable and was
clearly not raised only for the purpose of evading a legitimate obligation. We hold therefore that the award of moral and exemplary
damages and of attorney's fees is unjust and so must be disapproved.

In order that a person may be made liable to the payment of moral damages, the law requires that his act be
wrongful. The adverse result of an action does not per se make the act wrongful and subject the act or to the
payment of moral damages. The law could not have meant to impose a penalty on the right to litigate; such right is so
precious that moral damages may not be charged on those who may exercise it erroneously. For these the law taxes
costs. 7

The fact that the results of the trial were adverse to Barreto did not alone make his act in bringing the action wrongful
because in most cases one party will lose; we would be imposing an unjust condition or limitation on the right to
litigate. We hold that the award of moral damages in the case at bar is not justified by the facts had circumstances as
well as the law.

If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not the fact of winning
alone that entitles him to recover such damages of the exceptional circumstances enumerated in Art. 2208.
Otherwise, every time a defendant wins, automatically the plaintiff must pay attorney's fees thereby putting a premium
on the right to litigate which should not be so. For those expenses, the law deems the award of costs as sufficient. 8

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable to the private
respondent in the sum of P200,000.00 representing the face value of the insurance contract, with interest at the legal rate from the date
of the filing of the complaint until the full amount is paid, but MODIFIED with the deletion of all awards for damages, including attorney's
fees, except the costs of the suit.

SO ORDERED.