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CASE 1
G.R. No. L-8151

December 16, 1955

VIRGINIA
CALANOC,
vs.
COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE CO., respondents.

petitioner,

This suit involves the collection of P2,000 representing the value of a supplemental policy covering accidental
death which was secured by one Melencio Basilio from the Philippine American Life Insurance Company. The
case originated in the Municipal Court of Manila and judgment being favorable to the plaintiff it was appealed
to the court of first instance. The latter court affirmed the judgment but on appeal to the Court of Appeals the
judgment was reversed and the case is now before us on a petition for review.
Melencio Basilio was a watchman of the Manila Auto Supply located at the corner of Avenida Rizal and
Zurbaran. He secured a life insurance policy from the Philippine American Life Insurance Company in the
amount of P2,000 to which was attached a supplementary contract covering death by accident. On January 25,
1951, he died of a gunshot wound on the occasion of a robbery committed in the house of Atty. Ojeda at the
corner of Oroquieta and Zurbaan streets. Virginia Calanoc, the widow, was paid the sum of P2,000, face value
of the policy, but when she demanded the payment of the additional sum of P2,000 representing the value of
the supplemental policy, the company refused alleging, as main defense, that the deceased died because he
was murdered by a person who took part in the commission of the robbery and while making an arrest as an
officer of the law which contingencies were expressly excluded in the contract and have the effect of
exempting the company from liability.
The pertinent facts which need to be considered for the determination of the questions raised are those
reproduced in the decision of the Court of Appeals as follows:
The circumstances surrounding the death of Melencio Basilio show that when he was killed at about
seven o'clock in the night of January 25, 1951, he was on duty as watchman of the Manila Auto Supply
at the corner of Avenida Rizal and Zurbaran; that it turned out that Atty. Antonio Ojeda who had his
residence at the corner of Zurbaran and Oroquieta, a block away from Basilio's station, had come home
that night and found that his house was well-lighted, but with the windows closed; that getting
suspicious that there were culprits in his house, Atty. Ojeda retreated to look for a policeman and
finding Basilio in khaki uniform, asked him to accompany him to the house with the latter refusing on
the ground that he was not a policeman, but suggesting that Atty. Ojeda should ask the traffic
policeman on duty at the corner of Rizal Avenue and Zurbaran; that Atty. Ojeda went to the traffic
policeman at said corner and reported the matter, asking the policeman to come along with him, to
which the policeman agreed; that on the way to the Ojeda residence, the policeman and Atty. Ojeda
passed by Basilio and somehow or other invited the latter to come along; that as the tree approached
the Ojeda residence and stood in front of the main gate which was covered with galvanized iron, the
fence itself being partly concrete and partly adobe stone, a shot was fired; that immediately after the
shot, Atty. Ojeda and the policeman sought cover; that the policeman, at the request of Atty. Ojeda,
left the premises to look for reinforcement; that it turned out afterwards that the special watchman
Melencio Basilio was hit in the abdomen, the wound causing his instantaneous death; that the shot
must have come from inside the yard of Atty. Ojeda, the bullet passing through a hole waist-high in the
galvanized iron gate; that upon inquiry Atty. Ojeda found out that the savings of his children in the
amount of P30 in coins kept in his aparador contained in stockings were taken away, the aparador
having been ransacked; that a month thereafter the corresponding investigation conducted by the
police authorities led to the arrest and prosecution of four persons in Criminal Case No. 15104 of the
Court of First Instance of Manila for 'Robbery in an Inhabited House and in Band with Murder'.

1

It is contended in behalf of the company that Basilio was killed which "making an arrest as an officer of the law"
or as a result of an "assault or murder" committed in the place and therefore his death was caused by one of
the risks excluded by the supplementary contract which exempts the company from liability. This contention
was upheld by the Court of Appeals and, in reaching this conclusion, made the following comment:
From the foregoing testimonies, we find that the deceased was a watchman of the Manila Auto Supply,
and, as such, he was not boud to leave his place and go with Atty. Ojeda and Policeman Magsanoc to
see the trouble, or robbery, that occurred in the house of Atty. Ojeda. In fact, according to the finding
of the lower court, Atty. Ojeda finding Basilio in uniform asked him to accompany him to his house, but
the latter refused on the ground that he was not a policeman and suggested to Atty. Ojeda to ask help
from the traffic policeman on duty at the corner of Rizal Avenue and Zurbaran, but after Atty. Ojeda
secured the help of the traffic policeman, the deceased went with Ojeda and said traffic policeman to
the residence of Ojeda, and while the deceased was standing in front of the main gate of said
residence, he was shot and thus died. The death, therefore, of Basilio, although unexpected, was not
caused by an accident, being a voluntary and intentional act on the part of the one wh robbed, or one
of those who robbed, the house of Atty. Ojeda. Hence, it is out considered opinion that the death of
Basilio, though unexpected, cannot be considered accidental, for his death occurred because he left his
post and joined policeman Magsanoc and Atty. Ojeda to repair to the latter's residence to see what
happened thereat. Certainly, when Basilio joined Patrolman Magsanoc and Atty. Ojeda, he should have
realized the danger to which he was exposing himself, yet, instead of remaining in his place, he went
with Atty. Ojeda and Patrolman Magsanoc to see what was the trouble in Atty. Ojeda's house and thus
he was fatally shot.
We dissent from the above findings of the Court of Appeals. For one thing, Basilio was a watchman of the
Manila Auto Supply which was a block away from the house of Atty. Ojeda where something suspicious was
happening which caused the latter to ask for help. While at first he declied the invitation of Atty. Ojeda to go
with him to his residence to inquire into what was going on because he was not a regular policeman, he later
agreed to come along when prompted by the traffic policeman, and upon approaching the gate of the
residence he was shot and died. The circumstance that he was a mere watchman and had no duty to heed the
call of Atty. Ojeda should not be taken as a capricious desire on his part to expose his life to danger considering
the fact that the place he was in duty-bound to guard was only a block away. In volunteering to extend help
under the situation, he might have thought, rightly or wrongly, that to know the truth was in the interest of his
employer it being a matter that affects the security of the neighborhood. No doubt there was some risk coming
to him in pursuing that errand, but that risk always existed it being inherent in the position he was holding. He
cannot therefore be blamed solely for doing what he believed was in keeping with his duty as a watchman and
as a citizen. And he cannot be considered as making an arrest as an officer of the law, as contended, simply
because he went with the traffic policeman, for certainly he did not go there for that purpose nor was he asked
to do so by the policeman.
Much less can it be pretended that Basilio died in the course of an assault or murder considering the very
nature of these crimes. In the first place, there is no proof that the death of Basilio is the result of either crime
for the record is barren of any circumstance showing how the fatal shot was fired. Perhaps this may be clarified
in the criminal case now pending in court as regards the incident but before that is done anything that might be
said on the point would be a mere conjecture. Nor can it be said that the killing was intentional for there is the
possibility that the malefactor had fired the shot merely to scare away the people around for his own
protection and not necessarily to kill or hit the victim. In any event, while the act may not excempt the
triggerman from liability for the damage done, the fact remains that the happening was a pure accident on the
part of the victim. The victim could have been either the policeman or Atty. Ojeda for it cannot be pretended
that the malefactor aimed at the deceased precisely because he wanted to take his life.
We take note that these defenses are included among the risks exluded in the supplementary contract which
enumerates the cases which may exempt the company from liability. While as a general rule "the parties may
limit the coverage of the policy to certain particular accidents and risks or causes of loss, and may expressly
2

except other risks or causes of loss therefrom" (45 C. J. S. 781-782), however, it is to be desired that the terms
and phraseology of the exception clause be clearly expressed so as to be within the easy grasp and
understanding of the insured, for if the terms are doubtful or obscure the same must of necessity be
interpreted or resolved aganst the one who has caused the obscurity. (Article 1377, new Civil Code) And so it
has bene generally held that the "terms in an insurance policy, which are ambiguous, equivacal, or uncertain . .
. 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 a forfeiture is involved"
(29 Am. Jur., 181), and the reason for this rule is that he "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.)
Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by
experts who know and can anticipate the bearings 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 are therefore persuaded to conclude that the circumstances unfolded in the present case do not warrant
the finding that the death of the unfortunate victim comes within the purview of the exception clause of the
supplementary policy and, hence, do not exempt the company from liability.
Wherefore, reversing the decision appealed from, we hereby order the company to pay petitioner-appellant
the amount of P2,000, with legal interest from January 26, 1951 until fully paid, with costs.

3

CASE 2
G.R. No. L-25579 March 29, 1972
EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN and GRACIA T. BIAGTAN,
plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.
This is an appeal from the decision of the Court of First Instance of Pangasinan in its Civil Case No. D-1700.
The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife Assurance Company under
Policy No. 398075 for the sum of P5,000.00 and, under a supplementary contract denominated "Accidental
Death Benefit Clause, for an additional sum of P5,000.00 if "the death of the Insured resulted directly from
bodily injury effected solely through external and violent means sustained in an accident ... and independently
of all other causes." The clause, however,expressly provided that it would not apply where death resulted from
an injury"intentionally inflicted by another party."
On the night of May 20, 1964, or during the first hours of the following day a band of robbers entered the
house of the insured Juan S. Biagtan. What happened then is related in the decision of the trial court as follows:
...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said life
policy and supplementary contract were in full force and effect, the house of insured Juan S.
Biagtan was robbed by a band of robbers who were charged in and convicted by the Court of
First Instance of Pangasinan for robbery with homicide; that in committing the robbery, the
robbers, on reaching the staircase landing on the second floor, rushed towards the door of the
second floor room, where they suddenly met a person near the door of oneof the rooms who
turned out to be the insured Juan S. Biagtan who received thrusts from their sharp-pointed
instruments, causing wounds on the body of said Juan S. Biagtan resulting in his death at about
7 a.m. on the same day, May 21, 1964;
Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid the basic
amount of P5,000.00 but refused to pay the additional sum of P5,000.00 under the accidental death benefit
clause, on the ground that the insured's death resulted from injuries intentionally inflicted by third parties and
therefore was not covered. Plaintiffs filed suit to recover, and after due hearing the court a quo rendered
judgment in their favor. Hence the present appeal by the insurer.
The only issue here is whether under the facts are stipulated and found by the trial court the wounds received
by the insured at the hands of the robbers — nine in all, five of them mortal and four non-mortal — were
inflicted intentionally. The court, in ruling negatively on the issue, stated that since the parties presented no
evidence and submitted the case upon stipulation, there was no "proof that the act of receiving thrust (sic)
from the sharp-pointed instrument of the robbers was intended to inflict injuries upon the person of the
insured or any other person or merely to scare away any person so as to ward off any resistance or obstacle
that might be offered in the pursuit of their main objective which was robbery."
The trial court committed a plain error in drawing the conclusion it did from the admitted facts. Nine wounds
were inflicted upon the deceased, all by means of thrusts with sharp-pointed instruments wielded by the
robbers. This is a physical fact as to which there is no dispute. So is the fact that five of those wounds caused
the death of the insured. Whether the robbers had the intent to kill or merely to scare the victim or to ward off
any defense he might offer, it cannot be denied that the act itself of inflicting the injuries was intentional. It
should be noted that the exception in the accidental benefit clause invoked by the appellant does not speak of
the purpose — whether homicidal or not — of a third party in causing the injuries, but only of the fact that such
injuries have been "intentionally" inflicted — this obviously to distinguish them from injuries which, although
4

received at the hands of a third party, are purely accidental. This construction is the basic idea expressed in the
coverage of the clause itself, namely, that "the death of the insured resulted directly from bodily injury effected
solely through external and violent means sustained in an accident ... and independently of all other causes." A
gun which discharges while being cleaned and kills a bystander; a hunter who shoots at his prey and hits a
person instead; an athlete in a competitive game involving physical effort who collides with an opponent and
fatally injures him as a result: these are instances where the infliction of the injury is unintentional and
therefore would be within the coverage of an accidental death benefit clause such as thatin question in this
case. But where a gang of robbers enter a house and coming face to face with the owner, even if unexpectedly,
stab him repeatedly, it is contrary to all reason and logic to say that his injuries are not intentionally inflicted,
regardless of whether they prove fatal or not. As it was, in the present case they did prove fatal, and the
robbers have been accused and convicted of the crime of robbery with homicide.
The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in support of its decision.
The facts in that case, however, are different from those obtaining here. The insured there was a watchman in
a certain company, who happened to be invited by a policeman to come along as the latter was on his way to
investigate a reported robbery going on in a private house. As the two of them, together with the owner of the
house, approached and stood in front of the main gate, a shot was fired and it turned out afterwards that the
watchman was hit in the abdomen, the wound causing his death. Under those circumstances this Court held
that it could not be said that the killing was intentional for there was the possibility that the malefactor had
fired the shot to scare people around for his own protection and not necessarrily to kill or hit the victim. A
similar possibility is clearly ruled out by the facts in the case now before Us. For while a single shot fired from a
distance, and by a person who was not even seen aiming at the victim, could indeed have been fired without
intent to kill or injure, nine wounds inflicted with bladed weapons at close range cannot conceivably be
considered as innocent insofar as such intent is concerned. The manner of execution of the crime permits no
other conclusion.
Court decisions in the American jurisdiction, where similar provisions in accidental death benefit clauses in
insurance policies have been construed, may shed light on the issue before Us. Thus, it has been held that
"intentional" as used in an accident policy excepting intentional injuries inflicted by the insured or any other
person, etc., implies the exercise of the reasoning faculties, consciousness and volition. 1 Where a provision of
the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. 2 If
the injuries suffered by the insured clearly resulted from the intentional act of a third person the insurer is
relieved from liability as stipulated.
In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am. St. Rep. 484, the insured
was waylaid and assassinated for the purpose of robbery. Two (2) defenses were interposed to the action to
recover indemnity, namely: (1) that the insured having been killed by intentional means, his death was not
accidental, and (2) that the proviso in the policy expressly exempted the insurer from liability in case the
insured died from injuries intentionally inflicted by another person. In rendering judgment for the insurance
company the Court held that while the assassination of the insured was as to him an unforeseen event and
therefore accidental, "the clause of the proviso that excludes the (insurer's) liability, in case death or injury is
intentionally inflicted by another person, applies to this case."
In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the insured was shot three
times by a person unknown late on a dark and stormy night, while working in the coal shed of a railroad
company. The policy did not cover death resulting from "intentional injuries inflicted by the insured or any
other person." The inquiry was as to the question whether the shooting that caused the insured's death was
accidental or intentional; and the Court found that under the facts, showing that the murderer knew his victim
and that he fired with intent to kill, there could be no recovery under the policy which excepted death from
intentional injuries inflicted by any person.
WHEREFORE, the decision appealed from is reversed and the complaint dismissed, without pronouncement as
to costs.
5

CASE 3
G.R. No. 100970 September 2, 1992
FINMAN
GENERAL
ASSURANCE
CORPORATION,
vs.
THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.

petitioner,

This is a petition for certiorari with a prayer for the issuance of a restraining order and preliminary mandatory
injunction to annul and set aside the decision of the Court of Appeals dated July 11, 1991, affirming the
decision dated March 20, 1990 of the Insurance Commission 2 in ordering petitioner Finman General Assurance
Corporation to pay private respondent Julia Surposa the proceeds of the personal accident Insurance policy
with interest.
It appears on record that on October 22, 1986, deceased, Carlie Surposa was insured with petitioner Finman
General Assurance Corporation under Finman General Teachers Protection Plan Master Policy No. 2005 and
Individual Policy No. 08924 with his parents, spouses Julia and Carlos Surposa, and brothers Christopher,
Charles, Chester and Clifton, all surnamed, Surposa, as beneficiaries.
While said insurance policy was in full force and effect, the insured, Carlie Surposa, died on October 18, 1988 as
a result of a stab wound inflicted by one of the three (3) unidentified men without provocation and warning on
the part of the former as he and his cousin, Winston Surposa, were waiting for a ride on their way home along
Rizal-Locsin Streets, Bacolod City after attending the celebration of the "Maskarra Annual Festival."
Thereafter, private respondent and the other beneficiaries of said insurance policy filed a written notice of
claim with the petitioner insurance company which denied said claim contending that murder and assault are
not within the scope of the coverage of the insurance policy.
On February 24, 1989, private respondent filed a complaint with the Insurance Commission which subsequently
rendered a decision, the pertinent portion of which reads:
In the light of the foregoing. we find respondent liable to pay complainant the sum of
P15,000.00 representing the proceeds of the policy with interest. As no evidence was
submitted to prove the claim for mortuary aid in the sum of P1,000.00, the same cannot be
entertained.
WHEREFORE, judgment is hereby rendered ordering respondent to pay complainant the sum of
P15,000.00 with legal interest from the date of the filing of the complaint until fully satisfied.
With costs.
On July 11, 1991, the appellate court affirmed said decision.
Hence, petitioner filed this petition alleging grove abuse of discretion on the part of the appellate court in
applying the principle of "expresso unius exclusio alterius" in a personal accident insurance policy since death
resulting from murder and/or assault are impliedly excluded in said insurance policy considering that the cause
of death of the insured was not accidental but rather a deliberate and intentional act of the assailant in killing
the former as indicated by the location of the lone stab wound on the insured. Therefore, said death was
committed with deliberate intent which, by the very nature of a personal accident insurance policy, cannot be
indemnified.
We do not agree.

6

The terms "accident" and "accidental" as used in insurance contracts have not acquired any
technical meaning, and are construed by the courts in their ordinary and common acceptation.
Thus, the terms have been taken to mean that which happen by chance or fortuitously, without
intention and design, and which is unexpected, unusual, and unforeseen. 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 cause and, therefore, not expected.
. . . The generally accepted rule is that, death or injury does not result from accident or
accidental means within the terms of an accident-policy if it is the natural result of the
insured's voluntary act, unaccompanied by anything unforeseen except the death or injury.
There is no accident when a deliberate act is performed unless some additional, unexpected,
independent, and unforeseen happening occurs which produces or brings about the result of
injury or death. In other words, where the death or injury is not the natural or probable result
of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within the protection of the policies insuring against
death or injury from accident.
As correctly pointed out by the respondent appellate court in its decision:
In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an assault or
murder as a result of his voluntary act considering the very nature of these crimes. In the first
place, the insured and his companion were on their way home from attending a festival. They
were confronted by unidentified persons. The record is barren of any circumstance showing
how the stab wound was inflicted. Nor can it be pretended that the malefactor aimed at the
insured precisely because the killer wanted to take his life. In any event, while the act may not
exempt the unknown perpetrator from criminal liability, the fact remains that the happening
was a pure accident on the part of the victim. The insured died from an event that took place
without his foresight or expectation, an event that proceeded from an unusual effect of a
known cause and, therefore, not expected. Neither can it be said that where was a capricious
desire on the part of the accused to expose his life to danger considering that he was just going
home after attending a festival.
Furthermore, the personal accident insurance policy involved herein specifically enumerated only ten (10)
circumstances wherein no liability attaches to petitioner insurance company for any injury, disability or loss
suffered by the insured as a result of any of the stimulated causes. The principle of " expresso unius exclusio
alterius" — the mention of one thing implies the exclusion of another thing — is therefore applicable in the
instant case since murder and assault, not having been expressly included in the enumeration of the
circumstances that would negate liability in said insurance policy cannot be considered by implication to
discharge the petitioner insurance company from liability for, any injury, disability or loss suffered by the
insured. Thus, the failure of the petitioner insurance company to include death resulting from murder or
assault among the prohibited risks leads inevitably to the conclusion that it did not intend to limit or exempt
itself from liability for such death.
Article 1377 of the Civil Code of the Philippines provides that:
The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.
Moreover, it is well settled that contracts of insurance are to be construed liberally in favor of the insured and
strictly against the insurer. Thus ambiguity in the words of an insurance contract should be interpreted in favor
of its beneficiary.
WHEREFORE, finding no irreversible error in the decision of the respondent Court of Appeals, the petition for
certiorari with restraining order and preliminary injunction is hereby DENIED for lack of merit. SO ORDERED.
7

CASE 4
G.R. No. 85296 May 14, 1990
ZENITH
INSURANCE
CORPORATION,
vs.
COURT OF APPEALS and LAWRENCE FERNANDEZ, respondents.

petitioner,

Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No. 13498 entitled, "Lawrence L.
Fernandez, plaintiff-appellee v. Zenith Insurance Corp., defendant-appellant" which affirmed in toto the
decision of the Regional Trial Court of Cebu, Branch XX in Civil Case No. CEB-1215 and the denial of petitioner's
Motion for Reconsideration.
The antecedent facts are as follows:
On January 25, 1983, private respondent Lawrence Fernandez insured his car for "own damage" under private
car Policy No. 50459 with petitioner Zenith Insurance Corporation. On July 6, 1983, the car figured in an
accident and suffered actual damages in the amount of P3,640.00. After allegedly being given a run around by
Zenith for two (2) months, Fernandez filed a complaint with the Regional Trial Court of Cebu for sum of money
and damages resulting from the refusal of Zenith to pay the amount claimed. The complaint was docketed as
Civil Case No. CEB-1215. Aside from actual damages and interests, Fernandez also prayed for moral damages in
the amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees of P3,000.00 and litigation
expenses of P3,000.00.
On September 28, 1983, Zenith filed an answer alleging that it offered to pay the claim of Fernandez pursuant
to the terms and conditions of the contract which, the private respondent rejected. After the issues had been
joined, the pre-trial was scheduled on October 17, 1983 but the same was moved to November 4, 1983 upon
petitioner's motion, allegedly to explore ways to settle the case although at an amount lower than private
respondent's claim. On November 14, 1983, the trial court terminated the pre-trial. Subsequently, Fernandez
presented his evidence. Petitioner Zenith, however, failed to present its evidence in view of its failure to appear
in court, without justifiable reason, on the day scheduled for the purpose. The trial court issued an order on
August 23, 1984 submitting the case for decision without Zenith's evidence (pp. 10-11, Rollo). Petitioner filed a
petition for certiorari with the Court of Appeals assailing the order of the trial court submitting the case for
decision without petitioner's evidence. The petition was docketed as C.A.-G.R. No. 04644. However, the
petition was denied due course on April 29, 1986 (p. 56, Rollo).
On June 4, 1986, a decision was rendered by the trial court in favor of private respondent Fernandez. The
dispositive portion of the trial court's decision provides:
WHEREFORE, defendant is hereby ordered to pay to the plaintiff:
1. The amount of P3,640.00 representing the damage incurred plus interest at the rate of twice the
prevailing interest rates;
2. The amount of P20,000.00 by way of moral damages;
3. The amount of P20,000.00 by way of exemplary damages;
4. The amount of P5,000.00 as attorney's fees;
5. The amount of P3,000.00 as litigation expenses; and
6. Costs. (p. 9, Rollo)

Upon motion of Fernandez and before the expiration of the period to appeal, the trial court, on June 20, 1986,
ordered the execution of the decision pending appeal. The order was assailed by petitioner in a petition for
certiorari with the Court of Appeals on October 23, 1986 in C.A. G.R. No. 10420 but which petition was also
dismissed on December 24, 1986 (p. 69, Rollo).
8

On June 10, 1986, petitioner filed a notice of appeal before the trial court. The notice of appeal was granted in
the same order granting private respondent's motion for execution pending appeal. The appeal to respondent
court assigned the following errors:
I. The lower court erred in denying defendant appellant to adduce evidence in its behalf.
II. The lower court erred in ordering Zenith Insurance Corporation to pay the amount of P3,640.00 in its
decision.
III. The lower court erred in awarding moral damages, attorneys fees and exemplary damages, the worst
is that, the court awarded damages more than what are prayed for in the complaint. (p. 12, Rollo)

On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the decision of the trial court.
It also ruled that the matter of the trial court's denial of Fernandez's right to adduce evidence is a closed matter
in view of its (CA) ruling in AC-G.R. 04644 wherein Zenith's petition questioning the trial court's order
submitting the case for decision without Zenith's evidence, was dismissed.
The Motion for Reconsideration of the decision of the Court of Appeals dated August 17, 1988 was denied on
September 29, 1988, for lack of merit. Hence, the instant petition was filed by Zenith on October 18, 1988 on
the allegation that respondent Court of Appeals' decision and resolution ran counter to applicable decisions of
this Court and that they were rendered without or in excess of jurisdiction. The issues raised by petitioners in
this petition are:
a) The legal basis of respondent Court of Appeals in awarding moral damages, exemplary damages and
attomey's fees in an amount more than that prayed for in the complaint.
b) The award of actual damages of P3,460.00 instead of only P1,927.50 which was arrived at after
deducting P250.00 and P274.00 as deductible franchise and 20% depreciation on parts as agreed upon in
the contract of insurance.

Petitioner contends that while the complaint of private respondent prayed for P10,000.00 moral damages, the
lower court awarded twice the amount, or P20,000.00 without factual or legal basis; while private respondent
prayed for P5,000.00 exemplary damages, the trial court awarded P20,000.00; and while private respondent
prayed for P3,000.00 attorney's fees, the trial court awarded P5,000.00.
The propriety of the award of moral damages, exemplary damages and attorney's fees is the main issue raised
herein by petitioner.
The award of damages in case of unreasonable delay in the payment of insurance claims is governed by the
Philippine Insurance Code, which provides:
Sec. 244. In case of any litigation for the enforcement of any policy or contract of insurance, it
shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to
whether the payment of the claim of the insured has been unreasonably denied or withheld;
and in the affirmative case, the insurance company shall be adjudged to pay damages which
shall consist of attomey's fees and other expenses incurred by the insured person by reason of
such unreasonable denial or withholding of payment plus interest of twice the ceiling
prescribed by the Monetary Board of the amount of the claim due the insured, from the date
following the time prescribed in section two hundred forty-two or in section two hundred
forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to
pay any such claim within the time prescribed in said sections shall be considered prima facie
evidence of unreasonable delay in payment.

9

It is clear that under the Insurance Code, in case of unreasonable delay in the payment of the proceeds of an
insurance policy, the damages that may be awarded are: 1) attorney's fees; 2) other expenses incurred by the
insured person by reason of such unreasonable denial or withholding of payment; 3) interest at twice the
ceiling prescribed by the Monetary Board of the amount of the claim due the injured; and 4) the amount of the
claim.
As regards the award of moral and exemplary damages, the rules under the Civil Code of the Philippines shall govern.
"The purpose of moral damages is essentially indemnity or reparation, not punishment or correction. Moral damages are
emphatically not intended to enrich a complainant at the expense of a defendant, they are awarded only to enable the
injured party to obtain means, diversions or amusements that will serve to alleviate the moral suffering he has undergone
by reason of the defendant's culpable action." (J. Cezar S. Sangco, Philippine Law on Torts and Damages, Revised Edition,
p. 539) (See also R and B Surety & Insurance Co., Inc. v. IAC, G.R. No. 64515, June 22, 1984; 129 SCRA 745). While it is true
that no proof of pecuniary loss is necessary in order that moral damages may be adjudicated, the assessment of which is
left to the discretion of the court according to the circumstances of each case (Art. 2216, New Civil Code), it is equally true
that in awarding moral damages in case of breach of contract, there must be a showing that the breach was wanton and
deliberately injurious or the one responsible acted fraudently or in bad faith (Perez v. Court of Appeals, G.R. No. L-20238,
January 30,1965; 13 SCRA 137; Solis v. Salvador, G.R. No. L-17022, August 14, 1965; 14 SCRA 887). In the instant case,
there was a finding that private respondent was given a "run-around" for two months, which is the basis for the award of
the damages granted under the Insurance Code for unreasonable delay in the payment of the claim. However, the act of
petitioner of delaying payment for two months cannot be considered as so wanton or malevolent to justify an award of
P20,000.00 as moral damages, taking into consideration also the fact that the actual damage on the car was only P3,460.
In the pre-trial of the case, it was shown that there was no total disclaimer by respondent. The reason for petitioner's
failure to indemnify private respondent within the two-month period was that the parties could not come to an
agreement as regards the amount of the actual damage on the car. The amount of P10,000.00 prayed for by private
respondent as moral damages is equitable.
On the other hand, exemplary or corrective damages are imposed by way of example or correction for the public good
(Art. 2229, New Civil Code of the Philippines). In the case of Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22,1987; 151 SCRA
227, exemplary damages were not awarded as the insurance company had not acted in wanton, oppressive or malevolent
manner. The same is true in the case at bar.
The amount of P5,000.00 awarded as attomey's fees is justified under the circumstances of this case considering that
there were other petitions filed and defended by private respondent in connection with this case.
As regards the actual damages incurred by private respondent, the amount of P3,640.00 had been established before the
trial court and affirmed by the appellate court. Respondent appellate court correctly ruled that the deductions of P250.00
and P274.00 as deductible franchise and 20% depreciation on parts, respectively claimed by petitioners as agreed upon in
the contract, had no basis. Respondent court ruled:
Under its second assigned error, defendant-appellant puts forward two arguments, both of which are
entirely without merit. It is contented that the amount recoverable under the insurance policy
defendant-appellant issued over the car of plaintiff-appellee is subject to deductible franchise, and . . . .
The policy (Exhibit G, pp. 4-9, Record), does not mntion any deductible franchise, . . . (p. 13, Rollo)
Therefore, the award of moral damages is reduced to P10,000.00 and the award of exemplary damages is hereby deleted.
The awards due to private respondent Fernandez are as follows:
1) P3,640.00 as actual claim plus interest of twice the ceiling prescribed by the Monetary Board
computed from the time of submission of proof of loss;
2) P10,000.00 as moral damages;
3) P5,000.00 as attorney's fees;
4) P3,000.00 as litigation expenses; and
5) Costs.
ACCORDINGLY, the appealed decision is MODIFIED as above stated. SO ORDERED.

10

CASE 5
G.R. No. 92383 July 17, 1992
SUN
INSURANCE
OFFICE,
vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

LTD.,

petitioner,

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. 2The 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. 3The 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.
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.
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, 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 —
11

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.

12

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.
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.
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.

13

CASE 6
G.R. No. L-54171 October 28, 1980
JEWEL
VILLACORTA,
assisted
by
her
husband,
GUERRERO
VILLACORTA,
vs.
THE INSURANCE COMMISSION and EMPIRE INSURANCE COMPANY, respondents.

petitioner,

The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and holds that
where the insured's car is wrongfully taken without the insured's consent from the car service and repair shop
to whom it had been entrusted for check-up and repairs (assuming that such taking was for a joy ride, in the
course of which it was totally smashed in an accident), respondent insurer is liable and must pay insured for the
total loss of the insured vehicle under the theft clause of the policy.
The undisputed facts of the case as found in the appealed decision of April 14, 1980 of respondent insurance
commission are as follows:
Complainant [petitioner] was the owner of a Colt Lancer, Model 1976, insured with respondent
company under Private Car Policy No. MBI/PC-0704 for P35,000.00 — Own Damage;
P30,000.00 — Theft; and P30,000.00 — Third Party Liability, effective May 16, 1977 to May 16,
1978. On May 9, 1978, the vehicle was brought to the Sunday Machine Works, Inc., for general
check-up and repairs. On May 11, 1978, while it was in the custody of the Sunday Machine
Works, the car was allegedly taken by six (6) persons and driven out to Montalban, Rizal. While
travelling along Mabini St., Sitio Palyasan, Barrio Burgos, going North at Montalban, Rizal, the
car figured in an accident, hitting and bumping a gravel and sand truck parked at the right side
of the road going south. As a consequence, the gravel and sand truck veered to the right side of
the pavement going south and the car veered to the right side of the pavement going north.
The driver, Benito Mabasa, and one of the passengers died and the other four sustained
physical injuries. The car, as well, suffered extensive damage. Complainant, thereafter, filed a
claim for total loss with the respondent company but claim was denied. Hence, complainant,
was compelled to institute the present action.
The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire Insurance
Company admittedly undertook to indemnify the petitioner-insured against loss or damage to the car (a) by
accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or
consequent upon wear and tear; (b) by fire, external explosion, self-ignition or lightning or burglary,
housebreaking or theft; and (c) by malicious act.
Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the total loss of
the vehicle against private respondent, sustaining respondent insurer's contention that the accident did not fall
within the provisions of the policy either for the Own Damage or Theft coverage, invoking the policy provision
on "Authorized Driver" clause.
Respondent commission upheld private respondent's contention on the "Authorized Driver" clause in this wise:
"It must be observed that under the above-quoted provisions, the policy limits the use of the insured vehicle to
two (2) persons only, namely: the insured himself or any person on his (insured's) permission. Under the
second category, it is to be noted that the words "any person' is qualified by the phrase
... on the insured's order or with his permission.' It is therefore clear that if the person driving is
other than the insured, he must have been duly authorized by the insured, to drive the vehicle
to make the insurance company liable for the driver's negligence. Complainant admitted that
she did not know the person who drove her vehicle at the time of the accident, much less
consented to the use of the same (par. 5 of the complaint). Her husband likewise admitted that
14

he neither knew this driver Benito Mabasa (Exhibit '4'). With these declarations of complainant
and her husband, we hold that the person who drove the vehicle, in the person of Benito
Mabasa, is not an authorized driver of the complainant. Apparently, this is a violation of the
'Authorized Driver' clause of the policy.
Respondent commission likewise upheld private respondent's assertion that the car was not stolen and
therefore not covered by the Theft clause, ruling that "The element of 'taking' in Article 308 of the Revised
Penal Code means that the act of depriving another of the possession and dominion of a movable thing is
coupled ... with the intention. at the time of the 'taking', of withholding it with the character of permanency
(People vs. Galang, 7 Appt. Ct. Rep. 13). In other words, there must have been shown a felonious intent upon
the part of the taker of the car, and the intent must be an intent permanently to deprive the insured of his car,"
and that "Such was not the case in this instance. The fact that the car was taken by one of the residents of the
Sunday Machine Works, and the withholding of the same, for a joy ride should not be construed to mean
'taking' under Art. 308 of the Revised Penal Code. If at all there was a 'taking', the same was merely temporary
in nature. A temporary taking is held not a taking insured against (48 A LR 2d., page 15)."
The Court finds respondent commission's dismissal of the complaint to be contrary to the evidence and the
law.
First, respondent commission's ruling that the person who drove the vehicle in the person of Benito Mabasa,
who, according to its finding, was one of the residents of the Sunday Machine Works, Inc. to whom the car had
been entrusted for general check-up and repairs was not an "authorized driver" of petitioner-complainant is
too restrictive and contrary to the established principle that insurance contracts, being contracts of adhesion
where the only participation of the other party is the signing of his signature or his "adhesion" thereto,
"obviously call for greater strictness and vigilance on the part of courts of justice with a view of protecting the
weaker party from abuse and imposition, and prevent their becoming traps for the unwary.
The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a person other
than the insured owner, who drives the car on the insured's order, such as his regular driver, or with his
permission, such as a friend or member of the family or the employees of a car service or repair shop must be
duly licensed drivers and have no disqualification to drive a motor vehicle.
A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his car key
to the shop owner and employees who are presumed to have the insured's permission to drive the car for
legitimate purposes of checking or road-testing the car. The mere happenstance that the employee(s) of the
shop owner diverts the use of the car to his own illicit or unauthorized purpose in violation of the trust reposed
in the shop by the insured car owner does not mean that the "authorized driver" clause has been violated such
as to bar recovery, provided that such employee is duly qualified to drive under a valid driver's license.
The situation is no different from the regular or family driver, who instead of carrying out the owner's order to
fetch the children from school takes out his girl friend instead for a joy ride and instead wrecks the car. There is
no question of his being an "authorized driver" which allows recovery of the loss although his trip was for a
personal or illicit purpose without the owner's authorization.
Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft clause, not
the "authorized driver" clause, that applies), where a car is admittedly as in this case unlawfully and wrongfully
taken by some people, be they employees of the car shop or not to whom it had been entrusted, and taken on
a long trip to Montalban without the owner's consent or knowledge, such taking constitutes or partakes of the
nature of theft as defined in Article 308 of the Revised Penal Code, viz. "Who are liable for theft. — Theft is
committed by any person who, with intent to gain but without violence against or intimidation of persons nor
force upon things, shall take personal property of another without the latter's consent," for purposes of
recovering the loss under the policy in question.

15

The Court rejects respondent commission's premise that there must be an intent on the part of the taker of the
car "permanently to deprive the insured of his car" and that since the taking here was for a "joy ride" and
"merely temporary in nature," a "temporary taking is held not a taking insured against."
The evidence does not warrant respondent commission's findings that it was a mere "joy ride". From the very
investigator's report cited in its comment, 3the police found from the waist of the car driver Benito Mabasa
Bartolome who smashed the car and was found dead right after the incident "one cal. 45 Colt. and one apple
type grenade," hardly the materials one would bring along on a "joy ride". Then, again, it is equally evident that
the taking proved to be quite permanent rather than temporary, for the car was totally smashed in the fatal
accident and was never returned in serviceable and useful condition to petitioner-owner.
Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy ride", the
Court sustains as the better view that which holds that when a person, either with the object of going to a
certain place, or learning how to drive, or enjoying a free ride, takes possession of a vehicle belonging to
another, without the consent of its owner, he is guilty of theft because by taking possession of the personal
property belonging to another and using it, his intent to gain is evident since he derives therefrom utility,
satisfaction, enjoyment and pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds that the
use of a thing constitutes gain and Cuello Calon who calls it "hurt de uso."
The insurer must therefore indemnify the petitioner-owner for the total loss of the insured car in the sum of
P35,000.00 under the theft clause of the policy, subject to the filing of such claim for reimbursement or
payment as it may have as subrogee against the Sunday Machine Works, Inc.
ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing private
respondent to pay petitioner the sum of P35,000.00 with legal interest from the filing of the complaint until full
payment is made and to pay the costs of suit.
SO ORDERED.

16

CASE 7
G.R. No. L-36480 May 31, 1988
ANDREW
PALERMO,
vs.
PYRAMID INSURANCE CO., INC., defendant- appellant.

plaintiff-appellee,

The Court of Appeals certified this case to Us for proper disposition as the only question involved is the
interpretation of the provision of the insurance contract regarding the "authorized driver" of the insured motor
vehicle.
On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the Court of First Instance of
Negros Occidental against Pyramid Insurance Co., Inc., for payment of his claim under a Private Car
Comprehensive Policy MV-1251 issued by the defendant (Exh. A).
In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it disallowed the claim because at the time
of the accident, the insured was driving his car with an expired driver's license.
After the trial, the court a quo rendered judgment on October 29, 1969 ordering the defendant "to pay the
plaintiff the sum of P20,000.00, value of the insurance of the motor vehicle in question and to pay the costs."
On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution Pending Appeal." It was opposed
by the defendant, but was granted by the trial court on December 15, 1969.
The trial court found the following facts to be undisputed:
On October 12,1968, after having purchased a brand new Nissan Cedric de Luxe Sedan car
bearing Motor No. 087797 from the Ng Sam Bok Motors Co. in Bacolod City, plaintiff insured
the same with the defendant insurance company against any loss or damage for P 20,000.00
and against third party liability for P 10,000.00. Plaintiff paid the defendant P 361.34 premium
for one year, March 12, 1968 to March 12, 1969, for which defendant issued Private Car
Comprehensive Policy No. MV-1251, marked Exhibit "A."
The automobile was, however, mortgaged by the plaintiff with the vendor, Ng Sam Bok Motors
Co., to secure the payment of the balance of the purchase price, which explains why the
registration certificate in the name of the plaintiff remains in the hands of the mortgagee, Ng
Sam Bok Motors Co.
On April 17, 1968, while driving the automobile in question, the plaintiff met a violent accident.
The La Carlota City fire engine crashed head on, and as a consequence, the plaintiff sustained
physical injuries, his father, Cesar Palermo, who was with am in the car at the time was likewise
seriously injured and died shortly thereafter, and the car in question was totally wrecked.
The defendant was immediately notified of the occurrence, and upon its orders, the damaged
car was towed from the scene of the accident to the compound of Ng Sam Bok Motors in
Bacolod City where it remains deposited up to the present time.
The insurance policy, Exhibit "A," grants an option unto the defendant, in case of accident
either to indemnify the plaintiff for loss or damage to the car in cash or to replace the damaged
car. The defendant, however, refused to take either of the above-mentioned alternatives for
the reason as alleged, that the insured himself had violated the terms of the policy when he

17

drove the car in question with an expired driver's license. (Decision, Oct. 29, 1969, p. 68,
Record on Appeal.)
Appellant alleges that the trial court erred in interpreting the following provision of the Private Car
Comprehensive Policy MV-1251:
AUTHORIZED DRIVER:
Any of the following:
(a) The Insured.
(b) Any person driving on the Insured's order or with his permission. Provided that the person
driving is permitted in accordance with the licensing or other laws or regulations to drive the
Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of law
or by reason of any enactment or regulation in that behalf. (Exh. "A.")
There is no merit in the appellant's allegation that the plaintiff was not authorized to drive the insured motor
vehicle because his driver's license had expired. The driver of the insured motor vehicle at the time of the
accident was, the insured himself, hence an "authorized driver" under the policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway without a
license or with an expired license, an infraction of the Motor Vehicle Law on the part of the insured, is not a bar
to recovery under the insurance contract. It however renders him subject to the penal sanctions of the Motor
Vehicle Law.
The requirement that the driver be "permitted in accordance with the licensing or other laws or regulations to
drive the Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of Law or by
reason of any enactment or regulation in that behalf," applies only when the driver" is driving on the insured's
order or with his permission." It does not apply when the person driving is the insured himself.
This view may be inferred from the decision of this Court in Villacorta vs. Insurance Commission, 100 SCRA 467,
where it was held that:
The main purpose of the "authorized driver" clause, as may be seen from its text, is that a
person other than the insured owner, who drives the car on the insured's order, such as his
regular driver, or with his permission, such as a friend or member of the family or the
employees of a car service or repair shop, must be duly licensed drivers and have no
disqualification to drive a motor vehicle.
In an American case, where the insured herself was personally operating her automobile but without a license
to operate it, her license having expired prior to the issuance of the policy, the Supreme Court of
Massachusetts was more explicit:
... Operating an automobile on a public highway without a license, which act is a statutory
crime is not precluded by public policy from enforcing a policy indemnifying her against liability
for bodily injuries The inflicted by use of the automobile." (Drew C. Drewfield McMahon vs.
Hannah Pearlman, et al., 242 Mass. 367, 136 N.E. 154, 23 A.L.R. 1467.)
WHEREFORE, the appealed decision is affirmed with costs against the defendant-appellant.
SO ORDERED.

18

CASE 8
G.R. No. 60506 August 6, 1992
FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, LEONILA M. MALLARI, GILDA
ANTONIO and the minors LEAH, LOPE, JR., and ELVIRA, all surnamed MAGLANA, herein represented by their
mother,
FIGURACION
VDA.
DE
MAGLANA,
petitioners,
vs.
HONORABLE FRANCISCO Z. CONSOLACION, Presiding Judge of Davao City, Branch II, and AFISCO INSURANCE
CORPORATION, respondents.
The nature of the liability of an insurer sued together with the insured/operator-owner of a common carrier
which figured in an accident causing the death of a third person is sought to be defined in this petition for
certiorari.
The facts as found by the trial court are as follows:
. . . Lope Maglana was an employee of the Bureau of Customs whose work station was at Lasa,
here in Davao City. On December 20, 1978, early morning, Lope Maglana was on his way to his
work station, driving a motorcycle owned by the Bureau of Customs. At Km. 7, Lanang, he met
an accident that resulted in his death. He died on the spot. The PUJ jeep that bumped the
deceased was driven by Pepito Into, operated and owned by defendant Destrajo. From the
investigation conducted by the traffic investigator, the PUJ jeep was overtaking another
passenger jeep that was going towards the city poblacion. While overtaking, the PUJ jeep of
defendant Destrajo running abreast with the overtaken jeep, bumped the motorcycle driven by
the deceased who was going towards the direction of Lasa, Davao City. The point of impact was
on the lane of the motorcycle and the deceased was thrown from the road and met his
untimely death.
Consequently, the heirs of Lope Maglana, Sr., here petitioners, filed an action for damages and attorney's fees
against operator Patricio Destrajo and the Afisco Insurance Corporation (AFISCO for brevity) before the then
Court of First Instance of Davao, Branch II. An information for homicide thru reckless imprudence was also filed
against Pepito Into.
During the pendency of the civil case, Into was sentenced to suffer an indeterminate penalty of one (1) year,
eight (8) months and one (1) day of prision correccional, as minimum, to four (4) years, nine (9) months and
eleven (11) days of prision correccional, as maximum, with all the accessory penalties provided by law, and to
indemnify the heirs of Lope Maglana, Sr. in the amount of twelve thousand pesos (P12,000.00) with subsidiary
imprisonment in case of insolvency, plus five thousand pesos (P5,000.00) in the concept of moral and
exemplary damages with costs. No appeal was interposed by accused who later applied for probation.
On December 14, 1981, the lower court rendered a decision finding that Destrajo had not exercised sufficient
diligence as the operator of the jeepney. The dispositive portion of the decision reads:
WHEREFORE, the Court finds judgment in favor of the plaintiffs against defendant Destrajo,
ordering him to pay plaintiffs the sum of P28,000.00 for loss of income; to pay plaintiffs the
sum of P12,000.00 which amount shall be deducted in the event judgment in Criminal Case No.
3527-D against the driver, accused Into, shall have been enforced; to pay plaintiffs the sum of
P5,901.70 representing funeral and burial expenses of the deceased; to pay plaintiffs the sum
of P5,000.00 as moral damages which shall be deducted in the event judgment (sic) in Criminal
Case No. 3527-D against the driver, accused Into; to pay plaintiffs the sum of P3,000.00 as
attorney's fees and to pay the costs of suit.

19

The defendant insurance company is ordered to reimburse defendant Destrajo whatever
amounts the latter shall have paid only up to the extent of its insurance coverage.
SO ORDERED.
Petitioners filed a motion for the reconsideration of the second paragraph of the dispositive portion of the
decision contending that AFISCO should not merely be held secondarily liable because the Insurance Code
provides that the insurer's liability is "direct and primary and/or jointly and severally with the operator of the
vehicle, although only up to the extent of the insurance coverage." 4 Hence, they argued that the P20,000.00
coverage of the insurance policy issued by AFISCO, should have been awarded in their favor.
In its comment on the motion for reconsideration, AFISCO argued that since the Insurance Code does not
expressly provide for a solidary obligation, the presumption is that the obligation is joint.
In its Order of February 9, 1982, the lower court denied the motion for reconsideration ruling that since the
insurance contract "is in the nature of suretyship, then the liability of the insurer is secondary only up to the
extent of the insurance coverage."
Petitioners filed a second motion for reconsideration reiterating that the liability of the insurer is direct,
primary and solidary with the jeepney operator because the petitioners became direct beneficiaries under the
provision of the policy which, in effect, is a stipulation pour autrui.6This motion was likewise denied for lack of
merit.
Hence, petitioners filed the instant petition for certiorari which, although it does not seek the reversal of the
lower court's decision in its entirety, prays for the setting aside or modification of the second paragraph of the
dispositive portion of said decision. Petitioners reassert their position that the insurance company is directly
and solidarily liable with the negligent operator up to the extent of its insurance coverage.
We grant the petition.
The particular provision of the insurance policy on which petitioners base their claim is as follows:

Sec. 1 — LIABILITY TO THE PUBLIC
1. The 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 any THIRD PARTY
(b) . . . .
2. . . . .
3. In the event of the death of any person entitled to indemnity under this Policy, the Company
will, in respect of the liability incurred to such person indemnify his personal representatives in
terms of, and subject to the terms and conditions hereof. 7
The above-quoted provision leads to no other conclusion but that AFISCO can be held directly liable by
petitioners. As this Court ruled in Shafer vs. Judge, RTC of Olongapo City, Br. 75, "[w]here an insurance policy
insures directly against liability, the insurer's liability accrues immediately upon the occurrence of the injury or
even upon which the liability depends, and does not depend on the recovery of judgment by the injured party
20

against the insured."The underlying reason behind the third party liability (TPL) of the Compulsory Motor
Vehicle Liability Insurance is "to protect injured persons against the insolvency of the insured who causes such
injury, and to give such injured person a certain beneficial interest in the proceeds of the policy . . ." 9 Since
petitioners had received from AFISCO the sum of P5,000.00 under the no-fault clause, AFISCO's liability is now
limited to P15,000.00.
However, we cannot agree that AFISCO is likewise solidarily liable with Destrajo. In Malayan Insurance Co., Inc.
v. Court of Appeals, 10this Court had the opportunity to resolve the issue as to the nature of the liability of the
insurer and the insured vis-a-vis the third party injured in an accident. We categorically ruled thus:
While it is true that where the insurance contract provides for indemnity against liability to
third persons, such third persons can directly sue the insurer, however, the direct liability of the
insurer under indemnity contracts against third party liability does not mean that the insurer
can be held solidarily liable with the insured and/or the other parties found at fault. The
liability of the insurer is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos (the injured
third party), but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with
the two principal tortfeasors, namely respondents Sio Choy and San Leon Rice Mill, Inc. For if
petitioner-insurer were solidarily liable with said, two (2) respondents by reason of the
indemnity contract against third party liability — under which an insurer can be directly sued
by a third party — this will result in a violation of the principles underlying solidary obligation
and insurance contracts. (emphasis supplied)
The Court then proceeded to distinguish the extent of the liability and manner of enforcing the same in
ordinary contracts from that of insurance contracts. While in solidary obligations, the creditor may enforce the
entire obligation against one of the solidary debtors, in an insurance contract, the insurer undertakes for a
consideration to indemnify the insured against loss, damage or liability arising from an unknown or contingent
event. 11 Thus, petitioner therein, which, under the insurance contract is liable only up to P20,000.00, can not
be made solidarily liable with the insured for the entire obligation of P29,013.00 otherwise there would result
"an evident breach of the concept of solidary obligation."
Similarly, petitioners herein cannot validly claim that AFISCO, whose liability under the insurance policy is also
P20,000.00, can be held solidarily liable with Destrajo for the total amount of P53,901.70 in accordance with
the decision of the lower court. Since under both the law and the insurance policy, AFISCO's liability is only up
to P20,000.00, the second paragraph of the dispositive portion of the decision in question may have unwittingly
sown confusion among the petitioners and their counsel. What should have been clearly stressed as to leave no
room for doubt was the liability of AFISCO under the explicit terms of the insurance contract.
In fine, we conclude that the liability of AFISCO based on the insurance contract is direct, but not solidary with
that of Destrajo which is based on Article 2180 of the Civil Code. 12As such, petitioners have the option either to
claim the P15,000 from AFISCO and the balance from Destrajo or enforce the entire judgment from Destrajo
subject to reimbursement from AFISCO to the extent of the insurance coverage.
While the petition seeks a definitive ruling only on the nature of AFISCO's liability, we noticed that the lower
court erred in the computation of the probable loss of income. Using the formula: 2/3 of (80-56) x P12,000.00,
it awarded P28,800.00. Upon recomputation, the correct amount is P192,000.00. Being a "plain error," we opt
to correct the same. Furthermore, in accordance with prevailing jurisprudence, the death indemnity is hereby
increased to P50,000.00.
WHEREFORE, premises considered, the present petition is hereby GRANTED. The award of P28,800.00
representing loss of income is INCREASED to P192,000.00 and the death indemnity of P12,000.00 to
P50,000.00. SO ORDERED.
21

CASE 9
G.R. No. 96452 May 7, 1992
PERLA
COMPANIA
DE
SEGUROS,
vs.
THE COURT OF APPEALS, HERMINIO LIM and EVELYN LIM, respondents.

INC.

petitioner,

G.R. No. 96493 May 7, 1992
FCP CREDIT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, Special Third Division, HERMINIO LIM and EVELYN LIM, respondents.
These are two petitions for review on certiorari, one filed by Perla Compania de Seguros, Inc. in G.R. No. 96452,
and the other by FCP Credit Corporation in G.R. No. 96493, both seeking to annul and set aside the decision
dated July 30, 1990 1 of the Court of Appeals in CA-G.R. No. 13037, which reversed the decision of the Regional
Trial Court of Manila, Branch VIII in Civil Case No. 83-19098 for replevin and damages. The dispositive portion of
the decision of the Court of Appeals reads, as follows:
WHEREFORE, the decision appealed from is reversed; and appellee Perla Compania de Seguros,
Inc. is ordered to indemnify appellants Herminio and Evelyn Lim for the loss of their insured
vehicle; while said appellants are ordered to pay appellee FCP Credit Corporation all the unpaid
installments that were due and payable before the date said vehicle was carnapped; and
appellee Perla Compania de Seguros, Inc. is also ordered to pay appellants moral damages of
P12,000.00 for the latter's mental sufferings, exemplary damages of P20,000.00 for appellee
Perla Compania de Seguros, Inc.'s unreasonable refusal on sham grounds to honor the just
insurance claim of appellants by way of example and correction for public good, and attorney's
fees of P10,000.00 as a just and equitable reimbursement for the expenses incurred therefor
by appellants, and the costs of suit both in the lower court and in this appeal.
The facts as found by the trial court are as follows:
On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed a promissory note in
favor Supercars, Inc. in the sum of P77,940.00, payable in monthly installments according to the schedule of
payment indicated in said note, and secured by a chattel mortgage over a brand new red Ford Laser 1300 5DR
Hatchback 1981 model with motor and serial No. SUPJYK-03780, which is registered under the name of private
respondent Herminio Lim and insured with the petitioner Perla Compania de Seguros, Inc. (Perla for brevity) for
comprehensive coverage under Policy No. PC/41PP-QCB-43383.
On the same date, Supercars, Inc., with notice to private respondents spouses, assigned to petitioner FCP
Credit Corporation (FCP for brevity) its rights, title and interest on said promissory note and chattel mortgage
as shown by the Deed of Assignment.
At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at the back of Broadway
Centrum along N. Domingo Street, Quezon City. Private respondent Evelyn Lim, who was driving said car before
it was carnapped, immediately called up the Anti-Carnapping Unit of the Philippine Constabulary to report said
incident and thereafter, went to the nearest police substation at Araneta, Cubao to make a police report
regarding said incident, as shown by the certification issued by the Quezon City police.

22

On November 10, 1982, private respondent Evelyn Lim reported said incident to the Land Transportation
Commission in Quezon City, as shown by the letter of her counsel to said office, in compliance with the
insurance requirement. She also filed a complaint with the Headquarters, Constabulary Highway Patrol Group.
On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla but said claim was
denied on November 18, 1982 on the ground that Evelyn Lim, who was using the vehicle before it was
carnapped, was in possession of an expired driver's license at the time of the loss of said vehicle which is in
violation of the authorized driver clause of the insurance policy, which states, to wit:
AUTHORIZED DRIVER:
Any of the following: (a) The Insured (b) Any person driving on the Insured's order, or with his
permission. Provided that the person driving is permitted, in accordance with the licensing or
other laws or regulations, to drive the Scheduled Vehicle, or has been permitted and is not
disqualified by order of a Court of Law or by reason of any enactment or regulation in that
behalf.
On November 17, 1982, private respondents requests from petitioner FCP for a suspension of payment on the
monthly amortization agreed upon due to the loss of the vehicle and, since the carnapped vehicle insured with
petitioner Perla, said insurance company should be made to pay the remaining balance of the promissory note
and the chattel mortgage contract.
Perla, however, denied private respondents' claim. Consequently, petitioner FCP demanded that private
respondents pay the whole balance of the promissory note or to return the vehicle 12 but the latter refused.
On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in turn filed an amended
third party complaint against petitioner Perla on December 8, 1983. After trial on the merits, the trial court
rendered a decision, the dispositive portion which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1. Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and severally, plaintiff the
sum of P55,055.93 plus interest thereon at the rate of 24% per annum from July 2, 1983 until
fully paid;
2. Ordering defendants to pay plaintiff P50,000.00 as and for attorney's fees; and the costs of
suit.
Upon the other hand, likewise, ordering the DISMISSAL of the Third-Party Complaint filed
against Third-Party Defendant.
Not satisfied with said decision, private respondents appealed the same to the Court of Appeals, which
reversed said decision.
After petitioners' separate motions for reconsideration were denied by the Court of Appeals in its resolution of
December 10, 1990, petitioners filed these separate petitions for review on certiorari.
Petitioner Perla alleged that there was grave abuse of discretion on the part of the appellate court in holding
that private respondents did not violate the insurance contract because the authorized driver clause is not
applicable to the "Theft" clause of said Contract.

23

For its part, petitioner FCP raised the issue of whether or not the loss of the collateral exempted the debtor
from his admitted obligations under the promissory note particularly the payment of interest, litigation
expenses and attorney's fees.
We find no merit in Perla's petition.
The comprehensive motor car insurance policy issued by petitioner Perla undertook to indemnify the private
respondents against loss or damage to the car (a) by accidental collision or overturning, or collision or
overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external
explosion, self-ignition or lightning or burglary, housebreaking or theft; and (c) by malicious act.
Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's consent or
knowledge, such taking constitutes theft, and, therefore, it is the "THEFT"' clause, and not the "AUTHORIZED
DRIVER" clause that should apply. As correctly stated by the respondent court in its decision:
. . . Theft is an entirely different legal concept from that of accident. Theft is committed by a
person with the intent to gain or, to put it in another way, with the concurrence of the doer's
will. On the other hand, accident, although it may proceed or result from negligence, is the
happening of an event without the concurrence of the will of the person by whose agency it
was caused. (Bouvier's Law Dictionary, Vol. I, 1914 ed., p. 101).
Clearly, the risk against accident is distinct from the risk against theft. The "authorized driver
clause" in a typical insurance policy is in contemplation or anticipation of accident in the legal
sense in which it should be understood, and not in contemplation or anticipation of an event
such as theft. The distinction — often seized upon by insurance companies in resisting claims
from their assureds — between death occurring as a result of accident and death occurring as a
result of intent may, by analogy, apply to the case at bar. Thus, if the insured vehicle had
figured in an accident at the time she drove it with an expired license, then, appellee Perla
Compania could properly resist appellants' claim for indemnification for the loss or destruction
of the vehicle resulting from the accident. But in the present case. The loss of the insured
vehicle did not result from an accident where intent was involved; the loss in the present case
was caused by theft, the commission of which was attended by intent.
It is worthy to note that there is no causal connection between the possession of a valid driver's license and the
loss of a vehicle. To rule otherwise would render car insurance practically a sham since an insurance company
can easily escape liability by citing restrictions which are not applicable or germane to the claim, thereby
reducing indemnity to a shadow.
We however find the petition of FCP meritorious.
This Court agrees with petitioner FCP that private respondents are not relieved of their obligation to pay the
former the installments due on the promissory note on account of the loss of the automobile. The chattel
mortgage constituted over the automobile is merely an accessory contract to the promissory note. Being the
principal contract, the promissory note is unaffected by whatever befalls the subject matter of the accessory
contract. Therefore, the unpaid balance on the promissory note should be paid, and not just the installments
due and payable before the automobile was carnapped, as erronously held by the Court of Appeals.
However, this does not mean that private respondents are bound to pay the interest, litigation expenses and
attorney's fees stipulated in the promissory note. Because of the peculiar relationship between the three
contracts in this case, i.e., the promissory note, the chattel mortgage contract and the insurance policy, this
Court is compelled to construe all three contracts as intimately interrelated to each other, despite the fact that
at first glance there is no relationship whatsoever between the parties thereto.

24

Under the promissory note, private respondents are obliged to pay Supercars, Inc. the amount stated therein in
accordance with the schedule providedfor. To secure said promissory note, private respondents constituted a
chattel mortgage in favor of Supercars, Inc. over the automobile the former purchased from the latter. The
chattel mortgage, in turn, required private respondents to insure the automobile and to make the proceeds
thereof payable to Supercars, Inc. The promissory note and chattel mortgage were assigned by Supercars, Inc.
to petitioner FCP, with the knowledge of private respondents. Private respondents were able to secure an
insurance policy from petitioner Perla, and the same was made specifically payable to petitioner FCP.
The insurance policy was therefore meant to be an additional security to the principal contract, that is, to
insure that the promissory note will still be paid in case the automobile is lost through accident or theft. The
Chattel Mortgage Contract provided that:
THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE THE PROPERTY/IES
HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST LOSS OR DAMAGE BY ACCIDENT, THEFT
AND FIRE FOR A PERIOD OF ONE YEAR FROM DATE HEREOF AND EVERY YEAR THEREAFTER
UNTIL THE MORTGAGE OBLIGATION IS FULLY PAID WITH AN INSURANCE COMPANY OR
COMPANIES ACCEPTABLE TO THE MORTGAGEE IN AN AMOUNT NOT LESS THAN THE
OUTSTANDING BALANCE OF THE MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE ALL LOSS, IF
ANY, UNDER SUCH POLICY OR POLICIES, PAYABLE TO THE MORTGAGE OR ITS ASSIGNS AS ITS
INTERESTS MAY APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE
MORTGAGEE, . . .
It is clear from the abovementioned provision that upon the loss of the insured vehicle, the insurance company
Perla undertakes to pay directly to the mortgagor or to their assignee, FCP, the outstanding balance of the
mortgage at the time of said loss under the mortgage contract. If the claim on the insurance policy had been
approved by petitioner Perla, it would have paid the proceeds thereof directly to petitioner FCP, and this would
have had the effect of extinguishing private respondents' obligation to petitioner FCP. Therefore, private
respondents were justified in asking petitioner FCP to demand the unpaid installments from petitioner Perla.
Because petitioner Perla had unreasonably denied their valid claim, private respondents should not be made to
pay the interest, liquidated damages and attorney's fees as stipulated in the promissory note. As mentioned
above, the contract of indemnity was procured to insure the return of the money loaned from petitioner FCP,
and the unjustified refusal of petitioner Perla to recognize the valid claim of the private respondents should not
in any way prejudice the latter.
Private respondents can not be said to have unduly enriched themselves at the expense of petitioner FCP since
they will be required to pay the latter the unpaid balance of its obligation under the promissory note.
In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring petitioner Perla
to indemnify private respondents for the loss of their insured vehicle. However, the latter should be ordered to
pay petitioner FCP the amount of P55,055.93, representing the unpaid installments from December 30, 1982
up to July 1, 1983, as shown in the statement of account prepared by petitioner FCP, 18 plus legal interest from
July 2, 1983 until fully paid.
As to the award of moral damages, exemplary damages and attorney's fees, private respondents are legally entitled to the
same since petitioner Perla had acted in bad faith by unreasonably refusing to honor the insurance claim of the private
respondents. Besides, awards for moral and exemplary damages, as well as attorney's fees are left to the sound discretion
of the Court. Such discretion, if well exercised, will not be disturbed on appeal.
WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require private respondents to pay
petitioner FCP the amount of P55,055.93, with legal interest from July 2, 1983 until fully paid. The decision appealed from
is hereby affirmed as to all other respects. No pronouncement as to costs. SO ORDERED.

25

CASE 10
G.R. No. 114427 February 6, 1995
ARMANDO
GEAGONIA,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

petitioner,

Four our review under Rule 45 of the Rules of Court is the decision 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-14622 for P100,000.00.
The period of the policy was from 22 December 1989 to 22 December 1990 and covered the following: "Stockin-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.
F. Legaspi Gen. Merchandise
Cebu Tesing Textiles

P55,698.00
86,432.50
250,000.00
—————
P392,130.50

(on credit)

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).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.
26

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 complaint5 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" 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, 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, 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 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. . . .

27

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
28

Annex "M" thereof and made integral part of the complaint. 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.
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.
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 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. However, in order to constitute a violation, the other insurance must be upon same subject matter, the
same interest therein, and the same risk.
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. 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. 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. 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.
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. This kind of policy covers only such interest as the mortgagee has at the issuing of
the policy.

29

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. 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.
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 Huaor in Pioneer Insurance & Surety Corp. vs. Yap, 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
28
Co. 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. 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. 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.
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
30

insured," and the portion regarding the insured's declaration on the subheading CO-INSURANCE that the coinsurer 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 coinsurer'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 overinsurance 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.
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.

31

CASE 11
G.R. No. 115278 May 23, 1995
FORTUNE
INSURANCE
AND
SURETY
CO.,
vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

INC.,

petitioner,

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 (AntiHighway 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;

32

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.
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.
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

33

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.
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

34

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. NLRC7 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
35

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.
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." Persons frequently excluded under such provisions are those in the
insured's service and employment. The purpose of the exception is to guard against liability should the theft be
committed by one having unrestricted access to the property. In such cases, the terms specifying the excluded
classes are to be given their meaning as understood in common speech. The terms "service" and "employment"
are generally associated with the idea of selection, control, and compensation.
A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the
insurer, 15or 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. 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.
An insurance contract is a contract of indemnity upon the terms and conditions specified therein. It is settled
that the terms of the policy constitute the measure of the insurer's liability. In the absence of statutory
prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and
to impose whatever conditions they deem best upon their obligations not inconsistent with public policy.
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
36

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, 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.
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."
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.

37

CASE 12
G.R. No. L-34200 September 30, 1982
REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE OF RIZAL, BRANCH V,
QUEZON CITY, respondents-appellees.
The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance
Rizal, Branch V, Quezon City, to be taken directly to the Supreme Court is whether or not the acceptance by the
private respondent insurance corporation of the premium and the issuance of the corresponding certificate of
insurance should be deemed a waiver of the exclusionary condition of overage stated in the said certificate of
insurance.
The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent
insurance corporation for insurance coverage against accident and injuries. She filled up the blank application
form given to her and filed the same with the respondent insurance corporation. In the said application form
which was dated April 15, 1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the
sum of P20.00 representing the premium for which she was issued the corresponding receipt signed by an
authorized agent of the respondent insurance corporation. (Rollo, p. 27.) Upon the filing of said application and
the payment of the premium on the policy applied for, the respondent insurance corporation issued to Carmen
O. Lapuz its Certificate of Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90
days.
On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a
vehicular accident in the North Diversion Road.
On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the
policy, filed her claim for the proceeds of the insurance, submitting all the necessary papers and other
requisites with the private respondent. Her claim having been denied, Regina L. Edillon instituted this action in
the Court of First Instance of Rizal on August 27, 1969.
In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in
the Certificate of Insurance, excluding its liability to pay claims under the policy in behalf of "persons who are
under the age of sixteen (16) years of age or over the age of sixty (60) years ..." It is pointed out that the
insured being over sixty (60) years of age when she applied for the insurance coverage, the policy was null and
void, and no risk on the part of the respondent insurance corporation had arisen therefrom.
The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the
petitioner to pay attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the private
respondent; and ordered the private respondent to return the sum of TWENTY (P20.00) PESOS received by way
of premium on the insurancy policy. It was reasoned out that a policy of insurance being a contract of adhesion,
it was the duty of the insured to know the terms of the contract he or she is entering into; the insured in this
case, upon learning from its terms that she could not have been qualified under the conditions stated in said
contract, what she should have done is simply to ask for a refund of the premium that she paid. It was further
argued by the trial court that the ruling calling for a liberal interpretation of an insurance contract in favor of
the insured and strictly against the insurer may not be applied in the present case in view of the peculiar facts
and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the
insurance company. Her application for insurance coverage which was on a printed form furnished by private
respondent and which contained very few items of information clearly indicated her age of the time of filing
38

the same to be almost 65 years of age. Despite such information which could hardly be overlooked in the
application form, considering its prominence thereon and its materiality to the coverage applied for, the
respondent insurance corporation received her payment of premium and issued the corresponding certificate
of insurance without question. The accident which resulted in the death of the insured, a risk covered by the
policy, occurred on May 31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There
was sufficient time for the private respondent to process the application and to notice that the applicant was
over 60 years of age and thereby cancel the policy on that ground if it was minded to do so. If the private
respondent failed to act, it is either because it was willing to waive such disqualification; or, through the
negligence or incompetence of its employees for which it has only itself to blame, it simply overlooked such
fact. Under the circumstances, the insurance corporation is already deemed in estoppel. It inaction to revoke
the policy despite a departure from the exclusionary condition contained in the said policy constituted a waiver
of such condition, as was held in the case of "Que Chee Gan vs. Law Union Insurance Co., Ltd.,", 98 Phil. 85. This
case involved a claim on an insurance policy which contained a provision as to the installation of fire hydrants
the number of which depended on the height of the external wan perimeter of the bodega that was insured.
When it was determined that the bodega should have eleven (11) fire hydrants in the compound as required by
the terms of the policy, instead of only two (2) that it had, the claim under the policy was resisted on that
ground. In ruling that the said deviation from the terms of the policy did not prevent the claim under the same,
this Court stated the following:
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 an that the number of hydrants demanded therein never existed from the very beginning,
the appellant nevertheless 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 claim 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 Que 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 it 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 known 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 execute 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 is money
without consideration.' (29 Am. Jur., Insurance, section 807, at pp. 611-612.)
39

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 be abhorent to
fairminded men. It would be to allow the company to treat the policy as valid
long enough to get the premium 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, 543544).
A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA
134, which involved a violation of the provision of the policy requiring the payment of premiums before the
insurance shall become effective. The company issued the policy upon the execution of a promissory note for
the payment of the premium. A check given subsequent by the insured as partial payment of the premium was
dishonored for lack of funds. Despite such deviation from the terms of the policy, the insurer was held liable.
Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to
pay the insurance premium within thirty (30) days from the effective date of policy. By so
doing, it has impliedly agreed to modify the tenor of the insurance policy and in effect, waived
the provision therein that it would only pay for the loss or damage in case the same occurs
after the payment of the premium. Considering that the insurance policy is silent as to the
mode of payment, Capital Insurance is deemed to have accepted the promissory note in
payment of the premium. This rendered the policy immediately operative on the date it was
delivered. The view taken in most cases in the United States:
... is that although one of conditions of an insurance policy is that "it shall not
be valid or binding until the first premium is paid", if it is silent as to the mode
of payment, promissory notes received by the company must be deemed to
have been accepted in payment of the premium. In other words, a
requirement for the payment of the first or initial premium in advance or
actual cash may be waived by acceptance of a promissory note...
WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private
respondent insurance corporation is hereby ordered to pay to the petitioner the sum of TEN THOUSAND
(P10,000.00) PESOS as proceeds of Insurance Certificate No. 128866 with interest at the legal rate from May
31, 1969 until fully paid, the further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and
the costs of suit.
SO ORDERED.

40

CASE 13
G.R. No. 78860 May 28, 1990
PERLA
COMPANIA
DE
SEGUROS,
vs.
HONORABLE COURT OF APPEALS and MILAGROS CAYAS, respondents.

INC.,

petitioner,

This is a petition for review on certiorari of the decision of the Court of Appeals affirming in toto the decision of
the Regional Trial Court of Cavite, Branch XVI, the dispositive portion of which states:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering defendant Perla Compania
de Seguros, Inc. to pay plaintiff Milagros Cayas the sum of P50,000.00 under its maximum
liability as provided for in the insurance policy; and the sum of P5,000.00 as reasonable
attorney's fee with costs against said defendant.
SO ORDERED.
Private respondent Milagros Cayas was the registered owner of a Mazda bus with serial No. TA3H4 P-000445
and plate No. PUB-4G-593. Said passenger vehicle was insured with Perla Compania de Seguros, Inc. (PCSI)
under policy No. LTO/60CC04241 issued on February 3, 1978.
On December 17, 1978, the bus figured in an accident in Naic, Cavite injuring several of its passengers. One of
them, 19-year old Edgardo Perea, sued Milagros Cayas for damages in the Court of First Instance of Cavite,
Branch docketed as Civil Case No. NC-794; while three others, namely: Rosario del Carmen, Ricardo Magsarili
and Charlie Antolin, agreed to a settlement of P4,000.00 each with Milagros Cayas.
At the pre-trial of Civil Case No. NC-794, Milagros Cayas failed to appear and hence, she was declared as in
default. After trial, the court rendered a decision in favor of Perea with its dispositive portion reading thus:
WHEREFORE, under our present imperatives, judgment is hereby rendered in favor of the
plaintiffs and against the defendant Milagros Cayas who is hereby ordered to compensate the
plaintiff' Edgar Perea with damages in the sum of Ten Thousand (Pl0,000.00) Pesos for the
medical predicament he found himself as damaging consequences of defendant Milagros Cayas
complete lack of diligence of a good father of a family' when she secured the driving services of
one Oscar Figueroa on December, 17, 1978; the sum of Ten Thousand (P10,000.00) Pesos for
exemplary damages; the sum of Five Thousand (P5,000.00) Pesos for moral damages; the sum
of Seven Thousand (P7,000.00) Pesos for Attorney's fees, under the imperatives of the
monetary power of the peso today;
With costs against the defendant.
SO ORDERED.
When the decision in Civil Case No. NC-794 was about to be executed against her, Milagros Cayas filed a
complaint against PCSI in the Office of the Insurance Commissioner praying that PCSI be ordered to pay
P40,000.00 for all the claims against her arising from the vehicular accident plus legal and other expenses.
Realizing her procedural mistake, she later withdrew said complaint.
Consequently, on November 11, 1981, Milagros Cayas filed a complaint for a sum of money and damages
against PCSI in the Court of First Instance of Cavite (Civil Case No. N-4161). She alleged therein that to satisfy
the judgment in Civil Case No. NC-794, her house and lot were levied upon and sold at public auction for
P38,200; 10that to avoid numerous suits and the "detention" of the insured vehicle, she paid P4,000 to each of
41

the following injured passengers: Rosario del Carmen, Ricardo Magsarili and Charlie Antolin; that she could not
have suffered said financial setback had the counsel for PCSI, who also represented her, appeared at the trial of
Civil Case No. NC-794 and attended to the claims of the three other victims; that she sought reimbursement of
said amounts from the defendant, which notwithstanding the fact that her claim was within its contractual
liability under the insurance policy, refused to make such re-imbursement; that she suffered moral damages as
a consequence of such refusal, and that she was constrained to secure the services of counsel to protect her
rights. She prayed that judgment be rendered directing PCSI to pay her P50,000 for compensation of the
injured victims, such sum as the court might approximate as damages, and P6,000 as attorney's fees.
In view of Milagros Cayas' failure to prosecute the case, the court motu propio ordered its dismissal without
prejudice. Alleging that she had not received a copy of the answer to the complaint, and that "out of
sportsmanship", she did not file a motion to hold PCSI in default, Milagros Cayas moved for the reconsideration
of the dismissal order. Said motion for reconsideration was acted upon favorably by the court in its order of
March 31, 1982.
About two months later, Milagros Cayas filed a motion to declare PCSI in default for its failure to file an answer.
The motion was granted and plaintiff was allowed to adduce evidence ex-parte. On July 13, 1982, the court
rendered judgment by default ordering PCSI to pay Milagros Cayas P50,000 as compensation for the injured
passengers, P5,000 as moral damages and P5,000 as attorney's fees.
Said decision was set aside after the PCSI filed a motion therefor. Trial of the case ensued. In due course, the
court promulgated a decision in Civil Case No. N-4161, the dispositive portion of which was quoted earlier,
finding that:
In disavowing its obligation to plaintiff under the insurance policy, defendant advanced the
proposition that before it can be made to pay, the liability must first be determined in an
appropriate court action. And so plaintiffs liability was determined in that case filed against her
by Perea in the Naic CFI. Still, despite this determination of liability, defendant sought escape
from its obligation by positing the theory that plaintiff Milagros Cayas lost the Naic case due to
her negligence because of which, efforts exerted by defendant's lawyers in protecting Cayas'
rights proved futile and rendered nugatory. Blame was laid entirely on plaintiff by defendant
for losing the Naic case. Defendant labored under the impression that had Cayas cooperated
fully with defendant's lawyers, the latter could have won the suit and thus relieved of any
obligation to Perea Defendant's posture is stretching the factual circumstances of the Naic case
too far. But even accepting defendant's postulate, it cannot be said, nor was it shown positively
and convincingly, that if the Naic case had proceeded on trial on the merits, a decision
favorable to Milagros Cayas could have been obtained. Nor was it definitely established that if
the pre-trial was undertaken in that case, defendant's lawyers could have mitigated the claim
for damages by Perea against Cayas.
The court, however, held that inasmuch as Milagros Cayas failed to establish that she underwant moral
suffering and mental anguish to justify her prayer for damages, there should be no such award. But, there
being proof that she was compelled to engage the services of counsel to protect her rights under the insurance
policy, the court allowed attorney's fees in the amount of P5,000.
PCSI appealed to the Court of Appeals, which, in its decision of May 8, 1987 affirmed in toto the lower court's
decision. Its motion for reconsideration having been denied by said appellate court, PCSI filed the instant
petition charging the Court of Appeals with having erred in affirming in toto the decision of the lower court.
At the outset, we hold as factual and therefore undeserving of this Court's attention, petitioner's assertions
that private respondent lost Civil Case No. NC-794 because of her negligence and that there is no proof that the
decision in said case has been executed. Said contentions, having been raised and threshed out in the Court of
Appeals and rejected by it, may no longer be addressed to this Court.
42

Petitioner's other contentions are primarily concerned with the extent of its liability to private respondent
under the insurance policy. This, we consider to be the only issue in this case.
Petitioner seeks to limit its liability only to the payment made by private respondent to Perea and only up to
the amount of P12,000.00. It altogether denies liability for the payments made by private respondents to the
other three (3) injured passengers Rosario del Carmen, Ricardo Magsarili and Charlie Antolin in the amount of
P4,000.00 each or a total of P12,000.00.
There is merit in petitioner's assertions.
The insurance policy involved explicitly limits petitioner's liability to P12,000.00 per person and to P50,000.00
per accident. 13 Pertinent provisions of the policy also state:
SECTION I-Liability to the Public
xxx xxx xxx
3. The Limit of Liability stated in Schedule A as applicable (a) to THIRD PARTY is
the limit of the Company's liability for all damages arising out of death, bodily
injury and damage to property combined so sustained as the result of any one
accident; (b) "per person" for PASSENGER liability is the limit of the Company's
liability for all damages arising out of death or bodily injury sustained by one
person as the result of any one accident: (c) "per accident" for PASSENGER
liability is, subject to the above provisions respecting per person, the total limit
of the Company's liability for all such damages arising out of death or bodily
injury sustained by two or more persons as the result of any one accident.
Conditions Applicable to All Sections
xxx xxx xxx
5. No admission, offer, promise or payment shall be made by or on behalf of
the insured without the written consent of the Company which shall be
entitled, if it so desires, to take over and conduct in his (sic) name the defense
or settlement of any claim, or to prosecute in his (sic) name for its own benefit
any claim for indemnity or damages or otherwise, and shall have full discretion
in the conduct of any proceedings in the settlement of any claim, and the
insured shall give all such information and assistance as the Company may
require. If the Company shall make any payment in settlement of any claim,
and such payment includes any amount not covered by this Policy, the Insured
shall repay the Company the amount not so covered.
We have ruled in Stokes vs. Malayan Insurance Co., Inc., that the terms of the contract constitute the measure
of the insurer's liability and compliance therewith is a condition precedent to the insured's right of recovery
from the insurer.
In the case at bar, the insurance policy clearly and categorically placed petitioner's liability for all damages
arising out of death or bodily injury sustained by one person as a result of any one accident at P12,000.00. Said
amount complied with the minimum fixed by the law then prevailing, Section 377 of Presidential Decree No.
612 (which was retained by P.D. No. 1460, the Insurance Code of 1978), which provided that the liability of land
transportation vehicle operators for bodily injuries sustained by a passenger arising out of the use of their
vehicles shall not be less than P12,000. In other words, under the law, the minimum liability is P12,000 per
passenger. Petitioner's liability under the insurance contract not being less than P12,000.00, and therefore not
43

contrary to law, morals, good customs, public order or public policy, said stipulation must be upheld as
effective, valid and binding as between the parties.
In like manner, we rule as valid and binding upon private respondent the condition above-quoted requiring her
to secure the written permission of petitioner before effecting any payment in settlement of any claim against
her. There is nothing unreasonable, arbitrary or objectionable in this stipulation as would warrant its
nullification. The same was obviously designed to safeguard the insurer's interest against collusion between the
insured and the claimants.
In her cross-examination before the trial court, Milagros Cayas admitted, thus:
Atty. Yabut:
q With respect to the other injured passengers of your bus wherein you made
payments you did not secure the consent of defendant (herein petitioner) Perla
Compania de Seguros when you made those payments?
a I informed them about that
q But they did not give you the written authority that you were supposed to pay those
claims?
a No, sir .
It being specifically required that petitioner's written consent be first secured before any payment in
settlement of any claim could be made, private respondent is precluded from seeking reimbursement of the
payments made to del Carmen, Magsarili and Antolin in view of her failure to comply with the condition
contained in the insurance policy.
Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds
application in the present case. Thus, it was error on the part of the trial and appellate courts to have
disregarded the stipulations of the parties and to have substituted their own interpretation of the insurance
policy. In Phil. American General Insurance Co., Inc vs. Mutuc, we ruled that contracts which are the private
laws of the contracting parties should be fulfilled according to the literal sense of their stipulations, if their
terms are clear and leave no room for doubt as to the intention of the contracting parties, for contracts are
obligatory, no matter what form they may be, whenever the essential requisites for their validity are present.
Moreover, we stated in Pacific Oxygen & Acetylene Co. vs. Central Bank," that the first and fundamental duty of
the courts is the application of the law according to its express terms, interpretation being called for only when
such literal application is impossible.
We observe that although Milagros Cayas was able to prove a total loss of only P44,000.00, petitioner was
made liable for the amount of P50,000.00, the maximum liability per accident stipulated in the policy. This is
patent error. An insurance indemnity, being merely an assistance or restitution insofar as can be fairly
ascertained, cannot be availed of by any accident victim or claimant as an instrument of enrichment by reason
of an accident.
Finally, we find no reason to disturb the award of attorney's fees.
WHEREFORE, the decision of the Court of Appeals is hereby modified in that petitioner shall pay Milagros Cayas
the amount of Twelve Thousand Pesos (P12,000. 00) plus legal interest from the promulgation of the decision
of the lower court until it is fully paid and attorney's fees in the amount of P5,000.00. No pronouncement as to
costs. SO ORDERED.
44

CASE 14
G.R. No. 75605 January 22, 1993
RAFAEL
(REX)
VERENDIA,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.

petitioner,

G.R. No. 76399 January 22, 1993
FIDELITY
&
SURETY
CO.
OF
THE
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.

PHILIPPINES,

INC.,

petitioner,

The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety Insurance
Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F-18876 effective between June
23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential building located at Tulip Drive, Beverly
Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was the Monte de Piedad &
Savings Bank. Verendia also insured the same building with two other companies, namely, The Country Bankers
Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development
Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30, 198l.
While the three fire insurance policies were in force, the insured property was completely destroyed by fire on
the early morning of December 28, 1980. Fidelity was accordingly informed of the loss and despite demands,
refused payment under its policy, thus prompting Verendia to file a complaint with the then Court of First
Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon, plus attorney's fees and
litigation expenses. The complaint was later amended to include Monte de Piedad as an "unwilling defendant"
(P. 16, Record).
Answering the complaint, Fidelity, among other things, averred that the policy was avoided by reason of overinsurance; that Verendia maliciously represented that the building at the time of the fire was leased under a
contract executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo Garcia who was
the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor of Fidelity. In
sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of the policy was also violated
by Verendia in that the insured failed to inform Fidelity of his other insurance coverages with Country Bankers
Insurance and Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on March 31, 1986,
(CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court reversed for the
following reasons: (a) there was no misrepresentation concerning the lease for the contract was signed by
Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of the policy contract requiring Verendia to
give notice to Fidelity of other contracts of insurance was waived by Fidelity as shown by its conduct in
attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of directly filing a motion for
reconsideration within 15 days therefrom, Fidelity filed on April 21, 1986, a motion for extension of 3 days within which to
file a motion for reconsideration. The motion for extension was not filed on April 19, 1986 which was the 15th day after
receipt of the decision because said 15th day was a Saturday and of course, the following day was a Sunday (p. 14., Rollo
of G.R. No. 75605). The motion for extension was granted by the appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity
had in the meantime filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).

45

Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the ground that the motion
for extension was filed out of time because the 15th day from receipt of the decision which fell on a Saturday was ignored
by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate Court has personnel receiving pleadings even
on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for reconsideration was similarly
brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein docketed as G.R. No. 75605 was initiated. Subsequently,
or more specifically on October 21, 1986, the appellate court denied Fidelity's motion for reconsideration and account
thereof. Fidelity filed on March 31, 1986, the petition for review on certiorari now docketed as G.R. No. 76399. The two
petitions,
inter-related
as
they
are,
were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the petition for review on certiorari, we must
first determine whether the decision of the appellate court may still be reviewed, or whether the same is beyond further
judicial scrutiny. Stated otherwise, before anything else, inquiry must be made into the issue of whether Fidelity could
have legally asked for an extension of the 15-day reglementary period for appealing or for moving for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the pendency of a motion for
extension of time to perfect an appeal does not suspend the running of the period sought to be extended (Garcia vs.
Buenaventura 74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello
vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King (20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly prohibit the filing of a motion for
extension of time to file a motion for reconsideration in regard to a final order or judgment, magistrates, including those in
the Court of Appeals, held sharply divided opinions on whether the period for appealing which also includes the period for
moving to reconsider may be extended. The matter was not definitely settled until this Court issued its Resolution in
Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring that beginning one month from the promulgation of
the resolution on May 30, 1986 —
. . . the rule shall be strictly enforced that no motion for extension of time to file a motion for new trial or
reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30, 1986, although, of course, Verendia's
motion to expunge the motion for reconsideration was not finally disposed until July 22, 1986, or after the dictum in
Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for extension came before its formal
proscription under Habaluyas, for which reason we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the contract of lease submitted by
Verendia to support his claim on the fire insurance policy constitutes a false declaration which would forfeit his benefits
under Section 13 of the policy and (b) whether or not, in submitting the subrogation receipt in evidence, Fidelity had in
effect agreed to settle Verendia's claim in the amount stated in said receipt.
Verging on the factual, the issue of the veracity or falsity of the lease contract could have been better resolved by the
appellate court for, in a petition for review on certiorari under Rule 45, the jurisdiction of this Court is limited to the review
of errors of law. The appellate court's findings of fact are, therefore, conclusive upon this Court except in the following
cases: (1) when the conclusion is a finding grounded entirely on speculation, surmises, or conjectures; (2) when the
inference made is manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of discretion in the
appreciation of facts; (4) when the judgment is premised on a misapprehension of facts; (5) when the findings of fact are
conflicting; and (6) when the Court of Appeals in making its findings went beyond the issues of the case and the same are
contrary to the admissions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433 [1991]). In view of
the conflicting findings of the trial court and the appellate court on important issues in these consolidated cases and it
appearing that the appellate court judgment is based on a misapprehension of facts, this Court shall review the evidence
on record.
The contract of lease upon which Verendia relies to support his claim for insurance benefits, was entered into between
him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of
the insurance policy. When the rented residential building was razed to the ground on December 28, 1980, it appears that
Robert Garcia (or Roberto Garcia) was still within the premises. However, according to the investigation report prepared

46

by Pat. Eleuterio M. Buenviaje of the Antipolo police, the building appeared to have "no occupant" and that Mr. Roberto
Garcia
was
"renting
on
the
otherside
(sic)
portion
of
said
compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo Garcia, whom he considered
as the real lessee, was occupying the building when it was burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was able to locate him. Robert
Garcia then executed an affidavit before the National Intelligence and Security Authority (NISA) to the effect that he was
not the lessee of Verendia's house and that his signature on the contract of lease was a complete forgery. Thus, on the
strength of these facts, the adjuster submitted a report dated December 4, 1981 recommending the denial of Verendia's
claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the lease contract. According to
Verendia, it was signed by Marcelo Garcia, cousin of Robert, who had been paying the rentals all the while. Verendia,
however, failed to explain why Marcelo had to sign his cousin's name when he in fact was paying for the rent and why he
(Verendia) himself, the lessor, allowed such a ruse. Fidelity's conclusions on these proven facts appear, therefore, to have
sufficient bases; Verendia concocted the lease contract to deflect responsibility for the fire towards an alleged "lessee",
inflated the value of the property by the alleged monthly rental of P6,500 when in fact, the Provincial Assessor of Rizal had
assessed the property's fair market value to be only P40,300.00, insured the same property with two other insurance
companies for a total coverage of around P900,000, and created a dead-end for the adjuster by the disappearance of
Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific Banking Corporation vs.
Court of Appeals 168 SCRA 1 [1988]). Its terms and conditions constitute the measure of the insurer's liability and
compliance therewith is a condition precedent to the insured's right to recovery from the insurer (Oriental Assurance
Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla Compania de Seguros, Inc. vs. Court of Appeals, 185
SCRA 741 [1991]). As it is also a contract of adhesion, an insurance contract should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it (Western Guaranty Corporation vs. Court of
Appeals, 187 SCRA 652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia used a false lease contract to support his
claim under Fire Insurance Policy No. F-18876, the terms of the policy should be strictly construed against the insured.
Verendia failed to live by the terms of the policy, specifically Section 13 thereof which is expressed in terms that are clear
and unambiguous, that all benefits under the policy shall be forfeited "If the claim be in any respect fraudulent, or if any
false declaration be made or used in support thereof, or if any fraudulent means or devises are used by the Insured or
anyone acting in his behalf to obtain any benefit under the policy". Verendia, having presented a false declaration to
support his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of
Section 13 of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking Corporation vs. Court
of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia, reprehensibly disregarded the principle that
insurance contracts are uberrimae fidae and demand the most abundant good faith (Velasco vs. Apostol, 173 SCRA 228
[1989]).
There is also no reason to conclude that by submitting the subrogation receipt as evidence in court, Fidelity bound itself to
a "mutual agreement" to settle Verendia's claims in consideration of the amount of P142,685.77. While the said receipt
appears to have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It is even incomplete as the
blank spaces for a witness and his address are not filled up. More significantly, the same receipt states that Verendia had
received the aforesaid amount. However, that Verendia had not received the amount stated therein, is proven by the fact
that Verendia himself filed the complaint for the full amount of P385,000.00 stated in the policy. It might be that there had
been efforts to settle Verendia's claims, but surely, the subrogation receipt by itself does not prove that a settlement had
been arrived at and enforced. Thus, to interpret Fidelity's presentation of the subrogation receipt in evidence as indicative
of its accession to its "terms" is not only wanting in rational basis but would be substituting the will of the Court for that of
the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is GRANTED and the decision of
the then Intermediate Appellate Court under review is REVERSED and SET ASIDE and that of the trial court is hereby
REINSTATED and UPHELD.
SO ORDERED.

47

CASE 15
G.R. No. 125678

March 18, 2002

PHILAMCARE
HEALTH
SYSTEMS,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

INC.,

petitioner,

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).
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.
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. 9053795. 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 ofP10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.
48

SO ORDERED.
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.
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. 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.
49

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.
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.(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.
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.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.(Underscoring ours)

50

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.
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 noncompliance with his obligation. 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. 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.
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.

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.
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.
51

CASE 16
G.R. No. L-15895

November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to recover
from the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. The
trial court gave judgment for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance
Company of Canada through its office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the
manager of the company's Manila office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia solicitada por dicho Don
Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central de la Compañia.
The application was immediately forwarded to the head office of the company at Montreal, Canada. On November 26,
1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same day the cable was received
notice was sent by the Manila office of Herrer that the application had been accepted, is a disputed point, which will be
discussed later.) On December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A.
Torres wrote to the Manila office of the company stating that Herrer desired to withdraw his application. The following
day the local office replied to Mr. Torres, stating that the policy had been issued, and called attention to the notification of
November 26, 1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on
December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance of his
application. To resolve this question, we propose to go directly to the evidence of record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial testified that he
prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and handed it to the local manager,
Mr. E. E. White, for signature. The witness admitted on cross-examination that after preparing the letter and giving it to he
manager, he new nothing of what became of it. The local manager, Mr. White, testified to having received the cablegram
accepting the application of Mr. Herrer from the home office on November 26, 1917. He said that on the same day he
signed a letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after being signed, were sent
to the chief clerk and placed on the mailing desk for transmission. The witness could not tell if the letter had every actually
been placed in the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917, was not called as a witness. For the
defense, attorney Manuel Torres testified to having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr.
Herrer mentioned his application for a life annuity, and that he said that the only document relating to the transaction in
his possession was the provisional receipt. Rafael Enriquez, the administrator of the estate, testified that he had gone
through the effects of the deceased and had found no letter of notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer that his
application had been accepted, was prepared and signed in the local office of the insurance company, was placed in the
ordinary channels for transmission, but as far as we know, was never actually mailed and thus was never received by the
applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be applied to the facts.
In order to reach our legal goal, the obvious signposts along the way must be noticed.

52

Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of Commerce
and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III and Section III of Title III of
Book III, which dealt with insurance contracts. In the Civil Code there formerly existed and presumably still exist, Chapters
II and IV, entitled insurance contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there
was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health insurance. The Act
expressly repealed Title VIII of Book II and Section III of Title III of Book III of the code of Commerce. The law of insurance is
consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be followed in order that
there may be a contract of insurance. On the other hand, the Civil Code, in article 1802, not only describes a contact of life
annuity markedly similar to the one we are considering, but in two other articles, gives strong clues as to the proper
disposition of the case. For instance, article 16 of the Civil Code provides that "In matters which are governed by special
laws, any deficiency of the latter shall be supplied by the provisions of this Code." On the supposition, therefore, which is
incontestable, that the special law on the subject of insurance is deficient in enunciating the principles governing
acceptance, the subject-matter of the Civil code, if there be any, would be controlling. In the Civil Code is found article
1262 providing that "Consent is shown by the concurrence of offer and acceptance with respect to the thing and the
consideration which are to constitute the contract. An acceptance made by letter shall not bind the person making the
offer except from the time it came to his knowledge. The contract, in such case, is presumed to have been entered into at
the place where the offer was made." This latter article is in opposition to the provisions of article 54 of the Code of
Commerce.
If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the only duty
remaining is for the court to apply the law as it is found. The legislature in its wisdom having enacted a new law on
insurance, and expressly repealed the provisions in the Code of Commerce on the same subject, and having thus left a void
in the commercial law, it would seem logical to make use of the only pertinent provision of law found in the Civil code,
closely related to the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the date it came to
his knowledge, may not be the best expression of modern commercial usage. Still it must be admitted that its enforcement
avoids uncertainty and tends to security. Not only this, but in order that the principle may not be taken too lightly, let it be
noticed that it is identical with the principles announced by a considerable number of respectable courts in the United
States. The courts who take this view have expressly held that an acceptance of an offer of insurance not actually or
constructively communicated to the proposer does not make a contract. Only the mailing of acceptance, it has been said,
completes the contract of insurance, as the locus poenitentiae is ended when the acceptance has passed beyond the
control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of the Civil Code
providing that an acceptance made by letter shall not bind the person making the offer except from the time it came to his
knowledge. The pertinent fact is, that according to the provisional receipt, three things had to be accomplished by the
insurance company before there was a contract: (1) There had to be a medical examination of the applicant; (2) there had
to be approval of the application by the head office of the company; and (3) this approval had in some way to be
communicated by the company to the applicant. The further admitted facts are that the head office in Montreal did accept
the application, did cable the Manila office to that effect, did actually issue the policy and did, through its agent in Manila,
actually write the letter of notification and place it in the usual channels for transmission to the addressee. The fact as to
the letter of notification thus fails to concur with the essential elements of the general rule pertaining to the mailing and
delivery of mail matter as announced by the American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was received by the addressee as soon as it
could have been transmitted to him in the ordinary course of the mails. But if any one of these elemental facts fails to
appear, it is fatal to the presumption. For instance, a letter will not be presumed to have been received by the addressee
unless it is shown that it was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A.
[N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved
satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.
Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with legal interest
from November 20, 1918, until paid, without special finding as to costs in either instance. So ordered.

53

CASE 17
G.R. No. L-31845 April 30, 1979
GREAT
PACIFIC
LIFE
vs.
HONORABLE COURT OF APPEALS, respondents.

ASSURANCE

COMPANY,

petitioner,

G.R. No. L-31878 April 30, 1979
LAPULAPU
D.
vs.
HON. COURT OF APPEALS and NGO HING, respondents.

MONDRAGON,

petitioner,

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April 29, 1970,
(Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar relief, through these petitions for
certiorari by way of appeal, from the amended decision of respondent Court of Appeals which affirmed in toto
the decision of the Court of First Instance of Cebu, ordering "the defendants (herein petitioners Great Pacific
Ligfe Assurance Company and Mondragon) jointly and severally to pay plaintiff (herein private respondent Ngo
Hing) the amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the sum of
P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific Life Assurance
Company (hereinafter referred to as Pacific Life) for a twenty-year endownment policy in the amount of P50,000.00 on the
life of his one-year old daughter Helen Go. Said respondent supplied the essential data which petitioner Lapulapu D.
Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form in his own handwriting
(Exhibit I-M). Mondragon finally type-wrote the data on the application form which was signed by private respondent Ngo
Hing. The latter paid the annual premuim the sum of P1,077.75 going over to the Company, but he reatined the amount of
P1,317.00 as his commission for being a duly authorized agebt of Pacific Life. Upon the payment of the insurance
premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner
Mondragon handwrote at the bottom of the back page of the application form his strong recommendation for the
approval of the insurance application. Then on April 30, 1957, Mondragon received a letter from Pacific Life disapproving
the insurance application (Exhibit 3-M). The letter stated that the said life insurance application for 20-year endowment
plan is not available for minors below seven years old, but Pacific Life can consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner Mondragon to
private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending
the approval of the 20-year endowment insurance plan to children, pointing out that since 1954 the customers, especially
the Chinese, were asking for such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of
bronchopneumonia. Thereupon, private respondent sought the payment of the proceeds of the insurance, but having
failed in his effort, he filed the action for the recovery of the same before the Court of First Instance of Cebu, which
rendered the adverse decision as earlier refered to against both petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a temporary contract
of the life insurance in question; and (2) whether private respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT. These
conditions state that:
A. If the Company or its agent, shan have received the premium deposit ... and the insurance application,
ON or PRIOR to the date of medical examination ... said insurance shan be in force and in effect from the
date of such medical examination, for such period as is covered by the deposit ..., PROVIDED the

54

company shall be satisfied that on said date the applicant was insurable on standard rates under its rule
for the amount of insurance and the kind of policy requested in the application.
D. If the Company does not accept the application on standard rate for the amount of insurance and/or
the kind of policy requested in the application but issue, or offers to issue a policy for a different plan
and/or amount ..., the insurance shall not be in force and in effect until the applicant shall have accepted
the policy as issued or offered by the Company and shall have paid the full premium thereof. If the
applicant does not accept the policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition A above, and the Company declines to
approve the application the insurance applied for shall not have been in force at any time and the sum
paid be returned to the applicant upon the surrender of this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be merely a
provisional or temporary insurance contract and only upon compliance of the following conditions: (1) that the company
shall be satisfied that the applicant was insurable on standard rates; (2) that if the company does not accept the
application and offers to issue a policy for a different plan, the insurance contract shall not be binding until the applicant
accepts the policy offered; otherwise, the deposit shall be reftmded; and (3) that if the applicant is not ble according to the
standard rates, and the company disapproves the application, the insurance applied for shall not be in force at any time,
and the premium paid shall be returned to the applicant.
Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an acknowledgment,
on behalf of the company, that the latter's branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that the latter will either approve or reject
the same on the basis of whether or not the applicant is "insurable on standard rates." Since petitioner Pacific Life
disapproved the insurance application of respondent Ngo Hing, the binding deposit receipt in question had never become
in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure outright.
As held by this Court, where an agreement is made between the applicant and the agent, no liability shall attach until the
principal approves the risk and a receipt is given by the agent. The acceptance is merely conditional and is subordinated to
the act of the company in approving or rejecting the application. Thus, in life insurance, a "binding slip" or "binding
receipt" does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved
the insurance application in question on the ground that it is not offering the twenty-year endowment insurance policy to
children less than seven years of age. What it offered instead is another plan known as the Juvenile Triple Action, which
private respondent failed to accept. In the absence of a meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the latter's oneyear old daughter, and with the non-compliance of the abovequoted conditions stated in the disputed binding deposit
receipt, there could have been no insurance contract duly perfected between thenl Accordingly, the deposit paid by
private respondent shall have to be refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other contracts, must be
assented to by both parties either in person or by their agents ... The contract, to be binding from the date of the
application, must have been a completed contract, one that leaves nothing to be dione, nothing to be completed, nothing
to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of
the parties have met in agreement."
We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate to him
the rejection of the insurance application would not have any adverse effect on the allegedly perfected temporary
contract (Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected between the parties who had
no meeting of their minds. Private respondet, being an authorized insurance agent of Pacific Life at Cebu branch office, is
indubitably aware that said company does not offer the life insurance applied for. When he filed the insurance application
in dispute, private respondent was, therefore, only taking the chance that Pacific Life will approve the recommendation of
Mondragon for the acceptance and approval of the application in question along with his proposal that the insurance
company starts to offer the 20-year endowment insurance plan for children less than seven years. Nonetheless, the record
discloses that Pacific Life had rejected the proposal and recommendation. Secondly, having an insurable interest on the

55

life of his one-year old daughter, aside from being an insurance agent and an offense associate of petitioner Mondragon,
private respondent Ngo Hing must have known and followed the progress on the processing of such application and could
not pretend ignorance of the Company's rejection of the 20-year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate Justice Ruperto
G. Martin who later came up to this Court, from his dissenting opinion to the amended decision of the respondent court
which completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the reply
thereto of appellant Mondragon reiterating the desire for applicant's father to have the application
considered as one for a 20-year endowment plan was ever duly communicated to Ngo; Hing, father of
the minor applicant. I am not quite conninced that this was so. Ngo Hing, as father of the applicant
herself, was precisely the "underwriter who wrote this case" (Exhibit H-1). The unchallenged statement
of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing
was "our associate" and that it was the latter who "insisted that the plan be placed on the 20-year
endowment plan." Under these circumstances, it is inconceivable that the progress in the processing of
the application was not brought home to his knowledge. He must have been duly apprised of the
rejection of the application for a 20-year endowment plan otherwise Mondragon would not have
asserted that it was Ngo Hing himself who insisted on the application as originally filed, thereby implictly
declining the offer to consider the application under the Juvenile Triple Action Plan. Besides, the
associate of Mondragon that he was, Ngo Hing should only be presumed to know what kind of policies
are available in the company for minors below 7 years old. What he and Mondragon were apparently
trying to do in the premises was merely to prod the company into going into the business of issuing
endowment policies for minors just as other insurance companies allegedly do. Until such a definite
policy is however, adopted by the company, it can hardly be said that it could have been bound at all
under the binding slip for a plan of insurance that it could not have, by then issued at all. (Amended
Decision, Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private respondent had
deliberately concealed the state of health and piysical condition of his daughter Helen Go. Wher private regpondeit
supplied the required essential data for the insurance application form, he was fully aware that his one-year old daughter
is typically a mongoloid child. Such a congenital physical defect could never be ensconced nor disguished. Nonetheless,
private respondent, in apparent bad faith, withheld the fact materal to the risk to be assumed by the insurance compary.
As an insurance agent of Pacific Life, he ought to know, as he surely must have known. his duty and responsibility to such a
material fact. Had he diamond said significant fact in the insurance application fom Pacific Life would have verified the
same and would have had no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and perfect candor or
openness and honesty; the absence of any concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition],
not for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70).
Concealment is a neglect to communicate that which a partY knows aDd Ought to communicate (Section 25, Act No.
2427). Whether intentional or unintentional the concealment entitles the insurer to rescind the contract of insurance
(Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs. Philippine American Life Insurance
Company, 7 SCRA 316). Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected between the parties with the noncompliance of
the conditions provided in the binding receipt, and concealment, as legally defined, having been comraitted by herein
private respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered absolving
petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil liabilities as found by
respondent Court and ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without interest,
to private respondent, Ngo Hing. Costs against private respondent.
SO ORDERED.

56

CASE 18
G.R. No. L-109937 March 21, 1994
DEVELOPMENT
BANK
OF
THE
PHILIPPINES,
petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by CANDIDA G. DANS, and the
DBP MORTGAGE REDEMPTION INSURANCE POOL, respondents.
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside
the decision of the Court of Appeals in CA-G.R CV No. 26434 and its resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I
In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law, applied for a loan of
P500,000.00 with the Development Bank of the Philippines (DBP), Basilan Branch. As the principal mortgagor,
Dans, then 76 years of age, was advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and released on August
11, 1987. From the proceeds of the loan, DBP deducted the amount of P1,476.00 as payment for the MRI
premium. On August 15, 1987, Dans accomplished and submitted the "MRI Application for Insurance" and the
"Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was credited by DBP to
the savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this information to the DBP
MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP that Dans was not eligible for MRI coverage,
being over the acceptance age limit of 60 years at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's MRI application. The
DBP offered to refund the premium of P1,476.00 which the deceased had paid, but Candida Dans refused to
accept the same, demanding payment of the face value of the MRI or an amount equivalent to the loan. She,
likewise, refused to accept an ex gratia settlement of P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a complaint with the
Regional Trial Court, Branch I, Basilan, against DBP and the insurance pool for "Collection of Sum of Money with
Damages." Respondent Estate alleged that Dans became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to apply for MRI, and later collected the
insurance premium thereon. Respondent Estate therefore prayed: (1) that the sum of P139,500.00, which it
paid under protest for the loan, be reimbursed; (2) that the mortgage debt of the deceased be declared fully
paid; and (3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a cross-claim against
the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits submitted by respondent
Estate. As a result of these admissions, the trial court narrowed down the issues and, without opposition from
the parties, found the case ripe for summary judgment. Consequently, the trial court ordered the parties to
submit their respective position papers and documentary evidence, which may serve as basis for the judgment.
57

On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against DBP. The DBP
MRI Pool, however, was absolved from liability, after the trial court found no privity of contract between it and
the deceased. The trial court declared DBP in estoppel for having led Dans into applying for MRI and actually
collecting the premium and the service fee, despite knowledge of his age ineligibility. The dispositive portion of
the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance of justice and
equity, the Court finds judgment for the plaintiff and against Defendant DBP, ordering the
latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of interest as
amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest accumulated or
otherwise to have been settled, satisfied or set-off by virtue of the insurance coverage of the
late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other expenses, and
other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The Crossclaim of Defendant DBP is likewise dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the appellate court affirmed
in toto the decision of the trial court. The DBP's motion for reconsideration was denied in a resolution dated
April 20, 1993. Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement for DBP MRI Pool" (Exh. "5Bank") with the following declaration:
I hereby declare and agree that all the statements and answers contained herein are true,
complete and correct to the best of my knowledge and belief and form part of my application
for insurance. It is understood and agreed that no insurance coverage shall be effected unless
and until this application is approved and the full premium is paid during my continued good
health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the application shall be
approved by the insurance pool; and (2) when the full premium is paid during the continued good health of the
applicant. These two conditions, being joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The pool, however, did
not approve the application of Dans. There is also no showing that it accepted the sum of P1,476.00, which DBP
credited to its account with full knowledge that it was payment for Dan's premium. There was, as a result, no
perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable on a contract that does not
exist.
The liability of DBP is another matter.

58

It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure MRI coverage.
Instead of allowing Dans to look for his own insurance carrier or some other form of insurance policy, DBP
compelled him to apply with the DBP MRI Pool for MRI coverage. When Dan's loan was released on August 11,
1987, DBP already deducted from the proceeds thereof the MRI premium. Four days latter, DBP made Dans fill
up and sign his application for MRI, as well as his health statement. The DBP later submitted both the
application form and health statement to the DBP MRI Pool at the DBP Main Building, Makati Metro Manila. As
service fee, DBP deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the second as an insurance
agent.
As an insurance agent, DBP made Dans go through the motion of applying for said insurance, thereby leading
him and his family to believe that they had already fulfilled all the requirements for the MRI and that the
issuance of their policy was forthcoming. Apparently, DBP had full knowledge that Dan's application was never
going to be approved. The maximum age for MRI acceptance is 60 years as clearly and specifically provided in
Article 1 of the Group Mortgage Redemption Insurance Policy signed in 1984 by all the insurance companies
concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not personally liable to
the party with whom he contracts, unless he expressly binds himself or exceeds the limits of his authority
without giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more than 60 years of age (Exh.
"1-Pool"). Knowing all the while that Dans was ineligible for MRI coverage because of his advanced age, DBP
exceeded the scope of its authority when it accepted Dan's application for MRI by collecting the insurance
premium, and deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon whether the third person is
aware of the limits of the agent's powers. There is no showing that Dans knew of the limitation on DBP's
authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of the authority conferred by the principal on
the agent and he (third person) has been deceived by the non-disclosure thereof by the agent, then the latter is
liable for damages to him (V Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, p.
422 [1992], citing Sentencia [Cuba] of September 25, 1907). The rule that the agent is liable when he acts
without authority is founded upon the supposition that there has been some wrong or omission on his part
either in misrepresenting, or in affirming, or concealing the authority under which he assumes to act (Francisco,
V., Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of the limits of
the agency carries with it the implication that a deception was perpetrated on the unsuspecting client, the
provisions of Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his duties, act with
justice give everyone his due and observe honesty and good faith.
Article 20 provides:
Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21 provides:

59

Any person, who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy. To assume that were it not
for DBP's concealment of the limits of its authority, Dans would have secured an MRI from another insurance
company, and therefore would have been fully insured by the time he died, is highly speculative. Considering
his advanced age, there is no absolute certainty that Dans could obtain an insurance coverage from another
company. It must also be noted that Dans died almost immediately, i.e., on the nineteenth day after applying
for the MRI, and on the twenty-third day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly
proved (Civil Code of the Philippines, Art. 2199). Damages, to be recoverable, must not only be capable of
proof, but must be actually proved with a reasonable degree of certainty (Refractories Corporation v.
Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447
[1916]). Speculative damages are too remote to be included in an accurate estimate of damages (Sun Life
Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral damages. No proof of pecuniary
loss is required in the assessment of said kind of damages (Civil Code of Philippines, Art. 2216). The same may
be recovered in acts referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of the court according to the circumstances of each
case (Civil Code of the Philippines, Art. 2216). Considering that DBP had offered to pay P30,000.00 to
respondent Estate in ex gratia settlement of its claim and that DBP's non-disclosure of the limits of its authority
amounted to a deception to its client, an award of moral damages in the amount of P50,000.00 would be
reasonable.
The award of attorney's fees is also just and equitable under the circumstances (Civil Code of the Philippines,
Article 2208 [11]).
WHEREFORE,
the
decision
of
the
Court
of
Appeals
in
CA
G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent Estate of Juan B. Dans
the amount of P1,476.00 with legal interest from the date of the filing of the complaint until fully paid; and (2)
to PAY said Estate the amount of Fifty Thousand Pesos (P50,000.00) as moral damages and the amount of Ten
Thousand Pesos (P10,000.00) as attorney's fees. With costs against petitioner.
SO ORDERED.

60

CASE 19
G.R. No. 112329

January 28, 2000

VIRGINIA
A.
PEREZ,
vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.

petitioner,

A contract of insurance, like all other contracts, must be assented to by both parties, either in person or
through their agents and so long as an application for insurance has not been either accepted or rejected, it is
merely a proposal or an offer to make a contract.
Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in CA-G.R. CV
35529 entitled, "BF Lifeman Insurance Corporations; Plaintiff-Appellant versus Virginia A. Perez. DefendantAppellee," which declared Insurance Policy 056300 for P50,000.00 issued by private respondent corporation in
favor of the deceased Primitivo B. Perez, null and void and rescinded, thereby reversing the decision rendered
by the Regional Trial Court of Manila, Branch XVI.
The facts of the case as summarized by respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for P20,000.00.
Sometime in October 1987, an agent of the insurance corporation, Rodolfo Lalog, visited Perez in Guinayangan,
Quezon and convinced him to apply for additional insurance coverage of P50,000.00, to avail of the ongoing
promotional discount of P400.00 if the premium were paid annually.
On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance
coverage of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivo's wife, paid P2,075.00 to Lalog.
The receipt issued by Lalog indicated the amount received was a "deposit." Unfortunately, Lalog lost the
application form accomplished by Perez and so on October 28, 1987, he asked the latter to fill up another
application form. On November 1, 1987, Perez was made to undergo the required medical examination, which
he passed.
Pursuant to the established procedure of the company, Lalog forwarded the application for additional
insurance of Perez, together with all its supporting papers, to the office of BF Lifeman Insurance Corporation at
Gumaca, Quezon which office was supposed to forward the papers to the Manila office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a storm. At
the time of his death, his application papers for the additional insurance of P50,000.00 were still with the
Gumaca office. Lalog testified that when he went to follow up the papers, he found them still in the Gumaca
office and so he personally brought the papers to the Manila office of BF Lifeman Insurance Corporation. It was
only on November 27, 1987 that said papers were received in Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved the
application and issued the corresponding policy for the P50,000.00 on December 2, 1987.
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased. She
was paid P40,000.00 under the first insurance policy for P20,000.00 (double indemnity in case of accident) but
the insurance company refused to pay the claim under the additional policy coverage of P50,000.00, the
proceeds of which amount to P150,000.00 in view of a triple indemnity rider on the insurance policy. In its
letter' of January 29, 1988 to Virginia A. Perez, the insurance company maintained that the insurance for
P50,000.00 had not been perfected at the time of the death of Primitivo Perez. Consequently, the insurance
company refunded the amount of P2,075.00 which Virginia Perez had paid.

61

On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint against Virginia
A. Perez seeking the rescission and declaration of nullity of the insurance contract in question.
Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his prestations under
the contract and all the elements of a valid contract are present. She then filed a counterclaim against private
respondent for the collection of P150,000.00 as actual damages, P100,000.00 as exemplary damages,
P30,000.00 as attorney's fees and P10,000.00 as expenses for litigation.
On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion of which
reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of defendant Virginia A.
Perez, ordering the plaintiff BF Lifeman Insurance Corporation to pay to her the face value of BF
Lifeman Insurance Policy No. 056300, plus double indemnity under the SARDI or in the total amount of
P150,000.00 (any refund made and/or premium deficiency to be deducted therefrom).
SO ORDERED.
The trial court, in ruling for petitioner, held that the premium for the additional insurance of P50,000.00 had
been fully paid and even if the sum of P2,075.00 were to be considered merely as partial payment, the same
does not affect the validity of the policy. The trial court further stated that the deceased had fully complied
with the requirements of the insurance company. He paid, signed the application form and passed the medical
examination. He should not be made to suffer the subsequent delay in the transmittal of his application form to
private respondent's head office since these were no longer within his control.
The Court of Appeals, however, reversed the decision of the trial court saying that the insurance contract for
P50,000.00 could not have been perfected since at the time that the policy was issued, Primitivo was already
dead. Citing the provision in the application form signed by Primitivo which states that:
. . . there shall be no contract of insurance unless and until a policy is issued on this application and that
the policy shall not take effect until the first premium has been paid and the policy has been delivered
to and accepted by me/us in person while I/we, am/are in good health
the Court of Appeals held that the contract of insurance had to be assented to by both parties and so long as
the application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make
a contract.
Petitioner's motion for reconsideration having been denied by respondent court, the instant petition for
certiorari was filed on the ground that there was a consummated contract of insurance between the deceased
and BF Lifeman Insurance Corporation and that the condition that the policy issued by the corporation be
delivered and received by the applicant in good health, is potestative, being dependent upon the will of the
insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other
for loss on a specified subject by specified perils. A contract, on the other hand, is a meeting of the minds
between two persons whereby one binds himself, with respect to the other to give something or to render
some service. Under Article 1318 of the Civil Code, there is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
62

(3) Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical
examination, his application was subject to the acceptance of private respondent BF Lifeman Insurance
Corporation. The perfection of the contract of insurance between the deceased and respondent corporation
was further conditioned upon compliance with the following requisites stated in the application form:
there shall be no contract of insurance unless and until a policy is issued on this application and that
the said policy shall not take effect until the premium has been paid and the policy delivered to and
accepted by me/us in person while I/We, am/are in good health.
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely
received the application form and all the requisite supporting papers of the applicant. Its assent was given
when it issues a corresponding policy to the applicant. Under the abovementioned provision, it is only when
the applicant pays the premium and receives and accepts the policy while he is in good health that the contract
of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for
additional insurance coverage were still with the branch office of respondent corporation in Gumaca and it was
only two days later, or on November 27, 1987, when Lalog personally delivered the application papers to the
head office in Manila. Consequently, there was absolutely no way the acceptance of the application could have
been communicated to the applicant for the latter to accept inasmuch as the applicant at the time was already
dead. In the case of Enriquez vs. Sun Life Assurance Co. of Canada, recovery on the life insurance of the
deceased was disallowed on the ground that the contract for annuity was not perfected since it had not been
proved satisfactorily that the acceptance of the application ever reached the knowledge of the applicant.
Petitioner insists that the condition imposed by respondent corporation that a policy must have been delivered
to and accepted by the proposed insured in good health is potestative being dependent upon the will of the
corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is considered
void. Article 1182 of the New Civil Code states: When the fulfillment of the condition depends upon the sole
will the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the respondent company for the perfection of the
contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to and accepted by the applicant while he is in good health.
The condition imposed by the corporation that the policy must have been delivered to and accepted by the
applicant while he is in good health can hardly be considered as a potestative or facultative condition. On the
contrary, the health of the applicant at the time of the delivery of the policy is beyond the control or will of the
insurance company. Rather, the condition is a suspensive one whereby the acquisition of rights depends upon
the happening of an event which constitutes the condition. In this case, the suspensive condition was the policy
63

must have been delivered and accepted by the applicant while he is in good health. There was non-fulfillment
of the condition, however, inasmuch as the applicant was already dead at the time the policy was issued.
Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in
person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is
merely an offer or proposal to make a contract. The contract, to be binding from the date of application, must
have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be
passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds
of the parties have met in agreement.
Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It should be
noted that an application is a mere offer which requires the overt act of the insurer for it to ripen into a
contract. Delay in acting on the application does not constitute acceptance even though the insured has
forwarded his first premium with his application. The corporation may not be penalized for the delay in the
processing of the application papers. Moreover, while it may have taken some time for the application papers
to reach the main office, in the case at bar, the same was acted upon less than a week after it was received.
The processing of applications by respondent corporation normally takes two to three weeks, the longest being
a month. In this case, however, the requisite medical examination was undergone by the deceased on
November 1, 1987; the application papers were forwarded to the head office on November 27, 1987; and the
policy was issued on December 2, 1987. Under these circumstances, we hold that the delay could not be
deemed unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300 for
P50,000.00 null and void and rescinded. The Court of Appeals corrected this in its Resolution of the motion for
reconsideration filed by petitioner, thus:
Anent the appearance of the word "rescinded" in the dispositive portion of the decision, to which
defendant-appellee attaches undue significance and makes capital of, it is clear that the use of the
words "and rescinded" is, as it is hereby declared, a superfluity. It is apparent from the context of the
decision that the insurance policy in question was found null and void, and did not have to be
"rescinded".
True, rescission presupposes the existence of a valid contract. A contract which is null and void is no contract at
all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is AFFIRMED insofar as it
declared Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance Corporation of no force
and effect and hence null and void. No costs.
SO ORDERED.

64

CASE 20
G.R. No. L-36413 September 26, 1988
MALAYAN
INSURANCE
CO.,
INC.,
petitioner,
vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC.
and PANGASINAN TRANSPORTATION CO., INC., respondents.
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22
February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil
Case No. U-2021 of the Court of First Instance of Pangasinan.
The antecedent facts of the case are as follows:
On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio
Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968,
covering a Willys jeep with Motor No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967.
The insurance coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount
of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30
o'clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the
respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan
Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales,
Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan P. Campollo, and the
respondent Martin C. Vallejos, who was riding in the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the
PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He
prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as
reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and
compensatory damages; and P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and
bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to
avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage, especially
in the selection and supervision of its employees and in the maintenance of its motor vehicles. It prayed that it
be absolved from any and all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff,
claiming that the fault in the accident was solely imputable to the PANTRANCO.
Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he
alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization
and other expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had
issued in his favor a private car comprehensive policy wherein the insurance company obligated itself to
indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for any liability to third persons
arising out of any accident during the effectivity of such insurance contract, which policy was in full force and
effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance
company for the amount that he may be ordered to pay.

65

Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San
Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was
an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not
an employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan
P. Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein
petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the
amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the
petitioner for any sum that it may be ordered to pay the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in
favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party
defendant San Leon Rice Mill, Inc., as follows:
(a) P4,103 as actual damages;
(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period
of three (3) years;
(c) P5,000.00 as moral damages;
(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby held jointly and
severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to
only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no
award should be made in its favor. Its counter-claim for attorney's fees is also dismissed for not
being proved.
On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San
Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded
to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to
indemnify or reimburse the petitioner insurance company for whatever amount it has been ordered to pay on
its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the
insurance company.
Hence, the present recourse by petitioner insurance company.
The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San
Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of
damages, petitioner may be ordered to pay jointly and severally with Sio Choy.
The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged
liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the
decision of the Court of Appeals shall be reviewed, hence, execution may already issue in favor of respondent
Martin C. Vallejos against the respondents, without prejudice to the determination of whether or not petitioner
shall be entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the
former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos."
However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is
important to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as
compared to that of respondents Sio Choy and San Leon Rice Mill, Inc.

66

Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of
Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily
liable" to respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon
Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance
policy.
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and
respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon
Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the
damages awarded to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys
jeep, pursuant to Article 2184 of the Civil Code which provides:
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former,
who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is
disputably presumed that a driver was negligent, if he had been found guilty of reckless driving
or violating traffic regulations at least twice within the next preceding two months.
If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff
Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap,
is Article 2180 of the Civil Code which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or
omissions, but also for those of persons for whom one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged ill any
business or industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein mentioned proved
that they observed all the diligence of a good father of a family to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are
primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are
liable for a quasi-delict is solidarily.
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If
petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on
account of its being the insurer of respondent Sio Choy under the third party liability clause included in the
private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the
complained vehicular accident.
In Guingon vs. Del Monte, a passenger of a jeepney had just alighted therefrom, when he was bumped by
another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger
67

against the driver and owner of the jeepney at fault as well as against the insurance company which insured the
latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the
driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of
P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the
amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said
owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the
jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim.
While it is true that where the insurance contract provides for indemnity against liability to third persons, such
third persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts
against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or
the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on
tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly
held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio
Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by
reason of the indemnity contract against third party liability-under which an insurer can be directly sued by a
third party — this will result in a violation of the principles underlying solidary obligation and insurance
contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On
the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify
another against loss, damage, or liability arising from an unknown or contingent event."
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills
Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that
petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be
compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification
made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount
stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is only
P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is
sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident
breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of
Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to
respondent Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is
not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not
privy to the contract of insurance existing between petitioner and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus —
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S.
530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto
to any right of action which the insured may have against the third person whose negligence or
wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish
Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is that of the
insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am.
Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

68

Although many policies including policies in the standard form, now provide for subrogation,
and thus determine the rights of the insurer in this respect, the equitable right of subrogation
as the legal effect of payment inures to the insurer without any formal assignment or any
express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when
the insurance company pays for the loss, such payment operates as an equitable assignment to
the insurer of the property and all remedies which the insured may have for the recovery
thereof. That right is not dependent upon , nor does it grow out of any privity of contract
(emphasis supplied) or upon written assignment of claim, and payment to the insured makes
the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C.
456, 142 SE 2d 18).
It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding
P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to
whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to
a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share
which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made. If the payment is made before the debt
is due, no interest for the intervening period may be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the
subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to
the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on
only one of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation
(P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation,
petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by
the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 )
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is
hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs.
SO ORDERED.

69

CASE 21
G.R. No. L-52756 October 12, 1987
MANILA
MAHOGANY
MANUFACTURING
CORPORATION,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

petitioner,

Petition to review the decision of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979,
ordering petitioner Manila Mahogany Manufacturing Corporation to pay private respondent Zenith Insurance
Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual interest from 18 January 1973,
attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and the resolution of the same
Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with respondent
insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a truck owned by San
Miguel Corporation. For the damage caused, respondent company paid petitioner five thousand pesos
(P5,000.00) in amicable settlement. Petitioner's general manager executed a Release of Claim, subrogating
respondent company to all its right to action against San Miguel Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand reimbursement from
San Miguel Corporation of the amount it had paid petitioner. Insurance Adjusters, Inc. refused reimbursement,
alleging that San Miguel Corporation had already paid petitioner P4,500.00 for the damages to petitioner's
motor vehicle, as evidenced by a cash voucher and a Release of Claim executed by the General Manager of
petitioner discharging San Miguel Corporation from "all actions, claims, demands the rights of action that now
exist or hereafter [sic] develop arising out of or as a consequence of the accident."
Respondent insurance company thus demanded from petitioner reimbursement of the sum of P4,500.00 paid
by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit in the City Court of Manila
for the recovery of P4,500.00. The City Court ordered petitioner to pay respondent P4,500.00. On appeal the
Court of First Instance of Manila affirmed the City Court's decision in toto, which CFI decision was affirmed by
the Court of Appeals, with the modification that petitioner was to pay respondent the total amount of
P5,000.00 that it had earlier received from the respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent company
as the subrogation in the Release of Claim it executed in favor of respondent was conditioned on recovery of
the total amount of damages petitioner had sustained. Since total damages were valued by petitioner at
P9,486.43 and only P5,000.00 was received by petitioner from respondent, petitioner argues that it was
entitled to go after San Miguel Corporation to claim the additional P4,500.00 eventually paid to it by the latter,
without having to turn over said amount to respondent. Respondent of course disputes this allegation and
states that there was no qualification to its right of subrogation under the Release of Claim executed by
petitioner, the contents of said deed having expressed all the intents and purposes of the parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner cites Art.
2207 of the Civil Code, which states:
If the plaintiff's property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of the
insurance company shall be subrogated to the rights of the insured against the 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.

70

Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may exercise his right for the remainder,
and he shall be preferred to the person who has been subrogated in his place in virtue of the
partial payment of the same credit.
We find petitioners arguments to be untenable and without merit. In the absence of any other evidence to
support its allegation that a gentlemen's agreement existed between it and respondent, not embodied in the
Release of Claim, such ease of Claim must be taken as the best evidence of the intent and purpose of the
parties. Thus, the Court of Appeals rightly stated:
Petitioner argues that the release claim it executed subrogating Private respondent to any right
of action it had against San Miguel Corporation did not preclude Manila Mahogany from filing a
deficiency claim against the wrongdoer. Citing Article 2207, New Civil Code, to the effect that if
the amount paid by an insurance company does not fully cover the loss, the aggrieved party
shall be entitled to recover the deficiency from the person causing the loss, petitioner claims a
preferred right to retain the amount coming from San Miguel Corporation, despite the
subrogation in favor of Private respondent.
Although petitioners right to file a deficiency claim against San Miguel Corporation is with legal
basis, without prejudice to the insurer's right of subrogation, nevertheless when Manila
Mahogany executed another release claim (Exhibit K) discharging San Miguel Corporation from
"all actions, claims, demands and rights of action that now exist or hereafter arising out of or as
a consequence of the accident" after the insurer had paid the proceeds of the policy- the
compromise agreement of P5,000.00 being based on the insurance policy-the insurer is entitled
to recover from the insured the amount of insurance money paid (Metropolitan Casualty
Insurance Company of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance
Code and Insolvency Law with comments and annotations, H.B. Perez 1976, p. 151). Since
petitioner by its own acts released San Miguel Corporation, thereby defeating private
respondents, the right of subrogation, the right of action of petitioner against the insurer was
also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54 O.G. 391) Otherwise stated:
private respondent may recover the sum of P5,000.00 it had earlier paid to petitioner.
As held in Phil. Air Lines v. Heald Lumber Co.,
If a property is insured and the owner receives the indemnity from the insurer, it is provided in
[Article 2207 of the New Civil Code] that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the insurer does not fully cover the
loss, then the aggrieved party is the one entitled to recover the deficiency. ... Under this legal
provision, the real party in interest with regard to the portion of the indemnity paid is the
insurer and not the insured 3 (Emphasis supplied)
The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500.00 as
originally asked for, but P5,000.00, the amount respondent company paid petitioner as insurance, is also in
accord with law and jurisprudence. In disposing of this issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation under its
clear right to file a deficiency claim for damages incurred, against the wrongdoer, should the
insurance company not fully pay for the injury caused (Article 2207, New Civil Code). However,
when petitioner released San Miguel Corporation from any liability, petitioner's right to retain
the sum of P5,000.00 no longer existed, thereby entitling private respondent to recover the
same. (Emphasis supplied)

71

As has been observed:
... The right of subrogation can only exist after the insurer has paid the otherwise the insured
will be deprived of his right to full indemnity. If the insurance proceeds are not sufficient to
cover the damages suffered by the insured, then he may sue the party responsible for the
damage for the the [sic] remainder. To the extent of the amount he has already received from
the insurer enjoy's [sic] the right of subrogation.
Since the insurer can be subrogated to only such rights as the insured may have, should the
insured, after receiving payment from the insurer, release the wrongdoer who caused the loss,
the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to
recover from the insured whatever it has paid to the latter, unless the release was made with
the consent of the insurer.(Emphasis supplied.)
And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still, the
respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by the insurer.
The Court of Appeals rightly reasoned as follows:
It is to be noted that private respondent, in its companies, prays for the recovery, not of
P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel Corporation had
paid to petitioner. On this score, We believe the City Court and Court of First Instance erred in
not awarding the proper relief. Although private respondent prays for the reimbursement of
P4,500.00 paid by San Miguel Corporation, instead of P5,000.00 paid under the insurance
policy, the trial court should have awarded the latter, although not prayed for, under the
general prayer in the complaint "for such further or other relief as may be deemed just or
equitable, (Rule 6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ;
Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby AFFIRMED
with costs against petitioner. SO ORDERED.

72

CASE 22
G.R. No. 81026 April 3, 1990
PAN
MALAYAN
INSURANCE
CORPORATION,
vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.

petitioner,

Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the Court of
Appeals which upheld an order of the trial court dismissing for no cause of action PANMALAY's complaint for
damages against private respondents Erlinda Fabie and her driver.
The principal issue presented for resolution before this Court is whether or not the insurer PANMALAY may
institute an action to recover the amount it had paid its assured in settlement of an insurance claim against
private respondents as the parties allegedly responsible for the damage caused to the insured vehicle.
On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private
respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt
Lancer car with plate No. DDZ-431 and registered in the name of Canlubang Automotive Resources Corporation
[CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and imprudence" of the unknown
driver of a pick-up with plate no. PCR-220, the insured car was hit and suffered damages in the amount of
P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore, was subrogated to
the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite
repeated demands, defendants, failed and refused to pay the claim of PANMALAY.
Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion thereto. In
compliance therewith, PANMALAY clarified, among others, that the damage caused to the insured car was
settled under the "own damage", coverage of the insurance policy, and that the driver of the insured car was,
at the time of the accident, an authorized driver duly licensed to drive the vehicle. PANMALAY also submitted a
copy of the insurance policy and the Release of Claim and Subrogation Receipt executed by CANLUBANG in
favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause of
action against them. They argued that payment under the "own damage" clause of the insurance policy
precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on the
assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an order dated
June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19, 1986, the RTC denied
PANMALAY's motion for reconsideration.
On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November 27, 1987.
Consequently, PANMALAY filed the present petition for review.
After private respondents filed its comment to the petition, and petitioner filed its reply, the Court considered
the issues joined and the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition.
PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had indemnified
CANLUBANG for the damage to the insured car resulting from a traffic accident allegedly caused by the
negligence of the driver of private respondent, Erlinda Fabie. PANMALAY contended, therefore, that its cause
of action against private respondents was anchored upon Article 2207 of the Civil Code, which reads:
73

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. . . .
PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is
destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon
payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the
extent that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an
equitable assignment to the former of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow
out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer [Compania Maritima v. Insurance Company of North America, G.R. No. L-18965,
October 30, 1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L27427, April 7, 1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases the
wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of subrogation is
defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886);
Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly,
where the insurer pays the assured the value of the lost goods without notifying the carrier who has in good
faith settled the assured's claim for loss, the settlement is binding on both the assured and the insurer, and the
latter cannot bring an action against the carrier on his right of subrogation [McCarthy v. Barber Steamship
Lines, Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured for a loss which is not a risk covered by
the policy, thereby effecting "voluntary payment", the former has no right of subrogation against the third
party liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September
5, 1967, 21 SCRA 12].
None of the exceptions are availing in the present case.
The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally
subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not have any
cause of action against private respondents. On the one hand, the trial court held that payment by PANMALAY
of CANLUBANG's claim under the "own damage" clause of the insurance policy was an admission by the insurer
that the damage was caused by the assured and/or its representatives. On the other hand, the Court of Appeals
in applying the ejusdem generis rule held that Section III-1 of the policy, which was the basis for settlement of
CANLUBANG's claim, did not cover damage arising from collision or overturning due to the negligence of third
parties as one of the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article
2207 and claim reimbursement from private respondents as alleged wrongdoers or parties responsible for the
damage.
The above conclusion is without merit.
It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy implies
damage to the insured car caused by the assured itself, instead of third parties, proceeds from an incorrect
comprehension of the phrase "own damage" as used by the insurer. When PANMALAY utilized the phrase "own
damage" — a phrase which, incidentally, is not found in the insurance policy — to define the basis for its
settlement of CANLUBANG's claim under the policy, it simply meant that it had assumed to reimburse the costs
for repairing the damage to the insured vehicle [See PANMALAY's Compliance with Supplementary Motion for
Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage" coverage under
Section III of the insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability"
74

coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from Section IV-2
which refer to "Property Damage" coverage (liabilities arising from damage caused by the insured vehicle to the
properties of third parties).
Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section III-1 of the
policy does not include to the insured vehicle arising from collision or overturning due to the negligent acts of
the third party. Not only does it stem from an erroneous interpretation of the provisions of the section, but it
also violates a fundamental rule on the interpretation of property insurance contracts.
It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed according to
the sense and meaning of the terms which the parties thereto have used. In the case of property insurance
policies, the evident intention of the contracting parties, i.e., the insurer and the assured, determine the import
of the various terms and provisions embodied in the policy. It is only when the terms of the policy are
ambiguous, equivocal or uncertain, such that the parties themselves disagree about the meaning of particular
provisions, that the courts will intervene. In such an event, the policy will be construed by the courts liberally in
favor of the assured and strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co.,
Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R.
No. L-43706, November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].
Section III-1 of the insurance policy which refers to the conditions under which the insurer PANMALAY is liable
to indemnify the assured CANLUBANG against damage to or loss of the insured vehicle, reads as follows:
SECTION III — LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: —
(a) by accidental collision or overturning, or collision or overturning consequent
upon mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self ignition or lightning or burglary,
housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading)
incidental to such transit by road, rail, inland, waterway, lift or elevator.
xxx xxx xxx
[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars;
Record, p. 34; Emphasis supplied].
PANMALAY contends that the coverage of insured risks under the above section, specifically Section III-1(a), is
comprehensive enough to include damage to the insured vehicle arising from collision or overturning due to
the fault or negligence of a third party. CANLUBANG is apparently of the same understanding. Based on a police
report wherein the driver of the insured car reported that after the vehicle was sideswiped by a pick-up, the
driver thereof fled the scene [Record, p. 20], CANLUBANG filed its claim with PANMALAY for indemnification of
the damage caused to its car. It then accepted payment from PANMALAY, and executed a Release of Claim and
Subrogation Receipt in favor of latter.
Considering that the very parties to the policy were not shown to be in disagreement regarding the meaning
and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for the appellate court to
indulge in contract construction, to apply the ejusdem generis rule, and to ascribe meaning contrary to the
clear intention and understanding of these parties.

75

It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental collision
or overturning" found in the first paint of sub-paragraph (a) is untenable. Although the terms "accident" or
"accidental" as used in insurance contracts have not acquired a technical meaning, the Court has on several
occasions defined these terms to mean that which takes place "without one's foresight or expectation, an
event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not
expected" [De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559;
Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it
cannot be inferred from jurisprudence that these terms, without qualification, exclude events resulting in
damage or loss due to the fault, recklessness or negligence of third parties. The concept "accident" is not
necessarily synonymous with the concept of "no fault". It may be utilized simply to distinguish intentional or
malicious acts from negligent or careless acts of man.
Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured
vehicle due to negligent or careless acts of third parties is not listed under the general and specific exceptions
to the coverage of insured risks which are enumerated in detail in the insurance policy itself [See Annex "A-1"
of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the coverage
of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that insisted upon by
respondents herein. By arguing that this section covers losses or damages due not only to malicious, but also to
negligent acts of third parties, PANMALAY in effect advocates for a more comprehensive coverage of insured
risks. And this, in the final analysis, is more in keeping with the rationale behind the various rules on the
interpretation of insurance contracts favoring the assured or beneficiary so as to effect the dominant purpose
of indemnity or payment [See Calanoc v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable
Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R.
No. L-35529, July 16, 1984, 130 SCRA 327].
Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy does not cover
damage to the insured vehicle caused by negligent acts of third parties, and that PANMALAY's settlement of CANLUBANG's
claim for damages allegedly arising from a collision due to private respondents' negligence would amount to unwarranted
or "voluntary payment", dismissal of PANMALAY's complaint against private respondents for no cause of action would still
be a grave error of law.
For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its assured under
Article 2207 of the Civil Code, PANMALAY would still have a cause of action against private respondents. In the pertinent
case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no
rights of subrogation due to "voluntary" payment may nevertheless recover from the third party responsible for the
damage to the insured property under Article 1236 of the Civil Code.

In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee merely prays
that it be allowed to institute an action to recover from third parties who allegedly caused damage to the
insured vehicle, the amount which it had paid its assured under the insurance policy. Having thus shown from
the above discussion that PANMALAY has a cause of action against third parties whose negligence may have
caused damage to CANLUBANG's car, the Court holds that there is no legal obstacle to the filing by PANMALAY
of a complaint for damages against private respondents as the third parties allegedly responsible for the
damage. Respondent Court of Appeals therefore committed reversible error in sustaining the lower court's
order which dismissed PANMALAY's complaint against private respondents for no cause of action. Hence, it is
now for the trial court to determine if in fact the damage caused to the insured vehicle was due to the
"carelessness, recklessness and imprudence" of the driver of private respondent Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages
against private respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on the
merits. SO ORDERED.

76

CASE 23
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.
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 Appeal 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 drydocking 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.
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.

77

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.
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 drydocking.
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:

78

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.

79

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE DOCTRINE OF RES
IPSALOQUITUR 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.

80

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 airconditioning 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.
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. 7When 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.
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 illfated 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.

81

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 to 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.
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
82

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.
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.
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. 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:
83

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(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. The evaluation of the average adjuster also reported a constructive
total loss. The 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.
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.
SO ORDERED.

84

CASE 24
G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.

CO.,

INC.,

petitioners,

This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of respondent Court
of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with private respondent CKS
Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects placed at any
stall or store or space in the leased premises without first obtaining the written consent and approval of the
LESSOR. If the LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then the policy is
deemed assigned and transferred to the LESSOR for its own benefit; . . .
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by fire the
merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with the United Insurance Co., Inc.
(hereinafter United) without the written consent of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it wrote the insurer
(United) a demand letter asking that the proceeds of the insurance contract (between the Cha spouses and United) be
paid directly to CKS, based on its lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering therein defendant United to
pay CKS the amount of P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as
attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision ** dated 11 January 1996, affirming
the trial court decision, deleting however the awards for exemplary damages and attorney's fees. A motion for
reconsideration by United was denied on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION IN THE CONTRACT
OF LEASE TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING
CONTRARY TO LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT OF LEASE ENTERED INTO AS
A CONTRACT OF ADHESION AND THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER

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III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY TO APPELLEE
WHICH IS NOT PRIVY TO THE SAID POLICY IN CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY ON THE BASIS
OF A STIPULATION WHICH IS VOID FOR BEING WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT
ON THE WILL OF THE RESPONDENT CORPORATION.
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the lease contract entered
into between CKS and the Cha spouses is valid insofar as it provides that any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the leased premises is deemed assigned or transferred to the lessor (CKS) if
said policy is obtained without the prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be contrary to law, morals,
good customs, public order or public policy.
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person
having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their merchandise is primarily
a contract of indemnity. Insurable interest in the property insured must exist at the time the insurance takes effect and at
the time the loss occurs. The basis of such requirement of insurable interest in property insured is based on sound public
policy: to prevent a person from taking out an insurance policy on property upon which he has no insurable interest and
collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance is a mere
wager which is void under Section 25 of the Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person insured has or has
not any interest in the property insured, or that the policy shall be received as proof of such interest, and every
policy executed by way of gaming or wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and merchandise inside the leased
premises under the provisions of Section 17 of the Insurance Code which provide:
Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by
loss of injury thereof.
Therefore, respondent CKS cannot, under the Insurance Code — a special law — be validly a beneficiary of the fire
insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest over said merchandise
remains with the insured, the Cha spouses. The automatic assignment of the policy to CKS under the provision of the lease
contract previously quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance policy
thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be
compelled to pay the proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in the property
insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses obtained a fire insurance
policy over their own merchandise, without the consent of CKS, is a separate and distinct issue which we do not resolve in
this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new decision is hereby
entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.

86

CASE 25
G.R. No. 113899 October 13, 1999
GREAT
PACIFIC
LIFE
ASSURANCE
vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.

CORP.,

petitioner,

This petition for review, under Rule 45 of the Rules of Court, assails the Decision dated May 17, 1993, of the
Court of Appeals and its Resolution dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate court
affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance claim
filed by private respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial court's
decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy No. G-1907, in relation to Certification B18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of
the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for damages, attorney's fees and litigation expenses in the
complaint and counterclaim, with costs against the defendant and dismissing the complaint in
respect to the plaintiffs, other than the widow-beneficiary, for lack of cause of action.
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance Corporation
(hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife agreed to insure
the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for membership
in the group life insurance plan. In an application form, Dr. Leuterio answered questions concerning his health
condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high
blood pressure, cancer, diabetes, lung; kidney or stomach disorder or any other
physical impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [x] Yes [ ] NO.
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio, to the
extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP submitted a
death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically healthy when
he applied for an insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not
disclose he had been suffering from hypertension, which caused his death. Allegedly, such non-disclosure
constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a complaint
with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific Performance with
87

Damages." During the trial, Dr. Hernando Mejia, who issued the death certificate, was called to testify. Dr.
Mejia's findings, based partly from the information given by the respondent widow, stated that Dr. Leuterio
complained of headaches presumably due to high blood pressure. The inference was not conclusive because
Dr. Leuterio was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against Grepalife.
On May 17, 1993, the Court of Appeals sustained the trial court's decision. Hence, the present petition.
Petitioners interposed the following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO
THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY
TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION
INSURANCE ON THE LIFE OF PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST
DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO
DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO
SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN
ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANTAPPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO
CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE
CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO.
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as
beneficiary in a group life insurance contract from a complaint filed by the
widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio
concealed that he had hypertension, which would vitiate the insurance
contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount
of eighty six thousand, two hundred (P86,200.00) pesos without proof of the
actual outstanding mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in interest,
hence the trial court acquired no jurisdiction over the case. It argues that when the Court of Appeals affirmed
the trial court's judgment, Grepalife was held liable to pay the proceeds of insurance contract in favor of DBP,
the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to this
type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage
88

redemption insurance," is a device for the protection of both the mortgagee and the mortgagor. On the part of
the mortgagee, it has to enter into such form of contract so that in the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be applied
to the payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. 7
In a similar vein, ample protection is given to the mortgagor under such a concept so that in the event of death;
the mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage
indebtedness. 8 Consequently, where the mortgagor pays the insurance premium under the group insurance
policy, making the loss payable to the mortgagee, the insurance is on the mortgagor's interest, and the
mortgagor continues to be a party to the contract. In this type of policy insurance, the mortgagee is simply an
appointee of the insurance fund, such loss-payable clause does not make the mortgagee a party to the
contract.
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not
cease to be a party to the original contract, and any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same effect, although the property is in the hands
of the mortgagee, but any act which, under the contract of insurance, is to be performed by
the mortgagor, may be performed by the mortgagee therein named, with the same effect as if
it had been performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance, the
policy stating that: "In the event of the debtor's death before his indebtedness with the Creditor [DBP] shall
have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the creditor and the
balance of sum assured, if there is any, shall then be paid to the beneficiary/ies designated by the debtor."
When DBP submitted the insurance claim against petitioner, the latter denied payment thereof, interposing the
defense of concealment committed by the insured. Thereafter, DBP collected the debt from the mortgagor and
took the necessary action of foreclosure on the residential lot of private respondent. In Gonzales La O vs. Yek
Tong Lin Fire & Marine Ins. Co. we held:
Insured, being the person with whom the contract was made, is primarily the proper person to
bring suit thereon. * * * Subject to some exceptions, insured may thus sue, although the policy
is taken wholly or in part for the benefit of another person named or unnamed, and although it
is expressly made payable to another as his interest may appear or otherwise. * * * Although a
policy issued to a mortgagor is taken out for the benefit of the mortgagee and is made payable
to him, yet the mortgagor may sue thereon in his own name, especially where the mortgagee's
interest is less than the full amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the policy for
the purpose of collection, or has assigned as collateral security any judgment he may obtain.
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might have
recovered, the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to
annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had hypertension,
which might have caused his death. Concealment exists where the assured had knowledge of a fact material to

89

the risk, and honesty, good faith, and fair dealing requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same.
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported by the
information given by the widow of the decedent. Grepalife asserts that Dr. Mejia's technical diagnosis of the
cause of death of Dr. Leuterio was a duly documented hospital record, and that the widow's declaration that
her husband had "possible hypertension several years ago" should not be considered as hearsay, but as part of
res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy on the
body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr. Leuterio's
any previous hospital confinement. Dr. Leuterio's death certificate stated that hypertension was only "the
possible cause of death." The private respondent's statement, as to the medical history of her husband, was
due to her unreliable recollection of events. Hence, the statement of the physician was properly considered by
the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in good health
and that he had not consulted a doctor or any of the enumerated ailments, including
hypertension; when he died the attending physician had certified in the death certificate that
the former died of cerebral hemorrhage, probably secondary to hypertension. From this report,
the appellant insurance company refused to pay the insurance claim. Appellant alleged that the
insured had concealed the fact that he had hypertension.
Contrary to appellant's allegations, there was no sufficient proof that the insured had suffered
from hypertension. Aside from the statement of the insured's widow who was not even sure if
the medicines taken by Dr. Leuterio were for hypertension, the appellant had not proven nor
produced any witness who could attest to Dr. Leuterio's medical history . . .
xxx xxx xxx
Appellant insurance company had failed to establish that there was concealment made by the
insured, hence, it cannot refuse payment of the claim.
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract. 18 Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the
duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. 19 In the case at
bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the
proceeds of the insurance.
And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's outstanding indebtedness to DBP at the time of the mortgagor's
death. Hence, for private respondent's failure to establish the same, the action for specific performance should
be dismissed. Petitioner's claim is without merit. A life insurance policy is a valued policy. 20 Unless the interest
of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy. The mortgagor paid the premium according to the
coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtor's death during the terms of this
insurance, a death benefit in the amount of P86,200.00 shall be paid.

90

In the event of the debtor's death before his indebtedness with the creditor shall have been
fully paid, an amount to pay the outstanding indebtedness shall first be paid to the Creditor
and the balance of the Sum Assured, if there is any shall then be paid to the beneficiary/ies
designated by the debtor." (Emphasis omitted)
However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private
respondent's memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagor's outstanding loan. Considering this supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should not unjustly
enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the
insurance proceeds, after it already foreclosed on the mortgage. The proceeds now rightly belong to Dr.
Leuterio's heirs represented by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. CV
18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance proceeds
amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's indebtedness to
Development Bank of the Philippines. Costs against petitioner.1âwphi1.nêt
SO ORDERED.

91

CASE 26
G.R. No. 128833 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.
G.R. No. 128834 April 20, 1998
RIZAL
COMMERCIAL
BANKING
CORPORATION,
petitioners,
vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK
and BETTY CHIU SUK YING alias BETTY GO, respondents.
G.R. No. 128866 April 20, 1998
MALAYAN
INSURANCE
vs.
GOYU & SONS, INC. respondent.

INC.,

petitioners,

The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent
Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the
mortgage contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37%
interest per annum commending July 27, 1992. RCBC was ordered to pay actual and compensatory damages in
the amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as
exemplary damages and P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC was fixed at
P68,785,069.04 as of April 1992, without any interest, surcharges, and penalties. RCBC and MICO appealed
separately but, in view of the common facts and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation,
RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU's
application for approval by RCBC's executive committee. A credit facility in the amount of P30 million was
initially granted. Upon GOYU's application and Uy's and Lao's recommendation, RCBC's executive committee
increased GOYU's credit facility to P50 million, then to P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel
mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila.
Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged property with an
insurance company approved by RCBC, and subsequently, to endorse and deliver the insurance polices to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance
Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine
endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").
On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently, GOYU
submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground
that the insurance policies were either attached pursuant to writs of attachments/garnishments issued by
various courts or that the insurance proceeds were also claimed by other creditors of GOYU alleging better
92

rights to the proceeds than the insured. GOYU filed a complaint for specific performance and damages which
was docketed at the Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case
No. 93-65442, now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the insurance
policies, but said claims were also denied for the same reasons that MICO denied GOYU's claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila
(Branch 3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust
Company obtained their respective writs of attachments from various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the ten insurance policies be deposited with the said court
minus the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for
the amount of P8,696,838.75 (Exhibit "22-Malayan").
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the
latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of
P74,040,518.58 less the amount of P50,000,000.00 which is
deposited with this Court;
b. To pay the plaintiff damages by was of interest for the
duration of the delay since July 27, 1992 (ninety days after
defendant insurer's receipt of the required proof of loss and
notice of loss) at the rate of twice the ceiling prescribed by the
Monetary Board, on the following amounts:
1) P50,000,000.00 — from July 27, 1992 up to
the time said amount was deposited with this
Court on January 7, 1994;
2) P24,040,518.58 — from July 27, 1992 up to
the time when the writs of attachments were
received by defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the
amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following
amounts:

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1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorney's fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its
loan obligations with defendant RCBC in the amount of P68,785,069.04, as of
April 27, 1992, with interest thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties) per computation, pp. 14A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by
defendant Malayan, together with all the interest earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amount
awarded in its favor. MICO and RCBC disputed the trial court's findings of liability on their part. The Court of
Appeals party granted GOYU's appeal, but sustained the findings of the trial court with respect to MICO and
RCBC's liabilities, thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as
follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of
P74,040,518.58 less the amount of P50,505,594.60 (per O.R.
No. 3649285) plus deposited in court and damages by way of
interest commencing July 27, 1992 until the time Goyu receives
the said amount at the rate of thirty-seven (37%) percent per
annum which is twice the ceiling prescribed by the Monetary
Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;
a) To pay the plaintiff actual and compensatory damages in the
amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL
BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following
amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorney's fees.

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4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay
its loan obligation with RCBC in the amount of P68,785,069.04 as of April 27,
1992 without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately
release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited
with it by Malayan Insurance Co., Inc., together with all the interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and
consequent reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of
the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject
of herein G.R. No. 128833). At issue in said petition is RCBC's right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of
Sebastian.
After a careful reviews of the material facts as found by the two courts below in relation to the pertinent and
applicable laws, we find merit in the submission of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues which are now
submitted in the petitions before us. This Court, however, discerns one primary and central issue, and this is,
whether or not RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in
case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed
several mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU
shall insure the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed
insured the mortgaged property with MICO, an insurance company acceptable to RCBC. Bases on their
stipulations in the mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of, and
deliver them, to RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the
subject insurance policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also Exh.
"51-RCBC" to "59-RCBC"), copies of which were delivered to GOYU, RCBC, and MICO. However, because these
endorsements do not bear the signature of any officer of GOYU, the trial court, as well as the Court of Appeals,
concluded that the endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the same
mortgaged property, such that each one of them may insure the same property for his own sole benefit. There
is no question that GOYU could insure the mortgaged property for its own exclusive benefit. In the present
case, although it appears that GOYU obtained the subject insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their contemporaneous acts, must be given due consideration in order to
better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in
a quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any
particular beneficiary or payee other than the insured had not such named payee or beneficiary been
specifically disclosed by the insured itself. It is also significant that GOYU voluntarily and purposely took the
insurance policies from MICO, a sister company of RCBC, and not just from any other insurance company.
Alchester would not have found out that the subject pieces of property were mortgaged to RCBC had not such
95

information been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have
known of GOYU's intention of obtaining insurance coverage in compliance with its undertaking in the mortgage
contracts with RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so
directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of
mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of
Appeals (94 SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good faith
and justice, and its purpose is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied
thereon. The doctrine of estoppel springs from equitable principles and the equities in the case.
It is designed to aid the law in the administration of justice where without its aid injustice might
result. It has been applied by this Court wherever and whenever special circumstances of a
case so demand. (p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared
in quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine insurance policies in
favor of RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the
others were sent to RCBC and MICO, while the fourth copies were detained for Alchester's file (tsn, February
23, pp. 7-8). GOYU has not denied having received from Alchester the originals of these documents.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the
stipulation in the mortgage contracts. We find such reliance to be justified under the circumstances of the case.
GOYU failed to seasonably repudiate the authority of the person or persons who prepared such endorsements.
Over and above this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended
to it by RCBC. After the occurrence of the loss insure against, it was too late for GOYU to disown the
endorsements for any imagined or contrived lack of authority of Alchester to prepare and issue said
endorsements. If there had not been actually an implied ratification of said endorsements by virtue of GOYU's
inaction in this case, GOYU is at the very least estopped from assailing their operative effects. To permit GOYU
to capitalize on its non-confirmation of these endorsements while it continued to enjoy the benefits of the
credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their
mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice.
Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case,
the Court is bound to recognize RCBC's right to the proceeds of the insurance polices if not for the actual
endorsement of the policies, at least on the basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance
shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The
peculiarity of the circumstances obtaining in the instant case presents a justification to take exception to the
strict application of said provision, it having been sufficiently established that it was the intention of the parties
to designate RCBC as the party for whose benefit the insurance policies were taken out. Consider thus the
following:
1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into
between RCBC and GOYU in consideration of and for securing GOYU's credit facilities from RCBC. The mortgage
contracts contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged
property properly covered against any loss by an insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a
sister company of RCBC and definitely an acceptable insurance company to RCBC.

96

3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc., and copies
thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said
endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by
RCBC which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the
mortgaged properties.
This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared
by Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said
endorsement to be sufficient compliance with its obligation under the mortgage contracts since RCBC
accordingly continued to extend the benefits of its credits facilities and GOYU continued to benefit therefrom.
Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of the various insurance
policies obtained by GOYU. The intention of the parties will have to be given full force and effect particular
case. The insurance proceeds may, therefore, be exclusively applied to RCBC, which under the factual
circumstances of the case, is truly the person or entity for whose benefit the polices were clearly intended.
Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged property is
expressed in Article 2127 of the Civil Code which states:
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and the rents or income not yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.
Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to
have been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU
as shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number F-114-07795 None
Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92
b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54
c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"
Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43
d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"
Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43

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e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76
f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan"
Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00
g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"
Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00
h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00
i. Policy Number F-114-07402 Exhibit "8-Malayan"
Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20
j. Policy Number F-114-07525 Exhibit "9-Malayan"
Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43
(pp. 456-457, Record; Folder of Exhibits for MICO.)
Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's witness, Atty.
Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit "5-Malayan", refers to a certain
insurance policy number ACIA-F-07066, which is not among the insurance policies involved in the complaint.
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being excessively
payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force
and effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYU's other creditors up
to the extent of the GOYU's outstanding obligation in RCBC's favor. Section 53 of the Insurance Code ordains
that the insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the
person for whose benefit it was made. In this case, to the extent of GOYU's obligation with RCBC, the interest
of GOYU in the subject policies had been transferred to RCBC effective as of the time of the endorsement.
These policies may no longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present
G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and academic in view of the
results reached herein. Only the two other policies amounting to P19,646,224.92 may be validly attached,
garnished, and levied upon by GOYU's other creditors. To the extent of GOYU's outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were endorsed to RCBC, are, therefore, to
be released from attachment, garnishment, and levy by the other creditors of GOYU.

98

This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation with RCBC
which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual
amount of GOYU's liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total obligation to
RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's exclusion of Promissory
Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of
Promissory Note No. 952-91) on the ground that their execution is highly questionable for not only are these
dated after the fire, but also because the signatures of either GOYU or any its representative are conspicuously
absent. Accordingly, the Court of Appeals speculated thusly:
. . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by
plaintiff in bank terms, as averred by plaintiff, in contemplation of the speedy grant of future
loans, for the same practice of procedure has always been adopted in its previous dealings with
the bank.
(Rollo, pp. 181-182.)
The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the
documents are spurious, for it is presumed that the ordinary course of business had been followed
(Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor and not the
holder of the negotiable instrument has the burden of proof of showing that he no longer owes the obligee any
amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to
P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap
when he answered the queries of the trial court.
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is

correct, Your Honor.
COURT

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Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as
hereinabove quotes, GOYU also offered and admitted to RCBC that is obligation be fixed at P116,301,992.60 as
shown in its letter date March 9, 1993, which pertinently reads:
We wish to inform you, therefore that we are ready and willing to pay the current past due
account of this company in the amount of P116,301,992.60 as of 21 January 1993, specified in
pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at
Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, less the
total of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other
legitimate deductions. We accept and confirm this amount of P116,301,992.60 as stated as
true and correct.
(Exhibit BB.)
The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are
dated after the fire. It failed to consider that said notes had for their origin transactions consummated prior to
the fire. Thus, careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere
renewals of Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU.
The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for
bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan
represented by these promissory notes were admittedly received by GOYU. There is ample factual and legal
basis for giving GOYU's judicial admission of liability in the amount of P116,301,992.60 full force and effect.
It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers
of the mortgage property will, nonetheless, have to be applied as payment against GOYU's obligation. But,
contrary to the lower courts' findings, payments effected by GOYU prior to January 21, 1993 should no longer
be deducted. Such payments had obviously been duly considered by GOYU, in its aforequoted letter date
March 9, 1993, wherein it admitted that its past due account totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to
wit:
Total Obligation as admitted by GOYU
as of January 21, 1993: P116,301,992.60
Broken down as follows:
Principal Interest
Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2
LESS:

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1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81
2) Proceeds from
Equitable Insurance
Company 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
___________
9,055,104.70
================
NET AMOUNT as of January 21, 1993 P107,246,887.90
The need for the payment of interest due the principal amount of the obligation, which is the cost of money to
RCBC, the primary end and the ultimate reason for RCBC's existence and being, was duly recognized by the trial
court when it ruled favorably on RCBC's counterclaim, ordering GOYU "to pay its loan obligation with RCBC in
the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the
respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B 14-C" (Record,
p. 479). Inexplicably, the Court of Appeals, without even laying down the factual or legal justification for its
ruling, modified the trial court's ruling and ordered GOYU "to pay the principal amount of P68,785,069.04
without any interest, surcharges and penalties" (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the
payment of additional interest, penalties, and charges, in this manner:
Regarding defendant RCBC's commitment not to charge additional interest, penalties and
surcharges, the same does not require that it be embodied in a document or some form of
writing to be binding and enforceable. The principle is well known that generally a verbal
agreement or contract is no less binding and effective than a written one. And the existence of
such a verbal agreement has been amply established by the evidence in this case. In any event,
regardless of the existence of such verbal agreement, it would still be unjust and inequitable
for defendant RCBC to charge the plaintiff with surcharges and penalties considering the
latter's pitiful situation. (Emphasis supplied).
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate and distinct from that of
surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and
penalties despite express stipulation therefor in a valid agreement, may not equally justify non-payment of
interest. The charging of interest for loans forms a very essential and fundamental element of the banking
business, which may truly be considered to be at the very core of its existence or being. It is inconceivable for a
bank to grant loans for which it will not charge any interest at all. We fail to find justification for the Court of
Appeal's outright deletion of the payment of interest as agreed upon in the respective promissory notes. This
constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this
Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

101

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the actual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date of the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.
(pp. 95-97).
There being written stipulations as to the rate of interest owing on each specific promissory note as
summarized and tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed interest rates
must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation must be
taken into account. We do not agree, however, that payment of any amount as surcharges and penalties
should altogether be deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli
Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU immediately after the occurrence
of the fire, we cannot accept the lower courts' finding that RCBC had thereby ipso facto effectively waived
collection of any additional interests, surcharges, and penalties from GOYU. Assurances of assistance are one
thing, but waiver of additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:
Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider
the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that
102

surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally
iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just
and equitable in another. This provision of law will have to be applied to the established facts of any given case.
Given the circumstance under which GOYU found itself after the occurrence of the fire, the Court rules the
surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous
and unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of
GOYU's offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit "BB"), which RCBC
refused, we find it more in keeping with justice and equity for RCBC not to charge additional interest,
surcharges, and penalties from that time onward.
Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for denying or
withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the
right to claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights,
GOYU lost its standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of
insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA.
185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain
a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to
pay a claim should not be inflicted unless the evidence and circumstances show that such refusal was willful
and without reasonable cause as the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs.
Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep
307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that
MICO wantonly and in bad faith delayed the release of the proceeds. The problem in the determination of who
is the actual beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to
partake of the insurance proceeds, not to mention the importance of the endorsement to RCBC, to our mind,
and as now borne out by the outcome herein, justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two
simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other
for foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a
single cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due
consideration to this argument of GOYU, for the foreclosure suit is still pending appeal before the same Court
of Appeals in CA G.R. CV No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted
the resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of
discretion.
As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):
It should have been enough, nonetheless, for the appellate court to merely set aside the
questioned ordered of the trial court for having been issued by the latter with grave abuse of
discretion. In likewise enjoining permanently herein petitioner "from entering in and interfering
with the use or occupation and enjoyment of petitioner's (now private respondent) residential
house and compound," the appellate court in effect, precipitately resolved with finality the
case for injunction that was yet to be heard on the merits by the lower court. Elevated to the
appellate court, it might be stressed, were mere incidents of the principal case still pending
with the trial court. In Municipality of Biñan, Laguna vs. Court of Appeals, 219 SCRA 69, we
ruled that the Court of Appeals would have "no jurisdiction in a certiorari proceeding involving

103

an incident in a case to rule on the merits of the main case itself which was not on appeal
before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it
has been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is
rendered moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC
over the MICO insurance policies. It is basic and fundamental that the first mortgagee has superior rights over
junior mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life
Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and
April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:
1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before
Branch 3 of the Manila Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking
Corporation the proceeds of the insurance policies in the amount of P51,862,390.94 (per report
of adjuster Toplis & Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of
P50,505,594.60 (per O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests
earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking
Corporation in the principal amount of P107,246,887.90, with interest at the respective rates
stipulated in each promissory note from January 21, 1993 until finality of this judgment, and
surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments
made by Malayan Insurance Company, Inc. and the proceeds of the amount deposited with the
trial court and its earned interest. The total amount due RCBC at the time of the finality of this
judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and
charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is
DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastian's right
as attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the
Malayan insurance policies as first mortgagee.
SO ORDERED.

104

CASE 27
G.R. No. L-47593 December 29, 1943
THE
INSULAR
LIFE
vs.
SERAFIN D. FELICIANO ET AL., respondents.

ASSURANCE

CO.,

LTD.,

petitioner,

In a four-to-three decision promulgated on September 13, 1941, 1 this Court affirmed the judgment of the Court
of Appeals in favor of the respondents and against the petitioner for the sum of P25,000, representing the
value of two insurance policies issued by the petitioner on the life of Evaristo Feliciano. A motion to reconsider
and set aside said decision has been filed by the petitioner, and both parties have submitted exhaustive and
luminous written arguments in support of their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions heretofore handed down by this
Court, the salient points of which may be briefly restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced pulmonary tuberculosis when
he signed his applications for insurance with the petitioner on October 12, 1934. On that same date Doctor
Trepp, who had taken X-ray pictures of his lungs, informed the respondent Dr. Serafin D. Feliciano, brother of
Evaristo, that the latter "was already in a very serious ad practically hopeless condition." Nevertheless the
question contained in the application — "Have you ever suffered from any ailment or disease of the lungs,
pleurisy, pneumonia or asthma?" — appears to have been answered , "No" And above the signature of the
applicant, following the answers to the various questions propounded to him, is the following printed
statement:1awphil.net
I declare on behalf of myself and of any person who shall have or claim any interest in any policy issued
hereunder, that each of the above answers is full, complete and true, and that to the best of my
knowledge and belief I am a proper subject for life insurance. (Exhibit K.)
The false answer above referred to, as well as the others, was written by the Company's soliciting agent
Romulo M. David, in collusion with the medical examiner Dr. Gregorio Valdez, for the purpose of securing the
Company's approval of the application so that the policy to be issued thereon might be credited to said agent in
connection with the inter-provincial contest which the Company was then holding among its soliciting agents to
boost the sales of its policies. Agent David bribed Medical Examiner Valdez with money which the former
borrowed from the applicant's mother by way of advanced payment on the premium, according to the finding
of the Court of Appeals. Said court also found that before the insured signed the application he, as well as the
members of his family, told the agent and the medical examiner that he had been sick and coughing for some
time and that he had gone three times to the Santol Sanatorium and had X-ray pictures of his lungs taken; but
that in spite of such information the agent and the medical examiner told them that the applicant was a fit
subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract between the parties hereto. . . .
Only the President, or the Manager, acting jointly with the Secretary or Assistant Secretary (and then
only in writing signed by them) have power in behalf of the Company to issue permits, or to modify this
or any contract, or to extend the same time for making any premium payment, and the Company shall
not be bound by any promise or representation heretofore or hereafter given by any person other than
the above-named officials, and by them only in writing and signed conjointly as stated.
The application contains, among others, the following statements:

105

18. — I [the applicant] hereby declare that all the above statements and answers as well as all those
that I may make to the Company's Medical Examiner in continuation of this application, to be
complete, true and correct to the best of my knowledge and belief, and I hereby agree as follows:
1. That his declaration, with the answers to be given by me to the Medical Examiner, shall be the basis
of the policy and form part of same.
xxx

xxx

xxx

3. That the said policy shall not take effect until the first premium has been paid and the policy has
been delivered to and accepted by me, while I am in good health.
4. That the agent taking this application has no authority to make, modify or discharge contracts, or to
waive any of the Company's rights or requirements.
5. My acceptance of any policy issued on this application will constitute a ratification by me of any
corrections in or additions to this application made by the Company in the space provided "For Home
Office Corrections or Additions Only." I agree that photographic copy of this applications as corrected
or added to shall constitute sufficient notice to me of the changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are null and void ab initio and that
all that the respondents are entitled to is the refund of the premiums paid thereon. After a careful reexamination of the facts and the law, we are persuaded that petitioner's contention is correct. To the reasons
adduced in the dissenting opinion heretofore published, we only desire to add the following considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in blank and authorized the
soliciting agent and/or medical examiner of the Company to write the answers for him, he made them his own
agents for that purpose, and he was responsible for their acts in that connection. If they falsified the answers
for him, he could not evade the responsibility for he falsification. He was not supposed to sign the application
in blank. He knew that the answers to the questions therein contained would be "the basis of the policy," and
for that every reason he was required with his signature to vouch for truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the insured acted in connivance
with the soliciting agent and the medical examiner of the Company in accepting the policies in question. Above
the signature of the applicant is the printed statement or representation: " . . . I am a proper subject for life
insurance." In another sheet of the same application and above another signature of the applicant was also
printed this statement: "That the said policy shall not take effect until he first premium has been paid and the
policy as been delivered to and accepted by me, while I am in good health." When the applicant signed the
application he was "having difficulty in breathing, . . . with a very high fever." He had gone three times to the
Santol Sanatorium and had X-ray pictures taken of his lungs. He therefore knew that he was not "a proper
subject for life insurance." When he accepted the policy, he knew that he was not in good health. Nevertheless,
he not only accepted the first policy of P20,000 but then and there applied for and later accepted another
policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to read the answers contained in
the photostatic copy of the application attached to and made a part of the policy before he accepted it and
paid the premium thereon. He must have notice that the answers to the questions therein asked concerning his
clinical history were false, and yet he accepted the first policy and applied for another. In any event, he
obligated himself to read the policy when he subscribed to this statement: "My acceptance of any policy issued
on this application will constitute a ratification by me of any corrections in or additions to this application made
by the Company . . ." By accepting the policy he became charged with knowledge of its contents, whether he
actually read it or not. He could not ostrich-like hide his head from it in order to avoid his part of the bargain
and at the same time claim the benefit thereof. He knew, or was chargeable with knowledge, from the very
106

terms of the two policies sued upon (one of which is printed in English and the other in Spanish) that the
soliciting agent and the medical examiner had no power to bind the Company by any verbal promise or oral
representation. The insured, therefore, had no right to rely — and we cannot believe he relied in good faith —
upon the oral representation. The insured, therefore, had no right to rely — and we cannot believe he relied in
good faith — upon the oral representation of said agent and medical examiner that he (the applicant) was a fit
subject for insurance notwithstanding that he had been and was still suffering with advanced pulmonary
tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude that the insured was a
coparticipant, and coresponsible with Agent David and Medical Examiner Valdez, in the fraudulent
procurement of the policies in question and that by reason thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the Court of Appeals is hereby
reversed. Let another judgment be entered in favor of the respondents and against the petitioner for the
refund of the premiums amounting to P1,389, with legal interest thereon from the date of the complaint, and
without any finding as to costs.

107

CASE 28
G.R. No. 105135 June 22, 1995
SUNLIFE
ASSURANCE
COMPANY
OF
CANADA,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI, respondents.

petitioner,

This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside
the Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its Resolution dated
April 22, 1992, denying reconsideration thereof.
We grant the petition.
I
On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was
issued Policy No. 3-903-766-X valued at P100,000.00, with double indemnity in case of accidental death. The
designated beneficiary was his mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner,
seeking the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its
findings prompted it to reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts
relevant to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing
the total premiums paid in the amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application when he answered the following
questions:
5. Within the past 5 years have you:
a) consulted any doctor or other health practitioner?
b) submitted to:
EGG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?
6. Have you ever had or sought advice for:
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation with a
certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for cough and flu
complications. The other questions were answered in the negative (Rollo, p. 53).
108

Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and
confined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his
confinement, the deceased was subjected to urinalysis, ultra-sonography and hematology tests.
On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando Bacani, filed an
action for specific performance against petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro
Manila. Petitioner filed its answer with counterclaim and a list of exhibits consisting of medical records
furnished by the Lung Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary Judgment"
where they manifested that they "have no evidence to refute the documentary evidence of
concealment/misrepresentation by the decedent of his health condition (Rollo, p. 62).
Petitioner filed its Request for Admissions relative to the authenticity and due execution of several documents
as well as allegations regarding the health of the insured. Private respondents failed to oppose said request or
reply thereto, thereby rendering an admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in favor of private respondents. The
dispositive portion of the decision is reproduced as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant,
condemning the latter to pay the former the amount of One Hundred Thousand Pesos
(P100,000.00) the face value of insured's Insurance Policy No. 3903766, and the Accidental
Death Benefit in the amount of One Hundred Thousand Pesos (P100,000.00) and further sum
of P5,000.00 in the concept of reasonable attorney's fees and costs of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made
in good faith and under a belief that they need not be disclosed. Moreover, it held that the health history of the
insured was immaterial since the insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court
ruled that petitioner cannot avoid its obligation by claiming concealment because the cause of death was
unrelated to the facts concealed by the insured. It also sustained the finding of the trial court that matters
relating to the health history of the insured were irrelevant since petitioner waived the medical examination
prior to the approval and issuance of the insurance policy. Moreover, the appellate court agreed with the trial
court that the policy was "non-medical" (Rollo, pp. 4-5).
Petitioner's motion for reconsideration was denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are binding on this Court is not
absolute and admits of exceptions, such as when the judgment is based on a misappreciation of the facts
(Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded that indeed there was concealment and
misrepresentation, however, the same was made in "good faith" and the facts concealed or misrepresented
were irrelevant since the policy was "non-medical". We disagree.

109

Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to
the other, in good faith, all facts within his knowledge which are material to the contract and as to which he
makes no warranty, and which the other has no means of ascertaining. Said Section provides:
A neglect to communicate that which a party knows and ought to communicate, is called
concealment.
Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the
facts upon the party to whom communication is due, in forming his estimate of the disadvantages of the
proposed contract or in making his inquiries (The Insurance Code, Sec. 31).
The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters
relating to his health.
The information which the insured failed to disclose were material and relevant to the approval and issuance of
the insurance policy. The matters concealed would have definitely affected petitioner's action on his
application, either by approving it with the corresponding adjustment for a higher premium or rejecting the
same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order
for it to reasonably assess the risk involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information
withheld does not depend on the state of mind of the insured. Neither does it depend on the actual or physical
events which ensue.
Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he was
hospitalized for two weeks prior to filing his application for insurance, raises grave doubts about his bonafides.
It appears that such concealment was deliberate on his part.
The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of
the facts concealed, is untenable. We reiterate our ruling in Saturnino v. Philippine American Life Insurance
Company, 7 SCRA 316 (1963), that " . . . the waiver of a medical examination [in a non-medical insurance
contract] renders even more material the information required of the applicant concerning previous condition
of health and diseases suffered, for such information necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether to issue the policy or not . . . "
Moreover, such argument of private respondents would make Section 27 of the Insurance Code, which allows
the injured party to rescind a contract of insurance where there is concealment, ineffective (See Vda. de
Canilang v. Court of Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled
that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making
inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by reason of
the concealment employed by the insured. It must be emphasized that rescission was exercised within the twoyear contestability period as recognized in Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED and SET ASIDE.
SO ORDERED.

110

CASE 29
G.R. No. 92492 June 17, 1993
THELMA
VDA.
DE
CANILANG,
vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE CORPORATION, respondents.

petitioner,

On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from "sinus
tachycardia." The doctor prescribed the following fro him: Trazepam, a tranquilizer; and Aptin, a beta-blocker
drug. Mr. Canilang consulted the same doctor again on 3 August 1982 and this time was found to have "acute
bronchitis."
On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with respondent Great
Pacific Life Assurance Company ("Great Pacific") naming his wife, Thelma Canilang, as his beneficiary. Jaime
Canilang was issued ordinary life insurance Policy No. 345163, with the face value of P19,700, effective as of 9
August 1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and "chronic anemia."
Petitioner, widow and beneficiary of the insured, filed a claim with Great Pacific which the insurer denied on 5
December 1983 upon the ground that the insured had concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance Commission for recovery of the
insurance proceeds. During the hearing called by the Insurance Commissioner, petitioner testified that she was
not aware of any serious illness suffered by her late husband 3and that, as far as she knew, her husband had
died because of a kidney disorder. A deposition given by Dr. Wilfredo Claudio was presented by petitioner.
There Dr. Claudio stated that he was the family physician of the deceased Jaime Canilang 5and that he had
previously treated him for "sinus tachycardia" and "acute bronchitis." Great Pacific for its part presented Dr.
Esperanza
Quismorio,
a
physician
and a medical underwriter working for Great Pacific. She testified that the deceased's insurance application had
been approved on the basis of his medical declaration. She explained that as a rule, medical examinations are
required only in cases where the applicant has indicated in his application for insurance coverage that he has
previously undergone medical consultation and hospitalization.
In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo ordered Great Pacific to pay
P19,700 plus legal interest and P2,000.00 as attorney's fees after holding that:
1. the ailment of Jaime Canilang was not so serious that, even if it had been disclosed, it would
not have affected Great Pacific's decision to insure him;
2. Great Pacific had waived its right to inquire into the health condition of the applicant by the
issuance of the policy despite the lack of answers to "some of the pertinent questions" in the
insurance application;
3. there was no intentional concealment on the part of the insured Jaime Canilang as he had
thought that he was merely suffering from a minor ailment and simple cold; and
4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not concealment
was intentionally made, was not applicable to Canilang's case as that law became effective only
on 1 June 1985.
On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the Insurance
Commissioner and dismissed Thelma Canilang's complaint and Great Pacific's counterclaim. The Court of
111

Appealed found that the use of the word "intentionally" by the Insurance Commissioner in defining and
resolving the issue agreed upon by the parties at pre-trial before the Insurance Commissioner was not
supported by the evidence; that the issue agreed upon by the parties had been whether the deceased insured,
Jaime Canilang, made a material concealment as the state of his health at the time of the filing of insurance
application, justifying respondent's denial of the claim. The Court of Appeals also found that the failure of Jaime
Canilang to disclose previous medical consultation and treatment constituted material information which
should have been communicated to Great Pacific to enable the latter to make proper inquiries. The Court of
Appeals finally held that the Ng Gan Zee case which had involved misrepresentation was not applicable in
respect of the case at bar which involves concealment.
Petitioner Thelma Canilang is now before this Court on a Petition for Review on Certiorari alleging that:
1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not holding that the
issue in the case agreed upon between the parties before the Insurance Commission is whether
or not Jaime Canilang "intentionally" made material concealment in stating his state of health;
2. . . . at any rate, the non-disclosure of certain facts about his previous health conditions does
not amount to fraud and private respondent is deemed to have waived inquiry thereto.
The medical declaration which was set out in the application for insurance executed by Jaime Canilang read as
follows:
MEDICAL DECLARATION
I hereby declare that:
(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any medical or
surgical advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a physician for a heart condition, high blood
pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
______________________________________________________________________________
__
GENERAL DECLARATION
I hereby declare that all the foregoing answers and statements are complete, true and correct.
I hereby agree that if there be any fraud or misrepresentation in the above statements material
to the risk, the INSURANCE COMPANY upon discovery within two (2) years from the effective
date of insurance shall have the right to declare such insurance null and void. That the liabilities
of the Company under the said Policy/TA/Certificate shall accrue and begin only from the date
of commencement of risk stated in the Policy/TA/Certificate, provided that the first premium is
paid and the Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in
actual good health.
Signed at Manila his 4th day of August, 1992.

112

llegible
——————————
Signature of Applicant.
We note that in addition to the negative statements made by Mr. Canilang in paragraph 1 and 2 of the medical
declaration, he failed to disclose in the appropriate space, under the caption "Exceptions," that he had twice
consulted Dr. Wilfredo B. Claudio who had found him to be suffering from "sinus tachycardia" and "acute
bronchitis."
The relevant statutory provisions as they stood at the time Great Pacific issued the contract of insurance and at the time
Jaime Canilang died, are set out in P.D. No. 1460, also known as the Insurance Code of 1978, which went into effect on 11
June 1978. These provisions read as follows:
Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a
concealment.
xxx xxx xxx
Sec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all factors
within his knowledge which are material to the contract and as to which he makes no warranty, and
which the other has not the means of ascertaining. (Emphasis supplied)
Under the foregoing provisions, the information concealed must be information which the concealing party knew and
"ought to [have] communicate[d]," that is to say, information which was "material to the contract." The test of materiality
is contained in Section 31 of the Insurance Code of 1978 which reads:
Sec. 31. Materially is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries. (Emphasis supplied)
13

"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per minute." The symptoms of this
condition include pounding in the chest and sometimes faintness and weakness of the person affected. The following
elaboration was offered by Great Pacific and set out by the Court of Appeals in its Decision :
Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per minute. (Harrison' s
Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is, among others, a common reaction to heart
disease, including myocardial infarction, and heart failure per se. (Henry J.L. Marriot, M.D.,
Electrocardiography, 6th ed., [1977], p. 127.) The medication prescribed by Dr. Claudio for treatment of
Canilang's ailment on June 18, 1982, indicates the condition that said physician was trying to manage.
Thus, he prescribed Trazepam, (Philippine Index of Medical Specialties (PIMS), Vol. 14, No. 3, Dec. 1985,
p. 112) which is anti-anxiety, anti-convulsant, muscle-relaxant; and Aptin, (Idem, p. 36) a cardiac drug,
for palpitations and nervous heart. Such treatment could have been a very material information to the
insurer in determining the action to be take on Canilang's application for life insurance coverage.
We agree with the Court of Appeals that the information which Jaime Canilang failed to disclose was material to the ability
of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang disclosed his visits
to his doctor, the diagnosis made and medicines prescribed by such doctor, in the insurance application, it may be
reasonably assumed that Great Pacific would have made further inquiries and would have probably refused to issue a non15
medical insurance policy or, at the very least, required a higher premium for the same coverage. The materiality of the
information withheld by Great Pacific did not depend upon the state of mind of Jaime Canilang. A man's state of mind or
subjective belief is not capable of proof in our judicial process, except through proof of external acts or failure to act from
which inferences as to his subjective belief may be reasonably drawn. Neither does materiality depend upon the actual or
physical events which ensue. Materiality relates rather to the "probable and reasonable influence of the facts" upon the
party to whom the communication should have been made, in assessing the risk involved in making or omitting to make
further inquiries and in accepting the application for insurance; that "probable and reasonable influence of the facts"
concealed must, of course, be determined objectively, by the judge ultimately.
The insurance Great Pacific applied for was a "non-medical" insurance policy. In Saturnino v. Philippine-American Life
Insurance Company, this Court held that:

113

. . . if anything, the waiver of medical examination [in a non-medical insurance contract] renders even
more material the information required of the applicant concerning previous condition of health and
diseases suffered, for such information necessarily constitutes an important factor which the insurer
takes into consideration in deciding whether to issue the policy or not . . . . (Emphasis supplied)
The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the insurer
was not "intentional" in nature, for the reason that Jaime Canilang believed that he was suffering from minor ailment like
a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is, throughout the time
range material for present purposes, provided that:
Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:
Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)
Upon
the
other
hand,
in
1985,
the
Insurance
Code
of
1978
was
amended
by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:
Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)
The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase "intentional or
unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party to "intentional concealments." This
argument is not persuasive. As a simple matter of grammar, it may be noted that "intentional" and "unintentional" cancel
each other out. The net result therefore of the phrase "whether intentional or unitentional" is precisely to leave
unqualified the term "concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to "any
concealment" without regard to whether such concealment is intentional or unintentional. The phrase "whether
intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether intentional or unintentional"
could not have had the effect of imposing an affirmative requirement that a concealment must be intentional if it is to
entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase "whether
intentional or unintentional" merely underscored the fact that all throughout (from 1914 to 1985), the statute did not
require proof that concealment must be "intentional" in order to authorize rescission by the injured party.
In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure to
communicate must have been intentional rather than merely inadvertent. For Jaime Canilang could not have been
unaware that his heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice in the
two (2) months before applying for non-medical insurance. Indeed, the last medical consultation took place just the day
before the insurance application was filed. In all probability, Jaime Canilang went to visit his doctor precisely because of
the discomfort and concern brought about by his experiencing "sinus tachycardia."
We find it difficult to take seriously the argument that Great Pacific had waived inquiry into the concealment by issuing the
insurance policy notwithstanding Canilang's failure to set out answers to some of the questions in the insurance
application. Such failure precisely constituted concealment on the part of Canilang. Petitioner's argument, if accepted,
would obviously erase Section 27 from the Insurance Code of 1978.
It remains only to note that the Court of Appeals finding that the parties had not agreed in the pretrial before the
Insurance Commission that the relevant issue was whether or not Jaime Canilang had intentionally concealed material
information from the insurer, was supported by the evidence of record, i.e., the Pre-trial Order itself dated 17 October
1984 and the Minutes of the Pre-trial Conference dated 15 October 1984, which "readily shows that the word
"intentional" does not appear in the statement or definition of the issue in the said Order and Minutes."
WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the Court of Appeals dated 16 October
1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No pronouncement as to the costs.SO ORDERED.

CASE 30 – PLEASE see CASE 15

114

CASE 31
G.R. No. L-20853

May 29, 1967

BONIFACIO
BROS.,
INC.,
vs.
ENRIQUE MORA, ET AL., defendants-appellees.

ET

AL.,

plaintiffs-appellants,

This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in civil case 48823,
affirming the decision of the Municipal Court of Manila, declaring the H.S. Reyes, Inc. as having a better right
than the Bonifacio Bros., Inc. and the Ayala Auto Parts Company, appellants herein, to the proceeds of motor
insurance policy A-0615, in the sum of P2,002.73, issued by the State Bonding & Insurance Co. Inc., and
directing payment of the said amount to the H. Reyes, Inc.
Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged the same to the H.S.
Reyes, Inc., with the condition that the former would insure the automobile with the latter as beneficiary. The
automobile was thereafter insured on June 23, 1959 with the State Bonding & Insurance Co., Inc., and motor
car insurance policy A-0615 was issued to Enrique Mora, the pertinent provisions of which read:
1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to the Limits of
Liability, indemnify the Insured against loss of or damages to the Motor Vehicle and its accessories and
spare parts whilst thereon; (a) by accidental collision or overturning or collision or overturning
consequent upon mechanical breakdown or consequent upon wear and tear,
xxx

xxx

xxx

2. At its own 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 whichever is the less. The Insured's estimate of
value stated in the schedule will 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, subject to the condition that "Loss, if any is payable to H.S. Reyes, Inc.," by
virtue of the fact that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and
that under a clause in said insurance policy, any loss was made payable to the H.S. Reyes, Inc. as
Mortgagee;
xxx

xxx

xxx

During the effectivity of the insurance contract, the car met with an accident. The insurance company then
assigned the accident to the Bayne Adjustment Co. for investigation and appraisal of the damage. Enrique
Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish
the labor and materials, some of which were supplied by the Ayala Auto Parts Co. For the cost of labor and
materials, Enrique Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. The insurance
company after claiming a franchise in the amount of P100, drew a check in the amount of P2,002.73, as
proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes,. Inc., and entrusted the
check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper party. In the meantime, the

115

car was delivered to Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros. Inc. and the
Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique Mora
and the State Bonding & Insurance Co., Inc. for the collection of the sum of P2,002.73 The insurance company
filed its answer with a counterclaim for interpleader, requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc.
to interplead in order to determine who has better right to the insurance proceeds in question. Enrique Mora
was declared in default for failure to appear at the hearing, and evidence against him was received ex parte.
However, the counsel for the Bonifacio Bros. Inc., Ayala Auto Parts Co. and State Bonding & Insurance Co. Inc.
submitted a stipulation of facts, on the basis of which are Municipal Court rendered a decision declaring the
H.S. Reyes, Inc. as having a better right to the disputed amount and ordering State Bonding & Insurance Co. Inc.
to pay to the H. S. Reyes, Inc. the said sum of P2,002.73. From this decision, the appellants elevated the case to
the Court of First Instance of Manila which the stipulation of facts was reproduced. On October 19, 1962 the
latter court rendered a decision, affirming the decision of the Municipal Court. The Bonifacio Bros. Inc. and the
Ayala Auto Parts Co. moved for reconsideration of the decision, but the trial court denied the motion. Hence,
this appeal.
The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc. and the Ayala Auto
Parts Co. on the one hand and the insurance company on the other. The appellants argue that the insurance
company and Enrique Mora are parties to the repair of the car as well as the towage thereof performed. The
authority for this assertion is to be found, it is alleged, in paragraph 4 of the insurance contract which provides
that "the insured may authorize the repair of the Motor Vehicle necessitated by damage for which the
company may be liable under the policy provided that (a) the estimated cost of such repair does not exceed the
Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded to the company without delay." It
is stressed that the H.H. Bayne Adjustment Company's recommendation of payment of the appellants' bill for
materials and repairs for which the latter drew a check for P2,002.73 indicates that Mora and the H.H. Bayne
Adjustment Co. acted for and in representation of the insurance company.
This argument is, in our view, beside the point, because from the undisputed facts and from the pleadings it
will be seen that the appellants' alleged cause of action rests exclusively upon the terms of the insurance
contract. The appellants seek to recover the insurance proceeds, and for this purpose, they rely upon
paragraph 4 of the insurance contract document executed by and between the State Bonding & Insurance
Company, Inc. and Enrique Mora. The appellants are not mentioned in the contract as parties thereto nor is
there any clause or provision thereof from which we can infer that there is an obligation on the part of the
insurance company to pay the cost of repairs directly to them. It is fundamental that contracts take effect only
between the parties thereto, except in some specific instances provided by law where the contract contains
some stipulation in favor of a third person.1 Such stipulation is known as stipulation pour autrui or a provision
in favor of a third person not a pay to the contract. Under this doctrine, a third person is allowed to avail
himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have
clearly and deliberately conferred a favor upon such person.2 Consequently, a third person not a party to the
contract has no action against the parties thereto, and cannot generally demand the enforcement of the same.3
The question of whether a third person has an enforcible interest in a contract, must be settled by determining
whether the contracting parties intended to tender him such an interest by deliberately inserting terms in their
agreement with the avowed purpose of conferring a favor upon such third person. In this connection, this
Court has laid down the rule that the fairest test to determine whether the interest of a third person in a
contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties
as disclosed by their contract.4 In the instant case the insurance contract does not contain any words or clauses
to disclose an intent to give any benefit to any repairmen or materialmen in case of repair of the car in
question. The parties to the insurance contract omitted such stipulation, which is a circumstance that supports
the said conclusion. On the other hand, the "loss payable" clause of the insurance policy stipulates that "Loss, if
any, is payable to H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended to
benefit.
116

We likewise observe from the brief of the State Bonding & Insurance Company that it has vehemently opposed
the assertion or pretension of the appellants that they are privy to the contract. If it were the intention of the
insurance company to make itself liable to the repair shop or materialmen, it could have easily inserted in the
contract a stipulation to that effect. To hold now that the original parties to the insurance contract intended to
confer upon the appellants the benefit claimed by them would require us to ignore the indespensable requisite
that a stipulation pour autrui must be clearly expressed by the parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of establishing
privity between the appellants and the insurance company, such stipulation merely establishes the procedure
that the insured has to follow in order to be entitled to indemnity for repair. This paragraph therefore should
not be construed as bringing into existence in favor of the appellants a right of action against the insurance
company as such intention can never be inferred therefrom.
Another cogent reason for not recognizing a right of action by the appellants against the insurance company is
that "a policy of insurance is a distinct and independent contract between the insured and insurer, and third
persons have no right either in a court of equity, or in a court of law, to the proceeds of it, unless there be some
contract of trust, expressed or implied between the insured and third person."5 In this case, no contract of
trust, expressed or implied exists. We, therefore, agree with the trial court that no cause of action exists in
favor of the appellants in so far as the proceeds of insurance are concerned. The appellants' claim, if at all, is
merely equitable in nature and must be made effective through Enrique Mora who entered into a contract with
the Bonifacio Bros. Inc. This conclusion is deducible not only from the principle governing the operation and
effect of insurance contracts in general, but is clearly covered by the express provisions of section 50 of the
Insurance Act which read:
The insurance shall be applied exclusively to the proper interests of the person in whose name it is
made unless otherwise specified in the policy.
The policy in question has been so framed that "Loss, if any, is payable to H.S. Reyes, Inc.," which unmistakably
shows the intention of the parties.
The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the insurance proceeds arises
only if there was loss and not where there is mere damage as in the instant case. Suffice it to say that any
attempt to draw a distinction between "loss" and "damage" is uncalled for, because the word "loss" in
insurance law embraces injury or damage.
Loss in insurance, defined. — The injury or damage sustained by the insured in consequence of the
happening of one or more of the accidents or misfortune against which the insurer, in consideration of
the premium, has undertaken to indemnify the insured. (1 Bouv. Ins. No. 1215; Black's Law Dictionary;
Cyclopedic Law Dictionary, cited in Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).
Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.
Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.

117

CASE 32
G.R. No. L-51221 July 31, 1991
FIRST
INTEGRATED
BONDING
&
INSURANCE
COMPANY,
INC.,
petitioner,
vs.
HON. HAROLD M. HERNANDO, VICTORINO ADVINCULA, ROMANA ADVINCULA, SILVERIO BLANCO & THE
SHERIFF OF MANILA and his DEPUTY SHERIFFS, respondents.
This petition for certiorari under Rule 65 of the Revised Rules of Court, seeks the annulment of the amended
decision of respondent trial court in Civil Case No. 1104 for allegedly having been rendered in excess of
jurisdiction. The same decision was sought to be annulled in a petition for relief from judgment filed in the
same case but the petition was denied for having been filed out of time.
The narration of facts below was taken from the pleadings filed by the parties. As regards the proceedings
following the promulgation of the amended decision, the dates were supplied in the Comment and Answer
filed by respondent judge and which were not disputed by petitioner.
Silverio Blanco was the owner of a passenger jeepney which he insured against liabilities for death and injuries
to third persons with First Integrated Bonding and Insurance Company, Inc. (First Insurance) under Motor
Vehicle Policy No. V-0563751 with the face value of P30,000.00 (p. 15, Rollo).
On November 25, 1976, the said jeepney driven by Blanco himself bumped a five-year old child, Deogracias
Advincula, causing the latter's death.
A complaint (pp. 38-41, Rollo) for damages was brought by the child's parents, the Advincula spouses, against
Silverio Blanco. First Insurance was also impleaded in the complaint as the insurer. The complaint was docketed
as Civil Case No. 1104 of the Court of First Instance of Abra (now Regional Trial Court).
Summons were served on Silverio Blanco and First Insurance. However, only Blanco filed an answer. Upon
motion of the Advincula spouses, First Insurance was declared in default (p. 45, Rollo) on January 19, 1978.
Thereafter, a pre-trial conference was conducted where the Advincula spouses presented the following
documentary evidence:
Exhibit "A" — Marriage Certificate, Exhibit B — Birth Certificate, Exhibit B-1 — The Certificate of
the Local Civil Registrar, Exhibit C — Certificate of Death, Exhibit C-1 — the official receipt of
the burial permit, Exhibit C-2 — the autopsy report, Exhibit D — filing fee under official receipt
in the amount of P80.00, Exhibit D-1 — list of actual expenses in connection with the death and
burial of the deceased Advincula, Exhibit E — Criminal Case No. 666 of the Municipal Court of
Tayum, Abra entitled People of the Philippines versus Silverio Blanco for Homicide thru
Reckless Imprudence, Exhibit E-1 — sworn statement of Severino Balneg Exhibit F — Tax
Declaration No. 906 in the name of Maria Blanco delivered by Silverio Blanco to the plaintiffs as
pledge of Silverio Blanco to settle the civil aspect of this case. (pp. 14-15, Rollo)
On the basis of the evidence presented by the Advincula spouses, judgment was rendered by the trial court on
March 1, 1978, the dispositive portion of which states:
WHEREFORE, for moral damages, this court adjudicates to the plaintiffs P5,000.00; for the life
of Deogracias Advincula P12,000.00, for funeral expenses, P3,663.50 and for attomey's fees,
P3,000.00. The satisfaction of these damages divulged (sic) independently now upon the
defendant insurance company and to pay the costs of the proceedings.
SO ORDERED. (p. 16, Rollo)
118

First Insurance received a copy of the decision on March 14, 1978. Upon motion of the Advincula spouses, the
decision was amended on March 27, 1978 (p. 17, Rollo), which, in addition to the damages granted in the
original decision, awarded damages in the amount of P6,336.50 to Silverio Blanco. The dispositive portion of
the amended decision is quoted, as follows:
WHEREFORE, for moral damages, this Court hereby adjudicates to the plaintiffs P5,000.00; for
the life of Deogracias Advincula P12,000.00; for funeral expenses P3,663.50 and for attorney's
fees P3,000.00 or in the total amount of P23,663.50 which must be satisfied independently by
the defendant First Integrated Bonding and Insurance Company, Inc. in favor of the plaintiffs
and the balance of P6,336.50 shall also be paid by said defendant Insurance Company to the
defendant Silverio Blanco. The grand total under the insurance policy, Exhibit H, is P30,000.00.
The defendant Insurance Company to pay the costs of the proceedings.
SO ORDERED. (p. 17, Rollo)
The amended decision was received by First Instance on April 11, 1978. On May 11, 1978, entry of judgment
was made, a copy of which was furnished First Insurance on June 27, 1978. Upon motion of the Advincula
spouses, an order granting execution was issued by the court on June 14, 1978, which was received by First
Insurance on August 1, 1978 (pp. 31-32, Rollo).
On September 5, 1978, First Insurance filed a petition for relief from judgment in the same case. The petition
was set for hearing on September 28, 1978. No appearance was entered by First Insurance on the said date. On
October 4, 1978, the trial court issued an order, denying the petition for relief from judgment (pp. 33-34, Rollo),
a copy of which was received by First Insurance on October 10, 1978 (p. 35, Rollo). The order reads:
The records of this case show that on April 11, 1978, the defendant First Integrated Bonding
and Insurance Company, Inc. received a copy of the amended decision dated March 27, 1978
and found on page 30 of the records of this case; on May 11, 1978, the Deputy Clerk of Court
entered the corresponding entry of judgment and the First Integrated Bonding and Insurance
Company, Inc. received a copy thereof on June 27, 1978, On June 13, 1978, the plaintiffs moved
for execution of judgment and the same was granted pursuant to an Order of this Court dated
June 14, 1978 and found on page 35 of the records of this case.
And now comes the petition for relief from the Order of execution and judgment with
preliminary injunction filed by First integrated Bonding and Insurance Co., Inc. and which was
received by this Court on September 5, 1978; on September 28, 1978, the plaintiffs filed their
written opposition to the petition for relief from judgment and preliminary injunction. The
opposition is based on three grounds, namely: 1. that the petition is filed out of time; 2. that
there was gross and notorious negligence of the Insurance Company; 3. that this case is within
the jurisdiction of this Court and therefore the cause of action of the plaintiffs deserves judicial
consideration.
It was on April 11, 1978 that the First Integrated Bonding and Insurance Co., Inc. received the
amended decision and the petition for relief from Order of Execution and judgment with
preliminary injunction was filed on September 5, 1978 or a period of 191 days already expired,
that is, more than 6 months already as required by Section 3, Rule 38 of the Rules of Court.
Consequently, the first ground invoked by the opposition must be sustained. On the second
ground, the records of this case show that the First Integrated Bonding and Insurance Co., Inc.
was duly summoned and served a copy of the complaint on August 16, 1977 and it was
received by the President of the Insurance Company as shown by the certificate of Service of
the Sheriff of Manila and found in page 12 and page 13 of the records of this case; after the
reglementary period to file an answer expired, the plaintiffs move to declare the defendant
119

insurance company in default and likewise asked the Court that they be allowed to present
their evidence on January 23, 1978 and which was granted by this Court pursuant to an order
dated January 19, 1978 and found on page 16 of the records of this case; after the reception of
the evidence for the plaintiffs this Court rendered a decision on March 1, 1978 and which is
found on pages 23 to 26 of the records of this case; subsequently, on March 27, 1978, an
amended decision was issued by this Court and it is found on page 30 of the records of this
case. Clearly, therefore, the First Integrated Bonding and Insurance Co., Inc. was grossly and
notoriously negligent in giving the proper attention to this case. This kind of gross and
notorious negligence can not be considered excusable. The last ground is that this Court has
jurisdiction over the plaintiffs' cause of action against the insurance company. This ground is
well-taken because according to Section 416 of the Philippine Insurance Code, Presidential
Decree No. 612, it provides that the authority to adjudicate granted to the Commissioner of
insurance shall be concurrent with that of the civil courts, but the filing of a complaint with the
commissioner shall preclude the civil courts from taking cognizance of a suit involving the same
subject matter. Furthermore, the plaintiffs did not intervene in the criminal aspect of this case,
instead, they filed a separate and independent civil action on July 26, 1977 and which is now
the present Civil Case No. 1104. It may be added, that the matter of exhaustion of
administrative remedy may be waived which has been so in the present case because the First
Integrated Bonding and Insurance Co., Inc. was declared in default.
In view of all the foregoing considerations, the petition for relief from the order of execution
and judgment with preliminary injunction, for lack of merit, is hereby denied.
SO ORDERED. (pp. 33-34, Rollo)
First Insurance filed a motion for reconsideration of the order denying the petition for relief on May 14, 1979.
The motion was set for hearing and again no appearance was entered by the movant First Insurance (p. 35,
Rollo), prompting the trial court to deny the same.
On August 13, 1979, the herein petitioner First Insurance filed this petition for certiorari on the following
grounds:
1. The trial court erred in deciding for the respondent spouse(s) where there exists no cause of
action against the herein petitioner.
2. The trial court erred when it abbreviated the proceeding and rendered judgment based only
on the documentary evidence presented during the pre-trial conference.
3. The trial court erred in holding the petitioner liable in excess of the limits of liability as
provided for in the policy contract.
On August 20, 1979, this Court issued a temporary restraining order enjoining the respondents from enforcing
the Writ of Execution dated August 1, 1978 (p. 19, Rollo)
It is the contention of the petitioner that the Advincula spouses have no cause of action against it. As parents of
the victim, they may proceed against the driver, Silverio Blanco on the basis of the provisions of the New Civil
Code. However, they have no cause of action against First Insurance, because they are not parties to the
insurance contract.
It is settled that where the insurance contract provides for indemnity against liability to a third party, such third
party can directly sue the insurer (Caguia v. Fieldman's Insurance Co., Inc., G. R. No. 23276, November 29, 1968,
26 SCRA 178). The liability of the insurer to such third person is based on contract while the liability of the
insured to the third party is based on tort (Malayan Insurance Co., Inc. v. CA, L-36413, September 26, 1988, 165
120

SCRA 536). This rule was explained in the case of Shafer v. Judge, RTC of Olongapo City, Br. 75, G.R. No. 78848,
November 14, 1988:
The injured for whom the contract of insurance is intended can sue directly the insurer. The
general purpose of statutes enabling an injured person to proceed directly against the insurer
is to protect injured persons against the insolvency of the insured who causes such injury, and
to give such injured person a certain beneficial interest in the proceeds of the policy, and
statutes are to be liberally construed so that their intended purpose may be accomplished. It
has even been held that such a provision creates a contractual relation which inures to the
benefit of any and every person who may be negligently injured by the named insured as if such
injured person were specifically named in the policy.
In the event that the injured fails or refuses to include the insurer as party defendant in his
claim for indemnity against the insured, the latter is not prevented by law to avail of the
procedural rules intended to avoid multiplicity of suits. Not even a "no action" clause under the
policy which requires that a final judgment be first obtained against the insured and that only
thereafter can the person insured recover on the policy can prevail over the Rules of Court
provisions aimed at avoiding multiplicity of suits. (p. 391, 167 SCRA) (emphasis supplied)
First Insurance cannot evade its liability as insurer by hiding under the cloak of the insured. Its liability is
primary and not dependent on the recovery of judgment from the insured.
Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily intended
to provide compensation for the death or bodily injuries suffered by innocent third parties or
passengers as a result of a negligent operation and use of motor vehicles. The victims and/or
their dependents are assured of immediate financial assistance, regardless of the financial
capacity of the motor vehicle owners.
. . . the insurer's liability accrues immediately upon the occurrence of the injury or event upon
which the liability depends, and does not depend on the recovery of judgment by the injured
party against the insured (Shafer v. Judge, RTC of Olongapo, supra, p. 390).
It is true that Blanco denied that he was negligent when the incident occurred. However, during the pre-trial
conference, when respondent judge admitted all the exhibits of the plaintiffs to abbreviate the proceedings, no
objection was interposed by Blanco. When a decision was rendered based only on the exhibits of the plaintiffs,
Blanco likewise did not object. No motion for reconsideration was filed by either Blanco or First Insurance.
Hence, the decision became final and may no longer be attacked.
It should be noted also that First Insurance was declared in default because of its failure to file an answer. As
far as it was concerned, it failed to raise any triable issue. It lost its standing in court and judgment may be
rendered against it on the basis only of the evidence of the Advincula spouses.
Petitioner had been given its day in court. Despite its having been declared in default and its failure to file a
motion to lift the order of default, it was still notified of the subsequent proceedings in the trial court. But no
positive step was taken by it on time to vacate the order of default, the decision nor the amended decision.
Instead, it chose to file a petition for relief from judgment on September 1, 1978 almost five (5) months from
its receipt of a copy of the amended decision on April 11, 1978. Clearly, the said petition for relief from
judgment was filed out of time. The rules require that such petitions must be filed within sixty (60) days after
the petitioner learns of the judgment and not more than six (6) months after such judgment was entered (Rule
38, Section 3). The period fixed by Rule 38 of the Rules of Court is non-extendible and never interrupted. It is
not subject to any condition or contingency, because it is itself devised to meet a condition or contingency. The
remedy allowed by Rule 38 is an act of grace, as it were, designed to give the aggrieved party another and last
chance. Being in the position of one who begs, such party's privilege is not to impose conditions, haggle or dilly121

dally, but to grab what is offered him. (Palomares, et al. v. Jimenez, et al., 90 Phil. 773, XVII, L.J., No. 3, p. 136,
Rafanan v. Rafanan, 35 O.G. 228; Santos v. Manila Electric Co., G.R. L-7735, December 29, 1955; Gana v. Abaya,
G.R. No. L-3106, December 29, 1955, cited in Vicente J. Francisco, The Revised Rules of Court of the Philippines,
Annotated and Commented, Vol, 11, p. 580.
It appears that the award of damages in favor of Blanco has no basis. The complaint in Civil case 1104 was for
damages brought by the spouses against Blanco and First Insurance. Blanco did not put up any claim against
the latter. However, since the said decision had already become final and executory, it can no longer be
corrected or amended. In the same vein, the claim of petitioner that its liability to third parties under the
insurance policy is limited to P20,000.00 only can no longer be given consideration at this late stage, when the
decision of the trial court awarding damages had already become final and executory.
ACCORDINGLY, finding respondent judge to have acted within his jurisdiction in denying the petition for relief
from judgment, the petition is DISMISSED. The questioned decision of the trial court in Civil Case No. 1104
having become final and executory, is AFFIRMED. The temporary restraining order issued on August 20, 1979 is
hereby lifted. Costs against petitioner.
SO ORDERED.

122

CASE 33
G.R. No. 78848 November 14, 1988
SHERMAN
SHAFER,
petitioner,
vs.
HON. JUDGE, REGIONAL TRIAL COURT OF OLONGAPO CITY, BRANCH 75, and MAKATI INSURANCE COMPANY,
INC., respondents.
This is a petition for review on certiorari of the Order * of the Regional Trial Court, Olongapo City, Branch 75,
dated 24 April 1986 dismissing petitioner's third party complaint filed in Criminal Case No. 381-85, a
prosecution for reckless imprudence resulting in damage to property and serious physical injuries.
On 2 January 1985, petitioner Sherman Shafer obtained a private car policy, GA No. 0889, over his Ford Laser
car with Plate No. CFN-361 from Makati Insurance Company, Inc., for third party liability (TPL).During the
effectivity of the policy, an information 3for reckless imprudence resulting in damage to property and serious
physical injuries was filed against petitioner. The information reads as follows:
That on or about the seventeeth (17th) day of May 1985, in the City of Olongapo, Philippines,
and within the jurisdiction of this Honorable Court, the above-named accused, being then the
driver and in actual physical control of a Ford Laser car bearing Plate No. CFN-361, did then and
there wilfully, unlawfully and criminally drive, operate and manage the said Ford Laser car in a
careless, reckless and imprudent manner without exercising reasonable caution, diligence and
due care to avoid accident to persons and damage to property and in disregard of existing
traffic rules and regulations, causing by such carelessness, recklessness and imprudence the
said Ford Laser car to hit and bump a Volkswagen car bearing Plate No. NJE-338 owned and
driven by Felino llano y Legaspi, thereby causing damage in the total amount of P12,345.00
Pesos, Philippine Currency, and as a result thereof one Jovencio Poblete, Sr. who was on board
of the said Volkswagen car sustained physical injuries, to wit:
1. 2 cm. laceration of left side of tongue.
2. 6 cm. laceration with partial transection of muscle (almost full thickness) left side of face.
3. Full thickness laceration of lower lip and adjacent skin. which injuries causing [sic] deformity
on the face.
The owner of the damaged Volkswagen car filed a separate civil action against petitioner for damages, while
Jovencio Poblete, Sr., who was a passenger in the Volkswagen car when allegedly hit and bumped by the car
driven by petitioner, did not reserve his right to file a separate civil action for damages. Instead, in the course of
the trial in the criminal case, Poblete, Sr. testified on his claim for damages for the serious physical injuries
which he claimed to have sustained as a result of the accident.
Upon motion, petitioner was granted leave by the former presiding judge of the trail court to file a third party
complaint against the herein private respondent, Makati Insurance Company, Inc. Said insurance company,
however, moved to vacate the order granting leave to petitioner to file a third party complaint against it and/or
to dismiss the same.
On 24 April 1987, the court a quo issued an order dismissing the third party complaint on the ground that it was
premature, based on the premise that unless the accused (herein petitioner) is found guilty and sentenced to
pay the offended party (Poblete Sr.) indemnity or damages, the third party complaint is without cause of
action. The court further stated that the better procedure is for the accused (petitioner) to wait for the
outcome of the criminal aspect of the case to determine whether or not the accused, also the third party
plaintiff, has a cause of action against the third party defendant for the enforcement of its third party liability

123

(TPL) under the insurance contract. 6Petitioner moved for reconsideration of said order, but the motion was
denied; 7 hence, this petition.
It is the contention of herein petitioner that the dismissal of the third party complaint amounts to a denial or
curtailment of his right to defend himself in the civil aspect of the case. Petitioner further raises the legal
question of whether the accused in a criminal action for reckless imprudence, where the civil action is jointly
prosecuted, can legally implead the insurance company as third party defendant under its private car insurance
policy, as one of his modes of defense in the civil aspect of said proceedings.
On the other hand, the insurance company submits that a third party complaint is, under the rules, available
only if the defendant has a right to demand contribution, indemnity, subrogation or any other relief in respect
of plaintiff's claim, to minimize the number of lawsuits and avoid the necessity of bringing two (2) or more suits
involving the same subject matter. The insurance company further contends that the contract of motor vehicle
insurance, the damages and attorney's fees claimed by accused/third party plaintiff are matters entirely
different from his criminal liability in the reckless imprudence case, and that petitioner has no cause of action
against the insurer until petitioner's liability shall have been determined by final judgment, as stipulated in the
contract of insurance.
Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily intended to provide
compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of a
negligent operation and use of motor vehicles. The victims and/or their dependents are assured of immediate
financial assistance, regardless of the financial capacity of motor vehicle owners.
The liability of the insurance company under the Compulsory Motor Vehicle Liability Insurance is for loss or
damage. Where an insurance policy insures directly against liability, the insurer's liability accrues immediately
upon the occurrence of the injury or event upon which the liability depends, and does not depend on the
recovery of judgment by the injured party against the insured.
The injured for whom the contract of insurance is intended can sue directly the insurer. The general purpose of
statutes enabling an injured person to proceed directly against the insurer is to protect injured persons against
the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy, and statutes are to be liberally construed so that their intended purpose
may be accomplished. It has even been held that such a provision creates a contractual relation which inures to
the benefit of any and every person who may be negligently injured by the named insured as if such injured
person were specifically named in the policy.
In the event that the injured fails or refuses to include the insurer as party defendant in his claim for indemnity
against the insured, the latter is not prevented by law to avail of the procedural rules intended to avoid
multiplicity of suits. Not even a "no action" clause under the policy-which requires that a final judgment be first
obtained against the insured and that only thereafter can the person insured recover on the policy can prevail
over the Rules of Court provisions aimed at avoiding multiplicity of suits.
In the instant case, the court a quo erred in dismissing petitioner's third party complaint on the ground that
petitioner had no cause of action yet against the insurance company (third party defendant). There is no need
on the part of the insured to wait for the decision of the trial court finding him guilty of reckless imprudence.
The occurrence of the injury to the third party immediately gave rise to the liability of the insurer under its
policy.
A third party complaint is a device allowed by the rules of procedure by which the defendant can bring into the
original suit a party against whom he will have a claim for indemnity or remuneration as a result of a liability
established against him in the original suit. 13 Third party complaints are allowed to minimize the number of
lawsuits and avoid the necessity of bringing two (2) or more actions involving the same subject matter. They
are predicated on the need for expediency and the avoidance of unnecessary lawsuits. If it appears probable
124

that a second action will result if the plaintiff prevails, and that this result can be avoided by allowing the third
party complaint to remain, then the motion to dismiss the third party complaint should be denied.
Respondent insurance company's contention that the third party complaint involves extraneous matter which
will only clutter, complicate and delay the criminal case is without merit. An offense causes two (2) classes of
injuries the first is the social injury produced by the criminal act which is sought to be repaired thru the
imposition of the corresponding penalty, and the second is the personal injury caused to the victim of the
crime, which injury is sought to be compensated thru indemnity, which is civil in nature.
In the instant case, the civil aspect of the offense charged, i.e., serious physical injuries allegedly suffered by
Jovencio Poblete, Sr., was impliedly instituted with the criminal case. Petitioner may thus raise all defenses
available to him insofar as the criminal and civil aspects of the case are concerned. The claim of petitioner for
payment of indemnity to the injured third party, under the insurance policy, for the alleged bodily injuries
caused to said third party, arose from the offense charged in the criminal case, from which the injured
(Jovencio Poblete, Sr.) has sought to recover civil damages. Hence, such claim of petitioner against the
insurance company cannot be regarded as not related to the criminal action.
WHEREFORE, the instant petition is GRANTED. The questioned order dated 24 April 1987 is SET ASIDE and a
new one entered admitting petitioner's third party complaint against the private respondent Makati Insurance
Company, Inc.
SO ORDERED.

125

CASE 34
G.R. No. 48049 June 29, 1989
EMILIO
TAN,
JUANITO
TAN,
ALBERTO
TAN
and
ARTURO
TAN,
petitioners,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondents.
This is a petition for review on certiorari of the Court of Appeals' decision affirming the decision of the
Insurance Commissioner which dismissed the petitioners' complaint against respondent Philippine American
Life Insurance Company for the recovery of the proceeds from their late father's policy. The facts of the case as
found by the Court of Appeals are:
Petitioners appeal from the Decision of the Insurance Commissioner dismissing herein
petitioners' complaint against respondent Philippine American Life Insurance Company for the
recovery of the proceeds of Policy No. 1082467 in the amount of P 80,000.00.
On September 23,1973, Tan Lee Siong, father of herein petitioners, applied for life insurance in
the amount of P 80,000.00 with respondent company. Said application was approved and
Policy No. 1082467 was issued effective November 6,1973, with petitioners the beneficiaries
thereof (Exhibit A).
On April 26,1975, Tan Lee Siong died of hepatoma (Exhibit B). Petitioners then filed with
respondent company their claim for the proceeds of the life insurance policy. However, in a
letter dated September 11, 1975, respondent company denied petitioners' claim and rescinded
the policy by reason of the alleged misrepresentation and concealment of material facts made
by the deceased Tan Lee Siong in his application for insurance (Exhibit 3). The premiums paid
on the policy were thereupon refunded .
Alleging that respondent company's refusal to pay them the proceeds of the policy was
unjustified and unreasonable, petitioners filed on November 27, 1975, a complaint against the
former with the Office of the Insurance Commissioner, docketed as I.C. Case No. 218.
After hearing the evidence of both parties, the Insurance Commissioner rendered judgment on
August 9, 1977, dismissing petitioners' complaint. (Rollo, pp. 91-92)
The Court of Appeals dismissed ' the petitioners' appeal from the Insurance Commissioner's decision for lack of
merit. Hence, this petition.
The petitioners raise the following issues in their assignment of errors, to wit:
A. The conclusion in law of respondent Court that respondent insurer has the right to rescind
the policy contract when insured is already dead is not in accordance with existing law and
applicable jurisprudence.
B. The conclusion in law of respondent Court that respondent insurer may be allowed to avoid
the policy on grounds of concealment by the deceased assured, is contrary to the provisions of
the policy contract itself, as well as, of applicable legal provisions and established
jurisprudence.
C. The inference of respondent Court that respondent insurer was misled in issuing the policy
are manifestly mistaken and contrary to admitted evidence. (Rollo, p. 7)

126

The petitioners contend that the respondent company no longer had the right to rescind the contract of
insurance as rescission must allegedly be done during the lifetime of the insured within two years and prior to
the commencement of action.
The contention is without merit.
The pertinent section in the Insurance Code provides:
Section 48. Whenever a right to rescind a contract of insurance is given to the insurer by any
provision of this chapter, such right must be exercised previous to the commencement of an
action on the contract.
After a policy of life insurance made payable on the death of the insured shall have been in
force during the lifetime of the insured for a period of two years from the date of its issue or of
its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable
by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
According to the petitioners, the Insurance Law was amended and the second paragraph of Section 48 added to
prevent the insurance company from exercising a right to rescind after the death of the insured.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false representations
or concealment of material facts insofar as health and previous diseases are concerned if the insurance has
been in force for at least two years during the insured's lifetime. The phrase "during the lifetime" found in
Section 48 simply means that the policy is no longer considered in force after the insured has died. The key
phrase in the second paragraph of Section 48 is "for a period of two years."
As noted by the Court of Appeals, to wit:
The policy was issued on November 6,1973 and the insured died on April 26,1975. The policy
was thus in force for a period of only one year and five months. Considering that the insured
died before the two-year period had lapsed, respondent company is not, therefore, barred
from proving that the policy is void ab initio by reason of the insured's fraudulent concealment
or misrepresentation. Moreover, respondent company rescinded the contract of insurance and
refunded the premiums paid on September 11, 1975, previous to the commencement of this
action on November 27,1975. (Rollo, pp. 99-100)
xxx xxx xxx
The petitioners contend that there could have been no concealment or misrepresentation by their late father
because Tan Lee Siong did not have to buy insurance. He was only pressured by insistent salesmen to do so.
The petitioners state:
Here then is a case of an assured whose application was submitted because of repeated visits
and solicitations by the insurer's agent. Assured did not knock at the door of the insurer to buy
insurance. He was the object of solicitations and visits.
Assured was a man of means. He could have obtained a bigger insurance, not just P 80,000.00.
If his purpose were to misrepresent and to conceal his ailments in anticipation of death during
the two-year period, he certainly could have gotten a bigger insurance. He did not.
Insurer Philamlife could have presented as witness its Medical Examiner Dr. Urbano Guinto. It
was he who accomplished the application, Part II, medical. Philamlife did not.

127

Philamlife could have put to the witness stand its Agent Bienvenido S. Guinto, a relative to Dr.
Guinto, Again Philamlife did not. (pp. 138139, Rollo)
xxx xxx xxx
This Honorable Supreme Court has had occasion to denounce the pressure and practice
indulged in by agents in selling insurance. At one time or another most of us have been
subjected to that pressure, that practice. This court took judicial cognizance of the whirlwind
pressure of insurance selling-especially of the agent's practice of 'supplying the information,
preparing and answering the application, submitting the application to their companies,
concluding the transactions and otherwise smoothing out all difficulties.
We call attention to what this Honorable Court said in Insular Life v. Feliciano, et al., 73 Phil. 201; at page 205:
It is of common knowledge that the selling of insurance today is subjected to the whirlwind
pressure of modern salesmanship.
Insurance companies send detailed instructions to their agents to solicit and procure
applications.
These agents are to be found all over the length and breadth of the land. They are stimulated
to more active efforts by contests and by the keen competition offered by the other rival
insurance companies.
They supply all the information, prepare and answer the applications, submit the applications to
their companies, conclude the transactions, and otherwise smooth out all difficulties.
The agents in short do what the company set them out to do.
The Insular Life case was decided some forty years ago when the pressure of insurance
salesmanship was not overwhelming as it is now; when the population of this country was less
than one-fourth of what it is now; when the insurance companies competing with one another
could be counted by the fingers. (pp. 140-142, Rollo)
xxx xxx xxx
In the face of all the above, it would be unjust if, having been subjected to the whirlwind
pressure of insurance salesmanship this Court itself has long denounced, the assured who dies
within the two-year period, should stand charged of fraudulent concealment and
misrepresentation." (p. 142, Rollo)
The legislative answer to the arguments posed by the petitioners is the "incontestability clause" added by the
second paragraph of Section 48.
The insurer has two years from the date of issuance of the insurance contract or of its last reinstatement within
which to contest the policy, whether or not, the insured still lives within such period. After two years, the
defenses of concealment or misrepresentation, no matter how patent or well founded, no longer lie. Congress
felt this was a sufficient answer to the various tactics employed by insurance companies to avoid liability. The
petitioners' interpretation would give rise to the incongruous situation where the beneficiaries of an insured
who dies right after taking out and paying for a life insurance policy, would be allowed to collect on the policy
even if the insured fraudulently concealed material facts.

128

The petitioners argue that no evidence was presented to show that the medical terms were explained in a
layman's language to the insured. They state that the insurer should have presented its two medical field
examiners as witnesses. Moreover, the petitioners allege that the policy intends that the medical examination
must be conducted before its issuance otherwise the insurer "waives whatever imperfection by ratification."
We agree with the Court of Appeals which ruled:
On the other hand, petitioners argue that no evidence was presented by respondent company
to show that the questions appearing in Part II of the application for insurance were asked,
explained to and understood by the deceased so as to prove concealment on his part. The
same is not well taken. The deceased, by affixing his signature on the application form,
affirmed the correctness of all the entries and answers appearing therein. It is but to be
expected that he, a businessman, would not have affixed his signature on the application form
unless he clearly understood its significance. For, the presumption is that a person intends the
ordinary consequence of his voluntary act and takes ordinary care of his concerns. [Sec. 5(c)
and (d), Rule 131, Rules of Court].
The evidence for respondent company shows that on September 19,1972, the deceased was
examined by Dr. Victoriano Lim and was found to be diabetic and hypertensive; that by
January, 1973, the deceased was complaining of progressive weight loss and abdominal pain
and was diagnosed to be suffering from hepatoma, (t.s.n. August 23, 1976, pp. 8-10; Exhibit 2).
Another physician, Dr. Wenceslao Vitug, testified that the deceased came to see him on
December 14, 1973 for consolation and claimed to have been diabetic for five years. (t.s.n.,
Aug. 23,1976, p. 5; Exhibit 6) Because of the concealment made by the deceased of his
consultations and treatments for hypertension, diabetes and liver disorders, respondent
company was thus misled into accepting the risk and approving his application as medically
standard (Exhibit 5- C) and dispensing with further medical investigation and examination
(Exhibit 5-A). For as long as no adverse medical history is revealed in the application form, an
applicant for insurance is presumed to be healthy and physically fit and no further medical
investigation or examination is conducted by respondent company. (t.s.n., April 8,1976, pp. 68). (Rollo, pp. 96-98)
There is no strong showing that we should apply the "fine print" or "contract of adhesion" rule in this case. (Sweet Lines,
Inc. v. Teves, 83 SCRA 361 [1978]). The petitioners cite:
It is a matter of common knowledge that large amounts of money are collected from ignorant persons by
companies and associations which adopt high sounding titles and print the amount of benefits they
agree to pay in large black-faced type, following such undertakings by fine print conditions which destroy
the substance of the promise. All provisions, conditions, or exceptions which in any way tend to work a
forfeiture of the policy should be construed most strongly against those for whose benefit they are
inserted, and most favorably toward those against whom they are meant to operate. (Trinidad v. Orient
Protective Assurance Assn., 67 Phil. 184)
There is no showing that the questions in the application form for insurance regarding the insured's medical history are in
smaller print than the rest of the printed form or that they are designed in such a way as to conceal from the applicant
their importance. If a warning in bold red letters or a boxed warning similar to that required for cigarette advertisements
by the Surgeon General of the United States is necessary, that is for Congress or the Insurance Commission to provide as
protection against high pressure insurance salesmanship. We are limited in this petition to ascertaining whether or not the
respondent Court of Appeals committed reversible error. It is the petitioners' burden to show that the factual findings of
the respondent court are not based on substantial evidence or that its conclusions are contrary to applicable law and
jurisprudence. They have failed to discharge that burden.
WHEREFORE, the petition is hereby DENIED for lack of merit. The questioned decision of the Court of Appeals is
AFFIRMED. SO ORDERED.

129

CASE 35
G.R. No. 71360 July 16, 1986
DEVELOPMENT
INSURANCE
CORPORATION,
petitioner,
vs.
INTERMEDIATE APPELLATE COURT, and PHILIPPINE UNION REALTY DEVELOPMENT CORPORATION,
respondents.
A fire occurred in the building of the private respondent and it sued for recovery of damages from the
petitioner on the basis of an insurance contract between them. The petitioner allegedly failed to answer on
time and was declared in default by the trial court. A judgment of default was subsequently rendered on the
strength of the evidence submitted ex parte by the private respondent, which was allowed full recovery of its
claimed damages. On learning of this decision, the petitioner moved to lift the order of default, invoking
excusable neglect, and to vacate the judgment by default. Its motion was denied. It then went to the
respondent court, which affirmed the decision of the trial court in toto. The petitioner is now before us, hoping
presumably that it will fare better here than before the trial court and the Intermediate Appellate Court. We
shall see.
On the question of default, the record argues mightily against it. It is indisputable that summons was served on
it, through its senior vice-president, on June 19,1980. On July 14, 1980, ten days after the expiration of the
original 15-day period to answer (excluding July 4), its counsel filed an ex parte motion for an extension of five
days within which to file its answer. On July 18, 1980, the last day of the requested extension-which at the time
had not yet been granted-the same counsel filed a second motion for another 5-day extension, fourteen days
after the expiry of the original period to file its answer. The trial court nevertheless gave it five days from July
14, 1980, or until July 19, 1980, within which to file its answer. But it did not. It did so only on July 26, 1980,
after the expiry of the original and extended periods, or twenty-one days after the July 5, deadline. As a
consequence, the trial court, on motion of the private respondent filed on July 28, 1980, declared the
petitioner in default. This was done almost one month later, on August 25, 1980. Even so, the petitioner made
no move at all for two months thereafter. It was only on October 27, 1980, more than one month after the
judgment of default was rendered by the trial court on September 26, 1980, that it filed a motion to lift the
order of default and vacate the judgment by default.
The pattern of inexcusable neglect, if not deliberate delay, is all too clear. The petitioner has slumbered on its
right and awakened too late. While it is true that in Trajano v. Cruz, 2 which it cites, this Court declared "that
judgments by default are generally looked upon with disfavor," the default judgment in that case was set aside
precisely because there was excusable neglect, Summons in that case was served through "an employee in
petitioners' office and not the person in-charge," whereas in the present case summons was served on the vicepresident of the petitioner who however refused to accept it. Furthermore, as Justice Guerrero noted, there
was no evidence showing that the petitioners in Trajano intended to unduly delay the case.
Besides, the petitioners in Trajano had a valid defense against the complaint filed against them, and this justified a
relaxation of the procedural rules to allow full hearing on the substantive issues raised. In the instant case, by contrast, the
petitioner must just the same fail on the merits even if the default orders were to be lifted. As the respondent Court
observed, "Nothing would be gained by having the order of default set aside considering the appellant has no valid
defense in its favor."
The petitioner's claim that the insurance covered only the building and not the elevators is absurd, to say the least. This
Court has little patience with puerile arguments that affront common sense, let alone basic legal principles with which
even law students are familiar. The circumstance that the building insured is seven stories high and so had to be provided
with elevators-a legal requirement known to the petitioner as an insurance company-makes its contention all the more
ridiculous.

130

No less preposterous is the petitioner's claim that the elevators were insured after the occurrence of the fire, a case of
shutting the barn door after the horse had escaped, so to speak. This pretense merits scant attention. Equally undeserving
of serious consideration is its submission that the elevators were not damaged by the fire, against the report of The arson
investigators of the INP and, indeed, its own expressed admission in its answer where it affirmed that the fire "damaged or
destroyed a portion of the 7th floor of the insured building and more particularly a Hitachi elevator control panel."
There is no reason to disturb the factual findings of the lower court, as affirmed by the Intermediate Appellate Court, that
the heat and moisture caused by the fire damaged although they did not actually burn the elevators. Neither is this Court
justified in reversing their determination, also factual, of the value of the loss sustained by the private respondent in the
amount of P508,867.00.
The only remaining question to be settled is the amount of the indemnity due to the private respondent under its
insurance contract with the petitioner. This will require an examination of this contract, Policy No. RY/F-082, as renewed,
by virtue of which the petitioner insured the private respondent's building against fire for P2,500,000.00.
The petitioner argues that since at the time of the fire the building insured was worth P5,800,000.00, the private
respondent should be considered its own insurer for the difference between that amount and the face value of the policy
and should share pro rata in the loss sustained. Accordingly, the private respondent is entitled to an indemnity of only
P67,629.31, the rest of the loss to be shouldered by it alone. In support of this contention, the petitioner cites Condition
17 of the policy, which provides:
If the property hereby insured shall, at the breaking out of any fire, be collectively of greater value than
the sum insured thereon then the insured shall be considered as being his own insurer for the difference,
and shall bear a ratable proportion of the loss accordingly. Every item, if more than one, of the policy
shall be separately subject to this condition.
However, there is no evidence on record that the building was worth P5,800,000.00 at the time of the loss; only the
petitioner says so and it does not back up its self-serving estimate with any independent corroboration. On the contrary,
the building was insured at P2,500,000.00, and this must be considered, by agreement of the insurer and the insured, the
actual value of the property insured on the day the fire occurred. This valuation becomes even more believable if it is
remembered that at the time the building was burned it was still under construction and not yet completed.
The Court notes that Policy RY/F-082 is an open policy and is subject to the express condition that:
Open Policy
This is an open policy as defined in Section 57 of the Insurance Act. In the event of loss, whether total or
partial, it is understood that the amount of the loss shall be subject to appraisal and the liability of the
company, if established, shall be limited to the actual loss, subject to the applicable terms, conditions,
warranties and clauses of this Policy, and in no case shall exceed the amount of the policy.
As defined in the aforestated provision, which is now Section 60 of the Insurance Code, "an open policy is one in which the
value of the thing insured is not agreed upon but is left to be ascertained in case of loss. " This means that the actual loss,
as determined, will represent the total indemnity due the insured from the insurer except only that the total indemnity
shall not exceed the face value of the policy.
The actual loss has been ascertained in this case and, to repeat, this Court will respect such factual determination in the
absence of proof that it was arrived at arbitrarily. There is no such showing. Hence, applying the open policy clause as
expressly agreed upon by the parties in their contract, we hold that the private respondent is entitled to the payment of
indemnity under the said contract in the total amount of P508,867.00.
The refusal of its vice-president to receive the private respondent's complaint, as reported in the sheriff's return, was the
first indication of the petitioner's intention to prolong this case and postpone the discharge of its obligation to the private
respondent under this agreement. That intention was revealed further in its subsequent acts-or inaction-which indeed
enabled it to avoid payment for more than five years from the filing of the claim against it in 1980. The petitioner has
temporized long enough to avoid its legitimate responsibility; the delay must and does end now. WHEREFORE, the
appealed decision is affirmed in full, with costs against the petitioner. SO ORDERED.

131

CASE 36
G.R. No. 89741 March 13, 1991
SUN
INSURANCE
OFFICE,
vs.
COURT OF APPEALS and EMILIO TAN, respondents.

LTD.,

petitioner,

This is a petition for review on certiorari of the June 20, 1989 decision 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:
I
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.

132

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. 5052), 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
133

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.

134

CASE 37
G.R. No. 103883 November 14, 1996
JACQUELINE
JIMENEZ
VDA.
DE
GABRIEL,
vs.
HON. COURT OF APPEALS and FORTUNE INSURANCE & SURETY COMPANY, INC., respondents.

petitioner,

The petition for review on certiorari in this case seeks the reversal of the decision of the Court of Appeals
setting aside the judgment of the Regional Trial Court of Manila, Branch 55, which has ordered private
respondent Fortune Insurance & Surety Company, Inc., to pay petitioner Jacqueline Jimenez vda. de Gabriel,
the surviving spouse and beneficiary in an accident (group) insurance of her deceased husband, the amount of
P100,000.00, plus legal interest.
Marcelino Gabriel, the insured, was employed by Emerald Construction & Development Corporation ("ECDC")
at its construction project in Iraq. He was covered by a personal accident insurance in the amount of
P100,000.00 under a group policy procured from private respondent by ECDC for its overseas workers. The
insured risk was for "(b)odily injury caused by violent accidental external and visible means which injury
(would) solely and independently of any other cause" result in death or disability.
On 22 May 1982, within the life of the policy, Gabriel died in Iraq. A year later, or on 12 July 1983, ECDC
reported Gabriel's death to private respondent by telephone. Among the documents thereafter submitted to
private respondent were a copy of the death certificate issued by the Ministry of Health of the Republic of Iraq
— which stated
REASON OF DEATH: UNDER EXAMINATION NOW — NOT YET KNOWN —
and an autopsy report of the National Bureau of Investigation ("NBI") to the effect that "(d)ue to
advanced state of postmortem decomposition, cause of death (could) not be determined." Private
respondent referred the insurance claim to Mission Adjustment Service, Inc.
Following a series of communications between petitioner and private respondent, the latter, on 22 September
1983, ultimately denied the claim of ECDC on the ground of prescription. Petitioner went to the Regional Trial
Court of Manila. In her complaint against ECDC and private respondent, she averred that her husband died of
electrocution while in the performance of his work and prayed for the recovery of P100,000.00 for insurance
indemnification and of various other sums by way of actual, moral, and exemplary damages, plus attorney's
fees and costs of suit.
Private respondent filed its answer, which was not verified, admitting the genuineness and due execution of
the insurance policy; it alleged, however, that since both the death certificate issued by the Iraqi Ministry of
Health and the autopsy report of the NBI failed to disclose the cause of Gabriel's death, it denied liability under
the policy. In addition, private respondent raised the defense of "prescription," invoking Section 384 10 of the
Insurance Code. Later, private respondent filed an amended answer, still unverified, reiterating its original
defenses but, this time, additionally putting up a counterclaim and a crossclaim.
The trial court dismissed the case against ECDC for the failure of petitioner to take steps to cause the service of
the fourth alias summons on ECDC. The dismissal was without prejudice.
The case proceeded against private respondent alone. On 28 May 1987, the trial court rendered its decision in
favor (partly) of petitioner's claim. In arriving at its conclusion, the trial court held that private respondent was
deemed to have waived the defense, i.e., that the cause of Gabriel's death was not covered by the policy, when
the latter failed to impugn by evidence petitioner's averment on the matter. With regard to the defense of

135

prescription, the court considered the complaint to have been timely filed or within one (1) year from private
respondent's denial of the claim.
Petitioner and private respondent both appealed to the Court of Appeals. Petitioner contended that the lower
court should have awarded all the claims she had asked for. Private respondent asserted, on its part, that the
lower court erred in ruling (a) that the insurer had waived the defense that Gabriel's death was not caused by
the insured peril ("violent accidental external and visible means") specified in the policy and (b) that the cause
of action had not prescribed.
The Court of Appeals, on 18 September 1991, reversed the decision of the lower court. The appellate court
held that petitioner had failed to substantiate her allegation that her husband's death was caused by a risk
insured against. The appellate court observed that the only evidence presented by petitioner, in her attempt to
show the circumstances that led to the death of the insured, were her own affidavit and a letter allegedly
written by a co-worker of the deceased in Iraq which, unfortunately for her, were held to be both
hearsay.
The motion for reconsideration was denied.
Petitioner's recourse to this Court must also fail.
On the issue of "prescription," private respondent correctly invoked Section 384 of the Insurance Code; viz:
Sec. 384. Any person having any claim upon the policy issued pursuant to this chapter shall,
without any unnecessary delay, present to the insurance company concerned a written notice
of claim setting forth the nature, extent and duration of the injuries sustained as certified by a
duly licensed physician. Notice of claim must be filed within six months from date of the
accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage
due to loss or injury must be brought, in proper cases, with the Commissioner or the Courts
within one year from denial of the claim, otherwise, the claimant's right of action shall
prescribe.
The notice of death was given to private respondent, concededly, more than a year after the death of
petitioner's husband. Private respondent, in invoking prescription, was not referring to the one-year
period from the denial of the claim within which to file an action against an insurer but obviously to the
written notice of claim that had to be submitted within six months from the time of the accident.
Petitioner argues that private respondent must be deemed to have waived its right to controvert the claim,
that is, to show that the cause of death is an excepted peril, by failing to have its answers (to the Request for
Admission sent by petitioner) duly verified. It is true that a matter of which a written request for admission is
made shall be deemed impliedly admitted "unless, within a period designated in the request, which shall not be
less than ten (10) days after service thereof, or within such further time as the court may allow on motion and
notice, the party to whom the request is directed serves upon the party requesting the admission a sworn
statement either denying specifically the matters of which an admission is requested or setting forth in detail
the reasons why he cannot truthfully either admit or deny those matters;" however, the verification, like in
most cases required by the rules of procedure, is a formal, not jurisdictional, requirement, and mainly intended
to secure an assurance that matters which are alleged are done in good faith or are true and correct and not of
mere speculation. When circumstances warrant, the court may simply order the correction of unverified
pleadings or act on it and waive strict compliance with the rules in order that the ends of justice may thereby
be served. In the case of answers to written requests for admission particularly, the court can allow the party
making the admission, whether made expressly or deemed to have been made impliedly, "to withdraw or
amend it upon such terms as may be just."

136

The appellate court acted neither erroneously nor with grave abuse of discretion when it seconded the court a
quo and ruled:
As to the allegation of the plaintiff-appellant that the matters requested by her to be admitted
by the defendant-appellant under the Request for Admission were already deemed admitted
by the latter for its failure to answer it under oath, has already been properly laid to rest when
the lower court in its Order of May 28, 1987 correctly ruled:
At the outset, it must be stressed that the defendant indeed filed a written
answer to the request for admission, sans verification. The case of Motor
Service Co., Inc. vs. Yellow Taxicab Co., Inc., et al. may not therefore be
controlling, or actually opposite. In said case, there was an absolute failure on
the part of the defendant to answer the request for admission, and thus the
court was justified in rendering a summary judgment. Here, however, as clearly
intimated elsewhere above, the defendant answered in writing practically
every question posed in the request for admission. The Court believes, under
the peculiar circumstance, that the more controlling jurisprudence on the
mater would be those cited by the defendant in its memorandum, particularly
the case of Quimpo vs. de la Victoria, 46 SCRA 139.
Prescinding from the foregoing, there is absolutely no basis in fact and in law for the lower
court to hold that the appellant insurance company was deemed to have waived the defense,
that the death of plaintiff-appellant's husband was not caused by violent accidental external
and visible means' as contemplated in the insurance policy. The Death Certificate (Exh. 9) and
the Autopsy Report (Exh. 10), more than controverted the allegation of the plaintiff-appellant
as to the cause of death of her husband.
The insurance policy expressly provided that to be compensable, the injury or death should be caused by
"violent accidental external and visible means." In attempting to prove the cause of her husband's death, all
that petitioner could submit were a letter sent to her by her husband's co-worker, stating that Gabriel died
when he tried to haul water out of a tank while its submerged motor was still functioning, and petitioner's
sinumpaang salaysay which merely confirmed the receipt and stated contents of the letter. Said the appellate
court in this regard:
. . . . It must be noted that the only evidence presented by her to prove the circumstances
surrounding her husband's death were her purported affidavit and the letter allegedly written
by the deceased co-worker in Iraq. The said affidavit however suffers from procedural infirmity
as it was not even testified to or identified by the affiant (plaintiff-appellant) herself. This selfserving affidavit therefore is a mere hearsay under the rules, . . . .
xxx xxx xxx
In like manner, the letter allegedly written by the deceased's co-worker which was never
identified to in court by the supposed author, suffers from the same defect as the affidavit of
the plaintiff-appellant.
Not one of the other documents submitted, to wit, the POEA decision, dated 06 June 1984, 21 the death
certificate issued by the Ministry of Health of Iraq and the NBI autopsy report, 22 could give any
probative value to petitioner's claim. The POEA decision did not make any categorical holding on the
specific cause of Gabriel's death. Neither did the death certificate issued by the health authorities in
Iraq nor the NBI autopsy report provide any clue on the cause of death. All that appeared to be clear
was the fact of Gabriel's demise on 22 May 1982 in Iraq.

137

Evidence, in fine, is utterly wanting to establish that the insured suffered from an accidental death, the risk
covered by the policy. In an accident insurance, the insured's beneficiary has the burden of proof in
demonstrating that the cause of death is due to the covered peril. Once that fact is established, the burden
then shifts to the insurer to show any excepted peril that may have been stipulated by the parties. An "accident
insurance" is not thus to be likened to an ordinary life insurance where the insured's death, regardless of the
cause thereof, would normally be compensable. The latter is akin in property insurance to an "all risk" coverage
where the insured, on the aspect of burden of proof, has merely to show the condition of the property insured
when the policy attaches and the fact of loss or damage during the period of the policy and where, thereafter,
the burden would be on the insurer to show any "excluded peril." When, however, the insured risk is specified,
like in the case before us, it lies with the claimant of the insurance proceeds to initially prove that the loss is
caused by the covered peril.
While petitioner did fail in substantiating her allegation that the death of her husband was due to an accident,
considering, however, the uncertainty on the real cause of death, private respondent might find its way clear
into still taking a second look on the matter and perhaps help ease the load of petitioner's loss.
WHEREFORE, the decision appealed from is AFFIRMED. No costs.
SO ORDERED.
CASE 38- can’t search

138

CASE 39
G.R. No. 95546 November 6, 1992
MAKATI
TUSCANY
CONDOMINIUM
CORPORATION,
petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by American International
Underwriters (Phils.), Inc., respondent.
This case involves a purely legal question: whether payment by installment of the premiums due on an
insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as the
Insurance Code, as amended, which provides:
Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is exposed to
the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract
of insurance issued by an insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life policy whenever the grace
period provision applies.
Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by American
International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany Condominium Corporation
(TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1
March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The premium was paid on
installments on 12 March 1982, 20 May 1982, 21 June 1982 and 16 November 1982, all of which were accepted
by private respondent.
On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-9210596, which
replaced and renewed the previous policy, for a term covering 1 March 1983 to 1 March 1984. The premium in
the amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9
September 1983, and 21 November 1983. All payments were likewise accepted by private respondent.
On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance Policy
No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy, petitioner made
two installment payments, both accepted by private respondent, the first on 6 February 1984 for P52,000.00
and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the
premium.
Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for Insurance
Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-9210651. It
explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its
favor and the receipts for the installment payments covering the policy for 1984-85, as well as the two (2)
previous policies, stated the following reservations:
2. Acceptance of this payment shall not waive any of the company rights to deny liability on any
claim under the policy arising before such payments or after the expiration of the credit clause
of the policy; and
3. Subject to no loss prior to premium payment. If there be any loss such is not covered.

139

Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then
pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with
amended counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85.
After some incidents, petitioner and private respondent moved for summary judgment.
On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following findings:
While it is true that the receipts issued to the defendant contained the aforementioned
reservations, it is equally true that payment of the premiums of the three aforementioned
policies (being sought to be refunded) were made during the lifetime or term of said policies,
hence, it could not be said, inspite of the reservations, that no risk attached under the policies.
Consequently, defendant's counterclaim for refund is not justified.
As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view of the
reservation in the receipts ordinarily issued by the plaintiff on premium payments the only
plausible conclusion is that plaintiff has no right to demand their payment after the lapse of the
term of said policy on March 1, 1985. Therefore, the defendant was justified in refusing to pay
the same.
Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a
decision modifying that of the trial court by ordering herein petitioner to pay the balance of the premiums due
on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the denial of the
counterclaim. The appellate court thus explained —
The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the
entire premium. Here, the parties herein agreed to make the premiums payable in
installments, and there is no pretense that the parties never envisioned to make the insurance
contract binding between them. It was renewed for two succeeding years, the second and third
policies being a renewal/replacement for the previous one. And the insured never informed the
insurer that it was terminating the policy because the terms were unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties may not agree to
make the insurance contract valid and binding without payment of premiums, there is nothing
in said section which suggests that the parties may not agree to allow payment of the
premiums in installment, or to consider the contract as valid and binding upon payment of the
first premium. Otherwise, we would allow the insurer to renege on its liability under the
contract, had a loss incurred (sic) before completion of payment of the entire premium, despite
its voluntary acceptance of partial payments, a result eschewed by a basic considerations of
fairness and equity.
To our mind, the insurance contract became valid and binding upon payment of the first
premium, and the plaintiff could not have denied liability on the ground that payment was not
made in full, for the reason that it agreed to accept installment payment. . . .
Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982,
1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance Code, as
amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss for
occurring before payment of premiums.
It argues that where the premiums is not actually paid in full, the policy would only be effective if there is an
acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the Insurance Code. The
absence of an express acknowledgment in the policies of such receipt of the corresponding premium payments,
140

and petitioner's failure to pay said premiums on or before the effective dates of said policies rendered them
invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance upon mere partial
payment of the premiums because under Sec. 77 of the Insurance Code, no contract of insurance is valid and
binding unless the premium thereof has been paid, notwithstanding any agreement to the contrary. As a
consequence, petitioner seeks a refund of all premium payments made on the alleged invalid insurance
policies.
We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly
show that petitioner and private respondent intended subject insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982
was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the installment payments.
Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to
petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting
and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the
premiums were not prepared in full.
We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and conclusion
of the appellate court contained in its Resolution denying the motion to reconsider its Decision —
While the import of Section 77 is that prepayment of premiums is strictly required as a
condition to the validity of the contract, We are not prepared to rule that the request to make
installment payments duly approved by the insurer, would prevent the entire contract of
insurance from going into effect despite payment and acceptance of the initial premium or first
installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the
condition of prepayment by making an acknowledgment in the insurance policy of receipt of
premium as conclusive evidence of payment so far as to make the policy binding despite the
fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating
that the policy is valid even if premiums are not paid, but does not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good
customs, public order or public policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in installments not so proscribed. At the very
least, both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted. 4
The
reliance
by
petitioner
on
Arce
vs.
Capital
Surety
and
Insurance
Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar. In Arce, no
payment was made by the insured at all despite the grace period given. In the case before Us, petitioner paid
the initial installment and thereafter made staggered payments resulting in full payment of the 1982 and 1983
insurance policies. For the 1984 policy, petitioner paid two (2) installments although it refused to pay the
balance.
It appearing from the peculiar circumstances that the parties actually intended to make three (3) insurance
contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the
balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP-9210651) in
March 1985. Moreover, as correctly observed by the appellate court, where the risk is entire and the contract is
indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk
insured for any period, however brief or momentary.
WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED. Costs against
petitioner.
SO ORDERED.

141

CASE 40
G.R. No. 102253 June 2, 1995
SOUTH
SEA
SURETY
AND
INSURANCE
COMPANY,
INC.,
petitioner,
vs.
HON. COURT OF APPEALS and VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY, INC., respondents.
Two issues on the subject of insurance are raised in this petition, that assails the decision, that assails the
decision of the Court of Appeals. (in CA-G.R. NO. CV-20156), the first dealing on the requirement of premium
payment and the second relating to the agency relationship of parties under that contract.
The court litigation started when Valenzuela Hardwood and Industrial Supply, Inc. ("Hardwood"), filed with the
Regional, Trial Court of the National Capital Judicial Region, Branch l71 in Valenzuela, Metro Manila, a
complaint for the recovery of the value of lost logs and freight charges from Seven Brothers Shipping
Corporation or, to the extent of its alleged insurance cover, from South Sea Surety and insurance Company.
The factual backdrop is described briefly by the appellate court thusly:
It appears that on 16 January 1984, plaintiff [Valenzuela Hardwood and Industrial Supply, Inc.]
entered into an agreement with the defendant Seven Brothers whereby the latter undertook to
load on board its vessel M/V Seven Ambassador the former's lauan round logs numbering 940
at the port of Maconacon, Isabela for shipment to Manila.
On 20 January 1984, plaintiff insured the logs, against loss and/or, damage with defendant
South Sea Surety and Insurance Co., Inc. for P2,000,000.00 end the latter issued its Marine
Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said date.
On 24 January 1984, the plaintiff gave the check in payment of the premium on the insurance
policy to Mr. Victorio Chua.
In the meantime, the said vessel M/V Seven Ambassador sank on 25 January 1984 resulting in
the loss of the plaintiffs insured logs.
On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover payment of the premium and
documentary stamps due on the policy was tendered to the insurer but was not accepted.
Instead, the South Sea Surety and Insurance Co., Inc. cancelled the insurance policy it issued as
of the date of inception for non-payment of the premium due in accordance with Section 77 of
the Insurance Code.
On 2 February 1984, plaintiff demanded from defendant South Sea Surety and Insurance Co.,
Inc. the payment of the proceeds of the policy but the latter denied liability under the policy.
Plaintiff likewise filed a formal claim with defendant Seven Brothers Shipping Corporation for
the value of the lost logs but the latter denied the claim.
In its decision, dated 11 May 1988, the trial court rendered judgment in favor of plaintiff Hardwood.
On appeal perfected by both the shipping firm and the insurance company, the Court of Appeals affirmed the
judgment of the court a quo only against the insurance corporation; in absolving the shipping entity from
liability, the appellate court ratiocinated:
The primary issue to be resolved before us is whether defendants shipping corporation and the
surety company are liable to the plaintiff for the latter's lost logs.
142

It appears that there is a stipulation in the charter party that the ship owner would be
exempted from liability in case of loss.
The court a quo erred in applying the provisions of the Civil Code on common carriers to
establish the liability of the shipping corporation. The provisions on common carriers should
not be applied where the carrier is not acting as such but as a private carrier.
Under American jurisprudence, a common carrier undertaking to carry a special or chartered to
a special person only, becomes a private carrier.
As a private carrier, a stipulation exempting the owner from liability even for the negligence of
its agent is valid (Home Insurance Company, Inc. vs. American Steamship Agencies, Inc., 23
SCRA 24).
The shipping corporation should not therefore be held liable for the loss of the logs.
In this petition for review on certiorari brought by South Sea Surety and Insurance Co., Inc., petitioner argues
that it likewise should have been freed from any liability to Hardwood. It faults the appellate court (a) for
having Supposedly disregarded Section 77 of the insurance Code and (b) for holding Victorio Chua to have been
an authorized representative of the insurer.
Section 77 of the Insurance Code provides:
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies.
Undoubtedly, the payment of the premium is a condition precedent to, and essential for, the efficaciousness of
the contract. The only two statutorily provided exceptions are (a) in case the insurance coverage relates to life
or industrial life (health) insurance when a grace period applies and (b) when the insurer makes a written
acknowledgment of the receipt of premium, this acknowledgment being declared by law to be then conclusive
evidence of the premium payment (Secs. 77-78, Insurance Code). The appellate court, contrary to what the
petition suggests, did not make any pronouncement to the contrary. Indeed, it has said:
Concerning the issue as to whether there is a valid contract of insurance between plaintiffappellee and defendant-appellant South Sea Surety and Insurance Co., Inc., Section 77 of the
Insurance Code explicitly provides that notwithstanding any agreement to the contrary, no
policy issued by an insurance company is valid and binding unless and until premium thereof
has been paid. It is therefore important to determine whether at the time of the loss, the
premium was already paid.
No attempt becloud the issues can disguise the fact that the sole question raised in the instant petition is really
evidentiary in nature, i.e., whether or not Victorio Chua, in receiving the check for the insurance premium prior
to the occurrence of the risk insured against has so acted as an agent of petitioner. The appellate court, like the
trial court, has found in the affirmative. Said the appellate court:
In the instant case, the Marine Cargo Insurance Policy No. 84/24229 was issued by defendant
insurance company on 20 January 1984. At the time the vessel sank on 25 January 1984
resulting in the loss of the insured logs, the insured had already delivered to Victorio Chua the
check in payment of premium. But, as Victorio Chua testified, it was only in the morning of 30

143

January 1984 or 5 days after the vessel sank when his messenger tendered the check to
defendant South Sea Surety and Insurance Co., Inc. (TSN, pp. 3-27, 16-17, 22 October 1985).
The pivotal issue to be resolved to determine the liability, of the surety corporation is whether
Mr. Chua acted as an agent of the surety company or of the insured when he received the
check for insurance premiums.
Appellant surety company insists that Mr. Chua is an administrative assistant for the past ten
years and an agent for less than ten years of the Columbia Insurance Brokers, Ltd. He is paid a
salary as a administrative assistant and a commission as agent based on the premiums he turns
over to the broker. Appellant therefore argues that Mr. Chua, having received the insurance
premiums as an agent of the Columbia Insurance Broker, acted as an agent of the insured
under Section 301 of the Insurance Code which provides as follows:
Sec. 301. Any person who for any compensation, commission or other thing of
value, acts, or aids in soliciting, negotiating or procuring the making of any
insurance contract or in placing risk or taking out insurance, on behalf of an
insured other than himself, shall be an insurance broker within the intent of
this Code, and shall thereby become liable to all the duties requirements,
liabilities and penalties to which an insurance broker is subject.
The appellees, upon the other hand, claim that the second paragraph of Section 306 of the
Insurance Code provide as follows:
Sec. 306. . . . Any insurance company which delivers to an insurance agent or
insurance broker a policy or contract of insurance shall be deemed to have
authorized such agent or broker to receive on its behalf payment of any
premium which is due on such policy of contract of insurance at the time of its
issuance or delivery or which becomes due thereon.
On cross-examination in behalf of South Sea Surety and Insurance Co., Inc. Mr. Chua testified
that the marine cargo insurance policy for the plaintiff's logs was delivered to him on 21
January 1984 at his office to be delivered to the plaintiff.
When the appellant South Sea Surety and Insurance Co., Inc. delivered to Mr. Chua the marine
cargo insurance policy for the plaintiffs logs, he is deemed to have been authorized by the
South Sea Surety and Insurance Co., Inc. to receive the premium which is due on its behalf.
When therefore the insured logs were lost, the insured had already paid the premium to an
agent of the South Sea Surety and Insurance Co., Inc., which is consequently liable to pay the
insurance proceeds under the policy it issued to the insured.
We see no valid reason to discard the factual conclusions of the appellate court. Just as so correctly pointed out
by private respondent, it is not the function of this Court to assess and evaluate all over again the evidence,
testimonial and documentary, adduced by the parties particularly where, such as here, the findings of both the
trial court and the appellate court on the matter coincide.
WHEREFORE, the resolution, dated 01 February 1993, granting due course to the petition is RECALLED, and the
petition is DENIED. Costs against petitioner.
SO ORDERED.

144

CASE 41
G.R. No. 119655 May 24, 1996
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA M. RORALDO, VIRGILIO
M.
RORALDO,
MYRNA
M.
RORALDO
and
ROSABELLA
M.
RORALDO,
petitioners,
vs.
COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC., respondents.
May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE) issued Fire
Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their two-storey residential
building located at 5855 Zobel Street, Makati City, together with all their personal effects therein. The
insurance was for P600,000.00 covering the period from 23 January 1987 to 23 January 1988. On 23 January
1987, of the total premium of P2,983.50, petitioner Violeta Tibay only paid P600.00 thus leaving a considerable
balance unpaid.
On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10 March 1987
Violeta Tibay paid the balance of the premium. On the same day, she filed with FORTUNE a claim on the fire
insurance policy. Her claim was accordingly referred to its adjuster, Goodwill Adjustment Services, Inc. (GASI),
which immediately wrote Violeta requesting her to furnish it with the necessary documents for the
investigation and processing of her claim. Petitioner forthwith complied. On 28 March 1987 she signed a nonwaiver agreement with GASI to the effect that any action taken by the companies or their representatives in
investigating the claim made by the claimant for his loss which occurred at 5855 Zobel Roxas, Makati on March
8, 1987, or in the investigating or ascertainment of the amount of actual cash value and loss, shall not waive or
invalidate any condition of the policies of such companies held by said claimant, nor the rights of either or any
of the parties to this agreement, and such action shall not be, or be claimed to be, an admission of liability on
the part of said companies or any of them.
In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition No. 2 and
of Sec. 77 of the Insurance Code. Efforts to settle the case before the Insurance Commission proved futile. On 3
March 1988 Violets and the other petitioners sued FORTUNE for damages in the amount of P600,000.00
representing the total coverage of the fire insurance policy plus 12% interest per annum, P100,000.00 moral
damages, and attorney's fees equivalent to 20% of the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value of the
insured building and personal properties in the amount of P600,000.00 plus interest at the legal rate of 6% per
annum from the filing of the complaint until full payment, and attorney's fees equivalent to 20% of the total
amount claimed plus costs of suit.
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be liable to
plaintiff-appellees therein but ordering defendant-appellant to return to the former the premium of P2,983.50
plus 12% interest from 10 March 1987 until full payment.
Hence this petition for review with petitioners contending mainly that contrary to the conclusion of the
appellate court, FORTUNE remains liable under the subject fire insurance policy in spite of the failure of
petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm the Court of Appeals.
Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. The consideration is the premium, which must be paid
145

at the time and in the way and manner specified in the policy, and if not so paid, the policy will lapse and be
forfeited by its own terms.
The pertinent provisions in the Policy on premium read —
THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the Company in
accordance with Policy Condition No. 2 of the total premiums by the insured as stipulated above
for the period aforementioned for insuring against Loss or Damage by Fire or Lightning as
herein appears, the Property herein described . . .
2. This policy including any renewal thereof and/or any endorsement thereon is not in force
until the premium has been fully paid to and duly receipted by the Company in the manner
provided herein.
Any supplementary agreement seeking to amend this condition prepared by agent, broker or
Company official, shall be deemed invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules and regulations which are or may
hereafter be in force provide for the payment of the stipulated premiums in periodic
installments at fixed percentage, it is hereby declared, agreed and warranted that this policy
shall be deemed effective, valid and binding upon the Company only when the premiums
therefor have actually been paid in full and duly acknowledged in a receipt signed by any
authorized official or representative/agent of the Company in such manner as provided herein.
(emphasis supplied).
Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only been
partially paid and the balance paid only after the peril insured against has occurred, the insurance contract did
not take effect and the insured cannot collect at all on the policy. This is fully supported by Sec. 77 of the
Insurance Code which provides —
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies (emphasis supplied).
Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has been paid."
This leads us to the manner of payment envisioned by the law to make the insurance policy operative and
binding. For whatever judicial construction may be accorded the disputed phrase must ultimately yield to the
clear mandate of the law. The principle that where the law does not distinguish the court should neither
distinguish assumes that the legislature made no qualification on the use of a general word or expression. In
Escosura v. San Miguel Brewery, Inc., 7 the Court through Mr. Justice Jesus G. Barrera, interpreting the phrase
"with pay" used in connection with leaves of absence with pay granted to employees, ruled —
. . . the legislative practice seems to be that when the intention is to distinguish between full
and partial payment, the modifying term is used . . .
Citing C.A. No. 647 governing maternity leaves of married women in government, R. A. No. 679
regulating employment of women and children, R.A. No. 843 granting vacation and sick leaves to
judges of municipal courts and justices of the peace, and finally, Art. 1695 of the New Civil Code
providing that every househelp shall be allowed four (4) days vacation each month, which laws simply
146

stated "with pay," the Court concluded that it was undisputed that in all these laws the phrase "with
pay" used without any qualifying adjective meant that the employee was entitled to full compensation
during his leave of absence.
Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial payment of the
premium due and the express stipulation thereof to the contrary, petitioners rely heavily on the 1967 case of
Philippine Phoenix and Insurance Co., Inc. v. Woodworks, Inc. 8 where the Court through Mr. Justice Arsenio P.
Dizon sustained the ruling of the trial court that partial payment of the premium made the policy effective
during the whole period of the policy. In that case, the insurance company commenced action against the
insured for the unpaid balance on a fire insurance policy. In its defense the insured claimed that nonpayment of
premium produced the cancellation of the insurance contract. Ruling otherwise the Court held —
It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by appellee and
delivered to appellant, and that on September 22 of the same year, the latter paid to the
former the sum of P3,000.00 on account of the total premium of P6,051.95 due thereon. There
is, consequently, no doubt at all that, as between the insurer and the insured, there was not
only a perfected contract of insurance but a partially performed one as far as the payment of
the agreed premium was concerned. Thereafter the obligation of the insurer to pay the insured
the amount, for which the policy was issued in case the conditions therefor had been complied
with, arose and became binding upon it, while the obligation of the insured to pay the
remainder of the total amount of the premium due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the factual
scenario is different. In Phoenix it was the insurance company that sued for the balance of the premium, i.e., it
recognized and admitted the existence of an insurance contract with the insured. In the case before us, there
is, quite unlike in Phoenix, a specific stipulation that (t)his policy . . . is not in force until the premium has been
fully paid and duly receipted by the Company . . .Resultantly, it is correct to say that in Phoenix a contract was
perfected upon partial payment of the premium since the parties had not otherwise stipulated that
prepayment of the premium in full was a condition precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the
premium without any other precondition to its enforceability as in the instant case, the insurer in effect had
shown its intention to continue with the existing contract of insurance, as in fact it was enforcing its right to
collect premium, or exact specific performance from the insured. This is not so here. By express agreement of
the parties, no vinculum juris or bond of law was to be established until full payment was effected prior to the
occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals the parties mutually agreed that the premiums could
be paid in installments, which in fact they did for three (3) years, hence, this Court refused to invalidate the
insurance policy. In giving effect to the policy, the Court quoted with approval the Court of Appeals —
The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the
entire premium. Here, the parties . . . agreed to make the premiums payable in installments,
and there is no pretense that the parties never envisioned to make the insurance contract
binding between them. It was renewed for two succeeding years, the second and third policies
being a renewal/replacement for the previous one. And the insured never informed the insurer
that it was terminating the policy because the terms were unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties may not agree to
make the insurance contract valid and binding without payment of premiums, there is nothing
in said section which suggests that the parties may not agree to allow payment of the
premiums in installment, or to consider the contract as valid and binding upon
payment of the first premium. Otherwise we would allow the insurer to renege on its liability
147

under the contract, had a loss incurred (sic) before completion of payment of the entire
premium, despite its voluntary acceptance of partial payments, a result eschewed by basic
considerations of fairness and equity . . .
These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or implied, of
prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in Phoenix, and
expressly, by agreeing to make premiums payable in installments as in Tuscany. But contrary to the stance
taken by petitioners, there is no waiver express or implied in the case at bench. Precisely, the insurer and the
insured expressly stipulated that (t)his policy including any renewal thereof and/or any indorsement thereon is
not in force until the premium has been fully paid to and duly receipted by the Company . . . and that this policy
shall be deemed effective, valid and binding upon the Company only when the premiums therefor have actually
been paid in full and duly acknowledged.
Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77 of the
Insurance Code the payment of partial premium by the assured in this particular instance should not be
considered the payment required by the law and the stipulation of the parties. Rather, it must be taken in the
concept of a deposit to be held in trust by the insurer until such time that the full amount has been tendered
and duly receipted for. In other words, as expressly agreed upon in the contract, full payment must be made
before the risk occurs for the policy to be considered effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever
resulted from the fractional payment of premium. The insurance contract itself expressly provided that the
policy would be effective only when the premium was paid in full. It would have been altogether different were
it not so stipulated. Ergo, petitioners had absolute freedom of choice whether or not to be insured by FORTUNE
under the terms of its policy and they freely opted to adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is the
intention
of
the
parties
as
expressed
in
the
policy. 10 Courts have no other function but to enforce the same. The rule that contracts of insurance will be
construed in favor of the insured and most strongly against the insurer should not be permitted to have the
effect of making a plain agreement ambiguous and then construe it in favor of the insured. 11 Verily, it is
elemental law that the payment of premium is requisite to keep the policy of insurance in force. If the premium
is not paid in the manner prescribed in the policy as intended by the parties the policy is ineffective. Partial
payment even when accepted as a partial payment will not keep the policy alive even for such fractional part of
the
year
as
the
part
payment
bears
to
the
whole
payment.
Applying further the rules of statutory construction, the position maintained by petitioners becomes even more
untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court Of Appeals, speaks only of two
(2) statutory exceptions to the requirement of payment of the entire premium as a prerequisite to the validity
of the insurance contract. These exceptions are: (a) in case the insurance coverage relates to life or industrial
life (health) insurance when a grace period applies, and (b) when the insurer makes a written acknowledgment
of the receipt of premium, this acknowledgment being declared by law to be then conclusive evidence of the
premium payment.
A maxim of recognized practicality is the rule that the expressed exception or exemption excludes others.
Exceptio firmat regulim in casibus non exceptis. The express mention of exceptions operates to exclude other
exceptions; conversely, those which are not within the enumerated exceptions are deemed included in the
general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and the law has not expressly
excepted partial payments, there is no valid and binding contract. Hence, in the absence of clear waiver of
prepayment in full by the insurer, the insured cannot collect on the proceeds of the policy.

148

In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is
primarily a risk distributing device, a mechanism by which all members of a group exposed to a particular risk
contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to
exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled
upon the happening of the contingency to pay the entire sum agreed upon, and the insured, that of parting
with the amount required as premium, without receiving anything therefor in case the contingency does not
happen. To ensure payment for these losses, the law mandates all insurance companies to maintain a legal
reserve fund in favor of those claiming under their policies. 15 It should be understood that the integrity of this
fund cannot be secured and maintained if by judicial fiat partial offerings of premiums were to be construed as
a legal nexus between the applicant and the insurer despite an express agreement to the contrary. For what
could prevent the insurance applicant from deliberately or wilfully holding back full premium payment and wait
for the risk insured against to transpire and then conveniently pass on the balance of the premium to be
deducted from the proceeds of the insurance? Worse, what if the insured makes an initial payment of only
10%, or even 1%, of the required premium, and when the risk occurs simply points to the proceeds from where
to source the balance? Can an insurance company then exist and survive upon the payment of 1%, or even
10%, of the premium stipulated in the policy on the basis that, after all, the insurer can deduct from the
proceeds of the insurance should the risk insured against occur?
Interpreting the contract of insurance stringently against the insurer but liberally in favor of the insured despite
clearly defined obligations of the parties to the policy can be carried out to extremes that there is the danger
that we may, so to speak, "kill the goose that lays the golden egg." We are well aware of insurance companies
falling into the despicable habit of collecting premiums promptly yet resorting to all kinds of excuses to deny or
delay payment of just insurance claims. But, in this case, the law is manifestly on the side of the insurer. For as
long as the current Insurance Code remains unchanged and partial payment of premiums is not mentioned at
all as among the exceptions provided in Sees. 77 and 78, no policy of insurance can ever pretend to be
efficacious or effective until premium has been fully paid.
And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business because
by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the public, hence,
the imperative need for its prompt payment and full satisfaction. It must be emphasized here that all actuarial
calculations and various tabulations of probabilities of losses under the risks insured against are based on the
sound hypothesis of prompt payment of premiums. Upon this bedrock insurance firms are enabled to offer the
assurance of security to the public at favorable rates. But once payment of premium is left to the whim and
caprice of the insured, as when the courts tolerate the payment of a mere P600.00 as partial undertaking out of
the stipulated total premium of P2,983.50 and the balance to be paid even after the risk insured against has
occurred, as petitioners have done in this case, on the principle that the strength of the vinculum juris is not
measured by any specific amount of premium payment, we will surely wreak havoc on the business and set to
naught what has taken actuarians centuries to devise to arrive at a fair and equitable distribution of risks and
benefits between the insurer and the insured.
The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of statutory
prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and
to impose whatever conditions they deem best upon their obligations not inconsistent with public policy. 17
The validity of these limitations is by law passed upon by the Insurance Commissioner who is empowered to
approve all forms of policies, certificates or contracts of insurance which insurers intend to issue or deliver.
That the policy contract in the case at bench was approved and allowed issuance simply reaffirms the validity of
such policy, particularly the provision in question.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24 March 1995 is
AFFIRMED.
SO ORDERED.

149

CASE 42
G.R. No. 137172 June 15, 1999
UCPB
GENERAL
INSURANCE
vs.
MASAGANA TELAMART, INC., respondent.

CO.,

INC.,

petitioner,

The case is an appeal via certiorari seeking to set aside the decision of the Court of Appeals, affirming with
modification that of the Regional Trial Court, Branch 58, Makati, ordering petitioner to pay respondent the sum
of P18,645,000.00, as the proceeds of the insurance coverage of respondent's property razed by fire; 25% of
the total amount due as attorney's fees and P25,000.00 as litigation expenses, and costs.
The facts are undisputed and may be related as follows:
On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's various property described
therein against fire, for the period from May 22, 1991 to May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew them upon expiration of their terms
on May 22, 1992. Petitioner advised respondent's broker, Zuellig Insurance Brokers, Inc. of its intention not to
renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the policies at the address
stated in the policies.
On June 13, 1992, fire razed respondent's property covered by three of the insurance policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its head office five (5) manager's checks in the
total amount of P225,753.95, representing premium for the renewal of the policies from May 22, 1992 to May
22, 1993. No notice of loss was filed by respondent under the policies prior to July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of the insured property
razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager's checks that it
tendered, and at the same time rejected respondent's claim for the reasons (a) that the policies had expired
and were not renewed, and (b) that the fire occurred on June 13, 1992, before respondent's tender of premium
payment.
On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati City, a civil complaint
against petitioner for recovery of P18,645,000.00, representing the face value of the policies covering
respondent's insured property razed by fire, and for attorney's fees.
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an answer to the complaint.
It alleged that the complaint "fails to state a cause of action"; that petitioner was not liable to respondent for
insurance proceeds under the policies because at the time of the loss of respondent's property due to fire, the
policies had long expired and were not renewed.
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati, rendered decision, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant, as follows:
150

(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of
P225,753.95 (refused by the defendant) as full payment of the corresponding premiums for the
replacement-renewal policies for Exhibits A, B, C, D and E;
(2) Declaring plaintiff to have fully complied with its obligation to pay the premium thereby
rendering the replacement-renewal policy of Exhibits A, B, C, D and E effective and binding for
the duration May 22, 1992 until May 22, 1993; and, ordering defendant to deliver forthwith to
plaintiff the said replacement-renewal policies;
(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992 and August 9,
1991 to August 9, 1992, respectively; and
(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00 representing the
latter's claim for indemnity under Exhibits A, B & C and/or its replacement-renewal policies; (b)
25% of the total amount due as and for attorney's fees; (c) P25,000.00 as necessary litigation
expenses; and, (d) the costs of suit.
All other claims and counterclaims asserted by the parties are denied and/or dismissed,
including plaintiff's claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.
ZOSIMO Z. ANGELES.
Judge.
In due time, petitioner appealed to the Court of Appeals.
On September 7, 1998, the Court of Appeals promulgated its decision affirming that of the Regional Trial Court
with the modification that item No. 3 of the dispositive portion was deleted, and the award of attorney's fees
was reduced to 10% of the total amount due.
The Court of Appeals held that following previous practise, respondent was allowed a sixty (60) to ninety (90)
day credit term for the renewal of its policies, and that the acceptance of the late premium payment suggested
an understanding that payment could be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent to comment on the petition, not to file a
motion to dismiss within ten (10) days from notice. On April 22, 1999, respondent filed its comment.
Respondent submits that the Court of Appeals correctly ruled that no timely notice of non-renewal was sent.
The notice of non-renewal sent to broker Zuellig which claimed that it verbally notified the insurance agency
but not respondent itself did not suffice. Respondent submits further that the Court of Appeals did not err in
finding that there existed a sixty (60) to ninety (90) days credit agreement between UCPB and Masagana, and
that, finally, the Supreme Court could not review factual findings of the lower court affirmed by the Court of
Appeals.
We give due course to the appeal.

151

The basic issue raised is whether the fire insurance policies issued by petitioner to the respondent covering the
period May 22, 1991 to May 22, 1992, had expired on the latter date or had been extended or renewed by an
implied credit arrangement though actual payment of premium was tendered on a later date after the
occurrence of the risk (fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance policy, other than life, issued originally or on
renewal, is not valid and binding until actual payment of the premium. Any agreement to the contrary is void.
11
The parties may not agree expressly or impliedly on the extension of creditor time to pay the premium and
consider the policy binding before actual payment.
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, cited by the Court of Appeals, is not applicable. In that
case, payment of the premium was in fact actually made on December 24, 1981, and the fire occurred on
January 18, 1982. Here, the payment of the premium for renewal of the policies was tendered on July 13, 1992,
a month after the fire occurred on June 13, 1992. The assured did not even give the insurer a notice of loss
within a reasonable time after occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals in CA-G.R. CV
No. 42321. In lieu thereof the Court renders judgment dismissing respondent's complaint and petitioner's
counterclaims thereto filed with the Regional Trial Court, Branch 58, Makati City, in Civil Case No. 92-2023.
Without costs.
SO ORDERED.

152

CASE 43
G.R. No. 130421 June 28, 1999
AMERICAN
HOME
vs.
ANTONIO CHUA, respondent.

ASSURANCE

COMPANY,

petitioner,

In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, petitioner seeks the
reversal of the decision of the Court of Appeals in CA-G.R. CV No. 40751, which affirmed in toto the decision of
the Regional Trial Court, Makati City, Branch 150 (hereafter trial court), in Civil Case No. 91-1009.
Petitioner is a domestic corporation engaged in the insurance business. Sometime in 1990, respondent
obtained from petitioner a fire insurance covering the stock-in-trade of his business, Moonlight Enterprises,
located at Valencia, Bukidnon. The insurance was due to expire on 25 March 1990.
On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of P2,983.50 to petitioner's agent,
James Uy, as payment for the renewal of the policy. In turn, the latter delivered Renewal Certificate No.
00099047 to respondent. The check was drawn against a Manila bank and deposited in petitioner's bank
account in Cagayan de Oro City. The corresponding official receipt was issued on 10 April. Subsequently, a new
insurance policy, Policy No. 206-4234498-7, was issued, whereby petitioner undertook to indemnify
respondent for any damage or loss arising from fire up to P200,000 for the period 25 March 1990 to 25 March
1991.
On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was estimated between
P4,000,000 and P5,000,000. Respondent filed an insurance claim with petitioner and four other co-insurers,
namely, Pioneer Insurance and Surety Corporation, Prudential Guarantee and Assurance, Inc., Filipino
Merchants Insurance Co. and Domestic Insurance Company of the Philippines. Petitioner refused to honor the
claim notwithstanding several demands by respondent, thus, the latter filed an action against petitioner before
the trial court.
In its defense, petitioner claimed there was no existing insurance contract when the fire occurred since
respondent did not pay the premium. It also alleged that even assuming there was a contract, respondent
violated several conditions of the policy, particularly: (1) his submission of fraudulent income tax return and
financial statements; (2) his failure to establish the actual loss, which petitioner assessed at P70,000; and (3) his
failure to notify to petitioner of any insurance already effected to cover the insured goods. These violations,
petitioner insisted, justified the denial of the claim.
The trial court ruled in favor of respondent. It found that respondent paid by way of check a day before the fire
occurred. The check, which was deposited in petitioner's bank account, was even acknowledged in the renewal
certificate issued by petitioner's agent. It declared that the alleged fraudulent documents were limited to the
disparity between the official receipts issued by the Bureau of Internal Revenue (BIR) and the income tax
returns for the years 1987 to 1989. All the other documents were found to be genuine. Nonetheless, it gave
credence to the BIR certification that respondent paid the corresponding taxes due for the questioned years.
As to respondent's failure to notify petitioner of the other insurance contracts covering the same goods, the
trial court held that petitioner failed to show that such omission was intentional and fraudulent. Finally, it
noted that petitioner's investigation of respondent's claim was done in collaboration with the representatives
of other insurance companies who found no irregularity therein. In fact, Pioneer Insurance and Surety
Corporation and Prudential Guarantee and Assurance, Inc. promptly paid the claims filed by respondent.
The trial court decreed as follows:

153

WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the [petitioner]
ordering the latter to pay the former the following:
1. P200,000.00, representing the amount of the insurance, plus legal interest
from the date of filing of this case;
2. P200,000.00 as moral damages;
3. P200,000.00 as loss of profit;
4. P100,000.00 as exemplary damages;
5. P50,000.00 as attorney's fees; and
6. Cost of suit.
On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court of Appeals found that
respondent's claim was substantially proved and petitioner's unjustified refusal to pay the claim entitled
respondent to the award of damages.
Its motion for reconsideration of the judgment having been denied, petitioner filed the petition in this case.
Petitioner reiterates its stand that there was no existing insurance contract between the parties. It invokes
Section 77 of the Insurance Code, which provides:
An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of life or an industrial life policy whenever the grace
period provision applies.
and cites the case of Arce v. Capital Insurance & Surety Co., Inc., where we ruled that unless and until
the premium is paid there is no insurance.
Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract was not yet subsisting
pursuant to Article 1249 3 of the Civil Code, which recognizes that a check can only effect payment once it has
been cashed. Although respondent testified that he gave the check on 5 April to a certain James Uy, the check,
drawn against a Manila bank and deposited in a Cagayan de Oro City bank, could not have been cleared by 6
April, the date of the fire. In fact, the official receipt issued for respondent's check payment was dated 10 April
1990, four days after the fire occurred.
Citing jurisprudence, petitioner also contends that respondent's non-disclosure of the other insurance contracts
rendered the policy void. It underscores the trial court's neglect in considering the Commission on Audit's
certification that the BIR receipts submitted by respondent were, in effect, fake since they were issued to other
persons. Finally, petitioner argues that the award of damages was excessive and unreasonable considering that
it did not act in bad faith in denying respondent's claim.
Respondent counters that the issue of non-payment of premium is a question of fact which can no longer be
assailed. The trial court's finding on the matter, which was affirmed by the Court of Appeals, is conclusive.
Respondent refutes the reason for petitioner's denial of his claim. As found by the trial court, petitioner's loss
adjuster admitted prior knowledge of respondent's existing insurance contracts with the other insurance
companies. Nonetheless, the loss adjuster recommended the denial of the claim, not because of the said
contracts, but because he was suspicious of the authenticity of certain documents which respondent submitted
in filing his claim.
To bolster his argument, respondent cites Section 66 of the Insurance Code, 5 which requires the insurer to give
a notice to the insured of its intention to terminate the policy forty-five days before the policy period ends. In
the instant case, petitioner opted not to terminate the policy. Instead, it renewed the policy by sending its
154

agent to respondent, who was issued a renewal certificate upon delivery of his check payment for the renewal
of premium. At this precise moment the contract of insurance was executed and already in effect. Respondent
also claims that it is standard operating procedure in the provinces to pay insurance premiums by check when
collected by insurance agents.
On the issue of damages, respondent maintains that the amounts awarded were reasonable. He cites
numerous trips he had to make from Cagayan de Oro City to Manila to follow up his rightful claim. He imputes
bad faith on petitioner who made enforcement of his claim difficult in the hope that he would eventually
abandon it. He further emphasizes that the adjusters of the other insurance companies recommended
payment of his claim, and they complied therewith.
In its reply, petitioner alleges that the petition questions the conclusions of law made by the trial court and the
Court of Appeals.
Petitioner invokes respondent's admission that his check for the renewal of the policy was received only on 10
April 1990, taking into account that the policy period was 25 March 1990 to 25 March 1991. The official receipt
was dated 10 April 1990. Anent respondent's testimony that the check was given to petitioner's agent, a certain
James Uy, the latter points out that even respondent was not sure if Uy was indeed its agent. It faults
respondent for not producing Uy as his witness and not taking any receipt from him upon presentment of the
check. Even assuming that the check was received a day before the concurrence of the fire, there still could not
have been payment until the check was cleared.
Moreover, petitioner denies respondent's allegation that it intended a renewal of the contract for the renewal
certificate clearly specified the following conditions:
Subject to the payment by the assured of the amount due prior to renewal date, the policy
shall be renewed for the period stated.
Any payment tendered other than in cash is received subject to actual cash collection.
Subject to no loss prior to premium and payment. If there be any loss, is not covered [sic].
Petitioner asserts that an insurance contract can only be enforced upon the payment of the premium,
which should have been made before the renewal period.
Finally, in assailing the excessive damages awarded to respondent petitioner stresses that the policy in issue
was limited to a liability of P200,000; but the trial court granted the following monetary awards: P200,000 as
actual damages; P200,000 as moral damages; P100,000 as exemplary damages; and P50,000 as attorney's fees.
The following issues must be resolved: first, whether there was a valid payment of premium, considering that
respondent's check was cashed after the occurrence of the fire; second, whether respondent violated the policy
by his submission of fraudulent documents and non-disclosure of the other existing insurance contracts; and
finally, whether respondent is entitled to the award of damages.
The general rule in insurance laws is that unless the premium is paid the insurance policy is not valid and
binding. The only exceptions are life and industrial life insurance. 6 Whether payment was indeed made is a
question of fact which is best determined by the trial court. The trial court found, as affirmed by the Court of
Appeals, that there was a valid check payment by respondent to petitioner. Well-settled is the rule that the
factual findings and conclusions of the trial court and the Court of Appeals are entitled to great weight and
respect, and will not be disturbed on appeal in the absence of any clear showing that the trial court overlooked
certain facts or circumstances which would substantially affect the disposition of the case. 7 We see no reason
to depart from this ruling.

155

According to the trial court the renewal certificate issued to respondent contained the acknowledgment that
premium had been paid. It is not disputed that the check drawn by respondent in favor of petitioner and
delivered to its agent was honored when presented and petitioner forthwith issued its official receipt to
respondent on 10 April 1990. Section 306 of the Insurance Code provides that any insurance company which
delivers a policy or contract of insurance to an insurance agent or insurance broker shall be deemed to have
authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy
or contract of insurance at the time of its issuance or delivery or which becomes due thereon. 8 In the instant
case, the best evidence of such authority is the fact that petitioner accepted the check and issued the official
receipt for the payment. It is, as well, bound by its agent's acknowledgment of receipt of payment.
Sec. 78 of the Insurance Code explicitly provides:
An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is actually paid.
This Section establishes a legal fiction of payment and should be interpreted as an exception to Section
77.
Is respondent guilty of the policy violations imputed against him? We are not convinced by petitioner's
arguments. The submission of the alleged fraudulent documents pertained to respondent's income tax returns
for 1987 to 1989. Respondent, however, presented a BIR certification that he had paid the proper taxes for the
said years. The trial court and the Court of Appeals gave credence to the certification and it being a question of
fact, we hold that said finding is conclusive.
Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers, nondisclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is common in fire
insurance policies and is known as the "other insurance clause." The purpose for the inclusion of this clause is
to prevent an increase in the moral hazard. We have ruled on its validity and the case of Geagonia v. Court of
Appeals10clearly illustrates such principle. However, we see an exception in the instant case.
Citing Section 29 11 of the Insurance Code, the trial court reasoned that respondent's failure to disclose was not
intentional and fraudulent. The application of Section 29 is misplaced. Section 29 concerns concealment which
is intentional. The relevant provision is Section 75, which provides that:
A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the
breach of an immaterial provision does not avoid the policy.
To constitute a violation the other existing insurance contracts must be upon the same subject matter and with
the same interest and risk. Indeed, respondent acquired several co-insurers and he failed to disclose this
information to petitioner. Nonetheless, petitioner is estopped from must invoking this argument. The trial
court cited the testimony of petitioner's loss adjuster who admitted previous knowledge of the co-insurers.
Thus,
COURT:
Q The matter of additional insurance of other companies, was that ever
discussed in your investigation?
A Yes, sir.
Q In other words, from the start, you were aware the insured was insured with
other companies like Pioneer and so on?
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A Yes, Your Honor.
Q But in your report you never recommended the denial of the claim simply
because of the non-disclosure of other insurance? [sic]
A Yes, Your Honor.
Q In other words, to be emphatic about this, the only reason you
recommended the denial of the claim, you found three documents to be
spurious. That is your only basis?
A Yes, Your Honor. [Emphasis supplied]
Indubitably, it cannot be said that petitioner was deceived by respondent by the latter's non-disclosure of the
other insurance contracts when petitioner actually had prior knowledge thereof. Petitioner's loss adjuster had
known all along of the other existing insurance contracts, yet, he did not use that as basis for his
recommendation of denial. The loss adjuster, being an employee of petitioner, is deemed a representative of
the latter whose awareness of the other insurance contracts binds petitioner. We, therefore, hold that there
was no violation of the "other insurance" clause by respondent.
Petitioner is liable to pay its share of the loss. The trial court and the Court of Appeals were correct in awarding
P200,000 for this. There is, however, merit in petitioner's grievance against the damages and attorney's fees
awarded.
There is no legal and factual basis for the award of P200,000 for loss of profit. It cannot be denied that the fire
totally gutted respondent's business; thus, respondent no longer had any business to operate. His loss of profit
cannot be shouldered by petitioner whose obligation is limited to the object of insurance, which was the stockin-trade, and not the expected loss in income or profit.
Neither can we approve the award of moral and exemplary damages. At the core of this case is petitioner's
alleged breach of its obligation under a contract of insurance. Under Article 2220 of the Civil Code, moral
damages may be awarded in breaches of contracts where the defendant acted fraudulently or in bad faith. We
find no such fraud or bad faith. It must again be stressed that moral damages are emphatically not intended to
enrich a plaintiff at the expense of the defendant. Such damages are awarded only to enable the injured party
to obtain means, diversion or amusements that will serve to obviate the moral suffering he has undergone, by
reason of the defendant's culpable action. Its award is aimed at the restoration, within the limits of the
possible, of the spiritual status quo ante, and it must be proportional to the suffering inflicted. 14 When
awarded, moral damages must not be palpably and scandalously excessive as to indicate that it was the result
of passion, prejudice or corruption on the part of the trial court judge.
The law 16 is likewise clear that in contracts and quasi-contracts the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Nothing thereof can be
attributed to petitioner which merely tried to resist what it claimed to be an unfounded claim for enforcement
of the fire insurance policy.
As to attorney's fees, the general rule is that attorney's fees cannot be recovered as part of damages because
of the policy that no premium should be placed on the right to litigate. 17 In short, the grant of attorney's fees
as part of damages is the exception rather than the rule; counsel's fees are not awarded every time a party
prevails in a suit. It can be awarded only in the cases enumerated in Article 2208 of the Civil Code, and in all
cases it must be reasonable. 18 Thereunder, the trial court may award attorney's fees where it deems just and
equitable that it be so granted. While we respect the trial court's exercise of its discretion in this case, the
award of P50,000 is unreasonable and excessive. It should be reduced to P10,000.
WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the Court of Appeals in CA-G.R.
No. 40751 is hereby MODIFIED by a) deleting the awards of P200,000 for loss of profit, P200,000 as moral
damages and P100,000 as exemplary damages, and b) reducing the award of attorney's fees from P50,000 to
P10,000.

157

No pronouncement as to costs.
CASE 44
G.R. No. L-36232 December 19, 1974
PIONEER
INSURANCE
AND
SURETY
CORPORATION,
petitioner-appellant,
vs.
OLIVA YAP, represented by her attorney-in-fact, CHUA SOON POON respondent-appellee.
This is an appeal by certiorari from the decision of the Court of Appeals dated December 16, 1972, in CA-G.R.
No. 36669-R, affirming the judgment of the Court of First Instance of Manila (Branch VI) in Civil Case No. 54508,
which latter court declared plaintiff Oliva Yap, herein respondent, entitled to recover from defendant Pioneer
Insurance & Surety Corporation, herein petitioner, the full amount of the damage inquired in Policy No. 4219,
which is P25,000.00, plus 12% of said sum from the date of filing of the complaint until full payment, in addition
to the sum of P6,000.00 for attorney's fees, and costs.
Respondent Oliva Yap was the owner of a store in a two-storey building located at No. 856 Juan Luna Street,
Manila, where in 1962 she sold shopping bags and footwear, such as shoes, sandals and step-ins. Chua Soon
Poon Oliva Yap's son-in-law, was in charge of the store.
On April 19, 1962, respondent Yap took out Fire Insurance Policy No. 4216 from petitioner Pioneer Insurance &
Surety Corporation with a face value of P25,000.00 covering her stocks, office furniture, fixtures and fittings of
every kind and description. Among the conditions in the policy executed by the parties are the following:
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. (emphasis supplied)
It is understood that, except as may be stated on the face of this policy there is no other
insurance on the property hereby covered and no other insurance is allowed except by the
consent of the Company endorsed hereon. Any false declaration or breach or this condition will
render this policy null and void.
At the time of the insurance on April 19, 1962 of Policy No. 4219 in favor of respondent Yap, an insurance
policy for P20,000.00 issued by the Great American Insurance Company covering the same properties was
noted on said policy as co-insurance (Annex "1-E"). Later, on August 29, 1962, the parties executed Exhibit "1K", as an endorsement on Policy No. 4219, stating:
It is hereby declared and agreed that the co-insurance existing at present under this policy is as
follows: P20,000.00 — Northwest Ins., and not as originally stated. (emphasis supplied)
Except as varied by this endorsement, all other terms and conditions remain unchanged.
Still later, or on September 26, 1962, respondent Oliva Yap took out another fire insurance policy for
P20,000.00 covering the same properties, this time from the Federal Insurance Company, Inc., which new
policy was, however, procured without notice to and the written consent of petitioner Pioneer Insurance &
Surety Corporation and, therefore, was not noted as a co-insurance in Policy No. 4219.
At dawn on December 19, 1962, a fire broke out in the building housing respondent Yap's above-mentioned
store, and the said store was burned. Respondent Yap filed an insurance claim, but the same was denied in
158

petitioner's letter of May 17, 1963 (Exhibit "G"), on the ground of "breach and/or violation of any and/or all
terms and conditions" of Policy No. 4219.
On July 17, 1963, Oliva Yap filed with the Court of First Instance of Manila the present complaint, asking, among
others, for payment of the face value of her fire insurance policy. In its answer, petitioner alleged that no
property belonging to plaintiff Yap and covered by the insurance policy was destroyed by the fire; that Yap's
claim was filed out of time; and that Yap took out an insurance policy from another insurance company without
petitioner's knowledge and/or endorsement, in violation of the express stipulations in Policy No. 4219, hence,
all benefits accruing from the policy were deemed forfeited.
As already stated at the beginning of this opinion, the trial court decided for plaintiff Oliva Yap; and its
judgment was affirmed in full by the Court of Appeals.
The vital issue in this appeal is whether or not petitioner should be absolved from liability on Fire Insurance
Policy No. 4219 on account of any violation by respondent Yap of the co-insurance clause therein. In resolving
this problem, the Court of Appeals stated in its decision:
5. The plaintiff-appellee has not violated the other insurance clause (Exhibit 1-F) of the
insurance Policy No. 4219 that would justify the defendant-appellant, as insurer, to avoid its
liability thereunder. It appears on the face of said policy that a co-insurance in the amount of
P20,000.00 was secured from the Great American Insurance and was declared by the plaintiffappellee and recognized by the defendant-appellant. This was later on substituted for the same
amount and secured by the Federal Insurance Company. Chua Soon Poon on being crossexamined by counsel for the defendant-appellant, declared that the Great American Insurance
policy was cancelled because of the difference in the premium and the same was changed for
that of the Federal (t.s.n., hearing of December 1, 1964, pp. 35-36). Contrary to the assertion of
the defendant-appellant, the Great American Insurance policy was not substituted by the
Northwest Insurance policy. As admitted by the defendant-appellant in its brief (p. 48), the fire
insurance policy issued by the Great American Insurance Company for P20,000.00 (Exhibit 1-E)
was cancelled on August 29, 1962. On the other hand, the fire insurance policy issued by the
Northwest Insurance & Surety Company for P20,000.00 (Exhibit 1-K) was taken out on July 23,
1962. How then can the Northwest Insurance policy issued on July 23, 1962, be considered as
having substituted the Great American policy which was cancelled only on August 29, 1962?
The defendant-appellant can be considered to have waived the formal requirement of
indorsing the policy of co-insurance since there was absolutely no showing that it was not
aware of said substitution and preferred to continue the policy (Gonzales La O vs. Yek Tong Lin
Fire and Marine Insurance Co., 55 Phil. 386). Even assuming that the defendant-appellant did
not indorse the Federal Insurance policy, there is no question that the same was only a
substitution and did not in any way increase the amount of the declared co-insurance. In other
words, there was no increase in the risk assumed by the defendant-appellant.
We do not agree with the conclusion of the Court of Appeals.
There was a violation by respondent Oliva Yap of the co-insurance clause contained in Policy No. 4219 that
resulted in the avoidance of petitioner's liability. The insurance policy for P20,000.00 issued by the Great
American Insurance Company covering the same properties of respondent Yap and duly noted on Policy No.
4219 as c-insurance, ceased, by agreement of the parties (Exhibit "1-L"), to be recognized by them as a coinsurance policy. The Court of Appeals says that the Great American Insurance policy was substituted by the
Federal Insurance policy for the same amount, and because it was a mere case of substitution, there was no
necessity for its endorsement on Policy No. 4219. This finding, as well as reasoning, suffers from several flaws.
There is no evidence to establish and prove such a substitution. If anything was substituted for the Great
American Insurance policy, it could only be the Northwest Insurance policy for the same amount of P20,000.00.
The endorsement (Exhibit "1-K") quoted above shows the clear intention of the parties to recognize on the date
159

the endorsement was made (August 29, 1962), the existence of only one co-insurance, and that is the
Northwest Insurance policy, which according to the stipulation of the parties during the hearing, was issued on
August 20, 1962 (t.s.n., January 12, 1965, pp. 3-4) and endorsed only on August 20, 1962. The finding of the
Court of Appeals that the Great American Insurance policy was substituted by the Federal Insurance policy is
unsubstantiated by the evidence of record and indeed contrary to said stipulation and admission of
respondent, and is grounded entirely on speculation, surmises or conjectures, hence, not binding on the
Supreme Court.
The Court of Appeals would consider petitioner to have waived the formal requirement of endorsing the policy
of co-insurance "since there was absolutely no showing that it was not aware of said substitution and preferred
to continue the policy." The fallacy of this argument is that, contrary to Section 1, Rule 131 of the Revised Rules
of Court, which requires each party to prove his own allegations, it would shift to petitioner, respondent's
burden of proving her proposition that petitioner was aware of the alleged substitution, and with such
knowledge preferred to continue the policy. Respondent Yap cites Gonzales La O vs. Yek Tong Lin Fire and
Marine Insurance Co., Ltd. 2 to justify the assumption but in that case, unlike here, there was knowledge by the
insurer of violations of the contract, to wit: "If, with the knowledge of the existence of other insurances which
the defendant deemed violations of the contract, it has preferred to continue the policy, its action amounts to
a waiver of the annulment of the contract ..." A waiver must be express. If it is to be implied from conduct
mainly, said conduct must be clearly indicative of a clear intent to waive such right. Especially in the case at bar
where petitioner is assumed to have waived a valuable right, nothing less than a clear, positive waiver, made
with full knowledge of the circumstances, must be required.
By the plain terms of the policy, other insurance without the consent of petitioner would ipso facto avoid the
contract. It required no affirmative act of election on the part of the company to make operative the clause
avoiding the contract, wherever the specified conditions should occur. Its obligations ceased, unless, being
informed of the fact, it consented to the additional insurance.
The validity of a clause in a fire insurance policy to the effect that the procurement of additional insurance
without the consent of the insurer renders ipso facto the policy void is well-settled:
In Milwaukee Mechanids' Lumber Co., vs. Gibson, 199 Ark. 542, 134 S. W. 2d 521, 522, a
substantially identical clause was sustained and enforced, the court saying: "The rule in this
state and practically all of the states is to the effect that a clause in a policy to the effect that
the procurement of additional insurance without the consent of the insurer renders the policy
void is a valid provision. The earlier cases of Planters Mutual Insurance Co., vs. Green, 72 Ark.
305, 80 S.W. 92, are to the same effect." And see Vance, Insurance, 2nd Ed., 725. (Reach vs.
Arkansas Farmers Mut. Fire Ins. Co., [Ark. Nov. 14, 1949] 224 S. W. 2d 48, 49.)
2. Where a policy contains a clause providing that the policy shall be void if insured has or shall
procure any other insurance on the property, the procurement of additional insurance without
the consent of the insurer avoids the policy." (Planters' Mut. Ins. Ass'n vs. Green [Supreme
Court of Arkansas, March 19, 1904] 80 S.W. 151.)
3. The policy provided that it should be void in case of other insurance "without notice and
consent of this company. ..." It also authorized the company to terminate the contract at any
time, at its option, by giving notice and refunding a ratable proportion of the premium. Held,
that additional insurance, unless consented to, or unless a waiver was shown, ipso facto
avoided the contract, and the fact that the company had not, after notice of such insurance,
cancelled the policy, did not justify the legal conclusion that it had elected to allow it to
continue in force." (Johnson vs. American Fire Ins., Co., [Supreme Court of Minnesota, Aug. 12,
1889] 43 N.W., 59)

160

The aforecited principles have been applied in this jurisdiction in General Insurance & Surety Corporation vs. Ng
Hua3. There, the policy issued by the General Insurance & Surety Corporation in favor of respondent Ng Hua
contained a provision identical with the provisions in Policy No. 4219 quoted above. 4 This Court, speaking thru
Justice Cesar P. Bengson, in reversing the judgment of the Court of Appeals and absolving the insurer from
liability under the policy, held:
... And considering the terms of the policy which required the insured to declare other
insurances, the statement in question must be deemed to be a statement (warranty) binding
on both insurer and insured, that there were no other insurance on the property. ...
The annotation then, must be deemed to be a warranty that the property was not insured by
any other policy. Violation thereof entitled the insurer to rescind. (Sec. 69, Insurance Act.) Such
misrepresentation is fatal in the light of our views in Santa Ana vs. Commercial Union
Assurance Company, Ltd., 55 Phil. 329. The materiality of non-disclosure of other insurance
policies is not open to doubt.
Furthermore, even if the annotations were overlooked the defendant insurer would still be free
from liability because there is no question that the policy issued by General Indemnity has not
been stated in nor endorsed on Policy No. 471 of defendant. And as stipulated in the abovequoted provisions of such policy "all benefit under this policy shall be forfeited. (Emphasis
supplied)
The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance and thus avert the
perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a fire
would be profitable to the insured. According to Justice Story: "The insured has no right to complain, for he
assents to comply with all the stipulation on his side, in order to entitle himself to the benefit of the contract,
which, upon reason or principle, he has no right to ask the court to dispense with the performance of his own
part of the agreement, and yet to bind the other party to obligations, which, but for those stipulation would
not have been entered into."
In view of the above conclusion, We deem it unnecessary to consider the other defenses interposed by
petitioner.
WHEREFORE, the appealed judgment of the Court of Appeals is reversed and set aside, and the petitioner
absolved from all liability under the policy. Costs against private respondent.
SO ORDERED.

161

CASE 45
G.R. No. L-27932 October 30, 1972
UNION MANUFACTURING CO., INC. and the REPUBLIC BANK, plaintiffs, REPUBLIC BANK, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY CO., INC., defendant-appellee.
In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co., Inc., defendant in the lower
court and now appellee, was able to avoid liability upon proof that there was a violation of a warranty. There
was no denial thereof from the insured, Union Manufacturing Co., Inc. With such a legally crippling blow, the
effort of the Republic Bank, the main plaintiff and now the sole appellant, to recover on such policy as
mortgagee, by virtue of the cover note in the insurance policy providing that it is entitled to the payment of loss
or damages as its interest may appear, was in vain. The defect being legally incurable, its appeal is likewise
futile. We affirm.
As noted in the decision, the following facts are not disputed: "(1) That on January 12, 1962, the Union
Manufacturing Co., Inc. obtained certain loans, overdrafts and other credit accommodations from the Republic
Bank in the total sum of P415,000.00 with interest at 9% per annum from said date and to secure the payment
thereof, said Union Manufacturing Co., Inc. executed a real and chattel mortgages on certain properties, which
are more particularly described and listed at the back of the mortgage contract ...; (2) That as additional
condition of the mortgage contract, the Union Manufacturing Co., Inc. undertook to secure insurance coverage
over the mortgaged properties for the same amount of P415,000.00 distributed as follows: (a) Buildings,
P30,000.00; (b) Machineries, P300,000.00; and (c) Merchandise Inventory, P85,000.00, giving a total of
P415,000.00; (3) That as Union Manufacturing Co., Inc. failed to secure insurance coverage on the mortgaged
properties since January 12, 1962, despite the fact that Cua Tok, its general manager, was reminded of said
requirement, the Republic Bank procured from the defendant, Philippine Guaranty Co., Inc. an insurance
coverage on loss against fire for P500,000.00 over the properties of the Union Manufacturing Co., Inc., as
described in defendant's 'Cover Note' dated September 25, 1962, with the annotation that loss or damage, if
any, under said Cover Note is payable to Republic Bank as its interest may appear, subject however to the
printed conditions of said defendant's Fire Insurance Policy Form; (4) That on September 27, 1962, Fire
Insurance Policy No. 43170 ... was issued for the sum of P500,000.00 in favor of the assured, Union
Manufacturing Co., Inc., for which the corresponding premium in the sum of P8,328.12, which was reduced to
P6,688.12, was paid by the Republic Bank to the defendant, Philippine Guaranty Co., Inc. ...; (5) That upon the
expiration of said fire policy on September 25, 1963, the same was renewed by the Republic Bank upon
payment of the corresponding premium in the same amount of P6,663.52 on September 26, 1963; (6) That in
the corresponding voucher ..., it appears that although said renewal premium was paid by the Republic Bank,
such payment was for the account of Union Manufacturing Co., Inc. and that the cash voucher for the payment
of the first premium was paid also by the Republic Bank but for the account Union Manufacturing Co., Inc.; (7)
That sometime on September 6, 1964, a fire occurred in the premises of the Union Manufacturing Co., Inc.; (8)
That on October 6, 1964, the Union Manufacturing Co., Inc. filed its fire claim with the defendant Philippine
Guaranty Co., Inc., thru its adjuster, H. H. Bayne Adjustment Co., which was denied by said defendant in its
letter dated November 27, 1964 ..., on the following grounds: 'a. Policy Condition No. 3 and/or the 'Other
Insurance Clause' of the policy violated because you did not give notice to us the other insurance which you
had taken from New India for P80,000.00, Sincere Insurance for P25,000.00 and Manila Insurance for
P200,000.00 with the result that these insurances, of which we became aware of only after the fire, were not
endorsed on our policy; and (b) Policy Condition No. 11 was not complied with because you have failed to give
to our representatives the required documents and other proofs with respect to your claim and matters
touching on our liability, if any, and the amount of such liability'; (9) That as of September, 1962, when the
defendant Philippine Guaranty Co., issued Fire Insurance Policy No. 43170 ... in the sum of P500,000.00 to
cover the properties of the Union Manufacturing Co., Inc., the same properties were already covered by Fire
162

Policy No. 1533 of the Sincere Insurance Company for P25,000.00 for the period from October 7, 1961 to
October 7, 1962 ...; and by insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic Insurance Agency for
the total sum of P300,000.00 and for periods respectively, from January 27, 1962 to January 27, 1963, and from
June 1, 1962 to June 1, 1963; and (10) That when said defendant's Fire Insurance Policy No. 43170 was already
in full force and effect, the Union Manufacturing Co., Inc. without the consent of the defendant, Philippine
Guaranty Co., Inc., obtained other insurance policies totalling P305,000.00 over the same properties prior to
the fire, to wit: (1) Fire Policy No. 250 of New India Assurance Co., Ltd., for P80,000.00 for the period from May
27, 1964 to May 27, 1965 ...; (2) Fire Policy No. 3702 of the Sincere Insurance Company for P25,000.00 for the
period from October 7, 1963 to October 7, 1964 ...; and (3) Fire Policy No. 6161 of Manila Insurance Co. for
P200,000.00 for the period from May 15, 1964 to May 15, 1965 ... ." There is in the cover note and in the fire
insurance policy the following warranty: "[Co- Insurance Declared]: Nil."
Why the appellant Republic Bank could not recover, as payee, in case of loss as its "interest may appear subject to the
terms and conditions, clauses and warranties" of the policy was expressed in the appealed decision thus: "However,
inasmuch as the Union Manufacturing Co., Inc. has violated the condition of the policy to the effect that it did not reveal
the existence of other insurance policies over the same properties, as required by the warranty appearing on the face of
the policy issued by the defendant and that on the other hand said Union Manufacturing Co., Inc. represented that there
were no other insurance policies at the time of the issuance of said defendant's policy, and it appearing furthermore that
while the policy of the defendant was in full force and effect the Union Manufacturing Co., Inc. secured other fire
insurance policies without the written consent of the defendant endorsed on the policy, the conclusion is inevitable that
both the Republic Bank and Union Manufacturing Co., Inc. cannot recover from the same policy of the defendant because
the same is null and void." The tone of confidence apparent in the above excerpts from the lower court decision is
understandable. The conclusion reached by the lower court finds support in authoritative precedents. It is far from easy,
therefore, for appellant Republic Bank to impute to such a decision a failure to abide by the law. Hence, as noted at the
outset, the appeal cannot prosper. An affirmance is indicated.
6

It is to Santa Ana v. Commercial Union Assurance Co., a 1930 decision, that one turns to for the first explicit formulation
as to the controlling principle. As was made clear in the opinion of this Court, penned by Justice Villa-Real: "Without
deciding whether notice of other insurance upon the same property must be given in writing, or whether a verbal notice is
sufficient to render an insurance valid which requires such notice, whether oral or written, we hold that in the absolute
7
absence of such notice when it is one of the conditions specified in the fire insurance policy, the policy is null and void."
8
The next year, in Ang Giok Chip v. Springfield Fire & Marine Ins. Co., the conformity of the insured to the terms of the
policy, implied from the failure to express any disagreement with what is provided for, was stressed in these words of the
ponente, Justice Malcolm: "It is admitted that the policy before us was accepted by the plaintiff. The receipt of this policy
by the insured without objection binds both the acceptor and the insured to the terms thereof. The insured may not
thereafter be heard to say that he did not read the policy or know its terms, since it is his duty to read his policy and it will
10
be assumed that he did so." 9 As far back as 1915, in Young v. Midland Textile Insurance Company, it was categorically
set forth that as a condition precedent to the right of recovery, there must be compliance on the part of the insured with
the terms of the policy. As stated in the opinion of the Court through Justice Johnson: "If the insured has violated or failed
to perform the conditions of the contract, and such a violation or want of performance has not been waived by the
insurer, then the insured cannot recover. Courts are not permitted to make contracts for the parties. The function and
duty of the courts consist simply in enforcing and carrying out the contracts actually made. While it is true, as a general
rule, that contracts of insurance are construed most favorably to the insured, yet contracts of insurance, like other
contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If
11
such terms are clear and unambiguous they must be taken and understood in their plain, ordinary and popular sense."
More specifically, there was a reiteration of this Santa Ana ruling in a decision by the then Justice, later Chief Justice,
Bengzon, in General Insurance & Surety Corp. v. Ng Hua. Thus: "The annotation then, must be deemed to be a warranty
that the property was not insured by any other policy. Violation thereof entitles the insurer to rescind. (Sec. 69, Insurance
Act) Such misrepresentation is fatal in the light of our views in Santa Ana v. Commercial Union Assurance Company, Ltd. ...
13
. The materiality of non-disclosure of other insurance policies is not open to doubt." As a matter of fact, in a 1966
decision, Misamis Lumber Corp. v. Capital Ins. & Surety Co., Inc., Justice J.B.L. Reyes, for this Court, made manifest anew its
adherence to such a principle in the face of an assertion that thereby a highly unfavorable provision for the insured would
be accorded recognition. This is the language used: "The insurance contract may be rather onerous ('one sided', as the
lower court put it), but that in itself does not justify the abrogation of its express terms, terms which the insured accepted
or adhered to and which is the law between the contracting parties."

163

There is no escaping the conclusion then that the lower court could not have disposed of this case in a way other than it
did. Had it acted otherwise, it clearly would have disregarded pronouncements of this Court, the compelling force of which
cannot be denied. There is, to repeat, no justification for a reversal. WHEREFORE, the decision of the lower court of March
31, 1967 is affirmed. No costs.

CASE 46
G.R. No. 94052 August 9, 1991
ORIENTAL
ASSURANCE
CORPORATION,
vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.

petitioner,

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
164

l % P/tax 25.00
TOTAL P2,712.50
CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES
Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following clauses:
— Civil Code Article 1250 Waiver clause
— Typhoon warranty clause
— Omnibus clause.
The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a volume of 1,000
cubicmeters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters.
On 28 January 1986, the two barges were towed by one tug-boat, the MT 'Seminole' But, as fate would have it,
during the voyage, rough seas and strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497
pieces of logs out of the 598 pieces loaded thereon.
Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its contracted
liability was for "TOTAL LOSS ONLY." The rejection was upon the recommendation of the Tan Gatue Adjustment
Company.
Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for Damages against Ever
Insurance Agency (allegedly, also liable), Benito Sy Lee Yong and Oriental Assurance, before the Regional Trial
Court, Kalookan, Branch 123, docketed as Civil Case No. C-12601.
After trial on the merit, the RTC 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.
165

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.

166

The basis thus used is, in our opinion, reversible error. The requirements for the application of Section 139 of
the Insurance Code, quoted above, have not been met. The logs involved, although placed in two barges, were
not separately valued by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000 in
relation to the total number of logs loaded on the same barge can not be made the basis for determining
constructive total loss. The logs having been insured as one inseparable unit, the correct basis for determining
the existence of constructive total loss is the totality of the shipment of logs. Of the entirety of 1,208, pieces of
logs, only 497 pieces thereof were lost or 41.45% of the entire shipment. Since the cost of those 497 pieces
does not exceed 75% of the value of all 1,208 pieces of logs, the shipment can not be said to have sustained a
constructive total loss under Section 139(a) of the Insurance Code.
In the absence of either actual or constructive total loss, there can be no recovery by the insured Panama
against the insurer, Oriental Assurance.
By reason of the conclusions arrived at, Panama's asseverations in its Comment need no longer be passed
upon, besides the fact that no review, in proper form, has been sought by it.
WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental Assurance Corporation, is
hereby ABSOLVED from liability under its marine insurance policy No. OAC-M-86/002. No costs.
SO ORDERED.

167

CASE 47
G.R. No. L-66935 November 11, 1985
ISABELA ROQUE, doing busines under the name and style of Isabela Roque Timber Enterprises and ONG
CHIONG,
petitioners,
vs.
HON. INTERMEDIATE APPELATE COURT and PIONEER INSURANCE AND SURETY CORPORATION, respondent.
This petition for certiorari asks for the review of the decision of the Intermediate Appellate Court which
absolved the respondent insurance company from liability on the grounds that the vessel carrying the insured
cargo was unseaworthy and the loss of said cargo was caused not by the perils of the sea but by the perils of
the ship.
On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay), a common carrier, entered into a
contract with the petitioners whereby the former would load and carry on board its barge Mable 10 about
422.18 cubic meters of logs from Malampaya Sound, Palawan to North Harbor, Manila. The petitioners insured
the logs against loss for P100,000.00 with respondent Pioneer Insurance and Surety Corporation (Pioneer).
On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at Malampaya Sound, Palawan
for carriage and delivery to North Harbor, Port of Manila, but the shipment never reached its destination
because Mable 10 sank with the 811 pieces of logs somewhere off Cabuli Point in Palawan on its way to Manila.
As alleged by the petitioners in their complaint and as found by both the trial and appellate courts, the barge
where the logs were loaded was not seaworthy such that it developed a leak. The appellate court further found
that one of the hatches was left open causing water to enter the barge and because the barge was not
provided with the necessary cover or tarpaulin, the ordinary splash of sea waves brought more water inside the
barge.
On March 8, 1972, the petitioners wrote a letter to Manila Bay demanding payment of P150,000.00 for the loss
of the shipment plus P100,000.00 as unrealized profits but the latter ignored the demand. Another letter was
sent to respondent Pioneer claiming the full amount of P100,000.00 under the insurance policy but respondent
refused to pay on the ground that its hability depended upon the "Total loss by Total Loss of Vessel only".
Hence, petitioners commenced Civil Case No. 86599 against Manila Bay and respondent Pioneer.
After hearing, the trial court found in favor of the petitioners. The dispositive portion of the decision reads:
FOR ALL THE FOREGOING, the Court hereby rendered judgment as follows:
(a) Condemning defendants Manila Bay Lighterage Corporation and Pioneer Insurance and
Surety Corporation to pay plaintiffs, jointly and severally, the sum of P100,000.00;
(b) Sentencing defendant Manila Bay Lighterage Corporation to pay plaintiff, in addition, the
sum of P50,000.00, plus P12,500.00, that the latter advanced to the former as down payment
for transporting the logs in question;
(c) Ordering the counterclaim of defendant Insurance against plaintiffs, dismissed, for lack of
merit, but as to its cross-claim against its co-defendant Manila Bay Lighterage Corporation, the
168

latter is ordered to reimburse the former for whatever amount it may pay the plaintiffs as such
surety;
(d) Ordering the counterclaim of defendant Lighterage against plaintiffs, dismissed for lack of
merit;
(e) Plaintiffs' claim of not less than P100,000.00 and P75,000.00 as exemplary damages are
ordered dismissed, for lack of merits; plaintiffs' claim for attorney's fees in the sum of
P10,000.00 is hereby granted, against both defendants, who are, moreover ordered to pay the
costs; and
(f) The sum of P150,000.00 award to plaintiffs, shall bear interest of six per cent (6%) from
March 25, 1975, until amount is fully paid.
Respondent Pioneer appealed to the Intermediate Appellate Court. Manila Bay did not appeal. According to the
petitioners, the transportation company is no longer doing business and is without funds.
During the initial stages of the hearing, Manila Bay informed the trial court that it had salvaged part of the logs.
The court ordered them to be sold to the highest bidder with the funds to be deposited in a bank in the name
of Civil Case No. 86599.
On January 30, 1984, the appellate court modified the trial court's decision and absolved Pioneer from liability
after finding that there was a breach of implied warranty of seaworthiness on the part of the petitioners and
that the loss of the insured cargo was caused by the "perils of the ship" and not by the "perils of the sea". It
ruled that the loss is not covered by the marine insurance policy.
After the appellate court denied their motion for reconsideration, the petitioners filed this petition with the
following assignments of errors:
I
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT IN CASES OF MARINE CARGO
INSURANCE, THERE IS A WARRANTY OF SEAWORTHINESS BY THE CARGO OWNER.
II
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT THE LOSS OF THE CARGO IN
THIS CASE WAS CAUSED BY "PERILS OF THE SHIP" AND NOT BY "PERILS OF THE SEA."
III
THE INTERMEDIATE APPELLATE COURT ERRED IN NOT ORDERING THE RETURN TO PETITIONER
OF THE AMOUNT OF P8,000.00 WHICH WAS DEPOSITED IN THE TRIAL COURT AS SALVAGE
VALUE OF THE LOGS THAT WERE RECOVERED.
In their first assignment of error, the petitioners contend that the implied warranty of seaworthiness provided
for in the Insurance Code refers only to the responsibility of the shipowner who must see to it that his ship is
reasonably fit to make in safety the contemplated voyage.
The petitioners state that a mere shipper of cargo, having no control over the ship, has nothing to do with its
seaworthiness. They argue that a cargo owner has no control over the structure of the ship, its cables, anchors,
fuel and provisions, the manner of loading his cargo and the cargo of other shippers, and the hiring of a
sufficient number of competent officers and seamen. The petitioners' arguments have no merit.
169

There is no dispute over the liability of the common carrier Manila Bay. In fact, it did not bother to appeal the
questioned decision. However, the petitioners state that Manila Bay has ceased operating as a firm and nothing
may be recovered from it. They are, therefore, trying to recover their losses from the insurer.
The liability of the insurance company is governed by law. Section 113 of the Insurance Code provides:
In every marine insurance upon a ship or freight, or freightage, or upon any thing which is the
subject of marine insurance, a warranty is implied that the ship is seaworthy.
Section 99 of the same Code also provides in part.
Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, ...
From the above-quoted provisions, there can be no mistaking the fact that the term "cargo" can be the subject
of marine insurance and that once it is so made, the implied warranty of seaworthiness immediately attaches
to whoever is insuring the cargo whether he be the shipowner or not.
As we have ruled in the case of Go Tiaoco y Hermanos v. Union Insurance Society of Canton (40 Phil. 40):
The same conclusion must be reached if the question be discussed with reference to the
seaworthiness of the ship. It is universally accepted that in every contract of insurance upon
anything which is the subject of marine insurance, a warranty is implied that the ship shall be
seaworthy at the time of the inception of the voyage. This rule is accepted in our own
Insurance Law (Act No. 2427, sec. 106). ...
Moreover, the fact that the unseaworthiness of the ship was unknown to the insured is immaterial in ordinary
marine insurance and may not be used by him as a defense in order to recover on the marine insurance policy.
As was held in Richelieu and Ontario Nav. Co. v. Boston Marine, Inc., Co. (136 U.S. 406):
There was no look-out, and both that and the rate of speed were contrary to the Canadian
Statute. The exception of losses occasioned by unseaworthiness was in effect a warranty that a
loss should not be so occasioned, and whether the fact of unseaworthiness were known or
unknown would be immaterial.
Since the law provides for an implied warranty of seaworthiness in every contract of ordinary marine insurance,
it becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in
seaworthy condition. The shipper of cargo may have no control over the vessel but he has full control in the
choice of the common carrier that will transport his goods. Or the cargo owner may enter into a contract of
insurance which specifically provides that the insurer answers not only for the perils of the sea but also
provides for coverage of perils of the ship.
We are constrained to apply Section 113 of the Insurance Code to the facts of this case. As stated by the private
respondents:
In marine cases, the risks insured against are "perils of the sea" (Chute v. North River Ins. Co.,
Minn—214 NW 472, 55 ALR 933). The purpose of such insurance is protection against
contingencies and against possible damages and such a policy does not cover a loss or injury
which must inevitably take place in the ordinary course of things. There is no doubt that the
170

term 'perils of the sea' extends only to losses caused by sea damage, or by the violence of the
elements, and does not embrace all losses happening at sea. They insure against losses from
extraordinary occurrences only, such as stress of weather, winds and waves, lightning,
tempests, rocks and the like. These are understood to be the "perils of the sea" referred in the
policy, and not those ordinary perils which every vessel must encounter. "Perils of the sea" has
been said to include only such losses as are of extraordinary nature, or arise from some
overwhelming power, which cannot be guarded against by the ordinary exertion of human skill
and prudence. Damage done to a vessel by perils of the sea includes every species of damages
done to a vessel at sea, as distinguished from the ordinary wear and tear of the voyage, and
distinct from injuries suffered by the vessel in consequence of her not being seaworthy at the
outset of her voyage (as in this case). It is also the general rule that everything which happens
thru the inherent vice of the thing, or by the act of the owners, master or shipper, shall not be
reputed a peril, if not otherwise borne in the policy. (14 RCL on Insurance, Sec. 384, pp. 12031204; Cia. de Navegacion v. Firemen's Fund Ins. Co., 277 US 66, 72 L. ed. 787, 48 S. Ct. 459).
With regard to the second assignment of error, petitioners maintain, that the loss of the cargo was caused by
the perils of the sea, not by the perils of the ship because as found by the trial court, the barge was turned
loose from the tugboat east of Cabuli Point "where it was buffeted by storm and waves." Moreover, petitioners
also maintain that barratry, against which the cargo was also insured, existed when the personnel of the
tugboat and the barge committed a mistake by turning loose the barge from the tugboat east of Cabuli Point.
The trial court also found that the stranding and foundering of Mable 10 was due to improper loading of the
logs as well as to a leak in the barge which constituted negligence.
On the contention of the petitioners that the trial court found that the loss was occasioned by the perils of the
sea characterized by the "storm and waves" which buffeted the vessel, the records show that the court ruled
otherwise. It stated:
xxx xxx xxx
... The other affirmative defense of defendant Lighterage, 'That the supposed loss of the logs
was occasioned by force majeure... "was not supported by the evidence. At the time Mable 10
sank, there was no typhoon but ordinary strong wind and waves, a condition which is natural
and normal in the open sea. The evidence shows that the sinking of Mable 10 was due to
improper loading of the logs on one side so that the barge was tilting on one side and for that it
did not navigate on even keel; that it was no longer seaworthy that was why it developed leak;
that the personnel of the tugboat and the barge committed a mistake when it turned loose the
barge from the tugboat east of Cabuli point where it was buffeted by storm and waves, while
the tugboat proceeded to west of Cabuli point where it was protected by the mountain side
from the storm and waves coming from the east direction. ..."
In fact, in the petitioners' complaint, it is alleged that "the barge Mable 10 of defendant carrier developed a
leak which allowed water to come in and that one of the hatches of said barge was negligently left open by the
person in charge thereof causing more water to come in and that "the loss of said plaintiffs' cargo was due to
the fault, negligence, and/or lack of skill of defendant carrier and/or defendant carrier's representatives on
barge Mable 10."
It is quite unmistakable that the loss of the cargo was due to the perils of the ship rather than the perils of the
sea. The facts clearly negate the petitioners' claim under the insurance policy. In the case of Go Tiaoco y
Hermanos v. Union Ins. Society of Canton, supra, we had occasion to elaborate on the term "perils of the ship."
We ruled:
It must be considered to be settled, furthermore, that a loss which, in the ordinary course of
events, results from the natural and inevitable action of the sea, from the ordinary wear and
171

tear of the ship, or from the negligent failure of the ship's owner to provide the vessel with
proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such
a loss is rather due to what has been aptly called the "peril of the ship." The insurer undertakes
to insure against perils of the sea and similar perils, not against perils of the ship. As was well
said by Lord Herschell in Wilson, Sons & Co. v. Owners of Cargo per the Xantho ([1887], 12 A. C.,
503, 509), there must, in order to make the insurer liable, be some casualty, something which
could not be foreseen as one of the necessary incidents of the adventure. The purpose of the
policy is to secure an indemnity against accidents which may happen, not against events which
must happen.
In the present case the entrance of the sea water into the ship's hold through the defective
pipe already described was not due to any accident which happened during the voyage, but to
the failure of the ship's owner properly to repair a defect of the existence of which he was
apprised. The loss was therefore more analogous to that which directly results from simple
unseaworthiness than to that which result from the perils of the sea.
xxx xxx xxx
Suffice it to say that upon the authority of those cases there is no room to doubt the liability of
the shipowner for such a loss as occurred in this case. By parity of reasoning the insurer is not
liable; for generally speaking, the shipowner excepts the perils of the sea from his engagement
under the bill of lading, while this is the very perils against which the insurer intends to give
protection. As applied to the present case it results that the owners of the damaged rice must
look to the shipowner for redress and not to the insurer.
Neither can petitioners allege barratry on the basis of the findings showing negligence on the part of the
vessel's crew.
Barratry as defined in American Insurance Law is "any willful misconduct on the part of master or crew in
pursuance of some unlawful or fraudulent purpose without the consent of the owners, and to the prejudice of
the owner's interest." (Sec. 171, U.S. Insurance Law, quoted in Vance, Handbook on Law of Insurance, 1951, p.
929.)
Barratry necessarily requires a willful and intentional act in its commission. No honest error of judgment or
mere negligence, unless criminally gross, can be barratry. (See Vance on Law of Insurance, p. 929 and cases
cited therein.)
In the case at bar, there is no finding that the loss was occasioned by the willful or fraudulent acts of the
vessel's crew. There was only simple negligence or lack of skill. Hence, the second assignment of error must
likewise be dismissed.
Anent the third assignment of error, we agree with the petitioners that the amount of P8,000.00 representing
the amount of the salvaged logs should have been awarded to them. However, this should be deducted from
the amounts which have been adjudicated against Manila Bay Lighterage Corporation by the trial court.
WHEREFORE, the decision appealed from is AFFIRMED with the modification that the amount of P8,000.00
representing the value of the salvaged logs which was ordered to be deposited in the Manila Banking
Corporation in the name of Civil Case No. 86599 is hereby awarded and ordered paid to the petitioners. The
liability adjudged against Manila Bay Lighterage Corporation in the decision of the trial court is accordingly
reduced by the same amount.
SO ORDERED.

172

CASE 48
G.R. No. 85141 November 28, 1989
FILIPINO
MERCHANTS
INSURANCE
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.

CO.,

INC.,

petitioner,

This is a review of the decision of the Court of Appeals, promulgated on July 19,1988, the dispositive part of
which reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino
Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with interest at legal
rate from the date of filing of the complaint, and is modified with respect to the third party
complaint in that (1) third party defendant E. Razon, Inc. is ordered to reimburse third party
plaintiff the sum of P25,471.80 with legal interest from the date of payment until the date of
reimbursement, and (2) the third-party complaint against third party defendant Compagnie
Maritime Des Chargeurs Reunis is dismissed.
The facts as found by the trial court and adopted by the Court of Appeals are as follows:
This is an action brought by the consignee of the shipment of fishmeal loaded on board the
vessel SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976 and
seeks to recover from the defendant insurance company the amount of P51,568.62
representing damages to said shipment which has been insured by the defendant insurance
company under Policy No. M-2678. The defendant brought a third party complaint against third
party defendants Compagnie Maritime Des Chargeurs Reunis and/or E. Razon, Inc. seeking
judgment against the third (sic) defendants in case Judgment is rendered against the third
party plaintiff. It appears from the evidence presented that in December 1976, plaintiff insured
said shipment with defendant insurance company under said cargo Policy No. M-2678 for the
sum of P267,653.59 for the goods described as 600 metric tons of fishmeal in new gunny bags
of 90 kilos each from Bangkok, Thailand to Manila against all risks under warehouse to
warehouse terms. Actually, what was imported was 59.940 metric tons not 600 tons at $395.42
a ton CNF Manila. The fishmeal in 666 new gunny bags were unloaded from the ship on
December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant's
surveyor ascertained and certified that in such discharge 105 bags were in bad order condition
as jointly surveyed by the ship's agent and the arrastre contractor. The condition of the bad
order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to
120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6- Razon.
The cargo was also surveyed by the arrastre contractor before delivery of the cargo to the
consignee and the condition of the cargo on such delivery was reflected in E. Razon's Bad Order
Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in bad order condition.
Defendant's surveyor has conducted a final and detailed survey of the cargo in the warehouse
for which he prepared a survey report Exhibit F with the findings on the extent of shortage or
loss on the bad order bags totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on
said computation the plaintiff made a formal claim against the defendant Filipino Merchants
Insurance Company for P51,568.62 (Exhibit C) the computation of which claim is contained
173

therein. A formal claim statement was also presented by the plaintiff against the vessel dated
December 21, 1976, Exhibit B, but the defendant Filipino Merchants Insurance Company
refused to pay the claim. Consequently, the plaintiff brought an action against said defendant
as adverted to above and defendant presented a third party complaint against the vessel and
the arrastre contractor.
The court below, after trial on the merits, rendered judgment in favor of private respondent, the decretal
portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff and
against the defendant Filipino Merchant's (sic) Insurance Co., ordering the defendants to pay
the plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint;
On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs
Reunis and third party defendant E. Razon, Inc. are ordered to pay to the third party plaintiff
jointly and severally reimbursement of the amounts paid by the third party plaintiff with legal
interest from the date of such payment until the date of such reimbursement.
Without pronouncement as to costs.
On appeal, the respondent court affirmed the decision of the lower court insofar as the award on the complaint
is concerned and modified the same with regard to the adjudication of the third-party complaint. A motion for
reconsideration of the aforesaid decision was denied, hence this petition with the following assignment of
errors:
1. The Court of Appeals erred in its interpretation and application of the "all risks" clause of the
marine insurance policy when it held the petitioner liable to the private respondent for the
partial loss of the cargo, notwithstanding the clear absence of proof of some fortuitous event,
casualty, or accidental cause to which the loss is attributable, thereby contradicting the very
precedents cited by it in its decision as well as a prior decision of the same Division of the said
court (then composed of Justices Cacdac, Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that the private respondent had no insurable
interest in the subject cargo, hence, the marine insurance policy taken out by private
respondent is null and void;
3. The Court of Appeals erred in not holding that the private respondent was guilty of fraud in
not disclosing the fact, it being bound out of utmost good faith to do so, that it had no
insurable interest in the subject cargo, which bars its recovery on the policy.
On the first assignment of error, petitioner contends that an "all risks" marine policy has a technical meaning in
insurance in that before a claim can be compensable it is essential that there must be "some fortuity, "
"casualty" or "accidental cause" to which the alleged loss is attributable and the failure of herein private
respondent, upon whom lay the burden, to adduce evidence showing that the alleged loss to the cargo in
question was due to a fortuitous event precludes his right to recover from the insurance policy. We find said
contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the subject-matter insured but shall in
no case be deemed to extend to cover loss, damage, or expense proximately caused by delay
174

or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be
payable irrespective of percentage.
An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses by an
accidental cause of any kind. The terms "accident" and "accidental", as used in insurance contracts, have not
acquired any technical meaning. They are construed by the courts in their ordinary and common acceptance.
Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention and
design, and which is unexpected, unusual and unforeseen. 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 cause and, therefore, not expected.
The very nature of the term "all risks" must be given a broad and comprehensive meaning as covering any loss
other than a willful and fraudulent act of the insured. 7 This is pursuant to the very purpose of an "all risks"
insurance to give protection to the insured in those cases where difficulties of logical explanation or some
mystery surround the loss or damage to property. 8 An "all asks" policy has been evolved to grant greater
protection than that afforded by the "perils clause," in order to assure that no loss can happen through the
incidence of a cause neither insured against nor creating liability in the ship; it is written against all losses, that
is, attributable to external causes.
The term "all risks" cannot be given a strained technical meaning, the language of the clause under the Institute
Cargo Clauses being unequivocal and clear, to the effect that it extends to all damages/losses suffered by the
insured cargo except (a) loss or damage or expense proximately caused by delay, and (b) loss or damage or
expense proximately caused by the inherent vice or nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an
"all risks" policy the burden is not on the insured to prove the precise cause of loss or damage for which it seeks
compensation. The insured under an "all risks insurance policy" has the initial burden of proving that the cargo
was in good condition when the policy attached and that the cargo was damaged when unloaded from the
vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage. 10 As we held in
Paris-Manila Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance company has
the burden of proving that the loss is caused by the risk excepted and for want of such proof, the company is
liable.
Coverage under an "all risks" provision of a marine insurance policy creates a special type of insurance which
extends coverage to risks not usually contemplated and avoids putting upon the insured the burden of
establishing that the loss was due to the peril falling within the policy's coverage; the insurer can avoid
coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. 12 A marine
insurance policy providing that the insurance was to be "against all risks" must be construed as creating a
special insurance and extending to other risks than are usually contemplated, and covers all losses except such
as arise from the fraud of the insured. 13 The burden of the insured, therefore, is to prove merely that the
goods he transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to the
insurer to prove that the loss was due to excepted perils. To impose on the insured the burden of proving the
precise cause of the loss or damage would be inconsistent with the broad protective purpose of "all risks"
insurance.
In the present case, there being no showing that the loss was caused by any of the excepted perils, the insurer
is liable under the policy. As aptly stated by the respondent Court of Appeals, upon due consideration of the
authorities and jurisprudence it discussed —
... it is believed that in the absence of any showing that the losses/damages were caused by an
excepted peril, i.e. delay or the inherent vice or nature of the subject matter insured, and there
is no such showing, the lower court did not err in holding that the loss was covered by the
policy.
175

There is no evidence presented to show that the condition of the gunny bags in which the
fishmeal was packed was such that they could not hold their contents in the course of the
necessary transit, much less any evidence that the bags of cargo had burst as the result of the
weakness of the bags themselves. Had there been such a showing that spillage would have
been a certainty, there may have been good reason to plead that there was no risk covered by
the policy (See Berk vs. Style [1956] cited in Marine Insurance Claims, Ibid, p. 125). Under an 'all
risks' policy, it was sufficient to show that there was damage occasioned by some accidental
cause of any kind, and there is no necessity to point to any particular cause.
Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The
agreement has the force of law between the parties. The terms of the policy constitute the measure of the
insurer's liability. If such terms are clear and unambiguous, they must be taken and understood in their plain,
ordinary and popular sense.
Anent the issue of insurable interest, we uphold the ruling of the respondent court that private respondent, as
consignee of the goods in transit under an invoice containing the terms under "C & F Manila," has insurable
interest in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every interest in property, whether
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured. In principle, anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction whether he has or has not any title in, or lien
upon or possession of the property y. Insurable interest in property may consist in (a) an existing interest; (b)
an inchoate interest founded on an existing interest; or (c) an expectancy, coupled with an existing interest in
that out of which the expectancy arises.
Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be the
subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale. The
perfected contract of sale between him and the shipper of the goods operates to vest in him an equitable title even before
delivery or before be performed the conditions of the sale. The contract of shipment, whether under F.O.B., C.I.F., or C. &
F. as in this case, is immaterial in the determination of whether the vendee has an insurable interest or not in the goods in
transit. The perfected contract of sale even without delivery vests in the vendee an equitable title, an existing interest over
the goods sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized or
required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for, the
purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule not
obtaining in the present case. The Court has heretofore ruled that the delivery of the goods on board the carrying vessels
partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the goods and
paid the insurance premium covering them.
C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the goods
and freight to the named destination. It simply means that the seller must pay the costs and freight necessary to bring the
goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer
when the goods pass the ship's rail in the port of shipment.
Moreover, the issue of lack of insurable interest was not among the defenses averred in petitioners answer. It was neither
an issue agreed upon by the parties at the pre-trial conference nor was it raised during the trial in the court below. It is a
settled rule that an issue which has not been raised in the court a quo cannot be raised for the first time on appeal as it
23
would be offensive to the basic rules of fair play, justice and due process. This is but a permuted restatement of the long
settled rule that when a party deliberately adopts a certain theory, and the case is tried and decided upon that theory in
the court below, he will not be permitted to change his theory on appeal because, to permit him to do so, would be unfair
to the adverse party.

176

If despite the fundamental doctrines just stated, we nevertheless decided to indite a disquisition on the issue of insurable
interest raised by petitioner, it was to put at rest all doubts on the matter under the facts in this case and also to dispose
of petitioner's third assignment of error which consequently needs no further discussion.
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent Court of Appeals is AFFIRMED in
toto. SO ORDERED.

***CASE 49- cant search***
CASE 50
G.R. No. L-9374

February 16, 1915

FRANCISCO
DEL
vs.
ANDRES DEL VAL, defendant-appellee.

VAL,

ET

AL.,

plaintiffs-appellants,

This is an appeal from a judgment of the Court of First Instance of the city of Manila dismissing the complaint
with costs.
The pleadings set forth that the plaintiffs and defendant are brother and sisters; that they are the only heirs at
law and next of kin of Gregorio Nacianceno del Val, who died in Manila on August 4, 1910, intestate; that an
administrator was appointed for the estate of the deceased, and, after a partial administration, it was closed
and the administrator discharged by order of the Court of First Instance dated December 9, 1911; that during
the lifetime of the deceased he took out insurance on his life for the sum of P40,000 and made it payable to the
defendant as sole beneficiary; that after his death the defendant collected the face of the policy; that of said
policy he paid the sum of P18,365.20 to redeem certain real estate which the decedent had sold to third
persons with a right to repurchase; that the redemption of said premises was made by the attorney of the
defendant in the name of the plaintiff and the defendant as heirs of the deceased vendor; that the redemption
of said premises they have had the use and benefit thereof; that during that time the plaintiffs paid no taxes
and made no repairs.
It further appears from the pleadings that the defendant, on the death of the deceased, took possession of
most of his personal property, which he still has in his possession, and that he has also the balance on said
insurance policy amounting to P21,634.80.
Plaintiffs contend that the amount of the insurance policy belonged to the estate of the deceased and not to
the defendant personally; that, therefore, they are entitled to a partition not only of the real and personal
property, but also of the P40,000 life insurance. The complaint prays a partition of all the property, both real
and personal, left by the deceased; that the defendant account for P21,634.80, and that that sum be divided
equally among the plaintiffs and defendant along with the other property of deceased.
The defendant denies the material allegations of the complaint and sets up as special defense and counterclaim
that the redemption of the real estate sold by his father was made in the name of the plaintiffs and himself
instead of in his name alone without his knowledge or consent; and that it was not his intention to use the
proceeds of the insurance policy for the benefit of any person but himself, he alleging that he was and is the
sole owner thereof and that it is his individual property. He, therefore, asks that he be declared the owner of
the real estate redeemed by the payment of the P18,365.20, the owner of the remaining P21,634.80, the
balance of the insurance policy, and that the plaintiff's account for the use and occupation of the premises so
redeemed since the date of the redemption.
The learned trial court refused to give relief to either party and dismissed the action.

177

It says in its opinion: "This purports to be an action for partition, brought against an heir by his coheirs. The
complaint, however, fails to comply with Code Civ., Pro. sec. 183, in that it does not 'contain an adequate
description of the real property of which partition is demanded.' Because of this defect (which has not been
called to our attention and was discovered only after the cause was submitted) it is more than doubtful
whether any relief can be awarded under the complaint, except by agreement of all the parties."
This alleged defect of the complaint was made one of the two bases for the dismissal of the action.
We do not regard this as sufficient reason for dismissing the action. It is the doctrine of this court, set down in
several decisions, Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504, that, even though the complaint is
defective to the extent of failing in allegations necessary to constitute a cause of action, if, on the trial of the
cause, evidence is offered which establishes the cause of action which the complaint intended to allege, and
such evidence is received without objection, the defect is thereby cured and cannot be made the ground of a
subsequent objection. If, therefore, evidence was introduced on the trial in this case definitely and clearly
describing the real estate sought to be partitioned, the defect in the complaint was cured in that regard and
should not have been used to dismiss the action. We do not stop to inquire whether such evidence was or was
not introduced on the trial, inasmuch as this case must be turned for a new trial with opportunity to both
parties to present such evidence as is necessary to establish their respective claims.
The court in its decision further says: "It will be noticed that the provision above quoted refers exclusively to
real estate. . . . It is, in other words, an exclusive real property action, and the institution thereof gives the court
no jurisdiction over chattels. . . . But no relief could possibly be granted in this action as to any property except
the last (real estate), for the law contemplated that all the personal property of an estate be distributed before
the administration is closed. Indeed, it is only in exceptional cases that the partition of the real estate is
provided for, and this too is evidently intended to be effected as a part of the administration, but here the
complaint alleges that the estate was finally closed on December 9, 1911, and we find upon referring to the
record in that case that subsequent motion to reopen the same were denied; so that the matter of the
personal property at least must be considered res judicata (for the final judgment in the administration
proceedings must be treated as concluding not merely what was adjudicated, but what might have been). So
far, therefore, as the personal property at least is concerned, plaintiffs' only remedy was an appeal from said
order."
We do not believe that the law is correctly laid down in this quotation. The courts of the Islands have
jurisdiction to divide personal property between the common owners thereof and that power is as full and
complete as is the power to partition real property. If an actual partition of personal property cannot be made
it will be sold under the direction of the court and the proceeds divided among the owners after the necessary
expenses have been deducted.
The administration of the estate of the decedent consisted simply, so far as the record shows, in the payment
of the debts. No division of the property, either real or personal, seems to have been made. On the contrary,
the property appears, from the record, to have been turned over to the heirs in bulk. The failure to partition
the real property may have been due either to the lack of request to the court by one or more of the heirs to
do so, as the court has no authority to make a partition of the real estate without such request; or it may have
been due to the fact that all the real property of decedent had been sold under pacto de retro and that,
therefore, he was not the owner of any real estate at the time of his death. As to the personal property, it does
not appear that it was disposed of in the manner provided by law. (Sec. 753, Code of Civil Procedure.) So far as
this action is concerned, however, it is sufficient for us to know that none of the property was actually divided
among the heirs in the administration proceeding and that they remain coowners and tenants-in- common
thereof at the present time. To maintain an action to partition real or personal property it is necessary to show
only that it is owned in common.
The order finally closing the administration and discharging the administrator, referred to in the opinion of the trial court,
has nothing to do with the division of either the real or the personal property. The heirs have the right to ask the probate
court to turn over to them both the real and personal property without division; and where that request is unanimous it is

178

the duty of the court to comply with it, and there is nothing in section 753 of the Code of Civil Procedure which prohibits
it. In such case an order finally settling the estate and discharging the administrator would not bar a subsequent action to
require a division of either the real or personal property. If, on the other hand, an order had been made in the
administration proceedings dividing the personal or the real property, or both, among the heirs, then it is quite possible
that, to a subsequent action brought by one of the heirs for a partition of the real or personal property, or both, there
could have been interposed a plea of res judicata based on such order. As the matter now stands, however, there is no
ground on which to base such a plea. Moreover, no such plea has been made and no evidence offered to support it.
With the finding of the trial court that the proceeds of the life-insurance policy belong exclusively to the defendant as his
individual and separate property, we agree. That the proceeds of an insurance policy belong exclusively to the beneficiary
and not to the estate of the person whose life was insured, and that such proceeds are the separate and individual
property of the beneficiary, and not of the heirs of the person whose life was insured, is the doctrine in America. We
believe that the same doctrine obtains in these Islands by virtue of section 428 of the Code of Commerce, which reads:
The amount which the underwriter must deliver to the person insured, in fulfillment of the contract, shall be the
property of the latter, even against the claims of the legitimate heirs or creditors of any kind whatsoever of the
person who effected the insurance in favor of the former.
It is claimed by the attorney for the plaintiffs that the section just quoted is subordinate to the provisions of the Civil Code
as found in article 1035. This article reads:
An heir by force of law surviving with others of the same character to a succession must bring into the hereditary
estate the property or securities he may have received from the deceased during the life of the same, by way of
dowry, gift, or for any good consideration, in order to compute it in fixing the legal portions and in the account of
the division.
Counsel also claim that the proceeds of the insurance policy were a donation or gift made by the father during his lifetime
to the defendant and that, as such, its ultimate destination is determined by those provisions of the Civil Code which relate
to donations, especially article 819. This article provides that "gifts made to children which are not betterments shall be
considered as part of their legal portion."
We cannot agree with these contentions. 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. That
subject is regulated exclusively by the Code of Commerce which provides for the terms of the contract, the relations of the
parties and the destination of the proceeds of the policy.
The proceeds of the life-insurance policy being the exclusive property of the defendant and he having used a portion
thereof in the repurchase of the real estate sold by the decedent prior to his death with right to repurchase, and such
repurchase having been made and the conveyance taken in the names of all of the heirs instead of the defendant alone,
plaintiffs claim that the property belongs to the heirs in common and not to the defendant alone.
We are not inclined to agree with this contention unless the fact appear or be shown that the defendant acted as he did
with the intention that the other heirs should enjoy with him the ownership of the estate — in other words, that he
proposed, in effect, to make a gift of the real estate to the other heirs. If it is established by the evidence that that was his
intention and that the real estate was delivered to the plaintiffs with that understanding, then it is probable that their
contention is correct and that they are entitled to share equally with the defendant therein. If, however, it appears from
the evidence in the case that the conveyances were taken in the name of the plaintiffs without his knowledge or consent,
or that it was not his intention to make a gift to them of the real estate, then it belongs to him. If that facts are as stated,
he has two remedies. The one is to compel the plaintiffs to reconvey to him and the other is to let the title stand with
them and to recover from them the sum he paid on their behalf.
For the complete and proper determination of the questions at issue in this case, we are of the opinion that the cause
should be returned to the trial court with instructions to permit the parties to frame such issues as will permit the
settlement of all the questions involved and to introduce such evidence as may be necessary for the full determination of
the issues framed. Upon such issues and evidence taken thereunder the court will decide the questions involved according
to the evidence, subordinating his conclusions of law to the rules laid down in this opinion.

179

We do not wish to be understood as having decided in this opinion any question of fact which will arise on the trial and be
there in controversy. The trial court is left free to find the facts as the evidence requires. To the facts as so found he will
apply the law as herein laid down.
The judgment appealed from is set aside and the cause returned to the Court of First Instance whence it came for the
purpose hereinabove stated. So ordered.

CASE 51
G.R. No. L-34583

October 22, 1931

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late Adolphe Oscar Schuetze,
plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.
The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe Oscar Schuetze, has
appealed to this court from the judgment of the Court of First Instance of Manila absolving the defendant Juan
Posadas, Jr., Collector of Internal Revenue, from the complaint filed against him by said plaintiff bank, and
dismissing the complaint with costs.
The appellant has assigned the following alleged errors as committed by the trial court in its judgment, to wit:
1. The lower court erred in holding that the testimony of Mrs. Schuetze was inefficient to established
the domicile of her husband.
2. The lower court erred in holding that under section 1536 of the Administrative Code the tax imposed
by the defendant is lawful and valid.
3. The lower court erred in not holding that one-half (½) of the proceeds of the policy in question is
community property and that therefore no inheritance tax can be levied, at least on one-half (½) of the
said proceeds.
4. The lower court erred in not declaring that it would be unconstitutional to impose an inheritance tax
upon the insurance policy here in question as it would be a taking of property without due process of
law.
The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of Internal Revenue,
the amount of P1,209 paid by the plaintiff under protest, in its capacity of administrator of the estate of the
late Adolphe Oscar Schuetze, as inheritance tax upon the sum of P20,150, which is the amount of an insurance
policy on the deceased's life, wherein his own estate was named the beneficiary.
At the hearing, in addition to documentary and parol evidence, both parties submitted the following agreed
statement of facts of the court for consideration:
It is hereby stipulated and agreed by and between the parties in the above-entitled action through
their respective undersigned attorneys:
1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late Adolphe Oscar Schuetze, is of
legal age, a native of Manila, Philippine Islands, and is and was at all times hereinafter mentioned a
resident of Germany, and at the time of the death of her husband, the late Adolphe Oscar Schuetze,
she was actually residing and living in Germany;

180

2. That the Bank of the Philippine Islands, is and was at all times hereinafter mentioned a banking
institution duly organized and existing under and by virtue of the laws of the Philippine Islands;
3. That on or about August 23, 1928, the herein plaintiff before notary public Salvador Zaragoza, drew a
general power appointing the above-mentioned Bank of the Philippine Islands as her attorney-in-fact,
and among the powers conferred to said attorney-in-fact was the power to represent her in all legal
actions instituted by or against her;
4. That the defendant, of legal age, is and at all times hereinafter mentioned the duly appointed
Collector of Internal Revenue with offices at Manila, Philippine Islands;
5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for the first time of March
31, 1890, and worked in the several German firms as a mere employee and that from the year 1903
until the year 1918 he was partner in the business of Alfredo Roensch;
6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of making various trips to
Europe;
7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java, and with the
intention of going to Bremen, landed in the Philippine Islands where he met his death on February 2,
1928;
8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany, executed a will, in
accordance with its law, wherein plaintiff was named his universal heir;
9. That the Bank of the Philippine Islands by order of the Court of First Instance of Manila under date of
May 24, 1928, was appointed administrator of the estate of the deceased Adolphe Oscar Schuetze;
10. That, according to the testamentary proceedings instituted in the Court of First Instance of Manila,
civil case No. 33089, the deceased at the time of his death was possessed of not only real property
situated in the Philippine Islands, but also personal property consisting of shares of stock in nineteen
(19) domestic corporations;
11. That the fair market value of all the property in the Philippine Islands left by the deceased at the
time of his death in accordance with the inventory submitted to the Court of First Instance of Manila,
civil case No. 33089, was P217,560.38;
12. That the Bank of the Philippine Islands, as administrator of the estate of the deceased rendered its
final account on June 19, 1929, and that said estate was closed on July 16, 1929;
13. That among the personal property of the deceased was found life-insurance policy No. 194538
issued at Manila, Philippine Islands, on January 14, 1913, for the sum of $10,000 by the Sun Life
Assurance Company of Canada, Manila branch, a foreign corporation duly organized and existing under
and by virtue of the laws of Canada, and duly authorized to transact business in the Philippine Islands;
14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was named the
beneficiary without any qualification whatsoever;
15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the premiums of said
policy to the Sun Life Assurance Company of Canada, Manila branch;
16. That on or about the year 1918, the Sun Life Assurance Company of Canada, Manila branch,
transferred said policy to the Sun Life Assurance Company of Canada, London branch;
181

17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the time of his death paid
the premiums of said policy to the Sun Life Assurance Company of Canada, London Branch;
18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his widow, the plaintiff
herein;
19. That at the time of the death of the deceased and at all times thereafter including the date when
the said insurance policy was paid, the insurance policy was not in the hands or possession of the
Manila office of the Sun Life Assurance Company of Canada, nor in the possession of the herein
plaintiff, nor in the possession of her attorney-in-fact the Bank of the Philippine Islands, but the same
was in the hands of the Head Office of the Sun Life Assurance Company of Canada, at Montreal,
Canada;
20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of the decedent's estate
received from the Sun Life Assurance Company of Canada, Manila branch, the sum of P20,150
representing the proceeds of the insurance policy, as shown in the statement of income and expenses
of the estate of the deceased submitted on June 18, 1929, by the administrator to the Court of First
Instance of Manila, civil case No. 33089;
21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said sum of P20,150;
22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax upon the
transmission of the proceeds of the policy in question in the sum of P20,150 from the estate of the late
Adolphe Oscar Schuetze to the sole heir of the deceased, or the plaintiff herein, which inheritance tax
amounted to the sum of P1,209;
23. That the Bank of the Philippine Islands as administrator of the decedent's estate and as attorney-infact of the herein plaintiff, having been demanded by the herein defendant to pay inheritance tax
amounting to the sum of P1,209, paid to the defendant under protest the above-mentioned sum;
24. That notwithstanding the various demands made by plaintiff to the defendant, said defendant has
refused and refuses to refund to plaintiff the above mentioned sum of P1,209;
25. That plaintiff reserves the right to adduce evidence as regards the domicile of the deceased, and so
the defendant, the right to present rebuttal evidence;
26. That both plaintiff and defendant submit this stipulation of facts without prejudice to their right to
introduce such evidence, on points not covered by the agreement, which they may deem proper and
necessary to support their respective contentions.
In as much as one of the question raised in the appeal is whether an insurance policy on said Adolphe Oscar
Schuetze's life was, by reason of its ownership, subject to the inheritance tax, it would be well to decide first
whether the amount thereof is paraphernal or community property.
According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze is the sole
beneficiary named in the life-insurance policy for $10,000, issued by the Sun Life Assurance Company of Canada
on January 14, 1913. During the following five years the insured paid the premiums at the Manila branch of the
company, and in 1918 the policy was transferred to the London branch.
The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano on
January 16, 1914.

182

With the exception of the premium for the first year covering the period from January 14, 1913 to January 14,
1914, all the money used for paying the premiums, i. e., from the second year, or January 16, 1914, or when
the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano, until his death on
February 2, 1929, is conjugal property inasmuch as it does not appear to have exclusively belonged to him or to
his wife (art. 1407, Civil Code). As the sum of P20,150 here in controversy is a product of such premium it must
also be deemed community property, because it was acquired for a valuable consideration, during said Adolphe
Oscar Schuetze's marriage with Rosario Gelano at the expense of the common fund (art. 1401, No. 1, Civil
Code), except for the small part corresponding to the first premium paid with the deceased's own money.
In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats of life insurance in
the following terms, to wit:
The amount of the policy represents the premiums to be paid, and the right to it arises the moment the
contract is perfected, for at the moment the power of disposing of it may be exercised, and if death
occurs payment may be demanded. It is therefore something acquired for a valuable consideration
during the marriage, though the period of its fulfillment, depend upon the death of one of the spouses,
which terminates the partnership. So considered, the question may be said to be decided by articles
1396 and 1401: if the premiums are paid with the exclusive property of husband or wife, the policy
belongs to the owner; if with conjugal property, or if the money cannot be proved as coming from one
or the other of the spouses, the policy is community property.
The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ. A., 509) laid down the
following doctrine:
COMMUNITY PROPERTY — LIFE INSURANCE POLICY. — A husband took out an endowment life
insurance policy on his life, payable "as directed by will." He paid the premiums thereon out of
community funds, and by his will made the proceeds of the policy payable to his own estate. Held, that
the proceeds were community estate, one-half of which belonged to the wife.
In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the following doctrine:
A testator, after marriage, took out an insurance policy, on which he paid the premiums from his salary.
Held that the insurance money was community property, to one-half of which, the wife was entitled as
survivor.
In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following doctrine:
A decedent paid the first third of the amount of the premiums on his life-insurance policy out of his
earnings before marriage, and the remainder from his earnings received after marriage. Held, that onethird of the policy belonged to his separate estate, and the remainder to the community property.
Thus both according to our Civil Code and to the ruling of those North American States where the Spanish Civil
Code once governed, the proceeds of a life-insurance policy whereon the premiums were paid with conjugal
money, belong to the conjugal partnership.
The appellee alleges that it is a fundamental principle that a life-insurance policy belongs exclusively to the
beneficiary upon the death of the person insured, and that in the present case, as the late Adolphe Oscar
Schuetze named his own estate as the sole beneficiary of the insurance on his life, upon his death the latter
became the sole owner of the proceeds, which therefore became subject to the inheritance tax, citing Del Val
vs. Del Val (29 Phil., 534), where the doctrine was laid down that an heir appointed beneficiary to a lifeinsurance policy taken out by the deceased, becomes the absolute owner of the proceeds of such policy upon
the death of the insured.

183

The estate of a deceased person cannot be placed on the same footing as an individual heir. The proceeds of a
life-insurance policy payable to the estate of the insured passed to the executor or administrator of such
estate, and forms part of its assets (37 Corpus Juris, 565, sec. 322); whereas the proceeds of a life-insurance
policy payable to an heir of the insured as beneficiary belongs exclusively to said heir and does not form part of
the deceased's estate subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323, and
articles 419 and 428 of the Code of Commerce.)
Just as an individual beneficiary of a life-insurance policy taken out by a married person becomes the exclusive
owner of the proceeds upon the death of the insured even if the premiums were paid by the conjugal
partnership, so, it is argued, where the beneficiary named is the estate of the deceased whose life is insured,
the proceeds of the policy become a part of said estate upon the death of the insured even if the premiums
have been paid with conjugal funds.
In a conjugal partnership the husband is the manager, empowered to alienate the partnership property without
the wife's consent (art. 1413, Civil Code), a third person, therefore, named beneficiary in a life-insurance policy
becomes the absolute owner of its proceeds upon the death of the insured even if the premiums should have
been paid with money belonging to the community property. When a married man has his life insured and
names his own estate after death, beneficiary, he makes no alienation of the proceeds of conjugal funds to a
third person, but appropriates them himself, adding them to the assets of his estate, in contravention of the
provisions of article 1401, paragraph 1, of the Civil Code cited above, which provides that "To the conjugal
partnership belongs" (1) Property acquired for a valuable consideration during the marriage at the expense of
the common fund, whether the acquisition is made for the partnership or for one of the spouses only."
Furthermore, such appropriation is a fraud practised upon the wife, which cannot be allowed to prejudice her,
according to article 1413, paragraph 2, of said Code. Although the husband is the manager of the conjugal
partnership, he cannot of his own free will convert the partnership property into his own exclusive property.
As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar Schuetze, were paid out of the
conjugal funds, with the exceptions of the first, the proceeds of the policy, excluding the proportional part corresponding
to the first premium, constitute community property, notwithstanding the fact that the policy was made payable to the
deceased's estate, so that one-half of said proceeds belongs to the estate, and the other half to the deceased's widow, the
plaintiff-appellant Rosario Gelano Vda. de Schuetze.
The second point to decide in this appeal is whether the Collector of Internal Revenue has authority, under the law, to
collect the inheritance tax upon one-half of the life-insurance policy taken out by the late Adolphe Oscar Schuetze, which
belongs to him and is made payable to his estate.
According to the agreed statement of facts mentioned above, the plaintiff-appellant, the Bank of the Philippine Islands,
was appointed administrator of the late Adolphe Oscar Schuetze's testamentary estate by an order dated March 24, 1928,
entered by the Court of First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of Canada, whose main
office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her arrival at Manila, the sum of P20,150, which
was the amount of the insurance policy on the life of said deceased, payable to the latter's estate. On the same date
Rosario Gelano Vda. de Schuetze delivered the money to said Bank of the Philippine Islands, as administrator of the
deceased's estate, which entered it in the inventory of the testamentary estate, and then returned the money to said
widow.
Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and section 1 of Act No. 3031,
contains the following relevant provision:
SEC. 1536. Conditions and rate of taxation. — Every transmission by virtue of inheritance, devise, bequest, gift
mortis causa or advance in anticipation of inheritance, devise, or bequest of real property located in the
Philippine Islands and real rights in such property; of any franchise which must be exercised in the Philippine
Islands; of any shares, obligations, or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippine Islands in accordance with its laws; of any shares or rights in any partnership,
business or industry established in the Philippine Islands or of any personal property located in the Philippine
Islands shall be subject to the following tax:

184

xxx

xxx

xxx

In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze were paid to the Bank of
the Philippine Islands, as administrator of the deceased's estate, for management and partition, and as such proceeds
were turned over to the sole and universal testamentary heiress Rosario Gelano Vda. de Schuetze, the plaintiff-appellant,
here in Manila, the situs of said proceeds is the Philippine Islands.
In his work "The Law of Taxation," Cooley enunciates the general rule governing the levying of taxes upon tangible
personal property, in the following words:
GENERAL RULE. — The suits of tangible personal property, for purposes of taxation may be where the owner is
domiciled but is not necessarily so. Unlike intangible personal property, it may acquire a taxation situs in a state
other than the one where the owner is domiciled, merely because it is located there. Its taxable situs is where it is
more or less permanently located, regardless of the domicile of the owner. It is well settled that the state where
it is more or less permanently located has the power to tax it although the owner resides out of the state,
regardless of whether it has been taxed for the same period at the domicile of the owner, provided there is
statutory authority for taxing such property. It is equally well settled that the state where the owner is domiciled
has no power to tax it where the property has acquired an actual situs in another state by reason of its more or
less permanent location in that state. ... (2 Cooley, The Law of Taxation, 4th ed., p. 975, par. 451.)
With reference to the meaning of the words "permanent" and "in transit," he has the following to say:
PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. — In order to acquire a situs in a state or taxing district so as
to be taxable in the state or district regardless of the domicile of the owner and not taxable in another state or
district at the domicile of the owner, tangible personal property must be more or less permanently located in the
state or district. In other words, the situs of tangible personal property is where it is more or less permanently
located rather than where it is merely in transit or temporarily and for no considerable length of time. If tangible
personal property is more or less permanently located in a state other than the one where the owner is
domiciled, it is not taxable in the latter state but is taxable in the state where it is located. If tangible personal
property belonging to one domiciled in one state is in another state merely in transitu or for a short time, it is
taxable in the former state, and is not taxable in the state where it is for the time being. . . . .
Property merely in transit through a state ordinarily is not taxable there. Transit begins when an article is
committed to a carrier for transportation to the state of its destination, or started on its ultimate passage. Transit
ends when the goods arrive at their destination. But intermediate these points questions may arise as to when a
temporary stop in transit is such as to make the property taxable at the place of stoppage. Whether the property
is taxable in such a case usually depends on the length of time and the purpose of the interruption of transit. . . . .
. . . It has been held that property of a construction company, used in construction of a railroad, acquires a situs at
the place where used for an indefinite period. So tangible personal property in the state for the purpose of
undergoing a partial finishing process is not to be regarded as in the course of transit nor as in the state for a
mere temporary purpose. (2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988, par. 452.)
If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze and made payable to his estate,
were delivered to the Bank of the Philippine Islands for administration and distribution, they were not in transit but were
more or less permanently located in the Philippine Islands, according to the foregoing rules. If this be so, half of the
proceeds which is community property, belongs to the estate of the deceased and is subject to the inheritance tax, in
accordance with the legal provision quoted above, irrespective of whether or not the late Adolphe Oscar Schuetze was
domiciled in the Philippine Islands at the time of his death.
By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a life-insurance policy payable to the
insured's estate, on which the premiums were paid by the conjugal partnership, constitute community property, and
belong one-half to the husband and the other half to the wife, exclusively; (2) that if the premiums were paid partly with
paraphernal and partly conjugal funds, the proceeds are likewise in like proportion paraphernal in part and conjugal in
part; and (3) that the proceeds of a life-insurance policy payable to the insured's estate as the beneficiary, if delivered to
the testamentary administrator of the former as part of the assets of said estate under probate administration, are subject
to the inheritance tax according to the law on the matter, if they belong to the assured exclusively, and it is immaterial
that the insured was domiciled in these Islands or outside.

185

Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return to the plaintiff the one-half of
the tax collected upon the amount of P20,150, being the proceeds of the insurance policy on the life of the late Adolphe
Oscar Schuetze, after deducting the proportional part corresponding to the first premium, without special pronouncement
of costs. So ordered.

CASE 52
G.R. No. L-44059 October 28, 1977
THE
INSULAR
LIFE
ASSURANCE
COMPANY,
LTD.,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

plaintiff-appellee,

This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life insurance
policy of a legally married man claim the proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., Policy No.
009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same amount Buenaventura C.
Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing branch of a
tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the coverage in the total
amount of P11,745.73, representing the face value of the policy in the amount of P5,882.00 plus the additional
benefits for accidental death also in the amount of P5,882.00 and the refund of P18.00 paid for the premium
due November, 1969, minus the unpaid premiums and interest thereon due for January and February, 1969, in
the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated beneficiary
therein, although she admits that she and the insured Buenaventura C. Ebrado were merely living as husband
and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that she is the
one entitled to the insurance proceeds, not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance Co., Ltd.
commenced an action for Interpleader before the Court of First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a pre-trial order
was entered reading as follows: ñé+.£ªwph!1
During the pre-trial conference, the parties manifested to the court. that there is no possibility
of amicable settlement. Hence, the Court proceeded to have the parties submit their evidence
for the purpose of the pre-trial and make admissions for the purpose of pretrial. During this
conference, parties Carponia T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the
deceased Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six —
(legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed
Ebrado; 2) that during the lifetime of the deceased, he was insured with Insular Life Assurance
Co. Under Policy No. 009929 whole life plan, dated September 1, 1968 for the sum of P5,882.00
with the rider for accidental death benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1
for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of
Buenaventura Ebrado, he was living with his common-wife, Carponia Ebrado, with whom she
had 2 children although he was not legally separated from his legal wife; 4) that Buenaventura
in accident on October 21, 1969 as evidenced by the death Exhibit 3 and affidavit of the police
186

report of his death Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the Insular
Life Assurance Co. which was contested by Pascuala Ebrado who also filed claim for the
proceeds of said policy 6) that in view ofthe adverse claims the insurance company filed this
action against the two herein claimants Carponia and Pascuala Ebrado; 7) that there is now due
from the Insular Life Assurance Co. as proceeds of the policy P11,745.73; 8) that the beneficiary
designated by the insured in the policy is Carponia Ebrado and the insured made reservation to
change the beneficiary but although the insured made the option to change the beneficiary,
same was never changed up to the time of his death and the wife did not have any opportunity
to write the company that there was reservation to change the designation of the parties
agreed that a decision be rendered based on and stipulation of facts as to who among the two
claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda
from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T. Ebrado
disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and directing the payment
of the insurance proceeds to the estate of the deceased insured. The trial court held: ñé+.£ªwph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for
adultery or concubinage is not essential in order to establish the disqualification mentioned
therein. Neither is it also necessary that a finding of such guilt or commission of those acts be
made in a separate independent action brought for the purpose. The guilt of the donee
(beneficiary) may be proved by preponderance of evidence in the same proceeding (the action
brought to declare the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in the policy in question for the disqualification and
incapacity to exist and that it is only necessary that such fact be established by preponderance
of evidence in the trial. Since it is agreed in their stipulation above-quoted that the deceased
insured and defendant Carponia T. Ebrado were living together as husband and wife without
being legally married and that the marriage of the insured with the other defendant Pascuala
Vda. de Ebrado was valid and still existing at the time the insurance in question was purchased
there is no question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds of the
insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the Appellate
Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance Code (PD
No. 612, as amended) does not contain any specific provision grossly resolutory of the prime question at hand.
Section 50 of the Insurance Act which provides that "(t)he insurance shag be applied exclusively to the proper
interest of the person in whose name it is made" 1 cannot be validly seized upon to hold that the mm includes
the beneficiary. The word "interest" highly suggests that the provision refers only to the "insured" and not to
the beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the prohibitory laws against
illicit relationships especially on property and descent will be rendered nugatory, as the same could easily be
circumvented by modes of insurance. Rather, the general rules of civil law should be applied to resolve this void
in the Insurance Law. Article 2011 of the New Civil Code states: "The contract of insurance is governed by
187

special laws. Matters not expressly provided for in such special laws shall be regulated by this Code." When not
otherwise specifically provided for by the Insurance Law, the contract of life insurance is governed by the
general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person who
is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a fife insurance
policy by the person who cannot make a donation to him. Common-law spouses are, definitely, barred from
receiving donations from each other. Article 739 of the new Civil Code provides:
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the time of
donation;
Those made between persons found guilty of the same criminal offense, in consideration
thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by preponderance of
evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned.
Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the
premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or
profits of said insurance. As a consequence, the proscription in Article 739 of the new Civil Code should equally
operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot
receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make
the donation. Under American law, a policy of life insurance is considered as a testament and in construing it,
the courts will, so far as possible treat it as a will and determine the effect of a clause designating the
beneficiary by rules under which wins are interpreted.
3. Policy considerations and dictates of morality rightly justify the institution of a barrier between common law
spouses in record to Property relations since such hip ultimately encroaches upon the nuptial and filial rights of
the legitimate family There is every reason to hold that the bar in donations between legitimate spouses and
those between illegitimate ones should be enforced in life insurance policies since the same are based on
similar consideration As above pointed out, a beneficiary in a fife insurance policy is no different from a donee.
Both are recipients of pure beneficence. So long as manage remains the threshold of family laws, reason and
morality dictate that the impediments imposed upon married couple should likewise be imposed upon extramarital relationship. If legitimate relationship is circumscribed by these legal disabilities, with more reason
should an illicit relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, this Court,
through Justice Fernando, said:
If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that
court (Court of Appeals), 'to prohibit donations in favor of the other consort and his
descendants because of and undue and improper pressure and influence upon the donor, a
prejudice deeply rooted in our ancient law;" por-que no se enganen desponjandose el uno al
otro por amor que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV),
reiterating the rationale 'No Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1,
De donat, inter virum et uxorem); then there is very reason to apply the same prohibitive policy
to persons living together as husband and wife without the benefit of nuptials. For it is not to
be doubted that assent to such irregular connection for thirty years bespeaks greater influence
of one party over the other, so that the danger that the law seeks to avoid is correspondingly
increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it
188

would not be just that such donations should subsist, lest the condition 6f those who incurred
guilt should turn out to be better.' So long as marriage remains the cornerstone of our family
law, reason and morality alike demand that the disabilities attached to marriage should
likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement, any other
conclusion cannot stand the test of scrutiny. It would be to indict the frame of the Civil Code
for a failure to apply a laudable rule to a situation which in its essentials cannot be
distinguished. Moreover, if it is at all to be differentiated the policy of the law which embodies
a deeply rooted notion of what is just and what is right would be nullified if such irregular
relationship instead of being visited with disabilities would be attended with benefits. Certainly
a legal norm should not be susceptible to such a reproach. If there is every any occasion where
the principle of statutory construction that what is within the spirit of the law is as much a part
of it as what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an interpretation
purely literal of the language used must be remedied by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities mentioned in
Article 739 may effectuate. More specifically, with record to the disability on "persons who were guilty of
adultery or concubinage at the time of the donation," Article 739 itself provides:
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilty of the donee may be proved by preponderance of
evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is a condition precedent. In
fact, it cannot even be from the aforequoted provision that a prosecution is needed. On the contrary, the law
plainly states that the guilt of the party may be proved "in the same acting for declaration of nullity of
donation. And, it would be sufficient if evidence preponderates upon the guilt of the consort for the offense
indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the insured and the beneficiary
has been conveniently supplied by the stipulations between the parties in the pre-trial conference of the case.
It case agreed upon and stipulated therein that the deceased insured Buenaventura C. Ebrado was married to
Pascuala Ebrado with whom she has six legitimate children; that during his lifetime, the deceased insured was
living with his common-law wife, Carponia Ebrado, with whom he has two children. These stipulations are
nothing less than judicial admissions which, as a consequence, no longer require proof and cannot be
contradicted. A fortiori, on the basis of these admissions, a judgment may be validly rendered without going
through the rigors of a trial for the sole purpose of proving the illicit liaison between the insured and the
beneficiary. In fact, in that pretrial, the parties even agreed "that a decision be rendered based on this
agreement and stipulation of facts as to who among the two claimants is entitled to the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is hereby
declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life insurance policy. As a
consequence, the proceeds of the policy are hereby held payable to the estate of the deceased insured. Costs
against Carponia T. Ebrado.
SO ORDERED.

189

CASE 53
G.R. No. L-2910

June 29, 1951

THE
MANUFACTURERS
LIFE
INSURANCE
CO.,
vs.
BIBIANO L. MEER, in the capacity as Collector of Internal Revenue, defendant-appellee.

plaintiff-appellant,

Appeal from a decision of the Honorable Buenaventura Ocampo, then judge of the Manila court of first
instance, dismissing plaintiff's complaint to recover money paid under protest for taxes. The case was
submitted upon a stipulation of facts, supplemented by documentary evidence.
The plaintiff, the Manufacturer Life Insurance Company in a corporation duly organized in Canada with head
office at Toronto. It is duly registered and licensed to engage in life insurance business in the Philippines, and
maintains a branch office in Manila. It was engaged in such business in the Philippines for more than five years
before and including the year 1941. But due to the exigencies of the war it closed the branch office at Manila
during 1942 up to September 1945.
In the course of its operations before the war, plaintiff issued a number of life insurance policies in the
Philippines containing stipulations referred to as non-forfeiture clauses, as follows:
'8. Automatic Premium Loan. — This Policy shall not lapse for non-payment of any premium after it has
been three full years in force, if, at the due date of such premium, the Cash Value of this Policy and of
any bonus additions and dividends left on accumulation (after deducting any indebtedness to the
Company and the interest accrued thereon) shall exceed the amount of said premium. In which event
the company will, without further request, treat the premium then due as paid, and the amount of
such premium, with interest from its actual due date at six per cent per annum, compounded yearly,
and one per cent, compounded yearly, for expenses, shall be a first lien on this Policy in the Company's
favour in priority to the claim of any assignee or any other person. The accumulated lien may at any
time, while the Policy is in force, be paid in whole or in part.
"When the premium falls due and is not paid in cash within the month's grace, if the Cash Value of this
policy and of any bonus addition and dividends left on accumulation (after deducting any accumulated
indebtedness) be less than the premium then due, the Company will, without further requests,
continue this insurance in force for a period .. . .
"10. Cash and Paid-Up Insurance Values. — At the end of the third policy year or thereafter, upon the
legal surrender of this Policy to the Company while there is no default in premium payments or within
two months after the due date of the premium in default, the Company will (1) grant a cash value as
specified in Column (A) increased by the cash value of any bonus additions and dividends left on
accumulation, which have been alloted to this Policy, less all indebtedness to the Company on this
Policy on the date of such surrender, or (2) endorse this Policy as a Non-Participating Paid-up Policy for
the amount as specified in Column (B) of the Table of Guaranteed Values . . ..
"11. Extended Insurance. — After the premiums for three or more full years have been paid hereunder
in cash, if any subsequent premium is not paid when due, and there is no indebtness to the Company,
on the written request of the Insured . . ..
190

From January 1, 1942 to December 31, 1946 for failure of the insured under the above policies to pay the
corresponding premiums for one or more years, the plaintiff's head office of Toronto, applied the provision of
the automatic premium loan clauses; and the net amount of premiums so advanced or loaned totalled
P1,069,254.98. On this sum the defendant Collector of Internal Revenue assessed P17,917.12 — which plaintiff
paid supra protest —. The assessment was made pursuant to section 255 of the National Internal Revenue
Code as amended. which partly provides:
SEC. 255. Taxes on insurance premiums. — There shall be collected from every person, company, or
corporation (except purely cooperative companies or associations) doing business of any sort in the
Philippines a tax of one per centum of the total premiums collected .. whether such premiums are paid
in money, notes credits, or any substitute for money but premiums refunded within six months after
payment on account of rejection of risk or returned for other reason to person insured shall not be
included in the taxable receipts . . ..
It is the plaintiff's contention that when it made premium loans or premium advances, as above stated, by
virtue of the non-forfeiture clauses, it did not collect premiums within the meaning of the above sections of the
law, and therefore it is not amendable to the tax therein provided.
The plaintiff conveniently divides that issue into five minor issues, to wit:
(a) Whether or not premium advances made by plaintiff-appellant under the automatic premium loan
clause of its policies are "premium collected" by the Company subject to tax;
(b) Whether or not, in the application of the automatic premium loan clause of plaintiff-appellant's
policies, there is "payment in money, notes, credit, or any substitutes for money";
(c) Whether or not the collection of the alleged deficiency premium taxes constitutes double taxation;
(d) Whether the making of premium advances, granting for the sake of argument that it amounted to
collection of premiums, were done in Toronto, Canada, or in the Philippines; and
(e) Whether or not the fact that plaintiff-appellant was not doing business in the Philippines during the
period from January 1, 1942 to September 30, 1945, inclusive, exempts it from payment of premium
taxes corresponding to said period.
These points will be considered in their order. The first two may best taken up together in the light of a
practical illustration offered by appellant:
"Suppose that "A" years of age, secures a 20-years endowment policy for P5,000 from plaintiff-appellant
Company and pays an annual premium of P250. 'A' pays the first ten yearly premiums amounting to P2,500 and
on this amount plaintiff-appellant pays the corresponding taxes under section 255 of the National Internal
Revenue Code. Suppose also that the cash value of said policy after the payment of the 10th annual premium
amounts to P1,000." When on the eleventh year the annual premium fell due and the insured remitted no
money within the months grace, the insurer treated the premium then over due as paid from the cash value,
the amount being loan to the policyholder1 who could discharged it at anytime with interest at 6 per cent. The
insurance contract, therefore, continued in force for the eleventh year.
Under the circumstances described, did the insurer collect the amount of P250 as the annual premium for the
eleventh year on the said policy? The plaintiff says no; but the defendant and the lower court say yes. The
latter have, in our opinion, the correct view. In effect the Manufacturers Life Insurance Co. loaned to "A" on the
eleventh year, the sum of P250 and the latter in turn paid with that sum the annual premium on his policy. The
Company therefore collected the premium for the eleventh year.

191

"How could there be such a collection "plaintiff argues "when as a result thereof, insurer becomes a creditor,
acquires a lien on the policy and is entitled to collect interest on the amount of the unpaid premiums?".
Wittingly, the "premium" and the "loan" have been interchanged in the argument. The insurer "became a
creditor" of the loan, but not of the premium that had already been paid. And it is entitled to collect interest on
the loan, not on the premium.
In other words, "A" paid the premium for the eleventh; but in turn he became a debtor of the company for the
sum of P250. This debt he could repay either by later remitting the money to the insurer or by letting the cash
value compensate for it. The debt may also be deducted form the amount of the policy should "A" die
thereafter during the continuance of the policy.
Proceeding along the same line of argument counsel for plaintiff observes "that there is no change, much less
an increase, in the amount of the assets of plaintiff-appellant after the application of the automatic premium
loan clause. Its assets remain exactly the same after making the advances in question. It being so, there could
have been no collection of premium . . .. "We cannot assent to this view, because there was an increase. There
was the new credit for the advances made. True, the plaintiff could not sue the insured to enforce that credit.
But it has means of satisfaction out of the cash surrender value.
Here again it may be urged that if the credit is paid out of the cash surrender value, there were no new funds
added to the company's assets. Cash surrender value "as applied to life insurance policy, is the amount of
money the company agrees to pay to the holder of the policy if he surrenders it and releases his claims upon it.
The more premiums the insured has paid the greater will be the surrender value; but the surrender value is
always a lesser sum than the total amount of premiums paid." (Cyclopedia Law Dictionary 3d. ed. 1077.)
The cash value or cash surrender value is therefore an amount which the insurance company holds in trust 2 for
the insured to be delivered to him upon demand. It is therefore a liability of the company to the insured. Now
then, when the company's credit for advances is paid out of the cash value or cash surrender value, that value
and the company's liability is thereby dismissed pro tanto. Consequently, the net assets of the insurance
company increased corresponding; for it is plain mathematics that the decrease of a person's liabilities means a
corresponding increase in his net assets.
Nevertheless let us grant for the nonce that the operation of the automatic loan provision contributed no
additional cash to the funds of the insurer. Yet it must be admitted that the insurer agreed to consider the
premium paid on the strength of the automatic loan. The premium was therefore paid by means of a "note" or
"credit" or "other substitute for money" and the taxis due because section 255 above quoted levies taxes
according to the total premiums collected by the insurer "whether such premiums are paid in money, notes,
credits or any substitutes for money.
In connection with the third issue, appellant refers to its example about "A" who failed to pay the premium on
the eleventh year and the insurer advanced P250 from the cash value. Then it reasons out that "if the amount
P250 is deducted from the cash value of P1,000 of the policy, then taxing this P250 anew as premium collected,
as was done in the present case, will amount to double taxation since taxes had already been collected on the
cash value of P1,000 as part of the P2,500 collected as premiums for the first ten years." The trouble with the
argument is that it assumes all advances are necessarily repaid from the cash value. That is true in some cases.
In others the insured subsequently remits the money to repay the advance and to keep unimpaired the cash
reserve of his policy.
As to a matter of fact of the total amount advanced (P1,069,254.998) P158,666.63 had actually been repaid at
the time of assessment notice. Besides, the premiums paid and on which taxes had already been collected,
were those for the ten years. The tax demanded is on the premium for the eleventh year.
In any event there is no constitutional prohibition against double taxation.
192

On the fourth issue the appellant takes the position that as advances of premiums were made in Toronto, such
premiums are deemed to have been paid there — not in the Philippines — and therefore those payments are
not subject to local taxation. The thesis overlooks the actual fact that the loans are made to policyholders in the
Philippines, who in turn pay therewith the premium to the insurer thru the Manila branch. Approval of
appellants position will enable foreign insurers to evade the tax by contriving to require that premium
payments shall be made at their head offices. What is important, the law does not contemplate premiums
collected in the Philippines. It is enough that the insurer is doing insurance business in the Philippines,
irrespective of the place of its organization or establishment.
This brings forth the appellant's last contention that it was "engaged in business" in the Philippines during the
years 1942 to September 1945, and that as section 255 applies only to companies "doing insurance business in
the Philippines" this tax was improperly demanded.
It is our opinion that although during those years the appellant was not open for new business because its
branch office was closed, still it was practically and legally, operating in this country by collecting premiums on
its outstanding policies, incurring the risks and/or enjoying the benefits consequent thereto, without having
previously taken any steps indicating withdrawal in good faith field of economic activity3.
As a matter of fact, in objecting to the payment of the tax, plaintiff-appellant never insisted, before the Bureau
of Internal Revenue, that it was not engaged in business in this country during those years.
Wherefore, finding no prejudicial error in the appealed decisions, we hereby affirm it with costs.

193

CASE 54
G.R. No. L-109937 March 21, 1994
DEVELOPMENT
BANK
OF
THE
PHILIPPINES,
petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by CANDIDA G. DANS, and the
DBP MORTGAGE REDEMPTION INSURANCE POOL, respondents.
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside
the decision of the Court of Appeals in CA-G.R CV No. 26434 and its resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I
In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law, applied for a loan of
P500,000.00 with the Development Bank of the Philippines (DBP), Basilan Branch. As the principal mortgagor,
Dans, then 76 years of age, was advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and released on August
11, 1987. From the proceeds of the loan, DBP deducted the amount of P1,476.00 as payment for the MRI
premium. On August 15, 1987, Dans accomplished and submitted the "MRI Application for Insurance" and the
"Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was credited by DBP to
the savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this information to the DBP
MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP that Dans was not eligible for MRI coverage,
being over the acceptance age limit of 60 years at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's MRI application. The
DBP offered to refund the premium of P1,476.00 which the deceased had paid, but Candida Dans refused to
accept the same, demanding payment of the face value of the MRI or an amount equivalent to the loan. She,
likewise, refused to accept an ex gratia settlement of P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a complaint with the
Regional Trial Court, Branch I, Basilan, against DBP and the insurance pool for "Collection of Sum of Money with
Damages." Respondent Estate alleged that Dans became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to apply for MRI, and later collected the
insurance premium thereon. Respondent Estate therefore prayed: (1) that the sum of P139,500.00, which it
paid under protest for the loan, be reimbursed; (2) that the mortgage debt of the deceased be declared fully
paid; and (3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a cross-claim against
the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits submitted by respondent
Estate. As a result of these admissions, the trial court narrowed down the issues and, without opposition from
194

the parties, found the case ripe for summary judgment. Consequently, the trial court ordered the parties to
submit their respective position papers and documentary evidence, which may serve as basis for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against DBP. The DBP
MRI Pool, however, was absolved from liability, after the trial court found no privity of contract between it and
the deceased. The trial court declared DBP in estoppel for having led Dans into applying for MRI and actually
collecting the premium and the service fee, despite knowledge of his age ineligibility. The dispositive portion of
the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance of justice and
equity, the Court finds judgment for the plaintiff and against Defendant DBP, ordering the
latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of interest as
amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest accumulated or
otherwise to have been settled, satisfied or set-off by virtue of the insurance coverage of the
late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other expenses, and
other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The Crossclaim of Defendant DBP is likewise dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the appellate court affirmed
in toto the decision of the trial court. The DBP's motion for reconsideration was denied in a resolution dated
April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement for DBP MRI Pool" (Exh. "5Bank") with the following declaration:
I hereby declare and agree that all the statements and answers contained herein are true,
complete and correct to the best of my knowledge and belief and form part of my application
for insurance. It is understood and agreed that no insurance coverage shall be effected unless
and until this application is approved and the full premium is paid during my continued good
health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the application shall be
approved by the insurance pool; and (2) when the full premium is paid during the continued good health of the
applicant. These two conditions, being joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The pool, however, did
not approve the application of Dans. There is also no showing that it accepted the sum of P1,476.00, which DBP
credited to its account with full knowledge that it was payment for Dan's premium. There was, as a result, no

195

perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable on a contract that does not
exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure MRI coverage.
Instead of allowing Dans to look for his own insurance carrier or some other form of insurance policy, DBP
compelled him to apply with the DBP MRI Pool for MRI coverage. When Dan's loan was released on August 11,
1987, DBP already deducted from the proceeds thereof the MRI premium. Four days latter, DBP made Dans fill
up and sign his application for MRI, as well as his health statement. The DBP later submitted both the
application form and health statement to the DBP MRI Pool at the DBP Main Building, Makati Metro Manila. As
service fee, DBP deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the second as an insurance
agent.
As an insurance agent, DBP made Dans go through the motion of applying for said insurance, thereby leading
him and his family to believe that they had already fulfilled all the requirements for the MRI and that the
issuance of their policy was forthcoming. Apparently, DBP had full knowledge that Dan's application was never
going to be approved. The maximum age for MRI acceptance is 60 years as clearly and specifically provided in
Article 1 of the Group Mortgage Redemption Insurance Policy signed in 1984 by all the insurance companies
concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not personally liable to
the party with whom he contracts, unless he expressly binds himself or exceeds the limits of his authority
without giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more than 60 years of age (Exh.
"1-Pool"). Knowing all the while that Dans was ineligible for MRI coverage because of his advanced age, DBP
exceeded the scope of its authority when it accepted Dan's application for MRI by collecting the insurance
premium, and deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon whether the third person is
aware of the limits of the agent's powers. There is no showing that Dans knew of the limitation on DBP's
authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of the authority conferred by the principal on
the agent and he (third person) has been deceived by the non-disclosure thereof by the agent, then the latter is
liable for damages to him (V Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, p.
422 [1992], citing Sentencia [Cuba] of September 25, 1907). The rule that the agent is liable when he acts
without authority is founded upon the supposition that there has been some wrong or omission on his part
either in misrepresenting, or in affirming, or concealing the authority under which he assumes to act (Francisco,
V., Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of the limits of
the agency carries with it the implication that a deception was perpetrated on the unsuspecting client, the
provisions of Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his duties, act with
justice give everyone his due and observe honesty and good faith.
Article 20 provides:

196

Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy. To assume that were it not
for DBP's concealment of the limits of its authority, Dans would have secured an MRI from another insurance
company, and therefore would have been fully insured by the time he died, is highly speculative. Considering
his advanced age, there is no absolute certainty that Dans could obtain an insurance coverage from another
company. It must also be noted that Dans died almost immediately, i.e., on the nineteenth day after applying
for the MRI, and on the twenty-third day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly
proved (Civil Code of the Philippines, Art. 2199). Damages, to be recoverable, must not only be capable of
proof, but must be actually proved with a reasonable degree of certainty (Refractories Corporation v.
Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447
[1916]). Speculative damages are too remote to be included in an accurate estimate of damages (Sun Life
Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral damages. No proof of pecuniary
loss is required in the assessment of said kind of damages (Civil Code of Philippines, Art. 2216). The same may
be recovered in acts referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of the court according to the circumstances of each
case (Civil Code of the Philippines, Art. 2216). Considering that DBP had offered to pay P30,000.00 to
respondent Estate in ex gratia settlement of its claim and that DBP's non-disclosure of the limits of its authority
amounted to a deception to its client, an award of moral damages in the amount of P50,000.00 would be
reasonable.
The award of attorney's fees is also just and equitable under the circumstances (Civil Code of the Philippines,
Article 2208 [11]).
WHEREFORE,
the
decision
of
the
Court
of
Appeals
in
CA
G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent Estate of Juan B. Dans
the amount of P1,476.00 with legal interest from the date of the filing of the complaint until fully paid; and (2)
to PAY said Estate the amount of Fifty Thousand Pesos (P50,000.00) as moral damages and the amount of Ten
Thousand Pesos (P10,000.00) as attorney's fees. With costs against petitioner.
SO ORDERED.

197

CASE 55
G.R. No. 76101-02 September 30, 1991
TIO
KHE
CHIO,
petitioner,
vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND SURETY CORPORATION, respondents.
The issue in this petition for certiorari and prohibition is the legal rate of interest to be imposed in actions for
damages arising from unpaid insurance claims. Petitioner Tio Khe Chio claims that it should be twelve (12%) per
cent pursuant to Articles 243 and 244 of the Insurance Code while private respondent Eastern Assurance and
Surety Corporation (EASCO) claims that it should be six (6%) per cent under Article 2209 of the Civil Code.
The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one thousand (1,000) bags of
fishmeal valued at $36,000.30 from Agro Impex, U.S.A. Dallas, Texas, U.S.A. The goods were insured with
respondent EASCO and shipped on board the M/V Peskov, a vessel owned by Far Eastern Shipping Company.
When the goods reached Manila on January 28, 1979, they were found to have been damaged by sea water
which rendered the fishmeal useless. Petitioner filed a claim with EASCO and Far Eastern Shipping. Both
refused to pay. Whereupon, petitioner sued them before the then Court of First Instance of Cebu, Branch II for
damages. EASCO, as the insurer, filed a counterclaim against the petitioner for the recovery of P18,387.86
representing the unpaid insurance premiums.
On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern Shipping to pay petitioner
solidarily the sum of P105,986.68 less the amount of P18,387.86 for unpaid premiums with interest at the legal
rate from the filing of the complaint, the sum of P15,000.00 as attorney's fees and the costs.
The judgment became final as to EASCO but the shipping company appealed to the Court of Appeals and was
absolved from liability by the said court in AC-G.R. No. 00161, entitled "Tio Khe Chio vs. Eastern Assurance and
Surety Corporation."
The trial court, upon motion by petitioner, issued a writ of execution against EASCO. The sheriff enforcing the
writ reportedly fixed the legal rate of interest at twelve (12%). Respondent EASCO moved to quash the writ
alleging that the legal interest to be computed should be six (6%) per cent per annum in accordance with
Article 2209 of the Civil Code and not twelve (12%) per cent as insisted upon by petitioner's counsel. In its order
of July 30, 1986, the trial court denied EASCO's motion. EASCO then filed a petition for certiorari and
prohibition before the Court of Appeals.
On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive part of which states:
WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes the interest at 12% on the
principal amount of P87,598.82 from the date of filing of the complaint until the full payment of the amount,
and the interest that the private respondent is entitled to collect from the petitioner is hereby reduced to 6%
per annum.
No pronouncement as to costs.

198

In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not only is it unjust and
unfair but it is also contrary to the correct interpretation of the fixing of interest rates under Sections 243 and
244 of the Insurance Code. And since petitioner's claims is based on an insurance contract, then it is the
Insurance Code which must govern and not the Civil Code.
We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%) per annum as correctly
held by the Appellate Court.
Section 243 of the Insurance Code provides:
The amount of any loss or damage for which an insurer may be liable, under any policy other
than life insurance policy, shall be paid within thirty days after proof of loss is received by the
insurer and ascertainment of the loss or damage is made either by agreement between the
insured and the insurer or by arbitration; but if such ascertainment is not had or made within
sixty days after such receipt by the insurer of the proof of loss, then the loss or damage shall be
paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within
the time prescribed herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary
Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.
Section 244 of the aforementioned Code also provides:
In case of any litigation for the enforcement of any policy or contract of insurance, it shall be
the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether
the payment of the claim of the insured has been unreasonably denied or withheld; and in the
affirmative case, the insurance company shall be adjudged to pay damages which shall consist
of attorney's fees and other expenses incurred by the insured person by reason of such
undeniable denial or withholding of payment plus interest of twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as the case
may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within
the time prescribed in said sections shall be considered prima facie evidence of unreasonable
delay in payment.
In the case at bar, the Court of Appeals made no finding that there was an unjustified refusal or withholding of
payment on petitioner's claim. In fact, respondent court had this to say on EASCO's refusal to settle the claim of
petitioner:
... EASCO's refusal to settle the claim to Tio Khe Chio was based on some ground which, while
not sufficient to free it from liability under its policy, nevertheless is sufficient to negate any
assertion that in refusing to pay, it acted unjustifiably.
xxx xxx xxx
The case posed some genuine issues of interpretation of the terms of the policy as to which
persons may honestly differ. This is the reason the trial court did not say EASCO's refusal was
unjustified.
Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant case. They apply only
when the court finds an unreasonable delay or refusal in the payment of the claims.
Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974 pursuant to Presidential
Decree No. 116 (Usury Law) which raised the legal rate of interest from six (6%) to twelve (12%) per cent apply
199

to the case at bar as by the petitioner. The adjusted rate mentioned in the circular refers only to loans or
forbearances of money, goods or credits and court judgments thereon but not to court judgments for damages
arising from injury to persons and loss of property which does not involve a loan.
In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143 SCRA 158, the Court
declared that the legal rate of interest is six (6%) per cent per annum, and not twelve (12%) per cent, where a
judgment award is based on an action for damages for personal injury, not use or forbearance of money, goods
or credit. In the same vein, the Court held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30, 1986, 145
SCRA 311, that the rates under the Usury Law (amended by P.D. 116) are applicable only to interest by way of
compensation for the use or forbearance of money, interest by way of damages is governed by Article 2209 of
the Civil Code.
Clearly, the applicable law is Article 2209 of the Civil Code which reads:
If the obligation consists in the payment of a sum of money and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal interest which is six per cent
per annum.
And in the light of the fact that the contending parties did not allege the rate of interest stipulated in the
insurance contract, the legal interest was properly pegged by the Appellate Court at six (6%) per cent.
WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.
SO ORDERED.

200

CASE 56
G.R. No. L-49699 August 8, 1988
PERLA
COMPANIA
de
SEGUROS,
INC.,
petitioner,
vs.
HON. CONSTANTE A. ANCHETA, Presiding Judge of the Court of First instance of Camarines Norte, Branch III,
ERNESTO A. RAMOS and GOYENA ZENAROSA-RAMOS, for themselves and as Guardian Ad Litem for Minors
JOBET, BANJO, DAVID and GRACE all surnamed RAMOS, FERNANDO M. ABCEDE, SR., for himself and
Guardian Ad Litem for minor FERNANDO G. ABCEDE, JR., MIGUEL JEREZ MAGO as Guardian Ad Litem for
minors ARLEEN R. MAGO, and ANACLETA J. ZENAROSA., respondents.
The instant petition for certiorari and prohibition with preliminary injunction concerns the ability of insurers
under the "no fault indemnity" provision of the Insurance Code. *
On December 27, 1977, in a collision between the IH Scout in which private respondents were riding and a
Superlines bus along the national highway in Sta. Elena, Camarines Norte, private respondents sustained
physics injuries in varying degrees of gravity. Thus, they filed with the Court of First Instance of Camarines
Norte on February 23,1978 a complaint for damages against Superlines, the bus driver and petitioner, the
insurer of the bus [Rollo, pp. 27-39.] The bus was insured with petitioner for the amount of P50,000.00 as and
for passenger liability and P50,000.00 as and for third party liability. The vehicle in which private respondents
were riding was insured with Malayan Insurance Co.
Even before summons could be served, respondent judge issued an order dated March 1, 1978 [Rollo, pp. 4041], the pertinent portion of which stated:
The second incident is the prayer for an order of this court for the Insurance Company, Perla
Compania de Seguros, Inc., to pay immediately the P5,000.00 under the "no fault clause" as
provided for under Section 378 of the Insurance Code, and finding that the requisite
documents to be attached in the record, the said Insurance Company is therefore directed to
pay the plaintiffs (private respondents herein) within five (5) days from receipt of this order.
Petitioner denied in its Answer its alleged liability under the "no fault indemnity" provision [Rollo, p. 44] and
likewise moved for the reconsideration of the order. Petitioner held the position that under Sec. 378 of the
Insurance Code, the insurer liable to pay the P5,000.00 is the insurer of the vehicle in which private
respondents were riding, not petitioner, as the provision states that "[i]n the case of an occupant of a vehicle,
claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from."
Respondent judge, however, denied reconsideration. A second motion for reconsideration was filed by
petitioner. However, in an order dated January 3, 1979, respondent judge denied the second motion for
reconsideration and ordered the issuance of a writ of execution [Rollo, p. 69.] Hence, the instant petition
praying principally for the annulment and setting aside of respondent judge's orders dated March 1, 1978 and
January 3, 1979.
The Court issued a temporary restraining order on January 24,1979 [Rollo pp. 73-74.]

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The sole issue raised in this petition is whether or not petitioner is the insurer liable to indemnify private
respondents under Sec. 378 of the Insurance Code.
The key to the resolution of the issue is of courts e Sec. 378, which provides:
Sec. 378. Any claim for death or injury to any passenger or third party pursuant to the provision
of this chapter shall be paid without the necessity of proving fault or negligence of any kind.
Provided, That for purposes of this section —
(i) The indemnity in respect of any one person shall not exceed five thousand pesos;
(ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate
the claim:
(a) Police report of accident, and
(b) Death certificate and evidence sufficient to establish the proper payee, or
(c) Medical report and evidence of medical or hospital disbursement in respect of
which refund is claimed;
(iii) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim
shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from.
In any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right
of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall
be maintained. [Emphasis supplied.]
From a reading of the provision, which is couched in straight-forward and unambiguous language, the following rules on
claims under the "no fault indemnity" provision, where proof of fault or negligence is not necessary for payment of any
claim for death Or injury to a passenger or a third party, are established:
1. A claim may be made against one motor vehicle only.
2. If the victim is an occupant of a vehicle, the claim shall lie against the insurer of the vehicle. in which he is riding,
mounting or dismounting from.
3. In any other case (i.e. if the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly
offending vehicle.
4. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the
accident shall be maintained.
The law is very clear — the claim shall lie against the insurer of the vehicle in which the "occupant" ** is riding, and no
other. The claimant is not free to choose from which insurer he will claim the "no fault indemnity," as the law, by using the
word "shall, makes it mandatory that the claim be made against the insurer of the vehicle in which the occupant is riding,
mounting or dismounting from.
That said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the
party paying the claim under Sec. 378 may recover against the owner of the vehicle responsible for the accident. This is
precisely the essence of "no fault indemnity" insurance which was introduced to and made part of our laws in order to
provide victims of vehicular accidents or their heirs immediate compensation, although in a limited amount, pending final
determination of who is responsible for the accident and liable for the victims'injuries or death. In turn, the "no fault
indemnity" provision is part and parcel of the Insurance Code provisions on compulsory motor vehicle ability insurance
[Sec. 373-389] and should be read together with the requirement for compulsory passenger and/or third party liability
insurance [Sec. 377] which was mandated in order to ensure ready compensation for victims of vehicular accidents.

202

Irrespective of whether or not fault or negligence lies with the driver of the Superlines bus, as private respondents were
not occupants of the bus, they cannot claim the "no fault indemnity" provided in Sec. 378 from petitioner. The claim
should be made against the insurer of the vehicle they were riding. This is very clear from the law. Undoubtedly, in
ordering petitioner to pay private respondents the 'no fault indemnity,' respondent judge gravely abused his discretion in
a manner that amounts to lack of jurisdiction. The issuance of the corrective writ of certiorari is therefore warranted.
WHEREFORE, the petition is GRANTED and respondent judge's order dated March 1, 1978, requiring petitioner to pay
private respondents the amount of P5,000.00 as "no fault indemnity' under Sec. 378 of the Insurance Code, and that of
January 3, 1979, denying the second motion for reconsideration and issuing a writ of execution, are ANNULLED and SET
ASIDE. The temporary restraining order issued by the Court on January 24, 1979 is made permanent. SO ORDERED.

CASE 57
G.R. No. 98414 February 8, 1993
FIRST
QUEZON
CITY
INSURANCE
COMPANY,
INC.,
vs.
THE HON. COURT OF APPEALS and DE DIOS MARIKINA TRANSPORTATION CO., respondents.

petitioner,

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

203

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

204

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.

CASE 58
G.R. No. L-60887 November 13, 1991
PERLA
COMPANIA
DE
SEGUROS,
INC.,
petitioner,
vs.
HON. JOSE R. RAMOLETE, PRIMITIVA Y. PALMES, HONORATO BORBON, SR., OFFICE OF THE PROVINCIAL
SHERIFF, PROVINCE OF CEBU, respondents.The present Petition for Certiorari seeks to annul: (a) the Order
dated 6 August 1979 which ordered the Provincial Sheriff to garnish the third-party liability insurance policy
issued by petitioner Perla Compania de Seguros, Inc. ("Perla") in favor of Nelia Enriquez, judgment debtor in
Civil Case No. R-15391; (b) the Order dated 24 October 1979 which denied the motion for reconsideration of
the 6 August 1979 Order; and (c) the Order dated 8 April 1980 which ordered the issuance of an alias writ of
garnishment against petitioner.
In the afternoon of 1 June 1976, a Cimarron PUJ owned and registered in the name of Nelia Enriquez, and
driven by Cosme Casas, was travelling from Cebu City to Danao City. While passing through Liloan, Cebu, the
Cimarron PUJ collided with a private jeep owned by the late Calixto Palmes (husband of private respondent
Primitiva Palmes) who was then driving the private jeep. The impact of the collision was such that the private
jeep was flung away to a distance of about thirty (30) feet and then fell on its right side pinning down Calixto
Palmes. He died as a result of cardio-respiratory arrest due to a crushed chest. The accident also caused
physical injuries on the part of Adeudatus Borbon who was then only two (2) years old.
On 25 June 1976, private respondents Primitiva Palmes (widow of Calixto Palmes) and Honorato Borbon, Sr.
(father of minor Adeudatus Borbon) filed a complaint against Cosme Casas and Nelia Enriquez (assisted by her
husband Leonardo Enriquez) before the then Court of First Instance of Cebu, Branch 3, claiming actual, moral,
nominal and exemplary damages as a result of the accident.
The claim of private respondent Honorato Borbon, Sr., being distinct and separate from that of co-plaintiff
Primitiva Palmes, and the amount thereof falling properly within the jurisdiction of the inferior court,
respondent Judge Jose R. Ramolete ordered the Borbon claim excluded from the complaint, without prejudice
to its being filed with the proper inferior court.
On 4 April 1977, the Court of First Instance rendered a Decision in favor of private respondent Primitiva
Palmes, ordering common carrier Nelia Enriquez to pay her P10,000.00 as moral damages, P12,000.00 as
compensatory damages for the death of Calixto Palmes, P3,000.00 as exemplary damages, P5,000.00 as actual
damages, and P1,000.00 as attorney's fees.
The judgment of the trial court became final and executory and a writ of execution was thereafter issued. The
writ of execution was, however, returned unsatisfied. Consequently, the judgment debtor Nelia Enriquez was
summoned before the trial court for examination on 23 July 1979. She declared under oath that the Cimarron
PUJ registered in her name was covered by a third-party liability insurance policy issued by petitioner Perla.
Thus, on 31 July 1979, private respondent Palmes filed a motion for garnishment praying that an order of
garnishment be issued against the insurance policy issued by petitioner in favor of the judgment debtor. On 6
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August 1979, respondent Judge issued an Order directing the Provincial Sheriff or his deputy to garnish the
third-party liability insurance policy.
Petitioner then appeared before the trial court and moved for reconsideration of the 6 August 1979 Order and
for quashal of the writ of garnishment, alleging that the writ was void on the ground that it (Perla) was not a
party to the case and that jurisdiction over its person had never been acquired by the trial court by service of
summons or by any process. The trial court denied petitioner's motion. An Order for issuance of an alias writ of
garnishment was subsequently issued on 8 April 1980.
More than two (2) years later, the present Petition for Certiorari and Prohibition was filed with this Court on 25
June 1982 alleging grave abuse of discretion on the part of respondent Judge Ramolete in ordering garnishment
of the third-party liability insurance contract issued by petitioner Perla in favor of the judgment debtor, Nelia
Enriquez. The Petition should have been dismissed forthwith for having been filed way out of time but, for
reasons which do not appear on the record, was nonetheless entertained.
In this Petition, petitioner Perla reiterates its contention that its insurance contract cannot be subjected to
garnishment or execution to satisfy the judgment in Civil Case No. R-15391 because petitioner was not a party
to the case and the trial court did not acquire jurisdiction over petitioner's person. Perla further argues that the
writ of garnishment had been issued solely on the basis of the testimony of the judgment debtor during the
examination on 23 July 1979 to the effect that the Cimarron PUJ was covered by a third-party liability insurance
issued by Perla, without granting it the opportunity to set up any defenses which it may have under the
insurance contract; and that the proceedings taken against petitioner are contrary to the procedure laid down
in Economic Insurance Company, Inc. v. Torres, et al.,12 which held that under Rule 39, Section 45, the Court
"may only authorize" the judgment creditor to institute an action against a third person who holds property
belonging to the judgment debtor.
We find no grave abuse of discretion or act in excess of or without jurisdiction on the part of respondent Judge
Ramolete in ordering the garnishment of the judgment debtor's third-party liability insurance.
Garnishment has been defined as a species of attachment for reaching any property or credits pertaining or
payable to a judgment debtor. In legal contemplation, it is a forced novation by the substitution of creditors:
the judgment debtor, who is the original creditor of the garnishee is, through service of the writ of
garnishment, substituted by the judgment creditor who thereby becomes creditor of the garnishee.
Garnishment has also been described as a warning to a person having in his possession property or credits of
the judgment debtor, not to pay the money or deliver the property to the latter, but rather to appear and
answer the plaintiff's suit.
In order that the trial court may validly acquire jurisdiction to bind the person of the garnishee, it is not
necessary that summons be served upon him. The garnishee need not be impleaded as a party to the case. All
that is necessary for the trial court lawfully to bind the person of the garnishee or any person who has in his
possession credits belonging to the judgment debtor is service upon him of the writ of garnishment.
The Rules of Court themselves do not require that the garnishee be served with summons or impleaded in the
case in order to make him liable.
Rule 39, Section 15 provides:
Sec. 15. Execution of money judgments. — The officer must enforce an execution of a money
judgment by levying on all the property, real or personal of every name and nature
whatsoever, and which may be disposed of for value, of the judgment debtor not exempt from
execution . . .

206

Real property, stocks, shares, debts, credits, and other personal property, or any interest in
either real or personal property, may be levied on in like manner and with like effect as under a
writ of attachment. (Emphasis supplied).
Rule 57, Section 7(e) in turn reads:
Sec. 7. Attachment of real and personal property; recording thereof. — Properties shall be
attached by the officer executing the order in the following manner:
xxx xxx xxx
(e) Debts and credits, and other personal property not capable of manual delivery, by leaving
with the person owing such debts, or having his possession or under his control such credits or
other personal property, or with his agent, a copy of the order, and notice that the debts owing
by him to the party against whom attachment is issued, and the credits and other personal
property in his possession, or under his control, belonging to said party, are attached in
pursuance of such order;
xxx xxx xxx
(Emphasis supplied)
Through service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a "forced intervenor"
in, the case and the trial court thereby acquires jurisdiction to bind him to compliance with all orders and
processes of the trial court with a view to the complete satisfaction of the judgment of the court. In Bautista v.
Barredo, the Court, through Mr. Justice Bautista Angelo, held:
While it is true that defendant Jose M. Barredo was not a party in Civil Case No. 1636 when it
was instituted by appellant against the Philippine Ready Mix Concrete Company, Inc., however,
jurisdiction was acquired over him by the court and he became a virtual party to the case when,
after final judgment was rendered in said case against the company, the sheriff served upon
him a writ of garnishment in behalf of appellant. Thus, as held by this Court in the case of
Tayabas Land Company vs. Sharruf, 41 Phil. 382, the proceeding by garnishment is a species of
attachment for reaching credits belonging to the judgment debtor and owing to him from a
stranger to the litigation. By means of the citation, the stranger becomes a forced intervenor;
and the court, having acquired jurisdiction over him by means of the citation, requires him to
pay his debt, not to his former creditor, but to the new creditor, who is creditor in the main
litigation. (Emphasis supplied).
In Rizal Commercial Banking Corporation v. De Castro, the Court stressed that the asset or credit garnished is
thereupon subjected to a specific lien:
The garnishment of property to satisfy a writ of execution operates as an attachment and
fastens upon the property a lien by which the property is brought under the jurisdiction of the
court issuing the writ. It is brought into custodia legis, under the sole control of such
court. (Emphasis supplied)
In the present case, there can be no doubt, therefore, that the trial court actually acquired jurisdiction over
petitioner Perla when it was served with the writ of garnishment of the third-party liability insurance policy it
had issued in favor of judgment debtor Nelia Enriquez. Perla cannot successfully evade liability thereon by such
a contention.

207

Every interest which the judgment debtor may have in property may be subjected to execution. In the instant
case, the judgment debtor Nelia Enriquez clearly had an interest in the proceeds of the third-party liability
insurance contract. In a third-party liability insurance contract, the insurer assumes the obligation of paying the
injured third party to whom the insured is liable. The insurer becomes liable as soon as the liability of the
insured to the injured third person attaches. Prior payment by the insured to the injured third person is not
necessary in order that the obligation of the insurer may arise. From the moment that the insured became
liable to the third person, the insured acquired an interest in the insurance contract, which interest may be
garnished like any other credit.
Petitioner also contends that in order that it may be held liable under the third-party liability insurance, a
separate action should have been commenced by private respondents to establish petitioner's liability.
Petitioner invokes Economic Insurance Company, Inc. vs. Torres, which stated:
It is clear from Section 45, Rule 39 that if a persons alleged to have property of the judgment
debtor or to be indebted to him claims an interest in the property adverse to him or denies the
debt, the court may only authorize the judgment creditor to institute an action against such
person for the recovery of such interest or debt. Said section does not authorize the court to
make a finding that the third person has in his possession property belonging to the judgment
debtor or is indebted to him and to order said third person to pay the amount to the judgment
creditor.
It has been held that the only power of the court in proceedings supplemental to execution is to
niake an order authorizing the creditor to sue in the proper court to recover an indebtedness
due to the judgment debtor. The court has no jurisdiction to try summarily the question
whether the third party served with notice of execution and levy is indebted to defendant
when such indebtedness is denied. To make an order in relation to property which the
garnishee claimed to own in his own right, requiring its application in satisfaction of judgment
of another, would be to deprive the garnishee of property upon summary proceeding and
without due process of law. (Emphasis supplied)
But reliance by petitioner on the case of Economic Insurance Company, Inc. v. Torres (supra) is misplaced. The
Court there held that a separate action needs to be commenced when the garnishee "claims an interest in the
property adverse to him (judgment debtor) or denies the debt." In the instant case, petitioner Perla did not deny
before the trial court that it had indeed issued a third-party liability insurance policy in favor of the judgment
debtor. Petitioner moreover refrained from setting up any substantive defense which it might have against the
insured-judgment debtor. The only ground asserted by petitioner in its "Motion for Reconsideration of the
Order dated August 6, 1979 and to Quash Notice of Garnishment" was lack of jurisdiction of the trial court for
failure to implead it in the case by serving it with summons. Accordingly, Rule 39, Section 45 of the Rules of
Court is not applicable in the instant case, and we see no need to require a separate action against Perla: a writ
of garnishment suffices to hold petitioner answerable to the judgment creditor. If Perla had any substantive
defenses against the judgment debtor, it is properly deemed to have waived them by laches.
WHEREFORE, the Petition for Certiorari and Prohibition is hereby DISMISSED for having been filed out of time
and for lack of merit. The assailed Orders of the trial court are hereby AFFIRMED. Costs against petitioner. This
Decision is immediately executory.
SO ORDERED.

208

CASE 59
G.R. No. 101439 June 21, 1999
GOVERNMENT
SERVICE
INSURANCE
SYSTEM
(GSIS),
petitioner,
vs.
COURT OF APPEALS (former Tenth Division), VICTORIA JAIME VDA. DE KHO, for herself and minor ROY
ROLAND, GLORIA KHO VDA. DE CALABIA for herself and minors MARY GRACE, WILLIE, JR., VOLTAIRE, GLENN,
and MAY, all surnamed CALABIA, DANIEL KHO, JOSEFINA KHO, EMERITA KHO APEGO, ANTONIO KHO and
TERESITA KHO, respondents.
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Government Service
Insurance System (GSIS) assails the January 15, 1991 Decision of the Court of Appeals in CA-G.R. No. 19849,
which affirmed in toto the judgment of the Regional Trial Court of Butuan City, Branch II, dated April 30, 1985,
stating in part:
WHEREFORE, judgment is hereby rendered, as follows:
xxx xxx xxx
In Civil Case No. 2256:
a) Dismissing the complaint against defendant Victor Uy;
b) Ordering defendants Mabuhay Insurance and Guaranty
Company, Inc., Guillermo Corbeta, NFA and GSIS to pay jointly
and severally the following sums of money:
i. to pay plaintiff Gloria Kho Vda. de Calabia,
the sum of P8,935.06 for doctor's fees,
medicines, hospitalizations and medical
expenses; P2,319.00 for transportation
expenses; and P53.30 for telegrams;
P10,000.00 for the injuries she sustained;
P12,000.00 loss of income for six months.
ii. to plaintiff Victoria Kho, the sum P832.00 for
hospitalization and medicines; P10,000.00 for
the injuries she sustained;

209

iii. to the heirs of Wellie [Willie] Calabia,
Roland Kho and Maxima Uhmad [Ugmad] Vda.
de Kho, the sum of P7,500.00 as funeral
expenses less P5,000.00 advanced by
defendant Victor Uy.
iv. to the heirs of Wellie [Willie] Calabia, Sr.,
heirs of Roland Kho and heirs of Maxima
Ugmad Vda. de Kho; P30,000.00 each as
compensatory damages.
c) To pay plaintiff the sum of P10,000.00 as attorney's fees and
expenses of litigation;
d) Dismissing defendants counterclaim, and cross-claim; and
e) To pay the costs.
That this decision is without prejudice as to the right Mabuhay Insurance & Guaranty Co., Inc.,
and NFA to recover from Guillermo Corbeta and GSIS the amounts they may have paid by
virtue hereof.
For purposes of this review, we deem as also assailed the disposition by the trial court in its Order issued on
July 12, 1985, modifying its original decision, by awarding moral damages to the heirs of the deceased victims,
as follows:
Considering that the dispositive portion of the decision in this case, an award of P10,000.00
each made to plaintiffs Gloria Kho Vda. de Calabia . . ., for injuries they sustained, this award,
through [sic] not clearly stated in the decision, is the moral damages the instant motion seeks
to obtain. However, the prayer for moral damages for the death of the three (3) persons
above-mentioned is proper. (citation omitted)
In view of the foregoing, the prayer of plaintiffs Gloria Kho Vda. de Calabia and Victoria Kho for
an award of moral damages in their favor is hereby denied. However, as for the death of Wellie
[Willie] Calabia, Sr., Rolando Kho and Maxima Ugmad Vda. de Kho, an award of moral damages
is hereby made, and ordering and directing defendants Mabuhay Insurance and Guaranty
Company Inc., Guillermo Corbeta, National Food Authority and Government Service Insurance
System to pay jointly and severally the following sums to wit :
P10,000.00 to the heirs of Wellie [Willie]Calabia, Sr.
P10,000.00 to the heirs of Rolando Kho and
P10,000.00 to the heirs of Maxima Ugmad Vda. de Kho.
xxx xxx xxx
IT IS SO ORDERED.
The relevant facts as found by the trial court are as follows:
National Food Authority (NFA, formerly National Grains Authority) was the owner of a Chevrolet truck which
was insured against liabilities for death of and injuries to third persons with the GSIS.
210

On May 9, 1979, at about 7:00 in the evening at Tabon-Tabon, Butuan City, the said truck driven by Guillermo
Corbeta collided with a public utility vehicle, a Toyota Tamaraw. The Toyota Tamaraw was owned and operated
by Victor Uy, under the name and style of "Victory Line." The Tamaraw was a total wreck.
All the collision victims were passengers of the Toyota Tamaraw. Five (5) passengers died 4 while ten (10)
others sustained bodily injuries. Among those injured were private respondents, Victoria Jaime Vda. de Kho and
Gloria Kho Vda. de Calabia. Among the dead were Maxima Ugmad Vda. de Kho, Roland Kho and Willie Calabia,
Sr.
Three (3) cases were filed with the Court of First Instance of Agusan del Norte and Butuan City. The first, Civil
Case No. 2196 for quasi-delict, damages and attorney's fees, was commenced by Uy on June 5, 1979 against
NFA and Corbeta. On August 27, 1979, the second, Civil Case No. 2225 for damages, was filed by an injured
passenger, Librado Taer, against Uy, the operator of the public utility vehicle, and insurer, Mabuhay Insurance
and Guaranty Co. (MIGC). In turn, Uy filed a cross-claim against MIGC and a third-party complaint against
Corbeta and NFA. The third, Civil Case No. 2256, was instituted by herein private respondents on November 26,
1979 against the following: NFA and Corbeta for damages due to quasi-delict; GSIS as insurer of the truck; Uy
for breach of contract of carriage; and MIGC as insurer of the Toyota Tamaraw. These cases were consolidated
and partially tried by Judge Fortunate A. Vailoces, of the then Court of First Instance of Agusan del Norte and
Butuan City.
These cases were later on transferred to Branch II of the Regional Trial Court of Butuan City. Trial ensued and
on April 30, 1985, the court rendered its decision 5 holding that Corbeta's negligence was the proximate cause
of the collision. The findings of the trial court stated that the truck which crossed over to the other lane was
speeding because after the collision, its left front wheel was detached and the truck traveled for about fifty (50)
meters and fell into a ravine. Likewise, the court concluded that if both vehicles had traveled in their respective
lanes, the incident would not have occurred. 7 However, the Chevy cargo truck had crossed over to the other
lane which, under traffic rules, was the lane of the Toyota Tamaraw.
In Civil Case No. 2196, the trial court awarded Uy the total amount of one hundred nine thousand one hundred
(P109,100.00) pesos for damages. In Civil Case No. 2225, said court dismissed the case against Uy and ordered
MIGC, Corbeta and NFA to pay plaintiff Taer, jointly and severally, the total amount of forty thousand five
hundred fifty-nine pesos and ninety four centavos (P40,559.94) for actual, compensatory, and moral damages
plus attorney's fees. Damages were likewise awarded to the herein private respondents in Civil Case No. 2256,
as earlier mentioned.
Corbeta and NFA appealed the decision of the trial court in Civil Case Nos. 2196, 2225, and 2256 to the Court of
Appeals. GSIS also elevated the decision in Civil Case No. 2256 to the same appellate court. The appeals were
docketed as C.A.-G.R. Nos. 19847, 19848, and 19849.
The Court of Appeals agreed with the conclusions of the trial court and ruled as follows:
WHEREFORE, in view of the foregoing considerations, and finding no reversible error, the
decisions of the Court a quo in Civil Cases Nos. 2196, 2225 and 2256 are hereby AFFIRMED in
toto, with costs against the appellants.
SO ORDERED.
On February 5 and 6, 1991, GSIS and NFA filed their motions for reconsideration respectively, which were
denied by the respondent court in its Resolution dated August 13, 1991.
On October 4, 1991, only GSIS filed this petition for review on certiorari based on the following assigned errors:
1. The respondent court erred in holding GSIS solidarily liable with NFA.
211

2. The respondent court erred in holding GSIS liable beyond the terms and
conditions of the contract of insurance and the limitations under Insurance
Memorandum Circular (IMC) No. 5-78.
3. The respondent court erred in holding GSIS liable without proof that a notice
of claim had been filed within six (6) months from the date of the accident.
We find pertinent the following issues:
1) Whether the respondent court erred in holding GSIS solidarily liable with the
negligent insured/owner-operator of the Chevrolet truck for damages awarded
to private respondents which are beyond the limitations of the insurance policy
and the Insurance Memorandum Circular No. 5-78.
2) Whether the respondent court failed to consider that the private
respondents have no cause of action against the petitioner, allegedly for failure
of the victims to file an insurance claim within six (6) months from the date of
the accident.
Petitioner denies solidary liability with the NFA or the negligent operator of the cargo truck because it claims
that they are liable under different obligations. It asserts that the NFA's liability is based on quasi-delict, while
petitioner's liability is based on the contract of insurance. Citing articles 1207 11 and 1208 12 of the Civil Code of
the Philippines, petitioner states that when there are two or more debtors or two or more creditors, the
obligation as a general rule is joint. It claims that the only exceptions are: (1) when there is a stipulation for
solidary obligation; (2) when the nature of the obligation requires solidary liability; and (3) when the law
declares the obligation to be solidary. However, since neither the provision of the contract nor the insurance
law provides for solidary liability, petitioner asserts that the presumption is that its obligation arising from a
contract of insurance is joint.
Petitioner's position insofar as joint liability is concerned is not tenable. It is now established that the injured or
the heirs of a deceased victim of a vehicular accident may sue directly the insurer of the vehicle. Note that
common carriers are required to secure Compulsory Motor Vehicle Liability Insurance [CMVLI] coverage as
provided under Sec. 374 of the Insurance Code, precisely for the benefit of victims of vehicular accidents and to
extend them immediate relief. As this Court held in Shafter vs. Judge, RTC of Olongapo City, Br. 75:
Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily intended
to provide compensation for the death or bodily injuries suffered by innocent third parties or
passengers as a result of a negligent operation and use of motor vehicles. The victims and/or
their defendants [dependents] are assured of immediate financial assistance, regardless of the
financial capacity of motor vehicle owners.
xxx xxx xxx
The injured for whom the contract of insurance is intended can sue directly the insurer. The
general purpose of statutes enabling an injured person to proceed directly against the insurer
is to protect injured persons against the insolvency of the insured who causes such injury, and
to give such injured person a certain beneficial interest in the proceeds of the policy, and
statutes are to be liberally construed so that their intended purpose may be accomplished. It
has even been held that such a provision creates a contractual relation which injures to the
benefit of any and every person who may be negligently injured by the named insured as if
such injured person were specifically named in the policy. (S 449 7 Am. Jur., 2d, pp. 118-119)

212

However, although the victim may proceed directly against the insurer for indemnity, the third party liability is
only up to the extent of the insurance policy and those required by law. While it is true that where the
insurance contract provides for indemnity against liability to third persons, and such third persons can directly
sue the insurer, the direct liability of the insurer under indemnity contracts against third party liability does not
mean that the insurer can be held liable in solidum with the insured and/or the other parties found at fault. For
the liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based on tort. The
liability of GSIS based on the insurance contract is direct, but not solidary with that of the NFA. The latter's
liability is based separately on Article 2180 20 of the Civil Code.
Obviously, the insurer could be held liable only up to the extent of what was provided for by the contract of
insurance, in accordance with CMVLI law. At the time of the incident, the schedule of indemnities for death
and/or bodily injuries, professional fees, hospital and other charges payable under a CMVLI coverage was
provided under the Insurance Memorandum Circular (IMC) No. 5-78 which was approved on November 10,
1978. As therein provided, the maximum indemnity for death was twelve thousand (P12,000.00) pesos per
victim. 22 The schedules for medical expenses were also provided by said IMC, specifically in paragraphs (C) to
(G).
Consequently, heirs of the victims who died in the May 9, 1979 vehicular incident, could proceed (1) against
GSIS for the indemnity of P12,000 for each dead victim, and against NFA and Guillermo Corbeta for any other
damages or expenses claimed; or (2) against NFA and Corbeta to pay them all their claims in full.
It follows also that injured victims, Gloria Kho Vda. de Calabia and Victoria Kho, could claim their medical
expenses for eight thousand nine hundred thirty-five pesos and six centavos (P8,935.06) and eight hundred
thirty-two (P832.00) pesos, from any of the following: GSIS, NFA, or Corbeta. As to the other damages, only
NFA or Corbeta may be held liable therefor.
Computation of hospital charges and fees for the services rendered to the injured victims was conclusively
established by the trial court. The petitioner failed to object to the evidence thereon, when presented by the
private respondents during the trial. Thus, these factual bases for the award of damages may no longer be
attacked. For generally, findings of the judge who tried the case and heard the witnesses could not be
disturbed on appeal, unless there are substantial facts and particular circumstances which have been
overlooked but which, if properly considered, might affect the result of the case. 23 Thus, considering the
evidence on record including the schedule of indemnities provided under IMC No. 5-78, we find no cogent
reason to disturb the computation of medical charges and expenses that justify the award of damages by the
trial court.
As to the second issue, the petitioner contends that it cannot be held liable without proof nor allegation that
the private respondents filed before its office a notice of claim within six (6) months from the date of the
accident. This requirement, according to the petitioner, gives the insurer the opportunity to investigate the
veracity of the claim, and non-compliance therewith constitutes waiver. Since the claim was not reported to
the insurer, the petitioner avers that the presumption is that the victim opted to pursue his claim against the
motor vehicle owner or against the tortfeasor.
However, in this case the records reveal that on September 7, 1979, the private respondents sent a notice of
loss to the petitioner informing the latter of the accident. Included as "Exihibit J'' 24 in the records, this notice
constitutes evidence of the loss they suffered by reason of the vehicular collision. They stressed further that
the petitioner did not deny receipt of notice of claim during the trial, and it would be too late now to state
otherwise.
Although merely factual, we need to emphasize that the alleged delay in reporting the loss by the insured
and/or by the beneficiaries must be promptly raised by the insurer 25 in objecting to the claims. When the
insured presented proof of loss before the trial court, the insurer failed to object to said presentation. The
petitioner should have promptly interposed the defense of delay, or belated compliance, concerning the notice
213

of claim. Moreover, the petitioner merely waited for the victims or beneficiaries to file their complaint. As
matters stand now, the defense of laches or prescription is deemed waived because of petitioner's failure to
raise it not only before but also during the hearing. 26
To recapitulate, petitioner seeks a definitive ruling only on the extent of its liability, as insurer of NFA, to those
injured or killed in the May 9, 1979 vehicular collision.
As found by the trial court, the driver (Guillermo Corbeta), the operator (NFA), and MIGC, are solidarily liable
for damages as computed below:
SCHEDULE A
I. For the Injured Victims.
1) Gloria Kho Vda. de Calabia.
a) Medical expenses P8,935.06
b) Transportation and Telegraph Expenses 2,372.30
c) Other Compensatory/Moral Damages 10,000.00
d) Loss of Income 12,000.00
—————
Total P33,307.36
=========
2) Victoria Kho.
a) Medical expenses P832.00
b) Other Compensatory/Moral Damages 10,000.00
—————
Total P10,832.00
=========
II. For the Heirs of the Deceased Victims:
Compensatory/
Funeral Death Moral
Expenses Indemnity Damages Total
———— ———— ———— ———

214

1) Heirs of Willie Calabia, Sr. P2,500.00 P30,000.00 P10,000.00 42,500.00
2) Heirs of Roland Kho 2,500.00 30,000.00 10,000.00 42,500.00
3) Heirs of Maxima Ugmad Vda.
de Kho 2,500.00 30,000.00 10,000.00 42,500.00
———— ———— ———— ————
Sub-Total P7,500.00 P90,000.00 P30,000.00 P127,500.00
Less: Advances by Victor Uy (5,000.00) NIL (5,000.00)
________ _________ _________ _________
Balance P2,500.00 P90,000.00 P30,000.00 122,500.00
======== ======== ======== ========
III. Total Amount of Attorney's Fees P10,000.00
—————
Note that, the petitioner (GSIS) was impleaded as insurer of NFA. But under the CMVLI law, the petitioner could
only be held liable under its contract of insurance. And pursuant to the CMVLI law, its liability is primary, and
not dependent on the recovery of judgment from the insured. Hence, GSIS is directly liable to the private
respondents, in the following amounts.
SCHEDULE B
I. Injured Victims Medical Expenses
——————— —————————
1) Victoria Jaime Vda. de Kho P832.00
2) Gloria Kho Vda. de Calabia P8,935.00
II. Heirs of Deceased Victims Death Indemnity
———————————— ————————
1) Heirs of Willie Calabia, Sr. P12,000.00
2) Heirs of Roland Kho P12,000.00
3) Heirs of Maxima Ugmad Vda. de Kho P12,000.00
The balance of the private respondents' claims as shown on Schedule A above, must be paid by Corbeta or NFA,
or MIGC, the parties found solidarily liable.
WHEREFORE, the instant petition is hereby GRANTED, but the decision of the trial court as affirmed by the
Court of Appeals is hereby. MODIFIED, as follows:
1. Petitioner Government Service Insurance System is ordered to pay (a) twelve
thousand pesos (P12,000.00) as death indemnity to each group of heirs of the
deceased, Willie Calabia Sr., Roland Kho and Maxima Ugmad Vda. de Kho; (b)
215

eight hundred thirty-two (P832.00) pesos for medical expenses of Victoria
Jaime Vda. de Kho; and (c) eight thousand, nine hundred thirty-five pesos and
six centavos (P8,935.06) for medical expenses of Gloria Kho Vda. de Calabia.
2. Guillermo Corbeta, National Foods Authority, and Mabuhay Insurance &
Guaranty Co., Inc., jointly and severally, are ordered to pay private
respondents' claims 28 as adjudged by the Regional Trial Court of Butuan City,
minus the amounts that GSIS must pay to the injured victims and the heirs of
the deceased victims as above stated.
This decision is immediately executory. No pronouncement as to cost.
SO ORDERED.

CASE 60
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.
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.

216

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

217

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

218

(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.
219

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.

220

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