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G.R. No. 158085 October 14, 2005
REPUBLIC OF THE PHILIPPINES, Represented by the COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
SUNLIFE ASSURANCE COMPANY OF CANADA, Respondent.
D E C I S I O N
PANGANIBAN, J.:
aving satisfactorily proven to the Court of Tax Appeals, to the Court of
Appeals and to this Court that it is a bona fide cooperative, respondent is
entitled to exemption from the payment of taxes on life insurance premiums
and documentary stamps. Not being governed by the Cooperative Code of
the Philippines, it is not required to be registered with the Cooperative
Development Authority in order to avail itself of the tax exemptions.
Significantly, neither the Tax Code nor the Insurance Code mandates this
administrative registration.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court, seeking
to nullify the January 23, 2003 Decision
2
and the April 21, 2003 Resolution
3
of
the Court of Appeals (CA) in CA-GR SP No. 69125. The dispositive portion of
the Decision reads as follows:
"WHEREFORE, the petition for review is hereby DENIED."
4

The Facts
The antecedents, as narrated by the CA, are as follows:
"Sun Life is a mutual life insurance company organized and existing under the
laws of Canada. It is registered and authorized by the Securities and
Exchange Commission and the Insurance Commission to engage in business
in the Philippines as a mutual life insurance company with principal office at
Paseo de Roxas, Legaspi Village, Makati City.
"On October 20, 1997, Sun Life filed with the [Commissioner of Internal
Revenue] (CIR) its insurance premium tax return for the third quarter of 1997
and paid the premium tax in the amount of P31,485,834.51. For the period
covering August 21 to December 18, 1997, petitioner filed with the CIR its
[documentary stamp tax (DST)] declaration returns and paid the total amount
of P30,000,000.00.
"On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its
decision in Insular Life Assurance Co. Ltd. v. [CIR], which held that mutual life
insurance companies are purely cooperative companies and are exempt
from the payment of premium tax and DST. This pronouncement was later
affirmed by this court in [CIR] v. Insular Life Assurance Company, Ltd. Sun Life
surmised that[,] being a mutual life insurance company, it was likewise exempt
from the payment of premium tax and DST. Hence, on August 20, 1999, Sun
Life filed with the CIR an administrative claim for tax credit of its alleged
erroneously paid premium tax and DST for the aforestated tax periods.
"For failure of the CIR to act upon the administrative claim for tax credit and
with the 2-year period to file a claim for tax credit or refund dwindling away
and about to expire, Sun Life filed with the CTA a petition for review on August
23, 1999. In its petition, it prayed for the issuance of a tax credit certificate in
the amount ofP61,485,834.51 representing P31,485,834.51 of erroneously paid
premium tax for the third quarter of 1997 andP30,000[,000].00 of DST on
policies of insurance from August 21 to December 18, 1997. Sun Life stood firm
on its contention that it is a mutual life insurance company vested with all the
characteristic features and elements of a cooperative company or
association as defined in [S]ection 121 of the Tax Code. Primarily, the
management and affairs of Sun Life were conducted by its members;
secondly, it is operated with money collected from its members; and, lastly, it
has for its purpose the mutual protection of its members and not for profit or
gain.
"In its answer, the CIR, then respondent, raised as special and affirmative
defenses the following:
‘7. Petitioner’s (Sun Life’s) alleged claim for refund is subject to administrative
routinary investigation/examination by respondent’s (CIR’s) Bureau.
‘8. Petitioner must prove that it falls under the exception provided for under
Section 121 (now 123) of the Tax Code to be exempted from premium tax
and be entitled to the refund sought.
‘9. Claims for tax refund/credit are construed strictly against the claimants
thereof as they are in the nature of exemption from payment of tax.
‘10. In an action for tax credit/refund, the burden is upon the taxpayer to
establish its right thereto, and failure to sustain this burden is fatal to said claim
x x x.
‘11. It is incumbent upon petitioner to show that it has complied with the
provisions of Section 204[,] in relation to Section 229, both in the 1997 Tax
Code.’
"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely
from its earlier findings in Insular Life Assurance Company, Ltd. v. [CIR], which it
found to be on all fours with the present action, the CTA ruled:
‘The [CA] has already spoken. It ruled that a mutual life insurance company is
a purely cooperative company[;] thus, exempted from the payment of
premium and documentary stamp taxes. Petitioner Sun Life is without doubt a
mutual life insurance company. x x x.
‘ x x x x x x x x x
‘Being similarly situated with Insular, Petitioner at bar is entitled to the same
interpretation given by this Court in the earlier cases of The Insular Life
Assurance Company, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the
[CA] in the case entitled [CIR] vs. The Insular Life Assurance Company, Ltd.,
C.A. G.R. SP No. 46516, September 29, 1998. Petitioner Sun Life as a mutual life
insurance company is[,] therefore[,] a cooperative company or association
and is exempted from the payment of premium tax and [DST] on policies of
insurance pursuant to Section 121 (now Section 123) and Section 199[1]) (now
Section 199[a]) of the Tax Code.’
"Seeking reconsideration of the decision of the CTA, the CIR argued that Sun
Life ought to have registered, foremost, with the Cooperative Development
Authority before it could enjoy the exemptions from premium tax and DST
extended to purely cooperative companies or associations under [S]ections
121 and 199 of the Tax Code. For its failure to register, it could not avail of the
exemptions prayed for. Moreover, the CIR alleged that Sun Life failed to prove
that ownership of the company was vested in its members who are entitled to
vote and elect the Board of Trustees among [them]. The CIR further claimed
that change in the 1997 Tax Code subjecting mutual life insurance companies
to the regular corporate income tax rate reflected the legislature’s
recognition that these companies must be earning profits.
"Notwithstanding these arguments, the CTA denied the CIR’s motion for
reconsideration.
"Thwarted anew but nonetheless undaunted, the CIR comes to this
court via this petition on the sole ground that:
‘The Tax Court erred in granting the refund[,] because respondent does not
fall under the exception provided for under Section 121 (now 123) of the Tax
Code to be exempted from premium tax and DST and be entitled to the
refund.’
"The CIR repleads the arguments it raised with the CTA and proposes further
that the [CA] decision in [CIR] v. Insular Life Assurance Company, Ltd. is not
controlling and cannot constitute res judicata in the present action. At best,
the pronouncements are merely persuasive as the decisions of the Supreme
Court alone have a universal and mandatory effect."
5

Ruling of the Court of Appeals
In upholding the CTA, the CA reasoned that respondent was a purely
cooperative corporation duly licensed to engage in mutual life insurance
business in the Philippines. Thus, respondent was deemed exempt from
premium and documentary stamp taxes, because its affairs are managed
and conducted by its members with money collected from among
themselves, solely for their own protection, and not for profit. Its members or
policyholders constituted both insurer and insured who contribute, by a
system of premiums or assessments, to the creation of a fund from which all
losses and liabilities were paid. The dividends it distributed to them were not
profits, but returns of amounts that had been overcharged them for
insurance.
For having satisfactorily shown with substantial evidence that it had
erroneously paid and seasonably filed its claim for premium and documentary
stamp taxes, respondent was entitled to a refund, the CA ruled.
Hence, this Petition.
6

The Issues
Petitioner raises the following issues for our consideration:
"I.
"Whether or not respondent is a purely cooperative company or association
under Section 121 of the National Internal Revenue Code and a fraternal or
beneficiary society, order or cooperative company on the lodge system or
local cooperation plan and organized and conducted solely by the members
thereof for the exclusive benefit of each member and not for profit under
Section 199 of the National Internal Revenue Code.
"II.
"Whether or not registration with the Cooperative Development Authority is
a sine qua non requirement to be entitled to tax exemption.
"III.
"Whether or not respondent is exempted from payment of tax on life
insurance premiums and documentary stamp tax."
7

We shall tackle the issues seriatim.
The Court’s Ruling
The Petition has no merit.
First Issue:
Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association "conducted by the
members thereof with the money collected from among themselves and
solely for their own protection and not for profit."
8
Without a doubt,
respondent is a cooperative engaged in a mutual life insurance business.
First, it is managed by its members. Both the CA and the CTA found that the
management and affairs of respondent were conducted by its member-
policyholders.
9

A stock insurance company doing business in the Philippines may "alter its
organization and transform itself into a mutual insurance
company."
10
Respondent has been mutualized or converted from a stock life
insurance company to a nonstock mutual life insurance
corporation
11
pursuant to Section 266 of the Insurance Code of 1978.
12
On the
basis of its bylaws, its ownership has been vested in its member-policyholders
who are each entitled to one vote;
13
and who, in turn, elect from among
themselves the members of its board of trustees.
14
Being the governing body of
a nonstock corporation, the board exercises corporate powers, lays down all
corporate business policies, and assumes responsibility for the efficiency of
management.
15

Second, it is operated with money collected from its members. Since
respondent is composed entirely of members who are also its policyholders, all
premiums collected obviously come only from them.
16

The member-policyholders constitute "both insurer and insured"
17
who
"contribute, by a system of premiums or assessments, to the creation of a fund
from which all losses and liabilities are paid."
18
The premiums
19
pooled into this
fund are earmarked for the payment of their indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of
anyone.
As early as October 30, 1947, the director of commerce had already issued a
license to respondent -- a corporation organized and existing under the laws
of Canada -- to engage in business in the Philippines.
20
Pursuant to Section 225
of Canada’s Insurance Companies Act, the Canadian minister of state (for
finance and privatization) also declared in its Amending Letters Patent that
respondent would be a mutual company effective June 1, 1992.
21
In the
Philippines, the insurance commissioner also granted it annual Certificates of
Authority to transact life insurance business, the most relevant of which were
dated July 1, 1997 and July 1, 1998.
22

A mutual life insurance company is conducted for the benefit of its member-
policyholders,
23
who pay into its capital by way of premiums. To that extent,
they are responsible for the payment of all its losses.
24
"The cash paid in for
premiums and the premium notes constitute their assets x x x."
25
In the event
that the company itself fails before the terms of the policies expire, the
member-policyholders do not acquire the status of creditors.
26
Rather, they
simply become debtors for whatever premiums that they have originally
agreed to pay the company, if they have not yet paid those amounts in full,
for "[m]utual companies x x x depend solely upon x x x premiums."
27
Only
when the premiums will have accumulated to a sum larger than that required
to pay for company losses will the member-policyholders be entitled to a "pro
rata division thereof as profits."
28

Contributing to its capital, the member-policyholders of a mutual company
are obviously also its owners.
29
Sustaining a dual relationship inter se, they not
only contribute to the payment of its losses, but are also entitled to a
proportionate share
30
and participate alike
31
in its profits and surplus.
Where the insurance is taken at cost, it is important that the rates of premium
charged by a mutual company be larger than might reasonably be
expected to carry the insurance, in order to constitute a margin of safety. The
table of mortality used will show an admittedly higher death rate than will
probably prevail; the assumed interest rate on the investments of the
company is made lower than is expected to be realized; and the provision for
contingencies and expenses, made greater than would ordinarily be
necessary.
32
This course of action is taken, because a mutual company has no
capital stock and relies solely upon its premiums to meet unexpected losses,
contingencies and expenses.
Certainly, many factors are considered in calculating the insurance premium.
Since they vary with the kind of insurance taken and with the group of
policyholders insured, any excess in the amount anticipated by a mutual
company to cover the cost of providing for the insurance over its actual
realized cost will also vary. If a member-policyholder receives an excess
payment, then the apportionment must have been based upon a calculation
of the actual cost of insurance that the company has provided for that
particular member-policyholder. Accordingly, in apportioning divisible
surpluses, any mutual company uses a contribution method that aims to
distribute those surpluses among its member-policyholders, in the same
proportion as they have contributed to the surpluses by their payments.
33

Sharing in the common fund, any member-policyholder may choose to
withdraw dividends in cash or to apply them in order to reduce a subsequent
premium, purchase additional insurance, or accelerate the payment period.
Although the premium made at the beginning of a year is more than
necessary to provide for the cost of carrying the insurance, the member-
policyholder will nevertheless receive the benefit of the overcharge by way of
dividends, at the end of the year when the cost is actually ascertained. "The
declaration of a dividend upon a policy reduces pro tanto the cost of
insurance to the holder of the policy. That is its purpose and effect."
34

A stipulated insurance premium "cannot be increased, but may be lessened
annually by so much as the experience of the preceding year has
determined it to have been greater than the cost of carrying the insurance x x
x."
35
The difference between that premium and the cost of carrying the risk of
loss constitutes the so-called "dividend" which, however, "is not in any real
sense a dividend."
36
It is a technical term that is well understood in the
insurance business to be widely different from that to which it is ordinarily
attached.
The so-called "dividend" that is received by member-policyholders is not a
portion of profits set aside for distribution to the stockholders in proportion to
their subscription to the capital stock of a corporation.
37
One, a mutual
company has no capital stock
to which subscription is necessary; there are no stockholders to speak of, but
only members. And, two, the amount they receive does not partake of the
nature of a profit or income. The quasi-appearance of profit will not change
its character. It remains an overpayment, a benefit to which the member-
policyholder is equitably entitled.
38

Verily, a mutual life insurance corporation is a cooperative that promotes the
welfare of its own members. It does not operate for profit, but for the mutual
benefit of its member-policyholders. They receive their insurance at cost, while
reasonably and properly guarding and maintaining the stability and solvency
of the company.
39
"The economic benefits filter to the cooperative members.
Either equally or proportionally, they are distributed among members in
correlation with the resources of the association utilized."
40

It does not follow that because respondent is registered as a nonstock
corporation and thus exists for a purpose other than profit, the company can
no longer make any profits.
41
Earning profits is merely its secondary, not
primary, purpose. In fact, it may not lawfully engage in any business activity
for profit, for to do so would change or contradict its nature
42
as a non-profit
entity.
43
It may, however, invest its corporate funds in order to earn additional
income for paying its operating expenses and meeting benefit claims. Any
excess profit it obtains as an incident to its operations can only be used,
whenever necessary or proper, for the furtherance of the purpose for which it
was organized.
44

Second Issue:
Whether CDA Registration Is Necessary
Under the Tax Code although respondent is a cooperative, registration with
the Cooperative Development Authority (CDA)
45
is not necessary in order for it
to be exempt from the payment of both percentage taxes on insurance
premiums, under Section 121; and documentary stamp taxes on policies of
insurance or annuities it grants, under Section 199.
First, the Tax Code does not require registration with the CDA. No tax provision
requires a mutual life insurance company to register with that agency in order
to enjoy exemption from both percentage and documentary stamp taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91
requires the submission of the Certificate of Registration with the
CDA,
46
before the issuance of a tax exemption certificate. That provision
cannot prevail over the clear absence of an equivalent requirement under
the Tax Code. One, as we will explain below, the Circular does not apply to
respondent, but only to cooperatives that need to be registered under the
Cooperative Code. Two, it is a mere issuance directing all internal revenue
officers to publicize a new tax legislation. Although the Circular does not
derogate from their authority to implement the law, it cannot add a
registration requirement,
47
when there is none under the law to begin with.
Second, the provisions of the Cooperative Code of the Philippines
48
do not
apply. Let us trace the Code’s development in our history.
As early as 1917, a cooperative company or association was already defined
as one "conducted by the members thereof with money collected from
among themselves and solely for their own protection and not profit."
49
In
1990, it was further defined by the Cooperative Code as a "duly registered
association of persons, with a common bond of interest, who have voluntarily
joined together to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of
the risks and benefits of the undertaking in accordance with universally
accepted cooperative principles."
50

The Cooperative Code was actually an offshoot of the old law on
cooperatives. In 1973, Presidential Decree (PD) No. 175 was
signed into law by then President Ferdinand E. Marcos in order to strengthen
the cooperative movement.
51
The promotion of cooperative development
was one of the major programs of the "New Society" under his administration.
It sought to improve the country’s trade and commerce by enhancing
agricultural production, cottage industries, community development, and
agrarian reform through cooperatives.
52

The whole cooperative system, with its vertical and horizontal linkages -- from
the market cooperative of agricultural products to cooperative rural banks,
consumer cooperatives and cooperative insurance -- was envisioned to offer
considerable economic opportunities to people who joined
cooperatives.
53
As an effective instrument in redistributing income and
wealth,
54
cooperatives were promoted primarily to support the agrarian
reform program of the government.
55

Notably, the cooperative under PD 175 referred only to an organization
composed primarily of small producers and consumers who voluntarily joined
to form a business enterprise that they themselves owned, controlled, and
patronized.
56
The Bureau of Cooperatives Development -- under the
Department of Local Government and Community Development (later
Ministry of Agriculture)
57
-- had the authority to register, regulate and supervise
only the following cooperatives: (1) barrio associations involved in the
issuance of certificates of land transfer; (2) local or primary cooperatives
composed of natural persons and/or barrio associations; (3) federations
composed of cooperatives that may or may not perform business activities;
and (4) unions of cooperatives that did not perform any business
activities.
58
Respondent does not fall under any of the above-mentioned
types of cooperatives required to be registered under PD 175.
When the Cooperative Code was enacted years later, all cooperatives that
were registered under PD 175 and previous laws were also deemed registered
with the CDA.
59
Since respondent was not required to be registered under the
old law on cooperatives, it followed that it was not required to be registered
even under the new law.
Furthermore, only cooperatives to be formed or organized under the
Cooperative Code needed registration with the CDA.
60
Respondent already
existed before the passage of the new law on cooperatives. It was not even
required to organize under the Cooperative Code, not only because it
performed a different set of functions, but also because it did not operate to
serve the same objectives under the new law -- particularly on productivity,
marketing and credit extension.
61

The insurance against losses of the members of a cooperative referred to in
Article 6(7) of the Cooperative Code is not the same as the life insurance
provided by respondent to member-policyholders. The former is a function of
a service cooperative,
62
the latter is not. Cooperative insurance under the
Code is limited in scope and local in character. It is not the same as mutual
life insurance.
We have already determined that respondent is a cooperative. The
distinguishing feature of a cooperative enterprise
63
is the mutuality of
cooperation among its member-policyholders united for that purpose.
64
So
long as respondent meets this essential feature, it does not even have to
use
65
and carry the name of a cooperative to operate its mutual life insurance
business. Gratia argumenti that registration is mandatory, it cannot deprive
respondent of its tax exemption privilege merely because it failed to register.
The nature of its operations is clear; its purpose well-defined. Exemption when
granted cannot prevail over administrative convenience.
Third, not even the Insurance Code requires registration with the CDA. The
provisions of this Code primarily govern insurance contracts; only if a particular
matter in question is not specifically provided for shall the provisions of the Civil
Code on contracts and special laws govern.
66

True, the provisions of the Insurance Code relative to the organization and
operation of an insurance company also apply to cooperative insurance
entities organized under the Cooperative Code.
67
The latter law, however,
does not apply to respondent, which already existed as a cooperative
company engaged in mutual life insurance prior to the laws passage of that
law. The statutes prevailing at the time of its organization and mutualization
were the Insurance Code and the Corporation Code, which imposed no
registration requirement with the CDA.
Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST
Having determined that respondent is a cooperative that does not have to
be registered with the CDA, we hold that it is entitled to exemption from both
premium taxes and documentary stamp taxes (DST).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts
cooperative companies from the 5 percent percentage tax on insurance
premiums. On the other hand, Section 199 also exempts from the DST, policies
of insurance or annuities made or granted by cooperative companies. Being
a cooperative, respondent is thus exempt from both types of taxes.
It is worthy to note that while RA 8424 amending the Tax Code has deleted
the income tax of 10 percent imposed upon the gross investment income of
mutual life insurance companies -- domestic
68
and foreign
69
-- the provisions of
Section 121 and 199 remain unchanged.
70

Having been seasonably filed and amply substantiated, the claim for
exemption in the amount of P61,485,834.51, representing percentage taxes on
insurance premiums and documentary stamp taxes on policies of insurance or
annuities that were paid by respondent in 1997, is in order. Thus, the grant of a
tax credit certificate to respondent as ordered by the appellate court was
correct.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution are AFFIRMED. No pronouncement as to costs.


G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, Inc. In the
standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for
high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or
peptic ulcer? (If Yes, give details).
1

The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondent’s husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was
also entitled to avail of "out-patient benefits" such as annual physical
examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1,
1990. The amount of coverage was increased to a maximum sum of
P75,000.00 per disability.
2

During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning
March 9, 1990. While her husband was in the hospital, respondent tried to
claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void.
According to petitioner, there was a concealment regarding Ernani’s medical
history. Doctors at the MMC allegedly discovered at the time of Ernani’s
confinement that he was hypertensive, diabetic and asthmatic, contrary to
his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a
physical therapist at home. Later, he was admitted at the Chinese General
Hospital. Due to financial difficulties, however, respondent brought her
husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr.
Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked
for reimbursement of her expenses plus moral damages and attorney’s fees.
After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of
the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of
the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount
is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to
plaintiff;
3. Defendants to pay the reduced amount of

P10,000.00 as exemplary
damages to plaintiff;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.
SO ORDERED.
3

On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner
Reverente.
4
Petitioner’s motion for reconsideration was denied.
5
Hence,
petitioner brought the instant petition for review, raising the primary argument
that a health care agreement is not an insurance contract; hence the
"incontestability clause" under the Insurance Code
6
does not
apply.1âwphi1.nêt
Petitioner argues that the agreement grants "living benefits," such as medical
check-ups and hospitalization which a member may immediately enjoy so
long as he is alive upon effectivity of the agreement until its expiration one-
year thereafter. Petitioner also points out that only medical and hospitalization
benefits are given under the agreement without any indemnification, unlike in
an insurance contract where the insured is indemnified for his loss. Moreover,
since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer,
7
petitioner argues that
the incontestability clause does not apply, as the same requires an effectivity
period of at least two years. Petitioner further argues that it is not an insurance
company, which is governed by the Insurance Commission, but a Health
Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a premium.
8

Section 3 of the Insurance Code states that any contingent or unknown
event, whether past or future, which may damnify a person having an
insurable interest against him, may be insured against. Every person has an
insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or prevent
the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondent’s husband in obtaining
the health care agreement was his own health. The health care agreement
was in the nature of non-life insurance, which is primarily a contract of
indemnity.
9
Once the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the
contract.
Petitioner argues that respondent’s husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondent’s husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health
to furnish any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination.
10
Specifically, the
Health Care Agreement signed by respondent’s husband states:
We hereby declare and agree that all statement and answers contained
herein and in any addendum annexed to this application are full, complete
and true and bind all parties in interest under the Agreement herein applied
for, that there shall be no contract of health care coverage unless and until
an Agreement is issued on this application and the full Membership Fee
according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired
by any Representative of PhilamCare shall be binding upon PhilamCare unless
set out in writing in the application;that any physician is, by these presents,
expressly authorized to disclose or give testimony at anytime relative to any
information acquired by him in his professional capacity upon any question
affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office
Endorsement.
11
(Underscoring ours)
In addition to the above condition, petitioner additionally required the
applicant for authorization to inquire about the applicant’s medical history,
thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare
Health Systems, Inc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage
only. A photographic copy of this authorization shall be as valid as the
original.
12
(Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement"
which reads:
Failure to disclose or misrepresentation of any material information by the
member in the application or medical examination, whether intentional or
unintentional, shall automatically invalidate the Agreement from the very
beginning and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the
applicant by Philamcare or the assessment of a higher Membership Fee for
the benefit or benefits applied for.
13

The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather
than fact, especially coming from respondent’s husband who was not a
medical doctor. Where matters of opinion or judgment are called for, answers
made in good faith and without intent to deceive will not avoid a policy even
though they are untrue.
14
Thus,
(A)lthough false, a representation of the expectation, intention, belief,
opinion, or judgment of the insured will not avoid the policy if there is no
actual fraud in inducing the acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the rule although the statement is
material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement, but
is obligated to make further inquiry. There is a clear distinction between such a
case and one in which the insured is fraudulently and intentionally states to be
true, as a matter of expectation or belief, that which he then knows, to be
actually untrue, or the impossibility of which is shown by the facts within his
knowledge, since in such case the intent to deceive the insurer is obvious and
amounts to actual fraud.
15
(Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.
16
Concealment as a defense for the
health care provider or insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence
rests upon the provider or insurer. In any case, with or without the authority to
investigate, petitioner is liable for claims made under the contract. Having
assumed a responsibility under the agreement, petitioner is bound to answer
the same to the extent agreed upon. In the end, the liability of the health
care provider attaches once the member is hospitalized for the disease or
injury covered by the agreement or whenever he avails of the covered
benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured
party to rescind a contract of insurance." The right to rescind should be
exercised previous to the commencement of an action on the contract.
17
In
this case, no rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of the following
conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy
of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown
in the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance
Code and upon request of insured, to furnish facts on which cancellation is
based.
18

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

Anent the incontestability of the membership of respondent’s husband, we
quote with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare
Health Systems Inc. had twelve months from the date of issuance of the
Agreement within which to contest the membership of the patient if he had
previous ailment of asthma, and six months from the issuance of the
agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer
lie.
23

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

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


G.R. No. 119176 March 19, 2002
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE
INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents.
KAPUNAN, J.:
This is a petition for review on certiorari filed by the Commission on Internal
Revenue of the decision of the Court of Appeals dated November 18, 1994 in
C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax
Appeals in C.T.A. Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-
CMA Life Insurance Company, Inc.) is a domestic corporation registered with
the Securities and Exchange Commission and engaged in life insurance
business. In the years prior to 1984, private respondent issued a special kind of
life insurance policy known as the "Junior Estate Builder Policy," the
distinguishing feature of which is a clause providing for an automatic increase
in the amount of life insurance coverage upon attainment of a certain age
by the insured without the need of issuing a new policy. The clause was to
take effect in the year 1984. Documentary stamp taxes due on the policy
were paid by petitioner only on the initial sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with a
par value of P100.00 per share or a total par value of P5,000,000.00. The actual
value of said shares, represented by its book value, wasP19,307,500.00.
Documentary stamp taxes were paid based only on the par value
of P5,000,000.00 and not on the book value.1âwphi1.nêt
Subsequently, petitioner issued deficiency documentary stamps tax
assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding
to the amount of automatic increase of the sum assured on the policy issued
by respondent, and (b) P78,991.25 corresponding to the book value in excess
of the par value of the stock dividends. The computation of the deficiency
documentary stamp taxes is as follows:
On Policies Issued:
Total policy issued during the year P1,360,054,000.00
Documentary stamp tax due thereon
(P1,360,054,000.00 divided by P200.00 multiplied by
P0.35)

P 2,380,094.50
Less: Payment P 1,915,495.75
Deficiency P 464,598.75
Add: Compromise Penalty 300.00
-----------------------
TOTAL AMOUNT DUE & COLLECTIBLE P 464,898.75
Private respondent questioned the deficiency assessments and sought their
cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA
Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the
deficiency tax assessment on the stock dividends, as well as on the insurance
policy. The dispositive portion of the CTA’s decision reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the
amount of P464,898.76 andP78,991.25 or a total of P543,890.01 are hereby
cancelled for lack of merit. Respondent Commissioner of Internal Revenue is
ordered to desist from collecting said deficiency documentary stamp taxes
for the same are considered withdrawn.
SO ORDERED.
1

Petitioner appealed the CTA’s decision to the Court of Appeals. On
November 18, 1994, the Court of Appeals promulgated a decision affirming
the CTA’s decision insofar as it nullified the deficiency assessment on the
insurance policy, but reversing the same with regard to the deficiency
assessment on the stock dividends. The CTA ruled that the correct basis of the
documentary stamp tax due on the stock dividends is the actual value or
book value represented by the shares. The dispositive portion of the Court of
Appeals’ decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby REVERSED with respect to the deficiency tax assessment on the stock
dividends, but AFFIRMED with regards to the assessment on the Insurance
Policies. Consequently, private respondent is ordered to pay the petitioner
herein the sum ofP78,991.25, representing documentary stamp tax on the
stock dividends it issued. No costs pronouncement.
SO ORDERED.
2

A motion for reconsideration of the decision having been denied,
3
both the
Commissioner of Internal Revenue and private respondent appealed to this
Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R.
No. 118043, private respondent appealed the decision of the Court of
Appeals insofar as it upheld the validity of the deficiency tax assessment on
the stock dividends. The Commissioner of Internal Revenue, on his part, filed
the present petition questioning that portion of the Court of Appeals’ decision
which invalidated the deficiency assessment on the insurance policy,
attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A
SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC
INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49
OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A
RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT
OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY
INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE
CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC
CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.
4

Section 173 of the National Internal Revenue Code on documentary stamp
taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon
documents, instruments, loan agreements, and papers, and upon
acceptances, assignments, sales, and transfers of the obligation, right or
property incident thereto, there shall be levied, collected and paid for, and in
respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following section of this Title, by
the person making, signing, issuing, accepting, or transferring the same
wherever the document is made, signed, issued, accepted, or transferred
when the obligation or right arises from Philippine sources or the property is
situated in the Philippines, and at the same time such act is done or
transaction had: Provided, That whenever one party to the taxable document
enjoys exemption from the tax herein imposed, the other party thereto who is
not exempt shall be the one directly liable for the tax. (As amended by PD No.
1994) The basis for the value of documentary stamp taxes to be paid on the
insurance policy is Section 183 of the National Internal Revenue Code which
states in part:
The basis for the value of documentary stamp taxes to be paid on the
insurance policy is Section 183 of the National Internal Revenue Code which
states in part:
Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or
other instruments by whatever name the same may be called, whereby any
insurance shall be made or renewed upon any life or lives, there shall be
collected a documentary stamp tax of thirty (now 50c) centavos on each
Two hundred pesos per fractional part thereof, of the amount insured by any
such policy.
Petitioner claims that the "automatic increase clause" in the subject insurance
policy is separate and distinct from the main agreement and involves another
transaction; and that, while no new policy was issued, the original policy was
essentially re-issued when the additional obligation was assumed upon the
effectivity of this "automatic increase clause" in 1984; hence, a deficiency
assessment based on the additional insurance not covered in the main policy
is in order.
The Court of Appeals sustained the CTA’s ruling that there was only one
transaction involved in the issuance of the insurance policy and that the
"automatic increase clause" is an integral part of that policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the
written instrument in which a contract of insurance is set forth.
5
Section 50 of
the same Code provides that the policy, which is required to be in printed
form, may contain any word, phrase, clause, mark, sign, symbol, signature,
number, or word necessary to complete the contract of insurance.
6
It is thus
clear that any rider, clause, warranty or endorsement pasted or attached to
the policy is considered part of such policy or contract of insurance.
The subject insurance policy at the time it was issued contained an
"automatic increase clause." Although the clause was to take effect only in
1984, it was written into the policy at the time of its issuance. The distinctive
feature of the "junior estate builder policy" called the "automatic increase
clause" already formed part and parcel of the insurance contract, hence,
there was no need for an execution of a separate agreement for the increase
in the coverage that took effect in 1984 when the assured reached a certain
age.
It is clear from Section 173 that the payment of documentary stamp taxes is
done at the time the act is done or transaction had and the tax base for the
computation of documentary stamp taxes on life insurance policies under
Section 183 is the amount fixed in policy, unless the interest of a person insured
is susceptible of exact pecuniary measurement.
7
What then is the amount
fixed in the policy? Logically, we believe that the amount fixed in the policy is
the figure written on its face and whatever increases will take effect in the
future by reason of the "automatic increase clause" embodied in the policy
without the need of another contract.
Here, although the automatic increase in the amount of life insurance
coverage was to take effect later on, the date of its effectivity, as well as the
amount of the increase, was already definite at the time of the issuance of
the policy. Thus, the amount insured by the policy at the time of its issuance
necessarily included the additional sum covered by the automatic increase
clause because it was already determinable at the time the transaction was
entered into and formed part of the policy.
The "automatic increase clause" in the policy is in the nature of a conditional
obligation under Article 1181,
8
by which the increase of the insurance
coverage shall depend upon the happening of the event which constitutes
the obligation. In the instant case, the additional insurance that took effect in
1984 was an obligation subject to a suspensive obligation,
9
but still a part of
the insurance sold to which private respondent was liable for the payment of
the documentary stamp tax.
The deficiency of documentary stamp tax imposed on private respondent is
definitely not on the amount of the original insurance coverage, but on the
increase of the amount insured upon the effectivity of the "Junior Estate
Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes and
arrangements are not prohibited,
10
tax laws cannot be circumvented in order
to evade the payment of just taxes. In the case at bar, to claim that the
increase in the amount insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance) should not be included in
the computation of the documentary stamp taxes due on the policy would
be a clear evasion of the law requiring that the tax be computed on the basis
of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the
Court of Appeals is SET ASIDEinsofar as it affirmed the decision of the Court of
Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed
on private respondent in the amount of P464,898.75 corresponding to the
increase in 1984 of the sum under the policy issued by
respondent.1âwphi1.nêt


G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for
petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the Resolution of
this Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the
petitioners in both cases seek similar relief, through these petitions for certiorari
by way of appeal, from the amended decision of respondent Court of
Appeals which affirmed in toto the decision of the Court of First Instance of
Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe
Assurance Company and Mondragon) jointly and severally to pay plaintiff
(herein private respondent Ngo Hing) the amount of P50,000.00 with interest at
6% from the date of the filing of the complaint, and the sum of P1,077.75,
without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an
application with the Great Pacific Life Assurance Company (hereinafter
referred to as Pacific Life) for a twenty-year endownment policy in the
amount of P50,000.00 on the life of his one-year old daughter Helen Go. Said
respondent supplied the essential data which petitioner Lapulapu D.
Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the
corresponding form in his own handwriting (Exhibit I-M). Mondragon finally
type-wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of
P1,317.00 as his commission for being a duly authorized agebt of Pacific Life.
Upon the payment of the insurance premuim, the binding deposit receipt
(Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner
Mondragon handwrote at the bottom of the back page of the application
form his strong recommendation for the approval of the insurance
application. Then on April 30, 1957, Mondragon received a letter from Pacific
Life disapproving the insurance application (Exhibit 3-M). The letter stated that
the said life insurance application for 20-year endowment plan is not
available for minors below seven years old, but Pacific Life can consider the
same under the Juvenile Triple Action Plan, and advised that if the offer is
acceptable, the Juvenile Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing.
Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly
recommending the approval of the 20-year endowment insurance plan to
children, pointing out that since 1954 the customers, especially the Chinese,
were asking for such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of
influenza with complication of bronchopneumonia. Thereupon, private
respondent sought the payment of the proceeds of the insurance, but having
failed in his effort, he filed the action for the recovery of the same before the
Court of First Instance of Cebu, which rendered the adverse decision as earlier
refered to against both petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt
(Exhibit E) constituted a temporary contract of the life insurance in question;
and (2) whether private respondent Ngo Hing concealed the state of health
and physical condition of Helen Go, which rendered void the aforesaid Exhibit
E.
1. At the back of Exhibit E are condition precedents required before a deposit
is considered a BINDING RECEIPT. These conditions state that:
A. If the Company or its agent, shan have received the premium deposit ...
and the insurance application, ON or PRIOR to the date of medical
examination ... said insurance shan be in force and in effect from the date of
such medical examination, for such period as is covered by the deposit
...,PROVIDED the company shall be satisfied that on said date the applicant
was insurable on standard rates under its rule for the amount of insurance and
the kind of policy requested in the application.
D. If the Company does not accept the application on standard rate for the
amount of insurance and/or the kind of policy requested in the
application but issue, or offers to issue a policy for a different plan and/or
amount ..., the insurance shall not be in force and in effect until the applicant
shall have accepted the policy as issued or offered by the Company and
shall have paid the full premium thereof. If the applicant does not accept the
policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition A above,
and the Company declines to approve the application the insurance applied
for shall not have been in force at any time and the sum paid be returned to
the applicant upon the surrender of this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit
receipt is intended to be merely a provisional or temporary insurance contract
and only upon compliance of the following conditions: (1) that the company
shall be satisfied that the applicant was insurable on standard rates; (2) that if
the company does not accept the application and offers to issue a policy for
a different plan, the insurance contract shall not be binding until the
applicant accepts the policy offered; otherwise, the deposit shall be
reftmded; and (3) that if the applicant is not ble according to the standard
rates, and the company disapproves the application, the insurance applied
for shall not be in force at any time, and the premium paid shall be returned
to the applicant.
Clearly implied from the aforesaid conditions is that the binding deposit
receipt in question is merely an acknowledgment, on behalf of the company,
that the latter's branch office had received from the applicant the insurance
premium and had accepted the application subject for processing by the
insurance company; and that the latter will either approve or reject the same
on the basis of whether or not the applicant is "insurable on standard rates."
Since petitioner Pacific Life disapproved the insurance application of
respondent Ngo Hing, the binding deposit receipt in question had never
become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an
agreement is made between the applicant and the agent, no liability shall
attach until the principal approves the risk and a receipt is given by the
agent. The acceptance is merely conditional and is subordinated to the act
of the company in approving or rejecting the application. Thus, in life
insurance, a "binding slip" or "binding receipt" does not insure by itself (De Lim
vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company communication of April 30,
1957 (Exhibit 3-M), Pacific Life disapproved the insurance application in
question on the ground that it is not offering the twenty-year endowment
insurance policy to children less than seven years of age. What it offered
instead is another plan known as the Juvenile Triple Action, which private
respondent failed to accept. In the absence of a meeting of the minds
between petitioner Pacific Life and private respondent Ngo Hing over the 20-
year endowment life insurance in the amount of P50,000.00 in favor of the
latter's one-year old daughter, and with the non-compliance of the
abovequoted conditions stated in the disputed binding deposit receipt, there
could have been no insurance contract duly perfected between thenl
Accordingly, the deposit paid by private respondent shall have to be
refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a
contract of insurance, like other contracts, must be assented to by both
parties either in person or by their agents ... The contract, to be binding from
the date of the application, must have been a completed contract, one that
leaves nothing to be dione, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be no contract of
insurance unless the minds of the parties have met in agreement."
We are not impressed with private respondent's contention that failure of
petitioner Mondragon to communicate to him the rejection of the insurance
application would not have any adverse effect on the allegedly perfected
temporary contract (Respondent's Brief, pp. 13-14). In this first place, there was
no contract perfected between the parties who had no meeting of their
minds. Private respondet, being an authorized insurance agent of Pacific Life
at Cebu branch office, is indubitably aware that said company does not offer
the life insurance applied for. When he filed the insurance application in
dispute, private respondent was, therefore, only taking the chance that
Pacific Life will approve the recommendation of Mondragon for the
acceptance and approval of the application in question along with his
proposal that the insurance company starts to offer the 20-year endowment
insurance plan for children less than seven years. Nonetheless, the record
discloses that Pacific Life had rejected the proposal and recommendation.
Secondly, having an insurable interest on the life of his one-year old daughter,
aside from being an insurance agent and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must have known and followed the
progress on the processing of such application and could not pretend
ignorance of the Company's rejection of the 20-year endowment life
insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation
of then Appellate Associate Justice Ruperto G. Martin who later came up to
this Court, from his dissenting opinion to the amended decision of the
respondent court which completely reversed the original decision, the
following:
Of course, there is the insinuation that neither the memorandum of rejection
(Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the
desire for applicant's father to have the application considered as one for a
20-year endowment plan was ever duly communicated to Ngo; Hing, father
of the minor applicant. I am not quite conninced that this was so. Ngo Hing,
as father of the applicant herself, was precisely the "underwriter who wrote
this case" (Exhibit H-1). The unchallenged statement of appellant Mondragon
in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing
was "our associate" and that it was the latter who "insisted that the plan be
placed on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was not
brought home to his knowledge. He must have been duly apprised of the
rejection of the application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing himself who insisted
on the application as originally filed, thereby implictly declining the offer to
consider the application under the Juvenile Triple Action Plan. Besides, the
associate of Mondragon that he was, Ngo Hing should only be presumed to
know what kind of policies are available in the company for minors below 7
years old. What he and Mondragon were apparently trying to do in the
premises was merely to prod the company into going into the business of
issuing endowment policies for minors just as other insurance companies
allegedly do. Until such a definite policy is however, adopted by the
company, it can hardly be said that it could have been bound at all under
the binding slip for a plan of insurance that it could not have, by then issued
at all. (Amended Decision, Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm
belief that private respondent had deliberately concealed the state of health
and piysical condition of his daughter Helen Go. Wher private regpondeit
supplied the required essential data for the insurance application form, he
was fully aware that his one-year old daughter is typically a mongoloid child.
Such a congenital physical defect could never be ensconced nor disguished.
Nonetheless, private respondent, in apparent bad faith, withheld the fact
materal to the risk to be assumed by the insurance compary. As an insurance
agent of Pacific Life, he ought to know, as he surely must have known. his duty
and responsibility to such a material fact. Had he diamond said significant
fact in the insurance application fom Pacific Life would have verified the
same and would have had no choice but to disapprove the application
outright.
The contract of insurance is one of perfect good faith uberrima fides meaning
good faith, absolute and perfect candor or openness and honesty; the
absence of any concealment or demotion, however slight [Black's Law
Dictionary, 2nd Edition], not for the alone but equally so for the insurer (Field
man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a
neglect to communicate that which a partY knows aDd Ought to
communicate (Section 25, Act No. 2427). Whether intentional or unintentional
the concealment entitles the insurer to rescind the contract of insurance
(Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930;
Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316).
Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected
between the parties with the noncompliance of the conditions provided in
the binding receipt, and concealment, as legally defined, having been
comraitted by herein private respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu
thereof, one is hereby entered absolving petitioners Lapulapu D. Mondragon
and Great Pacific Life Assurance Company from their civil liabilities as found
by respondent Court and ordering the aforesaid insurance company to
reimburse the amount of P1,077.75, without interest, to private respondent,
Ngo Hing. Costs against private respondent.


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.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance
Pool.

QUIASON, J.:
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.
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 Cross-claim 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. "5-Bank") 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.
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:
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.


G.R. No. 112329 January 28, 2000
VIRGINIA A. PEREZ, petitioner,
vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.
YNARES-SANTIAGO, J.:
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. Defendant-Appellee,"
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.1âwphi1.nêt
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."
1
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.
2
On November 1, 1987,
Perez was made to undergo the required medical examination, which he
passed.
3

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.
4

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.
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.
5

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.
6
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 certiorariwas 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.
7
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.
8
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;
(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.
9

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,
10
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 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.
11

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.
12
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".
13

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.1âwphi1.nêt


G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, Inc. In the
standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for
high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or
peptic ulcer? (If Yes, give details).
1

The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondent’s husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was
also entitled to avail of "out-patient benefits" such as annual physical
examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1,
1990. The amount of coverage was increased to a maximum sum of
P75,000.00 per disability.
2

During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning
March 9, 1990. While her husband was in the hospital, respondent tried to
claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void.
According to petitioner, there was a concealment regarding Ernani’s medical
history. Doctors at the MMC allegedly discovered at the time of Ernani’s
confinement that he was hypertensive, diabetic and asthmatic, contrary to
his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a
physical therapist at home. Later, he was admitted at the Chinese General
Hospital. Due to financial difficulties, however, respondent brought her
husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr.
Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked
for reimbursement of her expenses plus moral damages and attorney’s fees.
After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of
the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of
the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount
is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to
plaintiff;
3. Defendants to pay the reduced amount of

P10,000.00 as exemplary
damages to plaintiff;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.
SO ORDERED.
3

On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner
Reverente.
4
Petitioner’s motion for reconsideration was denied.
5
Hence,
petitioner brought the instant petition for review, raising the primary argument
that a health care agreement is not an insurance contract; hence the
"incontestability clause" under the Insurance Code
6
does not
apply.1âwphi1.nêt
Petitioner argues that the agreement grants "living benefits," such as medical
check-ups and hospitalization which a member may immediately enjoy so
long as he is alive upon effectivity of the agreement until its expiration one-
year thereafter. Petitioner also points out that only medical and hospitalization
benefits are given under the agreement without any indemnification, unlike in
an insurance contract where the insured is indemnified for his loss. Moreover,
since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer,
7
petitioner argues that
the incontestability clause does not apply, as the same requires an effectivity
period of at least two years. Petitioner further argues that it is not an insurance
company, which is governed by the Insurance Commission, but a Health
Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a premium.
8

Section 3 of the Insurance Code states that any contingent or unknown
event, whether past or future, which may damnify a person having an
insurable interest against him, may be insured against. Every person has an
insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or prevent
the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondent’s husband in obtaining
the health care agreement was his own health. The health care agreement
was in the nature of non-life insurance, which is primarily a contract of
indemnity.
9
Once the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the
contract.
Petitioner argues that respondent’s husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondent’s husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health
to furnish any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination.
10
Specifically, the
Health Care Agreement signed by respondent’s husband states:
We hereby declare and agree that all statement and answers contained
herein and in any addendum annexed to this application are full, complete
and true and bind all parties in interest under the Agreement herein applied
for, that there shall be no contract of health care coverage unless and until
an Agreement is issued on this application and the full Membership Fee
according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired
by any Representative of PhilamCare shall be binding upon PhilamCare unless
set out in writing in the application;that any physician is, by these presents,
expressly authorized to disclose or give testimony at anytime relative to any
information acquired by him in his professional capacity upon any question
affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office
Endorsement.
11
(Underscoring ours)
In addition to the above condition, petitioner additionally required the
applicant for authorization to inquire about the applicant’s medical history,
thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare
Health Systems, Inc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage
only. A photographic copy of this authorization shall be as valid as the
original.
12
(Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement"
which reads:
Failure to disclose or misrepresentation of any material information by the
member in the application or medical examination, whether intentional or
unintentional, shall automatically invalidate the Agreement from the very
beginning and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the
applicant by Philamcare or the assessment of a higher Membership Fee for
the benefit or benefits applied for.
13

The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather
than fact, especially coming from respondent’s husband who was not a
medical doctor. Where matters of opinion or judgment are called for, answers
made in good faith and without intent to deceive will not avoid a policy even
though they are untrue.
14
Thus,
(A)lthough false, a representation of the expectation, intention, belief,
opinion, or judgment of the insured will not avoid the policy if there is no
actual fraud in inducing the acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the rule although the statement is
material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement, but
is obligated to make further inquiry. There is a clear distinction between such a
case and one in which the insured is fraudulently and intentionally states to be
true, as a matter of expectation or belief, that which he then knows, to be
actually untrue, or the impossibility of which is shown by the facts within his
knowledge, since in such case the intent to deceive the insurer is obvious and
amounts to actual fraud.
15
(Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.
16
Concealment as a defense for the
health care provider or insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence
rests upon the provider or insurer. In any case, with or without the authority to
investigate, petitioner is liable for claims made under the contract. Having
assumed a responsibility under the agreement, petitioner is bound to answer
the same to the extent agreed upon. In the end, the liability of the health
care provider attaches once the member is hospitalized for the disease or
injury covered by the agreement or whenever he avails of the covered
benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured
party to rescind a contract of insurance." The right to rescind should be
exercised previous to the commencement of an action on the contract.
17
In
this case, no rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of the following
conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy
of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown
in the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance
Code and upon request of insured, to furnish facts on which cancellation is
based.
18

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

Anent the incontestability of the membership of respondent’s husband, we
quote with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare
Health Systems Inc. had twelve months from the date of issuance of the
Agreement within which to contest the membership of the patient if he had
previous ailment of asthma, and six months from the issuance of the
agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer
lie.
23

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

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


G.R. No. 156167 May 16, 2005
GULF RESORTS, INC., petitioner,
vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
D E C I S I O N
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules
of Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court
decision
1
which dismissed its two appeals and affirmed the judgment of the
trial court.
For review are the warring interpretations of petitioner and respondent on the
scope of the insurance company’s liability for earthquake damage to
petitioner’s properties. Petitioner avers that, pursuant to its earthquake shock
endorsement rider, Insurance Policy No. 31944 covers all damages to the
properties within its resort caused by earthquake. Respondent contends that
the rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate
court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had
its properties in said resort insured originally with the American Home
Assurance Company (AHAC-AIU). In the first four insurance policies issued by
AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and
"F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss from earthquake
shock was extended only to plaintiff’s two swimming pools, thus, "earthquake
shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and two (2) swimming
pools only (Exhs. "C-1"; ‘D-1", "E" and "F-1"). "Item 5" in those policies referred to
the two (2) swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that
subsequently AHAC(AIU) issued in plaintiff’s favor Policy No. 206-4182383-0
covering the period March 14, 1988 to March 14, 1989 (Exhs. "G" also "G-1")
and in said policy the earthquake endorsement clause as indicated in Exhibits
"C-1", "D-1", Exhibits "E" and "F-1" was deleted and the entry under
Endorsements/Warranties at the time of issue read that plaintiff renewed its
policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990
under Policy No. 206-4568061-9 (Exh. "H") which carried the entry under
"Endorsement/Warranties at Time of Issue", which read "Endorsement to
Include Earthquake Shock (Exh. "6-B-1") in the amount of P10,700.00 and
paid P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof, computed as
follows:
Item - P7,691,000.00 - on the Clubhouse only
@ .392%;
- 1,500,000.00 - on the furniture, etc. contained in the building above-
[email protected] .490%;
- 393,000.00 - on the two swimming pools, only (against the peril of earthquake
shock only) @ 0.100%
- 116,600.00 other buildings include as follows:
a) Tilter House - P19,800.00 - 0.551%
b) Power House - P41,000.00 - 0.551%
c) House Shed - P55,000.00 - 0.540%
P100,000.00 - for furniture, fixtures, lines air-con and operating equipment
that plaintiff agreed to insure with defendant the properties covered by
AHAC (AIU) Policy No. 206-4568061-9 (Exh. "H") provided that the policy
wording and rates in said policy be copied in the policy to be issued by
defendant; that defendant issued Policy No. 31944 to plaintiff covering the
period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total
premium of P45,159.92 (Exh. "I"); that in the computation of the premium,
defendant’s Policy No. 31944 (Exh. "I"), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium – P37,420.60 F/L
– 2,061.52 – Typhoon
– 1,030.76 – EC
– 393.00 – ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00
as premium against earthquake shock (ES); that in all the six insurance policies
(Exhs. "C", "D", "E", "F", "G" and "H"), the premium against the peril of earthquake
shock is the same, that is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-
2"; "F-02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D",
"E", "F", "G" and "H") and in Policy No. 31944 issued by defendant, the shock
endorsement provide(sic):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding
what is stated in the printed conditions of this policy due to the contrary, that
this insurance covers loss or damage to shock to any of the property insured
by this Policy occasioned by or through or in consequence of earthquake
(Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was
deleted; that on July 16, 1990 an earthquake struck Central Luzon and
Northern Luzon and plaintiff’s properties covered by Policy No. 31944 issued by
defendant, including the two swimming pools in its Agoo Playa Resort were
damaged.
2

After the earthquake, petitioner advised respondent that it would be making
a claim under its Insurance Policy No. 31944 for damages on its properties.
Respondent instructed petitioner to file a formal claim, then assigned the
investigation of the claim to an independent claims adjuster, Bayne Adjusters
and Surveyors, Inc.
3
On July 30, 1990, respondent, through its adjuster,
requested petitioner to submit various documents in support of its claim. On
August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President
A.R. de Leon,
4
rendered a preliminary report
5
finding extensive damage
caused by the earthquake to the clubhouse and to the two swimming pools.
Mr. de Leon stated that "except for the swimming pools, all affected items
have no coverage for earthquake shocks."
6
On August 11, 1990, petitioner
filed its formal demand
7
for settlement of the damage to all its properties in
the Agoo Playa Resort. On August 23, 1990, respondent denied petitioner’s
claim on the ground that its insurance policy only afforded earthquake shock
coverage to the two swimming pools of the resort.
8
Petitioner and respondent
failed to arrive at a settlement.
9
Thus, on January 24, 1991, petitioner filed a
complaint
10
with the regional trial court of Pasig praying for the payment of
the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured
properties, with interest thereon, as computed under par. 29 of the policy
(Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained
by plaintiff on account of defendant’s refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorney’s fees and expenses of litigation;
5.) Costs.
11

Respondent filed its Answer with Special and Affirmative Defenses with
Compulsory Counterclaims.
12

On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium
of P393.00 against the peril of earthquake shock, the same premium it paid
against earthquake shock only on the two swimming pools in all the policies
issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the Court
must consequently agree with the position of defendant that the
endorsement rider (Exhibit "7-C") means that only the two swimming pools
were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of
adhesion hence, where the language used in an insurance contract or
application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the language used in the
policy in litigation is clear and unambiguous hence there is no need for
interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming
pools had earthquake shock coverage and were heavily damaged by the
earthquake which struck on July 16, 1990. Defendant having admitted that
the damage to the swimming pools was appraised by defendant’s adjuster
at P386,000.00, defendant must, by virtue of the contract of insurance, pay
plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its willingness
and readiness to settle said liability, there is no basis for the grant of the other
damages prayed for by plaintiff. As to the counterclaims of defendant, the
Court does not agree that the action filed by plaintiff is baseless and highly
speculative since such action is a lawful exercise of the plaintiff’s right to
come to Court in the honest belief that their Complaint is meritorious. The
prayer, therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the
sum of THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00)
representing damage to the two (2) swimming pools, with interest at 6% per
annum from the date of the filing of the Complaint until defendant’s
obligation to plaintiff is fully paid.
No pronouncement as to costs.
13

Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an
appeal with the Court of Appeals based on the following assigned errors:
14

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE
POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE
PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANT’S RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEE’S POLICY (NO. 31944; EXH "I") BY
LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower
court’s failure to award it attorney’s fees and damages on its compulsory
counterclaim.
After review, the appellate court affirmed the decision of the trial court and
ruled, thus:
However, after carefully perusing the documentary evidence of both parties,
We are not convinced that the last two (2) insurance contracts (Exhs. "G" and
"H"), which the plaintiff-appellant had with AHAC (AIU) and upon which the
subject insurance contract with Philippine Charter Insurance Corporation is
said to have been based and copied (Exh. "I"), covered an extended
earthquake shock insurance on all the insured properties.
x x x
We also find that the Court a quo was correct in not granting the plaintiff-
appellant’s prayer for the imposition of interest – 24% on the insurance claim
and 6% on loss of income allegedly amounting toP4,280,000.00. Since the
defendant-appellant has expressed its willingness to pay the damage caused
on the two (2) swimming pools, as the Court a quo and this Court correctly
found it to be liable only, it then cannot be said that it was in default and
therefore liable for interest.
Coming to the defendant-appellant’s prayer for an attorney’s fees, long-
standing is the rule that the award thereof is subject to the sound discretion of
the court. Thus, if such discretion is well-exercised, it will not be disturbed on
appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover,
being the award thereof an exception rather than a rule, it is necessary for the
court to make findings of facts and law that would bring the case within the
exception and justify the grant of such award (Country Bankers Insurance
Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No.
136914, January 25, 2002). Therefore, holding that the plaintiff-appellant’s
action is not baseless and highly speculative, We find that the Court a quo did
not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED
and judgment of the Trial Court hereby AFFIRMED in toto. No costs.
15

Petitioner filed the present petition raising the following issues:
16

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONER’S PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEY’S
FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policy’s earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words "any
property insured by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which
states that it is "[s]ubject to: Other Insurance Clause, Typhoon
Endorsement,Earthquake Shock Endt., Extended Coverage Endt., FEA
Warranty & Annual Payment Agreement On Long Term Policies."
17

Third, that the qualification referring to the two swimming pools had already
been deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an
inadvertent omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given
precedence over the wording of the insurance policy, because the rider is the
more deliberate expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be
resolved in favor of petitioner and against respondent. It was respondent
which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire
insurance policy, such as to remove the two swimming pools from the
coverage for the risk of fire. It should not be used to limit the respondent’s
liability for earthquake shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional
premium was not paid under the extended coverage. The premium for the
earthquake shock coverage was already included in the premium paid for
the policy.
Tenth, the parties’ contemporaneous and subsequent acts show that they
intended to extend earthquake shock coverage to all insured properties.
When it secured an insurance policy from respondent, petitioner told
respondent that it wanted an exact replica of its latest insurance policy from
American Home Assurance Company (AHAC-AIU), which covered all the
resort’s properties for earthquake shock damage and respondent agreed.
After the July 16, 1990 earthquake, respondent assured petitioner that it was
covered for earthquake shock. Respondent’s insurance adjuster, Bayne
Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under
the doctrine of equitable estoppel, it cannot deny that the insurance policy it
issued to petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review
by certiorari under Rule 45 of the Revised Rules of Court as its remedy, and
there is no need for calibration of the evidence in order to establish the facts
upon which this petition is based.
On the other hand, respondent made the following counter arguments:
18

First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioner’s insured
properties other than on the two swimming pools. Petitioner admitted that
from 1984 to 1988, only the two swimming pools were insured against
earthquake shock. From 1988 until 1990, the provisions in its policy were
practically identical to its earlier policies, and there was no increase in the
premium paid. AHAC-AIU, in a letter
19
by its representative Manuel C. Quijano,
categorically stated that its previous policy, from which respondent’s policy
was copied, covered only earthquake shock for the two swimming pools.
Second, petitioner’s payment of additional premium in the amount of P393.00
shows that the policy only covered earthquake shock damage on the two
swimming pools. The amount was the same amount paid by petitioner for
earthquake shock coverage on the two swimming pools from 1990-1991. No
additional premium was paid to warrant coverage of the other properties in
the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake
shock endorsement to the two swimming pools in the policy schedule did not
expand the earthquake shock coverage to all of petitioner’s properties. As
per its agreement with petitioner, respondent copied its policy from the
AHAC-AIU policy provided by petitioner. Although the first five policies
contained the said qualification in their rider’s title, in the last two policies, this
qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda III,
stated that such deletion was a mere inadvertence. This inadvertence did not
make the policy incomplete, nor did it broaden the scope of the
endorsement whose descriptive title was merely enumerated. Any ambiguity
in the policy can be easily resolved by looking at the other provisions,
specially the enumeration of the items insured, where only the two swimming
pools were noted as covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through
1988, the phrase "Item 5 –P393,000.00 – on the two swimming pools only
(against the peril of earthquake shock only)" meant that only the swimming
pools were insured for earthquake damage. The same phrase is used in toto in
the policies from 1989 to 1990, the only difference being the designation of
the two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective,
premiums must be paid for all the properties covered. In all of its seven
insurance policies, petitioner only paid P393.00 as premium for coverage of
the swimming pools against earthquake shock. No other premium was paid
for earthquake shock coverage on the other properties. In addition, the use of
the qualifier "ANY" instead of "ALL" to describe the property covered was done
deliberately to enable the parties to specify the properties included for
earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its
properties must be included in the earthquake shock coverage. Petitioner’s
own evidence shows that it only required respondent to follow the exact
provisions of its previous policy from AHAC-AIU. Respondent complied with this
requirement. Respondent’s only deviation from the agreement was when it
modified the provisions regarding the replacement cost endorsement. With
regard to the issue under litigation, the riders of the old policy and the policy
in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as
would estop it from maintaining that only the two swimming pools were
covered for earthquake shock. The adjuster’s letter notifying petitioner to
present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIU’s inadvertent deletion of the phrase
"Item 5 Only" after the descriptive name or title of the Earthquake Shock
Endorsement. However, the words of the policy reflect the parties’ clear
intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its
conditions. It did not object to any deficiency nor did it institute any action to
reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorney’s fees and
litigation expenses. Since respondent was willing and able to pay for the
damage caused on the two swimming pools, it cannot be considered to be in
default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of
the case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:
ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril of
earthquake shock only)
20

Second, under the breakdown for premium payments,
21
it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
x x x
3 393,000.00 0.100%-E/S 393.00
22]

Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or
through or in consequence, directly or indirectly of any of the following
occurrences, namely:--
(a) Earthquake, volcanic eruption or other convulsion of nature.
23

Fourth, the rider attached to the policy, titled "Extended Coverage
Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and Smoke),"
stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS
INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A
DISCOUNT OF 5% OR 7 ½ % OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x
AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum
of P. . . . . . . . . . . . . . . . . additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this Policy to the
contrary, that this insurance covers loss or damage (including loss or damage
by fire) to any of the property insured by this Policy occasioned by or through
or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so
far as they may be hereby expressly varied) and that any reference therein to
loss or damage by fire should be deemed to apply also to loss or damage
occasioned by or through or in consequence of Earthquake.
24

Petitioner contends that pursuant to this rider, no qualifications were placed
on the scope of the earthquake shock coverage. Thus, the policy extended
earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined
and interpreted in consonance with each other.
25
All its parts are reflective of
the true intent of the parties. The policy cannot be construed piecemeal.
Certain stipulations cannot be segregated and then made to control; neither
do particular words or phrases necessarily determine its character. Petitioner
cannot focus on the earthquake shock endorsement to the exclusion of the
other provisions. All the provisions and riders, taken and interpreted together,
indubitably show the intention of the parties to extend earthquake shock
coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the
clear intent of the parties to extend earthquake shock coverage only to the
two swimming pools. 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. Thus, 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.
26
(Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to
indemnify the insured against a specified peril.
27
In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk
attaches.
28
In the subject policy, no premium payments were made with
regard to earthquake shock coverage, except on the two swimming pools.
There is no mention of any premium payable for the other resort properties
with regard to earthquake shock. This is consistent with the history of
petitioner’s previous insurance policies from AHAC-AIU. As borne out by
petitioner’s witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4, 1985 the
coverage on earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to
the two swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they
are of course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to
March 14, 1989, did you give written instruction to Forte Insurance Agency
advising it that the earthquake shock coverage must extend to all properties
of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other
properties of the company.
Q. And that instruction, according to you, was very important because in April
1987 there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the
[future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be covered
again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home
Assurance Company marked Exhibit "G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake
shock endorsement has no more limitation referring to the two swimming
pools only, I was contented already that the previous limitation pertaining to
the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to:
Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual
Payment Agreement on Long Term Policies"
29
to the insurance policy as proof
of the intent of the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the descriptive titles of the
riders, clauses, warranties or endorsements to which the policy is subject, as
required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the
qualification limiting the coverage to the two swimming pools. The
earthquake shock endorsement cannot stand alone. As explained by the
testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III
30

TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you
have occasion to review of (sic) these six (6) policies issued by your company
[in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to
H respectively carries an earthquake shock endorsement[?] My question to
you is, on the basis on (sic) the wordings indicated in Exhibits C to H
respectively what was the extent of the coverage [against] the peril of
earthquake shock as provided for in each of the six (6) policies?
x x x
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming
pools only?
WITNESS:
Because it says here in the policies, in the enumeration "Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone
basis. For swimming pools we do cover earthquake shock. For building we
covered it for full earthquake coverage which includes earthquake shock…
COURT:
As far as earthquake shock endorsement you do not have a specific
coverage for other things other than swimming pool? You are covering
building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering
building or another we can issue earthquake shock solely but that the
moment I see this, the thing that comes to my mind is either insuring a
swimming pool, foundations, they are normally affected by earthquake but
not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiff’s witness, Mr. Mantohac testified and he alleged that only Exhibits
C, D, E and F inclusive [remained] its coverage against earthquake shock to
two (2) swimming pools only but that Exhibits G and H respectively entend the
coverage against earthquake shock to all the properties indicated in the
respective schedules attached to said policies, what can you say about that
testimony of plaintiff’s witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without
the other half of it. I assure you that this one covers the two swimming pools
with respect to earthquake shock endorsement. Based on it, if we are going
to look at the premium there has been no change with respect to the rates.
Everytime (sic) there is a renewal if the intention of the insurer was to include
the earthquake shock, I think there is a substantial increase in the premium.
We are not only going to consider the two (2) swimming pools of the other as
stated in the policy. As I see, there is no increase in the amount of the
premium. I must say that the coverage was not broaden (sic) to include the
other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you
are going to do some computation based on the rates you will arrive at the
same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we don’t, sir.
Q. That is why the phrase "earthquake shock to the two (2) swimming pools
only" was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you
have pointed to during your direct-examination, the phrase "Item no. 5 only"
meaning to (sic) the two (2) swimming pools was deleted from the policies
issued by AIU, is it not?
x x x
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion
of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is
inadvertent. Being a company underwriter, we do not cover. . it was
inadvertent because of the previous policies that we have issued with no
specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioner’s contention that respondent’s
contemporaneous and subsequent acts to the issuance of the insurance
policy falsely gave the petitioner assurance that the coverage of the
earthquake shock endorsement included all its properties in the resort.
Respondent only insured the properties as intended by the petitioner.
Petitioner’s own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what
exactly did you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of
procuring the policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same
provisions as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that of the premium
rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates
that they will be charging will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
provisions and scope of coverage of Exhibits "I" and "H" sometime in the third
week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between
the policy wordings as well as scope of coverage of Exhibits "I" and "H"
respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the insurance
policy I sent them but it was only when this case erupted that we discovered
some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice
any discrepancy at any time between those indicated in Exhibit "I" and those
indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only against the
peril of earthquake shock which I understood before that this provision will
have to be placed here because this particular provision under the peril of
earthquake shock only is requested because this is an insurance policy and
therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondent’s representative Atty.
Umlas were not proved. Atty. Umlas categorically denied having given such
assurances.
Finally, petitioner puts much stress on the letter of respondent’s independent
claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the
representative of Bayne Adjusters and Surveyors, Inc., respondent never
meant to lead petitioner to believe that the endorsement for earthquake
shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors,
Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item
3 specifically that the coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had
found out in the policy and he confirmed to me indeed only Item 3 which
were the two swimming pools have coverage for earthquake shock.
x x x
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating
that except for the swimming pools all affected items have no coverage for
earthquake shock?
x x x
A. I based my statement on my findings, because upon my examination of
the policy I found out that under Item 3 it was specific on the wordings that on
the two swimming pools only, then enclosed in parenthesis (against the peril[s]
of earthquake shock only), and secondly, when I examined the summary of
premium payment only Item 3 which refers to the swimming pools have a
computation for premium payment for earthquake shock and all the other
items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders.
Petitioner cannot rely on the general rule that insurance contracts are
contracts of adhesion which should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it.
31
A
contract of adhesion is one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his
signature or his "adhesion" thereto. Through the years, the courts have held
that in these type of contracts, the parties do not bargain on equal footing,
the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom
the courts of justice must protect.
32
Consequently, any ambiguity therein is
resolved against the insurer, or construed liberally in favor of the insured.
33

The case law will show that this Court will only rule out blind adherence to
terms where facts and circumstances will show that they are basically one-
sided.
34
Thus, we have called on lower courts to remain careful in scrutinizing
the factual circumstances behind each case to determine the efficacy of the
claims of contending parties. InDevelopment Bank of the Philippines v.
National Merchandising Corporation, et al.,
35
the parties, who were acute
businessmen of experience, were presumed to have assented to the assailed
documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at
bar. Petitioner cannot claim it did not know the provisions of the policy. From
the inception of the policy, petitioner had required the respondent to
copyverbatim the provisions and terms of its latest insurance policy from
AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in
securing the insurance policy of petitioner, is reflective of petitioner’s
knowledge,viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC
36

TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for
those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the same or
exact provisions of the previous insurance policy we had with American Home
Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you
wanted in the American Home Insurance policy are to be incorporated in the
PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance
Corporation I specifically told him that the policy and wordings shall be
copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied
AIU Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true
that there was variance in some terms, specifically in the replacement cost
endorsement, but the principal provisions of the policy remained essentially
similar to AHAC-AIU’s policy. Consequently, we cannot apply the "fine print" or
"contract of adhesion" rule in this case as the parties’ intent to limit the
coverage of the policy to the two swimming pools only is not ambiguous.
37

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The
petition for certiorari is dismissed. No costs.


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.
Freqillana Jr. for petitioner.
B.F. Estrella & Associates for respondent Martin Vallejos.
Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.
Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

PADILLA, J.:
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.
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.
1

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.
2

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."
3

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.
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.
4

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,
5
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 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,
6
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."
8

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).
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).
9

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.


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

PADILLA, J:
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.
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 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.
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.
4
(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.
G.R. No. 81026 April 3, 1990
PAN MALAYAN INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.
Regulus E. Cabote & Associates for petitioner.
Benito P. Fabie for private respondents.

CORTES, J.:
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:
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. L-
27427, 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 theejusdem 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 impliesdamage 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" 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. L-41014,
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.
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
[SeeCalanoc 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.
G.R. No. 132607 May 5, 1999
CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,
vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY,
INC., respondents.

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules
of Court seeking a reversal of the decision of the Court of Appeal
1
which
affirmed the decision of the trial court of origin finding the petitioner herein,
Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and liable for
damages to the private respondent, William Lines, Inc., and to the insurer,
Prudential Guarantee Assurance Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation
engaged in the business of dry-docking and repairing of marine vessels while
the private respondent, Prudential Guarantee and Assurance, Inc.
(Prudential), also a domestic corporation is in the non-life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of
M/V Manila City, a luxury passenger-cargo vessel, which caught fire and sank
on February 16, 1991. At the time of the unfortunate occurrence sued upon,
subject vessel was insured with Prudential for P45,000,000.00 pesos for hull and
machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause
covering loss of or damage to the vessel through the negligence of, among
others, ship repairmen. The Policy provided as follows:
Subject to the conditions of this Policy, this insurance also covers loss of or
damage to Vessel directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or
Repairers are not an Assured hereunder.
xxx xxx xxx
provided such loss or damage has not resulted from want of due diligence by
the Assured, the Owners or Managers of the Vessel, of any of them Masters,
Officers, Crew or Pilots are not to be considered Owners within the meaning of
this Clause should they hold shares in the Vessel.
2

Petitioner CSEW was also insured by Prudential for third party liability under a
Shiprepairer's Legal Liability Insurance Policy. The policy was for P10 million
only, under the limited liability clause, to wit:
7. Limit of Liability
The limit of liability under this insurance, in respect of any one accident or
series of accidents, arising out of one occurrence, shall be [P10 million],
including liability for costs and expense which are either:
(a) incurred with the written consent of the underwriters hereon, or
(b) awarded against the Assured.
3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to
the Cebu Shipyard in Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives
of William Lines, Inc. and CSEW to discuss the work to be undertaken on the
M/V Manila City.
The contracts, denominated as Work Orders, were signed thereafter, with the
following stipulations:
10. The Contractor shall replace at its own work and at its own cost any work
or material which can be shown to be defective and which is communicated
in writing within one (1) month of redelivery of the vessel or if the vessel was
not in the Contractor's Possession, the withdrawal of the Contractor's
workmen, or at its option to pay a sum equal to the cost of such replacement
at its own works. These conditions shall apply to any such replacements.
11. Save as provided in Clause 10, the Contractor shall not be under any
liability to the Customer either in contract or for delict or quasi-delict or
otherwise except for negligence and such liability shall itself be subject to the
following overriding limitations and exceptions, namely:
(a) The total liability of the Contractor to the Customer (over and above the
liability to replace under Clause 10) or of any sub-contractor shall be limited in
respect of any defect or event (and a series of accidents arising out of the
same defect or event shall constitute one defect or event) to the sum of
Pesos Philippine Currency One Million only.
(b) In no circumstance whatsoever shall the liability of the Contractor or any
Sub-Contractor include any sum in respect of loss of profit or loss of use of the
vessel or damages consequential on such loss of use
xxx xxx xxx
20. The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect.
4

While the M/V Manila City was undergoing dry-docking and repairs within the
premises of CSEW, the master, officers and crew of M/V Manila City stayed in
the vessel using their cabins as living quarters. Other employees hired by
William Lines to do repairs and maintenance work on the vessel were also
present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking
quay, it caught fire and sank, resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against
CSEW, alleging that the fire which broke out in M/V Manila City was caused
by CSEW's negligence and lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as
co-plaintiff, after the latter had paid William Lines, Inc. the value of the hull
and machinery insurance on the M/V Manila City. As a result of such payment
Prudential was subrogated to the claim of P45 million, representing the value
of the said insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against
CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
the defendant, ordering the latter.
1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the
subrogee, the amount of Forty-five Million (P45 million) Pesos, with interest at
the legal rate until full payment is made.
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven
Hundred Fifteen Thousand (P56,715,000.00) Pesos representing loss of income
of M/V MANILA CITY, with interest at the legal rate until full payment is made.
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11
million) as payment, in addition to what it received from the insurance
company to fully cover the injury or loss, in order to replace the M/V MANILA
CITY, with interest at the legal rate until full payment is made;
4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-
Seven Thousand Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub (sic)
oil on board the vessel when she was completely gutted by fire at defendant,
Cebu Shipyard's quay, with interest at the legal rate until full payment is made;
5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four
Thousand Six Hundred Seventy-seven Pesos and Ninety-five centavos
(P3,054.677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full
payment is made;
6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand
(P500,000 00) Pesos in moral damages;
7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000.000.00) Pesos in attorney's fees; and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid decision to the Court of
Appeals. During the pendency of the appeal, CSEW and William Lines
presented a "Joint Motion for Partial Dismissal" with prejudice, on the basis of
the amicable settlement inked between Cebu Shipyard and William Lines
only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the
case insofar as CSEW and William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision
of the trial court, ruling thus:
WHEREFORE, the judgment of the lower court ordering the defendant, Cebu
Shipyard and Engineering Works, Inc. to pay the plaintiff Prudential Guarantee
and Assurance, Inc., the subrogee, the sum of P45 Million, with interest at the
legal rate until full payment is made, as contained in the decision of Civil Case
No. CEB-9935 is hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeal's
Resolution dated February 13, 1998, CSEW found its way to this court via the
present petition, contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT
CSEW HAD "MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V MANILA
CITY AT THE TIME THE FIRE BROKE OUT.
II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE
DOCTRINE OFRES IPSA LOQUITUR AGAINST CSEW.
III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY
LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED FINDINGS OF FACT
NOT SUPPORTED BY EVIDENCE.
IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEW'S
EXPERT EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.
V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT
PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.
VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION
AND THAT CSEW WAS NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS
UNDER THE SHIPREPAIR CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING
CSEW'S LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P 1 MILLION IS NOT
VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE COURT.
Petitioner's version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V Manila
City at its grave dock. It was then transferred to the docking quay of CSEW
where the remaining repair to be done was the replating of the top of Water
Ballast Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to
JNB General Services. Tank Top No. 12 was at the rear section of the vessel, on
level with the flooring of the crew cabins located on the vessel's second deck.
At around seven o'clock in the morning of February 16, 1991, the JNB workers
trimmed and cleaned the tank framing which involved minor hotworks
(welding/cutting works). The said work was completed at about 10:00 a.m.
The JNB workers then proceeded to rig the steel plates, after which they had
their lunch break. The rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB workers noticed
smoke coming from the passageway along the crew cabins. When one of the
workers, Mr. Casas, proceeded to the passageway to ascertain the origin of
the smoke, he noticed that smoke was gathering on the ceiling of the
passageway but did not see any fire as the crew cabins on either side of the
passageway were locked. He immediately sought out the proprietor of JNB,
Mr. Buenavista, and the Safety officer CSEW, Mr. Aves, who sounded the fire
alarm. CSEW's fire brigade immediately responded as well as the other fire
fighting units in Metro Cebu. However, there were no WLI representative,
officer or crew to guide the firemen inside the vessel.
Despite the combined efforts of the firemen of the Lapulapu City Fire
Department, Mandaue Fire Cordova Fire Department, Emergency Rescue
Unit Foundation, and fire brigade of CSEW, the fire was not controlled until
2:00 a.m., of the following day, February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled the flames on
the vessel and fire again broke out. Then the huge amounts of water pumped
into the vessel, coupled with the strong current, caused the vessel to tilt until it
capsized and sank.
When M/V Manila City capsized, steel and angle bars were noticed to have
been newly welded along the port side of the hull of the vessel, at the level of
the crew cabins. William Lines did not previously apply for a permit to do
hotworks on the said portion of the ship as it should have done pursuant to its
work order with CSEW.
5

Respondent Prudential, on the other hand, theorized that the fire broke out in
the following manner:
At around eleven o'clock in the morning of February 16, 1991, the Chief Mate
of M/V Manila City was inspecting the various works being done by CSEW on
the vessel, when he saw that some workers of CSEW were cropping out steel
plates Tank Top No. 12 using acetylene, oxygen and welding torch. He also
observed that the rubber insulation wire coming out of the air-conditioning
unit was already burning, prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke coming from
Tank No. 12. The vessel's reeferman reported such occurence to the Chief
Mate who immediately assembled the crew members to put out the fire.
When it was too hot for them to stay on board and seeing that the fire cannot
be controlled, the vessel's crew were forced to withdraw from CSEW's docking
quay.
In the morning of February 17, 1991, M/V Manila City sank. As the vessel was
insured with Prudential Guarantee, William Lines filed a claim for constructive
loss, and after a thorough investigation of the surrounding circumstances of
the tragedy, Prudential Guaranteed found the said insurance claim to be
meritorious and issued a check in favor of William Lines in the amount of P 45
million pesos representing the total value of M/V Manila City's hull and
machinery insurance.
6

The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and
liable for damages for the respondents, William Lines, Inc., and Prudential for
the loss of M/V Manila City. It is petitioner's submission that the finding of
negligence by the Court of Appeals is not supported by the evidence on
record, and contrary to what the Court of Appeals found, petitioner did not
have management and control over M/V Manila City. Although it was
brought to the premises of CSEW for annual repair, William Lines, Inc. retained
control over the vessel as the ship captain remained in command and the
ship's crew were still present. While it imposed certain rules and regulations on
William Lines, it was in the exercise of due diligence and not an indication of
CSEW's exclusive control over subject vessel. Thus, CSEW maintains that it did
not have exclusive control over the M/V Manila City and the trial court and
the Court of Appeals erred in applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule
that factual findings by the Court of Appeals are conclusive on the parties
and are not reviewable by this Court. They are entitled to great weight and
respect, even finality, especially when, as in this case, the Court of Appeals
affirmed the factual findings arrived at by the trial court.
7
When supported by
sufficient evidence, findings of fact by the Court of Appeals affirming those of
the trial court, are not to be disturbed on appeal. The rationale behind this
doctrine is that review of the findings of fact of the Court of Appeals is not a
function that the Supreme Court normally undertakes.
8

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

Furthermore, in petitions for review on certiorari, only questions of law may be
put into issue. Questions of fact cannot be entertained. The finding of
negligence by the Court of Appeals is a question which this Court cannot look
into as it would entail going into factual matters on which the finding of
negligence was based. Such an approach cannot be allowed by this Court in
the absence of clear showing that the case falls under any of the
exceptions
10
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.
11

What is more, in the present case the trial court found direct evidence to
prove that the workers and/or employees of CSEW were remiss in their duty of
exercising due diligence in the care of subject vessel. The direct evidence
substantiates the conclusion that CSEW was really negligent. Thus, even
without applying the doctrine of res ipsa loquitur, in light of the direct
evidence on record, the ineluctable conclusion is that the petitioner, Cebu
Shipyard and Engineering Works, Inc., was negligent and consequently liable
for damages to the respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of
Appeals erroneously ruled on the inadmissibility of the expert testimonies it
(petitioner) introduced on the probable cause and origin of the fire. Petitioner
maintains that the Court of Appeals erred in disregarding the testimonies of
the fire experts, Messrs. David Grey and Gregory Michael Southeard, who
testified on the probable origin of the fire in M/V Manila City. Petitioner avers
that since the said fire experts were one in their opinion that the fire did not
originate in the area of Tank Top No. 12 where the JNB workers were doing
hotworks but on the crew accommodation cabins on the portside No. 2 deck,
the trial court and the Court of Appeals should have given weight to such
finding based on the testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they
may have probative value, reception in evidence of expert testimonies is
within the discretion of the court. Section 49, Rule 130 of the Revised Rules of
Court, provides:
Sec. 49. Opinion of expert witness. — The opinion of a witness on a matter
requiring special knowledge, skill, experience or training which he is shown to
possess, may be received in evidence.
The word "may" signifies that the use of opinion of an expert witness as
evidence is a prerogative of the courts. It is never mandatory for judges to
give substantial weight to expert testimonies. If from the facts and evidence
on record, a conclusion is readily ascertainable, there is no need for the judge
to resort to expert opinion evidence. In the case under consideration, the
testimonies of the fire experts were not the only available evidence on the
probable cause and origin of the fire. There were witnesses who were actually
on board the vessel when the fire occurred. Between the testimonies of the
fire experts who merely based their findings and opinions on interviews and
the testimonies of those present during the fire, the latter are of more
probative value. Verily, the trial court and the Court of Appeals did not err in
giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that Prudential is not entitled
to be subrogated to the rights of William Lines, Inc., theorizing that (1) the fire
which gutted M/V Manila City was an excluded risk and (2) it is a co-assured
under the Marine Hull Insurance Policy.
It is petitioner's submission that the loss of M/V Manila City or damage thereto
is expressly excluded from the coverage of the insurance because the same
resulted from "want of due diligence by the Assured, Owners or Managers"
which is not included in the risks insured against. Again, this theory of petitioner
is bereft of any factual or legal basis. It proceeds from a wrong premise that
the fire which gutted subject vessel was caused by the negligence of the
employees of William Lines, Inc. To repeat, the issue of who between the
parties was negligent has already been resolved against Cebu Shipyard and
Engineering Works, Inc. Upon proof of payment by Prudential to William Lines,
Inc. the former was subrogated to the right of the latter to indemnification
from CSEW. As aptly ruled by the Court of Appeals, the law on the manner is
succinct and clear, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the insurance company
does not fully cover the injury or loss the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
12

Thus, when Prudential, after due verification of the merit and validity of the
insurance claim of William Lines, Inc., paid the latter the total amount covered
by its insurance policy, it was subrogated to the right of the latter to recover
the insured loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is
deemed a co-assured under the subject insurance policy. To buttress its
stance that it is a co-assured, petitioner placed reliance on Clause 20 of the
Work Order which states:
20 The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect.
13

According to petitioner, under the aforecited clause, William Lines, Inc.,
agreed to assume the risk of loss of the vessel while under dry-dock or repair
and to such extent, it is benefited and effectively constituted as a co-assured
under the policy.
This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work
Order in question is clear in the sense that it requires William Lines to maintain
insurance on the vessel during the period of dry-docking or repair.
Concededly, such a stipulation works to the benefit of CSEW as the ship
repairer. However, the fact that CSEW benefits from the said stipulation does
not automatically make it as a co-assured of William Lines. The intention of the
parties to make each other a co-assured under an insurance policy is to be
gleaned principally from the insurance contract or policy itself and not from
any other contract or agreement because the insurance policy denominates
the assured and the beneficiaries of the insurance. The hull and machinery
insurance procured by William Lines, Inc. from Prudential named only "William
Lines, Inc." as the assured. There was no manifestation of any intention of
William Lines, Inc. to constitute CSEW as a co-assured under subject policy. It is
axiomatic that when the terms of a contract are clear its stipulations
control.
14
Thus, when the insurance policy involved named only William Lines,
Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is
unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it
is provided that:
Subject to the conditions of this Policy, this insurance also covers loss of or
damage to vessel directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or
Repairers are not an Assured hereunder
15
(emphasis supplied).
As correctly pointed out by respondent Prudential, if CSEW were deemed a
co-assured under the policy, it would nullify any claim of William Lines, Inc.
from Prudential for any loss or damage caused by the negligence of CSEW.
Certainly, no shipowner would agree to make a shiprepairer a co-assured
under such insurance policy; otherwise, any claim for loss or damage under
the policy would be invalidated. Such result could not have been intended by
William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore
liable to William Lines Inc., by stipulation in the Contract or Work Order its
liability is limited to One Million (P1,000,000.00) Pesos only, and Prudential a
mere subrogee of William Lines, Inc., should only be entitled to collect the sum
stipulated in the said contract.
Although in this jurisdiction, contracts of adhesion have been consistently
upheld as valid per se; as binding as an ordinary contract, the Court
recognizes instances when reliance on such contracts cannot be favored
especially where the facts and circumstances warrant that subject stipulations
be disregarded.
16
Thus, in ruling on the validity and applicability of the
stipulation limiting the liability of CSEW for negligence to One Million
(P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of
the provision sought to be enforced should be considered, bearing in mind
the principles of equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty
Five Million (P45,000,000.00) Pesos. To determine the validity and sustainability
of the claim of William Lines, Inc., for a total loss, Prudential conducted its own
inquiry. Upon thorough investigation by its hull surveyor, M/V Manila City was
found to be beyond economical salvage and repair.
17
The evaluation of the
average adjuster also reported a constructive total loss.
18
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.
19

Considering the aforestated circumstances, let alone the fact that
negligence on the part of petitioner has been sufficiently proven, it would
indeed be unfair and inequitable to limit the liability of petitioner to One
Million Pesos only. As aptly held by the trial court, "it is rather unconscionable if
not overstrained." To allow CSEW to limit its liability to One Million Pesos
notwithstanding the fact that the total loss suffered by the assured and paid
for by Prudential amounted to Forty Five Million (P45,000,000.00) Pesos would
sanction the exercise of a degree of diligence short of what is ordinarily
required because, then, it would not be difficult for petitioner to escape
liability by the simple expedient of paying an amount very much lower than
the actual damage or loss suffered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision,
dated September 3, 1997, and Resolution, dated February 13, 1998, of the
Court of Appeals AFFIRMED. No pronouncement as to costs.1âwphi1.nêt


G.R. No. 132607 May 5, 1999
CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,
vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY,
INC., respondents.

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules
of Court seeking a reversal of the decision of the Court of Appeal
1
which
affirmed the decision of the trial court of origin finding the petitioner herein,
Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and liable for
damages to the private respondent, William Lines, Inc., and to the insurer,
Prudential Guarantee Assurance Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation
engaged in the business of dry-docking and repairing of marine vessels while
the private respondent, Prudential Guarantee and Assurance, Inc.
(Prudential), also a domestic corporation is in the non-life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of
M/V Manila City, a luxury passenger-cargo vessel, which caught fire and sank
on February 16, 1991. At the time of the unfortunate occurrence sued upon,
subject vessel was insured with Prudential for P45,000,000.00 pesos for hull and
machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause
covering loss of or damage to the vessel through the negligence of, among
others, ship repairmen. The Policy provided as follows:
Subject to the conditions of this Policy, this insurance also covers loss of or
damage to Vessel directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or
Repairers are not an Assured hereunder.
xxx xxx xxx
provided such loss or damage has not resulted from want of due diligence by
the Assured, the Owners or Managers of the Vessel, of any of them Masters,
Officers, Crew or Pilots are not to be considered Owners within the meaning of
this Clause should they hold shares in the Vessel.
2

Petitioner CSEW was also insured by Prudential for third party liability under a
Shiprepairer's Legal Liability Insurance Policy. The policy was for P10 million
only, under the limited liability clause, to wit:
7. Limit of Liability
The limit of liability under this insurance, in respect of any one accident or
series of accidents, arising out of one occurrence, shall be [P10 million],
including liability for costs and expense which are either:
(a) incurred with the written consent of the underwriters hereon, or
(b) awarded against the Assured.
3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to
the Cebu Shipyard in Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives
of William Lines, Inc. and CSEW to discuss the work to be undertaken on the
M/V Manila City.
The contracts, denominated as Work Orders, were signed thereafter, with the
following stipulations:
10. The Contractor shall replace at its own work and at its own cost any work
or material which can be shown to be defective and which is communicated
in writing within one (1) month of redelivery of the vessel or if the vessel was
not in the Contractor's Possession, the withdrawal of the Contractor's
workmen, or at its option to pay a sum equal to the cost of such replacement
at its own works. These conditions shall apply to any such replacements.
11. Save as provided in Clause 10, the Contractor shall not be under any
liability to the Customer either in contract or for delict or quasi-delict or
otherwise except for negligence and such liability shall itself be subject to the
following overriding limitations and exceptions, namely:
(a) The total liability of the Contractor to the Customer (over and above the
liability to replace under Clause 10) or of any sub-contractor shall be limited in
respect of any defect or event (and a series of accidents arising out of the
same defect or event shall constitute one defect or event) to the sum of
Pesos Philippine Currency One Million only.
(b) In no circumstance whatsoever shall the liability of the Contractor or any
Sub-Contractor include any sum in respect of loss of profit or loss of use of the
vessel or damages consequential on such loss of use
xxx xxx xxx
20. The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect.
4

While the M/V Manila City was undergoing dry-docking and repairs within the
premises of CSEW, the master, officers and crew of M/V Manila City stayed in
the vessel using their cabins as living quarters. Other employees hired by
William Lines to do repairs and maintenance work on the vessel were also
present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking
quay, it caught fire and sank, resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against
CSEW, alleging that the fire which broke out in M/V Manila City was caused
by CSEW's negligence and lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as
co-plaintiff, after the latter had paid William Lines, Inc. the value of the hull
and machinery insurance on the M/V Manila City. As a result of such payment
Prudential was subrogated to the claim of P45 million, representing the value
of the said insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against
CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
the defendant, ordering the latter.
1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the
subrogee, the amount of Forty-five Million (P45 million) Pesos, with interest at
the legal rate until full payment is made.
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven
Hundred Fifteen Thousand (P56,715,000.00) Pesos representing loss of income
of M/V MANILA CITY, with interest at the legal rate until full payment is made.
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11
million) as payment, in addition to what it received from the insurance
company to fully cover the injury or loss, in order to replace the M/V MANILA
CITY, with interest at the legal rate until full payment is made;
4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-
Seven Thousand Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub (sic)
oil on board the vessel when she was completely gutted by fire at defendant,
Cebu Shipyard's quay, with interest at the legal rate until full payment is made;
5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four
Thousand Six Hundred Seventy-seven Pesos and Ninety-five centavos
(P3,054.677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full
payment is made;
6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand
(P500,000 00) Pesos in moral damages;
7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000.000.00) Pesos in attorney's fees; and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid decision to the Court of
Appeals. During the pendency of the appeal, CSEW and William Lines
presented a "Joint Motion for Partial Dismissal" with prejudice, on the basis of
the amicable settlement inked between Cebu Shipyard and William Lines
only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the
case insofar as CSEW and William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision
of the trial court, ruling thus:
WHEREFORE, the judgment of the lower court ordering the defendant, Cebu
Shipyard and Engineering Works, Inc. to pay the plaintiff Prudential Guarantee
and Assurance, Inc., the subrogee, the sum of P45 Million, with interest at the
legal rate until full payment is made, as contained in the decision of Civil Case
No. CEB-9935 is hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeal's
Resolution dated February 13, 1998, CSEW found its way to this court via the
present petition, contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT
CSEW HAD "MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V MANILA
CITY AT THE TIME THE FIRE BROKE OUT.
II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE
DOCTRINE OFRES IPSA LOQUITUR AGAINST CSEW.
III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY
LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED FINDINGS OF FACT
NOT SUPPORTED BY EVIDENCE.
IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEW'S
EXPERT EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.
V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT
PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.
VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION
AND THAT CSEW WAS NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS
UNDER THE SHIPREPAIR CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING
CSEW'S LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P 1 MILLION IS NOT
VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE COURT.
Petitioner's version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V Manila
City at its grave dock. It was then transferred to the docking quay of CSEW
where the remaining repair to be done was the replating of the top of Water
Ballast Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to
JNB General Services. Tank Top No. 12 was at the rear section of the vessel, on
level with the flooring of the crew cabins located on the vessel's second deck.
At around seven o'clock in the morning of February 16, 1991, the JNB workers
trimmed and cleaned the tank framing which involved minor hotworks
(welding/cutting works). The said work was completed at about 10:00 a.m.
The JNB workers then proceeded to rig the steel plates, after which they had
their lunch break. The rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB workers noticed
smoke coming from the passageway along the crew cabins. When one of the
workers, Mr. Casas, proceeded to the passageway to ascertain the origin of
the smoke, he noticed that smoke was gathering on the ceiling of the
passageway but did not see any fire as the crew cabins on either side of the
passageway were locked. He immediately sought out the proprietor of JNB,
Mr. Buenavista, and the Safety officer CSEW, Mr. Aves, who sounded the fire
alarm. CSEW's fire brigade immediately responded as well as the other fire
fighting units in Metro Cebu. However, there were no WLI representative,
officer or crew to guide the firemen inside the vessel.
Despite the combined efforts of the firemen of the Lapulapu City Fire
Department, Mandaue Fire Cordova Fire Department, Emergency Rescue
Unit Foundation, and fire brigade of CSEW, the fire was not controlled until
2:00 a.m., of the following day, February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled the flames on
the vessel and fire again broke out. Then the huge amounts of water pumped
into the vessel, coupled with the strong current, caused the vessel to tilt until it
capsized and sank.
When M/V Manila City capsized, steel and angle bars were noticed to have
been newly welded along the port side of the hull of the vessel, at the level of
the crew cabins. William Lines did not previously apply for a permit to do
hotworks on the said portion of the ship as it should have done pursuant to its
work order with CSEW.
5

Respondent Prudential, on the other hand, theorized that the fire broke out in
the following manner:
At around eleven o'clock in the morning of February 16, 1991, the Chief Mate
of M/V Manila City was inspecting the various works being done by CSEW on
the vessel, when he saw that some workers of CSEW were cropping out steel
plates Tank Top No. 12 using acetylene, oxygen and welding torch. He also
observed that the rubber insulation wire coming out of the air-conditioning
unit was already burning, prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke coming from
Tank No. 12. The vessel's reeferman reported such occurence to the Chief
Mate who immediately assembled the crew members to put out the fire.
When it was too hot for them to stay on board and seeing that the fire cannot
be controlled, the vessel's crew were forced to withdraw from CSEW's docking
quay.
In the morning of February 17, 1991, M/V Manila City sank. As the vessel was
insured with Prudential Guarantee, William Lines filed a claim for constructive
loss, and after a thorough investigation of the surrounding circumstances of
the tragedy, Prudential Guaranteed found the said insurance claim to be
meritorious and issued a check in favor of William Lines in the amount of P 45
million pesos representing the total value of M/V Manila City's hull and
machinery insurance.
6

The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and
liable for damages for the respondents, William Lines, Inc., and Prudential for
the loss of M/V Manila City. It is petitioner's submission that the finding of
negligence by the Court of Appeals is not supported by the evidence on
record, and contrary to what the Court of Appeals found, petitioner did not
have management and control over M/V Manila City. Although it was
brought to the premises of CSEW for annual repair, William Lines, Inc. retained
control over the vessel as the ship captain remained in command and the
ship's crew were still present. While it imposed certain rules and regulations on
William Lines, it was in the exercise of due diligence and not an indication of
CSEW's exclusive control over subject vessel. Thus, CSEW maintains that it did
not have exclusive control over the M/V Manila City and the trial court and
the Court of Appeals erred in applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule
that factual findings by the Court of Appeals are conclusive on the parties
and are not reviewable by this Court. They are entitled to great weight and
respect, even finality, especially when, as in this case, the Court of Appeals
affirmed the factual findings arrived at by the trial court.
7
When supported by
sufficient evidence, findings of fact by the Court of Appeals affirming those of
the trial court, are not to be disturbed on appeal. The rationale behind this
doctrine is that review of the findings of fact of the Court of Appeals is not a
function that the Supreme Court normally undertakes.
8

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

Furthermore, in petitions for review on certiorari, only questions of law may be
put into issue. Questions of fact cannot be entertained. The finding of
negligence by the Court of Appeals is a question which this Court cannot look
into as it would entail going into factual matters on which the finding of
negligence was based. Such an approach cannot be allowed by this Court in
the absence of clear showing that the case falls under any of the
exceptions
10
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.
11

What is more, in the present case the trial court found direct evidence to
prove that the workers and/or employees of CSEW were remiss in their duty of
exercising due diligence in the care of subject vessel. The direct evidence
substantiates the conclusion that CSEW was really negligent. Thus, even
without applying the doctrine of res ipsa loquitur, in light of the direct
evidence on record, the ineluctable conclusion is that the petitioner, Cebu
Shipyard and Engineering Works, Inc., was negligent and consequently liable
for damages to the respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of
Appeals erroneously ruled on the inadmissibility of the expert testimonies it
(petitioner) introduced on the probable cause and origin of the fire. Petitioner
maintains that the Court of Appeals erred in disregarding the testimonies of
the fire experts, Messrs. David Grey and Gregory Michael Southeard, who
testified on the probable origin of the fire in M/V Manila City. Petitioner avers
that since the said fire experts were one in their opinion that the fire did not
originate in the area of Tank Top No. 12 where the JNB workers were doing
hotworks but on the crew accommodation cabins on the portside No. 2 deck,
the trial court and the Court of Appeals should have given weight to such
finding based on the testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they
may have probative value, reception in evidence of expert testimonies is
within the discretion of the court. Section 49, Rule 130 of the Revised Rules of
Court, provides:
Sec. 49. Opinion of expert witness. — The opinion of a witness on a matter
requiring special knowledge, skill, experience or training which he is shown to
possess, may be received in evidence.
The word "may" signifies that the use of opinion of an expert witness as
evidence is a prerogative of the courts. It is never mandatory for judges to
give substantial weight to expert testimonies. If from the facts and evidence
on record, a conclusion is readily ascertainable, there is no need for the judge
to resort to expert opinion evidence. In the case under consideration, the
testimonies of the fire experts were not the only available evidence on the
probable cause and origin of the fire. There were witnesses who were actually
on board the vessel when the fire occurred. Between the testimonies of the
fire experts who merely based their findings and opinions on interviews and
the testimonies of those present during the fire, the latter are of more
probative value. Verily, the trial court and the Court of Appeals did not err in
giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that Prudential is not entitled
to be subrogated to the rights of William Lines, Inc., theorizing that (1) the fire
which gutted M/V Manila City was an excluded risk and (2) it is a co-assured
under the Marine Hull Insurance Policy.
It is petitioner's submission that the loss of M/V Manila City or damage thereto
is expressly excluded from the coverage of the insurance because the same
resulted from "want of due diligence by the Assured, Owners or Managers"
which is not included in the risks insured against. Again, this theory of petitioner
is bereft of any factual or legal basis. It proceeds from a wrong premise that
the fire which gutted subject vessel was caused by the negligence of the
employees of William Lines, Inc. To repeat, the issue of who between the
parties was negligent has already been resolved against Cebu Shipyard and
Engineering Works, Inc. Upon proof of payment by Prudential to William Lines,
Inc. the former was subrogated to the right of the latter to indemnification
from CSEW. As aptly ruled by the Court of Appeals, the law on the manner is
succinct and clear, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the insurance company
does not fully cover the injury or loss the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
12

Thus, when Prudential, after due verification of the merit and validity of the
insurance claim of William Lines, Inc., paid the latter the total amount covered
by its insurance policy, it was subrogated to the right of the latter to recover
the insured loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is
deemed a co-assured under the subject insurance policy. To buttress its
stance that it is a co-assured, petitioner placed reliance on Clause 20 of the
Work Order which states:
20 The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect.
13

According to petitioner, under the aforecited clause, William Lines, Inc.,
agreed to assume the risk of loss of the vessel while under dry-dock or repair
and to such extent, it is benefited and effectively constituted as a co-assured
under the policy.
This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work
Order in question is clear in the sense that it requires William Lines to maintain
insurance on the vessel during the period of dry-docking or repair.
Concededly, such a stipulation works to the benefit of CSEW as the ship
repairer. However, the fact that CSEW benefits from the said stipulation does
not automatically make it as a co-assured of William Lines. The intention of the
parties to make each other a co-assured under an insurance policy is to be
gleaned principally from the insurance contract or policy itself and not from
any other contract or agreement because the insurance policy denominates
the assured and the beneficiaries of the insurance. The hull and machinery
insurance procured by William Lines, Inc. from Prudential named only "William
Lines, Inc." as the assured. There was no manifestation of any intention of
William Lines, Inc. to constitute CSEW as a co-assured under subject policy. It is
axiomatic that when the terms of a contract are clear its stipulations
control.
14
Thus, when the insurance policy involved named only William Lines,
Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is
unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it
is provided that:
Subject to the conditions of this Policy, this insurance also covers loss of or
damage to vessel directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or
Repairers are not an Assured hereunder
15
(emphasis supplied).
As correctly pointed out by respondent Prudential, if CSEW were deemed a
co-assured under the policy, it would nullify any claim of William Lines, Inc.
from Prudential for any loss or damage caused by the negligence of CSEW.
Certainly, no shipowner would agree to make a shiprepairer a co-assured
under such insurance policy; otherwise, any claim for loss or damage under
the policy would be invalidated. Such result could not have been intended by
William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore
liable to William Lines Inc., by stipulation in the Contract or Work Order its
liability is limited to One Million (P1,000,000.00) Pesos only, and Prudential a
mere subrogee of William Lines, Inc., should only be entitled to collect the sum
stipulated in the said contract.
Although in this jurisdiction, contracts of adhesion have been consistently
upheld as valid per se; as binding as an ordinary contract, the Court
recognizes instances when reliance on such contracts cannot be favored
especially where the facts and circumstances warrant that subject stipulations
be disregarded.
16
Thus, in ruling on the validity and applicability of the
stipulation limiting the liability of CSEW for negligence to One Million
(P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of
the provision sought to be enforced should be considered, bearing in mind
the principles of equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty
Five Million (P45,000,000.00) Pesos. To determine the validity and sustainability
of the claim of William Lines, Inc., for a total loss, Prudential conducted its own
inquiry. Upon thorough investigation by its hull surveyor, M/V Manila City was
found to be beyond economical salvage and repair.
17
The evaluation of the
average adjuster also reported a constructive total loss.
18
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.
19

Considering the aforestated circumstances, let alone the fact that
negligence on the part of petitioner has been sufficiently proven, it would
indeed be unfair and inequitable to limit the liability of petitioner to One
Million Pesos only. As aptly held by the trial court, "it is rather unconscionable if
not overstrained." To allow CSEW to limit its liability to One Million Pesos
notwithstanding the fact that the total loss suffered by the assured and paid
for by Prudential amounted to Forty Five Million (P45,000,000.00) Pesos would
sanction the exercise of a degree of diligence short of what is ordinarily
required because, then, it would not be difficult for petitioner to escape
liability by the simple expedient of paying an amount very much lower than
the actual damage or loss suffered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision,
dated September 3, 1997, and Resolution, dated February 13, 1998, of the
Court of Appeals AFFIRMED. No pronouncement as to costs.1âwphi1.nêt


G.R. No. 127897 November 15, 2001
DELSAN TRANSPORT LINES, INC., petitioner,
vs.
THE HON. COURT OF APPEALS and AMERICAN HOME ASSURANCE
CORPORATION, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision
1
of the Court of
Appeals in CA-G.R. CV No. 39836 promulgated on June 17, 1996, reversing the
decision of the Regional Trial Court of Makati City, Branch 137, ordering
petitioner to pay private respondent the sum of Five Million Ninety-Six
Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos
(P5,096,635.57) and costs and the Resolution
2
dated January 21, 1997 which
denied the subsequent motion for reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a
contract of affreightment with the petitioner, Delsan Transport Lines, Inc., for a
period of one year whereby the said common carrier agreed to transport
Caltex’s industrial fuel oil from the Batangas-Bataan Refinery to different parts
of the country. Under the contract, petitioner took on board its vessel, MT
Maysun 2,277.314 kiloliters of industrial fuel oil of Caltex to be delivered to the
Caltex Oil Terminal in Zamboanga City. The shipment was insured with the
private respondent, American Home Assurance Corporation.
On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City.
Unfortunately, the vessel sank in the early morning of August 16, 1986 near
Panay Gulf in the Visayas taking with it the entire cargo of fuel oil.
Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six
Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos
(P5,096,635.67) representing the insured value of the lost cargo. Exercising its
right of subrogation under Article 2207 of the New Civil Code, the private
respondent demanded of the petitioner the same amount it paid to
Caltex.1âwphi1.nêt
Due to its failure to collect from the petitioner despite prior demand, private
respondent filed a complaint with the Regional Trial Court of Makati City,
Branch 137, for collection of a sum of money. After the trial and upon
analyzing the evidence adduced, the trial court rendered a decision on
November 29, 1990 dismissing the complaint against herein petitioner without
pronouncement as to cost. The trial court found that the vessel, MT Maysum,
was seaworthy to undertake the voyage as determined by the Philippine
Coast Guard per Survey Certificate Report No. M5-016-MH upon inspection
during its annual dry-docking and that the incident was caused by
unexpected inclement weather condition or force majeure, thus exempting
the common carrier (herein petitioner) from liability for the loss of its cargo.
3

The decision of the trial court, however, was reversed, on appeal, by the
Court of Appeals. The appellate court gave credence to the weather report
issued by the Philippine Atmospheric, Geophysical and Astronomical Services
Administration (PAGASA for brevity) which showed that from 2:00 o’clock to
8:oo o’clock in the morning on August 16, 1986, the wind speed remained at
10 to 20 knots per hour while the waves measured from .7 to two (2) meters in
height only in the vicinity of the Panay Gulf where the subject vessel sank, in
contrast to herein petitioner’s allegation that the waves were twenty (20) feet
high. In the absence of any explanation as to what may have caused the
sinking of the vessel coupled with the finding that the same was improperly
manned, the appellate court ruled that the petitioner is liable on its obligation
as common carrier
4
to herein private respondent insurance company as
subrogee of Caltex. The subsequent motion for reconsideration of herein
petitioner was denied by the appellate court.
Petitioner raised the following assignments of error in support of the instant
petition,
5
to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL
TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE
LEGAL PRESUMPTION THAT THE VESSEL MT "MAYSUN" WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE
SUPREME COURT IN THE CASE OF HOME INSURANCE CORPORATION V. COURT
OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of
the Insurance Code of the Philippines, which states that in every marine
insurance upon a ship or freight, or freightage, or upon any thin which is the
subject of marine insurance there is an implied warranty by the shipper that
the ship is seaworthy. Consequently, the insurer will not be liable to the assured
for any loss under the policy in case the vessel would later on be found as not
seaworthy at the inception of the insurance. It theorized that when private
respondent paid Caltex the value of its lost cargo, the act of the private
respondent is equivalent to a tacit recognition that the ill-fated vessel was
seaworthy; otherwise, private respondent was not legally liable to Caltex due
to the latter’s breach of implied warranty under the marine insurance policy
that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT
Maysun was not seaworthy on the ground that the marine officer who served
as the chief mate of the vessel, Francisco Berina, was allegedly not qualified.
Under Section 116 of the Insurance Code of the Philippines, the implied
warranty of seaworthiness of the vessel, which the private respondent
admitted as having been fulfilled by its payment of the insurance proceeds to
Caltex of its lost cargo, extends to the vessel’s complement. Besides, petitioner
avers that although Berina had merely a 2
nd
officer’s license, he was qualified
to act as the vessel’s chief officer under Chapter IV(403), Category
III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules and Regulations. In
fact, all the crew and officers of MT Maysun were exonerated in the
administrative investigation conducted by the Board of Marine Inquiry after
the subject accident.
6

In any event, petitioner further avers that private respondent failed, for
unknown reason, to present in evidence during the trial of the instant case the
subject marine cargo insurance policy it entered into with Caltex. By virtue of
the doctrine laid down in the case of Home Insurance Corporation vs.
CA,
7
the failure of the private respondent to present the insurance policy in
evidence is allegedly fatal to its claim inasmuch as there is no way to
determine the rights of the parties thereto.
Hence, the legal issues posed before the Court are:
I
Whether or not the payment made by the private respondent to Caltex for
the insured value of the lost cargo amounted to an admission that the vessel
was seaworthy, thus precluding any action for recovery against the petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars the
complaint for recovery of sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost
cargo operates as waiver of its (private respondent) right to enforce the term
of the implied warranty against Caltex under the marine insurance policy.
However, the same cannot be validly interpreted as an automatic admission
of the vessel’s seaworthiness by the private respondent as to foreclose
recourse against the petitioner for any liability under its contractual obligation
as a common carrier. The fact of payment grants the private respondent
subrogatory right which enables it to exercise legal remedies that would
otherwise be available to Caltex as owner of the lost cargo against the
petitioner common carrier.
8
Article 2207 of the New civil Code provides that:
Art. 2207. If the plaintiff’s property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the 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.
The right of subrogation has its roots in equity. It is designed to promote and to
accomplish justice and is the mode which equity adopts to compel the
ultimate payment of a debt by one who in justice and good conscience
ought to pay.
9
It 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
by the insurance company of the insurance claim.
10
Consequently, the
payment made by the private respondent (insurer) to Caltex (assured)
operates as an equitable assignment to the former of all the remedies which
the latter may have against the petitioner.
From the nature of their business and for reasons of public policy, common
carriers are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of passengers transported by them, according to all
the circumstance of each case.
11
In the event of loss, destruction or
deterioration of the insured goods, common carriers shall be responsible
unless the same is brought about, among others, by flood, storm, earthquake,
lightning or other natural disaster or calamity.
12
In all other cases, if the goods
are lost, destroyed or deteriorated, common carriers are presumed to have
been at fault or to have acted negligently, unless they prove that they
observed extraordinary diligence.
13

In order to escape liability for the loss of its cargo of industrial fuel oil belonging
to Caltex, petitioner attributes the sinking of MT Maysun to fortuitous even
or force majeure. From the testimonies of Jaime Jarabe and Francisco Berina,
captain and chief mate, respectively of the ill-fated vessel, it appears that a
sudden and unexpected change of weather condition occurred in the early
morning of August 16, 1986; that at around 3:15 o’clock in the morning a
squall ("unos") carrying strong winds with an approximate velocity of 30 knots
per hour and big waves averaging eighteen (18) to twenty (20) feet high,
repeatedly buffeted MT Maysun causing it to tilt, take in water and eventually
sink with its cargo.
14
This tale of strong winds and big waves by the said officers
of the petitioner however, was effectively rebutted and belied by the weather
report
15
from the Philippine Atmospheric, Geophysical and Astronomical
Services Administration (PAGASA), the independent government agency
charged with monitoring weather and sea conditions, showing that from 2:00
o’clock to 8:00 o’clock in the morning on August 16, 1986, the wind speed
remained at ten (10) to twenty (20) knots per hour while the height of the
waves ranged from .7 to two (2) meters in the vicinity of Cuyo East Pass and
Panay Gulf where the subject vessel sank. Thus, as the appellate court
correctly ruled, petitioner’s vessel, MT Maysun, sank with its entire cargo for the
reason that it was not seaworthy. There was no squall or bad weather or
extremely poor sea condition in the vicinity when the said vessel sank.
The appellate court also correctly opined that the petitioner’s witnesses,
Jaime Jarabe and Francisco Berina, ship captain and chief mate,
respectively, of the said vessel, could not be expected to testify against the
interest of their employer, the herein petitioner common carrier.
Neither may petitioner escape liability by presenting in evidence
certificates
16
that tend to show that at the time of dry-docking and inspection
by the Philippine Coast Guard, the vessel MT Maysun, was fit for voyage. These
pieces of evidence do not necessarily take into account the actual condition
of the vessel at the time of the commencement of the voyage. As correctly
observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit.
The certificates issued, however, do not negate the presumption of
unseaworthiness triggered by an unexplained sinking. Of certificates issued in
this regard, authorities are likewise clear as to their probative value, (thus):
Seaworthiness relates to a vessel’s actual condition. Neither the granting of
classification or the issuance of certificates established seaworthiness. (2-A
Benedict on Admiralty, 7-3, Sec. 62).
And also:
Authorities are clear that diligence in securing certificates of seaworthiness
does not satisfy the vessel owner’s obligation. Also securing the approval of
the shipper of the cargo, or his surveyor, of the condition of the vessel or her
stowage does not establish due diligence if the vessel was in fact
unseaworthy, for the cargo owner has no obligation in relation to
seaworthiness. (Ibid.)
17

Additionally, the exoneration of MT Maysun’s officers and crew by the Board
of Marine Inquiry merely concerns their respective administrative liabilities. It
does not in any way operate to absolve the petitioner common carrier from its
civil liabilities. It does not in any way operate to absolve the petitioner
common carrier from its civil liability arising from its failure to observe
extraordinary diligence in the vigilance over the goods it was transporting and
for the negligent acts or omissions of its employees, the determination of
which properly belongs to the courts.
18
In the case at bar, petitioner is liable
for the insured value of the lost cargo of industrial fuel oil belonging to Caltex
for its failure to rebut the presumption of fault or negligence as common
carrier
19
occasioned by the unexplained sinking of its vessel, MT Maysun, while
in transit.
Anent the second issue, it is our view and so hold that the presentation in
evidence of the marine insurance policy is not indispensable in this case
before the insurer may recover from the common carrier the insured value of
the lost cargo in the exercise of its subrogatory right. The subrogation receipt,
by itself, is sufficient to establish not only the relationship of herein private
respondent as insurer and Caltex, as the assured shipper of the lost cargo of
industrial fuel oil, but also the amount paid to settle the insurance claim. The
right of subrogation accrues simply upon payment by the insurance company
of the insurance claim.
20

The presentation of the insurance policy was necessary in the case of Home
Insurance Corporation v. CA
21
(a case cited by petitioner) because the
shipment therein (hydraulic engines) passed through several stages with
different parties involved in each stage. First, from the shipper to the port of
departure; second, from the port of departure to the M/S Oriental Statesman;
third, from the M/S Oriental Statesman to the M/S Pacific Conveyor; fourth,
from the M/S Pacific Conveyor to the port or arrival; fifth, from the port of
arrival to the arrastre operator; sixth, from the arrastre operator to the hauler,
Mabuhay Brokerage Co., Inc. (private respondent therein); and lastly, from
the hauler to the consignee. We emphasized in that case that in the absence
of proof of stipulations to the contrary, the hauler can be liable only for any
damage that occurred from the time it received the cargo until it finally
delivered it to the consignee. Ordinarily, it cannot be held responsible for the
handling of the cargo before it actually received it. The insurance contract,
which was not presented in evidence in that case would have indicated the
scope of the insurer’s liability, if any, since no evidence was adduced
indicating at what stage in the handling process the damage to the cargo
was sustained.
Hence, our ruling on the presentation of the insurance policy in the said case
of Home Insurance Corporation is not applicable to the case at bar. In
contrast, there is no doubt that the cargo of industrial fuel oil belonging to
Caltex, in the case at bar, was lost while on board petitioner’s vessel, MT
Maysun, which sank while in transit in the vicinity of Panay Gulf and Cuyo East
Pass in the early morning of August 16, 1986.
WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996
of the Court of Appeals in CA-G.R. CV No. 39836 is AFFIRMED. Costs against
the petitioner.


G.R. No. 150094 August 18, 2004
FEDERAL EXPRESS CORPORATION, petitioner,
vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,
INC., respondents.


D E C I S I O N


PANGANIBAN, J.:
Basic is the requirement that before suing to recover loss of or damage to
transported goods, the plaintiff must give the carrier notice of the loss or
damage, within the period prescribed by the Warsaw Convention and/or the
airway bill.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court,
challenging the June 4, 2001 Decision
2
and the September 21, 2001
Resolution
3
of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed
Decision disposed as follows:
"WHEREFORE, premises considered, the present appeal is hereby DISMISSED for
lack of merit. The appealed Decision of Branch 149 of the Regional Trial Court
of Makati City in Civil Case No. 95-1219,entitled 'American Home Assurance
Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION
and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.),' is
hereby AFFIRMED andREITERATED.
"Costs against the [petitioner and Cargohaus, Inc.]."
4

The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of
Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an agent of
[Petitioner] Federal Express Corporation, a shipment of 109 cartons of
veterinary biologicals for delivery to consignee SMITHKLINE and French
Overseas Company in Makati City, Metro Manila. The shipment was covered
by Burlington Airway Bill No. 11263825 with the words, 'REFRIGERATE WHEN NOT
IN TRANSIT' and 'PERISHABLE' stamp marked on its face. That same day,
Burlington insured the cargoes in the amount of $39,339.00 with American
Home Assurance Company (AHAC). The following day, Burlington turned over
the custody of said cargoes to Federal Express which transported the same to
Manila. The first shipment, consisting of 92 cartons arrived in Manila on January
29, 1994 in Flight No. 0071-28NRT and was immediately stored at [Cargohaus
Inc.'s] warehouse. While the second, consisting of 17 cartons, came in two (2)
days later, or on January 31, 1994, in Flight No. 0071-30NRT which was likewise
immediately stored at Cargohaus' warehouse. Prior to the arrival of the
cargoes, Federal Express informed GETC Cargo International Corporation, the
customs broker hired by the consignee to facilitate the release of its cargoes
from the Bureau of Customs, of the impending arrival of its client's cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after
the cargoes arrived in Manila, a non-licensed custom's broker who was
assigned by GETC to facilitate the release of the subject cargoes, found out,
while he was about to cause the release of the said cargoes, that the same
[were] stored only in a room with two (2) air conditioners running, to cool the
place instead of a refrigerator. When he asked an employee of Cargohaus
why the cargoes were stored in the 'cool room' only, the latter told him that
the cartons where the vaccines were contained specifically indicated therein
that it should not be subjected to hot or cold temperature. Thereafter,
DIONEDA, upon instructions from GETC, did not proceed with the withdrawal
of the vaccines and instead, samples of the same were taken and brought to
the Bureau of Animal Industry of the Department of Agriculture in the
Philippines by SMITHKLINE for examination wherein it was discovered that the
'ELISA reading of vaccinates sera are below the positive reference serum.'
"As a consequence of the foregoing result of the veterinary biologics test,
SMITHKLINE abandoned the shipment and, declaring 'total loss' for the
unusable shipment, filed a claim with AHAC through its representative in the
Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE
HUNDRED THIRTY NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an
action for damages against the [petitioner] imputing negligence on either or
both of them in the handling of the cargo.
"Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner]
being held solidarily liable for the loss as follows:
'WHEREFORE, judgment is hereby rendered in favor of [respondents] and
[petitioner and its Co-Defendant Cargohaus] are directed to pay
[respondents], jointly and severally, the following:
1. Actual damages in the amount of the peso equivalent of US$39,339.00 with
interest from the time of the filing of the complaint to the time the same is fully
paid.
2. Attorney's fees in the amount of P50,000.00 and
3. Costs of suit.
'SO ORDERED.'
"Aggrieved, [petitioner] appealed to [the CA]."
5

Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal
and Plant Health Inspection Service) was found by the CA to be inadmissible
in evidence. Despite this ruling, the appellate court held that the shipping
Receipts were a prima facie proof that the goods had indeed been delivered
to the carrier in good condition. We quote from the ruling as follows:
"Where the plaintiff introduces evidence which shows prima facie that the
goods were delivered to the carrier in good condition [i.e., the shipping
receipts], and that the carrier delivered the goods in a damaged condition, a
presumption is raised that the damage occurred through the fault or
negligence of the carrier,and this casts upon the carrier the burden of
showing that the goods were not in good condition when delivered to the
carrier, or that the damage was occasioned by some cause excepting the
carrier from absolute liability. This the [petitioner] failed to discharge. x x x."
6

Found devoid of merit was petitioner's claim that respondents had no
personality to sue. This argument was supposedly not raised in the Answer or
during trial.
Hence, this Petition.
7

The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.
Are the decision and resolution of the Honorable Court of Appeals proper
subject for review by the Honorable Court under Rule 45 of the 1997 Rules of
Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals – petitioner's claim that
respondents have no personality to sue because the payment was made by
the respondents to Smithkline when the insured under the policy is Burlington
Air Express is devoid of merit – correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were
received in good condition, correct or not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding
respondents' own admission that petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw
Convention?"
8

Simply stated, the issues are as follows: (1) Is the Petition proper for review by
the Supreme Court? (2) Is Federal Express liable for damage to or loss of the
insured goods?
This Court's Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from
undisputed facts is a question of law cognizable by the Supreme Court.
9

In the present case, the facts are undisputed. As will be shown shortly,
petitioner is questioning the conclusions drawn from such facts. Hence, this
case is a proper subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no
cause of action against it -- because the payment made to Smithkline was
erroneous.
Pertinent to this issue is the Certificate of Insurance
10
("Certificate") that both
opposing parties cite in support of their respective positions. They differ only in
their interpretation of what their rights are under its terms. The determination of
those rights involves a question of law, not a question of fact. "As distinguished
from a question of law which exists 'when the doubt or difference arises as to
what the law is on a certain state of facts' -- 'there is a question of fact when
the doubt or difference arises as to the truth or the falsehood of alleged facts';
or when the 'query necessarily invites calibration of the whole evidence
considering mainly the credibility of witnesses, existence and relevancy of
specific surrounding circumstance, their relation to each other and to the
whole and the probabilities of the situation.'"
11

Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is
"payable to order x x x upon surrender of this Certificate." Such wording
conveys the right of collecting on any such damage or loss, as fully as if the
property were covered by a special policy in the name of the holder itself. At
the back of the Certificate appears the signature of the representative of
Burlington. This document has thus been duly indorsed in blank and is deemed
a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the
right of collecting or of being indemnified for loss of or damage to the insured
shipment, as fully as if the property were covered by a special policy in the
name of the holder. Hence, being the holder of the Certificate and having an
insurable interest in the goods, Smithkline was the proper payee of the
insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed
a subrogation Receipt
12
in favor of respondents. The latter were thus
authorized "to file claims and begin suit against any such carrier, vessel,
person, corporation or government." Undeniably, the consignee had a legal
right to receive the goods in the same condition it was delivered for transport
to petitioner. If that right was violated, the consignee would have a cause of
action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to
the insured goods, the insurer's entitlement to subrogation pro tanto -- being
of the highest equity -- equips it with a cause of action in case of a
contractual breach or negligence.
13
"Further, the insurer's subrogatory right to
sue for recovery under the bill of lading in case of loss of or damage to the
cargo is jurisprudentially upheld."
14

In the exercise of its subrogatory right, an insurer may proceed against an
erring carrier. To all intents and purposes, it stands in the place and in
substitution of the consignee. A fortiori, both the insurer and the consignee are
bound by the contractual stipulations under the bill of lading.
15

Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has
tirelessly pointed out that respondents' claim and right of action are already
barred. The latter, and even the consignee, never filed with the carrier any
written notice or complaint regarding its claim for damage of or loss to the
subject cargo within the period required by the Warsaw Convention and/or in
the airway bill. Indeed, this fact has never been denied by respondents and is
plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of
the shipment unless a written notice, sufficiently describing the goods
concerned, the approximate date of the damage or loss, and the details of
the claim, is presented by shipper or consignee to an office of Burlington
within (14) days from the date the goods are placed at the disposal of the
person entitled to delivery, or in the case of total loss (including non-delivery)
unless presented within (120) days from the date of issue of the [Airway Bill]."
16

Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the carrier
in writing in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the
damage and at the latest within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date
of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at
his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days
from the date of the issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier
whose air waybill was used, or to the first carrier or to the last carrier or to the
carrier who performed the transportation during which the loss, damage or
delay took place."
17

Article 26 of the Warsaw Convention, on the other hand, provides:
"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or
goods without complaint shall be prima facie evidence that the same have
been delivered in good condition and in accordance with the document of
transportation.
(2) In case of damage, the person entitled to delivery must complain to the
carrier forthwith after the discovery of the damage, and, at the latest, within 3
days from the date of receipt in the case of baggage and 7 days from the
date of receipt in the case of goods. In case of delay the complaint must be
made at the latest within 14 days from the date on which the baggage or
goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of
transportation or by separate notice in writing dispatched within the times
aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the
carrier, save in the case of fraud on his part."
18

Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation
therefor actually constitutes a condition precedent to the accrual of a right of
action against a carrier for loss of or damage to the goods.
19
The shipper or
consignee must allege and prove the fulfillment of the condition. If it fails to
do so, no right of action against the carrier can accrue in favor of the former.
The aforementioned requirement is a reasonable condition precedent; it does
not constitute a limitation of action.
20

The requirement of giving notice of loss of or injury to the goods is not an
empty formalism. The fundamental reasons for such a stipulation are (1) to
inform the carrier that the cargo has been damaged, and that it is being
charged with liability therefor; and (2) to give it an opportunity to examine the
nature and extent of the injury. "This protects the carrier by affording it an
opportunity to make an investigation of a claim while the matter is fresh and
easily investigated so as to safeguard itself from false and fraudulent claims."
21

When an airway bill -- or any contract of carriage for that matter -- has a
stipulation that requires a notice of claim for loss of or damage to goods
shipped and the stipulation is not complied with, its enforcement can be
prevented and the liability cannot be imposed on the carrier. To stress, notice
is a condition precedent, and the carrier is not liable if notice is not given in
accordance with the stipulation.
22
Failure to comply with such a stipulation
bars recovery for the loss or damage suffered.
23

Being a condition precedent, the notice must precede a suit for
enforcement.
24
In the present case, there is neither an allegation nor a
showing of respondents' compliance with this requirement within the
prescribed period. While respondents may have had a cause of action then,
they cannot now enforce it for their failure to comply with the aforesaid
condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other
issues raised by petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. --
petitioner's co-defendant in respondents' Complaint below -- has been
adjudged by the trial court as liable for, inter alia, "actual damages in the
amount of the peso equivalent of US $39,339."
25
This judgment was affirmed by
the Court of Appeals and is already final and executory.
26

WHEREFORE, the Petition is GRANTED, and the assailed
Decision REVERSED insofar as it pertains to Petitioner Federal Express
Corporation. No pronouncement as to costs.

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