Delsan Transport lines, Inc vs.

CA, 369 SCRA 24

D E C I S I O N

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 Caltexs 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 Maysun 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 (P5,096,635.57) 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.

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 Maysun, 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 oclock to 8:00 oclock 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
petitioners 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 thing 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 latters 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 vessels complement. Besides, petitioner avers that although Berina had
merely a 2nd officers license, he was qualified to act as the vessels 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 vessels 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 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.

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 circumstances 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 event 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 oclock 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 oclock to 8:00 oclock 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, petitioners
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 petitioners 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 vessels actual condition. Neither the granting of classification or the
issuance of certificates establishes 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 owners 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 Maysuns 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 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 of 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 insurers 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 petitioners
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.

SO ORDERED.





(PAN MALAYAN INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS,
ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents., G.R. No. 81026, 1990
April 03, 3rd Division)


D E C I S I O N


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 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 . . .

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 the
ejusdem generis rule held that Section III-1 of the policy, which was the basis for settlement of
CANLUBANG's claim, did not cover damage arising from collision or overturning due to the
negligence of third parties as one of the insurable risks. Both tribunals concluded that
PANMALAY could not now invoke Article 2207 and claim reimbursement from private
respondents as alleged wrongdoers or parties responsible for the damage.

The above conclusion is without merit.

It must be emphasized that the lower court's ruling that the "own damage" coverage under the
policy implies damage to the insured car caused by the assured itself, instead of third parties,
proceeds from an incorrect comprehension of the phrase "own damage" as used by the insurer.
When PANMALAY utilized the phrase "own damage" a phrase which, incidentally, is not
found in the insurance policy to define the basis for its settlement of CANLUBANG's claim
under the policy, it simply meant that it had assumed to reimburse the costs for repairing the
damage to the insured vehicle [See PANMALAY's Compliance with Supplementary Motion for
Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage"
coverage under Section III of the insurance policy is differentiated from Sections I and IV-1
which refer to "Third Party Liability" 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 damage to the insured vehicle arising from collision
or overturning due to the negligent acts of a 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, water-way, lift or elevator.

xxx xxx xxx

[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars;
Record, p. 34].

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 part of sub-paragraph (a) is untenable.
Although the terms "accident" or "accidental" as used in insurance contracts have not acquired a
technical meaning, the Court has on several occasions defined these terms to mean that which
takes place "without one's foresight or expectation, an event that proceeds from an unknown
cause, or is an unusual effect of a known cause and, therefore, not expected" [De la Cruz v. The
Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino
Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989].
Certainly, it cannot be inferred from jurisprudence that these terms, without qualification,
exclude events resulting in damage or loss due to the fault, recklessness or negligence of third
parties. The concept "accident" is not necessarily synonymous with the concept of "no fault". It
may be utilized simply to distinguish intentional or malicious acts from negligent or careless acts
of man.

Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of,
the insured vehicle due to negligent or careless acts of third parties is not listed under the general
and specific exceptions to the coverage of insured risks which are enumerated in detail in the
insurance policy itself [See Annex "A-1" of PANMALAY's Compliance with Supplementary
Motion for Bill of Particulars, supra.]

The Court, furthermore, finds it noteworthy that the meaning advanced by PANMALAY
regarding the coverage of Section III-1(a) of the policy is undeniably more beneficial to
CANLUBANG than that insisted upon by respondents herein. By arguing that this section covers
losses or damages due not only to malicious, but also to negligent acts of third parties,
PANMALAY in effect advocates for a more comprehensive coverage of insured risks. And this,
in the final analysis, is more in keeping with the rationale behind the various rules on the
interpretation of insurance contracts favoring the assured or beneficiary so as to effect the
dominant purpose of indemnity or payment [See Calanoc v. Court of Appeals, 98 Phil. 79
(1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June
29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984, 130
SCRA 327].

Parenthetically, even assuming for the sake of argument that Section III-1(a)of the insurance
policy does not cover damage to the insured vehicle caused by negligent acts of third parties, and
that PANMALAY's settlement of CANLUBANG's claim for damages allegedly arising from a
collision due to private respondents' negligence would amount to unwarranted or "voluntary
payment", dismissal of PANMALAY's complaint against private respondents for no cause of
action would still be a grave error of law.

For even if under the above circumstances PANMALAY could not be deemed subrogated to the
rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause
of action against private respondents. In the pertinent case of Sveriges Angfartygs Assurans
Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of
subrogation due to "voluntary" payment may nevertheless recover from the third party
responsible for the damage to the insured property under Article 1236 of the Civil Code.

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

WHEREFORE, in view of the foregoing, the present petition is GRANTED.

Petitioner's complaint for damages against private respondents is hereby REINSTATED. Let the
case be remanded to the lower court for trial on the merits.

SO ORDERED.





([2004V926] FEDERAL EXPRESS CORPORATION, Petitioner, vs. AMERICAN HOME
ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC.,
Respondents., G.R. No. 150094, 2004 Aug 18, 3rd Division)


DECISION




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.





___________________________



* On leave.

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 and REITERATED.



"Costs against the [petitioner and Cargohaus, Inc.]."[4]







The assailed Resolution denied petitioners 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 clients
cargoes.



"On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the
cargoes arrived in Manila, a non-licensed customs 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. Attorneys 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 petitioners 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 - petitioners 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 Courts 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 insurers 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 insurers
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, petitioners 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. -- petitioners 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.

SO ORDERED.





([1967V374E] SVERIGES ANGFARTYGS ASSURANS FORENING, plaintiff-appellant,
vs. QUA CHEE GAN, defendant-appellee., G.R. No. L-22146, 1967 Sep 5, En Banc)


D E C I S I O N


BENGZON, J.P., J.:

On August 23 and 24, 1947, defendant Qua Chee Gan, a sole proprietorship, shipped on board
the S.S. NAGARA, as per bills of lading Exhs. A and B 2,032,000 kilos of bulk copra at Siain,
Quezon, consigned to DAL International Trading Co., in Gdynia, Poland. The vessel first called
at the port of Karlshamn, Sweden, where it unloaded 696,419 kilos of bulk copra. Then, it
proceeded to Gdynia where it unloaded the remaining copra shipment. The actual outturn
weights in the latter port showed that only 1,569,429 kilos were discharged.
Because of the alleged confirmed cargo shortage, the Polish cargo insurers had to indemnify the
consignee for the value thereof. Thereafter, the former sued the shipowner, the Swedish East
Asia Company, in Gothenburg, Sweden. The latter, in turn, sued defendant and had it summoned
to Gothenburg. Defendant However refused to submit to that court's jurisdiction and its objection
was sustained.
In March, 1951, a settlement was effected between the Polish cargo insurers and the shipowner.
Plaintiff, as the indemnity insurer for the latter, paid approximately $60,733.53 to the Polish
insurers. On August 16, 1954, claiming to have been subrogated to the rights of the carrier,
plaintiff sued defendant before the Court of First Instance of Manila to recover U.S. $60,733.53
plus 17% exchange tax, with legal interest, as the value of the alleged cargo shortshipment, and
P10,000 as attorney's fees. Defendant answered in due time and countered with a P15,000
counterclaim for attorney's fees.
On August 1, 1955, defendant filed a motion to dismiss on the ground of prescription under the
Carriage of Goods by Sea Act. The lower court sustained the motion and plaintiff appealed here.
We reversed the order of dismissal and remanded the case for further proceedings. 1
After trial, the lower court on September 28, 1963, rendered its decision dismissing the
complaint and awarding P10,000 as attorney's fees to defendant. It ruled (a) that there was no
short shipment on defendant's part; (b) that plaintiff's insurance policy did not cover the short
shipment, and (c) defendant was merely acting as an agent of Louis Dreyfus & Co., who was the
real shipper.
Taking issue with all the foregoing, plaintiff has interposed the present appeal to Us on questions
of fact and law, the amount involved exceeding P200,000.00.
Was the non-presentation of the insurance policy fatal to plaintiff's case? The lower court ruled
so, reasoning that unless the same as the best evidence were presented, it could not be
conclusively determined if "liability for shortshipment" was a covered risk. And the rule is that
an insurer who pays the insured for loss or liability not covered by the policy is not subrogated to
the latter. 2 However, even assuming that there was unwarranted or "volunteer" payment,
plaintiff could still recover what it paid in effect to the carrier from defendant shipper
under Art. 1236 of the Civil Code which allows a third person who pays on behalf of another to
recover from the latter, although there is no subrogation. But since the payment here was without
the knowledge and consent of defendant, plaintiff's right of recovery is defeasible by the former's
defenses since the Code is clear that the recovery is only up to the amount by which the
defendant was benefited.
This brings Us to the crux of the case: Was there a shortshipment? To support its case, plaintiff
theorizes that defendant had two shipments at Siain, Quezon province: (1) 812,800 kilos for
Karlshamn and (2) 2,032,000 kilos for Gdynia. The Karlshamn shipment was asserted to have
been covered by a separate bill of lading which however was allegedly lost subsequently. Thus,
the 696, 419 kilos of copra unloaded in Karlshamn was not part of the Gdynia shipment and
cannot explain the confirmed shortage at the latter port.
Plaintiff's cause of action suffers from several fatal defects and inconsistencies. The alleged
shipment of 812,800 kilos for Karlshamn is contradicted by plaintiff's admission in paragraphs 2
and 3 of its complaint that defendant shipped only 2,032,00 kilos of copra at Siain, purportedly
for both Gydnia and Karlshamn. 3 Needless to state, plaintiff is bound by such judicial
admission. 4 Moreover, the alleged existence of the Karlshamn bills of lading is negative by the
fact that Exhibits A and B the bills of lading presented by plaintiff show that the 2,032,000
kilos of copra loaded in Siain were for Gydnia only. Further destroying its case is the testimony
of plaintiff's own witness, Mr. Claro Pasicolan, who on direct examination affirmed 5 that these
two exhibits constituted the complete set of documents which the shipping agent in charge of the
vessel S.S. NAGARA issued covering the copra cargo loaded at Siain. In view of this admission
and for want of evident support, plaintiffs belated claim that there is another complete set of
documents can not be seriously taken.
Lastly, if there really was a separate bill of lading for the Karlshamn shipment, plaintiff could not
have failed to present a copy thereof. Mr. Pasicolan testified 6 that the shipping agent makes 20
copies of the documents of which three signed ones are given to the shipper and the rest, marked
as non-negotiable bills of lading like Exhibits A and B are kept on its file. For the three
signed copies to be lost, We may believe, but not for all the remaining 17 others copies. Under
the circumstances, it is more reasonable to hold that there was no separate shipment intended for
Karlshamn, Sweden.
As a corollary to the foregoing conclusion, it stands to reason that the copra unloaded in
Karlshamn formed part of the same and only shipment of defendant intended for Gdynia.
Now the fact that the sum total of the cargo unloaded at Karlshamn and Gdynia would exceed
what appears to have been loaded at Siain by as much as 233,848 kilos can only show that
defendant really overshipped, not shortshipped. And while this would not tally with defendant's
claim of having weighed the copra cargo 1000 at Siain, thus exposing a flaw in defendant's case,
yet it is elementary that plaintiff must rely on the strength of its own case to recover, and not
bank on the weakness of the defense. Plaintiff here failed to establish its case by preponderance
on evidence.
On the question whether defendant is the real shipper or merely an agent of Louis Dreyfus &
Co., suffice it to say that altho on Exhibits A and B his name appears as the shipper, yet the very
loading certificate, Exhibit 3 [5-Deposition of Horle], issued and signed by the Chief Mate and
Master of the S.S. NAGARA shows that defendant was acting merely for account of Louis
Dreyfus & Co. The other documentary exhibits 7 confirm this. Anyway, in whatever capacity
defendant is considered, it cannot be liable since no shortshipment was shown.
Plaintiff's action against defendant cannot, however, be considered as clearly unfounded as to
warrant an award of attorney's fees as damages to defendant under par. 4, Art. 2208 of the Civil
Code. The facts do not show that plaintiff's cause of action was so frivolous or untenable as to
amount to gross and evident bad faith. 8
WHEREFORE, but for the award of attorney's fees to defendant which is eliminated, the
decision appealed from is, in all other respects, hereby affirmed. Costs against plaintiff-appellant.
So ordered.
Concepcion, C.J., Reyes, J.B.L,, Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles and
Fernando, JJ., concur.





(ST. PAUL FIRE & MARINE INSURANCE CO., plaintiff-appellant, vs. MACONDRAY
& CO., INC., BARBER STEAMSHIP LINES, INC., WILHELM WILHELMSEN,
MANILA PORT SERVICE and/or MANILA RAILROAD COMPANY, defendants-
appellees., G.R. No. L-27796, 1976 March 25, 2nd Division)


D E C I S I O N

ANTONIO, J:

Certified to this Court by the Court of Appeals in its Resolution of May 8, 1967, 1 on the ground
that the appeal involves purely questions of law, thus: (a) whether or not, in case of loss or
damage, the liability of the carrier to the consignee is limited to the C.I.F. value of the goods
which were lost or damaged, and (b) whether the insurer who has paid the claim in dollars to the
consignee should be reimbursed in its peso equivalent on the date of discharge of the cargo or on
the date of the decision.

According to the records, on June 29, 1960, Winthrop Products, Inc., of New York, New York,
U.S.A., shipped aboard the SS "Tai Ping", owned and operated by Wilhelm Wilhelmsen, 218
cartons and drums of drugs and medicine, with the freight prepaid, which were consigned to
Winthrop-Steams, Inc., Manila, Philippines. Barber Steamship Lines, Inc., agent of Wilhelm
Wilhelmsen issued Bill of Lading No. 34, in the name of Winthrop Products, Inc. as shipper,
with arrival notice in Manila to consignee Winthrop-Stearns, Inc., Manila, Philippines. The
shipment was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine
Insurance Company under its insurance Special Policy No. OC-173766 dated June 23, 1960
(Exhibit "S").

On August 7, 1960, the SS "Tai Ping" arrived at the Port of Manila and discharged its aforesaid
shipment into the custody of Manila Port Service, the arrastre contractor for the Port of Manila.
The said shipment was discharged complete and in good order with the exception of one (1)
drum and several cartons which were in bad order condition. Because consignee failed to receive
the whole shipment and as several cartons of medicine were received in bad order condition, the
consignee filed the corresponding claim in the amount of P1,109.67 representing the C.I.F. value
of the damaged drum and cartons of medicine with the carrier, herein defendants-appellees
(Exhibits "G" and "H") and the Manila Port Service (Exhibits "I" & "J"). However, both refused
to pay such claim. Consequently, the consignee filed its claim with the insurer, St. Paul Fire &
Marine Insurance Co. (Exhibit "N"), and the insurance company, on the basis of such claim, paid
to the consignee the insured value of the lost and damaged goods, including other expenses in
connection therewith, in the total amount of $1,134.46 U.S. currency (Exhibit "U").

On August 5, 1961, as subrogee of the rights of the shipper and/or consignee, the insurer, St.
Paul Fire & Marine Insurance Co., instituted with the Court of First Instance of Manila the
present action 2 against the defendants for the recovery of said amount of $1,134.46, plus costs.

On August 23, 1961, the defendants Manila Port Service and Manila Railroad Company resisted
the action, contending, among others, that the whole cargo was delivered to the consignee in the
same condition in which it was received from the carrying vessel; that their rights, duties and
obligations as arrastre contractor at the Port of Manila are governed by and subject to the terms,
conditions and limitations contained in the Management Contract between the Bureau of
Customs and Manila Port Service, and their liability is limited to the invoice value of the goods,
but in no case more than P500.00 per package, pursuant to paragraph 15 of the said Management
Contract; and that they are not the agents of the carrying vessel in the receipt and delivery of
cargoes in the Port of Manila.

On September 7, 1961, the defendants Macondray & Co., Inc., Barber Steamship Lines, Inc. and
Wilhelm Wilhelmsen also contested the claim alleging, among others, that the carrier's liability
for the shipment ceased upon discharge thereof from the ship's tackle; that they and their co-
defendant Manila Port Service are not the agents of the vessel; that the said 218 packages were
discharged from the vessel SS "Tai Ping" into the custody of defendant Manila Port Service as
operator of the arrastre service for the Port of Manila; that if any damage was sustained by the
shipment while it was under the control of the vessel, such damage was caused by insufficiency
of packing, force majeure and/or perils of the sea; and that they, in good faith and for the purpose
only of avoiding litigation without admitting liability to the consignee, offered to settle the
latter's claim in full by paying the C.I.F. value of 27 lbs. caramel, 4.13 kilos methyl salicylate
and 12 pieces pharmaceutical vials of the shipment, but their offer was declined by the consignee
and/or the plaintiff.

After due trial, the lower court, on March 10, 1965 rendered judgment ordering defendants
Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm Wilhelmsen to pay to the
plaintiff, jointly and severally, the sum of P300.00, with legal interest thereon from the filing of
the complaint until fully paid, and defendants Manila Railroad Company and Manila Port
Service to pay to plaintiff, jointly and severally, the sum of P809.67, with legal interest thereon
from the filing of the complaint until fully paid, the costs to be borne by all the said defendants. 3
On April 12, 1965, plaintiff, contending that it should recover the amount of $1,134.46, or its
equivalent in pesos at the rate of P3.90, instead of P2.00, for every US$1.00, filed a motion for
reconsideration, but this was denied by the lower court on May 5, 1965. Hence, the present
appeal.

Plaintiff-appellant argues that, as subrogee of the consignee, it should be entitled to recover from
the defendants-appellees the amount of $1,134.46 which it actually paid to the consignee
(Exhibits "N" & "U") and which represents the value of the lost and damaged shipment as well
as other legitimate expenses such as the duties and cost of survey of said shipment, and that the
exchange rate on the date of the judgment, which was P3.90 for every US$1.00, should have
been applied by the lower court.

Defendants-appellees countered that their liability is limited to the C.I.F. value of the goods,
pursuant to contract of sea carriage embodied in the bill of lading; that the consignee's
(Winthrop-Steams, Inc.) claim against the carrier (Macondray & Co., Inc., Barber Steamship
Lines, Inc., Wilhelm Wilhelmsen) and the arrastre operators (Manila Port Service and Manila
Railroad Company) was only for the sum of P1,109.67 (Exhibits "G", "H", "I" & "J"),
representing the C.I.F. value of the loss and damage sustained by the shipment which was the
amount awarded by the lower court to the plaintiff-appellant; 4 defendants appellees are not
insurers of the goods and as such they should not be made to pay the insured value therefor; the
obligation of the defendants-appellees was established as of the date of discharge, hence the rate
of exchange should be based on the rate existing on that date, i.e., August 7, 1960, 5 and not the
value of the currency at the time the lower court rendered its decision on March 10, 1965.

The appeal is without merit.

The purpose of the bill of lading is to provide for the rights and liabilities of the parties in
reference to the contract to carry. 6 The stipulation in the bill of lading limiting the common
carrier's liability to the value of the goods appearing in the bill, unless the shipper or owner
declares a greater value, is valid and binding. 7 This limitation of the carrier's liability is
sanctioned by the freedom of the contracting parties to establish such stipulations, clauses, terms,
or conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs and public policy. 8 A stipulation fixing or limiting the sum that may be recovered from
the carrier on the loss or deterioration of the goods is valid, provided it is (a) reasonable and just
under the circumstances, 9 and (b) has been fairly and freely agreed upon. 10 In the case at bar,
the liabilities of the defendants-appellees with respect to the lost or damaged shipments are
expressly limited to the C.I.F. value of the goods as per contract of sea carriage embodied in the
bill of lading, which reads:

"Whenever the value of the goods is less than $500 per package or other freight unit, their value
in the calculation and adjustment of claims for which the Carrier may be liable shall for the
purpose of avoiding uncertainties and difficulties in fixing value be deemed to be the invoice
value, plus freight and insurance if paid, irrespective of whether any other value is greater or
less.

"The limitation of liability and other provisions herein shall inure not only to the benefit of the
carrier, its agents, servants and employees, but also to the benefit of any independent contractor
performing services including stevedoring in connection with the goods covered hereunder."
(Paragraph 17, mphasis supplied.).

It is not pretended that those conditions are unreasonable or were not freely and fairly agreed
upon. The shipper and consignee are, therefore, bound by such stipulations since it is expressly
stated in the bill of lading that in "accepting this Bill of Lading, the shipper, owner and consignee
of the goods, and the holder of the Bill of Lading agree to be bound by all its stipulations,
exceptions and conditions, whether written, stamped or printed, as fully as if they were all signed
by such shipper, owner, consignee or holder." It is obviously for this reason that the consignee
filed its claim against the defendants-appellees on the basis of the C.I.F. value of the lost or
damaged goods in the aggregate amount of P1,109.67 (Exhibits "G", "H", "I" and "J"). 11

The plaintiff-appellant, as insurer, after paying the claim of the insured for damages under the
insurance, is subrogated merely to the rights of the assured. As subrogee, it can recover only the
amount that is recoverable by the latter. Since the right of the assured, in case of loss or damage
to the goods, is limited or restricted by the provisions in the bill of lading, a suit by the insurer as
subrogee necessarily is subject to like limitations and restrictions.

"The insurer after paying the claim of the insured for damages under the insurance is subrogated
merely to the rights of the insured and therefore can necessarily recover only that to what was
recoverable by the insured." 12

"Upon payment for a total loss of goods insured, the insurance is only subrogated to such rights
of action as the assured has against 3rd persons who caused or are responsible for the loss. The
right of action against another person, the equitable interest in which passes to the insurer, being
only that which the assured has, it follows that if the assured has no such right of action, none
passes to the insurer, and if the assured's right of action is limited or restricted by lawful contract
between him and the person sought to be made responsible for the loss, a suit by the insurer, in
the right of the assured, is subject to like limitations or restrictions." 13

Equally untenable is the contention of the plaintiff-appellant that because of extraordinary
inflation, it should be reimbursed for its dollar payments at the rate of exchange on the date of
the judgment and not on the date of the loss or damage. The obligation of the carrier to pay for
the damage commenced on the date it failed to deliver the shipment in good condition to the
consignee.

The C.I.F. Manila value of the goods which were lost or damaged, according to the claim of the
consignee dated September 26, 1960 is $226.37 (for the pilferage, Exhibit "G") and $324.33
(shortlanded, Exhibit "H") or P456.14 and P653.53, respectively, in Philippine Currency. The
peso equivalent was based by the consignee on the exchange rate of P2.015 to $1.00 which was
the rate existing at that time. We find, therefore, that the trial court committed no error in
adopting the aforesaid rate of exchange.

WHEREFORE, the appealed decision is hereby affirmed, with costs against the plaintiff-
appellant.





([1988V726] F.F. CRUZ and CO., INC., petitioner, vs. THE COURT OF APPEALS,
GREGORIO MABLE as substituted by his wife LUZ ALMONTE MABLE and children
DOMING, LEONIDAS, LIGAYA, ELENA, GREGORIO, JR., SALOME, ANTONIO, and
BERNARDO all surnamed MABLE, respondents., G.R. No. L-52732, 1988 August 29, 3rd
Division)


D E C I S I O N


CORTES, J.:

This petition to review the decision of the Court of Appeals puts in issue the application of the
common law doctrine of res ipsa loquitur.

The essential facts of the case are not disputed.

The furniture manufacturing shop of petitioner in Caloocan City was situated adjacent to the
residence of private respondents. Sometime in August 1971, private respondent Gregorio Mable
first approached Eric Cruz, petitioner's plant manager, to request that a firewall be constructed
between the shop and private respondents' residence. The request was repeated several times but
they fell on deaf ears. In the early morning of September 6, 1974, fire broke out in petitioner's
shop. Petitioner's employees, who slept in the shop premises, tried to put out the fire, but their
efforts proved futile. The fire spread to private respondents' house. Both the shop and the house
were razed to the ground. The cause of the conflagration was never discovered. The National
Bureau of Investigation found specimens from the burned structures negative for the presence of
inflammable substances.

Subsequently, private respondents collected P35,000.00 on the insurance on their house and the
contents thereof.

On January 23, 1975, private respondents filed an action for damages against petitioner, praying
for a judgment in their favor awarding P150,000.00 as actual damages, P50,000.00 as moral
damages, P25,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs. The Court
of First Instance held for private respondents:

WHEREFORE, the Court hereby renders judgment, in favor of plaintiffs, and against the
defendant:

1. Ordering the defendant to pay to the plaintiffs the amount of P80,000.00 for damages
suffered by said plaintiffs for the loss of their house, with interest of 6% from the date of the
filing of the Complaint on January 23, 1975, until fully paid;

2. Ordering the defendant to pay to the plaintiffs the sum of P50,000.00 for the loss of
plaintiffs' furnitures, religious images, silverwares, chinawares, jewelries, books, kitchen
utensils, clothing and other valuables, with interest of 6% from date of the filing of the
Complaint on January 23, 1975, until fully paid;

3. Ordering the defendant to pay to the plaintiffs the sum of P5,000.00 as moral damages,
P2,000.00 as exemplary damages, and P5,000.00 as and by way of attorney's fees;

4. With costs against the defendant;

5. Counterclaim is ordered dismissed, for lack of merit. [CA Decision, pp. 1-2; Rollo, pp. 29-
30.]

On appeal, the Court of Appeals, in a decision promulgated on November 19, 1979, affirmed the
decision of the trial court but reduced the award of damages:

WHEREFORE, the decision declaring the defendants liable is affirmed. The damages to be
awarded to plaintiff should be reduced to P70,000.00 for the house and P50,000.00 for the
furniture and other fixtures with legal interest from the date of the filing of the complaint until
full payment thereof [CA Decision, p. 7; Rollo, p. 35.]

A motion for reconsideration was filed on December 3, 1979 but was denied in a resolution
dated February 18, 1980. Hence, petitioner filed the instant petition for review on February 22,
1980.

After the comment and reply were filed, the Court resolved to deny the petition for lack of merit
on June 11, 1980. However, petitioner filed a motion for reconsideration, which was granted, and
the petition was given due course on September 12, 1980. After the parties filed their
memoranda, the case was submitted for decision on January 21, 1981.

Petitioner contends that the Court of Appeals erred:

1. In not deducting the sum of P35,000.00, which private respondents recovered on the
insurance on their house, from the award of damages.

2. In awarding excessive and/or unproved damages.

3. In applying the doctrine of res ipsa loquitur to the facts of the instant case.

The pivotal issue in this case is the applicability of the common law doctrine of res ipsa loquitur,
the issue of damages being merely consequential. In view thereof, the errors assigned by
petitioner shall be discussed in the reverse order.

1. The doctrine of res ipsa loquitur, whose application to the instant case petitioner objects to,
may be stated as follows:

Where the thing which caused the injury complained of is shown to be under the management of
the defendant or his servants and the accident is such as in the ordinary course of things does not
happen if those who have its management or control use proper care, it affords reasonable
evidence, in the absence of explanation by the defendant, that the accident arose from want of
care. [Africa v. Caltex (Phil.), Inc., G.R. No. L-12986, March 31, 1966, 16 SCRA 448.]

Thus, in Africa, supra, where fire broke out in a Caltex service station while gasoline from a tank
truck was being unloaded into an underground storage tank through a hose and the fire spread to
and burned neighboring houses, this Court, applying the doctrine of res ipsa loquitur, adjudged
Caltex liable for the loss.

The facts of the case likewise call for the application of the doctrine, considering that in the
normal course of operations of a furniture manufacturing shop, combustible material such as
wood chips, sawdust, paint, varnish and fuel and lubricants for machinery may be found thereon.

It must also be noted that negligence or want of care on the part of petitioner or its employees
was not merely presumed. The Court of Appeals found that petitioner failed to construct a
firewall between its shop and the residence of private respondents as required by a city
ordinance; that the fire could have been caused by a heated motor or a lit cigarette; that gasoline
and alcohol were used and stored in the shop; and that workers sometimes smoked inside the
shop [CA Decision, p. 5; Rollo, p. 33.]

Even without applying the doctrine of res ipsa loquitur, petitioner's failure to construct a firewall
in accordance with city ordinances would suffice to support a finding of negligence.

Even then the fire possibly would not have spread to the neighboring houses were it not for
another negligent omission on the part of defendants, namely, their failure to provide a concrete
wall high enough to prevent the flames from leaping over it. As it was the concrete wall was only
2-1/2 meters high, and beyond that height it consisted merely of galvanized iron sheets, which
would predictably cramble and melt when subjected to intense heat. Defendant's negligence,
therefore, was not only with respect to the cause of the fire but also with respect to the spread
thereof to the neighboring houses. [Africa Y. Caltex (Phil.) Inc., supra]

In the instant case, with more reason should petitioner be found guilty of negligence since it had
failed to construct a firewall between its property and private respondents' residence which
sufficiently complies with the pertinent city ordinances. The failure to comply with an ordinance
providing for safety regulations had been ruled by the Court as an act of negligence [Teague v.
Fernandez, G.R. No. L-29745, June 4, 1973, 51 SCRA 181.]

The Court of Appeals, therefore, had more than adequate basis to find petitioner liable for the
loss sustained by private respondents.

2. Since the amount of the loss sustained by private respondents constitutes a finding of fact,
such finding by the Court of Appeals should not be disturbed by this Court [M.D. Transit & Taxi
Co., Inc. v. Court of Appeals, G.R. No. L-23882, February 17, 1968, 22 SCRA 559], more so
when there is no showing of arbitrariness.

In the instant case, both the CFI and the Court of Appeals, were in agreement as to the value of
private respondents' furniture and fixtures and personal effects lost in the fire (i.e. P50,000.00).
With regard to the house, the Court of Appeals reduced the award to P70,000.00 from
P80,000.00. Such cannot be categorized as arbitrary considering that the evidence shows that the
house was built in 1951 for P40,000.00 and, according to private respondents, its reconstruction
would cost P246,000.00. Considering the appreciation in value of real estate and the diminution
of the real value of the peso, the valuation of the house at P70,000.00 at time it was razed cannot
be said to be excessive.

3. While this Court finds that petitioner is liable for damages to private respondents as found by
the Court of Appeals, the fact that private respondents have been indemnified by their insurer in
the amount of P35,000.00 for the damage caused to their house and its contents has not escaped
the attention of the Court. Hence, the Court holds that in accordance with Article 2207 of the
Civil Code the amount of P35,000.00 should be deducted from the amount awarded as damages.
Said article provides:

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 is subrogated to the rights of the insured against the
wrongdoer or the person who 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 law is clear and needs no interpretation. Having been indemnified by their insurer, private
respondents are only entitled to recover the deficiency from petitioner.

On the other hand, the insurer, if it is so minded, may seek reimbursement of the amount it
indemnified private respondents from petitioner. This is the essence of its right to be subrogated
to the rights of the insured, as expressly provided in Article 2207. Upon payment of the loss
incurred by the insured, 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 [Fireman's Fund Insurance Co. v. Jamila & Co., Inc., G.R. No. L-27427, April 7, 1976,
70 SCRA 323.]

Under Article 2207, the real party in interest with regard to the indemnity received by the insured
is the insurer [Phil. Air Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031, (1957).] Whether or not
the insurer should exercise the rights of the insured to which it had been subrogated lies solely
within the former's sound discretion. Since the insurer is not a party to the case, its identity is not
of record and no claim is made on its behalf, the private respondent's insurer has to claim his
right to reimbursement of the P35,000.00 paid to the insured.

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby
AFFIRMED with the following modifications as to the damages awarded for the loss of private
respondents' house, considering their receipt of P35,000.00 from their insurer: (1) the damages
awarded for the loss of the house is reduced to P35,000.00; and (2) the right of the insurer to
subrogation and thus seek reimbursement from petitioner for the P35,000.00 it had paid private
respondents is recognized.

SO ORDERED.




([1968V250E] RIZAL SURETY & INSURANCE COMPANY, plaintiff-appellant, vs.
MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants-
appellees., G.R. No. L-24043, 1968 Apr 25, En Banc)


D E C I S I O N


FERNANDO, J.:

In this suit for the recovery of the amount paid by the plaintiff, Rizal Surety and Insurance
Company, to the consignee based on the applicable Civil Code provision, 1 which speaks to the
effect that the Insurance Company "shall be subrogated to the rights of the insured," it is its
contention that it is entitled to the amount paid by it in full, by virtue of the insurance contract.
The lower court, however, relying on the limited liability clause on a management contract with
the defendants, could not go along with such a theory. Hence this appeal.
The facts were stipulated. The more pertinent follow: That on or about November 29, 1960, the
vessel, SS Flying Trader, loaded on Board at Genoa, Italy for shipment to Manila, Philippines,
among other cargoes, 6 cases OMH, Special Single Colour Offset Press Machine, for which Bill
of Lading No. 1 was issued, consigned to Suter, Inc.; that such vessel arrived at the Port of
Manila, Philippines on or about January 16, 1961 and subsequently discharged complete and in
good order the aforementioned shipment into the custody of defendant Manila Port Service as
arrastre operator; that in the course of the handling, one of the six cases identified as Case No.
2143 containing the OMH, Special Single Colour Offset Press, while the same was being lifted
and loaded by the crane of the Manila Port Service into the consignee's truck, it was dropped by
the crane and as a consequence, the machine was heavily damaged for which plaintiff as insurer
paid to the consignee, Suter, Inc. the amount of P16,500.00, representing damages by way of
costs of replacement parts and repairs to put the machine in working condition, plus the sum of
P180.70 which plaintiff paid to the International Adjustment Bureau as adjuster's fee for the
survey conducted on the damaged cargo or a total of P16,680.70 representing plaintiff's liability
under the insurance contract; and that the arrastre charges in this particular shipment was paid on
the weight or measurement basis whichever is higher, and not on the value thereof. 2
Clause 15 of the management contract which as admitted by the plaintiff, appeared "at the dorsal
part of the Delivery Permit" and was "used in taking delivery of the subject shipment from the
defendants' (Manila Port Service and Manila Railroad Co.) custody and control, issued in the
name of consignee's broker," contained what was referred to as "an important notice." Such
permit "is presented subject to all the terms and conditions of the Management Contract between
the Bureau of Customs and Manila Port Service and amendments thereto or alterations thereof,
particularly but not limited to paragraph 15 thereof limiting the Company liability to P500.00 per
package, unless the value of the goods is otherwise, specified, declared or manifested and the
corresponding arrastre charges have been paid, . . ." 3
On the above facts and relying on Bernabe & Co. v. Delgado Brothers, Inc., 4 the lower court
rendered the judgment "ordering defendants, jointly and severally, to pay plaintiff the amount of
Five Hundred Pesos (P500.00), with legal interest thereon from January 13, 962, the date of the
filing oft he complaint, with costs against said defendants." 5
As noted at the outset, in this appeal, the point is pressed that under the applicable Civil Code
provision, plaintiff-appellant Insurance Company could recover in full. The literal language of
Article 2207, however, does not warrant such an interpretation. It is there made clear that in the
event that the property has been insured and the Insurance Company has paid the indemnity for
the injury or loss sustained, it "shall be subrogated to the rights of the insured against the wrong-
doer or the person who has violated the contract. "
Plaintiff-appellant Insurance Company, therefore, cannot recover from defendants an amount
greater than that to which the consignee could lawfully lay claim. The management contract is
clear. The amount is limited to Five Hundred Pesos (P500.00). Such a stipulation has invariably
received the approval of this Court from the leading case of Bernabe & Co. v. Delgado Bros.,
Inc. 6 Such a decision was quoted with approval in the following subsequent cases: Atlantic
Mutual Insurance Co. v. Manila Port Service, 7 Insurance Service Co. of North America v.
Manila Port Service, 8 Insurance Company of North America v. U.S. Lines, Co., 9 and
Insurance Company of North America v. Manila Port Service. 10
In one of them, Atlantic Mutual Insurance Company v. Manila Port Service, this Court, through
the then Justice, now Chief Justice, Concepcion, restated the doctrine thus: "Plaintiff maintains
that, not being a party to the management contract, the consignee into whose shoes plaintiff
had stepped in consequence of said payment is not subject to the provisions of said
stipulation, and that the same is furthermore invalid. The lower court correctly rejected this
pretense because, having taken delivery of the shipment aforementioned by virtue of a delivery
permit, incorporating thereto, by reference, the provisions of said management contract,
particularly paragraph 15 thereof, the gist of which was set forth in the permit, the consignee
became bound by said provisions, and because it could have avoided the application of said
maximum limit of P500.00 per package by stating the true value thereof in its claim for delivery
of the goods in question, which admittedly, the consignee failed to do. 11 Plaintiff-appellant
Rizal Surety and Insurance Company having been subrogated merely to the rights of the
consignee its recovery necessarily should be limited to what was recoverable by the insured. The
lower court therefore did not err when in the decision appealed from, it limited the amount which
defendants were jointly and severally to pay plaintiff-appellant to "Five Hundred Pesos
(P500.00) with legal interest thereon from January 31, 1962, the date of the filing of the
complaint, . . . "
WHEREFORE, the decision appealed from is affirmed. With costs against Rizal Surety and
Insurance Company.
Reyes, J.B.L. (Acting C.J.), Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and
Angeles, JJ., concur.





([1987V576] MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs. COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.,
G.R. No. L-52756, 1987 October 12, 2nd Division)


D E C I S I O N


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 its 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 P4,600.00. 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 petitioner's 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 Release 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 collected from San Miguel Corporation, despite the
subrogation in favor of private respondent.

"Although petitioner's 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 v. 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
respondent's right of subrogation, the right of action of petitioner against the insurer was also
nullified. (Sy Keng & Co. v. 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." 1

As held in Phil. Air Lines v. Heald Lumber Co., 2

If a property insured and the owner receives the indemnity from the insurer, it is provided in
[Article 2207 of the New Civil Code] that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the deficiency. . . . Under this legal
provision, the real party in interest with regard to the portion of the indemnity paid is the insurer
and not the insured. 3

The decision of the respondent court ordering petitioner to pay respondent company, not the
P4,500 as originally asked for, but P5,000, the amount respondent company paid petitioner as
insurance, is also in accord with law and jurisprudence. In disposing of the issue, the Court of
Appeals held:

". . . petitioner is entitled to keep the sum of P4,500 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'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:

"xxx xxx xxx

"The right of subrogation can only exist after the insurer has paid the insured, 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 [sic] remainder. To the extent of the amount he has already received from the
insurer, 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

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 complaint, 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 v. Reyes Ordoveza, 25 Phil. 495; Cabigao v.
Lim, 50 Phil. 844; Baguioro v. Barrios and Tupas, 77 Phil. 120)."

WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is
hereby AFFIRMED with costs against petitioner.

SO ORDERED.





([1989V586] PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE
HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents., G.R.
No. 84197, 1989 July 28, 3rd Division)


D E C I S I O N


GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-
G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila in
Civil Case No. 66135. The plaintiff's complaint (petitioner in G.R. No. 84197) against all
defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial
court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

"WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring him to pay
plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded
monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2, 1966, until
full payment is made; plus P70,000.00 moral and exemplary damages.

"It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from P151,000.00, making a total of P184,878.74. Defendant Jacob S. Lim is
further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana
the other half, the amount of P184,878.74 with interest from the filing of the cross-complaints
until the amount is fully paid; plus moral and exemplary damages in the amount of P184,878.84
with interest from the filing of the cross-complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each of the two Cervanteses.

"Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

"WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is
required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00
as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up
to the time it is paid.

"Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00
as attorney's fees and costs.

"No moral or exemplary damages is awarded against plaintiff for this action was filed in good
faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and that
they were required to file a counterbond in order to dissolve the attachment, is not an act of bad
faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was
the court that ordered it, in the exercise of its discretion.

"No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for
it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would
be liable for damages in performing an act which is clearly within its power and which is the
reason for its being, then nobody would engage in the insurance business. No further claim or
counter-claim for or against anybody is declared by this Court." (Rollo ---- G.R. No. 24197, pp.
15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as
owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts
and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7, 1965
while the other aircraft, arrived in Manila on July 18, 1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No.
84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco
and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds
were supposed to be their contributions to a new corporation proposed by Lim to expand his
airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in
favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL,
Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties,
charges and expenses of whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives should or
may pay or cause to be paid or become liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed
(Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila
and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the
Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from
the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before
the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim
alleging that they are co-owners of the aircrafts.
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim
alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim,
sought for damages for being exposed to litigation and for recovery of the sums of money they
advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs
complaint against all the defendants was dismissed. In all other respects the trial court's decision
was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE
APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF
THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE
AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo ---- G.R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

"We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk
of liability under the surety bond in favor of JDA and subsequently collected the proceeds of
such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts
to P295,000.00, hence, plaintiff's instant action for the recovery of the amount of P298,666.28
from defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to
institute the instant action as it does not stand to be benefited or injured by the judgment.

"Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present
any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to be the present real owner of the right
sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155.). It has
been held that the real party in interest is the party who would be benefited or injured by the
judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88
Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished
from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v.
David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers
v. Germana, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

"Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 ---- the bulk of
defendants' alleged obligation to Pioneer.

"In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and its
spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged chattels.
Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it
is patent that plaintiff has been overpaid in the amount of P33,383.72 considering that the total
amount it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from
defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment as it
has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as
surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no
person should unjustly enrich himself at the expense of another (Article 22, New Civil Code)."
(Rollo-84197, pp. 24-25).

The petitioner contends that ---- (1) it is at a loss where respondent court based its finding that
petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been raised
by any of the parties herein both in their answers in the court below and in their respective briefs
with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its
reinsurer, still none of the respondents had any interest in the matter since the reinsurance is
strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code;
(3) pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents
Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering
that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out
were:

xxx xxx xxx

"1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to
JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties?
(Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

"It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in
favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with
the said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that
on this score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for
the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the
latter, Pioneer says: 'The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.' '. . . . Pioneer Insurance & Surety Corporation is
representing the reinsurers to recover the amount.' In other words, insofar as the amount paid to
it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as
attorney-in-fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has
no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name instead of that of the
principal will not prosper, and this is so even where the name of the principal is disclosed in the
complaint.

"'Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in
the name of the real party in interest.' This provision is mandatory. The real party in interest is
the party who would be benefited or injured by the judgment or is the party entitled to the avails
of the suit.

"'This Court has held in various cases that an attorney-in-fact is not a real party in interest, that
there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and
Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinas
Industrial Corporation v. San Diego G.R. No. L-22347, 1968, 23 SCRA 706, 710-714.'"

"The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference
between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue
defendants, assuming that the indemnity agreement is still valid and effective. But since the
amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the airplanes
and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by
P33,383.72. Therefore, Pioneer has no more claim against defendants."' (Record on Appeal, pp.
360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment
made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents
had no interest in the reinsurance contract as this is strictly between the petitioner as insured and
the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has
no basis.

"In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).

"The rules of practice in actions on original insurance policies are in general applicable to actions
or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330, 126
GA. 380, 7 Ann. Con. 1134)".

Hence the applicable law is Article 2207 of the new Civil Code, 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."

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber
Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals (154 SCRA 650 [1987]):.

"Note that if a property is insured and the owner receives the indemnity from the insurer, it is
provided in said article 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. Evidently, 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."

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in
interest in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not
have been dismissed on the premise that the evidence on record shows that it is entitled to
recover from the counter indemnitors. It does not, however, cite any grounds except its allegation
that respondent "Maglana's defense and evidence are certainly incredible" (p. 12, Rollo) to back
up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
stated:

"Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective
after the execution of the chattel mortgage.

"Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

"Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to
issue the bond provided that the same would be mortgaged to it, but this was not possible
because the planes were still in Japan and could not be mortgaged here in the Philippines. As
soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer
Insurance to cover the bond, and this indemnity agreement would be cancelled.

"The following is averred under oath by Pioneer in the original complaint:

"'The various conflicting claims over the mortgaged properties have impaired and rendered
insufficient the security under the chattel mortgage and there is thus no other sufficient security
for the claim sought to be enforced by this action.'"

"This is judicial admission and aside from the chattel mortgage there is no other security for the
claim sought to be enforced by this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time this action was instituted. Sec 2,
Rule 129, Revised Rules of Court.

"Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes
and spare parts, no longer has any further action against the defendants as indemnitors to recover
any unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and
2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure
precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer
were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer 'shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L-24772, May 27, 1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that
Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of
JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be
validly opposed on the ground that these defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L-27862, Nov. 20,
1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL, extinguished the original obligations thru
novations, thus discharging the indemnitors.

"'The principal hereof shall be paid in eight equal successive three months interval installments,
the first of which shall be due and payable 25 August 1965, the remainder of which . . . shall be
due and payable on the 26th day . . . of each succeeding three months and the last of which shall
be due and payable 26th May 1967.'"

"However, at the trial of this case, Pioneer produced a memorandum executed by SAL, or Lim
and JDA, modifying the maturity dates of the obligations, as follows:

"'The principal hereof shall be paid in eight equal successive three month interval installments
the first of which shall be due and payable 4 September 1965, the remainder of which . . . shall
be due and payable on the 4th day . . . of each succeeding months and the last of which shall be
due and payable 4th June 1967.'"

"Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates
different from that fixed in the aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

"These restructuring of the obligations with regard to their maturity dates, effected twice, were
done without the knowledge, much less, would have it believed that these defendants Maglana
(sic). Pioneer's official Numeriano Carbonel, would have it believed that these defendants and
defendant Maglana knew of and consented to the modification of the obligations. But if that were
so, there would have been the corresponding documents in the form of a written notice to as well
as written conformity of these defendants, and there are no such document. The consequence of
this was the extinguishment of the obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable by analogy are the rulings of the
Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case
of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

"'Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of time referred
to herein, (New Civil Code).'"

"Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. Vl, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.

"Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors what it has paid to JDA. By virtue of an express stipulation in the surety
bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.

"Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

"'Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-
debtors if such payment is made after the obligation has prescribed or became illegal.'"

"These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety
by reason of the filing of the instant case against them and the attachment and garnishment of
their properties. The instant action is clearly unfounded insofar as plaintiff drags these
defendants and defendant Maglana." (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

"1. What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations where their contributions to the
intended 'corporation' were invested not through the corporate form? This Petition presents these
fundamental questions which we believe were resolved erroneously by the Court of Appeals
('CA')." (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to
incorporate, a de facto partnership among them was created, and that as a consequence of such
relationship all must share in the losses and/or gains of the venture in proportion to their
contribution. The petitioner, therefore, questions the appellate court's findings ordering him to
reimburse certain amounts given by the respondents to the petitioner as their contributions to the
intended corporation, to wit:

"However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total
amount of P184,878.74 as correctly found by the trail court, with the interest from the filing of
the cross-claims until the amount is fully paid. Defendants Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received the amount of P151,000.00 from
defendants Bormaheco and Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P184,878.74."

We first state the principles.

"While it has been held that as between themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A.
121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to
form a corporation and who carry on business under the corporate name occupy a position of
partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus,
where persons associate themselves together under articles to purchase property to carry on a
business, and their organization is so defective as to come short of creating a corporation within
the statute, they become in legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond
Packing Co., 84 A 268, 109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain
persons associated themselves as a corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and two of them contracted to pay a third
the difference in the proportionate value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds
distributed among them in proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between themselves, when their purpose is
that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S. Ct. 442, 116 U.S.
461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with other subscribers who engage in
business under the name of the pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other stockholders, who were also
directors, will not be implied in the absence of an agreement, so as to make the former liable to
contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210,
79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). mphasis supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to
appear during the pre-trial despite notification. In his answer, the petitioner denied having
received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court
and the appellate court, however, found through Exhibit 58, that the petitioner received the
amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio B.
Maglana in the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions
to a proposed corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:

". . . that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to
expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof Cervantes, likewise, delivered
his share of the undertaking. Lim in an undertaking sometime on or about August 9, 1965,
promised to incorporate his airline in accordance with their agreement and proceeded to acquire
the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed
and still refuses to set up the corporation or return the money of Maglana."

(Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-
claim and third party complaint:

"Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their lawful
contribution and participation in the proposed corporation to be known as SAL. Arrangements
and negotiations were undertaken by defendant Lim. Down payments were advanced by
defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E-1). Contrary to the
agreement among the defendants, defendant Lim in connivance with the plaintiff, signed and
executed the alleged chattel mortgage and surety bond agreement in his personal capacity as the
alleged proprietor of the SAL. The answering defendants learned for the first time of this trickery
and misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form
of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting to an aggregate sum of
P178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused to
comply with them." (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de
facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.

SO ORDERED.




Aboitiz Shipping Corp. vs. Insurance Company of South America, 561 SCRA 262






([1964V339E] COMPAIA MARITIMA, petitioner, vs. INSURANCE COMPANY OF
NORTH AMERICA, respondent., G.R. No. L-18965, 1964 Oct 30, En Banc)

D E C I S I O N


BAUTISTA ANGELO, J.:

Sometime in October, 1952, Macleod and Company of the Philippines contracted by telephone
the services of the Compaia Maritima, a shipping corporation, for the shipment of 2,645 bales
of hemp from the former's Sasa private pier at Davao City to Manila and for their subsequent
transshipment to Boston, Massachusetts, U.S.A. on board the S.S. Steel Navigator. This oral
contract was later on confirmed by a formal and written booking issued by Macleod's branch
office in Sasa and hand carried to Compaia Maritima's branch office in Davao in compliance
with which the latter sent to Macleod's private wharf LCT Nos. 1023 and 1025 on which the
loading of the hemp was completed on October 29, 1952. These two lighters were manned each
by a patron and an assistant patron. The patron of both barges issued the corresponding carrier's
receipts and that issued by the patron of Barge No. 1025 reads in part:
"Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND
COMPANY OF THE PHILIPPINES, SASA, Davao, for transshipment at Manila onto S.S. Steel
Navigator.
"FINAL DESTINATION: Boston"
Thereafter, the two loaded barges left Macleod's wharf and proceeded to and moored at the
government's marginal wharf in the same place to await the arrival of the S.S. Bowline Knot
belonging to Compaia Maritima on which the hemp was to be loaded. During the night of
October 29, 1952, or at the early hours of October 30, LCT No. 1025 sank resulting in the
damage or loss of 1,162 bales of hemp loaded therein. On October 30, 1952, Macleod promptly
notified the carrier's main office in Manila and its branch in Davao advising it of its liability. The
damaged hemp was brought to Odell Plantation in Madaum, Davao, for cleaning, washing,
reconditioning, and redrying. During the period from November 1-15, 1952, the carrier's trucks
and lighters hauled from Odell to Macleod at Sasa a total of 2,197.75 piculs of the reconditioned
hemp out of the original cargo of 1,162 bales weighing 2,324 piculs, which had a total of
P116,835.00. After reclassification, the value of the reconditioned hemp was reduced to
P84,887.28, or a loss in value of P31,947.72. Adding to this last amount the sum of P8,863.30
representing Macleod's expenses in checking, grading, rebaling, and other fees for washing,
cleaning and redrying in the amount of P19,610.00, the total loss adds up to P60,421.02.
All abaca shipments of Macleod, including the 1,162 bales loaded on the carrier's LCT No. 1025,
were insured with the Insurance Company of North America against all losses and damages. In
due time, Macleod filed a claim for the loss it suffered as above stated with said insurance
company, and after the same had been processed, the sum of P64,018.55 was paid, which was
noted down in a document which, aside from being a receipt of the amount paid, was a
subrogation agreement between Macleod and the insurance company wherein the former
assigned to the latter its rights over the insured and damaged cargo. Having failed to recover
from the carrier the sum of P60,421.021, which is the only amount supported by receipts, the
insurance company instituted the present action on October 28, 1953.
After trial, the court a quo rendered judgment ordering the carrier to pay the insurance company
the sum of P60,421.02, with legal interest thereon from the date of the filing of the complaint
until fully paid, and the costs. This judgment was affirmed by the Court of Appeals on December
14, 1960. Hence, this petition for review.
The issues posed before us are: (1) Was there a contract of carriage between the carrier and the
shipper even if the loss occurred when the hemp was loaded on a barge owned by the carrier
which was loaned free of charge and was not actually loaded on the S.S. Bowline Knot which
would carry the hemp to Manila and no bill of lading was issued therefor?; (2) Was the damage
caused to the cargo or the sinking of the barge where it was loaded due to a fortuitous event,
storm or natural disaster that would exempt the carrier from liability?; (3) Can respondent
insurance company sue the carrier under its insurance contract as assignee of Macleod in spite of
the fact that the liability of the carrier as insurer is not recognized in this jurisdiction?; (4) Has
the Court of Appeals erred in regarding Exhibit NNN-1 as an implied admission by the carrier of
the correctness and sufficiency of the shipper's statement of accounts contrary to the burden of
proof rule?; and (5) Can the insurance company maintain this suit without proof of its personality
to do so?
1. This issue should be answered in the affirmative. As found by the Court of Appeals,
Macleod and Company contracted by telephone the services of petitioner to ship the hemp in
question from the former's private pier at Sasa, Davao City, to Manila, to be subsequently
transshipped to Boston, Massachusetts, U.S.A., which oral contract was later confirmed by a
formal and written booking issued by the shipper's branch office, Davao City, in virtue of which
the carrier sent two of its lighters to undertake the service. It also appears that the patrons of said
lighters were employees of the carrier with due authority to undertake the transportation and to
sign the documents that may be necessary therefor so much so that the patron of LCT No. 1025
signed the receipt covering the cargo of hemp loaded therein as follows:
"Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND
COMPANY OF THE PHILIPPINES, Sasa, Davao, for transshipment at Manila onto S.S. Steel
Navigator.
"FINAL DESTINATION: Boston."
The fact that the carrier sent its lighters free of charge to take the hemp from Macleod's wharf at
Sasa preparatory to its loading unto the ship Bowline Knot does not in any way impair the
contract of carriage already entered into between the Carrier and the shipper, for that preparatory
steps is but a part and parcel of said contract of carriage. The lighters were merely employed as
the first step of the voyage, but once that step was taken and the hemp delivered to the carrier's
employees, the rights and obligations of the parties attached thereby subjecting them to the
principles and usages of the maritime law. In other words, here we have a complete contract of
carriage the consummation of which has already begun: the shipper delivering the cargo to the
carrier, and the latter taking possession thereof by placing it on a lighter manned by its
authorized employees, under which Macleod became entitled to the privilege secured to him by
law for its safe transportation and delivery, and the carrier to the full payment of its freight upon
completion of the voyage.
"The receipt of goods by the carrier has been said to lie at the foundation of the contract to carry
and deliver, and if actually no goods are received there can be no contract. The liability and
responsibility of the carrier under a contract for the carriage of goods commence on their actual
delivery to, or receipt by, the carrier or an authorized agent. . . . and delivery to a lighter in
charge of a vessel for shipment on the vessel, where it is the custom to deliver in that way, is a
good delivery and binds the vessel receiving the freight, the liability commencing at the time of
delivery to the lighter. . . and, similarly, where there is a contract to carry goods from one port to
another, and they cannot be loaded directly on the vessel, and lighters are sent by the vessel to
bring the goods to it, the lighters are for the time its substitutes, so that the bill of lading is
applicable to the goods as soon as they are placed on the lighters." (80 C.J.S., p. 901, talics
supplied)
". . . The test as to whether the relation of shipper and carrier had been established is, had the
control and possession of the cotton been completely surrendered by the shipper to the railroad
company? Whenever the control and possession of goods passes to the carrier and nothing
remains to be done by the shipper, then it can be said with certainty that the relation of shipper
and carrier has been established. Railroad Co. vs. Murphy, 60 Ark. 333, 30 S. W. 419, 46 A. St.
Rep. 202; Pine Bluff & Arkansas River Ry. vs. MaKenzie, 75 Ark. 100, 86 S.W. 834; Mathews
& Hood vs. St. L., I. M. & S. R. Co., 123 Ark. 365, 185 S. W. 461, L. R.A. 1916E, 1194." (W. F.
Bogart & Co., et al. vs. Wade, et al., 200 S. W. 148).
The claim that there can be no contract of affreightment because the hemp was not actually
loaded on the ship that was to take it from Davao City to Manila is of no moment, for, as already
stated, the delivery of the hemp to the carrier's lighter is in line with the contract. In fact, the
receipt signed by the patron of the lighter that carried the hemp stated that he was receiving the
cargo "in behalf of S.S. Bowline Knot in good order and condition. On the other hand, the
authorities are to the effect that a bill of lading is not indispensable for the creation of a contract
of carriage.
"Bill of lading not indispensable to contract of carriage. As to issuance of a bill of lading,
although Article, 350 of the Code of Commerce provides that 'the shipper as well as the carrier
of merchandise of goods may mutually demand that a bill of lading be made,' still, said bill of
lading is not indispensable. 'As regards the form of the contract of carriage it can be said that
provided that there is a meeting of the minds and from such meeting arise rights and obligations,
there should be no limitations as to form.' The bill of lading is not essential to the contract,
although it may become obligatory by reason of the regulations of railroad companies, or as a
condition imposed in the contract by the agreement of the parties themselves. The bill of lading
is juridically a documentary proof of the stipulations and conditions agreed upon by both parties.
(Del Viso p. 314-315; Robles vs. Santos, 44 O.G., 2268). In other words, the Code does not
demand, as necessary requisite in the contract of transportation, the delivery of the bill of lading
to the shipper, but gives right to both the carrier and the shipper to mutually demand of each
other the delivery of said bill. (Sp. Sup. Ct. Decision, May 6, 1895)." (Martin, Philippine
Commercial Laws, Vol. II, Revised Edition, pp. 12-13)
"The liability of the carrier as common carrier begins with the actual delivery of the goods for
transportation, and not merely with the formal execution of a receipt or bill of lading; the
issuance of a bill of lading is not necessary to complete delivery and acceptance. Even where it is
provided by statute that liability commences with the issuance of the bill of lading, actual
delivery and acceptance are sufficient to bind the carrier." (13 C.J.S., p. 288)
2. Petitioner disclaims responsibility for the damage of the cargo in question shielding itself
behind the claim of force majeure or storm which occurred on the night of October 29, 1952. But
the evidence fails to bear this out. Rather, it shows that the mishap that caused the damage or loss
was due, not to force majeure, but to lack of adequate precaution or measures taken by the carrier
to prevent the loss as may be inferred from the following findings of the Court of Appeals:
"Aside from the fact that, as admitted by appellant's own witness, the ill-fated barge had cracks
on its bottom (pp. 18-19, t.s.n., Sept. 13, 1959) which admitted sea water in the same manner as
rain entered 'thru tank manholes,' according to the patron of LCT No. 1023 (exh. JJJ-4)
conclusively showing that the barge was not seaworthy it should be noted that on the night of
the nautical accident there was no storm, flood, or other natural disaster or calamity. Certainly,
winds of 11 miles per hour, although stronger than the average 4.6 miles per hour then prevailing
in Davao on October 29, 1952 (exh. 5), cannot be classified as storm. For according to Beaufort's
wind scale, a storm has wind velocities of from 64 to 75 miles per hour; and by Philippine
Weather Bureau standards winds should have a velocity of from 55 to 74 miles per hour in order
to be classified as a storm (Northern Assurance Co., Ltd. vs. Visayan Stevedore Transportation
Co., CA-G. R. No. 23167-R. March 12, 1959)."
The Court of Appeals further added: "the report of R. J. del Pan & Co., Inc., marine surveyors,
attributes the sinking of LCT No. 1025 to the non-watertight conditions of various buoyancy
compartments' (exh. JJJ); and this report finds confirmation on the above mentioned admission
of two witnesses for appellant concerning the cracks of the lighter's bottom and the entrance of
the rain water 'thru manholes.'" We are not prepared to dispute this finding of the Court of
Appeals.
3. There can also be no doubt that the insurance company can recover from the carrier as
assignee of the owner of the cargo for the insurance amount it paid to the latter under the
insurance contract. And this is so because since the Cargo that was damaged was insured with
respondent company and the latter paid the amount represented by the loss, it is but fair that it be
given the right to recover from the party responsible for the loss. The instant case, therefore, is
not one between the insured and the insurer, but one between the shipper and the carrier, because
the insurance company merely stepped into the shoes of the shipper. And since the shipper has a
direct cause of action against the carrier on account of the damage of the cargo, no valid reason
is seen why such action cannot be asserted or availed of by the insurance company as a subrogee
of the shipper. Nor can the carrier set up as a defense any defect in the insurance policy not only
because it is not a privy to it but also because it cannot avoid its liability to the shipper under the
contract of carriage which binds it to pay any loss that may be caused to the cargo involved
therein. Thus, we find fitting the following comments of the Court of Appeals:
"It was not imperative and necessary for the trial court to pass upon the question of whether or
not the disputed abaca cargo was covered by Marine Open Cargo Policy No. MK-134 issued by
appellee. Appellant was neither a party nor privy to this insurance contract, and therefore cannot
avail itself of any defect in the policy which may constitute a valid reason for appellee, as the
insurer, to reject the claim of Macleod, as the insured. Anyway whatever defect the policy
contained, if any, is deemed to have been waived by the subsequent payment of Macleod's claim
by appellee. Besides, appellant is herein sued in its capacity as a common carrier, and appellee is
suing as the assignee of the shipper pursuant to Exhibit M. Since, as above demonstrated,
appellant is liable to Macleod and Company of the Philippines for the loss of or damage to the
1,162 bales of hemp after these were received in good order and condition by the patron of
appellant's LCT No. 1025, it necessarily follows that appellant is likewise liable to appellee who,
as assignee of Macleod, merely stepped into the shoes of and substituted the latter in demanding
from appellant the payment for the loss and damage aforecited."
4. It should be recalled in connection with this issue that during the trial of this case the
carrier asked the lower court to order the production of the books of accounts of the Odell
Plantation containing the charges it made for the loss of the damaged hemp for verification of its
accountants, but later it desisted therefrom on the claim that it finds their production no longer
necessary. This desistance notwithstanding, the shipper however presented other documents to
prove the damage it suffered in connection with the cargo and on the strength thereof the court a
quo ordered the carrier to pay the sum of P60,421.02. And having the Court of Appeals affirmed
this award upon the theory that the desistance of the carrier from producing the books of
accounts of Odell Plantation implies an admission of the correctness of the statements of
accounts contained therein, petitioner now contends that the Court of Appeals erred in basing the
affirmance of the award on such erroneous interpretation.
There is reason to believe that the act of petitioner in waiving its right to have the books of
accounts of Odell Plantation presented in Court is tantamount to an admission that the statements
contained therein are correct and their verification not necessary because its main defense here,
as well as below, was that it is not liable for the loss because there was no contract of carriage
between it and the shipper and the loss caused, if any, was due to a fortuitous event. Hence,
under the carrier's theory, the correctness of the account representing the loss was not so material
as would necessitate the presentation of the books in question. At any rate, even if the books of
accounts were not produced, the correctness of the accounts cannot now be disputed for the same
is supported by the original documents on which the entries in said books were based which were
presented by the shipper as part of its evidence. And according to the Court of Appeals, these
documents alone sufficiently establish the award of P60,421.02 made in favor of respondent.
5. Finally, with regard to the question concerning the personality of the insurance company
to maintain this action, we find the same of no importance, for the attorney himself of the carrier
admitted in open court that it is a foreign corporation doing business in the Philippines with a
personality to file the present action.
WHEREFORE, the decision appealed from is affirmed, with costs against petitioner.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal,
Bengzon, J.P., and Zaldivar, JJ., concur.


([1935V121E] SEGUNDINA MUSGI ET AL., plaintiffs-appellees, vs. WEST COAST
LIFE INSURANCE CO., defendant-appellant., G.R. No. 41794, 1935 Aug 30, En Banc)

D E C I S I O N


IMPERIAL, J:

The plaintiffs, as beneficiaries, brought suit against the defendant to recover the value of two life
insurance policies. The defendant appealed from a judgment sentencing it to pay the plaintiffs
the amount of said policies, and the costs.

The principal facts of the case are embodied in the following written stipulation entered into by
the parties:

"1. That Arsenio T. Garcia was insured by the defendant company in the sum of P5,000 as
evidenced by Policy No. 129454 effective as of July 25, 1931, hereby attached and marked as
Exhibit A;

"2. That the said Arsenio T. Garcia was again insured by the defendant company in the sum of
P10,000 effective as of October 20, 1931, as evidenced by Policy No. 130381 hereby attached
and marked as Exhibit B;

"3. That the two policies aforementioned were valid and subsisting at the time of the death of
the insured on December 30, 1932; the fact of said death is evidenced by the accompanying
death certificate issued by the Civil Register of Pasay, Rizal, which is marked as Exhibit C;

"4. That the plaintiffs herein are the beneficiaries in said policies, Segundina Musgi of Policy
No. 129454, and Buenaventura Garcia of Policy No. 130381;

"5. That demand was made upon the defendant company for the payment of the two policies
above referred to, but the defendant company refused to pay on the grounds stated in the
answer."

The two policies were issued upon applications filed by the insured on July 20, 1931 and
October 15, of the same year, respectively. In both applications, the insured had to answer
inquiries as to his state of health and that of his family, which he did voluntarily. In each of the
said applications the following question was asked: "1. What physician or practitioner or any
other person not named above have you consulted or been treated by, and for what illness, or
ailment? (If none, so state.)" In the first application, the insured answered "None", and in the
second, "No". These answers of the insured as well as his other statements contained in his
applications were one of the causes or considerations for the issuance of the policies and they so
positively appear therein. After the death of the insured and as a result of the demand made by
the beneficiaries upon the defendant to pay the value of the policies, the latter discovered that the
aforementioned answers were false and fraudulent, because the truth was that the insured, before
answering and signing the applications and before the issuance of the policies, had been treated
in the General Hospital by a lady physician for different ailments. It indisputably appears that
between May 13 and 19, 1929, the insured had entered the General Hospital in Manila, and was
treated by Doctor Pilar V. Cruz for peptic ulcer and chronic catarrhal nasopharyngitis; on August
5, 1930, he entered the same hospital and was treated by the same physician for chronic
pyelocystitis and for incipient pulmonary tuberculosis; on the 13th of the same month he
returned to the hospital and was treated by the same doctor for acute tracheo-bronchitis and
chronic suppurative pyelocystitis; on the 27th of the same month he again entered the same
hospital and was treated for the same ailments; on December 11, 1930, he again entered the
hospital and was treated for the same ailments; on the 18th of the same month, he again entered
the hospital and was treated for the same ailments; on the 28th of the same month he again
entered the hospital and was treated for the same ailments, and, finally, on January 11, 1931, he
again entered the hospital and was treated by the same doctor for the same ailments.

The defendant contended at the outset that the two policies did not create any valid obligation
because they were fraudulently obtained by the insured. The appealed decision holds that the
health of the insured before the acceptance of his applications and the issuance of the policies
could neither be discussed nor questioned by the defendant, because the insured was examined
by three physicians of the company and all of them unanimously certified that he was in good
health and that he could be properly insured. The question here is not whether the physicians'
reports or the answers which the insured gave to them relative to his health were correct or not. It
is admitted that such information was substantially correct, in the sense that the physicians of the
defendant who examined the insured, for failure to make a detailed examination, did not discover
the ailments suffered by the insured. However, the question raised for our determination is
whether the two answers given by the insured in his applications are false, and if they were the
cause, or one of the causes, which induced the defendant to issue the policies. On the first point,
the facts above set out leave no room for doubt. The insured knew that he had suffered from a
number of ailments, including incipient pulmonary tuberculosis, before subscribing the
applications, yet he concealed them and omitted the hospital where he was confined as well as
the name of the lady physician who treated him. That this concealment and the false statements
constituted fraud, is likewise clear, because the defendant by reason thereof accepted the risk
which it would otherwise have flatly refused. When not otherwise specially provided for by the
Insurance Law, the contract of life insurance is governed by the general rules of the civil law
regarding contracts. Article 1261 of the Civil Code provides that there is no contract unless there
should be, in addition to consent and a definite object, a consideration for the obligation
established. And article 1276 provides that the statement of a false consideration shall render the
contract void. The two answers being one of the considerations of the policies, and it appearing
that they are false and fraudulent, it is evident that the insurance contracts were null and void and
did not give rise to any right to recover their value or amount. A similar case was already
decided by this court in Argente vs. West Coast Life Insurance Co. (51 Phil., 725). In that case
the insured concealed from the physician who examined her that she had consulted and had been
treated by another physician for cerebral congestion and Bell's Palsy, and that she was addicted
to alcohol, so much so that on one occasion she was confined in the San Lazaro Hospital
suffering from "alcoholism"; this court held that such concealments and false and fraudulent
statements rendered the policy null and void. In discussing the legal phase of the case, this court
said:

"One ground for the rescission of a contract of insurance under the Insurance Act is a
'concealment', which in section 25 is defined as 'A neglect to communicate that which a party
knows and ought to communicate'. Appellant argues that the alleged concealment was
immaterial and insufficient to avoid the policy. We cannot agree. In an action on a life insurance
policy where the evidence conclusively shows that the answers to questions concerning diseases
were untrue, the truth or falsity of the answers become the determining factor. If the policy was
procured by fraudulent representations, the contract of insurance apparently set forth therein was
never legally existent. It can fairly be assumed that had the true facts been disclosed by the
assured, the insurance would never have been granted.

"In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found the following:

"'Concealment exists where the assured has knowledge of a fact material to the risk, and honesty,
good faith and fair dealing requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same.

"'Another rule is that if the assured undertakes to state all the circumstances affecting the risk, a
full and fair statement of all is required.

"'It is also held that the concealment must, in the absence of inquiries, be not only material, but
fraudulent, or the fact must have been intentionally withheld; so it is held under English law that
if no inquiries are made and no fraud or design to conceal enters into the concealment the
contract is not avoided. And it is determined that even though silence may constitute
misrepresentation or concealment it is not of itself necessarily so as it is a question of fact. Nor is
there a concealment justifying a forfeiture where the fact of insanity is not disclosed no questions
being asked concerning the same. . . .

"'But it would seem that if a material fact is actually known to the assured, its concealment must
of itself necessarily be a fraud, and if the fact is one which the assured ought to know, or is
presumed to know, the presumption of knowledge ought to place the assured in the same position
as in the former case with relation to material facts; and if the jury in such cases find the fact
material, and one tending to increase the risk, it is difficult to see how the inference of a
fraudulent intent or intentional concealment can be avoided. And it is declared that if a material
fact is concealed by assured it is equivalent to a false representation that it does not exist and that
the essentials are the truth of the representations whether they were intended to mislead and did
insurer accept them as true and act upon them to his prejudice. So it is decided that under a
stipulation voiding the policy for concealment or misrepresentation of any material fact or if his
interest is not truly stated or is other than the sole and unconditional ownership the facts are
unimportant that insured did not intend to deceive or withhold information as to encumbrances
even though no questions were asked. And if insured while being examined for life insurance,
and knowing that she had heart disease, falsely stated that she was in good health, and though
she could not read the application, it was explained to her and the questions asked through an
interpreter, and the application like the policy contained a provision that no liability should be
incurred unless the policy was delivered while the insured was in good health, the court properly
directed a verdict for the insurer, though a witness who was present at the examination testified
that the insured was not asked whether she had heart disease.

xxx xxx xxx

"'The basis of the rule vitiating the contract in cases of concealment is that it misleads or
deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon.
The insurer, relying upon the belief that the assured will disclose every material fact within his
actual or presumed knowledge, is misled into a belief that the circumstance withheld does not
exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist. The
principal question, therefore, must be. Was the assurer misled or deceived into entering a
contract obligation or in fixing the premium of insurance by a withholding of material
information or facts within the assured's knowledge or presumed knowledge?

"'It therefore follows that the assurer in assuming a risk is entitled to know every material fact of
which the assured has exclusive or peculiar knowledge, as well as all material facts which
directly tend to increase the hazard or risk which are known by the assured, or which ought to be
or are presumed to be known by him. And a concealment of such facts vitiates the policy. "It
does not seem to be necessary . . . that the . . . suppression of the truth should have been willful."
If it were but an inadvertent omission, yet if it were material to the risk and such as the plaintiff
should have known to be so, it would render the policy void. But it is held that if untrue or false
answers are given in response to inquiries and they relate to material facts the policy is avoided
without regard to the knowledge or fraud of assured, although under the statute statements are
representations which must be fraudulent to avoid the policy. So under certain codes the
important inquiries are whether the concealment was willful and related to a matter material to
the risk.

xxx xxx xxx

"'If the assured has exclusive knowledge of material facts, he should fully and fairly disclose the
same, whether he believes them material or not. But notwithstanding this general rule it will not
infrequently happen, especially in life risks, that the assured may have a knowledge actual or
presumed of material facts, and yet entertain an honest belief that they are not material. . . . The
determination of the point whether there has or has not been a material concealment must rest
largely in all cases upon the form of the questions propounded and the exact terms of the
contract. Thus, where in addition to specifically named diseases the insured was asked whether
he had had any sickness within ten years, to which he answered "No", and it was proven that
within that period he had had a slight attack of pharyngitis, it was held a question properly for
the jury whether such an inflammation of the throat was a "sickness" within the intent of the
inquiry, and the court remarked on the appealed decision that if it could be held as a matter of
law that the policy was thereby avoided, then it was a mere device on the part of insurance
companies to obtain money without rendering themselves liable under the policy. . ..

"' . . . The question should be left to the jury whether the assured truly represented the state of his
health so as not to mislead or deceive the insurer; and if he did not deal in good faith with the
insurer in that matter, then the inquiry should be made, Did he know the state of his health so as
to be able to furnish a proper answer to such questions as are propounded. A Massachusetts case,
if construed as it is frequently cited, would be opposed to the above conclusion; but, on the
contrary, it sustains it, for the reason that symptoms of consumption had so far developed
themselves within a few months prior to effecting the insurance as to induce a reasonable belief
that the applicant had that fatal disease, and we should further construe this case as establishing
the rule that such a matter cannot rest alone upon the assured's belief irrespective of what it is a
reasonable belief, but that it ought to be judged by the criterion whether the belief is one fairly
warranted by the circumstances. A case in Indiana, however, holds that if the assured has some
affection or ailment of one or more of the organs inquired about so well-defined and marked as
to materially derange for a time the functions of such organ, as in the case of Bright's disease, the
policy will be avoided by a nondisclosure, irrespective of the fact whether the assured knew of
such ailment or not. . . .'"

In view of the foregoing, we are of the opinion that the appellant's first two assignments of error
are well founded, wherefore, the appealed judgment is reversed and the defendant absolved from
the complaint, with the costs of both instances to the plaintiffs. So ordered.

Malcolm, Villa-Real, Butte and Goddard, JJ., concur.




([1935V132ECD] [1/3] FORTUNATA LUCERO VIUDA DE SINDAYEN, plaintiff-
appellant, vs. THE INSULAR LIFE ASSURANCE CO., LTD., defendant-appelle., G.R.
No. 41702, 1935 Sep 4, En Banc)


DECISION


BUTTE, J:

This is an appeal from a judgment of the Court of First Instance of Manila in an action brought
by the plaintiff-appellant as beneficiary to recover P1,000 upon a life insurance policy issued by
the defendant on the life of her deceased husband, Arturo Sindayen.

The essential facts upon which this case turns are not in dispute and may be stated as follows:

Arturo Sindayen, up to time of his death on January 19, 1933, was employed as a linotype
operator in the Bureau of Printing at Manila and had been such for eleven years prior thereto. He
and his wife went to Camiling, Tarlac, to spend the Christmas vacation with his aunt, Felicidad
Estrada. While there he made a written application on December 26, 1932, to the defendant
Insular Life Assurance Co., Ltd., through its agent, Cristobal Mendoza, for a policy of insurance
on his life in the sum of P1,000 and he paid to the agent P15 cash as part of the first premium. It
was agreed with the agent that the policy, when and if issued, should be delivered to his aunt,
Felicidad Estrada, with whom Sindayen left the sum of P25.06 to complete the payment of the
first annual premium of P40.06. On January 1, 1933, Sindayen, who was then twenty-nine years
of age, was examined by the company's doctor who made a favorable report to the company. On
January 2, 1933, Sindayen returned to Manila and resumed his work as linotype operator in the
Bureau of Printing. On January 11, 1933, the company accepted the risk and issued policy No.
47710 dated back to December 1, 1932, and mailed the same to its agent, Cristobal Mendoza, in
Camiling, Tarlac, for delivery to the insured. On January 11, 1933, Sindayen was at work in the
Bureau of Printing. On January 12, he complained of a severe headache and remained at home.
On January 15, he called a physician who found that he was suffering from acute nephritis and
uremia. His illness did not yield to treatment and on January 19, 1933, he died.

The policy which the company issued and mailed in Manila on January 11, 1933, was received
by its agent in Camiling, Tarlac, on January 16, 1933. On January 18, 1933, the agent, in
accordance with his agreement with the insured, delivered the policy to Felicidad Estrada upon
her payment of the balance of the first year's annual premium. The agent asked Felicidad Estrada
if her nephew was in good health and she replied that she believed so because she had no
information that he was sick and he thereupon delivered to her the policy.

On January 20, 1933, the agent learned of the death of Arturo Sindayen and called on Felicidad
Estrada and asked her to return the policy. He testified: "pedia a ella que me devolviera la poliza
para traerla a Manila para esperar la decision de la compaia" (t.s.n. p. 19). But he did not return
or offer to return the premium paid. Felicidad Estrada on his aforesaid statement gave him the
policy.

On February 4, 1933, under circumstances which it is not necessary to relate here, the company
obtained from the beneficiary, the widow of Arturo Sindayen, her signature to a legal document
entitled "ACCORD, SATISFACTION AND RELEASE" whereby in consideration of the sum of
P40.06 paid to her by a check of the company, she "assigns, releases and forever discharges said
Insular Life Assurance Co., Ltd., its successors and assigns, of all claims, obligation or
indebtedness which she, as such beneficiary ever had or now has, hereafter can, shall, or may
have, for, upon, or by reason of said policy of life insurance numbered 47710 upon the life of
said Arturo Sindayen, the latter now deceased, or arising therefrom or connected therewith in any
manner", which appears in the record as Exhibit A, attached to the deposition of the notary who
executed the fraudulent acknowledgment to Exhibit A. The said check for P40.06 was never
cashed but returned to the company and appears in the record of this case as Exhibit D.
Thereupon this action was brought to enforce payment of the policy.

By the terms of the policy, an annual premium of P40.06 is due on the first day of December
each year, the first premium already paid by the insured covering the period from December 1,
1932, to December 1, 1933. It is to be noted that the policy was not issued and the company
assumed no actual risk prior to January 11, 1933.

The policy contains the following paragraph:

"THE CONTRACT. This Policy and the application herefor constitute the entire contract
between the parties hereto. All statements made by the Insured shall, in the absence of fraud, be
deemed representations and not warranties, and no such statement shall void the Policy unless it
is contained in the written application, a copy of which is attached to this Policy. Only the
President, or the Manager, acting jointly with the Secretary or Assistant Secretary (and then only
in writing signed by them) have power in behalf of the Company to issue permits, or to modify
this or any contract, or to extend the time for making any premium payment, and the Company
shall not be bound by any promise or representation heretofore or hereafter given by any person
other than the above-named officials, and by them only in writing and signed conjointly as
stated."

The application which the insured signed in Camiling, Tarlac, on December 26, 1932, contained
among others the following provisions:

"2. That if this application is accepted and a policy issued in my favor, I bind myself to accept
the same and to pay at least the first year's premium thereon in the City of Manila.

"3. That the said policy shall not take effect until the first premium has been paid and the policy
has been delivered to and accepted by me, while I am in good health.

"4. That the agent taking this application has no authority to make, modify or discharge
contracts, or to waive any of the Company's right or requirements."

The insurance company does not set up any defense of fraud, misconduct or omission of duty of
the insured or his agent, Felicidad Estrada or of the beneficiary. In its answer it pleads the
"ACCORD, SATISFACTION AND RELEASE" (Exhibit A) signed by the widow of Arturo
Sindayen, the plaintiff-appellant. With respect to Exhibit A, it suffices to say that this release is
so inequitable, not to say fraudulent, that we are pleased to note that counsel for the defendant
company, on page 51 of their brief, state: "si resultara que la poliza aqui en cuestion es valida la
apelada seria la primera en no dar validez alguno al documento Exhbit A aunque la apelante
hubiera afirmado que lo otorgo con conocimiento de causa."

It is suggested in appellee's brief that there was no delivery of the policy in this case because the
policy was not delivered to and accepted by he insured in person. Delivery to the insured in
person is not necessary. Delivery may be made by mail or to a duly constituted agent. Appellee
cites no authorities to support its proposition and none need be cited to refute it.

We come now to the main defense of the company in this case, namely, that the said policy never
took effect because of paragraph 3 of the application above quoted, for at the time of its delivery
by the agent as aforesaid the insured was not in good health. We have not heretofore been called
upon to interpret and apply this clause in a life insurance application, but identical or
substantially identical clauses have been construed and applied in a number of cases in the
United States and the decisions thereon are far from uniform or harmonious. We do not find it
practicable to attempt to determine where the weight of authority lies and propose to resolve this
case on its own facts.

There is one line of cases which holds that the stipulation contained in paragraph 3 is in the
nature of a condition precedent, that is to say, that there can be no valid delivery to the insured
unless he is in good health at the time; that this condition precedent goes to the very essence of
the contract and cannot be waived by the agent making delivery of the policy. (Rathbun vs. New
York Life Insurance Co., 30 Idaho, 34; 165 Pac., 997; American Bankers Insurance Co. vs.
Thomas, 53 Okla., 11; 154 Pac., 44; Gordon vs. Prudential Insurance Co., 231 Pa., 404; Reliance
Life Insurance Co. vs. Hightower, 148 Ga., 843; 98 S. E., 469.)

On the other hand, a number of American decisions hold that an agent to whom a life insurance
policy similar to the one here involved was sent with instructions to deliver it to the insured has
authority to bind the company by making such delivery, although the insured was not in good
health at the time of delivery, on the theory that the delivery of the policy being the final act to
the consummation of the contract, the condition as to the insured's good health was waived by
the company. (Kansas City Life Insurance Co. vs. Ridout, 147 Ark., 563; 228 S. W., 55;
Metropolitan Life Insurance Co. vs. Willis, 37 Ind. App., 48; 76 N. E., 560; Grier vs. Mutual
Life Insurance Co. of New York, 132 N. C., 543; 44 S. E., 38; Bell vs. Missouri State Life
Insurance Co., 166 Mo. App., 390; 149 S. W., 33.)

A number of these cases go to the extent of holding that the delivery of the policy by the agent to
the insured consummates the contract even though the agent knew that the insured was not in
good health at the time, the theory being that his knowledge is the company's knowledge and his
delivery of the policy is the company's delivery; that when the delivery is made notwithstanding
this knowledge of the defect, the company is deemed to have waived the defect, the company is
deemed to have waived the defect. Although that appears to be the prevailing view in the
American decisions (14 R. C. L., 900) and leads to the same conclusion, namely, that the act of
delivery of the policy in the absence of fraud or other ground for rescission consummates the
insurance, we are inclined to the view that it is more consonant with the well known practice of
life insurance companies and the evidence in the present case to rest our decision on the
proposition that Mendoza was authorized by the company to make the delivery of the policy
when he received the payment of the first premium and he was satisfied that the insured was in
good health. As was well said in the case of McLaurin vs. Mutual Life Insurance Co. (115 S. C.,
59; 104 S. E., 327):

"So much comes from the necessity of the case; the president, the vice-president, and the
secretary cannot solicit, or collect, or deliver; they must commit that to others, and along with it
the discretions we have adverted to. . . . The power in the local agent to withhold the policy
involves the power to deliver it; there is no escape from that conclusion.

"But the appellant says, even though the local agent should have concluded that the applicant
was in good health, yet, if the fact be the contrary, then the policy never operated. The parties
intended to make a contract, and that involved the doing of everything necessary to carry it into
operation, to wit, the acceptance of the applicant as a person in good health. They never intended
to leave open that one essential element of the contract, when the parties dealth fairly one with
the other. It is plain, therefore, that upon the facts it is not necessarily a case of waiver or of
estoppel, but a case where the local agents, in the exercise of the powers lodged in them,
accepted the premium and delivered the policy. That act binds their principal, the defendant."

Mendoza was duly licensed by the Insurance Commissioner to act as the agent of the defendant
insurance company. The well known custom of the insurance business and the evidence in this
case prove that Mendoza was not regarded by the company as a mere conduit or automaton for
the performance of the physical act of placing the policy in the hands of the insured. If Mendoza
were only an automaton then the legally effective delivery of the policy and the consummation
of the contract occurred when the company expressed its will to release the policy by mailing it
to its agent, namely, on January 11, 1933. In such a case the agent would perform a purely
ministerial act and have no discretion. He could do nothing but make unconditional delivery. The
legal result would be the same as if the company had mailed the policy on January 11, 1933, to
the insured directly using the post- office as its conduit for delivery. On January 11, 1933, the
insured was in good health performing his regular duties in the Bureau of Printing.

But we are not inclined to take such a restrictive view of the agent's authority because the
evidence in the record shows that Mendoza had the authority, given him by the company, to
withhold the delivery of the policy to the insured "until the first premium has been paid and the
policy has been delivered to and accepted by me (the insured) while I am in good health".
Whether that condition had been met or not plainly calls for the exercise of discretion.
Mendoza's decision that the condition had been met by the insured and that it was proper to make
delivery of the policy to him is just as binding on the company as if the decision had been made
by its board of directors. Granted that Mendoza made a mistake of judgment because he acted on
insufficient evidence as to the state of health of the insured. But it is not charged that the mistake
was induced by any misconduct or omission of duty of the insured.

It is in the interest not only of the applicant but of all insurance companies as well that there
should be some act which gives the applicant the definite assurance that the contract has been
consummated. This sense of security and of peace of mind that one's dependents are provided for
without risk either of loss or of litigation is the bedrock of life insurance. A cloud will be thrown
over the entire insurance business if the condition of health of the insured at the time of delivery
of the policy may be inquired into years afterwards with the view to avoiding the policy on the
ground that it never took effect because of an alleged lack of good health, at the time of delivery.
Suppose in the present instance that Sindayen had recovered his health, but was killed in an
automobile accident six months after the delivery of the policy; and that when called on to pay
the loss, the company learns of Sindayen's grave illness on January 18, 1933, and alleges that the
policy had never taken effect. It is difficult to imagine that the insurance company would take
such a position in the face of the common belief of the insuring public that when the policy is
delivered, in the absence of fraud or other grounds for rescission, the contract of insurance is
consummated. The insured rests and acts on that faith. So does the insurance company, for that
matter, for from the date of delivery of the policy it appropriates to its own use the premium paid
by the insured. When the policy is issued and delivered, in the absence of fraud or other grounds
for rescission, it is plainly not within the intention of the parties that there should be any
questions held in abeyance or reserved for future determination that leave the very existence of
the contract in suspense and doubt. If this were not so, the entire business world which deals so
voluminously in insurance would be affected by this uncertainty. Policies that have been
delivered to the insured are constantly being assigned for credit and other purposes. Although
such policies are not negotiable instruments and are subject to defenses for fraud, it would be a
most serious handicap to business if the very existence of the contract remains in doubt even
though the policy has been issued and delivered with all the formalities required by the law. It is
therefore in the public interest, for the public is profoundly and generally interested in life
insurance, as well as in the interest of the insurance companies themselves by giving certainty
and security to their policies, that we are constrained to hold, as we do, that the delivery of the
policy to the insured by an agent of the company who is authorized to make delivery or withhold
delivery is the final act which binds the company (and the insured as well) in the absence of
fraud or other legal ground for rescission. The fact that the agent to whom it has entrusted this
duty (and corporations can only act through agents) is derelict or negligent or even dishonest in
the performance of the duty which has been entrusted to him would create a liability of the agent
to the company but does not resolve the company's obligation based upon the authorized acts of
the agent toward a third party who was not in collusion with the agent.

Paragraph 4 of the application to the effect "that the agent taking this application has no authority
to make, modify or discharge contracts or to waive any of the company's rights or requirements"
is not in point. Mendoza neither waived nor pretended to waive any right or requirement of the
company. In fact, his inquiry as to the state of health of the insured discloses that he was
endeavoring to assure himself that this requirement of the company had been satisfied. In doing
so, he acted within the authority conferred on him by his agency and his acts within that
authority bind the company. The company therefore having decided that all the conditions
precedent to the taking effect of the policy had been complied with and having accepted the
premium and delivered the policy thereafter to the insured, the company is now estopped to
assert that it never intended that the policy should take effect. (Cf. Northwestern Life Association
Life Association vs. Findley, 29 Tex. Civ. App., 494; 68 S. W., 695; McLaurin vs. Mutual Life
Insurance Co., 115 S. C., 59; 104 S. E., 327; 14 Cal. Jur., par. 12, pages 425-427.)

In view of the premises, we hold that the defendant company assumed the risk covered by policy
No. 47710 on the life of Arturo Sindayen on January 18, 1933, the date when the policy was
delivered to the insured. The judgment appealed from is therefore reversed with directions to
enter judgment against the appellee in the sum of P1,000 together with interest at the legal rate
from and after May 4, 1933, with costs in both instances against the appellee.

Malcolm, Villa-Real, Abad Santos, Hull, Vickers, Goddard, and Recto, JJ., concur.






([1920V96] RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin 'Ma.
Herrer, plaintiff-appellant, vs. SUN LIFE ASSURANCE COMPANY OF CANADA,
defendant-appellee., G.R. No. 10895, 1920 Nov 29, En Banc)


MALCOLM, J .:

This is an action brought by the plaintiff as administrator of the estate of the late Joaquin Ma.
Herrer to recover from the defendant life insurance company the sum of P6,000 paid by the
deceased for a life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the
Sun Life Assurance Company of Canada through its office in Manila for a life annuity. Two days
later he paid the sum of P6,000 to the manager of the company's Manila office and was given a
receipt reading as follows:

"MANILA, I. F., 26 de septiembre, 1917.

"PROVISIONAL RECEIPT

"P6,000

"Recibi la suma de seis mil pesos de Don Joaquin-Herrer de Manila como prima de la Renta
Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de
la Oficina Central de la Compaia."

The application was immediately forwarded to the head office of the company at Montreal,
Canada. On November 26, 1917, the head office gave notice of acceptance by cable to Manila.
(Whether on the same day the cable was received notice was sent by the Manila office to Herrer
that the application had been accepted, is a disputed point, which will be discussed later.) On
December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio
A. Torres wrote to the Manila office of the company stating that Herrer desired to withdraw his
application. The following day the local office replied to Mr. Torres, stating that the policy had
been issued, and called attention to the notification of November 26, 1917. This letter was
received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on December 20,
1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of
acceptance of his application. To resolve this question, we propose to go directly to the evidence
of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of
the trial testified that he prepared the letter introduced in evidence as Exhibit 3, of date
November 26, 1917, and handed it to the local manager, Mr. E. E. White, for signature. The
witness admitted on cross-examination that after preparing the letter and giving it to the
manager, he knew nothing of what became of it. The local manager, Mr. White, testified to
having received the cablegram accepting the application of Mr. Herrer from the home office on
November 26, 1917. He said that on the same day he signed a letter notifying Mr. Herrer of this
acceptance. The witness further said that letters, after being signed, were sent to the chief clerk
and placed on the mailing desk for transmission. The witness could not tell if the letter had ever
actually been placed in the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917,
was not called as a witness. For the defense, attorney Manuel Torres testified to having prepared
the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a
life annuity, and that he said that the only document relating to the transaction in his possession
was the provisional receipt. Rafael Enriquez, the administrator of the estate testified that he had
gone through the effects of the deceased and had found no letter of notification from the
insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917,
notifying Mr. Ferrer that his application had been accepted, was prepared and signed in the local
office of the insurance company, was placed in the ordinary channels for transmission, but as far
as we know, was never actually mailed and thus was never received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which
should be applied to the facts. In order to reach our legal goal, the obvious signposts along the
way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were found
in the Code of Commerce and the Civil Code. In the Code of Commerce, there formerly existed
Title VIII of Book II and Section III of Title III of Book III, which dealt with insurance
contracts. In the Civil Code there formerly existed and presumably still exist, Chapters II and IV,
entitled insurance contracts and life annuities, respectively, of Title XII of Book IV. On and after
July 1, 1915, there was, however, in force the Insurance Act, No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act expressly repealed Title VIII of Book II and Section
III of Title III of Book III of the Code of Commerce. The law of insurance is consequently now
found in the Insurance Act and the Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to
be followed in order that there may be a contract of insurance. On the other hand, the Civil Code,
in article 1802, not only describes a contract of life annuity markedly similar to the one we are
considering, but in two other articles, gives strong clues as to the proper disposition of the case.
For instance, article 16 of the Civil Code provides that "In matters which are governed by special
laws, any deficiency of the latter shall be supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that the special law on the subject of insurance is
deficient in enunciating the principles governing acceptance, the subject-matter of the Civil
Code, if there be any, would be controlling. In the Civil Code is found article 1262 providing that
"Consent is shown by the concurrence of offer and acceptance with respect to the thing and the
consideration which are to constitute the contract. An acceptance made by letter shall not bind
the person making the offer except from the time it came to his knowledge. The contract, in such
case, is presumed to have been entered into at the place where the offer was made." This latter
article is in opposition to the provisions of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a conclusion,
then the only duty remaining is for the court to apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance, and expressly repealed the provisions in the
Code of Commerce on the same subject, and having thus left a void in the commercial law, it
would seem logical to make use of the only pertinent provision of law found in the Civil Code,
closely related to the chapter concerning life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the offer
only from the date it came to his knowledge, may not be the best expression of modern
commercial usage. Still it must be admitted that its enforcement avoids uncertainty and tends to
security. Not only this, but in order that the principle may not be taken too lightly, let it be
noticed that it is identical with the principles announced by a considerable number of
respectable, courts in the United States. The courts who take this view have expressly held that
an acceptance of an offer of insurance not actually or constructively communicated to the
proposer does not make a contract. Only the mailing of acceptance, it has been said, completes
the contract of insurance, as the locus poienitentise is ended when the acceptance has passed
beyond the control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph of! article
1262 of the Civil Code providing that an acceptance made by letter shall not bind the person
making the offer except from the time it came to his knowledge. The pertinent fact is, that
according to the provisional receipt, three things had to be accomplished by the insurance
company before there was a contract: (1) There had to be a medical examination of the applicant;
(2) there had to be approval of the application by the head office of the company; and (3) this
approval had in some way to be communicated by the company to the applicant. The further
admitted facts are that the head office in Montreal did accept the application, did cable the
Manila office to that effect, did actually issue the policy and did, through its agent in Manila,
actually write the letter of notification and place it in the usual channels for transmission to the
addressee. The fact as to the letter of notification thus fails to concur with the essential elements
of the general rule pertaining to the mailing and delivery of mail matter as announced by the
American courts, namely, when a letter or other mail matter is addressed and mailed with
postage prepaid there is a rebuttable presumption of fact that it was received by the addressee as
soon as it could have been transmitted to him in the ordinary course of the mails. But if any one
of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will
not be presumed to have been received by the addressee unless it is shown that it was deposited
in the post-office, properly addressed and stamped. (See 22 C. J., 96, and 49 L. R. A. [N. S.], pp.
458, et seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because it has not
been proved satisfactorily that the acceptance of the application ever came to the knowledge of
the applicant.

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of
P6,000 with legal interest from November 20, 1918, until paid, without special finding as to
costs in either instance. So ordered.

Mapa, C.J. Araullo, Avancea and Villamor, JJ., concur.


(THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee, vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.,
G.R. No. L-44059, 1977 October 28, 1st Division)

D E C I S I O N

MARTIN, J:

This is a novel question in insurance law: Can a common-law wife named as beneficiary in the
life insurance policy of a legally married man claim the proceeds thereof in case of death of the
latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Insular Life Assurance
Co., Ltd., Policy No. 009929 on a whole-life plan for P5,882.00 with a rider for Accidental
Death Benefits for the same amount. Buenaventura C. Ebrado designated Carponia T. Ebrado as
the revocable beneficiary in his policy. He referred to her as his wife.

On October 21, 1969, Buenventura C. Ebrado died as a result of an accident when he was hit by
a falling branch of a tree. As the insurance policy was in force, The Insular Life Assurance Co.,
Ltd. stands liable to pay the coverage of the policy in an amount of P11,745.73, representing the
face value of the policy in the amount of P5,882.00 plus the additional benefits for accidental
death also in the amount of P5,882.00 and the refund of P18.00 paid for the premium due
November, 1969, minus the unpaid premiums and interest thereon due for January and February,
1969, in the sum of P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the benefit of marriage. Pascuala Vda. de Ebrado also
filed her claim as the widow of the deceased insured. She asserts that she is the one entitled to
the insurance proceeds, not the common-law wife, Carponia T. Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First Instance of
Rizal on April 29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a
pre-trial order was entered reading as follows:

"During the pre-trial conference, the parties manifested to the court that there is no possibility of
amicable settlement. Hence, the Court proceeded to have the parties submit their evidence for the
purposes of the pre-trial and make admissions for the purpose of pre-trial. During this
conference, parties Carponia T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the
deceased Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six
(legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed
Ebrado; 2) that during the lifetime of the deceased, he was insured with Insular Life Assurance
Co. Under Policy No. 009929 whole life plan, dated September 1, 1968 for the sum of P5,882.00
with the rider for accidental death benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1
for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of
Buenaventura Ebrado, he was living with his common-law wife, Carponia Ebrado, with whom
she had 2 children although he was not legally separated from his legal wife; 4) that
Buenaventura Ebrado died by accident on October 21, 1969 as evidenced by the death certificate
Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that complainant Carponia
Ebrado filed claim with the Insular Life Assurance Co. which was contested by Pascuala Ebrado
who also filed claim for the proceeds of said policy; 6) that in view of the adverse claims the
insurance company filed this action against the two herein claimants Carponia and Pascuala
Ebrado; 7) that there is now due from the Insular Life Assurance Co. as proceeds of the policy
P11,745.73; 8) that the beneficiary designated by the insured in the policy is Carponia Ebrado
and the insured made reservation to change the beneficiary but although the insured made the
option to change the beneficiary, same was never changed up to the time of his death and the
legal wife did not have any opportunity to write the company that there was reservation to
change the designation of the beneficiary; 9) the parties agreed that a decision be rendered based
on this agreement and stipulation of facts as to who among the two claimants is entitled to the
policy.

"Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda
from the receipt of this order.

SO ORDERED."

On September 25, 1972, the trial court rendered judgment declaring, among others, Carponia T.
Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds to the estate of the deceased insured. The trial
court held:

"It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for
adultery or concubinage is not essential in order to establish the disqualification mentioned
therein. Neither is it also necessary that a finding of such guilt or commission of those acts be
made in a separate independent action brought for the purpose. The guilt of the donee
(beneficiary) may be proved by preponderance of evidence in the same proceeding (the action
brought to declare the nullity of the donation).

It is, however, essential that such adultery or concubinage exists at the time defendant Carponia
T. Ebrado was made beneficiary in the policy in question for the disqualification and incapacity
to exist and that it is only necessary that such fact be established by preponderance of evidence
in the trial. Since it is agreed in their stipulation above-quoted that the deceased insured and
defendant Carponia T. Ebrado were living together as husband and wife without being legally
married and that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado
was valid and still existing at the time the insurance in question was purchased there is no
question that defendant Carponia T. Ebrado is disqualified from becoming the beneficiary of the
policy in question and as such she is not entitled to the proceeds of the insurance upon the death
of the insured."

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976,
the Appellate Court certified the case to Us as involving only questions of law.

We affirm the judgment of the lower court.

1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended) does not contain any specific provision grossly
resolutory of the prime question at hand. Section 50 of the Insurance Act which provides that
"(t)he insurance shall be applied exclusively to the proper interest of the person in whose name it
is made" 1 cannot be validly seized upon to hold that the same includes the beneficiary. The
word interest" highly suggests that the provision refers only to the insured" and not to the
beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the prohibitory
laws against illicit relationships especially on property and descent will be rendered nugatory, as
the same could easily be circumvented by modes of insurance. Rather, the general rules of civil
law should be applied to resolve this void in the Insurance Law Article 2011 of the New Civil
Code states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed by the
general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code,
"any person who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a life insurance policy by the person who cannot make a donation to him." 4
Common-law spouses are, definitely, barred from receiving donations from each other. Article
739 of the new Civil Code provides:

"The following donations shall be void:

"1.Those made between persons who were guilty of adultery or concubinage at the time of
donation;

"Those made between persons found guilty of the same criminal offense, in consideration
thereof;

"3.Those made to a public officer or his wife, descendants or ascendants by reason of his office.

"In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by preponderance of
evidence in the same action."

2.In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary
is like a donee, because from the premiums of the policy which the insured pays out of liberality,
the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the
proscription in Article 739 of the new Civil Code should equally operate in life insurance
contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot receive a
donation cannot be named as beneficiary in the life insurance policy of the person who cannot
make the donation. 5 Under American law, a policy of life insurance is considered as a
testament and in construing it, the courts will, so far as possible treat it as a will and determine
the effect of a clause designating the beneficiary by rules under which wills are interpreted. 6

3.Policy considerations and dictates of morality rightly justify the institution of 0a barrier
between common-law spouses in regard to property relations since such relationship ultimately
encroaches upon the nuptial and filial rights of the legitimate family. There is every reason to
hold that the bar in donations between legitimate spouses and those between illegitimate ones
should be enforced in life insurance policies since the same are based on similar consideration.
As above pointed out, a beneficiary in a life insurance policy is no different from a donee. Both
the recipients of pure beneficence. So long as marriage remains the threshold of family laws,
reason and morality dictate that the impediments imposed upon married couple should likewise
be imposed upon extra-marital relationship. If legitimate relationship is circumscribed by these
legal disabilities, with more reason should an illicit relationship be restricted by these disabilities.
Thus, in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said:

"If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that
court (Court of Appeals), `to prohibit donations in favor of the other consort and his descendants
because of fear and undue and improper pressure and influence upon the donor, a prejudice
deeply rooted in our ancient law;" por-que no se enganen desponjandose el uno al otro por amor
que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the
rationale `No Mutuato amore invicem spoliarentur' of the Pandects (Bk, 24, Titl. 1 De donat,
inter virum et uxorem); then there is very reason to apply the same prohibitive policy to persons
living together as husband and wife without the benefit of nuptials. For it is not to be doubted
that assent to such irregular connection for thirty years bespeaks greater influence of one party
over the other, so that the danger that the law seeks to avoid is correspondingly increased.
Moreover, as already pointed out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), `it would not be
just that such donations should subsist, lest the condition of those who incurred guilt should turn
out to be better.' So long as marriage remains the cornerstone of our family law, reason and
morality alike demand that the disabilities attached to marriage should likewise attach to
concubinage.

It is hardly necessary to add that even in the absence of the above pronouncement, any other
conclusion cannot stand the test of scrutiny. It would be to indict the framers of the Civil Code
for a failure to apply a laudable rule to a situation which in its essentials cannot be distinguished.
Moreover, if it is at all to be differentiated the policy of the law which embodies a deeply rooted
notion of what is just and what is right would be nullified if such irregular relationship instead of
being visited with disabilities would be attended with benefits. Certainly a legal norm should not
be susceptible to such a reproach. If there is every any occasion where the principle of statutory
construction that what is within the spirit of the law is as much a part of it as what is written, this
is it. Otherwise the basic purpose discernible in such codal provision would not be attained.
Whatever omission may be apparent in an interpretation purely literal of the language used must
be remedied by an adherence to its avowed objective."

4.We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with regard to the disability on
"persons who were guilty of adultery or concubinage at the time of the donation," Article 739
itself provides:

"In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by preponderance of
evidence in the same action."

The underscored clause neatly conveys that no criminal conviction for the disqualifying offense
is a condition precedent. In fact, it cannot even be gleaned from the aforequoted provision that a
criminal prosecution is needed. On the contrary, the law plainly states that the guilt of the party
may be proved "in the same action" for declaration of nullity of donation. And, it would be
sufficient if evidence preponderates upon the guilt of the consort for the offense indicated. The
quantum of proof in criminal cases is not demanded.

In the case before Us, the requisite proof of common-law relationship between the insured and
the beneficiary has been conveniently supplied by the stipulations between the parties in the pre-
trial conference of the case. It case agreed upon and stipulated therein that the deceased insured
Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate
children; that during his lifetime, the deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These stipulations are nothing less than
judicial admissions which, as a consequence, no longer require proof and cannot be contradicted.
8 A fortiori, on the basis of these admissions, a judgment may be validly rendered without going
through the rigors of a trial for the sole purpose of proving the illicit liaison between the insured
and the beneficiary. In fact, in that pre-trial, the parties even agreed "that a decision be rendered
based on this agreement and stipulation of facts as to who among the two claimants is entitled to
the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T.
Ebrado is hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado
in his life insurance policy. As a consequence, the proceeds of the policy are hereby held payable
to the estate of the deceased insured. Costs against Carponia T. Ebrado.

SO ORDERED.










(ZENITH INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and
LAWRENCE FERNANDEZ, respondents., G.R. No. 85296, 1990 May 14, 1st Division)

D E C I S I O N


MEDIALDEA, J.:

Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No. 13498
entitled, "Lawrence L. Fernandez, plaintiff-appellee v. Zenith Insurance Corp., defendant-
appellant" which affirmed in toto the decision of the Regional Trial Court of Cebu, Branch XX
in Civil Case No. CEB-1215 and the denial of petitioner's Motion for Reconsideration.

The antecedent facts are as follows:

On January 25, 1983, private respondent Lawrence Fernandez insured his car for "own damage"
under private car Policy No. 50459 with petitioner Zenith Insurance Corporation. On July 6,
1983, the car figured in an accident and suffered actual damages in the amount of P3,640.00.
After allegedly being given a run around by Zenith for two (2) months, Fernandez filed a
complaint with the Regional Trial Court of Cebu for sum of money and damages resulting from
the refusal of Zenith to pay the amount claimed. The complaint was docketed as Civil Case No.
CEB-1215. Aside from actual damages and interests, Fernandez also prayed for more damages in
the amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees of P3,000.00 and
litigation expenses of P3,000.00.

On September 28, 1983, Zenith filed an answer alleging that it offered to pay the claim of
Fernandez pursuant to the terms and conditions of the contract which, the private respondent
rejected. After the issues had been joined, the pre-trial was scheduled on October 17, 1983 but
the same was moved to November 4, 1983 upon petitioner's motion, allegedly to explore ways to
settle the case although at an amount lower than private respondent's claim. On November 14,
1983, the trial court terminated the pre-trial. Subsequently, Fernandez presented his evidence.
Petitioner Zenith, however, failed to present its evidence in new of its failure to appear in court,
without justifiable reason, on the day scheduled for the purpose. The trial court issued an order
on August 23, 1984 submitting the case for decision without Zenith's evidence (pp. 10-11,
Rollo). Petitioner filed a petition for certiorari with the Court of Appeals assailing the order of
the trial court submitting the case for decision without petitioner's evidence. The petition was
docketed as C.A.-G.R. No. 04644. However, the petition was denied due course on April 29,
1986 (p. 56, Rollo).

On June 4, 1986, a decision was rendered by the trial court in favor of private respondent
Fernandez. The dispositive portion of the trial court's decision provides:

"WHEREFORE, defendant is hereby ordered to pay to the plaintiff:.

1. The amount of P3,640.00 representing the damage incurred plus interest at the rate of twice
the prevailing interest rates;

2. The amount of P20,000.00 by way of moral damages;

3. The amount of P20,000.00 by way of exemplary damages;

4. The amount of P5,000.00 as attorney's fees;

5. The amount of P3,000.00 as litigation expenses; and

6. Costs." (p. 9, Rollo)

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

On June 10, 1986, petitioner filed a notice of appeal before the trial court. The notice of appeal
was granted in the same order granting private respondent's motion for execution pending
appeal. The appeal to respondent court assigned the following errors:

"I. The lower court erred in denying defendant appellant to adduce evidence in its behalf.

II. The lower court erred in ordering Zenith Insurance Corporation to pay the amount of
P3,640.00 in its decision.

III. The lower court erred in awarding moral damages, attorney's fees and exemplary damages,
the worst is that, the court awarded damages more than what are prayed for in the complaint." (p.
12, Rollo)

On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the decision of
the trial court. It also ruled that the matter of the trial court's denial of Fernandez's right to adduce
evidence is a closed matter in view of its (CA) ruling in AC-G.R. 04644 wherein Zenith's
petition questioning the trial court's order submitting the case for decision without Zenith's
evidence, was dismissed.

The Motion for Reconsideration of the decision of the Court of Appeals dated August 17, 1988
was denied on September 29, 1988, for lack of merit. Hence, the instant petition was filed by
Zenith on October 18, 1988 on the allegation that respondent Court of Appeals' decision and
resolution ran counter to applicable decisions of this Court and that they were rendered without
or in excess of jurisdiction. The issues raised by petitioners in this petition are:

a) The legal basis of respondent Court of Appeals in awarding moral damages, exemplary
damages and attorney's fees in an amount more than that prayed for in the complaint.

b) The award of actual damages of P3,460.00 instead of only P1,927.50 which was arrived at
after deducting P250.00 and P274.00 as deductible franchise and 20% depreciation on parts as
agreed upon in the contract of insurance.

Petitioner contends that while the complaint of private respondent prayed for P10,000.00 moral
damages, the lower court awarded twice the amount, or P20,000.00 without factual or legal
basis; while private respondent prayed for P5,000.00 exemplary damages, the trial court awarded
P20,000.00; and while private respondent prayed for P3,000.00 attorney's fees, the trial court
awarded P5,000.00.

The propriety of the award of moral damages, exemplary damages and attorney's fees is the main
issue raised herein by petitioner.

The award of damages in case of unreasonable delay in the payment of insurance claims is
governed by the Philippine Insurance Code, which provides:

"SEC. 244. In case of any litigation for the enforcement of any policy or contract of insurance,
it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to
whether the payment of the claim of the insured has been unreasonably denied or withheld; and
in the affirmative case, the insurance company shall be adjudged to pay damages which shall
consist of attorney's fees and other expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by
the Monetary Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as the case
may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within
the time prescribed in said sections shall be considered prima facie evidence of unreasonable
delay in payment."

It is clear that under the Insurance Code, in case of unreasonable delay in the payment of the
proceeds of an insurance policy, the damages that may be awarded are: 1) attorney's fees; 2)
other expenses incurred by the insured person by reason of such unreasonable denial or
withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary Board of the
amount of the claim due the injured; and 4) the amount of the claim.

As regards the award of moral and exemplary damages, the rules under the Civil Code of the
Philippines shall govern.

"The purpose of moral damages is essentially indemnity or reparation, not punishment or
correction. Moral damages are emphatically not intended to enrich a complainant at the expense
of a defendant, they are awarded only to enable the injured party to obtain means, diversions or
amusements that will serve to alleviate the moral suffering he has undergone by reason of the
defendant's culpable action." (J. Cezar S. Sangco, Philippine Law on Torts and Damages,
Revised Edition, p. 539) (See also R and B Surety & Insurance Co., Inc. v. IAC, G.R. No. 64515,
June 22, 1984; 129 SCRA 745). While it is true that no proof of pecuniary loss is necessary in
order that moral damages may be adjudicated, the assessment of which is left to the discretion of
the court according to the circumstances of each case (Art. 2216, New Civil Code), it is equally
true that in awarding moral damages in case of breach of contract, there must be a showing that
the breach was wanton and deliberately injurious or the one responsible acted fraudently or in
bad faith (Perez v. Court of Appeals, G.R. No. L-20238, January 30, 1965; 13 SCRA 137; Solis
v. Salvador, G.R. No. L-17022, August 14, 1965; 14 SCRA 887). In the instant case, there was a
finding that private respondent was given a "run-around" for two months, which is the basis for
the award of the damages granted under the Insurance Code for unreasonable delay in the
payment of the claim. However, the act of petitioner of delaying payment for two months cannot
be considered as so wanton or malevolent to justify an award of P20,000.00 as moral damages,
taking into consideration also the fact that the actual damage on the car was only P3,460. In the
pre-trial of the case, it was shown that there was no total disclaimer by respondent. The reason
for petitioner's failure to indemnify private respondent within the two-month period was that the
parties could not come to an agreement as regards the amount of the actual damage on the car.
The amount of P10,000.00 prayed for by private respondent as moral damages is equitable.

On the other hand, exemplary or corrective damages are imposed by way of example or
correction for the public good (Art. 2229, New Civil Code of the Philippines). In the case of
Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22, 1987; 151 SCRA 227, exemplary damages
were not awarded as the insurance company had not acted in wanton, oppressive or malevolent
manner. The same is true in the case at bar.

The amount of P5,000.00 awarded as attorney's fees is justified under the circumstances of this
case considering that there were other petitions filed and defended by private respondent in
connection with this case.

As regards the actual damages incurred by private respondent, the amount of P3,640.00 had been
established before the trial court and affirmed by the appellate court. Respondent appellate court
correctly ruled that the deductions of P250.00 and P274.00 as deductible franchise and 20%
depreciation on parts, respectively claimed by petitioners as agreed upon in the contract, had no
basis. Respondent court ruled:

"Under its second assigned error, defendant-appellant puts forward two arguments, both of
which are entirely without merit. It is contented that the amount recoverable under the insurance
policy defendant-appellant issued over the car of plaintiff-appellee is subject to deductible
franchise, and . . .

"The policy (Exhibit G, pp. 4-9, Record), does not mention any deductible franchise, . . ." (p. 13,
Rollo)

Therefore, the award of moral damages is reduced to P10,000.00 and the award of exemplary
damages is hereby deleted. The awards due to private respondent Fernandez are as follows:

1) P3,640.00 as actual claim plus interest of twice the ceiling prescribed by the Monetary
Board computed from the time of submission of proof of loss;

2) P10,000.00 as moral damages;

3) P5,000.00 as attorney's fees;

4) P3,000.00 as litigation expenses and

5) Costs

ACCORDINGLY, the appealed decision is MODIFIED as above stated. SO ORDERED.

([1916V53] CLARA CEREZO, plaintiff-appellant, vs. THE ATLANTIC GULF &
PACIFIC COMPANY, defendant-appellant., G.R. No. 10107, 1916 Feb 4, 1st Division)

D E C I S I O N

TRENT, J.:

This is an action for damages against the defendant for negligently causing the death of the
plaintiff's son, Jorge Ocumen, on the 8th of July, 1913, deceased being plaintiff's only means of
support. Judgment was entered in favor of the plaintiff for the sum of P1,250, together with
interest and costs. Defendant appealed.

The deceased was an employee of the defendant as a day laborer on the 8th day of July, 1913,
assisting in laying gas pipes on Calle Herran in the city of Manila. The digging of the trench was
completed both ways from the cross-trench in Calle Paz, and the pipes were laid therein up to
that point. The men of the deceased's gang were filling the west end, and there was no work in
progress at the east end of the trench. Shortly after the deceased entered the trench at the east end
to answer a call of nature, the bank cave in, burying him to his neck in dirt, where he died before
he could be released. It has not been shown that the deceased had received orders from the
defendant to enter the trench at this point; nor that he entered there to perform any duty for the
defendant; nor that the trench had been prepared by the defendant as a place to be used as a
watercloset; nor that the defendant acquiesced in the using of this place for these purposes. The
trench at the place where the accident occurred was between 3 and 4 feet deep. Nothing
remained to be done there except to refill the trench as soon as the pipes were connected. The
refilling was delayed at that place until completion of the connection. At the time of the accident
the place where the deceased's duty of refilling the trench required him to be was at the west end.
There is no contention that there was any danger whatever in the refilling of the trench.

The plaintiff insists that the defendant was negligent in failing to shore or brace that trench at the
place where the accident occurred. While, on the other hand, the defendant urges (1) that it was
under no obligation, in so far as the deceased was concerned, to brace the trench, in the absence
of a showing that the soil was of a loose character or the place itself was dangerous, and (2) that
although the relation of master and servant may not have cease, for the time being, to exist, the
defendant was under no duty to the deceased except to do him no intentional injury, and to
furnish him with a reasonably safe place to work.

As the complaint fails to show whether the plaintiff's right to recover is based on the Employers'
Liability Act (Act No. 1874) or the Civil Code, it is necessary to determine just what effect the
former has had upon the law of industrial in this country.


Act No. 1874 is essentially a copy of the Massachusetts Employers' Liability Act (Rev. Laws.
1902, chap. 106, secs. 71-79), it having been originally enacted in that jurisdiction in 1887. (Stat.
1887, chap. 270.) The Massachusetts statute was "copied verbatim, with some variations of
detail, from the English statute (43 & 44 Vict., c. 42). Therefore it is proper, if not necessary, to
begin by considering how the English act had been construed before our statute was enacted."
(Ryalls vs. Mechanics' Mills, 150 Mass., 190; 5 L. R. A., 667.)

The English statute was enacted effective January 1, 1881. The Employers' Liability Act of
Alabama, first enacted in 1885 (Civil Code 1907, chap. 80, sec. 3910), "is a substantial, if not an
exact, copy of the English act of 1880. This court is not finally concluded by the decision of any
other State court or the British court, in their construction of a similar statute, but the opinion of
learned courts upon similar questions are entitled to great weight, and this is especially true when
the statute, from which ours was copied, had been construed prior to its enactment by our
legislature." (Birmingham Ry. & Electric Co. vs. Allen, 99 Ala., 359, 371; 20 L. R. A., 457.)

The employers' Liability Act of Colorado (Laws 1893, chap. 77; Mill's Annotated Statutes, Supp.
1891-1896, sec. 1511a) was copied from the Massachusetts Act of 1887 and the construction that
had been given it by the courts of that state." (Colorado Milling & Elevator Co. vs. Mitchell
[1899], 26 Colo., 284). Generally speaking, when a statute has been adopted from another state
or country and such statute has previously been construed by the courts of such state or country,
the statute is deemed to have been adopted with the construction so given it (2 Lewis
Southerland on Stat. Const., sec. 783). The law being so clearly traced to its source, it is
advisable, if not necessary, to ascertain what the law stands for in those jurisdiction where it has
been in force for a long time past.

To adequately comprehend the significance of the Act in England and in those States of the
United States where it has been adopted, it is necessary to set forth briefly the liability of an
employer for personal injuries suffered by his workmen prior to its enactment. At common law
masters impliedly agreed to use reasonable care to provide reasonably safe premises and places
in and about which the servant was required to work, to furnish reasonably safe and suitable
machinery, and a sufficient supply of proper materials, tools, and appliances for the work to be
done, and at all times during the continuance of the work to repair and to keep in the same safe
suitable condition the places, machinery, and appliances; to provide competent workmen; and so
far as the servant could not be assumed to know the perils of the work itself, or of the particular
portion of it in which he was engaged, to instruct him and to warn him of any secret danger of
which the master was aware. As to these matters, the master was bound to exercise that measure
of care which reasonably prudent men take under similar circumstances. But the master was not
an insurer and was not required to provide the safes possible plant or to adopt the latest
improvements or to warrant against latent defects which a reasonable inspection did not disclose.
It was only necessary that the danger in the work be not enhanced through his fault.

The right of the master to shift responsibility for the performance of all or at least most of these
personal duties to the shoulders of a subordinate and thereby escape liability for the injuries
suffered by his workmen through his non-performance of these duties, was, in England,
definitely settled by the House of Lords in the case of Wilson vs. Merry (L. R. 1 H. L. Sc. App.
Cas., 326; 19 Eng. Rul. Cas., 132). This was just two years before the enactment of the
Employers' Liability Act of 1880, and no doubt the full significance of such a doctrine was one
of the impelling causes which expedited the passage of the Act, and chiefly accounts for the
presence in it of subsection 1 of section 1.

While there were some authorities in the United States prior to 1880 decidedly in favor of the
doctrine of Wilson Vs. Merry, by far the greater weight of authority was that such duties were
personal to the master and that he could not by delegating such duties to subordinates escape
liability for their negligent performance.

The servant, on his part, by entering the employment, was held to impliedly agree to take upon
himself the perils arising from the carelessness and recklessness of those who were in the same
employment, without regard to their grade or rank or authority in the service, provided that the
act causing the injury was not in the performance of any personal duty of the master intrusted to
the negligent servant.

In Streets' edition of Shearman & Redfield on Negligence (vol. 1, sec. 180), the following
statement and history of the rule is given:

"Under the principles before state, it must be conceded to be settled at common
law that a master is not liable for injuries personally suffered by his servant through the ordinary
risks of the business, including the negligence of a fellow servant, acting as such, while engaged
in the same common employment, unless the master is chargeable with negligence him after
actual or constructive notice of his incompetency. This `bad exception to a bad rule,' as Lord
Esher called it, in his testimony before a parliamentary committee, was first suggested in 1837,
in an English court, in Priestly vs. Fowler (3 M. & W., 1), where the precise point did not arise.
That case, however, is always spoken of as the foundation of the rule. The first real decision of
the question was made in South Carolina in 1841 (Murray vs. South Carolina R. Co., 1 McMull.
Law, 385.) This was cited and approved by Chief Justice Shaw, of Massachusetts, 1842, in the
Farwell case (Farwell vs. Boston, etc., R. Co., 4 Met., 49), which is the leading case on the
question, and contains all the reasoning in favor of the rule which is worth mentioning. His
opinion was followed in New York in 1847 (Coon vs. Syracuse, etc. R. Co., 6 Barb., 231,
affirmed 1851, 5 N. Y., 492). . . . Since then the rule has been forced upon Scotland, by the votes
of English judges, overruling the Scotch courts; and it has been accepted by all American Courts,
both Federal and State, with only some qualifications in Kentucky and some western and
southern State; which, however, turn rather upon the interpretation of the rule than upon the rule
itself."

As the inadequacy of the doctrine to keep pace with the marvelous industrial development of the
last century became apparent, it was sought, in most jurisdictions, to soften its rigors by
introducing the fiction of vice-principalship which undertook to increase the number of
responsibilities which the master could not escape by delegating them to subordinates. The
whole doctrine was, in brief, a denial as to the employee, of the principle of respondent superior.
Under the latter, a stranger invited upon the master's premises, either expressly or impliedly,
could recover for injuries received through the negligence of the master's employees. It was this
right which was denied to the employee.

Another defense to which the master was entitled under the common law was that known as
contractual assumption of risks. Practically the same thing is referred to in very many cases as
the defense of volenti non fit injuria. (That to which a person assents is not deemed in law an
injury.) While these two defenses are theoretically distinct, it has been said by one learned writer
that it is impossible to treat the two separately in reviewing American decisions (5 Labatt's
Master and Servant, sec. 1647a). The distinction is usually important only when the master's
breach of a statutory duty is concerned. In those jurisdictions holding that the continuance in the
service of an employee after he has knowledge of the violation of a statutory duty by the master
is not a defense, the holding is usually justified on the ground of an implied contract of the
servant to assume the risks of the business; and that, consequently, it would be against public
policy to permit the master to contract against the effects of a violation of the statute. It is in
those jurisdictions that recognize the same state of facts as a defense available to the master
where the maxim volenti non fit injuria is relied upon, such courts holding that no contract,
express or implied, is involved, and that, consequently, the public policy in question is not
involved. Under either name, the defense in question leaves the workman without remedy when
his injury results from a risk known or imputable to him before entering the employment or
because of his continuance at work after such knowledge came to him, whether such a risk was
due to a defect in the ways, works or machinery, or to negligence of the master or other persons
in the common employment.
A third defense which a master could interpose in an action against him by an employee for
personal injuries received in the course of the employment was that of contributory negligence. It
has been frequently remarked that this defense is often confused with that of assumption of risk
or volenti non fit injuria. The Supreme Court of the United States explained the distinction
between the two defenses in the following language in the recent case of Seaboard Air Line
Railway vs. Horton (233 U.S., 492, 503):


"The distinction, although simple, is sometimes overlooked or breach of duty on the part of the
employee; and his own safety when engaged in a hazardous occupation, contributory negligence
is sometimes defined as a failure to use such care for his safety as ordinarily prudent employees
in similar circumstances would use. On the other hand, the assumption of risk, even though the
risk, even though the risk be obvious, may be free from any suggestion of fault or negligence on
the part of the employee. The risks may be present, notwithstanding the exercise of all
reasonable care on his part. Some employments are necessarily fraught with danger to the
workman ---- danger that must be and is confronted in the line of his duty. Such dangers as are
normally and necessarily incident to the occupation are presumably taken into the account in
fixing the rate of wages. and a workman of mature years is taken to assume risks of this sort,
whether he is actually aware of them or not. But risks of another sort, not naturally incident to
the occupation, may arise out of the failure of the employer to exercise due care with respect to
providing a safe place of work and suitable and safe appliances for the work. These the employee
is not treated as assuming until he becomes aware of the defect and risk alike are so obvious that
an ordinarily prudent person under the circumstances would have observed and appreciated
them."

See also Dowd vs. New York, O. & W. Ry. Co. (170 N.Y., 459). In Halsbury's Laws of England
(vol. 20, p. 138), it is said:

"The defense of contributory negligence is always available in actions for compensation for
negligence. It is a common law defense available to a master sued by a workman in respect of
personal negligence, and, if proved, defeats the action."

Cooley on Torts (2d ed., page 667), says:

"Where the master is sued by his servant for an injury which it is claimed has been occasioned
by his negligence, it is very properly and justly held that the plaintiff is not to recover if his own
negligence contributed with that of the defendant in producing the injury."

Summing up the defenses available to the master under the common law of England and the
United States, it may be said that he could defend against an action by his servant by proving his
own freedom from negligence, the plaintiff's contributory negligence, that the injury was caused
by the negligence of a fellow servant, or that it happened through one of the ordinary risks of the
employment. Any one of these defenses was a sufficient answer to the plaintiff' claim. The first
two are defenses which he might urge against the claim of a stranger, but the last two are
peculiar to the relationship of master and servant, and are said to arise from the implied contract
of service between them.

Let us now see what effect the Employers' Liability Act had upon the common law. In England,
as we have stated above, the employer was not liable under the common law for injuries to his
employees caused by the negligence of a fellow servant who had been intrusted by the master
with the duty of furnishing the employees safe places, machinery, etc., for their work. Under the
first subsection 1 of the Employers' Liability Act, it is clear that an employer may no longer
claim exemption from liability upon this ground. But, as above stated, it was already the majority
rule of the common law in the United States that master could not delegate their responsibilities
to provide safe premises and machinery for their employees or subordinates. Hence, we find the
Massachusetts court saying in McCafferty vs. Lewando's F. D. & C. Co. (194 Mass., 412; 120
Am. St. Rep., 562):

"So far as defects in the way, works and machinery are concerned, there is no difference between
the liability under the Employers' Liability Act (Rev. Laws, c. 106, sec. 71, cl. 1) and at common
law, except in the amount which can be recovered."

In Alabama it was said Wilson vs. Louisville, etc., R. Co., (85 Ala., 269):

"Under the statute, negligence in causing, or failing to discover or remedy a defect, is essential to
liability. It does not undertake to define what shall constitute a defect, or negligence in regard to
the condition of the ways, works, machinery or plant. To determine these matters, reference must
be made to the principles of the common law. Therefore, whether the plaintiff's right to recover
is based on the statutory or common law liability of an employer, the measure of defendant's
duty to plaintiff is essentially the same."

In Colorado Milling & Elevator Co. vs. Mitchell (26 Colo., 284), it was said:

"Clauses 1 and 2, which are not only provisions that can be said to have any bearing upon the
case in hand, are, so far as they go, but a legislative recognition of the principles laid down in the
former decisions of this court."

It is, however, observed in Toomey vs. Donovan (158 Mass., 232), that section 4 of their Act
(sec. 6 of our own) enlarges "the liability of the employer; otherwise, it is meaning less. The
inference from the section plainly is that the employer should be liable when a contractor does
part of his work and an employee of the contractor is injured by reason of a detect in the
condition of the ways, works, machinery, or plant furnished by the employer to the contractor,
which has not been discovered or remedied through the negligence of the employer, or of some
person intrusted by him with the duty of seeing that they were in proper condition."

In England, the view is entertained that the liability imposed by the Act in extension or
derogation of the employer's common law liability arises almost entirely from the partial
abrogation of the doctrine of common employment which the Act effects (Weblin vs. Ballard, 17
Q. B. D., 122).

The Employers' Liability Act was passed to obviate the injustice to workmen that employers
should escape liability where persons having superintendence and control in the employment
were guilty of negligence causing injury to workmen. The object of the Act was to get rid of the
inference arising from the fact of common employment with respect to injuries caused by any
persons who are intrusted with the duty of seeing that the ways, works, or machinery are in
proper condition, who have duties of superintendence and control. And, in the case of railroads,
who have charge or control of engines, switches, signals, or trains. (Griffiths vs. Earl of Dudley,
9 Q. B. D., 357, 362.)

In Massachusetts, prior to the enactment in question, it had always been the rule that the common
employer was not liable to an employee for injuries sustained through the negligence of a
superintendent or superior workman (Ziegler vs. Day, 123 Mass., 152; Kalleck vs. Deering, 161
Mass., 469, 42 Am. St. Rep., 421). In Quinlan vs. Lackawanna Steel Co. (107 App. Div., 176; 94
N. Y. S., 942), it was said that the act was undoubtedly intended to make the employer liable for
the acts of a superintendent while engaged in acts of superintendence. In 1 Dresser on
Employers' Liability it is said:

"The effect of the Act is to except from the class of fellow servants, the risk of whose negligence
the servant was held to have assumed, such persons as are intrusted by the master with duties of
superintendents while in the exercise of them."

In Alabama it has been said that the statute does not make the master liable for the negligence of
an employee who is a mere fellow servant and nothing more of the injured employee (Walton vs.
Tennessee Coal, Iron & R. R. Co., 166 Ala., 538).

In 5 Labatt's Master & Servant, p. 5192, it is said that, generally speaking, conditions precedent
recovery are (1) that the servant was a "superintendent" within the meaning of the acts; (2) that
the act which was the immediate cause of the injury was negligent; and (3) that the act was done
in the exercise of the controlling functions of the superintendent. It has been suggested that, in
effect, subsection 2 of section 1 extends to workmen the benefit of the principle of respondent
superior so far as negligent acts of "superintendents" are concerned.

The third subsection of section 1 carries the abrogation of the fellow-servant doctrine even
farther as respects employees of what is generally known as the operating department of
railroads. In this industry an employer is liable not only for negligent acts of those who may be
properly said to be within subsection 2, but also, according to subsection 3, to all persons " in
charge or control of any signal, switch, locomotive engine or train." Railroad companies have
thus special liabilities and railroad employees have special benefits under the Act.

The effect of the Act on the fellow-servant doctrine was not to entirely abolish it but to reduce its
scope. As was said in Henahan vs. Lyons (1909) (201 Mass., 269), "There can be no recovery for
the negligence of an employee where there is no evidence that superintendence was his sole or
principal duty."

Now, what effect has the Act had upon the common law defense of assumption of risk, or as it is
considered in some jurisdictions, volenti non fit injuria? In a recent case decided by the Supreme
Court of the United States, in which the Federal Employers' Liability Act of April 22, 1908 (c.
149, 35 Stat., 65) was discussed, it was said:

"Upon the merits, we of course sustain the contention that by the Employers' Liability act the
defense of assumption of risk remains as at common law, saving in cases mentioned in section 4,
that is to say: `any case where the violation by such common carrier of any statute enacted for
the safety of employee.'" (Southern Ry. Co. vs. Crockett, 234 U. S., 725.)

In England, it was said in the case of Thomas vs. Quartermaine (18 Q. B. D., 685) that the Act
had not varied the effect of the maxim volenti non fit injuria so far as it involves the ordinary
risks inherent in his particular employment. To the same effect is O'Maley vs. South Boston Gas
Light Co. (158 Mas., 135); Birmingham Ry. & Electric Co. vs. Allen (99 Ala., 359); Whitcomb
vs. Standard Oil Co. (153 Ind., 513). But while the Act made no change in the doctrine of
assumed risks, there is, nevertheless, a noticeable difference in the application of the doctrine in
favor of the workman since the enactment of these Acts. The doctrine is based upon the implied
consent of the servant to accept or continue in the employment after becoming aware of the risk
which resulted in his injury. It was formerly held that mere acceptance of the employment or
continuance in it with knowledge of the risk was conclusive of the workman's consent to accept
the risk, and the usual practice was, when evidence of this nature was satisfactory, to direct a
verdict or nonsuit in favor of the defendant. The trend of modern public sentiment in favor of
compensation for industrial accidents, however, has had the influence of making the assumption
of risks almost entirely a question of fact instead of, as under the former practice, practically
inferring his consent from the fact of his knowledge of the risk coupled with his continuance in
the service. The unwillingness of the employee to sacrifice his employment has been recognized
as an inducement for him to run the risk, however unwilling he may be, in fact, to do so. This
new theory of the assumption of risk, however, does not abrogate the doctrine at all. It merely
requires more convincing evidence of the employee's consent to assume the risk. It is still true
that the employee assumes the ordinary risks inherent in the industry in which he is employed.
But as to those abnormal risks arising from unusual conditions, the new view of the doctrine
requires the question of his consent to undergo suck risks to be considered purely as a question
of fact and to require cogent and convincing evidence of such consent. Cases in which the whole
matter is discussed at length are Thomas vs. Quartermaine (18 Q. B. D., 685); Yarmouth vs.
France (19 Q. B. D., 647; 17 Eng. Rul. Cas., 217); Smith vs. Baker (60 L. J., Q. B. D., N. S.,
683); Fitzgerald vs. Connecticut River Paper Co. (155 Mass., 155; 31 Am. St. Rep., 537);
Mahoney vs. Dore (155 Mass., 513); Davis vs. Forbes, 171 Mass., 548); Simoneau vs. Rice &
Hutchins (202 Mass., 82); and see 3 Labatt's Master and Servant, p. 3627, et seq.; 2 Dresser on
Employers' Liability, p. 326.

"The defense of contributory negligence is always available in actions for compensation for
negligence. It is a common law defense available to a master sued by a workman in respect of
personal negligence, and, if proved, defeats the action. The act has not deprived the employer of
this defense." (20 Halsbury's Laws of England, p. 138.)

In Massachusetts it was said that assuming the negligence of a superintendent, the servant could
not recover if he were guilty of contributory negligence. (Regan vs. Lombard, 192 Mass., 319).
This doctrine, however, like that of the assumption of risk, has been more recently partially
abrogated by statutes. Under the Federal Employers' Liability Act of April 22, 1908 (35 Stat., 65;
U. S. Comp. Stat. Supp., 1911, p. 1322), the defense of contributory negligence "is abrogated in
all instances where the employer's violation of a statute enacted for the safety of his employees
contributes to the injury." And in several States the doctrine of comparative negligence, as to
some industries, has been established by statute. The effect of these statutes is to diminish the
damages recoverable in proportion to the negligence of the injured person. (Arkansas, Laws of
1907, p. 162; Colorado, Act of May 27, 1911; Morrison & De Soto Stat, Ann., secs. 2060 and
2063; Florida, Gen. Stat. 1906, secs. 3148 et seq.; Georgia, Code 1911, Acts 1909, p. 160).

Viewing the act as a whole, it was said in Thomas vs. Quartermaine (18 Q. B. D., 685), per
Bawen, L. J.:

"The true view in my opinion is that the Act, with certain exceptions, has placed the workman in
a position as advantageous as but no better than that of the rest of the world who use the master's
premises at his invitation on business. If it has created any further or other duty to be fulfilled by
the master I do not know what it is, how it is to be defined, or who is to define it."

In Mobile etc., Ry. Co. vs. Holborn (84 Ala., 133), it was said:

"The purpose of the statute is to protect the employee against the special defenses growing out
of, and incidental to, the relation of employer and employee; and the result is to take from the
employer such special defenses, but to leave him all the defenses which he has by the common
law against one of the public, not a trespasser, nor a bare licensee."

In 1 Dresser on Employers' Liability, sec. 2, it is observed that it is apparent that the Act has not
attempted to define generally the rights and duties of masters and servants, and is not a
codification of the law. Constant reference must be made to the common law to define who are
masters and who are servants, what is the scope of the employment and whether the inquiry was
the proximate result of the negligence; and negligence itself is determined by the common law,
and not by the Act. The Act, moreover, is silent concerning certain terms of the contract of
service. It does not impose any obligation on the master to employ competent servants, nor to
instruct or warn his servants about their work or the dangers of it. These obligations were too
well settled and important to be taken away by implication merely, and the courts have held that
the Act was remedial, and a concurrent, instead of an exclusive, remedy.

It is manifest, therefore, that the purpose of the Employers' Liability Act was, at most, to abolish
certain defenses in certain specified cases, but in no manner to prejudice common law rights of
employees or to interfere with the enforcement of any right that the Act itself did not create.
Such have the holdings of the courts in England and the United States from the very beginning.

We now come to the consideration of Act No. 1874 for the purpose of determining what effect
this Act has had upon the law of damages in personal injury cases in this country, bearing in
mind that the Act is, as we have indicated, essentially a copy of the Massachusetts Employers'
Liability Act which has "prevailed in the State of Massachusetts some years and upon which
interpretations have been made by the Massachusetts courts, defining the exact meaning of the
provisions of the law." (Special report of the joint committee of the Philippine Legislature on the
Employers' Liability Act, Commission Journal 1908, p. 296.) We agree with the Supreme Court
of Massachusetts that the Act should be liberally construed in favor of employees. The main
purpose of the Act, as its title indicates, was to extend the liability of employers and to render
them liable in damages for certain classes of personal injuries for which it was thought they were
not liable under the law prior to the passage of the Act.

We do not doubt that it was, prior to the passage of Act No. 1874 and still is, the duty of the
employer in this jurisdiction to perform those duties, in reference to providing reasonably safe
places, and safe and suitable ways, works, and machinary, etc., in and about which his
employees are required to work, which, under the common law of England and America, are
termed personal duties, and which in the United States are held to be such that the employer
cannot delegate his responsibility and liability to his subordinates.

"This (rule of) contractual obligation, implied from the relation and perhaps so inherent in its
nature to be invariable by the parties, binds the employer to provide safe appliance for the use of
the employee, thus closely corresponding to the English and American law." (Rakes vs. Atlantic,
Gulf & Pacific Co., 7 Phil. Rep., 359, 366.)

So, to this extent, the first subsection of section 1 of the Act is simply declaratory of the law as it
stood previous to the enactment. It may be that the employer would not be liable, under the Civil
Code, for personal injuries caused to his employees as a result of the negligence of the
employers' superintendent or acting superintendent, or that of a person in charge or control of a
signal, etc., provided that the employer "employed all the diligence of a good father of a family
to avoid that damage." (Art. 1903 of the Civil Code, and Chaves and Garcia vs. Manila Electric
Railroad and Light Co., 31 Phil. Rep., 47.) Under the Act the employer would be liable in
damages for such negligence of the employees named. If this view be correct, a question which
we are not now called upon to definitely determine, then the liability of employers was, in fact,
extended and new rights of action were created by the Act. It is these new rights to which the Act
refers, wherein it provides that "the employee, or his legal representatives, shall, subject to the
provisions of this Act, have the same rights to compensation and of action against the employer
as if he had not been an employee, nor in the service, nor engaged in the work, of the employer."

Standing in this form, it is quite clear that it was not intended that all rights to compensation and
of action against employers by injured employees or their representatives must be brought under
and be governed by the Act. The strongest proof of all, showing that the Legislature never
intended by the Act to curtail the rights of employees, is that of the defense of contributory
negligence which defeats the action under the Act, while under the Civil Code, such complete
defense does not exist at all in this country. (Rakes vs. Atlantic, Gulf & Pacific Co., supra; Eades
vs. Atlantic, Gulf & Pacific Co., 19 Phil. Rep., 561.) That the defense of contributory negligence,
as it is understood in the United States, is recognized in the Act with all as an essential requisite
that the employee be "in the exercise of due care" at the time of the injury in order to hold the
employer liable for damages. The plaintiff in the case of Rakes vs. Atlantic, Gulf & Pacific Co.
(supra) could not have recovered under the Act because he was not in the exercise of due care at
the time of the injury.

Taking into consideration what we have said above in reference to the origin and history of the
Act, its plain purport, and realizing that the legislature was content with the expounded meaning
of the words which it adopted, we find no difficulty in reaching the conclusion that in those cases
either within or without the words of the Act in which the law, as it stood prior to the passage of
the Act, gives an employee a remedy, he still has a right to sue under the same conditions and to
recover damages to the same extent as if the Act had not been passed. We are also of the opinion
that so far as section 1 of the Act is concerned, the provisions giving the employees the same
rights to compensation and to action as if they had not been employees, the requirement of notice
as a condition to maintaining the action, that relating to the time within which the action must be
brought, and that requiring the employee to give notice to his employer within a reasonable time
after be becomes aware of the defect or negligence, only apply to those extremes lying outside of
the Civil and allied Codes but embraced by the Act, unless a case shall arise in which the
plaintiff, although he has a remedy under the Civil Code, insists upon relying upon the Act alone.
(Ryalls vs. Mechanics' Mills, 150 Mass., 190, and cases cited therein.) Act No. 2473 has not in
the least changed these principles.

The net result is that we are required, under the pleadings and record in the case at bar, to
determine whether the plaintiff can recover for the death of her son under either Act No. 1874 of
the Civil Code.

Assuming that the excavation for the gas pipe is within the category of "ways, works, or
machinery connected with or used in the business of the defendant," we are of the opinion that
recovery cannot be had under the Act for the reason that, as we have indicated, the deceased was
at a place where he had no right to be at the time he met his death. His work did not call him
there, nor is it shown that he was permitted there tacitly or otherwise. Under the Anglo-American
law the rule applicable to such a set of facts is that the master is not responsible, under the
Employers' Liability Act, for accidents to his employees when they are outside the scope of their
employment for purposes of their own.

"The obligations of the master . . . continue in force, not only during all the time in which his
servants are actually engaged in his service, but also during the time reasonably occupied by
them on his premises in going to and returning from their work and in intervals of rest between. .
. . But he is under no obligation to keep in sage condition for their use any part of the premises to
which their duties do not call them and to which he has not given them permission to go."
(Street's edition of Shearman & Redfield on Negligence [vol. 1], sec. 188.)

To the same effect is 4 Labatt's Master and Servant, p. 4697.

"A master's duty in respect to furnishing his servants a safe place in which to work extends to
such parts of his premises only as he has prepared for their occupancy while doing his work, and
to such other parts as he knows or ought to know they ar accustomed to use while doing it. The
application of this principle has frequently prevented recovery in cases where the injury
proximately resulted from the fact that the injured servant was occupying the dangerous position
merely for his own convenience and accomodation. Under such circumstances his legal right are
no greater than those of a licensee."

Besides the many cases cited by this author supporting his text, we note Conell vs. New York C.
& H. R. R. Co. (129 N. Y., Sup. 666); Louisville & N. R. R. Co. vs. Hocker (111 Ky., 707);
Gawlack vs. Michigan C. R. Co. (11 Ohio C. C., 59); Pfeiffer vs. Ringler (12 Daly, 437) ---- in
all of which cases the injured persons were attending a call of nature in dangerous circumstances
at places not authorized by the employer to be used for that purposes; Wilson vs. Chesapeake &
O. Ry. Co. (130 Ky., 182), where plaintiff left a roundhouse in which he was working at night
and started in the dark through the yards for a restaurant to get something to eat; Pioneer Mining
& Mfg. Co. vs. Talley (12 L. R. A., N. S., 861), where plaintiff, a miner, left his own tools which
he had loaned to other workmen; McCann vs. Atlantic Mills (20 R. I., 566), where plaintiff went
into a dark place to get a drink of water and was injured by falling into a reservoir; and Adams
vs. Iron Cliffs Co. (78 Mich., 271; 18 Am. St. Rep., 441), where plaintiff left his work during
working hours and started to cross some railroad tracks for the purpose of attending to his private
business. In all these cases it was held that the injured person was outside the scope of his
employment at the time and, hence, had no right of action against his employer.

Article 1105 of the Civil Code provides that:

"No one shall be liable for events which could not be foreseen, or which having been foreseen
were inevitable, with the exception of the cases expressly mentioned in the law or those in which
the obligation so declares."

The case under consideration does not fall within the exceptions mentioned in the above quoted
article. (Manresa, vol. 8, p. 91.) After providing a reasonably safe place in an about which the
deceased was required to work, the defendant's liability was then limited to those events which
could have been foreseen. Article 1902 provides that a person who, by an act or omission causes
damage to another when there is fault or negligence shall be obliged to repair the damage so
done. Article 1903, after providing for the liability of principals for the acts of their employees,
agents, or those for whom they are otherwise responsible, provides that such liability shall cease
when the persons mentioned therein prove that they employed all the diligence of a good father
of a family to avoid the damage. We have then, on the one hand, nonliability of an employer for
events which could be foreseen (article 1105), and where he has exercised the care of a good
father of a family (article 1903), and, on the other hand, his liability where fault or negligence
may be attributable to him (article 1902).

Gideon, city engineer of Manila and a witness for the plaintiff, testified concerning his
experience with trenches in this city. He stated that if the trenches are very dangerous his
department uses sheathing piles and braces them firmly. If the trenches are of considerable depth
and the ground is not considered safe, they simply make the excavations. The conditions vary
and the precautions used depend upon the opinion of an experienced engineer. Seaver, chief of
police of the city of Manila and also a witness for the plaintiff, testified that the slide which
caused the death of the deceased came principally from the side of the trench farthest from the
street-car tracks. Captain Ordax of the police department, another witness for the plaintiff,
testified that the earth which covered the deceased's body came from the side opposite the street-
car tracks. Another witness testified that the distance from the street-car tracks to the trench was
only a few feet, but that the trench had been open for a week. From the testimony of the
witnesses it does not appear that there was any water in the bottom of the trench, although some
of the witnesses said that it was damp. The trench was only three and one-half to four and one-
half feet deep. The cause of Ocemen's death wa not the weight of the earth which fell upon him,
but was due to suffocation. He was sitting or squatting when the slide gave way. Had he been
even half- erect, it is highly probable that he would have escaped suffocation or even serious
injury. Hence, the accident was of a most unusual character. Experience and common sense
demonstrate that ordinarily no danger to employees is to be anticipated from such a trench as that
in question. The fact that the walls had maintained themselves for a week, without indication of
their giving way, strongly indicates that the necessity for bracing or shoring the trench was
remote. To require the company to guard against such accident as the one in question would
virtually dug by it in the city of Manila for the gas mains. Upon a full consideration of the
evidence, we are clearly of the opinion that ordinary care did not require the shoring of the trench
wall at the place where the deceased met his death. The event properly comes within the class of
those which could not be foreseen; and, therefore, the defendant is not liable under the Civil
Code.

Having reached the conclusions above set forth, it is unnecessary to inquire into the right of the
plaintiff to bring and maintain this action.

For the foregoing reasons the judgment appealed from is reversed and the complaint dismissed,
without costs. So ordered.

Arellano, C. J., Torres, Johnson, and Araullo, JJ., concur.


([1925V85E] HILARIO GERCIO, plaintiff-appellee, vs. SUN LIFE ASSURANCE CO. OF
CANADA ET AL., defendants. SUN LIFE ASSURANCE CO. OF CANADA, appellant.,
G.R. No. 23703, 1925 Sep 28, En Banc)

D E C I S I O N


MALCOLM, J .:

The question of first impression in the law of life insurance to be here decided is whether the
insured - the husband - has the power to change the beneficiary - the former wife - and to name
instead his actual wife, where the insured and the beneficiary have been divorced, and where the
policy of insurance does not expressly reserve to the insured the right to change the beneficiary
Although the authorities have been exhausted, no legal situation exactly like the one before us
has been encountered.

Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the insurer,
and Andrea Zialcita, the beneficiary, are the defendants. The complaint is in the nature of
mandamus. Its purpose is to compel the defendant Sun Life Assurance Co. of Canada to change
the beneficiary in the policy issued by the defendant company on the life of the plaintiff Hilario
Gercio with one Andrea Zialcita as beneficiary.

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

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

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

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

On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No. 161481
on the life of Hilario Gercio. The policy was what is known as a twenty-year endowment policy.
By its terms, the insurance company agreed to insure the life of Hilario Gercio for the sum of
P2,000, to be paid him on February 1, 1930, or if the insured should die before said date, then to
his wife, Mrs. Andrea Zialcita, should she survive him; otherwise, to the executors,
administrators, or assigns of the insured. The policy also contained a schedule of reserves,
amounts in cash, paid-up policies, and renewed insurance, guaranteed. The policy did not include
any provision reserving to the insured the right to change the beneficiary.

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

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

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

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

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

On the further supposition that the Insurance Act applies, it will be found that in this Law, there
is likewise no provision either permitting or prohibiting the insured to change the beneficiary.

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

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

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

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

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

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

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

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

xxx xxx xxx

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

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

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

xxx xxx xxx

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If space permitted, the following corroborative authority could also be taken into account: Joyce,
The Law of Insurance, second edition, vol. 2, pp. 1649 at seq.; 37 Corpus Juris, pp. 349 et seq.;
14 R. C. L., pp. 1376 et seq.; Green vs. Green ([1912], 147 Ky., 608; 39 L. R. A. [N. S.], 370);
Washington Life Insurance Co. vs. Berwald ([1903], 97 Tex., 111); Begley vs. miller ([1907],
137 Ill. App., 278); Blum vs. New York L. Ins. Co. ([1906], 197 Mo., 513; 8 L. R. A. [N. S.],
923); Union Central Life Ins. Co, vs. Buxer ([1900], 62 Ohio St., 385; 49 L. R. A., 737); Griffith
vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs. Conn Mut.
L. Ins. Co. of Hartford ([1902], 95 Md., 101); Snyder vs. Supreme Ruler of Fraternal Mystic
Circle ([1909], 122 Tenn., 248; 45 L. R. A. [N. S.], 209); Lloyd vs. Royal Union Mut. L. Ins. Co.
([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs. Dunham ([1878], 46 Conn., 79; 33 Am.
Rep., 14); Mckee vs. Phoenix Ins Co. ([1859], 28 Mo., 383; 75 Am. Rep., 129); Supreme
Council American Legion of Honor vs. Overhiser ([1900], 63 Ohio St., 77; 81 Am St. Rep., 612;
50 L. R. A., 552); Condon vs. New York life Insurance Co. ([1918], 183 Iowa, 658); with which
compare Foster vs. Gile ([1880], 50 Wis., 603) and Hatch vs. Hatch ([1904], 35 Tex. Civ. App.,
373).

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

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

Street, Villamor, Ostrand, Johns and Villa-Real, JJ., concur.

Avancea, C.J., concurs in the result.

Separate Opinions

JOHNSON, J., concurring:

I agree with the majority of the court, that the judgment of the lower court should be revoked, but
for a different reason. In my judgment, the question presented by the plaintiff is purely an
academic one. The purpose of the petition is to have declared the rights of certain persons in an
insurance policy which is not yet due and payable. It may never become due and payable. The
premiums may not be paid, thereby rendering the contract of insurance of non effect, and many
other things may occur before the policy becomes due, which would render it non effective. The
plaintiff and the other parties who are claiming an interest in said policy should wait until there is
something due them under the same. For the courts to declare now who are the persons entitled
to receive the amounts due, if they ever become due and payable, is impossible, for the reason
that nothing may ever become payable under the contract of insurance, and for many reasons
such persons may never have a right to receive anything when the policy does become due and
payable. In my judgment, the action is premature and should have been dismissed.

Romualdez, J., did not take part.









([1950V230E] PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant, vs. ASIA LIFE
INSURANCE COMPANY, defendant-appellee., G.R. No. L-1669, 1950 Aug 31, En Banc)

D E C I S I O N

BENGZON, J.:

These two cases, appealed from the Court of First Instance of Manila, call for decision of the
question whether the beneficiary in a life insurance policy may recover the amount thereof
although the insured died after repeatedly failing to pay the stipulated premiums, such failure
having been caused by the last war in the Pacific.

The facts are these:

First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia
Life Insurance Company (a foreign corporation incorporated under the laws of Delaware, U. S.
A.), issued on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life
of Arcadio Constantino for a term of twenty years. The first premium covered the period up to
September 26, 1942. The plaintiff Paz Lopez de Constantino was regularly appointed
beneficiary. The policy contained these stipulations, among others:

"This POLICY OF INSURANCE is issued in consideration of the written and printed application
herefor, a copy of which is attached hereto and is hereby made a part hereof, and of the payment
in advance during the lifetime and good health of the Insured of the annual premium of One
Hundred fifty-eight and 4/100 pesos Philippine currency 1 and of the payment of a like amount
upon each twenty-seventh day of September hereafter during the term of Twenty years or until
the prior death of the Insured. ( mphasis supplied.)

xxx xxx xxx

"All premium payments are due in advance and any unpunctuality in making any such payment
shall cause this policy to lapse unless and except as kept in force by the Grace Period condition
or under Option 4 below. (Grace of 31 days.)"

After that first payment, no further premiums were paid. The insured died on September 22,
1944.

It is admitted that the defendant, being an American corporation, had to close its branch office in
Manila by reason of the Japanese occupation, i. e. from January 2 1942, until the year 1945.

Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy
No. 78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the
lives of the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000, The annual
premium stipulated in the policy was regularly paid from August 1, 1938, up to and including
September 30, 1941. Effective August 1, 1941 the mode of payment of premiums was changed
from annual to quarterly, so that quarterly premiums were paid, the last having been delivered on
November 18, 1941, said payment covering the period up to January 31, 1942. No further
payments were handed to the insurer. Upon the Japanese occupation, the insured and the insurer
became separated by the lines of war, and it was impossible and illegal for them to deal with
each other. Because the insured had borrowed on the policy an amount of P234.00 in January,
1941, the cash surrender value of the policy was sufficient to maintain the policy in force only up
to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff Agustina Peralta is
his beneficiary. Her demand for payment met with defendant's refusal, grounded on non-
payment of the premiums.

The policy provides in part:

"This POLICY OF INSURANCE is issued in consideration of the written and printed application
herefor, a copy of which is attached hereto and is hereby made a part hereof, and of the payment
in advance during the life time and good health of the Insured of the annual premium of Two
hundred and 43/100 pesos Philippine currency and of the payment of a like amount upon each
first day of August hereafter during the term of Twenty years or until the prior death of either of
the Insured. ( mphasis supplied.)

xxx xxx xxx

"All premium payments are due in advance and any unpunctuality in making any such payment
shall cause this policy to lapse unless and except as kept in force by the Grace Period condition
or under Option 4 below. (Grace of 31 days.) . . ."

Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They allege that non-payment of the premiums was
caused by the closing of defendant's offices in Manila during the Japanese occupation and the
impossible circumstances created by war.

Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.

The lower court absolved the defendant. Hence this appeal.

The controversial point has never been decided in this jurisdiction. Fortunately, this court has
had the benefit of extensive and exhaustive memoranda including those of amici curiae. The
matter has received careful consideration, inasmuch as it affects the interest of thousands of
policy-holders and the obligations of many insurance companies operating in this country.

Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended,
and the Civil Code. 2 Act No. 2427 was largely copied from the Civil Code of California. 3
And this court has heretofore announced its intention to supplement the statutory laws with
general principles prevailing on the subject in the United States. 4

In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance
are contracts of indemnity upon the terms and conditions specified in the policy. The parties have
a right to impose such reasonable conditions at the time of the making of the contract as they
may deem wise and necessary. The rate of premium is measured by the character of the risk
assumed. The insurance company, for a comparatively small consideration, undertakes to
guarantee the insured against loss or damage, upon the terms and conditions agreed upon, and
upon no other, and when called upon to pay, in case of loss, the insurer, therefore, may justly
insist upon a fulfillment of these terms. If the insured cannot bring himself within the conditions
of the policy, he is not entitled to recover for the loss. The terms of the policy constitute the
measure of the insurer's liability, and in order to recover the insured must show himself within
those terms; and if it appears that the contract has been terminated by a violation, on the part of
the insured, of its conditions, then there can be no right of recovery. The compliance of the
insured with the terms of the contract is a condition precedent to the right of recovery."

Recall of the above pronouncements is appropriate because the policies in question stipulate that
"all premium payments are due in advance and any unpunctuality in making any such payment
shall cause this policy to lapse." Wherefore, it would seem that pursuant to the express terms of
the policy, non-payment of premium produces its avoidance.

"The conditions of contracts of insurance, when plainly expressed in a policy, are binding upon
the parties and should be enforced by the courts, if the evidence brings the case clearly within
their meaning and intent. It tends to bring the law itself into disrepute when, by astute and subtle
distinctions, a plain case is attempted to be taken without the operation of a clear, reasonable,
and material obligation of the contract. Mack vs. Rochester German Ins. Co., 106 N. Y., 560,
564." (Young vs. Midland Textile Insurance Co., 30 Phil., 617, 622.)

In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided
because the premium had not been paid within the time fixed, since by its express terms, non-
payment of any premium when due or within the thirty-day period of grace, ipso facto caused the
policy to lapse. This goes to show that although we take the view that insurance policies should
be conserved 5 and should not lightly be thrown out, still we do not hesitate to enforce the
agreement of the parties.

"Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse
to enforce an insurance contract according to its meaning." (45 C. J. S., p. 150.).

Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.

Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect
of non-payment of premiums occasioned by war, the American cases may be divided into three
groups, according as they support the so-called Connecticut Rule, the New York Rule, or the
United States Rule.

The first holds the view that "there are two elements in the consideration for which the annual
premium is paid - First, the mere protection for the year, and, second, the privilege of renewing
the contract for each succeeding year by paying the premium for that year at the time agreed
upon. According to this view of the contract, the payment of premiums is a condition precedent,
the non-performance of which, even when performance would be illegal, necessarily defeats the
right to renew the contract."

The second rule, apparently followed by the greater number of decisions, holds that "war
between states in which the parties reside merely suspends the contracts of life insurance, and
that, upon tender of all premiums due by the insured or his representative after the war has
terminated, the contract revives and becomes fully operative."

The United States rule declares that the contract is not merely suspended, but is abrogated by
reason of nonpayment of premiums, since the time of the payments is peculiarly of the essence
of the contract. It additionally holds that it would be unjust to allow the insurer to retain the
reserve value of the policy, which is the excess of the premiums paid over the actual risk carried
during the years when the policy had been in force. This rule was announced in the well-known
Statham 6 case which, in the opinion of Professor Vance, is the correct rule. 7

The appellants and some amici curi contend that the New York rule should be applied here.
The appellee and other amici curiae contend that the United States doctrine is the orthodox view.

We have read and re-read the principal cases upholding the different theories. Besides the respect
and high regard we have always entertained for decisions of the Supreme Court of the United
States, we cannot resist the conviction that the reasons expounded in its decision of the Statham
case are logically and juridically sound. Like the instant case, the policy involved in the Statham
decision specifies that non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the court said:

". . . it must be conceded that promptness of payment is essential in the business of life
insurance. All the calculations of the insurance company are based on the hypothesis of prompt
payments. They not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are enabled to offer assurance at the
favorable rates they do. Forfeiture for non-payment is a necessary means of protecting
themselves from embarrassment. Unless it were enforceable, the business would be thrown into
confusion. It is like the forfeiture of shares in mining enterprises, and all other hazardous
undertakings. There must be power to cut off unprofitable members, or the success of the whole
scheme is endangered. The insured parties are associates in a great scheme. This associated
relation exists whether the company be a mutual one or not. Each is interested in the
engagements of all; for out of the co- existence of many risks arises the law of average, which
underlies the whole business. An essential feature of this scheme is the mathematical calculations
referred to, on which the premiums and amounts assured are based. And these calculations,
again, are based on the assumption of average mortality, and of prompt payments and compound
interest thereon. Delinquency cannot be tolerated nor redeemed, except at the option of the
company. This has always been the understanding and the practice in this department of
business. Some companies, it is true, accord a grace of thirty days, or other fixed period, within
which the premium in arrear may be paid, on certain conditions of continued good health, etc.
But this is a matter of stipulation, or of discretion, on the part of the particular company. When
no stipulation exists, it is the general understanding that time is material, and that the forfeiture is
absolute if the premium be not paid. The extraordinary and even desperate efforts sometimes
made, when an insured person is in extremes to meet a premium coming due, demonstrates the
common view of this matter.

"The case, therefore, is one in which time is material and of the essence of the contract. Non-
payment at the day involves absolute forfeiture if such be the terms of the contract, as is the case
here. Courts cannot with safety vary the stipulation of the parties by introducing equities for the
relief of the insured against their own negligence."

In another part of the decision, the United States Supreme Court considers and rejects what is, in
effect, the New York theory in the following words and phrases:

"The truth is, that the doctrine of the revival of contracts suspended during the war is one based
on considerations of equity and justice, and cannot be invoked to revive a contract which it
would be unjust or inequitable to revive.

"In the case of life insurance, besides the materiality of time in the performance of the contract,
another strong reason exists why the policy should not be revived. The parties do not stand on
equal ground in reference to such a revival. It would operate most unjustly against the company.
The business of insurance is founded on the law of average; that of life insurance eminently so.
The average rate of mortality is the basis on which it rests. By spreading their risks over a large
number of cases, the companies calculate on this average with reasonable certainty and safety.
Anything that interferes with it deranges the security of the business. If every policy lapsed by
reason of the war should be revived, and all the back premiums should be paid, the companies
would have the benefit of this average amount of risk. But the good risks are never heard from;
only the bar are sought to be revived, where the person insured is either dead or dying. Those in
health can get new policies cheaper than to pay arrearages on the old. To enforce a revival of the
bad cases, whilst the company necessarily lose the cases which are desirable, would be
manifestly unjust. An insured person, as before stated, does not stand isolated and alone. His
case is connected with and co-related to the cases of all others insured by the same company. The
nature of the business, as a whole, must be looked at to understand the general equities of the
parties."

The above consideration certainly lend themselves to the approval of fair-minded men.
Moreover, if, as alleged, the consequences of war should not prejudice the insured, neither
should they bear down on the insurer.

Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the
insured to pay premiums was excused during the war owing to impossibility of performance, and
that consequently no unfavorable consequences should follow from such failure.

The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after
the first, is not an obligation of the insured, so much so that it is not a debt enforceable by action
of the insurer.

"Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation upon
which the insurer can maintain an action against insured; nor is its settlement governed by the
strict rule controlling payment of debts. So, the court in a Kentucky case declares, in the opinion,
that it is not a debt. . . . The fact that it is payable annually or semi-annually, or at any other
stipulated time, does not of itself constitute a promise to pay, either express or implied. In case of
non-payment, the policy is forfeited, except so far as the forfeiture may be saved by agreement,
by waiver, estoppel, or by statute. The payment of the premium is entirely optional, while a debt
may be enforced at law, and the fact that the premium is agreed to be paid is without force, in the
absence of an unqualified and absolute agreement to pay a specified sum at some certain time. In
the ordinary policy there is no promise to pay, but it is optional with the insured whether he will
continue the policy or forfeit it." (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)

"It is well settled that a contract of insurance is sui generis. While the insured by an observance
of the conditions may hold the insurer to his contract, the latter has not the power or right to
compel the insured to maintain the contract relation with it longer than he chooses. Whether the
insured will continue it or not is optional with him. There being no obligation to pay for the
premium, they did not constitute a debt." Noble vs. Southern States M. D. Ins. Co., 157 Ky., 46;
162 S. W., 528) (Emphasis ours.)

It should be noted that the parties contracted not only for peacetime conditions but also for times
of war, because the policies contained provisions applicable expressly to wartime days. The
logical inference, therefore, is that the parties contemplated uninterrupted operation of the
contract even if armed conflict should ensue.

For the plaintiffs, it is again argued that in view of the enormous growth of insurance business
since the Statham decision, it could now be relaxed and even disregarded. It is stated "that the
relaxation of rules relating to insurance is in direct proportion to the growth of the business. If
there were only 100 men, for example, insured by a Company or a mutual Association, the death
of one will distribute the insurance proceeds among the remaining 99 policy- holders. Because
the loss which each survivor will bear will be relatively great, death from certain agreed or
specified causes may be deemed not a compensable loss. But if the policy-holders of the
Company or Association should be 1,000,000 individuals, it is clear that the death of one of them
will not seriously prejudice each one of the 999,999 surviving insured. The loss to be borne by
each individual will be relatively small."

The answer to this is that as there are (in the example) one million policy-holders, the "losses" to
be considered will not be the death of one but the death of ten thousand, since the proportion of 1
to 100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively
small."

After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is
such a vital defense of insurance companies that since the very beginning, said Act No. 2427
expressly preserved it, by providing that after the policy shall have been in force for two years, it
shall become incontestable (i. e. the insurer shall have no defense) except for fraud, non-payment
of premiums, and military or naval service in time of war (sec. 184 [b], Insurance Act). And
when Congress recently amended this section (Rep. Act No. 171), the defense of fraud was
eliminated, while the defense of nonpayment of premiums was preserved. Thus the fundamental
character of the undertaking to pay premiums and the high importance of the defense of non-
payment thereof, was specifically recognized.

In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule,
which is in effect a variation of the Connecticut rule for the sake of equity. In this connection, it
appears that the first policy had no reserve value, and that the equitable values of the second had
been practically returned to the insured in the form of loan and advance for premium.

For all the foregoing, the lower court's decision absolving the defendant from all liability on the
policies in question, is hereby affirmed, without costs.

Moran, C.J., Ozaeta, Pars, Pablo, Montemayor, Tuason and Reyes, JJ., concur.












(COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ASTURIAS SUGAR
CENTRAL, INC., respondent., G.R. No. L-15013, 1961 Aug 31, En Banc)

D E C I S I O N

CONCEPCION, J.:

The Collector of Internal Revenue (now Commissioner of Internal Revenue) seeks a review of
the decision of the Court of Tax Appeals in C.T.A. Case No. 307, as amended, sentencing said
officer to refund to the Asturias Sugar Central, Inc. the sums of P563 and P24,839.00 at the legal
rate from the date of payment of said sums.
The facts, according to counsel for the Government, are set forth in the aforementioned decision,
from which we quote:
"Petitioner herein, Asturias Sugar Central, Inc., is a corporation duly organized and existing
under the laws of the Philippines with the office at Dumalag, Capiz (Par. 1, Stipulation of Facts).
Since its organization, petitioner has been engaged in the manufacture of sugar from sugar cane
in its mill located in San Juan, Municipality of Dumalag, Capiz (Par. 3, Stip. of Facts). On or
about April 18, 1942, the Asturias Sugar Central, Inc. was burned by the retreating USAFFE
under its scorch earth policy and/or to resist enemy attack (Par. 4, Stip. of Facts). The Central
was totally destroyed and was reconstructed only on or about 1947 (Par. 4, Stip. of Facts). The
petitioner on February 26, 1943, filed with the Philippine War Damage Commission a claim for
damages sustained on its properties during the war in the amount of P2,135,685.51 (par. 5 & 6,
Stip. of Facts). The War Damage Commission approved payment in favor of petitioner in the
amount of P1,064,312.92 (Par. 7, Stip. of Facts), and extended the first payment on account of
the approved claim in the amount of P426,526.16 under Treasury Warrant No. 1362433 dated
February 29, 1950 (should be February 28, 1950) and the amount was deposited by the petitioner
on May 7, 1950 at the Philippine National Bank, Iloilo Branch (Par. 8, Stip. of Facts). On
November 3, 1950, petitioner received the second payment of P319,413.90 covered by Treasury
Warrant No. 1463076 (Annex 'C') which amount was deposited on the same date by the
petitioner with the Philippine National Bank, Iloilo Branch (Par. 9, Stip. of Facts). Together with
the second check was a note informing petitioner that the amount would be the last payment
because there was no more funds available (Par. 9, Stip. of Facts).
"The petitioner filed its income tax returns on the fiscal year basis ending October 31, of each
year (Exhs. O, P, Q,). In its income tax return for 1950, it claimed a deduction of P354,606.30 as
war losses (Par. 10, Stip. of Facts). Upon proper verification respondent disallowed all
deductions for war losses and consequently, notices of deficiency income tax assessments were
issued against the petitioner in the amounts of P563.00 and P24,339.00 corresponding to the year
1950 and 1951. (Par. 12, Stip. of Facts.) Petitioner paid the above mentioned amounts in the total
sum of P25,402.00 under Official Receipt No. 719730 dated August 1, 1956 (Par. 13, Stip. of
Facts). On October 25, 1956, petitioner requested the refund of the said amount [(Annex '1') Par.
14, Stip. of Facts] which request was denied by respondent in a letter dated November 23, 1956
(Annex 'H' Par. 14, stip. of Facts). (Pp. 1-3, Memorandum for Respondent.)."
The main issue is likewise stated in said decision in the following language:
"The only issue presented for our consideration is whether the war losses in question were
properly deductible in 1942, when the losses were actually sustained, or in 1950 end 1951, when
petitioner was advised by the Philippine War Damage Commission that no further payment
would be made, unless the Congress of the United States should provide additional funds.
"Section 30 (d) (2) of the Revenue Code allows the deduction from the gross income of a
corporation of 'all losses actually sustained and charged off within the taxable year and not
compensated for by insurance or otherwise. If property is not insured against loss, the loss must
be deducted in the year it is actually sustained. If property is insured against loss, 'the amount of
the loss must be reduced by the amount of any insurance or other compensation received, and by
the salvaged value, if any, of the property'; and the amount not so compensated for by insurance
is deductible in the year the claim for indemnity is finally determined, since it is required that
losses, to be deductible, must be 'evidenced by closed and completed transactions.' (Secs. 94, 96,
Rev. Regs. No. 2, 39 O.G. 325, Feb. 11, 1941).
"On the ground that the losses sustained by it on account of the destruction of its properties on
April 18, 1943 were covered by the war risk insurance provided in a law passed by the United
States Congress, petitioner claimed as deduction in its income tax returns for 1950 and 1951,
when its claim for indemnity was finally determined, the portion of its losses in the sums of
P354,606.30 and P319,143.36 not compensated for by said insurance. In support of its claim that
its losses were covered by insurance, petitioner relies mainly on Public Law 506 77th
Congress of the United States. Respondent, on the other hand, claims that the losses sustained by
petitioner were not covered by insurance; hence, such losses must be claimed as deduction in the
year they were actually sustained, not in the years the claim for indemnity was finally
determined."
Section 5 (g) of said Public Law 506 77th Congress of the U.S. otherwise known as the
War Damage Corporation Act reads:
"(a) The Reconstruction Finance Corporation is hereby directed to continue to supply funds to
the War Damage Corporation, a corporation created pursuant to section 5d of this; . . . The
Reconstruction Finance Corporation is authorized to and shall empower the War Damage
Corporation to use its funds to provide, through insurance, reinsurance, or otherwise, reasonable
protection against loss of or damage to property, real and personal, which may result from enemy
attack (including any action taken by the military, naval, or air forces of the United States in
resisting enemy attack), with such general exception as the War Damage Corporation, with the
approval of the Secretary of Commerce, may deem advisable. Such protection shall be made
available through the War Damage Corporation on and after a date to be determined and
published by the Secretary of Commerce which shall not be later than July 1, 1942, upon the
payment of such premium or other charge, and subject to such terms and conditions, as the War
Damage Corporation with the approval of the Secretary of Commerce, may establish, but, in
view of the national interest involved, the War Damage Corporation shall from time to time
establish uniform rates for each type of property with respect to which such protection is made
available, and, in order to establish a basis for such rates, such Corporation shall estimate the
average risk, of loss on all property of such type in the United States. Such protection shall be
applicable only (1) to such property situated in the United States (including the several States
and the District of Columbia), the Philippine Islands, the Canal Zone, the Territories and
possessions of the United States, and in such other places as may be determined by the President
to be under the dominion and control of the United States, . . . Provided, That such protection
shall not be applicable after the date determined by the Secretary of Commerce under this
subsection to property in transit upon which the United States Maritime Commission is
authorized to provide marine war-risk insurance. The War Damage Commission, with the
approval of the Secretary of Commerce may suspend, restrict, or otherwise limit such protection
in any area to the extent that it may determine to be necessary or advisable in consideration of
the loss of control over such area by the United States making it impossible or impracticable to
provide such protection in such area.
"(b) Subject to the authorizations and limitations prescribed in subsection (a), any loss or
damage to any such property sustained subsequent to December 6, 1941, and prior to the date
determined by the Secretary of Commerce under subsection (a), may be compensated by the War
Damage Corporation without requiring a contract of insurance or the payment of premium, or
other charge, and such loss or damage may be adjusted as if a policy covering such property was
in fact in force at the time of such loss or damage". (U.S. Statutes at Large, Vol. 56, Part 1, pp.
175-176).
Considering that the Asturias Sugar Central was destroyed on April 18, 1942, or subsequent to
December 6, 1941, but not later than July 1, 1942, it is clear that the loss of the central was
compensable by the War Damage Corporation under the provisions of said section 5 (g),
particularly under subdivision (b) thereof. Our decision in Cu Unjieng & Sons, Inc. vs. Collector
of Internal Revenue, G.R. No. L-6296, promulgated September 29, 1956, is invoked by the
Government in support of its theory that the U. S. Government and the War Damage Corporation
were morally, not legally, committed to make payment on account of war damages in the
Philippines under the aforementioned Act of Congress. The facts in said case are, however,
materially different from those obtaining in the one at bar.
Whereas the Asturias Sugar Central was burned by the USAFFE subsequent to December 6,
1941, but prior to July 1, 1942, in furtherance of our resistance to enemy attack, the losses of the
Cu Unjieng were sustained when the enemy was retreating under the impact of the attack by the
American forces of Liberation, early in 1945. At that time, said losses of the Cu Unjiengs were
not compensable, either under the aforementioned Act of Congress of the U.S. their property
having been destroyed after July 1, 1942 or under the Philippine Rehabilitation Act
(Philippine Law 37079th Congress of the U.S.), for the latter was approved on April 30, 1946.
Hence, said losses were deductible in the year in which they were "actually sustained" (Sections
60 and 94 of our Tax Code).
Upon the other hand, when the Asturias Sugar Central was destroyed on April 18, 1942, the War
Damage Corporation Act was already in force, and subdivision (b) of Section 5g thereof
provided that said loss was compensable by the War Damage Corporation "without requiring a
contract of insurance or the payment of premium or other charge". The Asturias Sugar Central,
Inc. had, therefore, not only the right, but, also, the duty, before it claimed the corresponding
deduction for the loss of its central, to wait until it could determine, with reasonable certainty,
how much compensation, if any, it would get pursuant to said section 5g. Only then could it be
fairly said that it had complied with the requirement of section 96 of our Tax Code, to the effect
that:
"Losses must usually be evidenced by closed and completed transactions. Proper adjustment
must be made in each case . . . Moreover, the amount of loss must be reduced by the amount of
any insurance or other compensation received, and by the salvage value, if any, of the property . .
. ". ( nderscoring supplied.)
It is urged that "insurance" is a contract, which did not exist under the aforementioned section 5g
of the War Damage Corporation Act. Although "insurance" is generally a contract, nothing in its
nature bars an insurance by operation of law. Indeed, said section 5g particularly, subdivision
(b) thereof, providing for compensation "by the War Damage Corporation without requiring a
contract of insurance or the payment of premiums or other charge . . . as if a policy . . . was in
fact in force at the time of" the "loss or damage" in question leaves no room for doubt about
the intent of Congress of the United States to establish, between the War Damage Corporation
and the owner of the property lost or damaged, a relation identical to that existing between the
insurer and the insured under a contract of insurance. At any rate, the juridical relation thus
created is such as to clearly fall within the purview of the term "insurance or otherwise" used in
sections 30 and 94 of our Tax Code.
It is next urged that the obligation to compensate under subdivision (b) of section 5g of the War
Damage Corporation Act is purely moral, not legal, because it merely provides that the loss or
damage therein referred to "may be compensated . . . and may be adjusted" as pointed out above.
The verb "may" is used therein only to indicate a grant of authority which otherwise the War
Damage Corporation would not have. It does not connote Discretion to compensate or not to
compensate the loss or damage in question, for the War Damage Corporation is placed by law in
the position of one who has issued a policy covering the property lost or damaged, and is,
accordingly, bound to compensate in accordance with the terms and conditions of such policy.
The Solicitor-General maintains that the Government should not be required to pay interest on
the amount refundable to the Asturias Sugar Central, Inc., there being no statutory provision
expressly or clearly directing or authorizing such payment, but the propriety of awarding interest
on the sum recoverable by the taxpayer has already been upheld in our resolution denying the
motion for reconsideration filed by the Government in Carcar Electric and Ice Plant Co., Inc. vs.
Collector of Internal Revenue, 53 O.G. 1068, 1071, 1073-1075.
WHEREFORE, the decision appealed from is hereby affirmed, without costs. It is so ordered.
Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and
Natividad, JJ., concur.


Ang Goik Chip vs springfield fire & Marine Insurance Co., 58 Phil. 378, [1933]










([1996V710] JACQUELINE JIMENEZ VDA. DE GABRIEL, petitioner,
vs.
HON. COURT OF APPEALS and FORTUNE INSURANCE & SURETY COMPANY,
INC., respondents., G.R. No. 103883, 1996 Nov 14, 1st Division)

VITUG, J.:


The petition for review on certiorari in this case seeks the reversal of the decision 1 of the Court
of Appeals setting aside the judgment of the Regional Trial Court of Manila, Branch 55, which
has ordered private respondent Fortune Insurance & Surety Company, Inc., to pay petitioner
Jacqueline Jimenez vda. de Gabriel, the surviving spouse and beneficiary in an accident (group)
insurance of her deceased husband, the amount of P100,000.00, plus legal interest.

Marcelino Gabriel, the insured, was employed by Emerald Construction & Development
Corporation ("ECDC") at its construction project in Iraq. He was covered by a personal accident
insurance in the amount of P100,000.00 under a group policy 2 procured from private respondent
by ECDC for its overseas workers. The insured risk was for "(b)odily injury caused by violent
accidental external and visible means which injury (would) solely and independently of any
other cause" 3 result in death or disability.

On 22 May 1982, within the life of the policy, Gabriel died in Iraq. A year later, or on 12 July
1983, ECDC reported Gabriel's death to private respondent by telephone. 4 Among the
documents thereafter submitted to private respondent were a copy of the death certificate 5
issued by the Ministry of Health of the Republic of Iraq which stated

REASON OF DEATH: UNDER EXAMINATION NOW NOT YET KNOWN 6

and an autopsy report 7 of the National Bureau of Investigation ("NBI") to the effect that "(d)ue
to advanced state of postmortem decomposition, cause of death (could) not be determined." 8
Private respondent referred the insurance claim to Mission Adjustment Service, Inc.

Following a series of communications between petitioner and private respondent, the latter, on
22 September 1983, ultimately denied the claim of ECDC on the ground of prescription. 9
Petitioner went to the Regional Trial Court of Manila. In her complaint against ECDC and
private respondent, she averred that her husband died of electrocution while in the performance
of his work and prayed for the recovery of P100,000.00 for insurance indemnification and of
various other sums by way of actual, moral, and exemplary damages, plus attorney's fees and
costs of suit.

Private respondent filed its answer, which was not verified, admitting the genuineness and due
execution of the insurance policy; it alleged, however, that since both the death certificate issued
by the Iraqi Ministry of Health and the autopsy report of the NBI failed to disclose the cause of
Gabriel's death, it denied liability under the policy. In addition, private respondent raised the
defense of "prescription," invoking Section 384 10 of the Insurance Code. Later, private
respondent filed an amended answer, still unverified, reiterating its original defenses but, this
time, additionally putting up a counterclaim and a crossclaim.

The trial court dismissed the case against ECDC for the failure of petitioner to take steps to cause
the service of the fourth alias summons on ECDC. The dismissal was without prejudice.

The case proceeded against private respondent alone. On 28 May 1987, the trial court rendered
its decision 11 in favor (partly) of petitioner's claim. In arriving at its conclusion, the trial court
held that private respondent was deemed to have waived the defense, i.e., that the cause of
Gabriel's death was not covered by the policy, when the latter failed to impugn by evidence
petitioner's averment on the matter. With regard to the defense of prescription, the court
considered the complaint to have been timely filed or within one (1) year from private
respondent's denial of the claim.

Petitioner and private respondent both appealed to the Court of Appeals. Petitioner contended
that the lower court should have awarded all the claims she had asked for. Private respondent
asserted, on its part, that the lower court erred in ruling (a) that the insurer had waived the
defense that Gabriel's death was not caused by the insured peril ("violent accidental external and
visible means") specified in the policy and (b) that the cause of action had not prescribed.

The Court of Appeals, on 18 September 1991, reversed the decision of the lower court. The
appellate court held that petitioner had failed to substantiate her allegation that her husband's
death was caused by a risk insured against. The appellate court observed that the only evidence
presented by petitioner, in her attempt to show the circumstances that led to the death of the
insured, were her own affidavit and a letter allegedly written by a co-worker of the deceased in
Iraq which, unfortunately for her, were held to be bothhearsay. 12

The motion for reconsideration was denied. 13

Petitioner's recourse to this Court must also fail.

On the issue of "prescription," private respondent correctly invoked Section 384 of the Insurance
Code; viz:

Sec. 384. Any person having any claim upon the policy issued pursuant to this chapter shall,
without any unnecessary delay, present to the insurance company concerned a written notice of
claim setting forth the nature, extent and duration of the injuries sustained as certified by a duly
licensed physician. Notice of claim must be filed within six months from date of the accident,
otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss
or injury must be brought, in proper cases, with the Commissioner or the Courts within one year
from denial of the claim, otherwise, the claimant's right of action shall prescribe.

The notice of death was given to private respondent, concededly, more than a year after the death
of petitioner's husband. Private respondent, in invoking prescription, was not referring to the
one-year period from the denial of the claim within which to file an action against an insurer but
obviously to the written notice of claim that had to be submitted within six months from the time
of the accident.

Petitioner argues that private respondent must be deemed to have waived its right to controvert
the claim, that is, to show that the cause of death is an excepted peril, by failing to have its
answers (to the Request for Admission sent by petitioner) duly verified. It is true that a matter of
which a written request for admission is made shall be deemed impliedly admitted "unless,
within a period designated in the request, which shall not be less than ten (10) days after service
thereof, or within such further time as the court may allow on motion and notice, the party to
whom the request is directed serves upon the party requesting the admission a sworn statement
either denying specifically the matters of which an admission is requested or setting forth in
detail the reasons why he cannot truthfully either admit or deny those matters;" 14 however, the
verification, like in most cases required by the rules of procedure, is a formal, not jurisdictional,
requirement, and mainly intended to secure an assurance that matters which are alleged are done
in good faith or are true and correct and not of mere speculation. When circumstances warrant,
the court may simply order the correction of unverified pleadings or act on it and waive strict
compliance with the rules in order that the ends of justice may thereby be served. 15 In the case
of answers to written requests for admission particularly, the court can allow the party making
the admission, whether made expressly or deemed to have been made impliedly, "to withdraw or
amend it upon such terms as may be just." 16

The appellate court acted neither erroneously nor with grave abuse of discretion when it
seconded the court a quo and ruled:

As to the allegation of the plaintiff-appellant that the matters requested by her to be admitted by
the defendant-appellant under the Request for Admission were already deemed admitted by the
latter for its failure to answer it under oath, has already been properly laid to rest when the lower
court in its Order of May 28, 1987 correctly ruled:

At the outset, it must be stressed that the defendant indeed filed a written answer to the request
for admission, sans verification. The case of Motor Service Co., Inc. vs. Yellow Taxicab Co.,
Inc., et al. may not therefore be controlling, or actually opposite. In said case, there was an
absolute failure on the part of the defendant to answer the request for admission, and thus the
court was justified in rendering a summary judgment. Here, however, as clearly intimated
elsewhere above, the defendant answered in writing practically every question posed in the
request for admission. The Court believes, under the peculiar circumstance, that the more
controlling jurisprudence on the mater would be those cited by the defendant in its
memorandum, particularly the case of Quimpo vs. de la Victoria, 46 SCRA 139.

Prescinding from the foregoing, there is absolutely no basis in fact and in law for the lower court
to hold that the appellant insurance company was deemed to have waived the defense, that the
death of plaintiff-appellant's husband was not caused by violent accidental external and visible
means' as contemplated in the insurance policy. The Death Certificate (Exh. 9) and the Autopsy
Report (Exh. 10), more than controverted the allegation of the plaintiff-appellant as to the cause
of death of her husband. 17


The insurance policy expressly provided that to be compensable, the injury or death should be
caused by "violent accidental external and visible means." In attempting to prove the cause of her
husband's death, all that petitioner could submit were a letter sent to her by her husband's co-
worker, stating that Gabriel died when he tried to haul water out of a tank while its submerged
motor was still functioning, 18 and petitioner's sinumpaangsalaysay 19 which merely confirmed
the receipt and stated contents of the letter. Said the appellate court in this regard:

. . . . It must be noted that the only evidence presented by her to prove the circumstances
surrounding her husband's death were her purported affidavit and the letter allegedly written by
the deceased co-worker in Iraq. The said affidavit however suffers from procedural infirmity as it
was not even testified to or identified by the affiant (plaintiff-appellant) herself. This self-serving
affidavit therefore is a mere hearsay under the rules, . . . .

Xxx xxx xxx

In like manner, the letter allegedly written by the deceased's co-worker which was never
identified to in court by the supposed author, suffers from the same defect as the affidavit of the
plaintiff-appellant. 20

Not one of the other documents submitted, to wit, the POEA decision, dated 06 June 1984, 21
the death certificate issued by the Ministry of Health of Iraq and the NBI autopsy report, 22
could give any probative value to petitioner's claim. The POEA decision did not make any
categorical holding on the specific cause of Gabriel's death. Neither did the death certificate
issued by the health authorities in Iraq nor the NBI autopsy report provide any clue on the cause
of death. All that appeared to be clear was the fact of Gabriel's demise on 22 May 1982 in Iraq.

Evidence, in fine, is utterly wanting to establish that the insured suffered from an accidental
death, the risk covered by the policy. In an accident insurance, the insured's beneficiary has the
burden of proof in demonstrating that the cause of death is due to the covered peril. Once that
fact is established, the burden then shifts to the insurer to show any excepted peril that may have
been stipulated by the parties. An "accident insurance" is not thus to be likened to an ordinary
life insurance where the insured's death, regardless of the cause thereof, would normally be
compensable. The latter is akin in property insurance to an "all risk" coverage where the insured,
on the aspect of burden of proof, has merely to show the condition of the property insured when
the policy attaches and the fact of loss or damage during the period of the policy and where,
thereafter, the burden would be on the insurer to show any "excluded peril." When, however, the
insured risk is specified, like in the case before us, it lies with the claimant of the insurance
proceeds to initially prove that the loss is caused by the covered peril.

While petitioner did fail in substantiating her allegation that the death of her husband was due to
an accident, considering, however, the uncertainty on the real cause of death, private respondent
might find its way clear into still taking a second look on the matter and perhaps help ease the
load of petitioner's loss.

WHEREFORE, the decision appealed from is AFFIRMED. No costs.

SO ORDERED.

Padilla, Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.









([1997V474] MAYER STEEL PIPE CORPORATION and HONGKONG GOVERNMENT
SUPPLIES DEPARTMENT, petitioners, vs. COURT OF APPEALS, SOUTH SEA
SURETY AND INSURANCE CO., INC. and the CHARTER INSURANCE
CORPORATION, respondents., G.R. No. 124050, 1997 Jun 19, 2nd Division)


D E C I S I O N

PUNO, J:

This is a petition for review on certiorari to annul and set aside the Decision of respondent Court
of Appeals dated December 14, 1995 1 and its Resolution dated February 22, 1996 2 in CA-G.R.
CV No. 45805 entitled Mayer Steel Pipe Corporation and Hongkong Government Supplies
Department v. South Sea Surety Insurance Co., Inc. and The Charter Insurance Corporation. 3

In 1983, petitioner Hongkong Government Supplies Department (Hongkong) contracted
petitioner Mayer Steel Pipe Corporation (Mayer) to manufacture and supply various steel pipes
and fittings. From August to October, 1983, Mayer shipped the pipes and fittings to Hongkong as
evidenced by Invoice Nos. MSPC-1014, MSPC-1015, MSPC-1025, MSPC-1020, MSPC-1017
and MSPC-1022. 4

Prior to the shipping, petitioner Mayer insured the pipes and fittings against all risks with private
respondents South Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp.
(Charter). The pipes and fittings covered by Invoice Nos. MSPC-1014, 1015 and 1025 with a
total amount of US$212,772.09 were insured with respondent South Sea, while those covered by
Invoice Nos. 1020, 1017 and 1022 with a total amount of US$149,470.00 were insured with
respondent Charter.

Petitioners Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as
third-party inspector to examine whether the pipes and fittings are manufactured in accordance
with the specifications in the contract. Industrial Inspection certified all the pipes and fittings to
be in good order condition before they were loaded in the vessel. Nonetheless, when the goods
reached Hongkong, it was discovered that a substantial portion thereof was damaged.

Petitioners filed a claim against private respondents for indemnity under the insurance contract.
Respondent Charter paid petitioner Hongkong the amount of HK$64,904.75. Petitioners
demanded payment of the balance of HK$299,345.30 representing the cost of repair of the
damaged pipes. Private respondents refused to pay because the insurance surveyor's report
allegedly showed that the damage is a factory defect.

On April 17, 1986, petitioners filed an action against private respondents to recover the sum of
HK$299,345.30. For their defense, private respondents averred that they have no obligation to
pay the amount claimed by petitioners because the damage to the goods is due to factory defects
which are not covered by the insurance policies.

The trial court ruled in favor of petitioners. It found that the damage to the goods is not due to
manufacturing defects. It also noted that the insurance contracts executed by petitioner Mayer
and private respondents are "all risks" policies which insure against all causes of conceivable
loss or damage. The only exceptions are those excluded in the policy, or those sustained due to
fraud or intentional misconduct on the part of the insured. The dispositive portion of the decision
states:

WHEREFORE, judgment is hereby rendered ordering the defendants jointly and severally, to
pay the plaintiffs the following:

1. the sum equivalent in Philippine currency of HK$299,345.30 with legal rate of interest as of
the filing of the complaint;

2. P100,000.00 as and for attorney's fees; and

3. costs of suit.

SO ORDERED. 5

Private respondents elevated the case to respondent Court of Appeals.

Respondent court affirmed the finding of the trial court that the damage is not due to factory
defect and that it was covered by the "all risks" insurance policies issued by private respondents
to petitioner Mayer. However, it set aside the decision of the trial court and dismissed the
complaint on the ground of prescription. It held that the action is barred under Section 3(6) of the
Carriage of Goods by Sea Act since it was filed only on April 17, 1986, more than two years
from the time the goods were unloaded from the vessel. Section 3(6) of the Carriage of Goods by
Sea Act provides that "the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought within one year after delivery of the goods or the date when
the goods should have been delivered." Respondent court ruled that this provision applies not
only to the carrier but also to the insurer, citing Filipino Merchants Insurance Co., Inc. v.
Alejandro. 6

Hence this petition with the following assignments of error:

1. The respondent Court of Appeals erred in holding that petitioners' cause of action had already
prescribed on the mistaken application of the Carriage of Goods by Sea Act and the doctrine of
Filipino Merchants Co., Inc. v. Alejandro (145 SCRA 42); and

2. The respondent Court of Appeals committed an error in dismissing the complaint. 7

The petition is impressed with merit. Respondent court erred in applying Section 3(6) of the
Carriage of Goods by Sea Act.

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be
discharged from all liability for loss or damage to the goods if no suit is filed within one year
after delivery of the goods or the date when they should have been delivered. Under this
provision, only the carrier's liability is extinguished if no suit is brought within one year. But the
liability of the insurer is not extinguished because the insurer's liability is based not on the
contract of carriage but on the contract of insurance. A close reading of the law reveals that the
Carriage of Goods by Sea Act governs the relationship between the carrier on the one hand and
the shipper, the consignee and/or the insurer on the other hand. It defines the obligations of the
carrier under the contract of carriage. It does not, however, affect the relationship between the
shipper and the insurer. The latter case is governed by the Insurance Code.

Our ruling in Filipino Merchants Insurance Co., Inc. v. Alejandro 8 and the other cases 9 cited
therein does not support respondent court's view that the insurer's liability prescribes after one
year if no action for indemnity is filed against the carrier or the insurer. In that case, the shipper
filed a complaint against the insurer for recovery of a sum of money as indemnity for the loss
and damage sustained by the insured goods. The insurer, in turn, filed a third-party complaint
against the carrier for reimbursement of the amount it paid to the shipper. The insurer filed the
third-party complaint on January 9, 1978, more than one year after delivery of the goods on
December 17, 1977. The court held that the Insurer was already barred from filing a claim
against the carrier because under the Carriage of Goods by Sea Act, the suit against the carrier
must be filed within one year after delivery of the goods or the date when the goods should have
been delivered. The court said that "the coverage of the Act includes the insurer of the goods." 10

The Filipino Merchants case is different from the case at bar. In Filipino Merchants, it was the
insurer which filed a claim against the carrier for reimbursement of the amount it paid to the
shipper. In the case at bar, it was the shipper which filed a claim against the insurer. The basis of
the shipper's claim is the "all risks" insurance policies issued by private respondents to petitioner
Mayer.

The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the
shipper, the consignee or the insurer. When the court said in Filipino Merchants that Section 3(6)
of the Carriage of Goods by Sea Act applies to the insurer, it meant that the insurer, like the
shipper, may no longer file a claim against the carrier beyond the one-year period provided in the
law. But it does not mean that the shipper may no longer file a claim against the insurer because
the basis of the insurer's liability is the insurance contract. An insurance contract is a contract
whereby one party, for a consideration known as the premium, agrees to indemnify another for
loss or damage which he may suffer from a specified peril 11 An "all risks" insurance policy
covers all kinds of loss other than those due to willful and fraudulent act of the insured. 12 Thus,
when private respondents issued the "all risks" policies to petitioner Mayer, they bound
themselves to indemnify the latter in case of loss or damage to the goods insured. Such
obligation prescribes in ten years, in accordance with Article 1144 of the New Civil Code. 13

IN VIEW WHEREOF, the petition is GRANTED. The Decision of respondent Court of Appeals
dated December 14, 1995 and its Resolution dated February 22, 1996 are hereby SET ASIDE
and the Decision of the Regional Trial Court is hereby REINSTATED. No costs.
SO ORDERED.



(LUZON SURETY CO., INC., plaintiff-appellant, vs. THE CITY OF BACOLOD,
ROMEO GUANZON, in his capacity as Mayor of the City of Bacolod and PORFIRIO T.
DE LEON, in his capacity as Treasurer of the City of Bacolod, defendants-appellees., G.R.
No. L-23618, 1970 Aug 31, En Banc)

D E C I S I O N

CASTRO, J:

On July 1, 1962 the city council of the City of Bacolod approved Ordinance 158, series of 1962.
1 Pursuant to the said ordinance the plaintiff Luzon Surety Co., Inc. was required to pay a fixed
annual license fee of P300 and to apply for and obtain from the City Mayor a permit (upon
payment of the sum of P20 to the City Treasurer). 2

In 1963 the plaintiff started to pay the said fees, but under protest.

On February 13, 1964 the plaintiff filed a complaint with the Court of First Instance of Negros
Occidental, assailing the ordinance as "illegal, invalid and unconstitutional" and asking for the
refund of the amount of P430 it had previously paid under protest. The plaintiff alleged, inter
alia, that the Bacolod city council exceeded the power and authority granted to it by law in
approving the said ordinance, as the latter contravenes section 2, sub-section (j) of Republic Act
2264 3 which prohibits cities from taxing insurance companies.

The defendants contended, however, that Commonwealth Act 326, as amended, otherwise
known as "The Charter of the City of Bacolod," grants the city council the power to enact
ordinances intended to regulate and fix the amounts of permit and license fees, and that moreover
the ordinance in question does not violate section 2, sub section (j) of the Local Autonomy Act
because the plaintiff is a surety company and not an insurance company.

On July 25, 1964 the lower court adjudged the plaintiff as a surety company and not an insurance
company and, therefore, as not entitled to claim exemption from the effects of the controverted
ordinance, which it declared valid, legal and constitutional.

The plaintiff's appeal to this Court poses in issue the validity of the specific portions of the
ordinance (see footnote 22) prescribing fixed annual license and permit fees for "Fiadores (Casas
y Compaias)," insofar as these pro are construed by the City of Bacolod to include surety
companies within their purview and intendment, the plaintiff insisting that a surety company is
an insurance company, that no distinction of consequence exists between the two, and that
therefore the plaintiff falls within the mantle of the exemption afforded by section 2, sub-section
(j) of the Local Autonomy Act, which explicitly prohibits chartered cities from levying or
imposing "taxes of any kind on banks, insurance companies and persons paying franchise tax."

The defendants, on the other hand, while admitting that the plaintiff is a surety company,
nevertheless insist that fundamental distinctions exist between a surety company and an
insurance company, and that the plaintiff, its principal business being one of suretyship, does not
fall under the exemption granted by section 2, sub-section (j) of the Local Autonomy Act, the
exemption exclusively being applicable only to companies doing purely insurance business.

Resolution of this appeal requires a determination of whether a surety company is an insurance
company within the meaning and intendment of section 2, sub section (j) of the Local Autonomy
Act, both parties being in agreement that the license fee in question is in the nature and concept
of a tax.

No doubt surfaces as to the power of chartered cities to tax under the Local Autonomy Act. This
Court has consistently upheld the "doctrine that the grant of the power to tax to chartered cities
under section 2 of the Local Autonomy Act is sufficiently plenary to cover 'everything, excepting
those which are mentioned' therein, subject only to the limitation that the tax so levied is for
'public purposes, just and uniform'." 4

We hereunder quote the pertinent provisions of the Local Autonomy Act:

"Section 2. Any provision of the law to the contrary not- withstanding, all chartered cities . . .
shall have authority to impose municipal license taxes or fees upon persons engaged in any
occupation or business, or exercising privileges in chartered cities, . . . Provided, however, That
no city . . . may levy or impose any of the following:

xxx xxx xxx

"(j) Taxes of any kind on banks, insurance companies, and persons, paying franchise tax . . ."

Is the word "fiadores," as used in item B-17 of article 1 of section 3 of the ordinance,
comprehended within the meaning of the term "insurance companies" as used in section 2(j) of
the Local Autonomy Act?

To begin with we look to the provisions of Act 2427, as amended (otherwise known as "The
Insurance Act"). Section 170 thereof provides that "for the purpose of this chapter [captioned
INSURANCE COMPANIES] unless the context otherwise requires the terms 'company' or
'insurance company' shall include all corporations, associations, partnerships, or individuals
engaged as principals in the insurance business, excepting fraternal and benevolent orders and
societies." Section 194 of the same Act provides as follows: "Corporations formed or organized
to save any person or persons or other corporation harmless from loss, damage, or liability
arising from any unknown or future or contingent event, or to indemnify or to compensate any
person or persons or other corporation for any such loss, damage, or liability or to guarantee the
contractual obligations or debts of others, shall be known as Insurance Corporations for the
purposes of this chapter."

Let us now examine authoritative definitions of the word "fiador." Robb's Dictionary of Legal
Terms (1966), p. 56, gives the word "fiador" this meaning: "bondsman, surety, guarantor, bailor,
backer." The New Revised Velasquez Spanish and English Dictionary (1965) states that a
"fiador" is "1. One who trusts another 2. Bondsman, guarantor, surety, or one who becomes
security for another." 36A C.J.S. 375 has this to say on the meaning of the word "fiador": "In
Spanish law, surety." XVI Enciclopedia Juridica Espaola 233 describes "fiador" as "El que
responde de la obligacion ajena, tomando sobre si el cumplimiento de ella para el caso de que no
la cumpla el que contrajo." In our own jurisprudence, "fiador is defined in the Real Academia
Castellana as 'persona que fia a otra para la seguridad de aquello a que esta obligada.' " 5

We now turn to American jurisprudence.

The Cyclopedia of Insurance Law 6 states:

"A class of contracts written by guaranty or surety companies, and generally designated as
guaranty insurance, comprises principally contract, credit, fidelity, title, bond, and security
guaranty generally. Contracts of this kind are now almost universally regarded as those of
insurance where the underwriter engages in the business for profit, especially since the terms of
such contracts usually closely resemble the essential elements of an insurance contract."

On the business of fidelity guaranty, the same authority declares that "contracts of fidelity
guaranty are contracts of indemnity, and, where the business of underwriting is undertaken for
profit, are essentially insurance contracts, which, like other contracts of insurance, are construed
against the insurer," 7 On the business of contract guaranty, the same authority comments that
"the general rule that the bonds of guaranty and surety companies, who engage in the business
for profit, are essentially insurance contracts and are governed by the rules of construction
applicable thereto, rather than by the rules applicable to strict or pure contracts of suretyship,
applies to bonds guaranteeing the carrying out or performance of contracts to do a particular act
or carry out a particular project." 8

An American case 9 resolved, with meticulous care, the problem of whether a surety company
engages in insurance business for purposes of taxation. The American Surety Company, required
by the laws of the State of Tennessee to pay privilege taxes based on its gross premiums, brought
suit against the Insurance Commissioner denying its liability for the payment of the taxes,
contending it was not an insurance company. The Supreme Court of Tennessee rejected this
contention on the basis of its finding that the American Surety Company was authorized to
conduct the business of "guaranteeing the fidelity of persons holding places of public and private
trust, the performance of contracts other than insurance policies, and executing or guaranteeing
bonds and undertakings required or permitted in all actions or proceedings or by law allowed,"
and its ruling that the contracts thus authorized to he made by the American Surety Company are
contracts of insurance and the making of them is insurance business, as defined by the statutes of
the State and the common law. The court, in support of its opinion, quoted Frost's Law of
Guaranty Insurance, thus:

"In view of all that has been said in this immediate connection, can it be affirmed that fidelity,
commercial, and judicial bonds or policies, as issued by the so-called surety companies,
constitute contracts of insurance within the legal signification of that term? The answer to the
foregoing query must be unqualifiedly in the affirmative."

Thus, the conclusion seems rather irresistible that the plaintiff, which is the holder of a
"Certificate of Authority" (issued by the Insurance Commissioner) 10 as a "fire, marine,
earthquake, typhoon, tidal wave, riot, flood, civil commotion, war, civil war, revolutions,
rebellions, military or usurped power, use & occupancy, storm, bombardment, invasion,
insurrection, motor car, burglary, accident, and fidelity insurance company," and is authorized
"to become a surety upon official recognizances, stipulations, bonds and undertakings," 11 (a) is
engaged in the insurance business, and (b) is an insurance company within the intendment of
section 2(j) of the Local Autonomy Act.

We therefore hold that the plaintiff is not liable for the payment of the annual license fee of P300
imposed by the ordinance in question.

As to the P20 annual permit fee, it is our view and we so hold that the plaintiff was correctly
adjudged liable for the payment thereof. The authority of the City of Bacolod to require persons
and entities engaged in and conducting any business within its jurisdictional territory to obtain
permits and pay the corresponding permit fees, is specifically granted by paragraph (ee) of
section 17 of Commonwealth Act 326 (known as "The Charter of the City of Bacolod"),
approved on June 18, 1938, which empowers the city council "to enact all ordinances it may
deem necessary and proper for the sanitation and safety, the furtherance of the prosperity, and
the promotion of the morality, peace, good order, comfort, convenience, and general welfare of
the city and its inhabitants." 12 In requiring permits and the payment of nominal regulatory
permit fees, the ordinance itself invokes police power, stating explicitly that permits are
necessary "for the proper supervision and enforcement of existing laws and ordinances
governing the sanitation, security and welfare of the public and the health of the employees
engaged in the business therein specified."

ACCORDINGLY, the judgment a quo is set aside, and another is hereby entered (1) declaring
that the item "B-17 Fiadores (Casas y Compaias) . . . P300.00" of Article 1 of Section 3 of
Ordinance 158, series of 1962, of the respondent City of Bacolod does not embrace within its
purview, and is not applicable to, surety companies and corporations, such as the Luzon Surety
Company, Inc. and (2) ordering the respondent City to refund to the Luzon Surety Company, Inc.
all sums of money the latter has paid in virtue of the implementation and enforcement of the said
item by the respondent City. No pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo,
Villamor and Makasiar, JJ., concur.



([2005V502] GULF RESORTS, INC., Petitioner, versus PHILIPPINE CHARTER
INSURANCE CORPORATION, Respondent., G.R. No. 156167, 2005 May 16, 2nd
Division)

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 companys liability for earthquake damage to petitioners 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 plaintiffs 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 plaintiffs 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-mentioned@ .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, defendants 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 plaintiffs 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 petitioners 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 defendants 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 attorneys 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 defendants 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 plaintiffs 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 defendants obligation to plaintiff is fully paid.

No pronouncement as to costs.[13]



Petitioners 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-APPELLANTS RIGHT
TO RECOVER UNDER DEFENDANT-APPELLEES 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 courts failure to award it
attorneys 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-appellants prayer for
the imposition of interest 24% on the insurance claim and 6% on loss of income allegedly
amounting to P4,280,000.00. 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-appellants prayer for an attorneys 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-appellants 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
RESPONDENTS 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 PETITIONERS
PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEYS FEES AND EXPENSES OF LITIGATION.



Petitioner contends:

First, that the policys 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
respondents 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 resorts
properties for earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake shock.
Respondents 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 petitioners 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 respondents policy was copied, covered only earthquake shock for
the two swimming pools.

Second, petitioners 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 petitioners 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 riders 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. Petitioners 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. Respondents 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
adjusters 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-AIUs 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, attorneys 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 % 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 petitioners previous insurance policies
from AHAC-AIU. As borne out by petitioners 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. Plaintiffs 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 plaintiffs 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 dont, 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 petitioners contention that respondents 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. Petitioners 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 respondents representative Atty. Umlas were not
proved. Atty. Umlas categorically denied having given such assurances.

Finally, petitioner puts much stress on the letter of respondents 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. In Development 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 copy verbatim 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 petitioners 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-AIUs 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.



SO ORDERED.
([1915V112] K. S. YOUNG, plaintiff-appellee, vs. THE MIDLAND TEXTILE
INSURANCE COMPANY, defendant-appellant., G.R. No. 9370, 1915 Mar 31, En Banc)

D E C I S I O N


JOHNSON, J.:

The purpose of the present action is to recover the sum of P3,000 upon an insurance policy. The
lower court rendered a judgment in favor of the plaintiff and against the defendant for the sum of
P2,708.78, and costs. From that judgment the defendant appealed to this court.

The undisputed facts upon which said action is based are as follows:

1. The plaintiff conducted a candy and fruit store on the Escolta, in the city of Manila, and
occupied a building at '321 Calle Claveria, as a residence and bodega (storehouse).

2. On the 29th of May, 1912, the defendant, in consideration of the payment of a premium of
P60, entered into a contract of insurance with the plaintiff (policy No. 509105) by the terms of
which the defendant company, upon certain conditions, promised to pay to the plaintiff the sum
of P3,000, in case said residence and bodega and contents should be destroyed by fire.

3. One of the conditions of said contract of insurance is found in "warranty B" and is as follows:
"Warranty B. It is hereby declared and agreed that during the pendency of this policy no
hazardous goods be stored or kept for sale, and no hazardous trade or process be carried on, in
the building to which this insurance applies, or in any building connected therewith."

4. On the 4th or 5th of February, 1913, the plaintiff placed in said residence and bodega three
boxes, 18 by 18 by 20 inches measurement, which belonged to him and which were filled with
fireworks.

5. On the 18th day of March, 1913, said residence and bodega and the contents thereof were
partially destroyed

6. Said fireworks had been given to the plaintiff by the former owner of the Luneta Candy Store;
that the plaintiff intended to use the same in the celebration of the Chinese new year; that the
authorities of the city of Manila had prohibited the use of fireworks on said occasion, and that the
plaintiff then placed the same in said bodega, where they remained from the 4th or 5th of
February, 1913, until after the fire of the 18th of March, 1913.

7. Both of the parties agree that said fireworks come within the phrase "hazardous goods,"
mentioned in said "warranty B" of the policy.

8. That said fireworks were found in a part of the building not destroyed by the fire; that they in
no way contributed to the fire, or to the loss occasioned thereby.

The only question presented by the parties is whether or not the placing of said fireworks in the
building insured, under the conditions above enumerated, they being "hazardous goods," is a
violation of the terms of the contract of insurance and especially of "warranty B." "Warranty B"
provides that "no hazardous goods be stored" in the building insured. It is admitted by both
parties that the fireworks are "hazardous goods." The defendant alleged that they were "stored."
The plaintiff contends that under all the facts and circumstances of the case, they were not
"stored" in said building, and that the placing of them in the building was not a violation of the
terms of the contract. Both the plaintiff and defendant agree that if they were "hazardous goods,"
and if they were "stored," then the act of the plaintiff was a violation of the terms of the contract
of insurance and the defendant was justified in repudiating its liability thereunder.

This leads us to a consideration of the meaning of the word "stored" as used in said "warranty
B." While the word "stored" has been variously defined by authors, as well as by courts, we have
found no case exactly analogous to the present. The plaintiff says that he placed said fire- works
in the bodega after he had been notified that he could not use them on the Chinese new year, in
order that he might later send them to a friend in the provinces. Whether a particular article is
"stored" or not must, in some degree depend upon the intention of the parties. The interpretation
of the word "stored" is quite difficult, in view of the many decisions upon the various conditions
presented. Nearly all of the cases cited by the lower court are cases where the article w as being
put to some reasonable and actual use, which might easily have been permitted by the terms of
the policy, and within the intention of the parties and excepted from the operation of the
warranty, like the present. Said decisions are upon cases like:

1. Where merchants have had or kept the "hazardous" articles in small quantities, and for actual
daily use, for sale, .such as gasoline, gunpowder, etc.;

2. Where such articles have been brought on the premises for actual use thereon, and in small
quantities, such as oil, paints, etc; and

3. Where such articles or goods were used for lighting purposes, and in small quantities.

The author of the Century Dictionary defines the word "store" to be a deposit in a store or
warehouse for preservation or safe keeping; to put away for future use, especially for future
consumption; to place in a warehouse or other place of deposit for safe keeping. See also the
definitions given by the Standard Dictionary, to the same effect.

Said definitions, of course, do not include a deposit in a store, in small quantities, for daily use.
"Daily use" precludes the idea of a deposit for preservation or safe keeping, as well as a deposit
for future consumption, or safe keeping.

In the present case no claim is made that the "hazardous goods" were placed in the bodega for
present or daily use. It is admitted that they were placed in the bodega "for future use," or for
future consumption, or for safe keeping. The plaintiff makes no claim that he deposited them
there with any other idea than "for future use" ---- for future consumption. It seems clear to us
that the "hazardous goods" in question were "stored" in the bodega, as that word is generally
defined. That being true, suppose the defendant had made an examination of the premises, even
in the absence of a fire, and had found the "hazardous goods" there, under the conditions above
described, would it not have been justified, then and there, in declaring the policy null and of no
effect by reason of a violation of its terms on the part of the plaintiff ? If it might, then may it not
repudiate its liability, even after the fire? If the "warranty" is a term of the contract, will not its
violation cause a breach and justify noncompliance or a repudiation?

Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the
policy. The parties have a right to impose such reasonable conditions at the time of the making of
the contract as they may deem wise and necessary. The rate of premium is measured by the
character of the risk assumed. The insurance company, for a comparatively small consideration,
undertakes to guarantee the insured against loss or damage, upon the terms and conditions agreed
upon, and upon no other, and when called upon to pay, in case of loss, the insurer, therefore, may
justly insist upon a fulfillment of these terms. If the insured cannot bring himself within the
conditions of the policy, he is not entitled to recover for the loss. The terms of the policy
constitute the measure of the insurer's liability, and in order to recover the insured must show
himself within those terms; and if it appears that the contract has been terminated by a violation,
on the part of the insured, of its conditions, then there can be no right of recovery. The
compliance of the insured with the terms of the contract is a condition precedent to the right of
recovery. If the insured has violated or failed to perform the conditions of the contract, and such
a violation or want of performance has not been waived by the insurer, then the insured cannot
recover. Courts are not permitted to make contracts for the parties. The function and duty of the
courts consist simply in enforcing and carrying out the contracts actually made. While it is true,
as a general rule, that contracts of insurance are construed most favorably to the insured, yet
contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous they must be taken and understood in their plain, ordinary and popular sense.
(Imperial Fire Ins. Co. vs. County of Coos, 151 U. S., 452; Kyte vs. Commercial Union
Assurance Co., 149 Mass., 116, 122.) The conditions of contracts of insurance, when plainly
expressed in a policy, are binding upon the parties and should be enforced by the courts, if the
evidence brings the case clearly within their meaning and intent. It tends to bring the law itself
into disrepute when, by astute and subtle distinctions, a plain case is attempted to be taken
without the operation of a clear, reasonable, and material obligation of the contract. (Mack vs.
Rochester German Ins. Co., 106 N. Y., 560, 564.)

The appellant argues, however, that in view of the fact that the "storing" of the fireworks on the
premises of the insured did not contribute in any way to the damage occasioned by the fire, he
should be permitted to recover ---- that the "storing" of the "hazardous goods" in no way caused
injury to the defendant company. That argument, however, is beside the question, if the "storing"
was a violation of the terms of the contract. The violation of the terms of the contract, by virtue
of the provisions of the policy itself, terminated, at the election of either party, the contractual
relations. (Kyte vs. Commercial Union Assurance Co., 149 Mass., 116, 122.) The plaintiff paid a
premium based upon the risk at the time the policy was issued. Certainly it cannot be denied that
the placing of the firecrackers in the building insured increased the risk. The plaintiff had not
paid a premium based upon the increased risk, neither had the defendant issued a policy upon the
theory of a different risk. The plaintiff was enjoying, if his contention may be allowed, the
benefits of an insurance policy upon one risk, whereas, as a matter of fact, it was issued upon an
entirely different risk. The defendant had neither been paid nor had issued a policy to cover the
increased risk. An increase of risk which is substantial and which is continued for a considerable
period of time, is a direct and certain injury to the insurer, and changes the basis upon which the
contract of insurance rests. (Kyte vs. Commercial Union Assurance Co. (supra); Frost's Detroit
Lumber Works vs. Millers' Mutual Ins. Co., 37 Minn., 300, 302; Moore vs. Phoenix Ins. Co., 62
N. H., 240; Ferree vs. Oxford Fire & Life Ins. Co., 67 Pa. State, 373.)

Therefore and for the foregoing reasons, the judgment of the lower court is hereby revoked and
the defendant is hereby relieved from any responsibility under said complaint, and, without any
finding as to costs, it is so ordered.



([1991V193] SUN INSURANCE OFFICE, LTD., petitioner, vs. COURT OF APPEALS and
EMILIO TAN, respondents. Alfonso Felix, Jr., for petitioner.
William B. Devilles for private respondent., G.R. No. 89741, 1991 Mar 13, 2nd Division)

D E C I S I O N

PARAS, J.:

This is a petition for review on certiorari of the June 20, 1989 decision 1 of the Court of Appeals
in CA-G.R. SP. Case No. 13848 affirming the November 3, 1987 and January 14, 1988 Orders of
the Regional Trial Court 2 of Iloilo, Branch 27, in Civil Case No. 16817, denying the motion to
dismiss and the subsequent motion for reconsideration; and the August 22, 1989 resolution of the
same court denying the motion for reconsideration.

On August 15, 1983, herein private respondent Emilio Tan took from herein petitioner a
P300,000.00 property insurance policy to cover his interest in the electrical supply store of his
brother housed in a building in Iloilo City. Four (4) days after the issuance of the policy, the
building was burned including the insured store. On August 20, 1983, Tan filed his claim for fire
loss with petitioner, but on February 29, 1984, petitioner wrote Tan denying the latter's claim. On
April 3, 1984, Tan wrote petitioner, seeking reconsideration of the denial of his claim. On
September 3, 1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3,
1984 request for reconsideration.

Petitioner answered the letter on October 11, 1985, advising Tan's counsel that the Insurer's
denial of Tan's claim remained unchanged, enclosing copies of petitioners' letters of February 29,
1984 and May 17, 1985 (response to petition for reconsideration). On November 20, 1985, Tan
filed Civil Case No. 16817 with the Regional Trial Court of Iloilo, Branch 27 but petitioner filed
a motion to dismiss on the alleged ground that the action had already prescribed. Said motion
was denied in an order dated November 3, 1987; and petitioner's motion for reconsideration was
also denied in an order dated January 14, 1988.

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

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

Hence, the instant petition.

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

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

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

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

The answer to the first issue is in the negative.

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

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

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

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

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

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

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

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

1. . . .

2. . . .

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

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

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

In enunciating the above-cited principle, this Court had definitely settled the rationale for the
necessity of bringing suits against the Insurer within one year from the rejection of the claim.
The contention of the respondents that the one-year prescriptive period does not start to run until
the petition for reconsideration had been resolved by the insurer, runs counter to the declared
purpose for requiring that an action or suit be filed in the Insurance Commission or in a court of
competent jurisdiction from the denial of the claim.

To uphold respondents' contention would contradict and defeat the very principle which this
Court had laid down. Moreover, it can easily be used by insured persons as a scheme or device to
waste time until any evidence which may be considered against them is destroyed.

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

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

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

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

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

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

"Since 'cause of action' requires as essential elements not only a legal right of the plaintiff and a
correlated obligation of the defendant in violation of the said legal right, the cause of action does
not accrue until the party obligated (surety) refuses, expressly or impliedly, to comply with its
duty (in this case to pay the amount of the bond)."

Indisputably, the above-cited pronouncements of this Court may be taken to mean that the
insured's cause of action or his right to file a claim either in the Insurance Commission or in a
court of competent jurisdiction commences from the time of the denial of his claim by the
Insurer, either expressly or impliedly.

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

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

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

b) how many petitions for reconsideration should be permitted?

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

The "final rejection" being referred to in said case is the rejection by the insurance company.

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

SO ORDERED.



([1955V265] VIRGINIA CALANOC, petitioner, vs. COURT OF APPEALS and THE
PHILIPPINE AMERICAN LIFE INSURANCE CO., respondents., G.R. No. L-8151, 1955
Dec 16, 1st Division)

D E C I S I O N

BAUTISTA ANGELO, J.:

This suit involves the collection of P2,000 representing the value of a supplemental policy
covering accidental death which was secured by one Melencio Basilio from the Philippine
American Life Insurance Company. The case originated in the Municipal Court of Manila and
judgment being favorable to the plaintiff it was appealed to the court of first instance. The latter
court affirmed the judgment but on appeal to the Court of Appeals the judgment was reversed
and the case is now before us on a petition for review.

Melencio Basilio was a watchman of the Manila Auto Supply located at the corner of Avenida
Rizal and Zurbaran. He secured a life insurance policy from the Philippine American Life
Insurance Company in the amount of P2,000 to which was attached a supplementary contract
covering death by accident. On January 25, 1951, he died of a gunshot wound on the occasion of
a robbery committed in the house of Atty. Ojeda at the corner of Oroquieta and Zurbaran streets.
Virginia Calanoc, the widow, was paid the sum of P2,000, face value of the policy, but when she
demanded the payment of the additional sum of P2,000 representing the value of the
supplemental policy, the company refused alleging, as main defense, that the deceased died
because he was murdered by a person who took part in the commission of the robbery and while
making an arrest as an officer of the law which contingencies were expressly excluded in the
contract and have the effect of exempting the company from liability.

The pertinent facts which need to be considered for the determination of the questions raised are
those reproduced in the decision of the Court of Appeals as follows:

"The circumstances surrounding the death of Melencio Basilio show that when he was killed at
about seven o'clock in the night of January 25, 1951, he was on duty as watchman of the Manila
Auto Supply at the corner of Avenida Rizal and Zurbaran; that it turned out that Atty. Antonio
Ojeda who had his residence at the corner of Zurbaran and Oroquieta, a block away from
Basilio's station, had come home that night and found that his house was well-lighted, but with
the windows closed; that getting suspicious that there were culprits in his house, Atty. Ojeda
retreated to look for a policeman and finding Basilio in khaki uniform, asked him to accompany
him to the house, with the latter refusing on the ground that he was not a policeman, but
suggesting that Atty. Ojeda should ask the traffic policeman on duty at the corner of Rizal
Avenue and Zurbaran; that Atty. Ojeda went to the traffic policeman at said corner and reported
the matter, asking the policeman to come along with him, to which the policeman agreed; that on
the way to the Ojeda residence, the policeman and Atty. Ojeda passed by Basilio and somehow
or other invited the latter to come along; that as the three approached the Ojeda residence and
stood in front of the main gate which was covered with galvanized iron, the fence itself being
partly concrete and partly adobe stone, a shot was fired; that immediately after the shot, Atty.
Ojeda and the policeman sought cover; that the policeman, at the request of Atty. Ojeda, left the
premises to look for reinforcement; that it turned out afterwards that the special watchman
Melencio Basilio was hit in the abdomen, the wound causing his instantaneous death; that the
shot must have come from inside the yard of Atty. Ojeda, the bullet passing through a hole waist-
high in the galvanized iron gate; that upon inquiry Atty. Ojeda found out that the savings of his
children in the amount of P30 in coins kept in his aparador contained in stockings were taken
away, the aparador having been ransacked; that a month thereafter the corresponding
investigation conducted by the police authorities led to the arrest and prosecution of four persons
in Criminal Case No. 15104 of the Court of First Instance of Manila for `Robbery in an Inhabited
House and in Band with Murder'."

It is contended in behalf of the company that Basilio was killed which "making an arrest as an
officer of the law" or as a result of an "assault or murder" committed in the place and therefore
his death was caused by one of the risks excluded by the supplementary contract which exempts
the company from liability. This contention was upheld by the Court of Appeals and, in reaching
this conclusion, made the following comment:

"From the foregoing testimonies, we find that the deceased was a watchman of the Manila Auto
Supply, and, as such, he was not bound to leave his place and go with Atty. Ojeda and Policeman
Magsanoc to see the trouble, or robbery, that occurred in the house of Atty. Ojeda. In fact,
according to the finding of the lower court, Atty. Ojeda finding Basilio in uniform asked him to
accompany him to his house, but the latter refused on the ground that he was not a policeman
and suggested to Atty. Ojeda to ask help from the traffic policeman on duty at the corner of Rizal
Avenue and Zurbaran, but after Atty. Ojeda secured the help of the traffic policeman, the
deceased went with Ojeda and said traffic policeman to the residence of Ojeda; and while the
deceased was standing in front of the main gate of said residence, he was shot and thus died. The
death, therefore, of Basilio, although unexpected, was not caused by an accident, being a
voluntary and intentional act on the part of the one who robbed, or one of those who robbed, the
house of Atty. Ojeda. Hence, it is our considered opinion that the death of Basilio, though
unexpected, cannot be considered accidental, for his death occurred because he left his post and
joined policeman Magsanoc and Atty. Ojeda to repair to the latter's residence to see what
happened thereat. Certainly, when Basilio joined Patrolman Magsanoc and Atty. Ojeda, he
should have realized the danger to which he was exposing himself, yet, instead of remaining in
his place, he went with Atty. Ojeda and Patrolman Magsanoc to see what was the trouble in Atty.
Ojeda's house and thus he was fatally shot."

We dissent from the above findings of the Court of Appeals. For one thing, Basilio was a
watchman of the Manila Auto Supply which was a block away from the house of Atty. Ojeda
where something suspicious was happening which caused the latter to ask for help. While at first
he declined the invitation of Atty. Ojeda to go with him to his residence to inquire into what was
going on because he was not a regular policeman, he later agreed to come along when prompted
by the traffic policeman, and upon approaching the gate of the residence he was shot and died.
The circumstance that he was a mere watchman and had no duty to heed the call of Atty. Ojeda
should not be taken as a capricious desire on his part to expose his life to danger considering the
fact that the place he was in duty-bound to guard was only a block away. In volunteering to
extend help under the situation, he might have thought, rightly or wrongly, that to know the truth
was in the interest of his employer it being a matter that affects the security of the neighborhood.
No doubt there was some risk coming to him in pursuing that errand, but that risk always existed
it being inherent in the position he was holding. He cannot therefore be blamed solely for doing
what he believed was in keeping with his duty as a watchman and as a citizen. And he cannot be
considered as making an arrest as an officer of the law, as contended, simply because he went
with the traffic policeman, for certainly he did not go there for that purpose nor was he asked to
do so by the policeman.

Much less can it be pretended that Basilio died in the course of an assault or murder considering
the very nature of these crimes. In the first place, there is no proof that the death of Basilio is the
result of either crime for the record is barren of any circumstance showing how the fatal shot was
fired. Perhaps this may be clarified in the criminal case now pending in court as regards the
incident but before that is done anything that might be said on the point would be a mere
conjecture. Nor can it be said that the killing was intentional for there is the possibility that the
malefactor had fired the shot merely to scare away the people around for his own protection and
not necessarily to kill or hit the victim. In any event, while the act may not exempt the
triggerman from liability for the damage done, the fact remains that the happening was a pure
accident on the part of the victim. The victim could have been either the policeman or Atty.
Ojeda for it cannot be pretended that the malefactor aimed at the deceased precisely because he
wanted to take his life.

We take note that these defenses are included among the risks excluded in the supplementary
contract which enumerates the cases which may exempt the company from liability. While as a
general rule "the parties may limit the coverage of the policy to certain particular accidents and
risks or causes of loss, and may expressly except other risks or causes of loss therefrom" (45 C.
J. S. 781-782), however, it is to be desired that the terms and phraseology of the exception clause
be clearly expressed so as to be within the easy grasp and understanding of the insured, for if the
terms are doubtful or obscure the same must of necessity be interpreted or resolved against the
one who has caused the obscurity. (Article 1377, new Civil Code) And so it has been generally
held that the "terms in an insurance policy, which are ambiguous, equivocal, or uncertain . . . are
to be construed strictly and most strongly against the insurer, and liberally in favor of the insured
so as to effect the dominant purpose of indemnity or payment to the insured, especially where a
forfeiture is involved" (29 Am. Jur., 181), and the reason for this rule is that the "insured usually
has no voice in the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by experts and legal advisers employed by,
and acting exclusively in the interest of, the insurance company." (44 C. J. S., p. 1174.)

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

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

We are therefore persuaded to conclude that the circumstances unfolded in the present case do
not warrant the finding that the death of the unfortunate victim comes within the purview of the
exception clause of the supplementary policy and, hence, do not exempt the company from
liability.

Wherefore, reversing the decision appealed from, we hereby order the company to pay
petitioner-appellant the amount of P2,000, with legal interest from January 26, 1951 until fully
paid, with costs.

Paras, C. J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Labrador, Concepcion and Reyes,
J.B.L., JJ., concur.







([2006V82] DBP POOL OF ACCREDITED INSURANCE COMPANIES, Petitioner,
versus RADIO MINDANAO NETWORK,
INC., Respondent., G.R. No. 147039, 2006 Jan 27, 1st Division) \

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

This refers to the petition for certiorari under Rule 45 of the Rules of Court seeking the review of
the Decision[1] dated November 16, 2000 of the Court of Appeals (CA) in CA-G.R. CV No.
56351, the dispositive portion of which reads:

Wherefore, premises considered, the appealed Decision of the Regional Trial Court of Makati
City, Branch 138 in Civil Case No. 90-602 is hereby AFFIRMED with MODIFICATION in that
the interest rate is hereby reduced to 6% per annum.

Costs against the defendants-appellants.

SO ORDERED.[2]

The assailed decision originated from Civil Case No. 90-602 filed by Radio Mindanao Network,
Inc. (respondent) against DBP Pool of Accredited Insurance Companies (petitioner) and
Provident Insurance Corporation (Provident) for recovery of insurance benefits. Respondent
owns several broadcasting stations all over the country. Provident covered respondents
transmitter equipment and generating set for the amount of P13,550,000.00 under Fire Insurance
Policy No. 30354, while petitioner covered respondents transmitter, furniture, fixture and other
transmitter facilities for the amount of P5,883,650.00 under Fire Insurance Policy No. F-66860.

In the evening of July 27, 1988, respondents radio station located in SSS Building, Bacolod
City, was razed by fire causing damage in the amount of P1,044,040.00. Respondent sought
recovery under the two insurance policies but the claims were denied on the ground that the
cause of loss was an excepted risk excluded under condition no. 6 (c) and (d), to wit:

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 consequences, namely:

(c) War, invasion, act of foreign enemy, hostilities, or warlike operations (whether war be
declared or not), civil war.

(d) Mutiny, riot, military or popular rising, insurrection, rebellion, revolution, military or
usurped power.[3]

The insurance companies maintained that the evidence showed that the fire was caused by
members of the Communist Party of the Philippines/New Peoples Army (CPP/NPA); and
consequently, denied the claims. Hence, respondent was constrained to file Civil Case No. 90-
602 against petitioner and Provident.

After trial on the merits, the Regional Trial Court of Makati, Branch 138, rendered a decision in
favor of respondent. The dispositive portion of the decision reads:

IN VIEW THEREOF, judgment is rendered in favor of plaintiff. Defendant Provident Insurance
Corporation is directed to pay plaintiff the amount of P450,000.00 representing the value of the
destroyed property insured under its Fire Insurance Policy plus 12% legal interest from March 2,
1990 the date of the filing of the Complaint. Defendant DBP Pool Accredited Insurance
Companies is likewise ordered to pay plaintiff the sum of P602,600.00 representing the value of
the destroyed property under its Fire Insurance Policy plus 12% legal interest from March 2,
1990.

SO ORDERED.[4]

Both insurance companies appealed from the trial courts decision but the CA affirmed the
decision, with the modification that the applicable interest rate was reduced to 6% per annum. A
motion for reconsideration was filed by petitioner DBP which was denied by the CA per its
Resolution dated January 30, 2001.[5]

Hence, herein petition by DBP Pool of Accredited Insurance Companies,[6] with the following
assignment of errors:

Assignment of Errors

THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THERE WERE
NO SUFFICIENT EVIDENCE SHOWING THAT THE APPROXIMATELY TENTY [sic] (20)
ARMED MEN WHO CUSED [sic] THE FIRE AT RESPONDENTS RMN PROPERTY AT
BACOLOD CITY WERE MEMBERS OF THE CPP-NPA.

THE HONORABLE COURT OF APPEALS ERRED WHEN IT ADJUDGED THAT
RESPONDENT RMN CANNOT BEHELD [sic] FOR DAMAGES AND ATTORNEYS FEES
FOR INSTITUTING THE PRESENT ACTION AGAINST THE PETITIONER UNDER
ARTICLES 21, 2208, 2229 AND 2232 OF THE CIVIL CODE OF THE PHILIPPINES.[7]

Petitioner assails the factual finding of both the trial court and the CA that its evidence failed to
support its allegation that the loss was caused by an excepted risk, i.e., members of the CPP/NPA
caused the fire. In upholding respondents claim for indemnity, the trial court found that:

The only evidence which the Court can consider to determine if the fire was due to the
intentional act committed by the members of the New Peoples Army (NPA), are the testimony
[sic] of witnesses Lt. Col. Nicolas Torres and SPO3 Leonardo Rochar who were admittedly not
present when the fire occurred. Their testimony [sic] was [sic] limited to the fact that an
investigation was conducted and in the course of the investigation they were informed by
bystanders that heavily armed men entered the transmitter house, poured gasoline in (sic) it and
then lighted it. After that, they went out shouting Mabuhay ang NPA (TSN, p. 12., August 2,
1995). The persons whom they investigated and actually saw the burning of the station were not
presented as witnesses. The documentary evidence particularly Exhibits 5 and 5-C do not
satisfactorily prove that the author of the burning were members of the NPA. Exhibit 5-B
which is a letter released by the NPA merely mentions some dissatisfaction with the activities of
some people in the media in Bacolod. There was no mention there of any threat on media
facilities.[8]

The CA went over the evidence on record and sustained the findings of the trial court, to wit:

To recapitulate, defendants-appellants presented the following to support its claim, to wit: police
blotter of the burning of DYHB, certification of the Negros Occidental Integrated National
Police, Bacolod City regarding the incident, letter of alleged NPA members Celso Magsilang
claiming responsibility for the burning of DYHB, fire investigation report dated July 29, 1988,
and the testimonies of Lt. Col. Nicolas Torres and SFO III Leonardo Rochas. We examined
carefully the report on the police blotter of the burning of DYHB, the certification issued by the
Integrated National Police of Bacolod City and the fire investigation report prepared by SFO III
Rochas and there We found that none of them categorically stated that the twenty (20) armed
men which burned DYHB were members of the CPP/NPA. The said documents simply stated
that the said armed men were believed to be or suspected of being members of the said group.
Even SFO III Rochas admitted that he was not sure that the said armed men were members of the
CPP-NPA, thus:



In fact the only person who seems to be so sure that that the CPP-NPA had a hand in the burning
of DYHB was Lt. Col. Nicolas Torres. However, though We found him to be persuasive in his
testimony regarding how he came to arrive at his opinion, We cannot nevertheless admit his
testimony as conclusive proof that the CPP-NPA was really involved in the incident considering
that he admitted that he did not personally see the armed men even as he tried to pursue them.
Note that when Lt. Col. Torres was presented as witness, he was presented as an ordinary
witness only and not an expert witness. Hence, his opinion on the identity or membership of the
armed men with the CPP-NPA is not admissible in evidence.

Anent the letter of a certain Celso Magsilang, who claims to be a member of NPA-NIROC, being
an admission of person which is not a party to the present action, is likewise inadmissible in
evidence under Section 22, Rule 130 of the Rules of Court. The reason being that an admission
is competent only when the declarant, or someone identified in legal interest with him, is a party
to the action.[9]

The Court will not disturb these factual findings absent compelling or exceptional reasons. It
should be stressed that a review by certiorari under Rule 45 is a matter of discretion. Under this
mode of review, the jurisdiction of the Court is limited to reviewing only errors of law, not of
fact.[10]

Moreover, when supported by substantial evidence, findings of fact of the trial court as affirmed
by the CA are conclusive and binding on the parties,[11] which this Court will not review unless
there are exceptional circumstances. There are no exceptional circumstances in this case that
would have impelled the Court to depart from the factual findings of both the trial court and the
CA.

Both the trial court and the CA were correct in ruling that petitioner failed to prove that the loss
was caused by an excepted risk.

Petitioner argues that private respondent is responsible for proving that the cause of the
damage/loss is covered by the insurance policy, as stipulated in the insurance policy, to wit:



Any loss or damage happening during the existence of abnormal conditions (whether physical or
otherwise) which are occasioned by or through in consequence directly or indirectly, of any of
the said occurrences shall be deemed to be loss or damage which is not covered by the insurance,
except to the extent that the Insured shall prove that such loss or damage happened
independently of the existence of such abnormal conditions.

In any action, suit or other proceeding where the Companies allege that by reason of the
provisions of this condition any loss or damage is not covered by this insurance, the burden of
proving that such loss or damage is covered shall be upon the Insured.[12]

An insurance contract, being a contract of adhesion, should be so interpreted as to carry out the
purpose for which the parties entered into the contract which is to insure against risks of loss or
damage to the goods. Limitations of liability should be regarded with extreme jealousy and
must be construed in such a way as to preclude the insurer from noncompliance with its
obligations.[13]

The burden of proof contemplated by the aforesaid provision actually refers to the burden of
evidence (burden of going forward).[14] As applied in this case, it refers to the duty of the
insured to show that the loss or damage is covered by the policy. The foregoing clause
notwithstanding, the burden of proof still rests upon petitioner to prove that the damage or loss
was caused by an excepted risk in order to escape any liability under the contract.

Burden of proof is the duty of any party to present evidence to establish his claim or defense by
the amount of evidence required by law, which is preponderance of evidence in civil cases. The
party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of
proof to obtain a favorable judgment. For the plaintiff, the burden of proof never parts.[15] For
the defendant, an affirmative defense is one which is not a denial of an essential ingredient in the
plaintiffs cause of action, but one which, if established, will be a good defense i.e. an
avoidance of the claim.[16]

Particularly, in insurance cases, where a risk is excepted by the terms of a policy which insures
against other perils or hazards, loss from such a risk constitutes a defense which the insurer may
urge, since it has not assumed that risk, and from this it follows that an insurer seeking to defeat
a claim because of an exception or limitation in the policy has the burden of proving that the loss
comes within the purview of the exception or limitation set up. If a proof is made of a loss
apparently within a contract of insurance, the burden is upon the insurer to prove that the loss
arose from a cause of loss which is excepted or for which it is not liable, or from a cause which
limits its liability.[17]

Consequently, it is sufficient for private respondent to prove the fact of damage or loss. Once
respondent makes out a prima facie case in its favor, the duty or the burden of evidence shifts to
petitioner to controvert respondents prima facie case.[18] In this case, since petitioner alleged
an excepted risk, then the burden of evidence shifted to petitioner to prove such exception. It is
only when petitioner has sufficiently proven that the damage or loss was caused by an excepted
risk does the burden of evidence shift back to respondent who is then under a duty of producing
evidence to show why such excepted risk does not release petitioner from any liability.
Unfortunately for petitioner, it failed to discharge its primordial burden of proving that the
damage or loss was caused by an excepted risk.

Petitioner however, insists that the evidence on record established the identity of the author of
the damage. It argues that the trial court and the CA erred in not appreciating the reports of
witnesses Lt. Col Torres and SFO II Rochar that the bystanders they interviewed claimed that the
perpetrators were members of the CPP/NPA as an exception to the hearsay rule as part of res
gestae.

A witness can testify only to those facts which he knows of his personal knowledge, which
means those facts which are derived from his perception.[19] A witness may not testify as to
what he merely learned from others either because he was told or read or heard the same. Such
testimony is considered hearsay and may not be received as proof of the truth of what he has
learned. The hearsay rule is based upon serious concerns about the trustworthiness and
reliability of hearsay evidence inasmuch as such evidence are not given under oath or solemn
affirmation and, more importantly, have not been subjected to cross-examination by opposing
counsel to test the perception, memory, veracity and articulateness of the out-of-court declarant
or actor upon whose reliability on which the worth of the out-of-court statement depends.[20]

Res gestae, as an exception to the hearsay rule, refers to those exclamations and statements made
by either the participants, victims, or spectators to a crime immediately before, during, or after
the commission of the crime, when the circumstances are such that the statements were made as
a spontaneous reaction or utterance inspired by the excitement of the occasion and there was no
opportunity for the declarant to deliberate and to fabricate a false statement. The rule in res
gestae applies when the declarant himself did not testify and provided that the testimony of the
witness who heard the declarant complies with the following requisites: (1) that the principal act,
the res gestae, be a startling occurrence; (2) the statements were made before the declarant had
the time to contrive or devise a falsehood; and (3) that the statements must concern the
occurrence in question and its immediate attending circumstances.[21]

The Court is not convinced to accept the declarations as part of res gestae. While it may concede
that these statements were made by the bystanders during a startling occurrence, it cannot be said
however, that these utterances were made spontaneously by the bystanders and before they had
the time to contrive or devise a falsehood. Both SFO III Rochar and Lt. Col. Torres received the
bystanders statements while they were making their investigations during and after the fire. It is
reasonable to assume that when these statements were noted down, the bystanders already had
enough time and opportunity to mill around, talk to one another and exchange information, not to
mention theories and speculations, as is the usual experience in disquieting situations where
hysteria is likely to take place. It cannot therefore be ascertained whether these utterances were
the products of truth. That the utterances may be mere idle talk is not remote.

At best, the testimonies of SFO III Rochar and Lt. Col. Torres that these statements were made
may be considered as independently relevant statements gathered in the course of their
investigation, and are admissible not as to the veracity thereof but to the fact that they had been
thus uttered.[22]

Furthermore, admissibility of evidence should not be equated with its weight and
sufficiency.[23] Admissibility of evidence depends on its relevance and competence, while the
weight of evidence pertains to evidence already admitted and its tendency to convince and
persuade.[24] Even assuming that the declaration of the bystanders that it was the members of
the CPP/NPA who caused the fire may be admitted as evidence, it does not follow that such
declarations are sufficient proof. These declarations should be calibrated vis--vis the other
evidence on record. And the trial court aptly noted that there is a need for additional convincing
proof, viz.:

The Court finds the foregoing to be insufficient to establish that the cause of the fire was the
intentional burning of the radio facilities by the rebels or an act of insurrection, rebellion or
usurped power. Evidence that persons who burned the radio facilities shouted Mabuhay ang
NPA does not furnish logical conclusion that they are member [sic] of the NPA or that their act
was an act of rebellion or insurrection. Additional convincing proof need be submitted.
Defendants failed to discharge their responsibility to present adequate proof that the loss was due
to a risk excluded.[25]

While the documentary evidence presented by petitioner, i.e., (1) the police blotter; (2) the
certification from the Bacolod Police Station; and (3) the Fire Investigation Report may be
considered exceptions to the hearsay rule, being entries in official records, nevertheless, as noted
by the CA, none of these documents categorically stated that the perpetrators were members of
the CPP/NPA.[26] Rather, it was stated in the police blotter that: a group of persons
accompanied by one (1) woman all believed to be CPP/NPA more or less 20 persons
suspected to be CPP/NPA,[27] while the certification from the Bacolod Police station stated
that some 20 or more armed men believed to be members of the New Peoples Army
NPA,[28] and the fire investigation report concluded that (I)t is therefore believed by this
Investigating Team that the cause of the fire is intentional, and the armed men suspected to be
members of the CPP/NPA where (sic) the ones responsible [29] All these documents show
that indeed, the suspected executor of the fire were believed to be members of the CPP/NPA.
But suspicion alone is not sufficient, preponderance of evidence being the quantum of proof.

All told, the Court finds no reason to grant the present petition.

WHEREFORE, the petition is DISMISSED. The Court of Appeals Decision dated November
16, 2000 and Resolution dated January 30, 2001 rendered in CA-G.R. CV No. 56351 are
AFFIRMED in toto.

SO ORDERED.


Blue Cross Health Care vs Olivares, 554 SCRA 580,[2008]









([1984V299] NORA CANSING SERRANO, petitioner, vs. COURT OF APPEALS and
SOCIAL SECURITY COMMISSION, respondents., G.R. No. L-35529, 1984 Jul 16, 2nd
Division)

D E C I S I O N

MAKASIAR, J.:

This petition for certiorari seeks to review the decision of the then Court of Appeals (now
Intermediate Appellate Court under BP 129) dated August 31, 1972, affirming the validity of the
resolution of the Social Security Commission denying favorable consideration of the claim for
benefits of the petitioner under the Group Redemption Insurance plan of the Social Security
System (SYSTEM). The dispositive portion of the respondent Court's decision reads as follows:

"WHEREFORE, the Court hereby upholds the validity of the appealed resolution No. 1365,
dated December 24, 1968, of appellee Social Security Commission; without pronouncement as to
costs" (p. 31, Rec.).

The undisputed facts are as follows:

On or about January 1, 1965, upon application of the SYSTEM, Group Mortgage Redemption
Policy No. GMR-1 was issued by Private Life Insurance Companies operating in the Philippines
for a group life insurance policy on the lives of housing loan mortgagors of the SYSTEM. Under
this Group Mortgage Redemption scheme, a grantee of a housing loan of the SYSTEM is
required to mortgage the house constructed out of the loan and the lot on which it stands. The
SYSTEM takes a life insurance on the eligible mortgagor to the extent of the mortgage
indebtedness such that if the mortgagor dies, the proceeds of his life insurance under the Group
Redemption Policy will be used to pay his indebtedness to the SYSTEM and the deceased's heirs
will thereby be relieved of the burden of paying for the amortization of the deceased's still
unpaid loan to the SYSTEM (p. 25, rec.).

Petitioner herein is the widow of the late Bernardo G. Serrano, who, at the time of his death, was
an airline pilot of Air Manila, Inc. and as such was a member of the Social Security System.

On November 10, 1967, the SYSTEM approved the real estate mortgage loan of the late
Bernardo G. Serrano for P37,400.00 for the construction of the applicant's house (pp. 25-26,
rec.).

On December 26, 1967, a partial release in the amount of P35,400.00 was effected and devoted
to the construction of the house (p. 2, rec.). As a consequence, a mortgage contract was executed
in favor of the SYSTEM by the late Captain Serrano with his wife as co-mortgagor.

On March 8, 1968, Captain Serrano died in a plane crash and because of his death, the SYSTEM
closed his housing loan account to the released amount of P35,400.00 (p. 26, rec.).

On December 2, 1968, the petitioner sent a letter addressed to the Chairman of the Social
Security Commission requesting that the benefits of the Group Mortgage Redemption Insurance
be extended to her.

The letter of the petitioner was referred to the Administrator of the SYSTEM, who recommended
its disapproval on the ground that the late Captain Serrano was not yet covered by the Group
Mortgage Redemption Insurance policy at the time of his death on March 8, 1968. In its
resolution No. 1365 dated December 24, 1968, the Social Security Commission sustained the
said stand of the SYSTEM and thereby formally denied the request of the petitioner (p. 26, rec.).

On appeal to the then Court of Appeals, the respondent Court affirmed the decision of the Social
Security Commission.
Hence, this petition.

The only issue to be resolved is the correctness of the interpretation given by the respondent
Commission which was upheld by the respondent Court as to the applicability of the Mortgage
Redemption Insurance plan particularly on when coverage on the life of the mortgagor
commences.

Article II (Insurance Coverage) of the Group Mortgage Redemption Police No. GMR-1
provides:

"Section 1. Eligibility. - Every mortgagor who is not over age 65 nearest birthday at the time
the Mortgage Loan is granted (or, in the case of a Mortgagor applying for insurance coverage on
a Mortgage Loan granted before the Date of Issue, at the time he makes such application) and
who would not be over 75 nearest birthday on the date on which the original term of the
Mortgage Loan expires shall be eligible for insurance coverage under this Policy, provided that if
the total indebtedness to the Creditor under the new Mortgage Loan and the outstanding balance
of any prior Mortgage Loan or Loans insured hereunder, exceeds P70,000.00, he will be eligible
for insurance coverage up to this maximum limit only.

"Co-makers or co-signers of mortgage contract are not eligible for coverage under this Policy.

"Section 2. Mode of Acceptance - Any Mortgagor who is eligible for coverage on or after the
Date of Issue shall be automatically insured, subject to the amount of insurance limit in Section 1
hereof, without proof of insurability provided that he is not more than age 60 nearest birthday at
the time the Mortgage Loan is granted. Such a mortgagor who is over age 60 nearest birthday at
the time the Mortgage Loan is granted may be accepted for insurance only subject to the
submission of evidence of insurability satisfactory to the Subscribing Companies.

"Any eligible Mortgagor who was already a Mortgagor before the Date of Issue shall be
automatically insured, subject to the amount of insurance limit in Section 1 hereof, without proof
of insurability provided that he is not more than age 60 nearest birthday on the Date of Issue and
that he makes written application to the Creditor for coverage within ninety (90) days from the
Date of Issue. If such a Mortgagor applies for coverage after ninety (90) days from the Date of
Issue, he may be accepted for insurance upon written application therefor, subject to the
submission of evidence of insurability to the Subscribing Companies.

"Section 3. Effective Date of Insurance. - The insurance on the life of each eligible Mortgagor
Loan or partial release of Mortgage Loan accepted for coverage who becomes a Mortgagor on or
after the Date of Issue shall take effect from the beginning of the amortization period of such
Mortgage Loan or partial release of Mortgage Loan.

"The beginning of the amortization period as used herein shall mean the first day of the month
preceding the month in which the first monthly amortization payment falls due.

"It is hereby understood that before any release on any approved Mortgage Loan is made by the
Creditor, the requisites binding the Mortgagor and the Creditor as regards to said Mortgage Loan
shall have been completed.

xxx xxx xxx

(pp. 59-60, rec.; talics supplied).

A careful analysis of the provisions leads to the conclusion that the respondent Court of Appeals
erred in construing the effectivity date of insurance coverage from the beginning of the
amortization period of the loan.

WE REVERSE.

There can be no doubt as to the eligibility of the late Captain Serrano for coverage under Section
1 of Article II of the Group Mortgage Redemption Insurance Policy as he was a mortgagor of the
Social Security System not over the age of 65 nearest his birthday at the time when the mortgage
loan was granted to him (p. 26, rec.). This fact was admitted not only by the Social Security
Commission but also accepted by the Court of Appeals.

The problem manifests itself in Sections 2 and 3 of the same article of the Group Mortgage
Redemption Insurance Policy. Section 2 provides that "any mortgagor who is eligible for
coverage on or after the Date of Issue shall be automatically insured, . . ."; while Section 3
provides that the insurance "shall take effect from the beginning of the amortization period of
such Mortgage Loan or partial release of Mortgage Loan".

Section 2 of Article II of the Group Mortgage Redemption Insurance Policy provides that
insurance coverage shall be "automatic" and limited only by the amount of insurance and age
requirement. While the same section has for its title the mode of acceptance, what is controlling
is the meaning of the provision itself. The said section can only convey the idea that the
mortgagor who is eligible for coverage on or after the date of issue shall be automatically
insured. The only condition is that the age requirement should be satisfied, which had been
complied with by the deceased mortgagor in the instant case.

Under said Section 2, mortgage redemption insurance is not just automatic; it is compulsory for
all qualified borrowers. This is the same automatic redemption insurance applied to all qualified
borrowers by the GSIS (Government Service Insurance System) and the DBP (Development
Bank of the Philippines). Indeed, the Mortgage Redemption Insurance Policy of the GSIS
provides:

"Sec. 2. . . . This policy is granted subject to the terms and conditions set forth at the back
hereof and in consideration of the application therefor and shall take effect on the date of the first
date of the aforementioned loan" (p. 126, CA rec.).

WE take judicial notice of the Mortgage Contract being issued by the Social Security System in
connection with applications for housing loans, specifically Section 16 thereof:

"Section 16. - (a) The loan shall be secured against the death of the borrower through the
Mortgage Redemption Insurance Plan; (b) Coverage shall take effect on the date of the first
release voucher of the loan and shall continue until the real estate mortgage loan is fully paid; . .
."

However, Section 3 of Article II presents an ambiguity. The effective date of coverage can be
interpreted to mean that the insurance contract takes effect "from the beginning of the
amortization period of such Mortgage Loan" or "partial release of Mortgage Loan."

Applying Article 1374 of the new Civil Code, the mortgagor in the instant case was already
covered by the insurance upon the partial release of the loan.

Article 1374, NCC, reads thus:

"The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly."

The ambiguity in Section 3 of Article II should be resolved in favor of the petitioner. "The
interpretation of obscure words or stipulations in a contract shall not favor the party who caused
the obscurity" (Article 1377, Civil Code). WE have held that provisions, conditions or
exceptions tending to work a forfeiture of insurance policies should be construed most strongly
against those for whose benefit they are inserted, and most favorably toward those against whom
they are intended to operate (Trinidad vs. Orient Protective Ass., 67 Phil. 181).

While the issuance of the Group Mortgage Redemption Insurance is a contract between the
Social Security System and the Private Life Insurance Companies, the fact is that the SYSTEM
entered into such a contract to afford protection not only to itself should the mortgagor die before
fully paying the loan but also to afford protection to the mortgagor. WE take note of the
following:

"I. Insurance Coverage.

"1. Fire insurance - The SSS-financed house shall be covered by fire insurance equal to its
appraised value or the amount of the loan, whichever is lesser.
"2. Mortgage Redemption Insurance. - Coverage shall be compulsory for any mortgagor who is
not more than 60 years old.

"The insured indebtedness on the mortgage as provided in the policy shall be deemed paid upon
the death of a mortgagor covered under the MRI" (Employees' Benefits & Social Welfare, 1983
Rev. Ed., CBSI, pp. 50-51; talics supplied).

It is imperative to dissect the rationale of the insurance scheme envisioned by the Social Security
System. The Mortgage Redemption Insurance device is not only for the protection of the
SYSTEM but also for the benefit of the mortgagor. On the part of the SYSTEM, it has to enter
into such form of contract so that in the event of the unexpected demise of the mortgagor during
the subsistence of the mortgage contract, the proceeds from such insurance will be applied to the
payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the
obligation. The SYSTEM insures the payment to itself of the loan with the insurance proceeds. It
also negates any future problem that can crop up should the heirs be not in a position to pay the
mortgage loan. In short, the process of amortization is hastened and possible litigation in the
future is avoided. In a similar vein, ample protection is given to the mortgagor under such a
concept so that in the event of his death; the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness.

The interpretation of the Social Security Commission goes against the very rationale of the
insurance scheme. It cannot unjustly enrich itself at the expense of another (Nemo cum alterius
detrimento protest). "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
19, Civil Code). Simply put, the SYSTEM cannot be allowed to have the advantage of collecting
the insurance benefits from the private life insurance companies and at the same time avoid its
responsibility of giving the benefits of the Mortgage Redemption Insurance plan to the
mortgagor. The very reason for the existence of the Social Security System is to extend social
benefits. For SSS to be allowed to deny benefits to its members, is certainly not in keeping with
its policy ". . . to establish, develop, promote and perfect a sound and viable tax-exempt social
security service suitable to the needs of the people throughout the Philippines, which shall
provide to covered employees and their families protection against the hazards of disability,
sickness, old age, and death with a view to promote their well-being in the spirit of social justice"
(The Social Security Law, R.A. No. 1161, as amended).

To sustain the position of the SSS is to allow it to collect twice the same amount - first from the
insurance companies which paid to it the amount of the MRI and then from the heirs of the
deceased mortgagor. This result is unconscionable as it is iniquitous.

It is very clear that the spirit of social justice permeates the insurance scheme under the Group
Mortgage Redemption Insurance. It is a welcome innovation in these times when the concept of
social justice is not just an empty slogan nor a mere shibboleth. Social justice is explicitly
institutionalized and guaranteed under the Constitution (Article II, Section 6, 1973 Constitution).
The construction that would enhance the State's commitment on social justice mandates Us to
hold for the petitioner.

Usually, among the items to be deducted by the SYSTEM from the first release of the loan is the
premium corresponding to the mortgage redemption insurance (MRI). However, if the premium
corresponding to the amount to be deducted from the first release of the loan was not paid by the
borrower, the deceased mortgagor, the said unpaid premium should be refunded by the heirs of
the borrower.

WHEREFORE, THE DECISION OF THE RESPONDENT COURT OF APPEALS
AFFIRMING RESOLUTION NO. 1365 OF RESPONDENT COMMISSION IS HEREBY SET
ASIDE. THE SOCIAL SECURITY SYSTEM IS HEREBY DIRECTED TO RELEASE THE
PETITIONER FROM PAYING THE MORTGAGE LOAN. THE PETITIONER IS HEREBY
DIRECTED TO REFUND TO THE SSS THE PREMIUM CORRESPONDING TO THE
RELEASED AMOUNT, IF THE SAME HAD NOT BEEN DEDUCTED THEREFROM, NO
COSTS.

SO ORDERED.









([1986V249] NATIONAL POWER CORPORATION, petitioner, vs. HONORABLE
COURT OF APPEALS and CONRADO B. PAYUMO, respondents., G.R. No. L-46268,
1986 September 24, 1st Division)

D E C I S I O N

MELENCIO-HERRERA, J:

The National Power Corporation (NPC) seeks a review of the Decision of respondent Court of
Appeals granting the application for land registration of Conrado B. PAYUMO (private
respondent) and ordering the issuance of a decree in his favor. This ruling reversed the Decision
of the then Court of First Instance of Bulacan declaring the disputed parcel of land as public land
included in the Angat River Watershed Reservation under the administration of the NPC,
pursuant to Proclamation No. 599 of the President of the Philippines.

Following are the proceedings antecedent to this petition:

1. On October 12, 1969, PAYUMO filed an application for registration of a parcel of land
identified as Lot 1 of Plan Psu-167442, with an area of 15.3145 hectares, situated in sitio
Pamusuan, Barrio San Mateo, Norzagaray, Bulacan. He alleged ownership by purchase from his
father-in-law, Mariano Palad, in February 1937 and continuous, exclusive, and uninterrupted
possession for a period of thirty years, by taking to his possession that of his predecessor-in-
interest.

2. Oppositions to the application were filed by the Castillos, namely: Juan, Fausta, Ramon,
Fabian and Maria, and by the petitioner NPC.

The Castillos alleged that the land applied for forms part of a bigger parcel of 4,000 hectares of
land which they inherited from Don Mariano San Pedro y Esteban covered by a Spanish title
known as "Titulo de Composicion con el Estado," dated April 21, 1894.

The NPC, for its part, maintained that the greater portion of the land applied for is public land
included in the Angat River Project consisting of 10,711,119 square meters, more or less, and
reserved for its use under Proclamation No. 599 of the President of the Philippines, dated June
23, 1959, and is thus neither alienable nor disposable.

3. After trial, the Court of First Instance of Bulacan, on April 14, 1966, declared that neither
PAYUMO nor the Castillos had established any registerable right over the land applied for and
declared the disputed property as public land in a Decision, the dispositive portion of which
reads:

"WHEREFORE, the application as well as the oppositions filed by the different oppositors,
except the National Power Corporation are hereby dismissed, and the parcel of land identified as
Lot 1 of Plan Psu-167442 is declared public land, and that part thereof east of the boundary line
Exhibit 4-C in this plan of the Angat River Project Exhibit 4 is declared part of said Project in
accordance with Proclamation No. 599 of the President of the Philippines."

In disposing of the PAYUMO claim, the Trial Court ruled that no documentary evidence nor
credible testimony was given to establish the pretended ownership of the land by Mariano Palad
from whom PAYUMO claimed to have acquired it; that PAYUMO's claim of peaceful and
uninterrupted possession since 1937 is doubtful since it appears that there has been a running
dispute between the Castillos and PAYUMO over possession of the land, which prevents both of
them from availing of the provisions of the Public Land Act.

And, in so far as the Castillos are concerned, the Trial Court opined that the photostatic copy (in
lieu of the lost original) of the Spanish title in the name of Mariano San Pedro shows obvious
alterations and intercalations in an attempt to vastly increase the area and change the location of
the land described in the original title, which originally covered only two parcels of land located
in Pulo, Bulacan, with a combined area of slightly more than four hectares.

The factors considered by the Trial Court in upholding the NPC claim were:

Proclamation No. 599 itself; (2) the Angat River Project sketch plan showing that a portion of
Lot 1 lying east of the boundary is included in the Reservation; and (3) the Decision of the Court
of Appeals of January 25, 1960, in CA-G.R. No. 22876-R, involving the disputed property also
contested in that case by Fabian Castillo, among others, and PAYUMO wherein it was held that
the land in question belongs to the public domain.

4. From the adverse judgment against them, the applicant PAYUMO and the oppositors
Castillos appealed to the Court of Appeals. For failure to pay the required docket fees within the
reglementary period, the appeal of the Castillos was dismissed. 1

5. In its Decision, dated May 4, 1977, the Court of Appeals reversed the Trial Court and
sustained PAYUMO's claim of adverse possession under a claim of ownership of a public
agricultural land for the required period of 30 years, stating:
"there is every reason to believe Payumo's position, his evidence of adverse possession for the
required period of time, thirty (30) years at least, under R.A. 1942, because remember that as
shown on page 1 of original record, this application was filed on 12 October, 1959 but dated 7
October, 1959, and at that time, R. A. 1942, approved on 22 June, 1957, was already in force,
and required only a thirty (30) year period of adverse possession of public agricultural land under
a bona fide claim of ownership." 2

further, that PAYUMO's right over the land had already vested prior to the issuance of
Presidential Proclamation No. 599, thus:

"the fact that a portion of land applied for falls within the Angat River Project should not
altogether negate the validity of the application, because Presidential Proclamation No. 599,
dated 23 June, 1959, Exh. 1-NPC, contained a saving clause, that it was, 'subject to private
rights'." 3

and finally decreeing that:

"IN VIEW WHEREOF, this Court is constrained to reverse as it now reverses, judgment
appealed from, application granted, and once this decision should become final, if it ever would,
let decree issue in the name of applicant Payumo with the personal circumstances mentioned in
the application, no more pronouncement as to costs." 4

Hence, this petition for review before us filed by NPC.

We are constrained to reverse.

Prior to the application for registration filed by PAYUMO with the Trial Court on October 12,
1959, Proclamation No. 599 had already been issued by the President of the Philippines on June
23, 1959, "reserving for the Angat River Project of the National Power Corporation a certain
parcel of the public domain situated partly in the Municipality of Norzagaray, and partly in the
Municipality of San Jose, Province of Bulacan, Island of Luzon . . . subject to private rights."
There is no question that the bigger portion of the parcel of land in question is embraced in and
covered by the Proclamation No. 599 (Exhibit "4-NPC"). The question to determine is whether
or not PAYUMO had vested "private rights" prior to the issuance of the Proclamation.

Contrary to the finding of the Court of Appeals, the evidence calls for a negative answer.

PAYUMO's claim that he had been in continuous, exclusive, and uninterrupted possession of the
disputed land is negated not only by the running dispute between him and the Castillos over
possession of the litigated property, which culminated in the Decision of the Court of Appeals in
CA-G.R. No. 22876-R declaring it as public land, but also by the fact that he declared the
property for tax purposes only in October, 1959 (Exhibit "D") when he filed his application for
registration, although he could have done so in 1937 when he allegedly purchased the property
from Mariano Palad.

The pretended ownership of the land by Mariano Palad from whom PAYUMO claims to have
acquired it, and whose possession is being tacked to the latter's to comply with the 30-year
requirement, has not been established by satisfactory evidence, On the contrary, there is
testimony to the effect that Palad was never in possession of the disputed property. 5 Neither was
the purported notarized deed of sale allegedly executed in 1937 in PAYUMO's favor ever
presented by him in evidence on the allegation that his copy as well as the notarial copy had been
lost or burned during the second World War.

Of note is the finding of the Court of Appeals in CA-G.R. No. 22876-R, quoted by the
respondent Court in its Decision, reading:

"Defendant Conrado Payumo, 46, farmer, denied plaintiff's charges. He further testified that he
did not enter any land belonging to the plaintiff; that he had worked on the land he is occupying
since the Ipo Mines was there up to the present, more particularly since 1939; that the area of the
land he is occupying is 36 hectares, for which he has applied for a homestead patent in February
1956; that although he has already occupied the land for 20 years, he could not file his
application for a homestead patent earlier because the Ipo Mines claimed that land as belonging
to it; and that he had not paid any land taxes." 6

Significantly, in his testimony in that case, PAYUMO claimed that he had occupied the disputed
land for only 20 years and never did he mention that he had acquired the property from Mariano
Palad whose possession should be tacked to his to complete the 30-year requirement. It was only
when he filed the application for registration that he alleged that he purchased the land from
Mariano Palad and that the latter had been occupying the land even before the Japanese
occupation. As aptly concluded by the Trial Court:

"In the light of all the evidence presented, the Court is of the opinion that neither Conrado B.
Payumo nor the Castillos have established any registerable right over the lot covered by the
application. Not a bit of documentary evidence nor credible or satisfactory testimony was given
to establish the pretended ownership of the land by Mariano Palad, from whom Payumo claimed
to have acquired it. As to Payumo's claim of peaceful and uninterrupted possession since 1937, it
was indubitably shown, both by the admission of Fabian Castillo and the testimony of Cesar
Marcelo, that Lot 1 of Psu-167442 is the same property disputed by Fabian Castillo and Conrado
B. Payumo in CA-G.R. No. 22876-R, wherein the Court of Appeals held that the land in question
belonged to the public domain. In dismissing the claims of both Payumo and Castillo, the Court
said that it was more inclined to believe that the persons presently occupying the land in the
different sitios of Sicao (also referred to as Sikaw), Pamusuan, Bitbit, Suson Dalaga and
Kabuyao, Norzagaray, Bulacan were former workers of the (Ipo Mining Corporation), and that
when it ceased to exist in 1939 they continued to possess and cultivate the lands it formerly
occupied.

"What appears certain is that there has been a running dispute all along between Castillo and
Payumo over possession of the land, a situation which prevents either of them from availing
himself of the provisions of Rep. Act No. 1942, wherein 'open, continuous, exclusive and
notorious' possession is required for a period of 30 years prior to the filing of the application." 7

It is apparent that whatever interest PAYUMO had in the land subject of the suit had not yet
ripened into a vested right et the time Proclamation No. 599 was issued on June 23, 1959. The
right of an applicant to alienable lands of the public domain does not become absolute until after
he has complied with all the requirements of the law. 8 Under Section 48(b) of the Public Land
Act, the applicant for judicial confirmation of imperfect and incomplete titles to alienable and
disposable lands of the public domain must prove possession and occupation under claim of
ownership for at least thirty (30) years preceding the filing of the application for having failed to
satisfactorily prove that 30-year requirement in October, 1959, PAYUMO had not yet
established a conclusive right to the disputed property to exempt him from the ambit of
Proclamation No. 599, dated June 23, 1959.

WHEREFORE, the judgment of respondent Appellate Court under review is hereby SET
ASIDE, and that of the Court of First Instance of Bulacan hereby REINSTATED.

Costs against private respondent, Conrado Payumo.

SO ORDERED










([2000V833] RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF
APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents., G.R. No.
112360, 2000 Jul 18, 3rd Division)

D E C I S I O N

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to
annul and set aside the July 15, 1993 Decision1 [Annex "A"; Rollo, pp. 27-49.] and October 22,
1993 Resolution2 [Annex "B"; Rollo, pp. 51- 52.] of the Court of Appeals3 [Special Tenth
Division; composed of Associate Justices: Cezar D. Francisco (Ponente), Gloria C. Paras
(Chairman), and Ricardo P. Galvez (Member)] in CA-G.R. CV NO. 28779, which modified the
Ruling4 [Penned by Judge Efren D. Villanueva.] of the Regional Trial Court of Pasig, Branch
161, in Civil Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance
Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for One
Million (P1,000,000.00) Pesos and eventually increased to One Million Five Hundred Thousand
(P1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13, 1981.

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

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

xxx...............xxx...............xxx

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

'Bounds in front partly by one-storey concrete building under galvanized iron roof occupied as
canteen and guardhouse, partly by building of two and partly one storey constructed of concrete
below, timber above undergalvanized iron roof occupied as garage and quarters and partly by
open space and/or tracking/ packing, beyond which is the aforementioned Magdalo Street; on its
right and left by driveway, thence open spaces, and at the rear by open spaces.'"5 [Decision,
Annex "A"; Rollo, pp. 28-29.]

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

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

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

On May 26, 1982, private respondent brought against the said insurance companies an action for
collection of sum of money and damages, docketed as Civil Case No. 46106 before Branch 161
of the then Court of First Instance of Rizal; praying for judgment ordering Rizal Insurance and
New India to pay the amount of P2,747, 867.00 plus legal interest, P400,000.00 as attorney's
fees, exemplary damages, expenses of litigation of P50,000.00 and costs of suit.6 [Rollo, p. 59.]

Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the
contents of the four-span building, which was partly burned, and not the damage caused by the
fire on the two-storey annex building.7 [Rollo, p. 62.]

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

"ACCORDINGLY, judgment is hereby rendered as follows:

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

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

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

SO ORDERED."8 [Decision, Rollo, pp. 78-79.]

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

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

No costs.

SO ORDERED."9 [Decision, Rollo, p. 49.]

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

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

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

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

SO ORDERED."10 [Resolution, Rollo, p. 52.]

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

I

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

II

SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT
CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN
IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT THE PREMISES
OCCUPIED BY TRANSWORLD, WHERE THE INSURED PROPERTIES WERE
LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.

III

SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD
ACTED IN PALPABLE BAD FAITH AND WITH MALICE IN FILING ITS CLEARLY
UNFOUNDED CIVIL ACTION, AND IN NOT ORDERING TRANSWORLD TO PAY TO
RIZAL SURETY MORAL AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS
ATTORNEY'S FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL
CODE).11 [Petition, Rollo, pp. 12-13.]

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon protected only the
contents of the main building (four-span),12 [Answer, Rollo, p. 62.] and did not include those
stored in the two-storey annex building. On the other hand, the private respondent theorized that
the so called "annex" was not an annex but was actually an integral part of the four-span
building13 [Rollo, p. 76.] and therefore, the goods and items stored therein were covered by the
same fire insurance policy.

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

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

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

"First, said properties must be contained and/or stored in the areas occupied by Transworld and
second, said areas must form part of the building described in the policy xxx"14 [Rollo, p. 77.]

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

The Court is mindful of the well-entrenched doctrine that factual findings by the Court of
Appeals are conclusive on the parties and not reviewable by this Court, and the same carry even
more weight when the Court of Appeals has affirmed the findings of fact arrived at by the lower
court.15 [Borromeo vs. Court of Appeals, G.R. No. 75908, October 22, 1999; citing: Meneses
vs. Court of Appeals, 246 SCRA 162, p.171; Coca Cola Bottlers Phil., Inc vs. Court of Appeals,
229 SCRA 533; and Binalay vs. Manalo, 195 SCRA 374.]

In the case under consideration, both the trial court and the Court of Appeals found that the so
called "annex " was not an annex building but an integral and inseparable part of the four-span
building described in the policy and consequently, the machines and spare parts stored therein
were covered by the fire insurance in dispute. The letter-report of the Manila Adjusters and
Surveyor's Company, which petitioner itself cited and invoked, describes the "annex" building as
follows:

"Two-storey building constructed of partly timber and partly concrete hollow blocks under g.i.
roof which is adjoining and intercommunicating with the repair of the first right span of the lofty
storey building and thence by property fence wall."16 [Petitioner, Rollo, p. 17.]

Verily, the two-storey building involved, a permanent structure which adjoins and
intercommunicates with the "first right span of the lofty storey building",17 [Rollo, p. 17.]
formed part thereof, and meets the requisites for compensability under the fire insurance policy
sued upon.

So also, considering that the two-storey building aforementioned was already existing when
subject fire insurance policy contract was entered into on January 12, 1981, having been
constructed sometime in 1978,18 [Decision, Rollo, p. 69.] petitioner should have specifically
excluded the said two-storey building from the coverage of the fire insurance if minded to
exclude the same but if did not, and instead, went on to provide that such fire insurance policy
covers the products, raw materials and supplies stored within the premises of respondent
Transworld which was an integral part of the four-span building occupied by Transworld,
knowing fully well the existence of such building adjoining and intercommunicating with the
right section of the four-span building.

After a careful study, the Court does not find any basis for disturbing what the lower courts
found and arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has
created a doubt regarding the portions of the building insured thereby. Article 1377 of the New
Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal
Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy contract
under scrutiny. Citing the aforecited provision of law in point, the Court in Landicho vs.
Government Service Insurance System,19 [44 SCRA 7.] ruled:

"This is particularly true as regards insurance policies, in respect of which it is settled that the
'terms in an insurance policy, which are ambiguous, equivocal, or uncertain x x x are to be
construed strictly and most strongly against the insurer, and liberally in favor of the insured so as
to effect the dominant purpose of indemnity or payment to the insured, especially where
forfeiture is involved' (29 Am. Jur., 181), and the reason for this is that the 'insured usually has
no voice in the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by experts and legal advisers employed by,
and acting exclusively in the interest of, the insurance company.' (44 C.J.S., p. 1174).""20 [Ibid.,
pp. 12-13, citing: Calanoc vs. Court of Appeals, 98 Phil. 79, 84. See, also, H.E. Heacock Co. vs.
Macondray, 42, Phil. 205; Rivero vs. Robe, 54 Phil. 982; Asturias Sugar Central vs. The Pure
Cane Molasses Co., 57 Phil. 519; Gonzales vs. La Previsora Filipina, 74 Phil. 165; Del Rosario
vs. The Equitable Insurance, 620 O.G. 5400, 5403-04.]

Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company,
Inc. vs. Vda. De Songco,21 [25 SCRA 70.] to wit:

"'This rigid application of the rule on ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic power, manage to impose upon
parties dealing with them cunningly prepared 'agreements' that the weaker party may not change
one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave it'
labelled since Raymond Saleilles 'contracts by adherence' (contrats [sic] d'adhesion), in contrast
to these entered into by parties bargaining on an equal footing, such contracts (of which policies
of insurance and international bills of lading are prime example) obviously call for greater
strictness and vigilance on the part of courts of justice with a view to protecting the weaker party
from abuses and imposition, and prevent their becoming traps for the unwary (New Civil Code,
Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'"22 [Ibid., p. 75.]

The issue of whether or not Transworld has an insurable interest in the fun and amusement
machines and spare parts, which entitles it to be indemnified for the loss thereof, had been settled
in G.R. No. L-111118, entitled New India Assurance Company, Ltd., vs. Court of Appeals,
where the appeal of New India from the decision of the Court of Appeals under review, was
denied with finality by this Court on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises, precludes the
relitigation of a particular fact or issue in another action between the same parties based on a
different claim or cause of action. "xxx the judgment in the prior action operates as estoppel only
as to those matters in issue or points controverted, upon the determination of which the finding
or judgment was rendered. In fine, the previous judgment is conclusive in the second case, only
as those matters actually and directly controverted and determined and not as to matters merely
involved therein."23 [Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 197 SCRA
201, p. 209; citing: Tingson vs. Court of Appeals, 49 SCRA 429.]

Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc. vs.
Court of Appeals,24 [Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, supra.] held
that the issue of negligence of the shipping line, which issue had already been passed upon in a
case filed by one of the insurers, is conclusive and can no longer be relitigated in a similar case
filed by another insurer against the same shipping line on the basis of the same factual
circumstances. Ratiocinating further, the Court opined:

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been negligent, or
so negligent as to have proximately caused the collision between them, was an issue that was
actually, directly and expressly raised, controverted and litigated in C.A.-G.R. No. 61320-R.
Reyes, L.B., J., resolved that issue in his Decision and held the 'Don Carlos' to have been
negligent rather than the 'Yotai Maru' and, as already noted, that Decision was affirmed by this
Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The Reyes Decision thus
became final and executory approximately two (2) years before the Sison Decision, which is
assailed in the case at bar, was promulgated. Applying the rule of conclusiveness of judgment,
the question of which vessel had been negligent in the collision between the two (2) vessels, had
long been settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206-R.
Private respondent Go Thong was certainly bound by the ruling or judgment of Reyes, L.B., J.
and that of this Court. The Court of Appeals fell into clear and reversible error when it
disregarded the Decision of this Court affirming the Reyes Decision."25 [Ibid., pp. 210-211.]

The controversy at bar is on all fours with the aforecited case. Considering that private
respondent's insurable interest in, and compensability for the loss of subject fun and amusement
machines and spare parts, had been adjudicated, settled and sustained by the Court of Appeals in
CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118, in a Resolution, dated
February 2, 1994, the same can no longer be relitigated and passed upon in the present case.
Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the ruling of the Court
of Appeals and of this Court that the private respondent has an insurable interest in the aforesaid
fun and amusement machines and spare parts; and should be indemnified for the loss of the
same.

So also, the Court of Appeals correctly adjudged petitioner liable for the amount of P470,328.67,
it being the total loss and damage suffered by Transworld for which petitioner Rizal Insurance is
liable.26 [Rollo, p. 43.]

All things studiedly considered and viewed in proper perspective, the Court is of the irresistible
conclusion, and so finds, that the Court of Appeals erred not in holding the petitioner, Rizal
Surety Insurance Company, liable for the destruction and loss of the insured buildings and
articles of the private respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993,
of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement
as to costs.

SO ORDERED.







(HEIRS OF ILDEFONSO COSCOLLUELA, SR., INC., petitioner, vs. RICO GENERAL
INSURANCE CORPORATION, COURT OF APPEALS (11th Division), and HON.
ENRIQUE T. JOCSON, Judge, Regional Trial Court of Negros Occidental Branch,
respondents., G.R. No. 84628, 1989 November 16, 3rd Division)

D E C I S I O N


GUTIERREZ, JR., J.:

The main issues raised in this petition for review on certiorari are whether the Court of Appeals
erred in: (1) affirming the dismissal by the trial court of the complaint for damages on the ground
of lack of cause of action, and in (2) denying due course to a petition for certiorari on the ground
that the remedy of the petitioner to assail said order is appeal.

Petitioner, Heirs of Ildefonso Coscoluella, Inc. is a domestic corporation and the registered
owner of an Isuzu KBD Pick-up truck bearing Motor No. 663296 and Plate No. UV-FAW-189.
The vehicle was insured with the private respondent Rico General Insurance Corporation for a
consideration of P100,000.00 excluding third party liability under Commercial Vehicle Policy
No. CV-122415 per Renewal Certificate No. 02189. The premiums and other expenses for
insurance paid covered the period from October 1, 1986 to October 1, 1987.

On August 28, 1987 and within the period covered by the insurance, the insured vehicle was
severely damaged and rendered unserviceable when fired upon by a group of unidentified armed
persons at Hacienda Puyas, Barangay Blumentritt, Murcia, Negros Occidental. In the same
incident, four persons died.

Petitioner filed its claim of P80,000.00 for the repair of the vehicle but private respondent, in a
letter dated October 8, 1987, refused to grant it. As a consequence, the petitioner was prompted
to file a complaint with the Regional Trial Court, 6th Judicial Region, Branch 47 at Bacolod
City, docketed as Civil Case No. 4707, to recover the claim of P80,000.00 plus interest and
attorney's fees.

The private respondent filed a motion to dismiss alleging that the complaint lacks a cause of
action because the firing by armed men is a risk excepted under the following provisions in the
insurance policy:

"The Company shall not be liable under any Section of the Policy in respect of:

1. . . .

2. . . .

3. Except in respect of claims arising under Sections I and II of the policy, any accident, loss,
damage or liability directly or indirectly, proximately or remotely occasioned by, contributed to
by or traceable to, or arising out of, or in connection with flood, typhoon, hurricane, volcanic
eruption, earthquake or other convulsion of nature, invasion, the act of foreign enemies,
hostilities or warlike operations (whether war be declared or not), civil commotion, mutiny,
rebellion, insurrection, military or usurped power, or by any direct or indirect consequences of
any of the said occurrences and in the event of any claim hereunder, the insured shall prove that
the accident, loss or damage or liability arose independently of, and was in no way connected
with, or occasioned by, or contributed to, any of the said occurrences, or any consequence
thereof, and in default of such proof, the Company shall not be liable to make any payment in
respect of such claim." ( talics supplied; see Rollo, p. 33, 71)

The private respondent alleged that the firing was "an indirect consequence of rebellion,
insurrection or civil commotion." The petitioner opposed the motion, saying that the quoted
provision does not apply in the absence of an official governmental proclamation of any of the
above-enumerated conditions.

The trial court ordered the dismissal of the complaint for lack of cause of action stating that the
damage arose from a civil commotion or was a direct result thereof. (Rollo, p. 37)

A motion for reconsideration filed by the petitioner was denied by the trial court which further
noted that "Courts can take effective cognizance of the general civil disturbance in the country
akin to civil war without any executive proclamation of the existence of such unsettling
condition." (Rollo, p. 38)

A second motion for reconsideration was filed but was later withdrawn.

Petitioner filed a notice of appeal which was given due course. However, the trial court, stated in
its order that "the records of the case will not be transmitted to the Court of Appeals, the
appropriate remedy being (a) petition for review by way of certiorari." In that same order, the
trial court took cognizance of the withdrawal of the second motion for reconsideration but noted
the police blotter appended to said motion which showed that "other than M-16 Armalite Rifles
(the number of which were not specified for unknown reasons), nothing else was taken by the
attackers." (Rollo, p. 40)

Thereafter, the petitioner filed a petition for certiorari with the Court of Appeals. The appellate
court denied the petition, affirmed the trial court's dismissal order, and also ruled that an appeal
in the ordinary course of law, not a special civil action of certiorari, is the proper remedy for the
petitioner in assailing the dismissal order.

Hence, this petition to review the respondent appellate court's decision.

Petitioner asserts that its complaint states a cause of action since ultimate facts were alleged as
follows:

"3. That, on August 28, 1987, the ISUZU KBD PICK-UP referred to in the preceding
paragraph was damaged as a result of an incident at Hda. Puyas, Barangay Blumentritt, Murcia,
Negros Occidental, when it was fired upon by a group of unidentified armed persons causing
even the death of four (4) persons and rendering the said vehicle almost totally damaged and
unserviceable;

4. That when the said incident occurred on August 28, 1987, the said ISUZU KBD PICK-UP
was insured by the defendant for P100,000.00 excluding third-party liability under Commercial
Vehicle Policy No. CV/122415 per Renewal Certificate No. 02189 a copy of which is herewith
attached as Annex "B"; and with the premiums and other expenses thereon duly paid for under
Official Receipt No. 691, dated September 8, 1986, covering the period from October 1, 1986 to
October 1, 1987, a copy of the same being attached hereto as Annex "C";

5. That, the damage on said motor vehicle being a "fait accompli" and that it was insured by the
defendant at the time it was damaged, it is the obligation of the defendant to restore the said
vehicle to its former physical and running condition when it was insured however defendant
refused and still refuses and fails, despite demands in writing made by plaintiff and its counsel to
that effect, copies of said letters attached hereto as Annexes "D" & "E";

6. That, for purposes of restoring the ISUZU KBD PICK-UP insured by the defendant to its
former physical and running condition when it was insured, as mentioned above, would cost
P80,000.00, which will include repair, repainting, replacement of spare parts, labor, etc., the said
amount having arrived at upon inspection and appraisal of the said motor vehicle by
knowledgeable and technical people;

7. That, as a consequence of defendant's refusal to settle or pay the just claim of plaintiff,
plaintiff has been compelled to hire the legal services of counsel for the protection of its rights
and interest at the agreed fee of P15,000.00, for and as attorney's fees, which sum plaintiff is
claiming from the defendant." (At pp. 29-30, Rollo)

Petitioner further maintains that the order of dismissal was erroneous in that: it overlooked the
principle that a motion to dismiss a complaint on the ground of failure to state a cause of action
hypothetically admits the allegations in the complaint; no trial was held for the reception of proof
that the firing incident was a direct or indirect result of a civil commotion, mutiny, insurrection
or rebellion; private respondent had the burden of proof to show that the cause was really an
excepted risk; and in any case, the nature of the incident as a "civil disturbance" must first be
officially proclaimed by the executive branch of the government. Private respondent, on the
other hand, argues that the accident was really a result of a civil commotion, one of the fatalities
being a military officer. (Rollo, p. 59)

After a review of the records, the Court finds that the allegations set forth in the complaint
sufficiently establish a cause of action. The following are the requisites for the existence of a
cause of action: (1) a right in favor of the plaintiff by whatever means and under whatever law it
arises or is created; (2) an obligation on the part of the named defendant to respect, or not to
violate such right; and (3) an act or omission on the part of the said defendant constituting a
violation of the plaintiff's right or a breach of the obligation of the defendant to the plaintiff.
(Cole v. Vda. de Gregoria, 116 SCRA 670 [1982]; Baliwag Transit, Inc. v. Ople, G. R. No.
57642, March 16, 1989)

The facts as alleged clearly define the existence of a right of the petitioner to a just claim against
the insurer for the payment of the indemnity for a loss due to an event against which the
petitioner's vehicle was insured. The insurance contract mentioned therein manifests a right to
pursue a claim and a duty on the part of the insurer or private respondent to compensate the
insured in case of a risk insured against. The refusal of the insurer to satisfy the claim and the
consequent loss to the petitioner in incurring the cost of acquiring legal assistance on the matter
constitutes a violation or an injury brought to the petitioner.

There is, therefore, a sufficient cause of action upon which the trial court can render a valid
judgment. (Taedo v. Bernad, et al; G. R. No. 66520, August 30, 1988).

The Court is very much cognizant of the principle that a motion to dismiss on the ground of
failure to state a cause of action stated in the complaint hypothetically admits the truth of the
facts therein. The Court notes the following limitations on the hypothetical admission:

"The hypothetical admission is however limited to the relevant and material facts well pleaded in
the complaint and inferences fairly deducible therefrom. The admission does not extend to
conclusions or interpretations of law; nor does it cover allegations of fact the falsity of which is
subject to judicial notice." (U. Baez Electric Light Co. v. Abra Electric Cooperative, Inc., 119
SCRA 90 [1982])

Applying the above principle, we hold that the private respondent's motion to dismiss
hypothetically admits the facts alleged in the complaint. We do not find anything in the
complaint which does not deserve admission by the motion since there are no "conclusions or
interpretations of law" nor "allegations of fact the falsity of which is subject to judicial notice." It
is clear that the complaint does no more and no less than state simply that the van was damaged
due to the firing by unidentified armed men. Since the complaint does not explicitly state nor
intimate civil strife which private respondent insists to be the cause of the damage, the motion to
dismiss cannot go beyond the admission of the facts stated and inferences reasonably deducible
from them. Any other assertion by the private respondent is subject to proof. Meanwhile, the
sufficiency of the petitioner's cause of action has been shown since, admitting the facts alleged, a
valid judgment can be rendered.

The private respondent's invocation of the exceptions clause in the insurance policy as the basis
for its non-liability and the consequent dismissal of the complaint is without merit. We also
reiterate the established rule that when the terms of an insurance contract contain limitations on
liability, the court "should construe them in such a way as to preclude the insurer from non-
compliance with his obligations." (Taurus Taxi Co. Inc. v. Capital Insurance and Surety
Company, Inc., 24 SCRA 454 [1968]) A policy of insurance with a narration of exceptions
tending to work a forfeiture of the policy shall be interpreted liberally in favor of the insured and
strictly against the insurance company or the party for whose benefit they are inserted. (Eagle
Star Insurance, Ltd. v. Chia Yu, 96 Phil. 696 [1955]; Trinidad v. Orient Protective Asso., 67 Phil.
181 [1939]; Serrano v. Court of Appeals, 130 SCRA 327 [1984]; and National Power Corp. v.
Court of Appeals, 145 SCRA 533 [1986])

The facts alleged in the complaint do not give a complete scenario of the real nature of the firing
incident. Hence, it was incumbent upon the trial judge to have made a deeper scrutiny into the
circumstances of the case by receiving evidence instead of summarily disposing of the case.
Contrary to what the respondent appellate court says, this case does not present a pure question
of law but demands a factual determination of whether the incident was a result of events falling
under the exceptions to the liability of private respondent contained in the policy of insurance.

We agree with the petitioner's claim that the burden of proof to show that the insured is not liable
because of an excepted risk is on the private respondent. The Rules of Court in its Section 1,
Rule 131 provides that "each party must prove his affirmative allegations." (Summit Guaranty
and Insurance Co., Inc. vs. Court of Appeals, 110 SCRA 241 [1981]; Tai Tong Chuache & Co. v.
Insurance Commissioner, 158 SCRA 366 [1988]; Paris-Manila Perfume Co. v. Phoenix
Assurance Co., 49 Phil. 753 [1926]). Where the insurer denies liability for a loss alleged to be
due to a risk not insured against, but fails to establish the truth of such fact by concrete proofs,
the Court rules that the insurer is liable under the terms and conditions of the policy by which it
has bound itself. In this case, the dismissal order without hearing and reception of evidence to
prove that the firing incident was indeed a result of a civil commotion, rebellion or insurrection
constitutes reversible error on the part of the trial court.

The Court stresses that it would be a grave and dangerous procedure for the courts to permit
insurance companies to escape liability through a motion to dismiss without the benefit of
hearing and evidence every time someone is killed, or as in this case, property is damaged in an
ambush. The question on the nature of the firing incident for the purpose of determining whether
or not the insurer is liable must first be threshed out and resolved in a full-blown trial.

The evidence to be received does not even have to relate to the existence of an official
government proclamation of the nature of the incident because the latter is not an explicit
requirement in the exception clause resolved in a mere motion to dismiss and is, for purposes of
this petition for review on certiorari, immaterial. This particular issue on when to take
cognizance of a rebellion for purposes of the law on contracts and obligations should have been
developed during the trial on the merits or may have to await remedial legislation in Insurance
Law or a decision in a more appropriate case.

The petitioner also questions the reasoning of the Court of Appeals in denying due course to the
petition for certiorari. The appellate court said that even assuming for the sake of argument that
the dismissal order by the trial court was not procedurally correct for lack of hearing, there was
only an "error of judgment or procedure" correctible only by appeal then available in the
ordinary course of law and not by a special civil action of certiorari which cannot be a substitute
for appeal.

The records show that the remedy of appeal was actually intended to be pursued by petitioner.
However, the appeal was rendered unfeasible when the trial judge refused to transmit the records
to the appellate court. (see Rollo, p. 40) The judge, in effect, ruled out the remedy of appeal
which was supposed to be availed of as a matter of right. In filing a petition for certiorari, the
petitioner was acting upon the instructions of the judge. Under a situation where there was no
more plain, speedy and adequate remedy in the ordinary course of law, the only available
recourse was to file a special civil action of certiorari to determine whether or not the dismissal
order was issued with grave abuse of discretion.

It is apparent, moreover, that the respondent appellate court failed to appreciate the petitioner's
predicament. The trial judge, aside from dismissing the complaint which we now rule to have a
sufficient cause of action, likewise prevented an ordinary appeal to prosper in contravention of
what is provided for by the rules of procedure.

The April 6, 1988 order of the trial judge stating that the appropriate remedy was a petition for
review by way of certiorari is deplorable. The lower court cannot even distinguish between an
original petition for certiorari and a petition for review by way of certiorari. A petition for review
before the Court of Appeals could have been availed of if what is challenged is an adverse
decision of the Regional Trial Court in its appellate capacity affirming, modifying or reversing a
decision of a municipal trial court or lower tribunal. (Section 22, Batas Pambansa Blg. 129 and
Section 22 (6) of the Interim Rules). In this case, the petitioner assailed the dismissal order of the
Regional Trial Court of a complaint originally filed with it. This adverse order which had the
effect of a judgment on the merits, may be appealed to the Court of Appeals by filing a notice of
appeal within fifteen (15) days from receipt of notice of the order both on questions of law and of
fact, (Section 39, Batas Pambansa Blg. 129 and Section 19 (a) of the Interim Rules). This was
exactly what petitioner did after its motion for reconsideration was denied. Unfortunately, the
trial judge failed to see the propriety of this recourse. And the Court of Appeals compounded the
problem when it denied the petitioner any remedy arising from the Judge's wrong instructions.

The filing of the petition for certiorari was proper. Petitioner has satisfactorily shown before the
respondent appellate court that the trial judge "acted whimsically in total disregard of evidence
material to and even decisive of the controversy". (Pure Foods Corp. v. National Labor Relations
Commission, G. R. No. 78591, March 21, 1989).

The extraordinary writ of certiorari is always available where there is no appeal or any other
plain, speedy and adequate remedy in the ordinary course of law. (Tropical Homes, Inc. v.
National Housing Authority, 152 SCRA 540 [1987]; Pure Foods Corp. v. NLRC, supra).

Since the petitioner was denied the remedy of appeal, the Court deems that a certiorari petition
was in order.

WHEREFORE, considering the foregoing, the petition is hereby GRANTED. The decision of
the respondent Court of Appeals affirming the dismissal order by the Regional Trial Court. is
hereby REVERSED and SET ASIDE. Let the case be remanded to the lower court for trial on
the merits.

SO ORDERED.




([1995V90] ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS and
COUNTRY BANKERS INSURANCE CORPORATION, respondents., G.R. No. 114427,
1995 Feb 6, 1st Division)

D E C I S I O N


DAVIDE, JR., J.:

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

The petitioner is the owner of Norman's Mart located in the public market of San Francisco,
Agusan del Sur. On 22 December 1989, he obtained from the private respondent fire insurance
policy No. F-14622 2 for P100,000.00. The period of the policy was from 22 December 1989 to
22 December 1990 and covered the following: "Stock-in-trade consisting principally of dry
goods such as RTW's for men and women wear and other usual to assured's business."

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

Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
=========
P392,130.50

The policy contained the following condition:

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

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

"MORTGAGEE: Loss, if any, shall be payable to Messrs.
Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of
this policy. CO-INSURANCE DECLARED:
P100,000. - Phils. First CEB/F-24758" 4

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

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

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

In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not
violate Condition 3 as he had no knowledge of the existence of the two fire insurance policies
obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies
without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor, had
insurable interest on the stocks. These findings were based on the petitioner's testimony that he
came to know of the PFIC policies only when he filed his claim with the private respondent and
that Cebu Tesing Textile obtained them and paid for their premiums without informing him
thereof. The Insurance Commission then decreed:

"WHEREFORE, judgment is hereby rendered ordering the respondent company to pay
complainant the sum of P100,000.00 with legal interest from the time the complaint was filed
until fully satisfied plus the amount of P10,000.00 as attorney's fees. With costs. The compulsory
counterclaim of respondent is hereby dismissed."

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

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

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

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

It is clear that it was the private respondent [petitioner herein] who took out the policies on the
same property subject of the insurance with petitioner. Hence, in failing to disclose the existence
of these insurances private respondent violated Condition No. 3 of Fire Policy No. 14622. . . .

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

xxx xxx xxx

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

Sir, I am only an ordinary businessman interested in protecting my investments. The actual value
of my stocks damaged by the fire was estimated by the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex "A"). My Income Statement as of December 31,
1989 or five months before the fire, shows my merchandise inventory was already some
P595,455,75. . . . These will support my claim that the amount under the three policies are much
below the value of my stocks lost.

xxx xxx xxx

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

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

"A - . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED RESPECT
AND EVEN FINALITY BY THE COURTS;

B - . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT
PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND

C - . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE
PRIVATE RESPONDENT."

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

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter
was not offered in evidence and thus should not have been considered in deciding the case.
However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to
the petitioner's complaint in I.C. Case No. 3340 as Annex "M" thereof and made an integral part
of the complaint. 12 It has attained the status of a judicial admission and since its due execution
and authenticity was not denied by the other party, the petitioner is bound by it even if it were
not introduced as an independent evidence. 13

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

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

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

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

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

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

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

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

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

This is clearly a simple loss payable clause, not a standard mortgage clause.

It must, however, be underscored that unlike the "other insurance" clauses involved in General
Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27
which read:

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

or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. 28 which provided "that
any outstanding insurance upon the whole or a portion of the objects thereby assured must be
declared by the insured in writing and he must cause the company to add or insert it in the policy,
without which such policy shall be null and void, and the insured will not be entitled to
indemnity in case of loss," Condition 3 in the private respondent's policy No. F-14622 does not
absolutely declare void any violation thereof. It expressly provides that the condition "shall not
apply when the total insurance or insurances in force at the time of the loss or damage is not
more than P200,000.00."

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

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

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

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

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

Costs against private respondent Country Bankers Insurance Corporation.

SO ORDERED.








([1997V233] MALAYAN INSURANCE CORPORATION, petitioner vs. THE HON.
COURT OF APPEALS and TKC MARKETING CORPORATION, respondents., G.R. No.
119599, 1997 Mar 20, 2nd Division)

D E C I S I O N


ROMERO, J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G.
R. No. 43023 1 which affirmed, with slight modification, the decision of the Regional Trial
Court of Cebu, Branch 15.

Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric
tons of soya bean meal which was loaded on board the ship MV Al Kaziemah on or about
September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the port of Manila.
Said cargo was insured against the risk of loss by petitioner Malayan Insurance Corporation for
which it issued two (2) Marine Cargo policy Nos. M/LP 97800305 amounting to P18,986,902.45
and M/LP 97800306 amounting to P1,195,005.45, both dated September 1989.

While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila,
the civil authorities arrested and detained it because of a lawsuit on a question of ownership and
possession. As a result, private respondent notified petitioner on October 4, 1989 of the arrest of
the vessel and made a formal claim for the amount of US$916,886.66, representing the dollar
equivalent on the policies, for non-delivery of the cargo. Private respondent likewise sought the
assistance of petitioner on what to do with the cargo.

Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the
policies. Private respondent, accordingly, advised petitioner that it might tranship the cargo and
requested an extension of the insurance coverage until actual transhipment, which extension was
approved upon payment of additional premium. The insurance coverage was extended under the
same terms and conditions embodied in the original policies while in the process of making
arrangements for the transhipment of the cargo from Durban to Manila, covering the period
October 4 - December 19, 1989.

However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40
per metric ton or a total of P10,304,231.75 due to its perishable nature which could no longer
stand a voyage of twenty days to Manila and another twenty days for the discharge thereof. On
January 5, 1990, private respondent forthwith reduced its claim to US$448,806.09 (or its peso
equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private
respondent's loss after the proceeds of the sale were deducted from the original claim of
$916,886.66 or P20,184,159.55.

Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of
ownership was an excepted risk under the marine insurance policies. This prompted private
respondent to file a complaint for damages praying that aside from its claim, it be reimbursed the
amount of P128,770.88 as legal expenses and the interest it paid for the loan it obtained to
finance the shipment totalling P942,269.30. In addition, private respondent asked for moral
damages amounting to P200,000.00, exemplary damages amounting to P200,000.00 and
attorney's fees equivalent to 30% of what will be awarded by the court.

The lower court decided in favor of private respondent and required petitioner to pay, aside from
the insurance claim, consequential and liquidated damages amounting to P1,024,233.88,
exemplary damages amounting to P100,000.00, reimbursement in the amount equivalent to 10%
of whatever is recovered as attorney's fees as well as the costs of the suit. On private respondent's
motion for reconsideration, petitioner was also required to further pay interest at the rate of 12%
per annum on all amounts due and owing to the private respondent by virtue of the lower court
decision counted from the inception of this case until the same is paid.

On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the
deletion of Clause 12 of the policies issued to private respondent, the same became automatically
covered under subsection 1.1 of Section 1 of the Institute War Clauses. The arrests, restraints or
detainments contemplated in the former clause were those effected by political or executive acts.
Losses occasioned by riot or ordinary judicial processes were not covered therein. In other
words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules
out detention by ordinary legal processes. Hence, arrests by civil authorities, such as what
happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or
the F.C. & S. Clause. However, with the deletion of Clause 12 of the Institute Cargo Clause and
the consequent adoption or institution of the Institute War Clauses (Cargo), the arrest and seizure
by judicial processes which were excluded under the former policy became one of the covered
risks.

The appellate court added that the failure to deliver the consigned goods in the port of destination
is a loss compensable, not only under the Institute War Clause but also under the Theft,
Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read in relation to
Section 130 of the Insurance Code and as held in Williams v. Cole. 2

Furthermore, the appellate court contended that since the vessel was prevented at an intermediate
port from completing the voyage due to its seizure by civil authorities, a peril insured against, the
liability of petitioner continued until the goods could have been transhipped. But due to the
perishable nature of the goods, it had to be promptly sold to minimize loss. Accordingly, the sale
of the goods being reasonable and justified, it should not operate to discharge petitioner from its
contractual liability.

Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance
policies.
2. In ruling that there was constructive total loss over the cargo.
3. In ruling that petitioner was in bad faith in declining private respondent's claim.
4. In giving undue reliance to the doctrine that insurance policies are strictly construed against
the insurer.

In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not
compensable since the term "arrest" refers to "political or executive acts" and does not include a
loss caused by riot or by ordinary judicial process as in this case; (b) the deletion of the Free
from capture or Seizure Clause would leave the assured covered solely for the perils specified by
the wording of the policy itself; (c) the rationale for the exclusion of an arrest pursuant to judicial
authorities is to eliminate collusion between unscrupulous assured and civil authorities.

As to the second assigned error, petitioner submits that any loss which private respondent may
have incurred was in the nature and form of unrecovered acquisition value brought about by a
voluntary sacrifice sale and not by arrest, detention or seizure of the ship.

As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest
belief that the arrest of the vessel was not a compensable risk under the policies issued. In fact,
petitioner supported private respondent by accommodating the latter's request for an extension of
the insurance coverage, notwithstanding that it was then under no legal obligation to do so.

Private respondent, on the other hand, argued that when it appealed its case to the Court of
Appeals, petitioner did not raise as an issue the award of exemplary damages. It cannot now, for
the first time, raise the same before this Court. Likewise, petitioner cannot submit for the first
time on appeal its argument that it was wrong for the Court of Appeals to have ruled the way it
did based on facts that would need inquiry into the evidence. Even if inquiry into the facts were
possible, such was not necessary because the coverage as ruled upon by the Court of Appeals is
evident from the very terms of the policies.

It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly
interpreted against it because the rule is that any ambiguity is to be taken contra proferentum.
Risk policies should be construed reasonably and in a manner as to make effective the intentions
and expectations of the parties. It added that the policies clearly stipulate that they cover the risks
of non-delivery of an entire package and that it was petitioner itself that invited and granted the
extensions and collected premiums thereon.

The resolution of this controversy hinges on the interpretation of the "Perils" clause of the
subject policies in relation to the excluded risks or warranty specifically stated therein.

By way of a historical background, marine insurance developed as an all-risk coverage, using the
phrase "perils of the sea" to encompass the wide and varied range of risks that were covered.3
The subject policies contain the "Perils" clause which is a standard form in any marine insurance
policy. Said clause reads:

Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and
to take upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates,
Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea,
Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation,
Condition, or quality soever, Barratry of the Master and Mariners, and of all other Perils, Losses,
and Misfortunes, that have come to hurt, detriment, or damage of the said goods and
merchandise or any part thereof . AND in case of any loss or misfortune it shall be lawful to the
ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and about the
defence, safeguards, and recovery of the said goods and merchandises, and ship, & c., or any part
thereof, without prejudice to this INSURANCE; to the charges whereof the said COMPANY,
will contribute according to the rate and quantity of the sum herein INSURED. AND it is
expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or
preserving the Property insured shall be considered as a Waiver, or Acceptance of Abandonment.
And it is agreed by the said COMPANY, that this writing or Policy of INSURANCE shall be of
as much Force and Effect as the surest Writing or policy of INSURANCE made in LONDON.
And so the said MALAYAN INSURANCE COMPANY., INC., are contented, and do hereby
promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his
or their Executors, Administrators, or Assigns, for the true Performance of the Premises;
confessing themselves paid the Consideration due unto them for this INSURANCE at and after
the rate arranged.

The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject
policies is specifically referred to as Clause 12 called the "Free from Capture & Seizure Clause"
or the F.C. & S. Clause which reads, thus:

Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof
or of any attempt thereat; also from the consequences of hostilities and warlike operations,
whether there be a declaration of war or not; but this warranty shall not exclude collision, contact
with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire
unless caused directly (and independently of the nature of the voyage or service which the vessel
concerned or, in the case of a collision, any other vessel involved therein is performing) by a
hostile act by or against a belligerent power and for the purpose of this warranty "power"
includes any authorities maintaining naval, military or air forces in association with power.

Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike
arising therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form
part of this insurance.

However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War
Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides:

1. This insurance covers:

1.1 The risks excluded from the standard form of English Marine Policy by the clause
warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof
of hostilities or warlike operations, whether there be a declaration of war or not; but this
warranty shall not exclude collision, contact with any fixed or floating object (other than a mine
or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the
nature on voyage or service which the vessel concerned or, in the case of a collision any other
vessel involved therein is performing) by a hostile act by or against a belligerent power; and for
the purpose of this warranty "power" includes any authority maintaining naval, military or air
forces in association with a power. Further warranted free from the consequences of civil war,
revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy.

According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute
War Clauses (Cargo), among others, means that any "capture, arrest, detention, etc." pertained
exclusively to warlike operations if this Court strictly construes the heading of the said clauses.
However, it also claims that the parties intended to include arrests, etc. even if it were not the
result of hostilities or warlike operations. It further claims that on the strength of jurisprudence
on the matter, the term "arrests" would only cover those arising from political or executive acts,
concluding that whether private respondent's claim is anchored on subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by judicial
authorities is an excluded risk. 4

This Court cannot agree with petitioner's assertions, particularly when it alleges that in the
"Perils" Clause, it assumed the risk of arrest caused solely by executive or political acts of the
government of the seizing state and thereby excludes "arrests" caused by ordinary legal
processes, such as in the instant case.

With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this
Court agrees with the Court of Appeals and the private respondent that "arrest" caused by
ordinary judicial process is deemed included among the covered risks. This interpretation
becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses provided that
"this insurance covers the risks excluded from the Standard Form of English Marine Policy by
the clause "Warranted free of capture, seizure, arrest, etc. . . ." or the F.C. & S. Clause.

Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the
Standard Form of English Marine Policy by the F.C. & S. Clause.

Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not
included in the covered risk simply because the F.C. & S. Clause under the Institute War Clauses
can only be operative in case of hostilities or warlike operations on account of its heading
"Institute War Clauses." This Court agrees with the Court of Appeals when it held that ". . . .

Although the F.C. & S. Clause may have originally been inserted in marine policies to protect
against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9,
at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil
authorities seems consistent with the general purposes of the clause, . . . ." 5 In fact, petitioner
itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included "arrest" even
if it were not a result of hostilities or warlike operations. 6 In this regard, since what was also
excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process,
logically, such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of
the Institute War Clauses, regardless of whether or not said "arrest" by civil authorities occurred
in a state of war.

Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as
that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. &
S. Clause was "originally incorporated in insurance policies to eliminate the risks of warlike
operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike
operations . . . ." 7 In the same vein, it contended that subsection 1.1 of Section 1 of the Institute
War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the
deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1
of the Institute War Clauses (Cargo) was to include "arrest, etc. even if were not a result of
hostilities or warlike operations. 8

This Court cannot help the impression that petitioner is overly straining its interpretation of the
provisions of the policy in order to avoid being liable for private respondent's claim.

This Court finds it pointless for petitioner to maintain its position that it only insures risks of
"arrest" occasioned by executive or political acts of government which is interpreted as not
referring to those caused by ordinary legal processes as contained in the "Perils" Clause; deletes
the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political acts of
the government and naturally, also those caused by ordinary legal processes; and, thereafter
incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now includes in the
coverage risks of arrest due to executive or political acts of a government but then still excludes
"arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said
Clauses should also have included "arrests" previously excluded from the coverage of the F.C. &
S. Clause.

It has been held that a strained interpretation which is unnatural and forced, as to lead to an
absurd conclusion or to render the policy nonsensical, should, by all means, be avoided. 9
Likewise, it must be borne in mind that such contracts are invariably prepared by the companies
and must be accepted by the insured in the form in which they are written. 10 Any construction
of a marine policy rendering it void should be avoided. 11 Such policies will, therefore, be
construed strictly against the company in order to avoid a forfeiture, unless no other result is
possible from the language used. 12

If a marine insurance company desires to limit or restrict the operation of the general provisions
of its contract by special proviso, exception, or exemption, it should express such limitation in
clear and unmistakable language. 13 Obviously, the deletion of the F.C. & S. Clause and the
consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo)
gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly
indicated as an exception in the subject policies, there would have been no controversy with
respect to the interpretation of the subject clauses.

Be that as it may, exceptions to the general coverage are construed most strongly against the
company. 14 Even an express exception in a policy is to be construed against the underwriters by
whom the policy is framed, and for whose benefit the exception is introduced. 15

An insurance contract should be so interpreted as to carry out the purpose for which the parties
entered into the contract which is, to insure against risks of loss or damage to the goods. Such
interpretation should result from the natural and reasonable meaning of language in the policy.
16 Where restrictive provisions are open to two interpretations, that which is most favorable to
the insured is adopted. 17

Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared
by the insurer. 18 A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to preclude the insurer
from noncompliance with its obligations. 19

In view of the foregoing, this Court sees no need to discuss the other issues presented.

WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.






([2002V333] PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF
APPEALS and JULITA TRINOS, respondents., G.R. No. 125678, 2002 Mar 18, 1st
Division)

D E C I S I O N

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,
respondents 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 Ernanis medical history. Doctors at the MMC
allegedly discovered at the time of Ernanis 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 attorneys 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 attorneys 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] Petitioners 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.

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 insurers 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 respondents 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 respondents husband concealed a material fact in his application. It
appears that in the application for health coverage, petitioners required respondents 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 respondents 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 applicants 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
respondents 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 respondents 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
deceaseds hospitalization, medication and the professional fees of the attending physicians.[24]

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

SO ORDERED.



Eternal Garden Memorial Park Corp. vs Phil. American Life Insurance Co., 551 SCRA 1
[2008]














([1980V371] JEWEL VILLACORTA, assisted by her husband, GUERRERO
VILLACORTA, petitioner, vs. THE INSURANCE COMMISSION and EMPIRE
INSURANCE COMPANY, respondents., G.R. No. L-54171, 1980 Oct 28, 1st Division

D E C I S I O N


TEEHANKEE, Acting C.J.:

The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and
holds that where the insured's car is wrongfully taken without the insured's consent from the car
service and repair shop to whom it had been entrusted for check-up and repairs (assuming that
such taking was for a joy ride, in the course of which it was totally smashed in an accident),
respondent insurer is liable and must pay insured for the total loss of the insured vehicle under
the theft clause of the policy.


The undisputed facts of the case as found in the appealed decision of April 14, 1980 of
respondent insurance commission are as follows:

"Complainant (petitioner) was the owner of a Colt Lancer, Model 1976, insured with respondent
company under Private Car Policy No. MBI/PC-0704 for P35,000.00 - Own Damage;
P30,000.00 - Theft; and P30,000.00 - Third Party Liability, effective May 16, 1977 to May 16,
1978. On May 9, 1978, the vehicle was brought to the Sunday Machine Works, Inc., for general
check-up and repairs. On May 11, 1978, while it was in the custody of the Sunday Machine
Works, the car was allegedly taken by six (6) persons and driven out to Montalban, Rizal. While
travelling along Mabini St., Sitio Palyasan, Barrio Burgos, going North at Montalban, Rizal, the
car figured in an accident, hitting and bumping a gravel and sand truck parked at the right side of
the road going south. As a consequence, the gravel and sand truck veered to the right side of the
pavement going south and the car veered to the right side of the pavement going north. The
driver, Benito Mabasa, and one of the passengers died and the other four sustained physical
injuries. The car, as well, suffered extensive damage. Complainant, thereafter, filed a claim for
total loss with the respondent company hut claim was denied. Hence, complainant was
compelled to institute the present action."

The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire
Insurance Company admittedly undertook to indemnify the petitioner-insured against loss or
damage to the car (a) by accidental collision or overturning, or collision or overturning
consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external
explosion, self-ignition or lightning or burglary, housebreaking or theft; and (c) by malicious act.

Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the
total loss of the vehicle against private respondent, sustaining respondent insurer's contention
that the accident did not fall within the provisions of the policy either for the Own Damage or
Theft coverage, invoking the policy provision on "Authorized Driver" clause.

1
Respondent commission upheld private respondent's contention on the "Authorized Driver"
clause in this wise: "It must be observed that under the above-quoted provisions, the policy limits
the use of the insured vehicle to two (2) persons only, namely: the insured himself or any person
on his (insured's) permission. Under the second category, it is to be noted that the words "any
person' is qualified by the phrase ". . . on the insured's order or with his permission.' It is
therefore clear that if the person driving is other than the insured, he must have been duly
authorized by the insured, to drive the vehicle to make the Insurance company liable for the
driver's negligence. Complainant admitted that she did not know the person who drove her
vehicle at the time of the accident, much less consented to the use of the same (par. 5 of the
complaint). Her husband likewise admitted that he neither knew this driver Benito Mabasa
(Exhibit '4'). With these declarations of complainant and her husband, we hold that the person
who drove the vehicle, in the person of Benito Mabasa, is not an authorized driver of the
complainant. Apparently, this is a violation of the 'Authorized Driver' clause of the policy."

Respondent commission likewise upheld private respondent's assertion that the car was not
stolen and therefore not covered by the Theft clause, ruling that "(T)he element of 'taking' in
Article 308 of the Revised Penal Code means that the act of depriving another of the possession
and dominion of a movable thing is coupled . . . with the intention, at the time of the 'taking', of
withholding it with the character of permanency (People vs. Galang, 7 Appt. Ct. Rep. 13). In
other words, there must have been shown a felonious intent upon the part of the taker of the car,
and the intent must be an intent permanently to deprive the insured of his car," and that "(S)uch
was not the case in this instance. The fact that the car was taken by one of the residents of the
Sunday Machine Works, and the withholding of the same, for a joy ride should not be construed
to mean 'taking' under Art. 308 of the Revised Penal Code. If at all there was a 'taking', the same
was merely temporary in nature. A temporary taking is held not a taking insured against (48
ALR 2d., page 15)."

The Court finds respondent commission's dismissal of the complaint to be contrary to the
evidence and the law.

First, respondent commission's ruling that the person who drove the vehicle in the person of
Benito Mabasa, who, according to its own finding, was one of the residents of the Sunday
Machine Works, Inc. to whom the car had been entrusted for general check-up and repairs was
not an "authorized driver" of petitioner-complainant is too restrictive and contrary to the
established principle that insurance contracts, being contracts of adhesion where the only
participation of the other party is the signing of his signature or his "adhesion" thereto,
"obviously call for greater strictness and vigilance on the part of courts of justice with a view of
protecting the weaker party from abuse and imposition, and prevent their becoming traps for the
unwary." 2

The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a
person other than the insured owner, who drives the car on the insured's order, such as his regular
driver, or with his permission, such as a friend or member of the family or the employees of a car
service or repair shop must be duly licensed drivers and have no disqualification to drive a motor
vehicle.

A car owner who entrusts his car to an established car service and repair shop necessarily
entrusts his car key to the shop owner and employees who are presumed to have the insured's
permission to drive the car for legitimate purposes of checking or road-testing the car. The mere
happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit
or unauthorized purpose in violation of the trust reposed in the shop by the insured car owner
does not mean that the "authorized driver" clause has been violated such as to bar recovery,
provided that such employee is duly qualified to drive under a valid driver's license.

The situation is no different from the regular or family driver, who instead of carrying out the
owner's order to fetch the children from school takes out his girl friend instead for a joy ride and
instead wrecks the car. There is no question of his being an "authorized driver" which allows
recovery of the loss although his trip was for a personal or illicit purpose without the owner's
authorization.

Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft
clause, not the "authorized driver" clause, that applies), where a car is admittedly as in this case
unlawfully and wrongfully taken by some people, be they employees of the car shop or not to
whom it had been entrusted, and taken on a long trip to Montalban without the owner's consent
or knowledge, such taking constitutes or partakes of the nature of theft as defined in Article 308
of the Revised Penal Code, viz. "(W)ho are liable for theft. - Theft is committed by any person
who, with intent to gain but without violence against or intimidation of persons nor force upon
things, shall take personal property of another without the latter's consent," for purposes of
recovering the loss under the policy in question.

The Court rejects respondent commission's premise that there must be an intent on the part of the
taker of the car "permanently to deprive the insured of his car" and that since the taking here was
for a "joy ride" and "merely temporary in nature," a "temporary taking is held not a taking
insured against."

The evidence does not warrant respondent commission's findings that it was a mere "joy ride".
From the very investigator's report cited in its comment, 3 the police found from the waist of the
car driver Benito Mabasa y Bartolome who smashed the car and was found dead right after the
incident "one Cal. 45 Colt. and one apple type grenade," hardly the materials one would bring
along on a "joy ride". Then, again, it is equally evident that the taking proved to be quite
permanent rather than temporary, for the car was totally smashed in the fatal accident and was
never returned in serviceable and useful condition to petitioner-owner.

Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy
ride", the Court sustains as the better view that which holds that when a person, either with the
object of going to a certain place, or learning how to drive, or enjoying a free ride, takes
possession of a vehicle belonging to another, without the consent of its owner, he is guilty of
theft because by taking possession of the personal property belonging to another and using it, his
intent to gam is evident since he derives therefrom utility, satisfaction, enjoyment and pleasure.
Justice Ramon C. Aquino cites in his work Groizard who holds that the use of a thing constitutes
gain and Cuello Calon who calls it "hurt de uso."

The insurer must therefore indemnify the petitioner owner for the total loss of the insured car in
the sum of P35,000.00 under the theft clause of the policy, subject to the filing of such claim for
reimbursement or payment as it may have as subrogee against the Sunday Machine Works, Inc.

ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing
private respondent to pay petitioner the sum of P35,000.00 with legal interest from the filing of
the complaint until full payment is made and to pay the costs of suit.

SO ORDERED.




([1983V421] ASSOCIATION OF BAPTISTS FOR WORLD EVANGELISM, INC.,
plaintiff, vs. FIELDMEN'S INSURANCE CO., INC., defendant-appellant., G.R. No. L-
28772, 1983 September 21, 1st Division)

R E S O L U T I O N

MELENCIO-HERRERA, J.:

This case for "Indemnity for Damages and Attorney's Fees" was elevated to this Tribunal by the
then Court of Appeals on a question of law.
The Stipulation of Facts submitted by the parties before the Court of First Instance of Davao,
Branch I, in Case No. 3789, reads as follows:

"COMES the parties in the above entitled case, through their respective counsels and to this
Honorable Court respectfully submit the following stipulations of facts:

'1. That plaintiff is a religious corporation duly organized and registered under the laws of the
Philippines, while defendant is also a domestic corporation duly organized and existing under the
laws of the Philippines;

'2. That plaintiff, having an insurable interest in a Chevrolet Carry-all, 1955 Model, with Motor
No. 032433272555 and Plate No. E-73317 covered by Registration Certificate No. 288141 Rizal,
issued by the Davao Motor Vehicles Office Agency No. 20 and owned by Reverend Clinton
Bonnel, insured said vehicle with the defendant under Fieldmen's Insurance Co., Inc. Private Car
Comprehensive Policy No. 22 Jl 1107, attached hereto as Annex 'A' to 'A-2' against loss or
damage up to the amount of P5,000.00;

'3. That in the latter part of 1961, through plaintiff's representative, Dr. Antonio Lim, the
aforementioned Chevrolet Carry-all was placed at the Jones Monument Mobilgas Service Station
at Davao City, under the care of said station's operator, Rene Te so that said carry-all could be
displayed as being for sale, with the understanding that the latter or any of his station boys would
receive a 2% commission should they sell said vehicle.

'4. That on the night of January 18, 1962, Romeo Catiben one of the boys at the aforementioned
Jones Monument Service Station and a nephew of the wife of Rene Te who is residing with
them, took the aforementioned chevrolet carry-all for a joy ride to Toril, Davao City, without the
prior permission, authority or consent of either the plaintiff or its representative Dr. Antonio
Lim, or of Rene Te, and on its way back to Davao City, said vehicle, due to some mechanical
defect accidentally bumped an electric post causing actual damages valued at P5,518.61.

'5. That the issue before the Honorable Court is whether or not for the damage to the
abovementioned Chevrolet Carry-all to be compensable under the aforementioned Fieldmen's
Private Car Comprehensive Policy No. 22 JL 11107, there must be a prior criminal conviction of
Romeo Catiben for theft.

WHEREFORE, it is respectfully prayed that this Honorable Court render judgment on the facts
and issues above stipulated after the parties shall have submitted their respective memoranda."

The Trial Court rendered judgment based on the facts stipulated and ordered defendant insurance
company to pay plaintiff association the amount of P5,000.00 as indemnity for the damage
sustained by the vehicle, P2,000.00 for attorney's fees, and costs. Dissatisfied, the insurance
company interposed an appeal to the Appellate Court, docketed as CA-G.R. No. 33543-R, which
as above stated, elevated it to this instance.

We affirm. The Comprehensive Policy issued by the insurance company includes loss of or
damage to the motor vehicle by "burglary . . . or theft." It is settled that the act of Catiben in
taking the vehicle for a joy ride to Toril, Davao City, constitutes theft within the meaning of the
insurance policy and that recovery for damage to the car is not barred by the illegal use of the car
by one of the station boys.

". . . where a car is admittedly as in this case unlawfully and wrongfully taken by some people,
be they employees of the car shop or not to whom it had been entrusted, and taken on a long trip
to Montalban without the owner's consent or knowledge, such taking constitutes or partakes of
the nature of theft as defined in Article 308 of the Revised Penal Code, viz. '(W)ho are liable for
theft. - Theft is committed by any person who, with intent to gain but without violence against or
intimidation of persons nor force upon things, shall take personal property of another without the
latter's consent,' for purposes of recovering the loss under the policy in question."

". . . the Court sustains as the better view that which holds that when a person, either with the
object of going to a certain place, or learning how to drive, or enjoying a free ride, takes
possession of a vehicle belonging to another, without the consent of its owner, he is guilty of
theft because by taking possession of the personal property belonging to another and using it, his
intent to gain is evident since he derives therefrom utility, satisfaction, enjoyment and pleasure.
Justice Ramon C. Aquino cites in his work Groizard who holds that the use of a thing constitutes
gain and Cuello Calon who calls it 'hurto de uso.' 1

There need be no prior conviction for the crime of theft to make an insurer liable under the theft
clause of the policy. Upon the facts stipulated by the parties it is admitted that Catiben had taken
the vehicle for a joy ride and while the same was in his possession he bumped it against an
electric post resulting in damages. That act is theft within a policy of insurance. In a civil action
for recovery on an automobile insurance, the question whether a person using a certain
automobile at the time of the accident stole it or not is to be determined by a fair preponderance
of evidence and not by the rule of criminal law requiring proof of guilt beyond reasonable doubt.
2 Besides, there is no provision in the policy requiring prior criminal conviction for theft.

ACCORDINGLY, finding no error in the judgment appealed from, the same is hereby affirmed.
Costs against defendant Fieldmen's Insurance Co., Inc.

SO ORDERED.



([1986V374] MALAYAN INSURANCE CO., INC., petitioner-appellant, vs. THE
HONORABLE COURT OF APPEALS and AURELIO LACSON, respondents-appellees.,
G.R. No. L-59919, 1986 November 26, 2nd Division)

D E C I S I O N

PARAS, J:

This is an appeal by certiorari, for the review of the Decision of the respondent Court of Appeals
(C.A.) in CA-G.R. No. 63398-R, entitled "Aurelio Lacson, (appellee) vs. Malayan Insurance Co.,
Inc., (appellant), which affirmed the decision of the Court of First Instance (CFI) of Negros
Occidental holding petitioner liable to pay private respondent Aurelio Lacson the amount of
P20,000.00, less deductible franchise, which is the maximum coverage of the insurance policy,
with legal interest thereon from the date of filing of the complaint, the amount of P5,000.00 as
attorney's fees and expenses in litigation, and to pay the costs.

Plaintiff Aurelio Lacson (private respondent herein) is the owner of a Toyota NP Land Cruiser,
Model 1972, bearing Plate No. NY-362 and with engine Number F-374325. Said vehicle was
insured with defendant company (petitioner herein) under "private car comprehensive" policy
No. BIFC/PV-0767 for a one year period, from Dec. 3, 1974 to Dec. 3, 1975. On Dec. 1, 1975
plaintiff caused the delivery of subject vehicle to the shop of Carlos Jamelo for repair. On Dec. 2,
1975 while the vehicle was in Carlos Jamelo's shop, a certain Rogelio Mahinay, together with his
other co-employees in the shop, namely Johnny Mahinay, Rogelio Macapagong and Rogelio
Francisco took and drove the Toyota Land Cruiser, as a result of which it met with an accident at
Bo. Taculing, Bacolod City, causing damage thereto, in an estimated amount of P21,849.62.
Shopowner Carlos Jamelo reported the incident to the police and later on instituted a criminal
case for Qualified Theft against his employees who had taken plaintiff's vehicle. Plaintiff sought
indemnification under his insurance policy from defendant company but the latter refused to pay
on the ground that the claim is not covered by the policy inasmuch as the driver of the insured
vehicle at the time of the accident was not a duly licensed driver. This act of defendant company
prompted plaintiff to file a civil case for damages docketed as Civil Case No. 12447 of the CFI
of Negros Occidental. Defendant in its answer raised among other things as affirmative and
special defenses that plaintiff has no cause of action, claim is not covered by the insurance
policy, and nonjoinder of indispensable party. After trial, the Court a quo rendered a favorable
judgment for the plaintiff. On appeal, the Court of Appeals affirmed said decision and denied a
motion for reconsideration of the same. Hence, the instant petition by defendant company relying
on the following grounds:

1. the respondent Court of Appeals erred in holding that conviction of theft is not necessary for
claim to be compensable under the "theft" coverage of the insurance policy, which ruling
establishes a bad and dangerous precedent to the detriment and prejudice of insurance industry.

2. the respondent Court of Appeals erred in holding petitioner liable for actual damage of the
vehicle without sufficient and competent evidentiary basis.

3. the respondent Court of Appeals erred in holding petitioner liable to private respondent
Aurelio Lacson in disregard of the real party in interest BIFC, in violation of the principle
embodied in the Rules of Court, that every action must be prosecuted in the name of the real
party in interest.

4. the respondent Court of Appeals erred in holding petitioner liable for interest from filing of
the complaint and not from the date of decision or its finality, also in disregard of established
doctrines laid down by the Honorable Supreme Court.
Petitioner's contentions hold no water. The first assignment of error was satisfactorily disposed
of by the trial court as well as by the appellate court as shown by the ruling that "the taking of the
vehicle by another person without permission or authority from the owner or person-in-charge
thereof is sufficient to place it within the ambit of the word theft as contemplated in the policy,
and is therefore, compensable." The fact that one of the accused persons in the criminal case
(filed against those who took the jeep from the repair shop) pleaded guilty to the charge of
having unlawfully taken the insured vehicle did away with the necessity of a final disposition of
the criminal case in order for plaintiff to recover under his insurance policy. At any rate, accused
Rogelio Mahinay was convicted of Theft after he pleaded guilty to the charge.

There is no question that the vehicle of private respondent was damaged because the unlawful
taker, accused Rogelio Mahinay, drove it and met with a vehicular accident. The damages
therefore were sustained in the course of the unlawful taking. The testimonies of plaintiff and his
witness in this respect remain unrebutted. The fact remains that plaintiff's claim is substantiated
by competent evidence. The appellate court ruled:

"Appellant contends that the trial court erred in awarding the amount of P20,000.00 actual
damage without sufficient evidentiary basis and imposing interest from date of filing of the
complaint. We do not see anything erroneous with this finding of the trial court. As estimated by
a reputed motor company, Fidelity Motor Company, the damage which the insured vehicle
sustained amounts to P21,849.62. Actual repair is not necessary for the purpose, as the insured
has the option, either to advance expenses for the repair of or to wait for the proceeds of the
insurance."

Likewise in the very insurance policy (Exh. "A") covering the damaged vehicle, petitioner's
liability is fixed at P20,000 less deductible franchise of P800.00. As borne out by the evidence,
private respondent before instituting the present action against petitioner wrote a letter of
demand (Exh. "H") to petitioner for the payment of his claim in the amount of P21,849.62 as
estimated by Fidelity Motor Company. This notwithstanding, petitioner failed and refused to pay
respondent's claim prompting the latter to file the present action in court.

As to petitioner's third assignment of error, after considering the facts and circumstances of the
case as found by the trial court and the respondent appellate court, We cannot see any reason to
depart from the ruling set down by the respondent Court of Appeals. In this connection, the CA
said:

"the memorandum on the policy states LOSS on DAMAGE, IF ANY, under this policy shall be
payable to the Bacolod IFC 1 as their interest may appear, subject otherwise to the terms and
conditions, clauses and warranties of this policy. Since as testified to by plaintiff-appellee, 2
Bacolod IFC's interest in the insured vehicle was in the amount of P2,000.00 only compared to
plaintiff's P26,000.00 it is well to presume that Bacolod IFC did not deem it wise to be
impleaded as party ---- plaintiff in this case. Had Bacolod IFC been interested in the insurance
proceeds, it could thru its duly authorized office, have taken the initiative to join plaintiff in the
suit, but it did not. As a matter of fact, as testified to by the plaintiff, Atty. Morravilla of the
BIFC knew fully well that he (plaintiff) was pursuing a claim for insurance from defendant-
appellant, This inaction on the part of BIFC will only show that it was not really interested to
intervene."

Petitioner's fourth assignment of error is untenable. Respondent has sufficiently established his
demand for the award of damages plus interest as sanctioned under Arts. 1169, 1170 and 2209 of
the Civil Code. Thus, a debtor who is in delay (default) is liable for damages (Art. 1170)
generally from extrajudicial or judicial demand (Art. 1169) in the form of interest. (See Art.
2209, Civil Code).

WHEREFORE, premises considered, the present petition is hereby DENIED for lack of merit
and the judgment appealed from AFFIRMED in toto.

SO ORDERED.





([2001V1095] AMERICAN HOME ASSURANCE COMPANY, petitioner, vs. TANTUCO
ENTERPRISES, INC., respondent., G.R. No. 138941, 2001 Oct 8, 1st Division)

D E C I S I O N

PUNO, J.:

Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals in
CA-G.R. CV No. 52221 promulgated on January 14, 1999, which affirmed in toto the Decision
of the Regional Trial Court, Branch 53, Lucena City in Civil Case No. 92-51 dated October 16,
1995.

Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry.
It owns two oil mills. Both are located at its factory compound at Iyam, Lucena City. It appears
that respondent commenced its business operations with only one oil mill. In 1988, it started
operating its second oil mill. The latter came to be commonly referred to as the new oil mill.

The two oil mills were separately covered by fire insurance policies issued by petitioner
American Home Assurance Co., Philippine Branch.[1] The first oil mill was insured for three
million pesos (P3,000,000.00) under Policy No. 306-7432324-3 for the period March 1, 1991 to
1992.[2] The new oil mill was insured for six million pesos (P6,000,000.00) under Policy No.
306-7432321-9 for the same term.[3] Official receipts indicating payment for the full amount of
the premium were issued by the petitioner's agent.[4]

A fire that broke out in the early morning of September 30,1991 gutted and consumed the new
oil mill. Respondent immediately notified the petitioner of the incident. The latter then sent its
appraisers who inspected the burned premises and the properties destroyed. Thereafter, in a
letter dated October 15, 1991, petitioner rejected respondents claim for the insurance proceeds
on the ground that no policy was issued by it covering the burned oil mill. It stated that the
description of the insured establishment referred to another building thus: Our policy nos. 306-
7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend insurance coverage to your oil mill
under Building No. 5, whilst the affected oil mill was under Building No. 14.[5]

A complaint for specific performance and damages was consequently instituted by the
respondent with the RTC, Branch 53 of Lucena City. On October 16, 1995, after trial, the lower
court rendered a Decision finding the petitioner liable on the insurance policy thus:

WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to pay
plaintiff:

(a) P4,406,536.40 representing damages for loss by fire of its insured property with interest at the
legal rate;

(b) P80,000.00 for litigation expenses;

(c) P300,000.00 for and as attorneys fees; and

(d) Pay the costs.

SO ORDERED.[6]

Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld the
same in a Decision promulgated on January 14, 1999, the pertinent portion of which states:

WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the trial courts
Decision dated October 16, 1995 is hereby AFFIRMED in toto.

SO ORDERED.[7]

Petitioner moved for reconsideration. The motion, however, was denied for lack of merit in a
Resolution promulgated on June 10, 1999.

Hence, the present course of action, where petitioner ascribes to the appellate court the following
errors:

(1) The Court of Appeals erred in its conclusion that the issue of non-payment of the premium
was beyond its jurisdiction because it was raised for the first time on appeal.[8]

(2) The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing Appliances
Warranty' of the policy.[9]

(3) With due respect, the conclusion of the Court of Appeals giving no regard to the parole
evidence rule and the principle of estoppel is erroneous.[10]

The petition is devoid of merit.

The primary reason advanced by the petitioner in resisting the claim of the respondent is that the
burned oil mill is not covered by any insurance policy. According to it, the oil mill insured is
specifically described in the policy by its boundaries in the following manner:

Front: by a driveway thence at 18 meters distance by Bldg. No. 2.

Right: by an open space thence by Bldg. No. 4.

Left: Adjoining thence an imperfect wall by Bldg. No. 4.

Rear: by an open space thence at 8 meters distance.

However, it argues that this specific boundary description clearly pertains, not to the burned oil
mill, but to the other mill. In other words, the oil mill gutted by fire was not the one described by
the specific boundaries in the contested policy.

What exacerbates respondents predicament, petitioner posits, is that it did not have the supposed
wrong description or mistake corrected. Despite the fact that the policy in question was issued
way back in 1988, or about three years before the fire, and despite the Important Notice in the
policy that Please read and examine the policy and if incorrect, return it immediately for
alteration, respondent apparently did not call petitioners attention with respect to the
misdescription.

By way of conclusion, petitioner argues that respondent is barred by the parole evidence rule
from presenting evidence (other than the policy in question) of its self-serving intention (sic) that
it intended really to insure the burned oil mill, just as it is barred by estoppel from claiming
that the description of the insured oil mill in the policy was wrong, because it retained the policy
without having the same corrected before the fire by an endorsement in accordance with its
Condition No. 28.

These contentions can not pass judicial muster.

In construing the words used descriptive of a building insured, the greatest liberality is shown by
the courts in giving effect to the insurance.[11] In view of the custom of insurance agents to
examine buildings before writing policies upon them, and since a mistake as to the identity and
character of the building is extremely unlikely, the courts are inclined to consider that the policy
of insurance covers any building which the parties manifestly intended to insure, however
inaccurate the description may be.[12]

Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind,
that what the parties manifestly intended to insure was the new oil mill. This is obvious from the
categorical statement embodied in the policy, extending its protection:

On machineries and equipment with complete accessories usual to a coconut oil mill including
stocks of copra, copra cake and copra mills whilst contained in the new oil mill building, situate
(sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY
UNBLOCKED.[13] ( mphasis supplied.)

If the parties really intended to protect the first oil mill, then there is no need to specify it as new.

Indeed, it would be absurd to assume that respondent would protect its first oil mill for different
amounts and leave uncovered its second one. As mentioned earlier, the first oil mill is already
covered under Policy No. 306-7432324-4 issued by the petitioner. It is unthinkable for
respondent to obtain the other policy from the very same company. The latter ought to know that
a second agreement over that same realty results in its overinsurance.

The imperfection in the description of the insured oil mills boundaries can be attributed to a
misunderstanding between the petitioners general agent, Mr. Alfredo Borja, and its policy
issuing clerk, who made the error of copying the boundaries of the first oil mill when typing the
policy to be issued for the new one. As testified to by Mr.Borja:

Atty. G. Camaligan:

Q: What did you do when you received the report?

A: I told them as will be shown by the map the intention really of Mr. Edison Tantuco is to
cover the new oil mill that is why when I presented the existing policy of the old policy, the
policy issuing clerk just merely (sic) copied the wording from the old policy and what she typed
is that the description of the boundaries from the old policy was copied but she inserted covering
the new oil mill and to me at that time the important thing is that it covered the new oil mill
because it is just within one compound and there are only two oil mill[s] and so just enough, I
had the policy prepared. In fact, two policies were prepared having the same date one for the old
one and the other for the new oil mill and exactly the same policy period, sir.[14] mphasis
supplied)

It is thus clear that the source of the discrepancy happened during the preparation of the written
contract.

These facts lead us to hold that the present case falls within one of the recognized exceptions to
the parole evidence rule. Under the Rules of Court, a party may present evidence to modify,
explain or add to the terms of the written agreement if he puts in issue in his pleading, among
others, its failure to express the true intent and agreement of the parties thereto.[15] Here, the
contractual intention of the parties cannot be understood from a mere reading of the instrument.
Thus, while the contract explicitly stipulated that it was for the insurance of the new oil mill, the
boundary description written on the policy concededly pertains to the first oil mill. This
irreconcilable difference can only be clarified by admitting evidence aliunde, which will explain
the imperfection and clarify the intent of the parties.

Anent petitioners argument that the respondent is barred by estoppel from claiming that the
description of the insured oil mill in the policy was wrong, we find that the same proceeds from a
wrong assumption. Evidence on record reveals that respondents operating manager, Mr. Edison
Tantuco, notified Mr. Borja (the petitioners agent with whom respondent negotiated for the
contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr.
Tantuco that the use of the adjective new will distinguish the insured property. The assurance
convinced respondent that, despite the impreciseness in the specification of the boundaries, the
insurance will cover the new oil mill. This can be seen from the testimony on cross of Mr.
Tantuco:

"ATTY. SALONGA:

Q: You mentioned, sir, that at least in so far as Exhibit A is concern you have read what the
policy contents.(sic)

Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly
the boundaries of the property insured by the insurance policy Exhibit A, will you tell us as the
manager of the company whether the boundaries stated in Exhibit A-2 are the boundaries of the
old (sic) mill that was burned or not.

A: It was not, I called up Mr. Borja regarding this matter and he told me that what is important
is the word new oil mill. Mr. Borja said, as a matter of fact, you can never insured (sic) one
property with two (2) policies, you will only do that if you will make to increase the amount and
it is by indorsement not by another policy, sir."[16]

We again stress that the object of the court in construing a contract is to ascertain the intent of
the parties to the contract and to enforce the agreement which the parties have entered into. In
determining what the parties intended, the courts will read and construe the policy as a whole
and if possible, give effect to all the parts of the contract, keeping in mind always, however, the
prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In
determining the intent of the parties to the contract, the courts will consider the purpose and
object of the contract.[17]

In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal
policy for its failure to pay the full amount of the premium and breach of the Fire Extinguishing
Appliances Warranty.

The amount of the premium stated on the face of the policy was P89,770.20. From the
admission of respondents own witness, Mr. Borja, which the petitioner cited, the former only
paid it P75,147.00, leaving a difference of P14,623.20. The deficiency, petitioner argues,
suffices to invalidate the policy, in accordance with Section 77 of the Insurance Code.[18]

The Court of Appeals refused to consider this contention of the petitioner. It held that this issue
was raised for the first time on appeal, hence, beyond its jurisdiction to resolve, pursuant to Rule
46, Section 18 of the Rules of Court.[19]

Petitioner, however, contests this finding of the appellate court. It insists that the issue was
raised in paragraph 24 of its Answer, viz.:

24. Plaintiff has not complied with the condition of the policy and renewal certificate that the
renewal premium should be paid on or before renewal date.

Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who
acknowledged that the paid amount was lacking by P14,623.20 by reason of a discount or rebate,
which rebate under Sec. 361 of the Insurance Code is illegal.

The argument fails to impress. It is true that the asseverations petitioner made in paragraph 24 of
its Answer ostensibly spoke of the policys condition for payment of the renewal premium on
time and respondents non-compliance with it. Yet, it did not contain any specific and definite
allegation that respondent did not pay the premium, or that it did not pay the full amount, or that
it did not pay the amount on time.

Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial
proceedings, the question of the supposed inadequate payment was never raised. Most
significant to point, petitioner fatally neglected to present, during the whole course of the trial,
any witness to testify that respondent indeed failed to pay the full amount of the premium. The
thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of
proving this fact. Though it briefly touched on the alleged deficiency, such was made in the
course of discussing a discount or rebate, which the agent apparently gave the respondent.
Certainly, the whole tenor of Mr. Borjas testimony, both during direct and cross examinations,
implicitly assumed a valid and subsisting insurance policy. It must be remembered that he was
called to the stand basically to demonstrate that an existing policy issued by the petitioner covers
the burned building.

Finally, petitioner contends that respondent violated the express terms of the Fire Extinguishing
Appliances Warranty. The said warranty provides:

WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as
mentioned below shall be maintained in efficient working order on the premises to which
insurance applies:

- PORTABLE EXTINGUISHERS

- INTERNAL HYDRANTS

- EXTERNAL HYDRANTS

- FIRE PUMP

- 24-HOUR SECURITY SERVICES

BREACH of this warranty shall render this policy null and void and the Company shall no
longer be liable for any loss which may occur.[20]

Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances
specified therein. The breach occurred when the respondent failed to install internal fire
hydrants inside the burned building as warranted. This fact was admitted by the oil mills
expeller operator, Gerardo Zarsuela.

Again, the argument lacks merit. We agree with the appellate courts conclusion that the
aforementioned warranty did not require respondent to provide for all the fire extinguishing
appliances enumerated therein. Additionally, we find that neither did it require that the
appliances are restricted to those mentioned in the warranty. In other words, what the warranty
mandates is that respondent should maintain in efficient working condition within the premises
of the insured property, fire fighting equipments such as, but not limited to, those identified in
the list, which will serve as the oil mills first line of defense in case any part of it bursts into
flame.

To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil
mill can be found the following devices: numerous portable fire extinguishers, two fire
hoses,[21] fire hydrant,[22] and an emergency fire engine.[23] All of these equipments were in
efficient working order when the fire occurred.

It ought to be remembered that not only are warranties strictly construed against the insurer, but
they should, likewise, by themselves be reasonably interpreted.[24] That reasonableness is to be
ascertained in light of the factual conditions prevailing in each case. Here, we find that there is
no more need for an internal hydrant considering that inside the burned building were: (1)
numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has
a connection to one of the external hydrants.

IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant petition
is hereby DISMISSED.

SO ORDERED.