G.R. No.

156956

October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as Insurance

Commissioner,petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.:
The securities required by the Insurance Code to be deposited with the Insurance Commissioner are intended to answer
for the claims of all policy holders in the event that the depositing insurance company becomes insolvent or otherwise
unable to satisfy their claims. The security deposit must be ratably distributed among all the insured who are entitled to
their respective shares; it cannot be garnished or levied upon by a single claimant, to the detriment of the others.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the January 16, 2003 Order 2 of
the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance
Commissioner Eduardo T. Malinis guilty of indirect contempt for refusing to comply with the December 18, 2002
Resolution3 of the lower court. The January 16, 2003 Order states in full:
"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T. Malinis of the Office of the
Insurance Commission in Contempt of Court because of his failure and refusal to obey the lawful order of this
court embodied in a Resolution dated December 18, 2002 directing him to allow the withdrawal of the security
deposit of Capital Insurance and Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid to Sheriff
Manuel Paguyo in the satisfaction of the Notice of Garnishment pursuant to a Decision of this Court which has
become final and executory.
"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis or his counsel or his duly
authorized representative failed to appear despite notice in utter disregard of the order of this Court. However,
Commissioner Malinis filed on January 15, 2003 a written Comment reiterating the same grounds already passed
upon and rejected by this Court. This Court finds no lawful justification or excuse for Commissioner Malinis'
refusal to implement the lawful orders of this Court.
"Wherefore, premises considered and after due hearing, Commissioner Eduardo T. Malinis is hereby declared
guilty of Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of the 1997 Rules of Civil Procedure for
willfully disobeying and refusing to implement and obey a lawful order of this Court." 4
The Facts
On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412, finding the defendants (Vilfran Liner,
Inc., Hilaria Villegas and Maura Villegas) jointly and severally liable to pay Del Monte Motors, Inc.,P11,835,375.50
representing the balance of Vilfran Liner's service contracts with respondent. The trial court further ordered the execution
of the Decision against the counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).
On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent, claiming that the latter had no record or
document regarding the alleged issuance of the counterbond; thus, the bond was not valid and enforceable.

On June 13, 2002, the RTC granted the Motion for Execution and issued the corresponding Writ. Armed with this Writ,
Sheriff Manuel S. Paguyo proceeded to levy on the properties of CISCO. He also issued a Notice of Garnishment on
several depository banks of the insurance company. Moreover, he served a similar notice on the Insurance Commission,
so as to enforce the Writ on the security deposit filed by CISCO with the Commission in accordance with Section 203 of
the Insurance Code.
On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that the Notice of Garnishment served
by Sheriff Paguyo on the insurance commission was valid. The trial court added that the letter and spirit of the law made
the security deposit answerable for contractual obligations incurred by CISCO under the insurance contracts the latter had
entered into. The RTC resolved thus:
"Furthermore, the Commissioner of the Office of the Insurance Commission is hereby ordered to comply with its
obligations under the Insurance Code by upholding the integrity and efficacy of bonds validly issued by duly
accredited Bonding and Insurance Companies; and to safeguard the public interest by insuring the faithful
performance to enforce contractual obligations under existing bonds. Accordingly said office is ordered to
withdraw from the security deposit of Capital Insurance & Surety Company, Inc. the amount ofP11,835.50 to be
paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice of Garnishment served on August 16, 2002." 5
On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T. Malinis in contempt of court for his
refusal to obey the December 18, 2002 Resolution of the trial court.
Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis in contempt for his refusal to implement its Order. It explained that the
commissioner had no legal justification for his refusal to allow the withdrawal of CISCO's security deposit.
Hence, this Petition.6
Issues
Petitioner raises this sole issue for the Court's consideration:
"Whether or not the security deposit held by the Insurance Commissioner pursuant to Section 203 of the
Insurance Code may be levied or garnished in favor of only one insured." 7
The Court's Ruling
The Petition is meritorious.
Preliminary Issue:
Propriety of Review
Before discussing the principal issue, the Court will first dispose of the question of mootness.
Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the treasurer of the Philippines a letter dated
March 26, 2003, stating that the former had no objection to the release of the security deposit to Del Monte Motors.
Portions of the fund were consequently released to respondent in July, October, and December 2003. Thus, the issue
arises: whether these circumstances render the case moot.
Petitioner, however, contends that the partial releases should not be construed as an abandonment of its stand that
security deposits under Section 203 of the Insurance Code are exempt from levy and garnishment. The Republic claims
that the releases were made pursuant to the commissioner's power of control over the fund, not to the lower court's Order
of garnishment. Petitioner further invokes the jurisdiction of this Court to put to rest the principal issue of whether security
deposits made with the Insurance Commission may be levied and garnished.
The issue is not totally moot. To stress, only a portion of respondent's claim was satisfied, and the Insurance Commission
has required CISCO to replenish the latter's security deposit. Respondent, therefore, may one day decide to further
garnish the security deposit, once replenished. Moreover, after the questioned Order of the lower court was issued, similar

claims on the security deposits of various insurance companies have been made before the Insurance Commission. To
set aside the resolution of the issue will only postpone a task that is certain to crop up in the future.
Besides, the business of insurance is imbued with public interest. It is subject to regulation by the State, with respect not
only to the relations between the insurer and the insured, but also to the internal affairs of insurance companies. 8 As this
case is undeniably endowed with public interest and involves a matter of public policy, this Court shall not shirk from its
duty to educate the bench and the bar by formulating guiding and controlling principles, precepts, doctrines and rules. 9
Principal Issue:
Exemption of Security Deposit from Levy or Garnishment
Section 203 of the Insurance Code provides as follows:
"Sec. 203. Every domestic insurance company shall, to the extent of an amount equal in value to twenty-five per
centum of the minimum paid-up capital required under section one hundred eighty-eight, invest its funds only in
securities, satisfactory to the Commissioner, consisting of bonds or other evidences of debt of the Government of
the Philippines or its political subdivisions or instrumentalities, or of government-owned or controlled corporations
and entities, including the Central Bank of the Philippines: Provided, That such investments shall at all times be
maintained free from any lien or encumbrance; and Provided, further, That such securities shall be deposited with
and held by the Commissioner for the faithful performance by the depositing insurer of all its obligations under
its insurance contracts. The provisions of section one hundred ninety-two shall, so far as practicable, apply to
the securities deposited under this section.
"Except as otherwise provided in this Code, no judgment creditor or other claimant shall have the right to
levy upon any of the securities of the insurer held on deposit pursuant to the requirement of the
Commissioner." (Emphasis supplied)
Respondent notes that Section 203 does not provide for an absolute prohibition on the levy and garnishment of the
security deposit. It contends that the law requires the deposit, precisely to ensure faithful performance of all the
obligations of the depositing insurer under the latter's various insurance contracts. Hence, respondent claims that the
security deposit should be answerable for the counterbond issued by CISCO.
The Court is not convinced. As worded, the law expressly and clearly states that the security deposit shall be (1)
answerable for all the obligations of the depositing insurer under its insurance contracts; (2) at all times free from any
liens or encumbrance; and (3) exempt from levy by any claimant.
To be sure, CISCO, though presently under conservatorship, has valid outstanding policies. Its policy holders have a right
under the law to be equally protected by its security deposit. To allow the garnishment of that deposit would impair the
fund by decreasing it to less than the percentage of paid-up capital that the law requires to be maintained. Further, this
move would create, in favor of respondent, a preference of credit over the other policy holders and beneficiaries.
Our Insurance Code is patterned after that of California. 10 Thus, the ruling of the state's Supreme Court on a similar
concept as that of the security deposit is instructive. Engwicht v. Pacific States Life Assurance Co.11 held that the money
required to be deposited by a mutual assessment insurance company with the state treasurer was "a trust fund to be
ratably distributed amongst all the claimants entitled to share in it. Such a distribution cannot be had except in an action in
the nature of a creditors' bill, upon the hearing of which, and with all the parties interested in the fund before it, the court
may make equitable distribution of the fund, and appoint a receiver to carry that distribution into effect." 12
Basic is the statutory construction rule that provisions of a statute should be construed in accordance with the purpose for
which it was enacted.13 That is, the securities are held as a contingency fund to answer for the claims against the
insurance company by all its policy holders and their beneficiaries. This step is taken in the event that the company
becomes insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay stake on the
securities to the exclusion of all others. The other parties may have their own claims against the insurance company under
other insurance contracts it has entered into.
Respondent's Inchoate Right
The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all other obligations of the
company arising from its insurance contracts. Thus, respondent's interest is merely inchoate. Being a mere expectancy, it

has no attribute of property. At this time, it is nonexistent and may never exist. 14 Hence, it would be premature to make the
security deposit answerable for CISCO's present obligation to Del Monte Motors.
Moreover, since insolvency proceedings against CISCO have yet to be conducted, it would be impossible to establish at
this time which claimants are entitled to the security deposit and in what pro-rated amounts. Only after all other claimants
under subsisting policies issued by CISCO have been heard can respondent's share be determined.
Powers of the Commissioner
The Insurance Code has vested the Office of the Insurance Commission with both regulatory and adjudicatoryauthority
over insurance matters.15
The general regulatory authority of the insurance commissioner is described in Section 414 of the Code as follows:
"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance
companies and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully
executed and to perform the duties imposed upon him by this Code, and shall, notwithstanding any existing laws
to the contrary, have sole and exclusive authority to regulate the issuance and sale of variable contracts as
defined in section two hundred thirty-two and to provide for the licensing of persons selling such contracts, and to
issue such reasonable rules and regulations governing the same.
"The Commissioner may issue such rulings, instructions, circulars, orders and decisions as he may deem
necessary to secure the enforcement of the provisions of this Code, subject to the approval of the Secretary of
Finance. Except as otherwise specified, decisions made by the Commissioner shall be appealable to the
Secretary of Finance." (Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to issue) certificates of
authority to persons or entities desiring to engage in insurance business in the Philippines; 16 (2) revoke or suspend these
certificates of authority upon finding grounds for the revocation or suspension; 17 (3) impose upon insurance companies,
their directors and/or officers and/or agents appropriate penalties -- fines, suspension or removal from office -- for failing to
comply with the Code or with any of the commissioner's orders, instructions, regulations or rulings, or for otherwise
conducting business in an unsafe or unsound manner.18
Included in the above regulatory responsibilities is the duty to hold the security deposits under Sections 191 19 and 203 of
the Code, for the benefit and security of all policy holders. In relation to these provisions, Section 192 of the Insurance
Code states:
"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the benefit and security of all
the policyholders of the company depositing the same, but shall as long as the company is solvent, permit the
company to collect the interest or dividends on the securities so deposited, and, from time to time, with his assent,
to withdraw any of such securities, upon depositing with said Commissioner other like securities, the market value
of which shall be equal to the market value of such as may be withdrawn. In the event of any company ceasing to
do business in the Philippines the securities deposited as aforesaid shall be returned upon the company's making
application therefor and proving to the satisfaction of the Commissioner that it has no further liability under any of
its policies in the Philippines." (Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate the insurance industry so
as to protect the insuring public. The law specifically confers custody over the securities upon the commissioner, with
whom these investments are required to be deposited. An implied trust 20 is created by the law for the benefit of all
claimants under subsisting insurance contracts issued by the insurance company.21
As the officer vested with custody of the security deposit, the insurance commissioner is in the best position to determine
if and when it may be released without prejudicing the rights of other policy holders. Before allowing the withdrawal or the
release of the deposit, the commissioner must be satisfied that the conditions contemplated by the law are met and all
policy holders protected.
Commissioner's Actions
Entitled to Great Respect

In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing that the funds were
exempt from execution as provided by law, he sought to protect other policy holders. His interpretation of the provisions of
the law carries great weight and consideration,22 as he is the head of a specialized body tasked with the regulation of
insurance matters and primarily charged with the implementation of the Insurance Code.
The emergence of the multifarious needs of modern society necessitates the establishment of diverse administrative
agencies. In addressing these needs, the administrative agencies charged with applying and implementing particular
statutes have accumulated experience and specialized capabilities. Thus, in a long line of cases, this Court has
recognized that their construction of a statute is entitled to great respect and should ordinarily be controlling, unless
clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws. 23
Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit of CISCO. It follows that
without the issuance of a valid order, the insurance commissioner could not have been in contempt of court. 24
WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs.
SO ORDERED.

G.R. No. 76452 July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON MONTILLA PATERNO,
JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.

QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with preliminary injunction or
temporary restraining order, to annul and set aside the Order dated November 6, 1986 of the Insurance Commissioner
and the entire proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr. dated April 17, 1986, to
respondent Commissioner, alleging certain problems encountered by agents, supervisors, managers and public
consumers of the Philippine American Life Insurance Company (Philamlife) as a result of certain practices by said
company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los Reyes, in his capacity as
Philamlife's president, to comment on respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested that private respondent
"submit some sort of a 'bill of particulars' listing and citing actual cases, facts, dates, figures, provisions of law, rules and
regulations, and all other pertinent data which are necessary to enable him to prepare an intelligent reply" (Rollo, p. 37). A
copy of this letter was sent by the Insurance Commissioner to private respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private respondent maintaining that his lettercomplaint of April 17, 1986 was sufficient in form and substance, and requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated his claim that private
respondent's letter of May 16, 1986 did not supply the information he needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the validity of the Contract of
Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to specify the provisions of the agency
contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent Commissioner dated July 31, 1986,
reiterating his letter of April 17, 1986 and praying that the provisions on charges and fees stated in the Contract of Agency
executed between Philamlife and its agents, as well as the implementing provisions as published in the agents' handbook,
agency bulletins and circulars, be declared as null and void. He also asked that the amounts of such charges and fees
already deducted and collected by Philamlife in connection therewith be reimbursed to the agents, with interest at the
prevailing rate reckoned from the date when they were deducted.

Respondent Commissioner furnished petitioner De los Reyes with a copy of private respondent's letter of July 31, 1986,
and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:
(1) Private respondent's letter of August 11, 1986 does not contain any of the particular information which
Philamlife was seeking from him and which he promised to submit.
(2) That since the Commission's quasi-judicial power was being invoked with regard to the complaint,
private respondent must file a verified formal complaint before any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption of the hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President and Executive Assistant to
the President, asked that respondent Commission first rule on the questions of the jurisdiction of the Insurance
Commissioner over the subject matter of the letters-complaint and the legal standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the case on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following grounds;
1. The Subpoena/Notice has no legal basis and is premature because:
(1) No complaint sufficient in form and contents has been filed;
(2) No summons has been issued nor received by the
respondent De los Reyes, and hence, no jurisdiction has
been acquired over his person;
(3) No answer has been filed, and hence, the hearing
scheduled on November 5, 1986 in the
Subpoena/Notice, and wherein the respondent is
required to appear, is premature and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash. The dispositive portion of
said Order reads:
NOW, THEREFORE, finding the position of complainant thru counsel tenable and considering the fact
that the instant case is an informal administrative litigation falling outside the operation of the aforecited
memorandum circular but cognizable by this Commission, the hearing officer, in open session ruled as it
is hereby ruled to deny the Motion to Quash Subpoena/Notice for lack of merit (Rollo, p. 109).
Hence, this petition.
II

The main issue to be resolved is whether or not the resolution of the legality of the Contract of Agency falls within the
jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to take cognizance of the complaint in the
exercise of its quasi-judicial powers. The Solicitor General, upholding the jurisdiction of the Insurance Commissioner,
claims that under Sections 414 and 415 of the Insurance Code, the Commissioner has authority to nullify the alleged
illegal provisions of the Contract of Agency.
III
The general regulatory authority of the Insurance Commissioner is described in Section 414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance
companies and other insurance matters, mutual benefit associations and trusts for charitable uses are
faithfully executed and to perform the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the Insurance Commissioner
is hereby authorized, at his discretion, to impose upon insurance companies, their directors and/or
officers and/or agents, for any willful failure or refusal to comply with, or violation of any provision of this
Code, or any order, instruction, regulation or ruling of the Insurance Commissioner, or any commission of
irregularities, and/or conducting business in an unsafe and unsound manner as may be determined by the
the Insurance Commissioner, the following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing, removal of directors
and/or officers and/or agents.
A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to regulate the
business of insurance, which is defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of
this Code, shall include
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety; (c) doing any kind of business,
including a reinsurance business, specifically recognized as constituting the doing of an insurance
business within the meaning of this Code; (d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. (Insurance
Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not included within the meaning of an
insurance business, Section 2 of the Insurance Code cannot be invoked to give jurisdiction over the same to the
Insurance Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the Insurance Commissioner under Section
416 of the Insurance Code applies in his case, we likewise rule in the negative. Section 416 of the Code in pertinent part,
provides:
The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage
or liability for which an insurer may be answerable under any kind of policy or contract of insurance, or for

which such insurer may be liable under a contract of suretyship, or for which a reinsurer may be used
under any contract or reinsurance it may have entered into, or for which a mutual benefit association may
be held liable under the membership certificates it has issued to its members, where the amount of any
such loss, damage or liability, excluding interest, costs and attorney's fees, being claimed or sued upon
any kind of insurance, bond, reinsurance contract, or membership certificate does not exceed in any
single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner is limited by law "to
claims and complaints involving any loss, damage or liability for which an insurer may be answerable under any kind of
policy or contract of insurance, . . ." Hence, this power does not cover the relationship affecting the insurance company
and its agents but is limited to adjudicating claims and complaints filed by the insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance Code, the
provisions of said Chapter speak only of the licensing requirements and limitations imposed on insurance agents and
brokers.
The Insurance Code does not have provisions governing the relations between insurance companies and their agents. It
follows that the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over
controversies between the insurance companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989), andInvestment
Planning Corporation of the Philippines v. Social Security Commission, 21 SCRA 904 (1962), that an insurance company
may have two classes of agents who sell its insurance policies: (1) salaried employees who keep definite hours and work
under the control and supervision of the company; and (2) registered representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its agents is governed by the Contract of
Employment and the provisions of the Labor Code, while under the second category, the same is governed by the
Contract of Agency and the provisions of the Civil Code on the Agency. Disputes involving the latter are cognizable by the
regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance Commission is SET
ASIDE.
SO ORDERED.

[G. R. No. 141658. March 18, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE PHILIPPINE AMERICAN ACCIDENT INSURANCE
COMPANY, INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY, INC., and THE PHILIPPINE
AMERICAN GENERAL INSURANCE CO., INC., respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review [1] assailing the Decision[2] of 7 January 2000 of the Court of Appeals in CAG.R. SP No. 36816. The Court of Appeals affirmed the Decision[3] of 5 January 1995 of the Court of Tax Appeals
(CTA) in CTA Cases Nos. 2514, 2515 and 2516. The CTA ordered the Commissioner of Internal Revenue
(petitioner) to refund a total of P29,575.02 to respondent companies (respondents).
Antecedent Facts
Respondents are domestic corporations licensed to transact insurance business in the country. From August 1971
to September 1972, respondents paid the Bureau of Internal Revenue under protest the 3% tax imposed on lending
investors by Section 195-A[4] of Commonwealth Act No. 466 (CA 466), as amended by Republic Act No. 6110 (RA
6110) and other laws. CA 466 was the National Internal Revenue Code (NIRC) applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine American (PHILAM) Accident Insurance
Company; P7,047.80 from PHILAM Assurance Company; andP14,541.97 from PHILAM General Insurance Company.
These amounts represented 3% of each companys interest income from mortgage and other loans. Respondents also
paid the taxes required of insurance companies under CA 466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes paid under protest.
When respondents did not receive a response, each respondent filed on 26 April 1973 a petition for review with the
CTA. These three petitions, which were later consolidated, argued that respondents were not lending investors and as
such were not subject to the 3% lending investors tax under Section 195-A.
The CTA archived respondents case for several years while another case with a similar issue was pending before
the higher courts. When respondents case was reinstated, the CTA ruled that respondents were entitled to their refund.
The Ruling of the Court of Tax Appeals
The CTA held that respondents are not taxable as lending investors because the term lending investors does not
embrace insurance companies. The CTA traced the history of the tax on lending investors, as follows:
Originally, a person who was engaged in lending money at interest was taxed as a money lender. [Sec. 1464(x), Rev.
Adm. Code] The term money lenders was defined as including all persons who make a practice of lending money for
themselves or others at interest. [Sec. 1465(v), id.] Under this law, an insurance company was not considered a
money lender and was not taxable as such. To quote from an old BIR Ruling:
The lending of money at interest by insurance companies constitutes a necessary incident of their regular business.
For this reason, insurance companies are not liable to tax as money lenders or real estate brokers for making or
negotiating loans secured by real property. (Ruling, February 28, 1920; BIR 135.2) (The Internal Revenue Law,
Annotated, 2nd ed., 1929, by B.L. Meer, page 143)

The same rule has been applied to banks.

For making investments on salary loans, banks will not be required to pay the money lenders tax imposed by this
subsection, for the reason that money lending is considered a mere incident of the banking business. [See Ruling No.
43, (October 8, 1926) 25 Off. Gaz. 1326) (The Internal Revenue Law, Annotated, id.)
The term money lenders was later changed to lending investors but the definition of the term remains the same.
[Sec. 1464(x), Rev. Adm. Code, as finally amended by Com. Act No. 215, and Sec. 1465(v) of the same Code, as finally
amended by Act No. 3963] The same law is embodied in the present National Internal Revenue Code (Com. Act No.
466) without change, except in the amount of the tax. [See Secs. 182(A) (3) (dd) and 194(u), National Internal Revenue
Code.]
It is a well-settled rule that an administrative interpretation of a law which has been followed and applied for a long time,
and thereafter the law is re-enacted without substantial change, such administrative interpretation is deemed to have
received legislative approval. In short, the administrative interpretation becomes part of the law as it is presumed to
carry out the legislative purpose.[5]
The CTA held that the practice of lending money at interest is part of the insurance business. CA 466 already taxes
the insurance business. The CTA pointed out that the law recognizes and even regulates this practice of lending money
by insurance companies.
The CTA observed that CA 466 also treated differently insurance companies from lending investors in regard to
fixed taxes. Under Section 182(A)(3)(gg), insurance companies were subject to the same fixed tax as banks and
finance companies. The CTA reasoned that insurance companies were grouped with banks and finance companies
because the latters lending activities were also integral to their business. In contrast, lending investors were taxed at a
different fixed tax under Section 182(A)(3)(dd) of CA 466. The CTA stated that insurance companies xxx had never
been required by respondent [CIR] to pay the fixed tax imposed on lending investors xxx. [6]
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals (CTA Decision) reads:
WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co., Philippine American
Assurance Co., and Philippine American General Insurance Co., Inc. are not taxable on their lending transactions
independently of their insurance business. Accordingly, respondent is hereby ordered to refund to petitioner[s] the sum
of P7,985.25, P7,047.80 and P14,541.97 in CTA Cases No. 2514, 2515 and 2516, respectively representing the fixed
and percentage taxes when (sic) paid by petitioners as lending investor from August 1971 to September 1972.
No pronouncement as to cost.
SO ORDERED.[7]
Dissatisfied, petitioner elevated the matter to the Court of Appeals. [8]
The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not taxable as lending investors. In its Decision of 7 January
2000 (CA Decision), the Court of Appeals affirmed the ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is DISMISSED, hereby AFFIRMING the decision, dated January 5,
1995, of the Court of Tax Appeals in CTA Cases Nos. 2514, 2515 and 2516.
SO ORDERED.[9]
Petitioner appealed the CA Decision to this Court.

The Issues
Petitioner raises the sole issue:
WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE 3% PERCENTAGE TAX AS LENDING
INVESTORS UNDER SECTIONS 182(A)(3)(DD) AND 195-A, RESPECTIVELY IN RELATION TO SECTION 194(U),
ALL OF THE NIRC.[10]
The Ruling of the Court
The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors, depending on their location.
The sole question before the CTA was whether respondents were subject to the percentage tax on lending investors
under Section 195-A. Petitioner raised for the first time the issue of the fixed tax in the Petition for Review [12] petitioner
filed before the Court of Appeals.
[11]

Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the trial court. [13] The Court of
Appeals should not have taken cognizance of the issue on respondents supposed liability under Section 182(A)(3)(dd).
However, we cannot entirely fault the Court of Appeals or petitioner. Even if the percentage tax on lending investors
was the sole issue before it, the CTA ordered petitioner to refund to the PHILAM companies the fixed and percentage
taxes [t]hen paid by petitioners as lending investor. [14] Although the amounts for refund consisted only of what
respondents paid as percentage taxes, the CTA Decision also ordered the refund to respondents of the fixed tax on
lending investors. Respondents in their pleadings deny any liability under Section 182(A)(3)(dd), on the same ground
that they are not lending investors.
The question of whether respondents should pay the fixed tax under Section 182(A)(3)(dd) revolves around the
same issue of whether respondents are taxable as lending investors. In similar circumstances, the Court has held that
an appellate court may consider an unassigned error if it is closely related to an error that was properly assigned. [15] This
rule properly applies to the present case. Thus, we shall consider and rule on the issue of whether respondents are
subject to the fixed tax under Section 182(A)(3)(dd).
Whether Insurance Companies are
Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466, petitioner argues that insurance
companies are subject to two fixed taxes and two percentage taxes. Petitioner alleges that:
As a lending investor, an insurance company is subject to an annual fixed tax of P500.00 and another P500.00 under
Section 182 (A)(3)(dd) and (gg) of the Tax Code. As an underwriter, an insurance company is subject to the 3% tax of
the total premiums collected and another 3% on the gross receipts as a lending investor under Sections 255 and 195-A,
respectively of the same Code. xxx[16]
Petitioner also contends that the refund granted to respondents is in the nature of a tax exemption, and cannot be
allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is
clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be presumed. [17] Where
there is doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. [18] This is

because taxes are burdens on the taxpayer, and should not be unduly imposed or presumed beyond what the statutes
expressly and clearly import.[19]
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being for the
whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five pesos;
Provided, That lending investors who do business as such in more than one province shall pay a tax
of five hundred pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in securities and lending investors shall
pay a tax equivalent to three per centum on their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section 182(A)(3)(dd) provides for
the taxation of lending investors in different localities. Section 195-A refers to dealers in securities and lending investors.
The burden is thus on petitioner to show that insurance companies are lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner merely alleges
that the definition of lending investors under CA 466 is broad enough to encompass insurance companies. Petitioner
insists that because of Section 194(u), the two principal activities of the insurance business, namely, underwriting and
investment, are separately taxable.[20]
Section 194(u) of CA 466 states:
(u) Lending investor includes all persons who make a practice of lending money for themselves or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what lending investors
are. The question is whether the lending activities of insurance companies make them lending investors for purposes of
taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be considered lending
investors under CA 466, as amended.
Definition of Lending

Investors under CA 466 Does

Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad enough to include the business of insurance companies. The
Insurance Code of 1978[21] is very clear on what constitutes an insurance company. It provides that an insurer or
insurance company shall include all individuals, partnerships, associations or corporations xxx engaged as principals in
the insurance business, excepting mutual benefit associations. [22] More specifically, respondents fall under the category of
insurance corporations as defined in Section 185 of the Insurance Code, thus:
SECTION 185. Corporations formed or organized to save any person or persons or other corporations 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 corporations for any such loss, damage, or liability, or to guarantee the performance of or compliance
with contractual obligations or the payment of debts of others shall be known as insurance corporations.
Plainly, insurance companies and lending investors are different enterprises in the eyes of the law. Lending investors
cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor provide compensation or indemnity
for loss. The underwriting of risks is the prerogative of insurers, the great majority of which are incorporated insurance
companies[23] like respondents.
Granting of Mortgage and
other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of loans. However, this was not done independently of
respondents insurance business. The granting of certain loans is one of several means of investment allowed to
insurance companies. No less than the Insurance Code mandates and regulates this practice. [24]
Unlike the practice of lending investors, the lending activities of insurance companies are circumscribed and strictly
regulated by the State. Insurance companies cannot freely lend to themselves or others as lending investors can, [25] nor
can insurance companies grant simply any kind of loan. Even prior to 1978, the Insurance Code prescribed strict rules for
the granting of loans by insurance companies. [26] These provisions on mortgage, collateral and policy loans were
reiterated in the Insurance Code of 1978 and are still in force today.
Petitioner concedes that respondents investment practices are as much a part of the insurance business as the task
of underwriting. Nevertheless, petitioner argues that such investment practices are separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other funds received by respondents
through the granting of mortgage and other loans was necessary to respondents business and hence, should not be
taxed separately.
Insurance companies are required by law to possess and maintain substantial legal reserves to meet their obligations
to policyholders.[27] This obviously cannot be accomplished through the collection of premiums alone, as the legal reserves
and capital and surplus insurance companies are obligated to maintain run into millions of pesos. As such, the creation of
investment income has long been held to be generally, if not necessarily, essential to the business of insurance.[28]

The creation of investment income in the manner sanctioned by the laws on insurance is thus part of the business of
insurance, and the fruits of these investments are essentially income from the insurance business. This is particularly true
if the invested assets are held either as reserved funds to provide for policy obligations or as capital and surplus to
provide an extra margin of safety which will be attractive to insurance buyers. [29]
The Court has also held that when a company is taxed on its main business, it is no longer taxable further for
engaging in an activity or work which is merely a part of, incidental to and is necessary to its main business.
[30]
Respondents already paid percentage and fixed taxes on their insurance business. To require them to pay percentage
and fixed taxes again for an activity which is necessarily a part of the same business, the law must expressly require such
additional payment of tax. There is, however, no provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double percentage and fixed
taxes. They merely tax lending investors, not lending activities. Respondents were not transformed into lending investors
by the mere fact that they granted loans, as these investments were part of, incidental and necessary to their insurance
business.
Different Tax Treatment of
Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and insurance companies. The
relevant portions of Section 182 state:
Sec. 182. Fixed taxes. (A) On business xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being for the whole year,
when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five
pesos; Provided, That lending investors who do business as such in more than one province
shall pay a tax of five hundred pesos.
xxx
(gg) Banks, insurance companies, finance and investment companies doing business in the Philippines and franchise
grantees, five hundred pesos.
xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance companies demonstrate an intention to treat these
businesses differently. If Congress intended insurance companies to be taxed as lending investors, there would be no
need for Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That insurance companies were
included with banks, finance and investment companies also supports the CTAs conclusion that insurance companies

had more in common with the latter enterprises than with lending investors. As the CTA pointed out, banks also regularly
lend money at interest, but are not taxable as lending investors.
We find no merit in petitioners contention that Congress intended to subject respondents to two percentage taxes
and two fixed taxes. Petitioners argument goes against the doctrine of strict interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing jurisprudence. In Commissioner of Internal Revenue
v. Michel J. Lhuillier Pawnshop, Inc.,[31] the Court ruled that the different tax treatment accorded to pawnshops and
lending investors in the NIRC of 1977 and the NIRC of 1986 showed the intent of Congress to deal with both subjects
differently. The same reasoning applies squarely to the present case.
Even the current tax law does not treat insurance companies as lending investors. Under Section 108(A)[32] of the
NIRC of 1997, lending investors and non-life insurance companies, except for their crop insurances, are subject to valueadded tax (VAT). Life insurance companies are exempt from VAT, but are subject to percentage tax under Section 123
of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance companies already
implies the latters exclusion from the coverage of these provisions. When a statute enumerates the things upon which it
is to operate, everything else by implication must be excluded from its operation and effect. [33]
Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending of money at interest was a
necessary incident of the insurance business, and that insurance companies were thus not subject to the tax on money
lenders. Petitioner argues only that the 1920 ruling does not apply to the instant case because RA 6110 introduced the
definition of lending investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a time when lending investors were still referred to as
money lenders. Sections 45 and 46 of the Internal Revenue Law of 1914 [34] (1914 Tax Code) state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected as follows, the amount stated
being for the whole year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;
xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the preceding section words and
phrases shall be taken in the sense and extension indicated below:
xxx
Money lender includes all persons who make a practice of lending money for themselves or others at interest.
(Emphasis supplied)
As can be seen, the definitions of money lender under the 1914 Tax Code and lending investor under CA 466 are
identical. The term money lender was merely changed to lending investor when Act No. 3963 amended the Revised

Administrative Code in 1932.[35] This same definition of lending investor has since appeared in Section 194(u) of CA 466
and later tax laws.
Note that insurance companies were not included among the businesses subject to an annual fixed tax under the
1914 Tax Code.[36] That Congress later saw the need to introduce Section 182(A)(3)(gg) in CA 466 bolsters our view that
there was no legislative intent to tax insurance companies as lending investors. If insurance companies were already
taxed as lending investors, there would have been no need for a separate provision specifically requiring insurance
companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily developed an
expertise in the subject of taxation that this Court has recognized time and again. For this reason, the findings of fact of
the CTA, particularly when affirmed by the Court of Appeals, are generally conclusive on this Court absent grave abuse of
discretion or palpable error,[37] which are not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the Court of Appeals in
CA-G.R. SP No. 36816.
SO ORDERED.

[G.R. No. 154514. July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION AND
THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144,
affirming the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions
held that there was no violation of the Insurance Code and the respondents do not need license as insurer and insurance
agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The
Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety
Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance. [3] Pioneer also issued
receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latters
unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming that
Steamship Mutual violated Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections 299,
[6]
300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure
a license because it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection
and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a broker
for Steamship Mutual because Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was
already licensed, hence, a separate license solely as agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court
distinguished between P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer merely
acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE
PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR
BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN
THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT
RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE
WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT
REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in
the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do
business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued
by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its
assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals [10] as an association
composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual
basis against liabilities incidental to shipowning that the members incur in favor of third parties. It stresses that as a P & I
Club, Steamship Mutuals primary purpose is to solicit and provide protection and indemnity coverage and for this
purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in
the Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against
liabilities incidental to shipowning. [11] Respondents aver Hyopsung is inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business or transacting an
insurance business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of
an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.
. . .
The same provision also provides, the fact that no profit is derived from the making of insurance contracts,
agreements or transactions, or that no separate or direct consideration is received therefor, shall not preclude the
existence of an insurance business.[12]
The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act
required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes requisite. It is not by what it is called.[13]

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event. [14]
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses
incident to a marine adventure.[15] Section 99[16] of the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and
insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from which
all losses and liabilities are paid, and where the profits are divided among themselves, in proportion to their interest.
[17]
Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the third party is anyone other than the P & I
Club and the members.[19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance association
engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of
authority mandated by Section 187 [20] of the Insurance Code. It maintains a resident agent in the Philippines to solicit
insurance and to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it
was cancelled due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its
agent Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or
insurance company is allowed to engage in the insurance business without a license or a certificate of authority from the
Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration [22] issued by the
Insurance Commission. It has been licensed to do or transact insurance business by virtue of the certificate of
authority[23] issued by the same agency. However, a Certification from the Commission states that Pioneer does not have
a separate license to be an agent/broker of Steamship Mutual. [24]
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent
for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for
insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance
company doing business in the Philippines or any agent thereof, without first procuring a license so to act from the
Commissioner, which must be renewed annually on the first day of January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and officers.
Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals
affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The
Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are
ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and insurance agent,
respectively. The petitioners prayer for the revocation of Pioneers Certificate of Authority and removal of its directors and
officers, is DENIED. Costs against respondents.

SO ORDERED.

[G.R. No. 118342. January 5, 1998]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LYDIA CUBA, respondents.
[G.R. No. 118367. January 5, 1998]
LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA
P. CAPERAL, respondents.
DECISION
DAVIDE, JR., J.:
These two consolidated cases stemmed from a complaint [1] filed against the Development Bank of the Philippines
(hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court
of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBPs appropriation of CUBAs
rights, title, and interests over a 44-hectare fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of
the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of
DBPs sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the fishpond; and
(5) the recovery of damages, attorneys fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial court conducted a
pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pre-trial order: [2]
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13, 1974
from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the amounts
of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the Promissory Notes dated
September 6, 1974; August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of the Promissory
Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question, defendant DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights in favor of
plaintiff Lydia Cuba over the same fishpond in question;
7.

In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager DBP, Dagupan
City dated November 6, 1979 and December 20, 1979. DBP thereafter accepted the offer to repurchase in
a letter addressed to plaintiff dated February 1, 1982;

8.

After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond Lease
Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of Agriculture and Food in favor
of plaintiff Lydia Cuba only, excluding her husband;

9.

Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she entered
with the DBP a temporary arrangement whereby in consideration for the deferment of the Notarial
Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain payments as stated
in temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984, and which
was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the fishpond in
question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in question, DBP
advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina Caperal on
August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on December 28, 1984
by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order.

[3]

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBAs leasehold rights over the
fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil Code and, therefore,
invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised its contractual right under the
Assignments of Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession and ownership of the
property without foreclosure was plainly violative of Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of mortgage because (1) they
were given as security for loans, (2) although the fishpond land in question is still a public land, CUBAs leasehold rights
and interest thereon are alienable rights which can be the proper subject of a mortgage; and (3) the intention of the
contracting parties to treat the Assignment of Leasehold Rights as a mortgage was obvious and unmistakable; hence,
upon CUBAs default, DBPs only right was to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a clear case
of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the Civil Code. It then
concluded that since DBP never acquired lawful ownership of CUBAs leasehold rights, all acts of ownership and
possession by the said bank were void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial
rescission of such sale, and the Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of
Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found ample evidence on record that in 1984 the representatives of DBP ejected
CUBA and her caretakers not only from the fishpond area but also from the adjoining big house; and that when CUBAs
son and caretaker went there on 15 September 1985, they found the said house unoccupied and destroyed and CUBAs
personal belongings, machineries, equipment, tools, and other articles used in fishpond operation which were kept in the
house were missing. The missing items were valued at about P550,000. It further found that when CUBA and her men

were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish
(milkfish), all of which died because the DBP representatives prevented CUBAs men from feeding the fish. At the
conservative price of P3.00 per fish, the gross value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual
damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau of Fisheries
that it had foreclosed its mortgage on CUBAs leasehold rights. Such representation induced the said Bureau to terminate
CUBAs leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And considering that by reason
of her unlawful ejectment by DBP, CUBA suffered moral shock, degradation, social humiliation, and serious anxieties for
which she became sick and had to be hospitalized the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorneys fees in view of the considerable
expenses she incurred for lawyers fees and in view of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990,

[4]

the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant Development Bank of the Philippines
in appropriating for its own interest, without any judicial or extra-judicial foreclosure, plaintiffs leasehold rights
and interest over the fishpond land in question under her Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the defendant Development
Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the Development
Bank of the Philippines relative to said sale (Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the Development Bank of the
Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A
dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights
dated February 12, 1985 executed by defendant Agripina Caperal in favor of the defendant Development Bank of
the Philippines (Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal, jointly and
severally, to restore to plaintiff the latters leasehold rights and interests and right of possession over the fishpond
land in question, without prejudice to the right of defendant Development Bank of the Philippines to foreclose the
securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS (P1,067,500.00), as and
for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorneys fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to defendant Agripina
Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS
AND SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid by defendant Agripina
Caperal to defendant Development Bank of the Philippines under their Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought an
increase in the amount of damages, while the latter questioned the findings of fact and law of the lower court.
In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the deed of
assignment was null and void and that defendant Caperal could not validly acquire the leasehold rights from DBP; (2)
contrary to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code because DBP
appeared to be the sole creditor to CUBA - cession presupposes plurality of debts and creditors; (3) the deeds of
assignment represented the voluntary act of CUBA in assigning her property rights in payment of her debts, which
amounted to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped from
questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed of
conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell
whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence,
but agreed with the trial court as to the actual damages ofP1,067,500. It, however, deleted the amount of exemplary
damages and reduced the award of moral damages from P100,000 to P50,000 and attorneys fees, from P100,000
to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cubas leasehold rights
and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP;
(3) the deed of conditional sale between CUBA and DBP; and (4) the deed of conditional sale between DBP and Caperal,
the Fishpond Lease Agreement in favor of Caperal, and the assignment of leasehold rights executed by Caperal in favor
of DBP. It then ordered DBP to turn over possession of the property to Caperal as lawful holder of the leasehold rights
and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as
attorneys fees.
Since their motions for reconsideration were denied,[6] DBP and CUBA filed separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorneys fees in favor of
CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred (1) in not
holding that the questioned deed of assignment was a pactum commissorium contrary to Article 2088 of the Civil Code;
(b) in holding that the deed of assignment effected a novation of the promissory notes; (c) in holding that CUBA was
estopped from questioning the validity of the deed of assignment when she agreed to repurchase her leasehold rights
under a deed of conditional sale; and (d) in reducing the amounts of moral damages and attorneys fees, in deleting the
award of exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which was covered
by a promissory note. In all of these notes, there was a provision that: In the event of foreclosure of the mortgage
securing this notes, I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any. [7]
Simultaneous with the execution of the notes was the execution of Assignments of Leasehold Rights [8] where
CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As
pointed out by CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as borrower; the assigned
rights, as mortgaged properties; and the instrument itself, as mortgage contract. Moreover, under condition no. 22 of the
deed, it was provided that failure to comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed. And, condition no. 33 provided that if foreclosure
is actually accomplished, the usual 10% attorneys fees and 10% liquidated damages of the total obligation shall be
imposed. There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for the payment
of the loans; thus:

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights.
In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment to guarantee an
obligation is in effect a mortgage.
We find no merit in DBPs contention that the assignment novated the promissory notes in that the obligation to pay a
sum of money the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond
(under the deed of assignment). As correctly pointed out by CUBA, the said assignment merely complemented or
supplemented the notes; both could stand together. The former was only an accessory to the latter. Contrary to DBPs
submission, the obligation to pay a sum of money remained, and the assignment merely served as security for the loans
covered by the promissory notes. Significantly, both the deeds of assignment and the promissory notes were executed on
the same dates the loans were granted. Also, the last paragraph of the assignment stated: The assignor further
reiterates and states all terms, covenants, and conditions stipulated in the promissory note or notes covering the proceeds
of this loan, making said promissory note or notes, to all intent and purposes, an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and
simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more creditors
and involves the assignment of all the debtors property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads: Dation in
payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on
sales. It bears stressing that the assignment, being in its essence a mortgage, was but a security and not a satisfaction
of indebtedness.[10]
We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment constituted pactum
commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the Assignee his
Attorney-in-fact with full power and authority to take actual possession of the property above-described, together with all
improvements thereon, subject to the approval of the Secretary of Agriculture and Natural Resources, to lease the same
or any portion thereof and collect rentals, to make repairs or improvements thereon and pay the same, to sell or otherwise
dispose of whatever rights the Assignor has or might have over said property and/or its improvements and perform any
other act which the Assignee may deem convenient to protect its interest. All expenses advanced by the Assignee in
connection with purpose above indicated which shall bear the same rate of interest aforementioned are also guaranteed
by this Assignment. Any amount received from rents, administration, sale or disposal of said property may be supplied by
the Assignee to the payment of repairs, improvements, taxes, assessments and other incidental expenses and obligations
and the balance, if any, to the payment of interest and then on the capital of the indebtedness secured hereby. If after
disposal or sale of said property and upon application of total amounts received there shall remain a deficiency, said
Assignor hereby binds himself to pay the same to the Assignee upon demand, together with all interest thereon until fully
paid. The power herein granted shall not be revoked as long as the Assignor is indebted to the Assignee and all acts that
may be executed by the Assignee by virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. [11]
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon
CUBAs failure to pay the loan on time. It merely provided for the appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA, and to apply the
proceeds to the payment of the loan. This provision is a standard condition in mortgage contracts and is in conformity
with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it during
the pre-trial, it had [w]ithout foreclosure proceedings, whether judicial or extrajudicial, appropriated the [l]easehold
[r]ights of plaintiff Lydia Cuba over the fishpond in question. Its contention that it limited itself to mere administration by
posting caretakers is further belied by the deed of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein vendees [Cuba
spouses] the former acquired all the rights and interest of the latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon shall remain in the name of the Vendor until after
the purchase price, advances and interest shall have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBAs
leasehold rights merely on the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold
rights. As stated earlier, condition no. 12 did not provide that CUBAs default would operate to vest in DBP ownership of
the said rights. Besides, an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not
an absolute conveyance of title which confers ownership on the assignee. [12]
At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the Civil Code, which
forbids a creditor from appropriating, or disposing of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from
questioning DBPs act of appropriation. Estoppel is unavailing in this case. As held by this Court in some cases,
[13]
estoppel cannot give validity to an act that is prohibited by law or against public policy. Hence, the appropriation of the
leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy, cannot be deemed validated by
estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have foreclosed the
mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was no
such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural Resources
and coursed through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it had foreclosed
the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouces] to pay their loan amortizations. [14] This only goes to show that DBP was aware of the necessity of foreclosure
proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries
cancelled CUBAs original lease permit, approved the deed of conditional sale, and issued a new permit in favor of
CUBA. Said acts which were predicated on such false representation, as well as the subsequent acts emanating from
DBPs appropriation of the leasehold rights, should therefore be set aside. To validate these acts would open the
floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent
auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as amended. [15] With more
reason that the sale of property given as security for the payment of a debt be set aside if there was no prior foreclosure
proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the fishpond in question and
apply the said income in accordance with condition no. 12 of the deed of assignment which provided: Any amount
received from rents, administration, may be applied to the payment of repairs, improvements, taxes, assessment, and
other incidental expenses and obligations and the balance, if any, to the payment of interest and then on the capital of the
indebtedness.

We shall now take up the issue of damages.

Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss
suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. [16] A
court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend
upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual
amount thereof.[17] It must point out specific facts which could afford a basis for measuring whatever compensatory or
actual damages are borne.[18]
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000
which represented the value of the alleged lost articles of CUBA and P517,500 which represented the value of the
230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the adjoining
house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear evidence. Other than
the testimony of CUBA and her caretaker, there was no proof as to the existence of those items before DBP took over the
fishpond in question. As pointed out by DBP, there was not inventory of the alleged lost items before the loss which is
normal in a project which sometimes, if not most often, is left to the care of other persons. Neither was a single receipt or
record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the damages resulting
from DBPs take-over of the fishpond. Yet, it was only in September 1985 when her son and a caretaker went to the
fishpond and the adjoining house that she came to know of the alleged loss of several articles. Such claim for losses of
property, having been made before knowledge of the alleged actual loss, was therefore speculative. The alleged loss
could have been a mere afterthought or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which died
when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss was not duly proved;
besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of her complaint in court in May
1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October 1979, [19] she
declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the same period I neglected the
management and supervision of the cultivation and harvest of the produce of the aforesaid fishpond thereby resulting to
the irreparable loss in the produce of the same in the amount of about P500,000.00 to my great damage and prejudice
due to fraudulent acts of some of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond, did CUBA
intimate that upon DBPs take-over there was a total of 230,000 pieces of bangus, but all of which died because of DBPs
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary to law and public policy,
as well as its false representation to the then Ministry of Agriculture and Natural Resources that it had foreclosed the
mortgage, an award of moral damages in the amount of P50,000 is in order conformably with Article 2219(10), in relation
to Article 21, of the Civil Code. Exemplary or corrective damages in the amount of P25,000 should likewise be awarded
by way of example or correction for the public good. [20] There being an award of exemplary damages, attorneys fees are
also recoverable.[21]

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby REVERSED,
except as to the award of P50,000 as moral damages, which is hereby sustained. The 31 January 1990 Decision of the
Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that
condition no. 12 of the deed of assignment constituted pactum commissorium and the award of actual damages; and by
reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000;
and the attorneys fees, from P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered to render
an accounting of the income derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well as the
statement of the account of Lydia P. Cuba, and for the determination of each partys financial obligation to one another.
SO ORDERED.

[G.R. No. 137172. April 4, 2001]

UCPB GENERAL INSURANCE CO. INC., petitioner, vs. MASAGANA TELAMART, INC., respondent.
RESOLUTION
DAVIDE, JR., C.J.:
In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision [1] of the Court of
Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum
of P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondents properties;
(b) declaring the replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering
Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewal-replacement
policies. The modification consisted in the (1) deletion of the trial courts declaration that three of the policies were in force
from August 1991 to August 1992; and (2) reduction of the award of the attorneys fees from 25% to 10% of the total
amount due the Respondent.
The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals
in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits "A" to "E",
Record, pp. 158-175) on its properties [in Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992."
On June 13, 1992, plaintiff's properties located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by
fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's Checks in the total
amount of P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No. 62926 (Exhibit "Q",
Record, p. 191) was issued by defendant. On July 14, 1992, Masagana made its formal demand for indemnification for
the burned insured properties. On the same day, defendant returned the five (5) manager's checks stating in its letter
(Exhibit "R"/"8", Record, p. 192) that it was rejecting Masagana's claim on the following grounds:
"a) Said policies expired last May 22, 1992 and were not renewed for another term;
b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and
c) The properties covered by the said policies were burned in a fire that took place last June 13, 1992, or before
tender of premium payment."

(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioners stand that Respondents tender of payment of the premiums on 13
July 1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as provided
under Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days in advance of the end of the policy period mails or
delivers to the assured at the address shown in the policy notice of its intention not to renew the policy or to condition its
renewal upon reduction of limits or elimination of coverages, the assured shall be entitled to renew the policy upon
payment of the premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured
insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the renewal of
the policies. Such a practice had existed up to the time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was
paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No.
34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but
premium was collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and
"V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991
was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and
"W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990
but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X-1"). Fire Insurance Policy No.
34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid only
on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance risks
from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but premium therefor was collected only on July 25,
1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from
January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December 10,
1988 but premium therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire
Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No.
40800 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No.
29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk
coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was
issued on June 15, 1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on November
22, 1988 but premium therefor was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks coverage
from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof that no timely
notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350) from Ultramar Reinsurance Brokers
that plaintiffs reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit
11. Apparently, the notice of non-renewal (Exhibit 7, Record, p. 320) was sent not earlier than said date, or within
45 days from the expiry dates of the policies as provided under Policy Condition No. 26; (2) Defendant insurer
unconditionally accepted, and issued an official receipt for, the premium payment on July 1[3], 1992 which indicates
defendant's willingness to assume the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer
appointed Esteban Adjusters and Valuers to investigate plaintiffs claim as shown by the letter dated July 17, 1992
(Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be whether the fire insurance policies issued by
petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 had been extended or renewed by
an implied credit arrangement though actual payment of premium was tendered on a later date and after the occurrence
of the (fire) risk insured against. We resolved this issue in the negative in view of Section 77 of the Insurance Code and
our decisions in Valenzuela v. Court of Appeals [2]; South Sea Surety and Insurance Co., Inc. v. Court of Appeals [3];
and Tibay v. Court of Appeals.[4] Accordingly, we reversed and set aside the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we
had made in the decision our own findings of facts, which are not in accord with those of the trial court and the Court of
Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22 May 1992,
or before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by operation of
law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within the 60- to
90-day credit term.

Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension
of credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take
judicial notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit terms
in premium payment has been the prevalent practice in the insurance industry. Most insurance companies, including
Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely
designed for the protection of the parties to an insurance contract. The Code itself, in Section 78, authorizes the validity
of a policy notwithstanding non-payment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77
Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term was
perfectly alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and habitually
accepting payments 60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify the tenor of the
insurance policy and in effect waived the provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.
Petitioner filed an opposition to the Respondents motion for reconsideration. It argues that both the trial court and
the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of
non-renewal and sent by personal delivery a copy thereof to Respondents broker, Zuellig. Both courts likewise ignored
the fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the Insurance Code
readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on
the effective date of renewal should first be made. Respondents argument that Section 77 is not a prohibitive provision
finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and
the pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts, as
found by the trial court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually
renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on
the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the notice
sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent to Zuellig was ever
transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by Respondent
within the 60- to 90-day credit term and were duly accepted and received by Petitioners cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No.
1460) must be strictly applied to Petitioners advantage despite its practice of granting a 60- to 90-day credit term for the
payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December
1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as
amended by R.A. No. 3540, approved on 21 June 1963, which read:

SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril insured
against, unless there is clear agreement to grant the insured credit extension of the premium due. No policy issued by an
insurance company is valid and binding unless and until the premium thereof has been paid. (Underscoring supplied)
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement
to extend the period to pay the premium. But are there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the
grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until
premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals,[5] wherein we
ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial
payment has been made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that
the petitioners and private respondent intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in
1984. In those three years, the insurer accepted all the installment payments. Such acceptance of payments speaks
loudly of the insurers intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and
fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and
later deny liability on the lame excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the
contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer would
prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or
first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by
making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to
make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from
stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting
credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De Leon,
The Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments not so
prescribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth
exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This simply
means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the
expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within
the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term
within which to pay the premiums. That agreement is not against the law, morals, good customs, public order or public
policy. The agreement binds the parties. Article 1306 of the Civil Code provides:

ART. 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against
Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full
awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith on
such practice. Estoppel then is the fifth exception to Section 77.
WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new one is
hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a reversible error was
committed by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.

G.R. No. L-24833

September 23, 1968

FIELDMEN'S INSURANCE CO., INC., petitioner,

vs.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. and COURT OF APPEALS, respondents.
Jose S. Suarez for petitioner.
Eligio G. Lagman for respondents.

FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not allowed to escape liability under a common carrier
insurance policy on the pretext that what was insured, not once but twice, was a private vehicle and not a common carrier,
the policy being issued upon the insistence of its agent who discounted fears of the insured that his privately owned
vehicle might not fall within its terms, the insured moreover being "a man of scant education," finishing only the first grade.
So it was held in a decision of the lower court thereafter affirmed by respondent Court of Appeals. Petitioner in seeking the
review of the above decision of respondent Court of Appeals cannot be so sanguine as to entertain the belief that a
different outcome could be expected. To be more explicit, we sustain the Court of Appeals.
The facts as found by respondent Court of Appeals, binding upon us, follow: "This is a peculiar case. Federico Songco of
Floridablanca, Pampanga, a man of scant education being only a first grader ..., owned a private jeepney with Plate No.
41-289 for the year 1960. On September 15, 1960, as such private vehicle owner, he was induced by Fieldmen's
Insurance Company Pampanga agent Benjamin Sambat to apply for a Common Carrier's Liability Insurance Policy
covering his motor vehicle ... Upon paying an annual premium of P16.50, defendant Fieldmen's Insurance Company, Inc.
issued on September 19, 1960, Common Carriers Accident Insurance Policy No. 45-HO- 4254 ... the duration of which will
be for one (1) year, effective September 15, 1960 to September 15, 1961. On September 22, 1961, the defendant
company, upon payment of the corresponding premium, renewed the policy by extending the coverage from October 15,
1961 to October 15, 1962. This time Federico Songco's private jeepney carried Plate No. J-68136-Pampanga-1961. ... On
October 29, 1961, during the effectivity of the renewed policy, the insured vehicle while being driven by Rodolfo Songco, a
duly licensed driver and son of Federico (the vehicle owner) collided with a car in the municipality of Calumpit, province of
Bulacan, as a result of which mishap Federico Songco (father) and Rodolfo Songco (son) died, Carlos Songco (another
son), the latter's wife, Angelita Songco, and a family friend by the name of Jose Manuel sustained physical injuries of
varying degree." 1
It was further shown according to the decision of respondent Court of Appeals: "Amor Songco, 42-year-old son of
deceased Federico Songco, testifying as witness, declared that when insurance agent Benjamin Sambat was inducing his
father to insure his vehicle, he butted in saying: 'That cannot be, Mr. Sambat, because our vehicle is an "owner" private
vehicle and not for passengers,' to which agent Sambat replied: 'whether our vehicle was an "owner" type or for
passengers it could be insured because their company is not owned by the Government and the Government has nothing
to do with their company. So they could do what they please whenever they believe a vehicle is insurable' ... In spite of the
fact that the present case was filed and tried in the CFI of Pampanga, the defendant company did not even care to rebut
Amor Songco's testimony by calling on the witness-stand agent Benjamin Sambat, its Pampanga Field Representative." 2
The plaintiffs in the lower court, likewise respondents here, were the surviving widow and children of the deceased
Federico Songco as well as the injured passenger Jose Manuel. On the above facts they prevailed, as had been
mentioned, in the lower court and in the respondent Court of Appeals.1awphl.nt
The basis for the favorable judgment is the doctrine announced in Qua Chee Gan v. Law Union and Rock Insurance Co.,
Ltd., 3 with Justice J. B. L. Reyes speaking for the Court. It is now beyond question that where inequitable conduct is
shown by an insurance firm, it is "estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on
the insured." 4

As much, if not much more so than the Qua Chee Gan decision, this is a case where the doctrine of estoppel undeniably
calls for application. After petitioner Fieldmen's Insurance Co., Inc. had led the insured Federico Songco to believe that he
could qualify under the common carrier liability insurance policy, and to enter into contract of insurance paying the
premiums due, it could not, thereafter, in any litigation arising out of such representation, be permitted to change its stand
to the detriment of the heirs of the insured. As estoppel is primarily based on the doctrine of good faith and the avoidance
of harm that will befall the innocent party due to its injurious reliance, the failure to apply it in this case would result in a
gross travesty of justice.
That is all that needs be said insofar as the first alleged error of respondent Court of Appeals is concerned, petitioner
being adamant in its far-from-reasonable plea that estoppel could not be invoked by the heirs of the insured as a bar to
the alleged breach of warranty and condition in the policy. lt would now rely on the fact that the insured owned a private
vehicle, not a common carrier, something which it knew all along when not once but twice its agent, no doubt without any
objection in its part, exerted the utmost pressure on the insured, a man of scant education, to enter into such a contract.
Nor is there any merit to the second alleged error of respondent Court that no legal liability was incurred under the policy
by petitioner. Why liability under the terms of the policy 5 was inescapable was set forth in the decision of respondent Court
of Appeals. Thus: "Since some of the conditions contained in the policy issued by the defendant-appellant were
impossible to comply with under the existing conditions at the time and 'inconsistent with the known facts,' the insurer 'is
estopped from asserting breach of such conditions.' From this jurisprudence, we find no valid reason to deviate and
consequently hold that the decision appealed from should be affirmed. The injured parties, to wit, Carlos Songco, Angelito
Songco and Jose Manuel, for whose hospital and medical expenses the defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence, and Rodolfo Songco, for whose burial expenses the defendant
company was also being made liable was the driver of the vehicle in question. Except for the fact, that they were not fare
paying passengers, their status as beneficiaries under the policy is recognized therein." 6
Even if it be assumed that there was an ambiguity, an excerpt from the Qua Chee Gan decision would reveal anew the
weakness of petitioner's contention. Thus: "Moreover, taking into account the well known rule that ambiguities or
obscurities must be strictly interpreted against the party that caused them, the 'memo of warranty' invoked by appellant
bars the latter from questioning the existence of the appliances called for in the insured premises, since its initial
expression, 'the undernoted appliances for the extinction of fire being kept on the premises insured hereby, ... it is hereby
warranted ...,' admits of interpretation as an admission of the existence of such appliances which appellant cannot now
contradict, should the parol evidence rule apply." 7
To the same effect is the following citation from the same leading case: "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
d'adhesion), in contrast to those entered into by parties bargaining on an equal footing, such contracts (of which policies
of insurance and international bills of lading are prime examples) obviously call for greater strictness and vigilance on the
part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming
traps for the unwary (New Civil Code. Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942)." 8
The last error assigned which would find fault with the decision of respondent Court of Appeals insofar as it affirmed the
lower court award for exemplary damages as well as attorney's fees is, on its face, of no persuasive force at all.
The conclusion that inescapably emerges from the above is the correctness of the decision of respondent Court of
Appeals sought to be reviewed. For, to borrow once again from the language of the Qua Chee Gan opinion: "The contract
of insurance is one of perfect good faith (uberima fides) not for the insured alone,but equally so for the insurer; in fact, it is
more so for the latter, since its dominant bargaining position carries with it stricter responsibility." 9
This is merely to stress that while the morality of the business world is not the morality of institutions of rectitude like the
pulpit and the academe, it cannot descend so low as to be another name for guile or deception. Moreover, should it
happen thus, no court of justice should allow itself to lend its approval and support.1awphl.nt

We have no choice but to recognize the monetary responsibility of petitioner Fieldmen's Insurance Co., Inc. It did not
succeed in its persistent effort to avoid complying with its obligation in the lower court and the Court of Appeals. Much less
should it find any receptivity from us for its unwarranted and unjustified plea to escape from its liability.
WHEREFORE, the decision of respondent Court of Appeals of July 20, 1965, is affirmed in its entirety. Costs against
petitioner Fieldmen's Insurance Co., Inc.

G.R. No. L-16215

June 29, 1963

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.
Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee.
K. V. Faylona for defendant-appellant.
PAREDES, J.:
On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc., issued Personal Accident Policy No.
7136 on the life of Francisco del Rosario, alias Paquito Bolero, son of herein plaintiff-appellee, binding itself to pay the
sum of P1,000.00 to P3,000.00, as indemnity for the death of the insured. The pertinent provisions of the Policy, recite:
Part I. Indemnity For Death
If the insured sustains any bodily injury which is effected solely through violent, external, visible and accidental
means, and which shall result, independently of all other causes and within sixty (60) days from the occurrence
thereof, in the Death of the Insured, the Company shall pay the amount set opposite such injury:

Section 1. Injury sustained other than those specified below

unless excepted hereinafter. . . . . . . .
P1,000.00
Section 2. Injury sustained by the wrecking or disablement of
a railroad passenger car or street railway car in or on which
the Insured is travelling as a farepaying passenger. . . . . . . .
P1,500.00
Section 3. Injury sustained by the burning of a church,
theatre, public library or municipal administration building
while the Insured is therein at the commencement of the fire. .
......
P2,000.00
Section 4. Injury sustained by the wrecking or disablement of
a regular passenger elevator car in which the Insured is being
conveyed as a passenger (Elevator in mines excluded)
P2,500.00

Section 5. Injury sustained by a stroke of lightning or by a

cyclone. . . . . . . .
P3,000.00
xxx

xxx

xxx

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover Death, Disability, Hospital fees, or Loss
of Time, caused to the insured:

. . . (h) By drowning except as a consequence of the wrecking or disablement in the Philippine waters of a
passenger steam or motor vessel in which the Insured is travelling as a farepaying passenger; . . . .
A rider to the Policy contained the following:
IV. DROWNING
It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the policy is hereby waived by
the company, and to form a part of the provision covered by the policy.
On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board the motor launch
"ISLAMA" together with 33 others, including his beneficiary in the Policy, Remedios Jayme, were forced to jump off said
launch on account of fire which broke out on said vessel, resulting in the death of drowning, of the insured and beneficiary
in the waters of Jolo. 1wph1.t
On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim for payment with defendant
company, and on September 13, 1957, defendant company paid to him (plaintiff) the sum of P1,000.00, pursuant to
Section 1 of Part I of the policy. The receipt signed by plaintiff reads
RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of PESOS ONE
THOUSAND (P1,000.00) Philippine Currency, being settlement in full for all claims and demands against
said Company as a result of an accident which occurred on February 26, 1957, insured under out
ACCIDENT Policy No. 7136, causing the death of the Assured.
In view of the foregoing, this policy is hereby surrendered and CANCELLED.
LOSS COMPUTATION
Amount of Insurance

P1,000.00
__________
vvvvv

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company acknowledging receipt by
his client (plaintiff herein), of the P1,000.00, but informing said company that said amount was not the correct one. Atty.
Francisco claimed
The amount payable under the policy, I believe should be P1,500.00 under the provision of Section 2, part 1 of the
policy, based on the rule of pari materia as the death of the insured occurred under the circumstances similar to
that provided under the aforecited section.
Defendant company, upon receipt of the letter, referred the matter to the Insurance Commissioner, who rendered an
opinion that the liability of the company was only P1,000.00, pursuant to Section 1, Part I of the Provisions of the policy
(Exh. F, or 3). Because of the above opinion, defendant insurance company refused to pay more than P1,000.00. In the
meantime, Atty. Vicente Francisco, in a subsequent letter to the insurance company, asked for P3,000.00 which the
Company refused, to pay. Hence, a complaint for the recovery of the balance of P2,000.00 more was instituted with the
Court of First Instance of Rizal (Pasay City, Branch VII), praying for it further sum of P10,000.00 as attorney's fees,
expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or claim is set forth in the
complaint had already been released, plaintiff having received the full amount due as appearing in policy and as per
opinion of the Insurance Commissioner. An opposition to the motion to dismiss, was presented by plaintiff, and other
pleadings were subsequently file by the parties. On December 28, 1957, the trial court deferred action on the motion to
dismiss until termination of the trial of the case, it appearing that the ground thereof was not indubitable. In the Answer to
the complaint, defendant company practically admitted all the allegations therein, denying only those which stated that
under the policy its liability was P3,000.00.
On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions of which read
xxx

xxx

xxx

Since the contemporaneous and subsequent acts of the parties show that it was not their intention that the
payment of P1,000.00 to the plaintiff and the signing of the loss receipt exhibit "1" would be considered as
releasing the defendant completely from its liability on the policy in question, said intention of the parties should
prevail over the contents of the loss receipt "1" (Articles 1370 and 1371, New Civil Code).
". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to P3,000.00 as indemnity for
the death of the insured. The insured died of drowning. Death by drowning is covered by the policy the pertinent
provisions of which reads as follows:
xxx

xxx

xxx

"Part I of the policy fixes specific amounts as indemnities in case of death resulting from "bodily injury
which is effected solely thru violence, external, visible and accidental means" but, Part I of the Policy is
not applicable in case of death by drowning because death by drowning is not one resulting from "bodily
injury which is affected solely thru violent, external, visible and accidental means" as "Bodily Injury"
means a cut, a bruise, or a wound and drowning is death due to suffocation and not to any cut, bruise or
wound."
xxx

xxx

xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for recovery apart from the
bodily injury because death by bodily injury is covered by Part I of the policy while death by drowning is covered
by Part VI thereof. But while the policy mentions specific amounts that may be recovered for death for bodily
injury, yet, there is not specific amount mentioned in the policy for death thru drowning although the latter is, under
Part VI of the policy, a ground for recovery thereunder. Since the defendant has bound itself to pay P1000.00 to
P3,000.00 as indemnity for the death of the insured but the policy does not positively state any definite amount
that may be recovered in case of death by drowning, there is an ambiguity in this respect in the policy, which
ambiguity must be interpreted in favor of the insured and strictly against the insurer so as to allow greater
indemnity.
xxx

xxx

xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid the amount of P1,000.00 to
the plaintiff so that there still remains a balance of P2,000.00 of the amount to which plaintiff is entitled to recover
under the policy Exhibit "A".
The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of litigation. However, since it is
evident that the defendant had not acted in bad faith in refusing to pay plaintiff's claim, the Court cannot award
plaintiff's claim for attorney's fees and expenses of litigation.
IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its decision dated July 21, 1958
and hereby renders judgment, ordering the defendant to pay plaintiff the sum of Two Thousand (P2,000.00) Pesos
and to pay the costs.
The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a Resolution dated
September 29, 1959, elevated the case to this Court, stating that the genuine issue is purely legal in nature.
All the parties agree that indemnity has to be paid. The conflict centers on how much should the indemnity be. We believe
that under the proven facts and circumstances, the findings and conclusions of the trial court, are well taken, for they are
supported by the generally accepted principles or rulings on insurance, which enunciate that where there is an ambiguity
with respect to the terms and conditions of the policy, the same will be resolved against the one responsible thereof. It
should be recalled in this connection, that generally, the insured, has little, if any, participation in the preparation of the
policy, together with the drafting of its terms and Conditions. The interpretation of obscure stipulations in a contract should
not favor the party who cause the obscurity (Art. 1377, N.C.C.), which, in the case at bar, is the insurance company.
. . . . And so it has been generally held that the "terms in an insurance policy, which are ambiguous, equivocal or
uncertain . . . are to be construed strictly against, the insurer, and liberally in favor of the insured so as to effect
the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is involved," (29 Am.
Jur. 181) and the reason for this rule is that the "insured usually has no voice in the selection or arrangement of
the words employed and that the language of the contract is selected with great care and deliberation by expert

and legal advisers employed by, and acting exclusively in the interest of, the insurance company" (44 C.J.S.
1174). Calanoc v. Court of Appeals, et al., G.R. No. L-8151, Dec. 16, 1955.
. . . . Where two interpretations, equally fair, of languages used in an insurance policy may be made, that which
allows the greater indemnity will prevail. (L'Engel v. Scotish Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67
LRA 581 111 Am. St. Rep. 70, 5 Ann. Cas. 749).
At any event, the policy under consideration, covers death or disability by accidental means, and the appellant insurance
company agreed to pay P1,000.00 to P3,000.00. is indemnity for death of the insured.
In view of the conclusions reached, it would seem unnecessary to discuss the other issues raised in the appeal.
The judgment appealed from is hereby affirmed. Without costs.

G.R. No. L-28866 March 17, 1972

FE DE JOYA LANDICHO, in her own behalf and as judicial guardian of her minor children, RAFAEL J. LANDICHO
and MA. LOURDES EUGENIA LANDICHO,plaintiffs-appellees,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM,defendant-appellant. .
Vedasto J. Hernandez for plaintiffs-appellees.Government Corporate Counsel Leopoldo M. Abellera and Trial Attorney
Arsenio J. Magpale defendant-appellant.

CONCEPCION, C.J.:p
Appeal of the Government Service Insurance System hereinafter referred to as GSIS, for the sake of brevity from a
decision of the Court of First Instance of Manila directing said defendant to pay to the plaintiffs-appellees, Fe de Joya
Landicho and her minor children, Rafael J. and Maria Lourdes Eugenia, both surnamed Landicho, the sum of P15,800,
with interest thereon, at the legal rate, from September 26, 1967, until fully paid, in addition to the sum of P1,000, as and
for attorney's fees, and the costs.
The facts are not in dispute. On June 1, 1964, the GSIS issued in favor of Flaviano Landicho, a civil engineer of the
Bureau of Public Works, stationed at Mamburao, Mindoro Occidental, optional additional life insurance policy No. OG136107 in the sum of P7,900. The policy states on its face:
This insurance is granted subject to the terms and conditions hereinafter set forth and in consideration of
the "Information" therefor and of the payment on the day this Policy takes effect of the monthly premiums
stated above, due from and payable by the Insured, and the like payments on the last day of every month
during the lifetime of the Insured until maturity of this Policy or until prior death of the Insured.
On page 2 of said policy, condition No. 1 provides, in part: .
1. PAYMENT OF PREMIUMS: .
... . Premiums are due and payable at the Office of the System in Manila or at any of its branches. When
any premium or installment thereof remains unpaid after its due date, such due date is the date of default
in payment of premiums. The mere possession of this Policy does not imply that it is in force unless the
premiums due thereon are paid on time or the policy has sufficient cash value to keep it in force.
Condition No. 18, on page 8 of the policy, is of the following tenor: .
18. ENTIRE CONTRACT IN THIS POLICY: .
This Policy together with the "Information" sheet signed by the Insured, a copy of which is attached
hereto, is issued under the provisions of Commonwealth Act No. 186, as amended, and constitutes the
entire contract.
All statements made by the Insured shall, in the absence of fraud, be deemed representations and no
warranties, and no statement shall void the Policy or be used as a defense to claim hereunder unless it
be contained in written information and a copy of such information be endorsed upon or attached to the
Policy when issued.
Before the issuance of said policy, the insured had filed an application, by filing and signing a printed form of the GSIS on
the basis of which the policy was issued. Paragraph 7 of said application States:

7. I hereby declare that all the above statements and answers as well as those I may make to the
System's Medical Examiner in continuation of this application, to be true and co direct to the best of my
knowledge and belief, and I hereby agree as follows: .
a. That this declaration, with the answers to be given by me to the Medical Officer, shall be made the
basis the policy and form part of the same; .
b. That acceptance of my policy issued on this application will constitute a ratification by me of any
correction or addition to this application made by the System; .
c. That this application serves as a letter of authority to the Collecting Officer of our Office thru the GSIS
to deduct from my salary the monthly premium in the amount of P33.36, beginning the month of May,
1964, and every month thereafter until notice of its discontinuance shall have beenreceived from the
System; .
d. That the failure to deduct from my salary the month premiums shall not make the policy lapse,
however, the premium account shall be considered as indebtedness which, I bind myself to pay the
System; .
e. That my policy shall be made effective on the first day of the month next following the month the first
premium is paid; provided, that it is not more ninety (90) days before or after the date of the medical
examination,was conducted if required." .
While still under the employment of the Bureau of Public Works, Mr. Landicho met his death, on June 29, 1966, in an
airplane crash in Mindoro. Thereupon, Mrs. Landicho, in her own behalf and that of her co-plaintiffs and minor children,
Rafael J. and Maria Lourdes Eugenia, filed with the GSIS a claim for P15,800, as the double indemnity due under policy
No. OG-136107, because of the untimely death of the insured owing to said accident. The GSIS denied the claim, upon
the ground that the policy had never been in force because, pursuant to subdivision (e) of the above-quoted paragraph 7
of the application, the policy "shall be ... effective on the first day of the month next following the month the first premium is
paid," and no premium had ever been paid on said policy. Upon refusal of the GSIS to reconsider its stand, this action was
filed, September 22, 1967, in the Court of First Instance of Manila, in which the GSIS reiterated its aforementioned
defense. Thereafter submitted by both parties for judgment on the pleadings, upon the ground thatthe case involve purely
questions of law, said court rendered, in due course, its abovementioned decision, from which the GSIS has taken the
present appeal.
The main issue therein is whether or not the insurance policy in question has ever been in force, not a single premium
having been paid thereon. In support of the affirmative, plaintiffs invoke the stipulation in the policy to the effect that the
information contained in the application filed by the insured shall form part of the contract between him and the GSIS, and,
especially, subdivisions (c) and (d) of paragraph 7 of said application stating that the same shall serve "as a letter of
authority to the Collecting Officer of our Office" the Bureau of Public Works "thru the GSIS to deduct from my salary
the monthly premium in the amount of P33.36 beginning the month of May, 1964, and every month thereafter," and that
"failure to deduct from my salary the monthly premiums shallnot make the policy lapse, however, the premium account
shall be considered as indebtedness which, I" the insured "bind myself to pay the System." 1 The GSIS maintains,
however, the negative, relying upon subdivision (e) of the same paragraph No. 7, which provides that the "policy shall be
made effective on the first day of the month next following the month the first premium is paid." Under this theory,
subdivisions (c) and (d) of said paragraph 7 would not apply unless and until the first premium shall have been actually
paid, pursuant to subdivision (e) of the same paragraph.
Although it may not be entirely farfetched, this view is not likely to be in accord with the understanding of many, if not
most, government employees who obtain an optional additional life insurance policy. As a consequence, the actual receipt
by them of their full pay without any deduction for premiums on their optional additional life insurance policies may
not impart to them the warning which, otherwise, it would necessarily convey that said policy is not, as yet, in force,
for they are liable to believe "that failure to deduct" from the salary of the insured "the monthly premiums shall not"
in the language of subdivision (d) "make the policy lapse" and that "the premiums account shall be considered as

indebtedness," to be paid or deducted later, because, after all, the so called "payment" of premiums is nothing but a
"paper" or "accounting" process, whereby funds are merely transferred, not physically, but constructively, from one office
of the government to another. In other words, the language, of subdivisions (c), (d) and (e) is such as to create an
ambiguity that should be resolved against the party responsible therefor defendant GSIS, as the party who prepared
and furnished the application form and in favor of the party misled thereby, the insured employee.
Indeed, our Civil Code provides:
The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity. 2
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 ... 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 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.) 3.
The equitable and ethical considerations justifying the foregoing view are bolstered up by two (2) factors, namely:
(a) The aforementioned subdivision (c) states "that this application serves as a letter of authority to the Collecting Officer
of our Office" the Bureau of Public Works "thru the GSIS to deduct from my salary the monthly premium in the
amount of P33.36." No such deduction was made and, consequently, not even the first premium "paid" because the
collecting officer of the Bureau of Public Works was not advised by the GSIS to make it (the deduction) pursuant to said
authority. Surely, this omission of the GSIS should not inure to its benefit. .
(b) The GSIS had impliedly induced the insured to believe that Policy No. OG-136107 was in force, he having been paid
by the GSIS the dividends corresponding to said policy. Had the insured had the slightest inkling that the latter was not, as
yet, effective for non-payment of the first premium, he would have, in all probability, caused the same to be forthwith
satisfied.
WHEREFORE, the decision appealed from should be, it is hereby affirmed, with costs against the defendant-appellant,
Government Service Insurance System. It is so ordered. .
Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Villamor, Barredo and Makasiar, JJ., concur.

G.R. No. 166245

April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the November 26,
2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the inaction of the insurer on the
insurance application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into an agreement
denominated as Creditor Group Life Policy No. P-1920 2 with petitioner Eternal Gardens Memorial Park Corporation
(Eternal). Under the policy, the clients of Eternal who purchased burial lots from it on installment basis would be insured
by Philamlife. The amount of insurance coverage depended upon the existing balance of the purchased burial lots. The
policy was to be effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted to the Assured
for the unpaid balance of his loan with the Assured, and is accepted for Life Insurance coverage by the Company
on its effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00. However, a declaration of
good health shall be required for all Lot Purchasers as part of the application. The Company reserves the right to
require further evidence of insurability satisfactory to the Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid balance of his
loan (including arrears up to but not exceeding 2 months) as reported by the Assured to the Company or the sum
of P100,000.00, whichever is smaller. Such benefit shall be paid to the Assured if the Lot Purchaser dies while
insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured.
However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.3

Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together with a copy of the
application of each purchaser, and the amounts of the respective unpaid balances of all insured lot purchasers. In relation
to the instant petition, Eternal complied by submitting a letter dated December 29, 1982, 4containing a list of insurable
balances of its lot buyers for October 1982. One of those included in the list as "new business" was a certain John
Chuang. His balance of payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for Chuangs death.
Attached to the claim were the following documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating
that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of Attending Physician; and (5)
Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984, 6 requiring Eternal to submit the following documents
relative to its insurance claim for Chuangs death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate
(with form attached); (3) Application for Insurance accomplished and signed by the insured, Chuang, while still living; and
(4) Statement of Account showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984, 7 which was received by Philamlife
on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance claim. This prompted
Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on April 25, 1986. 8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May 20, 1986, 9 a portion of
which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal Gardens Memorial
Park in October 1982 for the total maximum insurable amount of P100,000.00 each. No application for Group
Insurance was submitted in our office prior to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability provision, "a
declaration of good health shall be required for all Lot Purchasers as party of the application." We cite further the
provision on Effective Date of Coverage under the policy which states that "there shall be no insurance if the
application is not approved by the Company." Since no application had been submitted by the Insured/Assured,
prior to his death, for our approval but was submitted instead on November 15, 1984, after his death, Mr. John Uy
Chuang was not covered under the Policy. We wish to point out that Eternal Gardens being the Assured was a
party to the Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of the insurance coverage
but are held by us in trust for the payor until the prerequisites for insurance coverage shall have been met. We will
however, return all the premiums which have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money against
Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, against
Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and, to pay the sum of
P10,000.00 as attorneys fees.
SO ORDERED.

The RTC found that Eternal submitted Chuangs application for insurance which he accomplished before his death, as
testified to by Eternals witness and evidenced by the letter dated December 29, 1982, stating, among others: "Encl: PhilAm Life Insurance Application Forms & Cert."10 It further ruled that due to Philamlifes inaction from the submission of the
requirements of the group insurance on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes
acceptance of the premiums during the same period, Philamlife was deemed to have approved Chuangs application. The
RTC said that since the contract is a group life insurance, once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is REVERSED and SET
ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in Eternals letter dated
December 29, 1982. It further ruled that the non-accomplishment of the submitted application form violated Section 26 of
the Insurance Code. Thus, the CA concluded, there being no application form, Chuang was not covered by Philamlifes
insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore determined by this Honorable
Court, or has decided it in a way not in accord with law or with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife before the death of John
Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the CA and first level
courts, considering their findings of facts are conclusive and binding on this Court. However, such rule is subject to
exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made
is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment
is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its
findings the [CA] went beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth
in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; (10) when
the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different conclusion. 12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it submitted a copy of
the insurance application of Chuang before his death. In Eternals letter dated December 29, 1982, a list of insurable
interests of buyers for October 1982 was attached, including Chuang in the list of new businesses. Eternal added it was

noted at the bottom of said letter that the corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed
in the letter that was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy
of the insurance application which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that Eternal must
present evidence showing that Philamlife received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received, states that the
insurance forms for the attached list of burial lot buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is an admission by Philamlife against its
own interest.13 The burden of evidence has shifted to Philamlife, which must prove that the letter did not contain Chuangs
insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed to have received Chuangs
insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped as received, the
contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to inconsistencies is groundless. The
trial court is in the best position to determine the reliability and credibility of the witnesses, because it has the opportunity
to observe firsthand the witnesses demeanor, conduct, and attitude. Findings of the trial court on such matters are binding
and conclusive on the appellate court, unless some facts or circumstances of weight and substance have been
overlooked, misapprehended, or misinterpreted,14 that, if considered, might affect the result of the case. 15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no overlooked facts of
substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of Chuang was, as
shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form and the original of this is
submitted to Philamlife together with the monthly remittances and the second copy is remained or retained with
the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for the location and does not
[ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]

A As far as I remember I do not know where the original but when I submitted with that payment together with the
new clients all the originals I see to it before I sign the transmittal letter the originals are attached therein. 16
In other words, the witness admitted not knowing where the original insurance application was, but believed that the
application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two insurance application
forms were accomplished and the testimony of Mendoza on who actually filled out the application form, these are minor
inconsistencies that do not affect the credibility of the witnesses. Thus, we ruled in People v. Paredes that minor
inconsistencies are too trivial to affect the credibility of witnesses, and these may even serve to strengthen their credibility
as these negate any suspicion that the testimonies have been rehearsed. 17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions evidence as a
whole or reflect on the witnesses honesty. The test is whether the testimonies agree on essential facts and
whether the respective versions corroborate and substantially coincide with each other so as to make a consistent
and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is not at issue, neither is
whether the insurance application presented by Eternal has been falsified. Thus, the inconsistencies pointed out by
Philamlife are minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life Policy No. P-1920
dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured.
However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The first sentence appears to
state that the insurance coverage of the clients of Eternal already became effective upon contracting a loan with Eternal
while the second sentence appears to require Philamlife to approve the insurance contract before the same can become
effective.
It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of
the insured and strictly against the insurer in order to safeguard the latters interest. Thus, in Malayan Insurance
Corporation v. Court of Appeals, this Court held that:
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. 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 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above ruling, stating
that:

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. Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which prepared the contract, the insurer. By
reason of the exclusive control of the insurance company over the terms and phraseology of the insurance
contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially
to avoid forfeiture.20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10, 1980, must be
construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a partys purchase of a
memorial lot on installment from Eternal, an insurance contract covering the lot purchaser is created and the same is
effective, valid, and binding until terminated by Philamlife by disapproving the insurance application. The second sentence
of Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which
would lead to the cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance
application must not work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The
termination of the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is inaccurate at best.
Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the industry purposefully used
to its advantage. More often than not, insurance contracts are contracts of adhesion containing technical terms and
conditions of the industry, confusing if at all understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of insurance
applicants, insurance companies must be obligated to act with haste upon insurance applications, to either deny or
approve the same, or otherwise be bound to honor the application as a valid, binding, and effective insurance contract. 21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810
isREVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138 is MODIFIED. Philamlife
is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the time of extrajudicial demand by Eternal until Philamlifes receipt of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from June 17,
1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs.
SO ORDERED.

G.R. No. L-36413 September 26, 1988

MALAYAN INSURANCE CO., INC., petitioner,
vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC.
and PANGASINAN TRANSPORTATION CO., INC., respondents.
Freqillana Jr. for petitioner.
B.F. Estrella & Associates for respondent Martin Vallejos.
Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.
Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

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

comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage
to his motor vehicle, as well as for any liability to third persons arising out of any accident during the effectivity of such
insurance contract, which policy was in full force and effect when the vehicular accident complained of occurred. He
prayed that he be reimbursed by the insurance company for the amount that he may be ordered to pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice
Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the
San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy;
and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for
the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered
against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon
Rice Mill, Inc. to reimburse and indemnify the petitioner for any sum that it may be ordered to pay the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the
plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice
Mill, Inc., as follows:
(a) P4,103 as actual damages;
(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3)
years;
(c) P5,000.00 as moral damages;
(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby held jointly and severally
liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award
should be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved.

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill,
Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C.
Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner
insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not
a privy to the contract of insurance between Sio Choy and the insurance company. 2
Hence, the present recourse by petitioner insurance company.
The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice
Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may
be ordered to pay jointly and severally with Sio Choy.
The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of
respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of
Appeals shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos against the
respondents, without prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by
respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been
adjudged to pay respondent Vallejos." 3

However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to
determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents
Sio Choy and San Leon Rice Mill, Inc.
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals,
was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent
Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever
amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy.
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents
Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill,
Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant
to Article 2184 of the Civil Code which provides:
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in
the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed
that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at
least twice within the next preceding two months.
If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the
former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the
Civil Code which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions,
but also for those of persons for whom one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not engaged ill any business or
industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein mentioned proved that they
observed all the diligence of a good father of a family to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily
liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasidelict is solidarily. 4
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is
adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer
of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing
between petitioner and respondent Sio Choy at the time of the complained vehicular accident.

In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another
passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver
and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third
party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and
severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the
insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial
satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was
only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable
to the heirs of the victim.
While it is true that where the insurance contract provides for indemnity against liability to third persons, such third
persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third
party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at
fault. The liability of the insurer is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the
trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice
Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract
against third party liability-under which an insurer can be directly sued by a third party this will result in a violation of the
principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other
hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss,
damage, or liability arising from an unknown or contingent event." 8
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily
liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to
P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay
the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be
obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity
against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the
effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is
an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of
Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent
Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled
to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of
insurance existing between petitioner and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77
L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of
action which the insured may have against the third person whose negligence or wrongful act caused the
loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283
U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but
after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16,
citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).
Although many policies including policies in the standard form, now provide for subrogation, and thus
determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of

payment inures to the insurer without any formal assignment or any express stipulation to that effect in
the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such
payment operates as an equitable assignment to the insurer of the property and all remedies which the
insured may have for the recovery thereof. That right is not dependent upon , nor does it grow out of any
privity of contract (emphasis supplied) or upon written assignment of claim, and payment to the insured
makes the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C.
456, 142 SE 2d 18). 9
It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall
become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has
against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the
entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made. If the payment is made before the debt is due, no interest for
the intervening period may be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of
solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the
respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said
solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as
insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of
Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of
P29,103.00 )
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby
AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs.
SO ORDERED.

G.R. No. 198174

September 2, 2013

ALPHA INSURANCE AND SURETY CO., PETITIONER,

vs.
ARSENIA SONIA CASTOR, RESPONDENT.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision 1 dated May 31,
2011 and Resolution2 dated August 10, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 93027.
The facts follow.
On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No. MAND/CV-00186, with
petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The contract of insurance obligates the petitioner to pay
the respondent the amount of Six Hundred Thirty Thousand Pesos (P630,000.00) in case of loss or damage to said
vehicle during the period covered, which is from February 26, 2007 to February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar Lanuza (Lanuza), to bring the
above-described vehicle to a nearby auto-shop for a tune-up. However, Lanuza no longer returned the motor vehicle to
respondent and despite diligent efforts to locate the same, said efforts proved futile. Resultantly, respondent promptly
reported the incident to the police and concomitantly notified petitioner of the said loss and demanded payment of the
insurance proceeds in the total sum of P630,000.00.
In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating among others, thus:
Upon verification of the documents submitted, particularly the Police Report and your Affidavit, which states that the
culprit, who stole the Insure[d] unit, is employed with you. We would like to invite you on the provision of the Policy under
Exceptions to Section-III, which we quote:
1.) The Company shall not be liable for:
xxxx
(4) Any malicious damage caused by the Insured, any member of his family or by "A PERSON IN THE INSUREDS
SERVICE."
In view [of] the foregoing, we regret that we cannot act favorably on your claim.
In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and argued that the exception refers to
damage of the motor vehicle and not to its loss. However, petitioners denial of respondents insured claim remains firm.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner before the Regional Trial
Court (RTC) of Quezon City on September 10, 2007.
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of respondent in this wise:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the latter as follows:

To pay plaintiff the amount of P466,000.00 plus legal interest of 6% per annum from the time of demand up to the time the
amount is fully settled;
To pay attorneys fees in the sum of P65,000.00; and
To pay the costs of suit.
All other claims not granted are hereby denied for lack of legal and factual basis. 3
Aggrieved, petitioner filed an appeal with the CA.
On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon Citys decision. The fallo reads:
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision, dated December 19, 2008,
of Branch 215 of the Regional Trial Court of Quezon City, in Civil Case No. Q-07-61099, is hereby AFFIRMED in toto.
SO ORDERED.4
Petitioner filed a Motion for Reconsideration against said decision, but the same was denied in a Resolution dated August
10, 2011.
Hence, the present petition wherein petitioner raises the following grounds for the allowance of its petition:
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND GROSSLY OR GRAVELY
ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF THE PRIVATE RESPONDENT AND AGAINST THE
PETITIONER AND RULED THAT EXCEPTION DOES NOT COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS
OF THE INSURANCE POLICY ARE [AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT THE PARTIES
THEMSELVES DISAGREE ABOUT THE MEANING OF PARTICULAR PROVISIONS, THE POLICY WILL BE
CONSTRUED BY THE COURTS LIBERALLY IN FAVOR OF THE ASSURED AND STRICTLY AGAINST THE INSURER.
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND COMMITTED GRAVE ABUSE OF
DISCRETION WHEN IT [AFFIRMED] IN TOTO THE JUDGMENT OF THE TRIAL COURT.5
Simply, the core issue boils down to whether or not the loss of respondents vehicle is excluded under the insurance
policy.
We rule in the negative.
Significant portions of Section III of the Insurance Policy states:
SECTION III LOSS OR DAMAGE
The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to the Schedule
Vehicle and its accessories and spare parts whilst thereon:
(a)
by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent
upon wear and tear;
(b)
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;

(c)
by malicious act;
(d)
whilst in transit (including the processes of loading and unloading) incidental to such transit by road, rail, inland waterway,
lift or elevator.
xxxx
EXCEPTIONS TO SECTION III
The Company shall not be liable to pay for:
Loss or Damage in respect of any claim or series of claims arising out of one event, the first amount of each and every
loss for each and every vehicle insured by this Policy, such amount being equal to one percent (1.00%) of the Insureds
estimate of Fair Market Value as shown in the Policy Schedule with a minimum deductible amount of Php3,000.00;
Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures or breakages;
Damage to tires, unless the Schedule Vehicle is damaged at the same time;
Any malicious damage caused by the Insured, any member of his family or by a person in the Insureds service. 6
In denying respondents claim, petitioner takes exception by arguing that the word "damage," under paragraph 4 of
"Exceptions to Section III," means loss due to injury or harm to person, property or reputation, and should be construed to
cover malicious "loss" as in "theft." Thus, it asserts that the loss of respondents vehicle as a result of it being stolen by the
latters driver is excluded from the policy.
We do not agree.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft perpetrated by the driver of the
insured is not an exception to the coverage from the insurance policy, since Section III thereof did not qualify as to who
would commit the theft. Thus:
Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance policy subject of this
case. This is evident from the very provision of Section III "Loss or Damage." The insurance company, subject to the
limits of liability, is obligated to indemnify the insured against theft. Said provision does not qualify as to who would commit
the theft. Thus, even if the same is committed by the driver of the insured, there being no categorical declaration of
exception, the same must be covered. As correctly pointed out by the plaintiff, "(A)n insurance contract should be
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. Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is
adopted." The defendant would argue that if the person employed by the insured would commit the theft and the insurer
would be held liable, then this would result to an absurd situation where the insurer would also be held liable if the insured
would commit the theft. This argument is certainly flawed. Of course, if the theft would be committed by the insured
himself, the same would be an exception to the coverage since in that case there would be fraud on the part of the
insured or breach of material warranty under Section 69 of the Insurance Code. 7
Moreover, 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. 8 Accordingly, in interpreting the exclusions in an insurance contract,
the terms used specifying the excluded classes therein are to be given their meaning as understood in common speech. 9
Adverse to petitioners claim, the words "loss" and "damage" mean different things in common ordinary usage. The word
"loss" refers to the act or fact of losing, or failure to keep possession, while the word "damage" means deterioration or
injury to property.1wphi1
Therefore, petitioner cannot exclude the loss of respondents vehicle under the insurance policy under paragraph 4 of
"Exceptions to Section III," since the same refers only to "malicious damage," or more specifically, "injury" to the motor
vehicle caused by a person under the insureds service. Paragraph 4 clearly does not contemplate "loss of property," as
what happened in the instant case.
Further, the CA aptly ruled that "malicious damage," as provided for in the subject policy as one of the exceptions from
coverage, is the damage that is the direct result from the deliberate or willful act of the insured, members of his family, and
any person in the insureds service, whose clear plan or purpose was to cause damage to the insured vehicle for
purposes of defrauding the insurer, viz.:
This interpretation by the Court is bolstered by the observation that the subject policy appears to clearly delineate
between the terms "loss" and "damage" by using both terms throughout the said policy. x x x
xxxx
If the intention of the defendant-appellant was to include the term "loss" within the term "damage" then logic dictates that it
should have used the term "damage" alone in the entire policy or otherwise included a clear definition of the said term as
part of the provisions of the said insurance contract. Which is why the Court finds it puzzling that in the said policys
provision detailing the exceptions to the policys coverage in Section III thereof, which is one of the crucial parts in the
insurance contract, the insurer, after liberally using the words "loss" and "damage" in the entire policy, suddenly went
specific by using the word "damage" only in the policys exception regarding "malicious damage." Now, the defendantappellant would like this Court to believe that it really intended the word "damage" in the term "malicious damage" to
include the theft of the insured vehicle.
The Court does not find the particular contention to be well taken.
True, 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. However, when the terms of the insurance policy are ambiguous, equivocal or
uncertain, such that the parties themselves disagree about the meaning of particular provisions, the policy will be
construed by the courts liberally in favor of the assured and strictly against the insurer.10
Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the 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.
Thus, in Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Company,11 this Court ruled
It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of
the insured and strictly against the insurer in order to safeguard the latters interest. Thus, in Malayan Insurance
Corporation v. Court of Appeals, this Court held that:
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. 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 non-compliance with
its obligations.

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above ruling, stating
that:
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. Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract, the insurer. By reason of the exclusive
control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. 12
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED. Accordingly, the Decision
dated May 31, 2011 and Resolution dated August 10, 2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.

[G.R. No. 112360. July 18, 2000]

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF APPEALS and TRANSWORLD
KNITTING MILLS, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to annul and set aside the
July 15, 1993 Decision[1] and October 22, 1993 Resolution[2] of the Court of Appeals[3] in CA-G.R. CV NO. 28779,
which modified the Ruling[4] 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]
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]
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the contents of the fourspan building, which was partly burned, and not the damage caused by the fire on the two-storey annex building. [7]
On January 4, 1990, the trial court rendered its decision; disposing as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic) Knitting Mills, Inc.
the amount of P826, 500.00 representing the actual value of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting Mills, Inc., went to the
Court of Appeals, which came out with its decision of July 15, 1993 under attack, the decretal portion of which
reads:
"WHEREFORE, and upon all the foregoing, the decision of the court below is MODIFIED in that
defendant New India Assurance Company has and is hereby required to pay plaintiff-appellant the
amount of P1,818,604.19 while the other Rizal Surety has to pay the plaintiff-appellant P470,328.67,
based on the actual losses sustained by plaintiff Transworld in the fire, totalling P2,790,376.00 as against
the amounts of fire insurance coverages respectively extended by New India in the amount of
P5,800,000.00 and Rizal Surety and Insurance Company in the amount of P1,500,000.00.
No costs.
SO ORDERED."[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India appealed to this Court
theorizing inter alia that the private respondent could not be compensated for the loss of the fun and amusement
machines and spare parts stored at the two-storey building because it (Transworld) had no insurable interest in
said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New India Assurance
Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for Reconsideration before the
Court of Appeals, and on October 22, 1993, the Court of Appeals reconsidered its decision of July 15, 1993, as
regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the imposition of legal
interest is concerned, that, on the assessment against New India Assurance Company on the amount of
P1,818,604.19 and that against Rizal Surety & Insurance Company on the amount of P470,328.67, from

May 26, 1982 when the complaint was filed until payment is made. The rest of the said decision is
retained in all other respects.
SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the present Petition,
contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING WHERE THE
BULK OF THE BURNED PROPERTIES WERE STORED, WAS INCLUDED IN THE COVERAGE OF
THE INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT CONSIDERING THE
PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH
CLEARLY SHOW THAT THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD ACTED IN
PALPABLE BAD FAITH AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION,
AND IN NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND PUNITIVE
DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND EXPENSES OF LITIGATION
(ART. 2208 PARS. 4 and 11, CIVIL CODE).[11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon protected only the contents of the main
building (four-span),[12] and did not include those stored in the two-storey annex building. On the other hand, the
private respondent theorized that the so called "annex" was not an annex but was actually an integral part of the
four-span building[13]and therefore, the goods and items stored therein were covered by the same fire insurance
policy.
Resolution of the issues posited here hinges on the proper interpretation of the stipulation in subject fire insurance
policy regarding its coverage, which reads:
"xxx contained and/or stored during the currency of this Policy in the premises occupied by them forming
part of the buildings situate (sic) within own Compound xxx"
Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit its coverage to what
were stored in the four-span building. As opined by the trial court of origin, two requirements must concur in order
that the said fun and amusement machines and spare parts would be deemed protected by the fire insurance
policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied by Transworld and second,
said areas must form part of the building described in the policy xxx" [14]
'Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under galvanized
iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo
assembly plant, offices, ware house and caretaker's quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by the Court of Appeals are conclusive
on the parties and not reviewable by this Court, and the same carry even more weight when the Court of Appeals
has affirmed the findings of fact arrived at by the lower court. [15]

In the case under consideration, both the trial court and the Court of Appeals found that the so called "annex "
was not an annex building but an integral and inseparable part of the four-span building described in the policy
and consequently, the machines and spare parts stored therein were covered by the fire insurance in dispute. The
letter-report of the Manila Adjusters and Surveyor's Company, which petitioner itself cited and invoked, describes
the "annex" building as follows:
"Two-storey building constructed of partly timber and partly concrete hollow blocks under g.i. roof which is
adjoining and intercommunicating with the repair of the first right span of the lofty storey building and
thence by property fence wall."[16]
Verily, the two-storey building involved, a permanent structure which adjoins and intercommunicates with the "first
right span of the lofty storey building",[17] formed part thereof, and meets the requisites for compensability under
the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was already existing when subject fire insurance
policy contract was entered into on January 12, 1981, having been constructed sometime in 1978, [18] petitioner
should have specifically excluded the said two-storey building from the coverage of the fire insurance if minded to
exclude the same but if did not, and instead, went on to provide that such fire insurance policy covers the
products, raw materials and supplies stored within the premises of respondent Transworld which was an integral
part of the four-span building occupied by Transworld, knowing fully well the existence of such building adjoining
and intercommunicating with the right section of the four-span building.
After a careful study, the Court does not find any basis for disturbing what the lower courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt
regarding the portions of the building insured thereby. Article 1377 of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety Insurance
Company, whose lawyer or managers drafted the fire insurance policy contract under scrutiny. Citing the
aforecited provision of law in point, the Court in Landicho vs. Government Service Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of which it is settled that the 'terms in an
insurance policy, which are ambiguous, equivocal, or uncertain x x x are to be construed strictly and most
strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of
indemnity or payment to the insured, especially where forfeiture is involved' (29 Am. Jur., 181), and the
reason for this is that the 'insured usually has no voice in the selection or arrangement of the words
employed and that the language of the contract is selected with great care and deliberation by experts
and legal advisers employed by, and acting exclusively in the interest of, the insurance company.' (44
C.J.S., p. 1174).""[20]
Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company, Inc. vs. Vda. De
Songco,[21] to wit:
"'This rigid application of the rule on ambiguities has become necessary in view of current business
practices. The courts cannot ignore that nowadays monopolies, cartels and concentration of capital,
endowed with overwhelming economic power, manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party may not change one whit, his participation in the
'agreement' being reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles
'contracts by adherence' (contrats [sic] d'adhesion), in contrast to these entered into by parties bargaining
on an equal footing, such contracts (of which policies of insurance and international bills of lading are
prime example) obviously call for greater strictness and vigilance on the part of courts of justice with a

view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February
1942.)'"[22]
The issue of whether or not Transworld has an insurable interest in the fun and amusement machines and spare
parts, which entitles it to be indemnified for the loss thereof, had been settled in G.R. No. L-111118, entitled New
India Assurance Company, Ltd., vs. Court of Appeals, where the appeal of New India from the decision of the
Court of Appeals under review, was denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises, precludes the relitigation of a
particular fact or issue in another action between the same parties based on a different claim or cause of action.
"xxx the judgment in the prior action operates as estoppel only as to those matters in issue or points controverted,
upon the determination of which the finding or judgment was rendered. In fine, the previous judgment is
conclusive in the second case, only as those matters actually and directly controverted and determined and not as
to matters merely involved therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc. vs. Court of Appeals,
[24]
held that the issue of negligence of the shipping line, which issue had already been passed upon in a case filed
by one of the insurers, is conclusive and can no longer be relitigated in a similar case filed by another insurer
against the same shipping line on the basis of the same factual circumstances. Ratiocinating further, the Court
opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been negligent, or so
negligent as to have proximately caused the collision between them, was an issue that was actually,
directly and expressly raised, controverted and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J.,
resolved that issue in his Decision and held the 'Don Carlos' to have been negligent rather than the 'Yotai
Maru' and, as already noted, that Decision was affirmed by this Court in G.R. No. L-48839 in a Resolution
dated 6 December 1987. The Reyes Decision thus became final and executory approximately two (2)
years before the Sison Decision, which is assailed in the case at bar, was promulgated. Applying the rule
of conclusiveness of judgment, the question of which vessel had been negligent in the collision between
the two (2) vessels, had long been settled by this Court and could no longer be relitigated in C.A.-G.R.
No. 61206-R. Private respondent Go Thong was certainly bound by the ruling or judgment of Reyes, L.B.,
J. and that of this Court. The Court of Appeals fell into clear and reversible error when it disregarded the
Decision of this Court affirming the Reyes Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering that private respondent's insurable
interest in, and compensability for the loss of subject fun and amusement machines and spare parts, had been
adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R.
No. L-111118, in a Resolution, dated February 2, 1994, the same can no longer be relitigated and passed upon in
the present case. Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the ruling of the Court
of Appeals and of this Court that the private respondent has an insurable interest in the aforesaid fun and
amusement machines and spare parts; and should be indemnified for the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the amount of P470,328.67, it being the total
loss and damage suffered by Transworld for which petitioner Rizal Insurance is liable. [26]
All things studiedly considered and viewed in proper perspective, the Court is of the irresistible conclusion, and so
finds, that the Court of Appeals erred not in holding the petitioner, Rizal Surety Insurance Company, liable for the
destruction and loss of the insured buildings and articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993, of the Court of
Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 156167. May 16, 2005]

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
DECISION
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; G2 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.
xxx
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 toP4,280,000.00. Since the defendantappellant 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 paidP393.00 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

xxx
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?
xxx
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?
xxx
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.
xxx

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?
xxx
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.