SYNOPSIS

On April 6, 1990, Moonlight Enterprises, respondents business establishment, was razed by fire. Respondent
then filed an insurance claim with petitioner and four other co-insurers. Petitioner refused to honor the claim, thus
prompting respondent to file an action. In its defense, petitioner claimed that there was no existing insurance
contract when the fire occurred since respondent did not pay the premium. It alleged that even assuming there was a
contract, respondent violated several conditions of the policy. The trial court ruled in favor of respondent. This was
affirmed in toto by the Court of Appeals. Its motion for reconsideration having been denied, petitioner filed this
petition.

Petitioner accepted the check and issued an official receipt for the payment. Its agent acknowledged receipt of
payment. An acknowledgement of the receipt of premium is conclusive evidence of its payment, so far as to make
the policy binding.

It cannot be said that petitioner was deceived by respondent by the latters non-disclosure of the other insurance
contracts when petitioner actually had prior knowledge thereof.

However, loss of profit cannot be shouldered by petitioner whose obligation is limited to the object of insurance,
which was the stock-in-trade and not the expected loss in income or profit. The awards of moral and exemplary
damages were also deleted. Moral damages may be awarded in breaches of contracts where the defendant acted in
bad faith. The Court found no such fraud or bad faith. Exemplary damages may be awarded if the defendant acted
in a wanton, fraudulent, reckless, oppressive or malevolent manner. Nothing thereof can be attributed to petitioner.
The award of attorneys fees was reduced to a reasonable level.

SYLLABUS

1. MERCANTILE LAW; INSURANCE; POLICY NOT VALID AND BINDING UNLESS PREMIUM IS PAID. - The
general rule in insurance laws is that unless the premium is paid the insurance policy is not valid and binding.
The only exceptions are life and industrial life insurance. Whether payment was indeed made is a question of
fact which is best determined by the trial court.

2. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF TRIAL AND APPELLATE COURTS, GENERALLY NOT
DISTURBED ON APPEAL. - The trial court found, as affirmed by the Court of Appeals, that there was a valid
check payment by respondent to petitioner. Well-settled is the rule that the factual findings and conclusions of
the trial court and the Court of Appeals are entitled to great weight and respect, and will not be disturbed on
appeal in the absence of any clear showing that the trial court overlooked certain facts or circumstances which
would substantially affect the disposition of the case. We see no reason to depart from this ruling.

3. ID.; ID.; ID.; CASE AT BAR. - According to the trial court the renewal certificate issued to respondent contained
the acknowledgment that premium had been paid. It is not disputed that the check drawn by respondent in favor
of petitioner and delivered to its agent was honored when presented and petitioner forthwith issued its official
1
 receipt to respondent on 10 April 1990. Section 306 of the Insurance Code provides that any insurance
company which delivers a policy or contract of insurance to an insurance agent or insurance broker shall be
deemed to have authorized such agent or broker to receive on its behalf payment of any premium which is due
on such policy or contract of insurance at the time of its issuance or delivery or which becomes due thereon. In
the instant case, the best evidence of such authority is the fact that petitioner accepted the check and issued the
official receipt for the payment. It is, as well, bound by its agents acknowledgment of receipt of payment. The
submission of the alleged fraudulent documents pertained to respondent's income tax returns for 1987 to 1989.
Respondent, however, presented a BIR certification that he had paid the proper taxes for the said years. The
trial court and the Court of Appeals gave credence to the certification and it being a question of fact, we hold that
said finding is conclusive.

4. MERCANTILE LAW; INSURANCE; OTHER INSURANCE CLAUSE; COMPANY ESTOPPED FROM

ASSAILING VIOLATION THEREOF WHERE ITS AGENT KNEW OF OTHER INSURANCE SECURED; CASE
AT BAR. - Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers,
non-disclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is common in fire
insurance policies and is known as the other insurance clause. The purpose for the inclusion of this clause is to
prevent an increase in the moral hazard. We have ruled on its validity and the case of Geagonia v. Court of
Appeals clearly illustrates such principle. However, we see an exception in the instant case. To constitute a
violation the other existing insurance contracts must be upon the same subject matter and with the same interest
and risk. Indeed, respondent acquired several co-insurers and he failed to disclose this information to
petitioner. Nonetheless, petitioner is estopped from invoking this argument. The trial court cited the testimony
of petitioner's loss adjuster who admitted previous knowledge of the co-insurers. Indubitably, it cannot be said
that petitioner was deceived by respondent by the latter's non-disclosure of the other insurance contracts when
petitioner actually had prior knowledge thereof. Petitioner's loss adjuster had known all along of the other
existing insurance contracts, yet, he did not use that as basis for his recommendation of denial. The loss
adjuster, being an employee of petitioner, is deemed a representative of the latter whose awareness of the other
insurance contracts binds petitioner. We, therefore, hold that there was no violation of the other insurance
clause by respondent.

5. CIVIL LAW; DAMAGES; LOSS OF PROFIT; NOT RECOVERABLE WHERE CLAIMANT NO LONGER HAD
ANY BUSINESS TO OPERATE. - There is no legal and factual basis for the award of P200,000 for loss of
profit. It cannot be denied that the fire totally gutted respondent's business; thus, respondent no longer had any
business to operate. His loss of profit cannot be shouldered by petitioner whose obligation is limited to the
object of insurance, which was the stock-in-trade, and not the expected loss in income or profit.

6. ID.; ID.; MORAL DAMAGES; ABSENCE OF FRAUD AND BAD FAITH NEGATES RECOVERY THEREOF. - At
the core of this case is petitioner's alleged breach of its obligation under a contract of insurance. Under Article
2220 of the Civil Code, moral damages may be awarded in breaches of contracts where the defendant acted
fraudulently or in bad faith. We find no such fraud or bad faith. It must again be stressed that moral damages
are emphatically not intended to enrich a plaintiff at the expense of the defendant. Such damages are awarded
only to enable the injured party to obtain means, diversion or amusements that will serve to obviate the moral
suffering he has undergone, by reason of the defendant's culpable action. Its award is aimed at the restoration,
within the limits of the possible, of the spiritual status quo ante, and it must be proportional to the suffering
inflicted. When awarded, moral damages must not be palpably and scandalously excessive as to indicate that it
was the result of passion, prejudice or corruption on the part of the trial court judge.

2
7. ID.; ID.; EXEMPLARY DAMAGES; DEFENDANT DID NOT ACT IN OPPRESSIVE OR MALEVOLENT MANNER
IN RESISTING CLAIM. - The law is likewise clear that in contracts and quasi-contracts the court may award
exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner. Nothing thereof can be attributed to petitioner which merely tried to resist what it claimed to be an
unfounded claim for enforcement of the fire insurance policy.

8. ID.; ID.; ATTORNEY'S FEES; NOT AWARDED EVERY TIME A PARTY PREVAILS IN A SUIT. - As to attorneys
fees, the general rule is that attorney's fees cannot be recovered as part of damages because of the policy that
no premium should be placed on the right to litigate. In short, the grant of attorney's fees as part of damages is
the exception rather than the rule; counsel's fees are not awarded every time a party prevails in a suit. It can be
awarded only in the cases enumerated in Article 2208 of the Civil Code, and in all cases it must be reasonable.
Thereunder, the trial court may award attorney's fees where it deems just and equitable that it be so granted.
While we respect the trial court's exercise of its discretion in this case, the award of P50,000 is unreasonable
and excessive. It should be reduced to P10,000.

FIRST DIVISION

[G.R. No. 130421. June 28, 1999]

AMERICAN HOME ASSURANCE COMPANY, petitioner, vs. ANTONIO CHUA, respondent.

DECISION

DAVIDE, JR. C.J.:

In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, petitioner seeks the
reversal of the decision[1] of the Court of Appeals in CA-G.R. CV No. 40751, which affirmed in toto the decision of the
Regional Trial Court, Makati City, Branch 150 (hereafter trial court), in Civil Case No. 91-1009.

Petitioner is a domestic corporation engaged in the insurance business. Sometime in 1990, respondent obtained
from petitioner a fire insurance covering the stock-in-trade of his business, Moonlight Enterprises, located at Valencia,
Bukidnon. The insurance was due to expire on 25 March 1990.

On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of P2,983.50 to petitioners agent,
James Uy, as payment for the renewal of the policy. In turn, the latter delivered Renewal Certificate No. 00099047 to
respondent. The check was drawn against a Manila bank and deposited in petitioners bank account in Cagayan de
Oro City. The corresponding official receipt was issued on 10 April. Subsequently, a new insurance policy, Policy No.

3
206-4234498-7, was issued, whereby petitioner undertook to indemnify respondent for any damage or loss arising
from fire up toP200,000 for the period 25 March 1990 to 25 March 1991.

On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was estimated
between P4,000,000 and P5,000,000. Respondent filed an insurance claim with petitioner and four other co-insurers,
namely, Pioneer Insurance and Surety Corporation, Prudential Guarantee and Assurance, Inc., Filipino Merchants
Insurance Co. and Domestic Insurance Company of the Philippines. Petitioner refused to honor the claim
notwithstanding several demands by respondent, thus, the latter filed an action against petitioner before the trial
court.

In its defense, petitioner claimed there was no existing insurance contract when the fire occurred since
respondent did not pay the premium. It also alleged that even assuming there was a contract, respondent violated
several conditions of the policy, particularly: (1) his submission of fraudulent income tax return and financial
statements; (2) his failure to establish the actual loss, which petitioner assessed at P70,000; and (3) his failure to
notify to petitioner of any insurance already effected to cover the insured goods. These violations, petitioner insisted,
justified the denial of the claim.

The trial court ruled in favor of respondent. It found that respondent paid by way of check a day before the fire
occurred. The check, which was deposited in petitioners bank account, was even acknowledged in the renewal
certificate issued by petitioners agent. It declared that the alleged fraudulent documents were limited to the disparity
between the official receipts issued by the Bureau of Internal Revenue (BIR) and the income tax returns for the years
1987 to 1989. All the other documents were found to be genuine. Nonetheless, it gave credence to the BIR
certification that respondent paid the corresponding taxes due for the questioned years.

As to respondents failure to notify petitioner of the other insurance contracts covering the same goods, the trial
court held that petitioner failed to show that such omission was intentional and fraudulent. Finally, it noted that
petitioners investigation of respondent's claim was done in collaboration with the representatives of other insurance
companies who found no irregularity therein. In fact, Pioneer Insurance and Surety Corporation and Prudential
Guarantee and Assurance, Inc. promptly paid the claims filed by respondent.

The trial court decreed as follows:

WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the [petitioner] ordering the latter to
pay the former the following:

1. P200,000.00, representing the amount of the insurance, plus legal interest from the date of filing of this
case;

2. P200,000.00 as moral damages;

3. P200,000.00 as loss of profit;

4. P100,000.00 as exemplary damages;

5. P50,000.00 as attorneys fees; and

6. Cost of suit.

On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court of Appeals found that
respondents claim was substantially proved and petitioners unjustified refusal to pay the claim entitled respondent to
the award of damages.

4
 Its motion for reconsideration of the judgment having been denied, petitioner filed the petition in this
case. Petitioner reiterates its stand that there was no existing insurance contract between the parties. It invokes
Section 77 of the Insurance Code, which provides:

An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium thereof has been paid, except in the case of life or an
industrial life policy whenever the grace period provision applies.

and cites the case of Arce v. Capital Insurance & Surety Co., Inc., [2] where we ruled that unless and until the premium
is paid there is no insurance.

Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract was not yet subsisting
pursuant to Article 1249[3] of the Civil Code, which recognizes that a check can only effect payment once it has been
cashed. Although respondent testified that he gave the check on 5 April to a certain James Uy, the check, drawn
against a Manila bank and deposited in a Cagayan de Oro City bank, could not have been cleared by 6 April, the date
of the fire. In fact, the official receipt issued for respondents check payment was dated 10 April 1990, four days after
the fire occurred.

Citing jurisprudence,[4] petitioner also contends that respondents non-disclosure of the other insurance contracts
rendered the policy void. It underscores the trial courts neglect in considering the Commission on Audits certification
that the BIR receipts submitted by respondent were, in effect, fake since they were issued to other persons. Finally,
petitioner argues that the award of damages was excessive and unreasonable considering that it did not act in bad
faith in denying respondents claim.

Respondent counters that the issue of non-payment of premium is a question of fact which can no longer be
assailed. The trial courts finding on the matter, which was affirmed by the Court of Appeals, is conclusive.

Respondent refutes the reason for petitioners denial of his claim. As found by the trial court, petitioners loss
adjuster admitted prior knowledge of respondents existing insurance contracts with the other insurance companies.
Nonetheless, the loss adjuster recommended the denial of the claim, not because of the said contracts, but because
he was suspicious of the authenticity of certain documents which respondent submitted in filing his claim.

To bolster his argument, respondent cites Section 66 of the Insurance Code, [5] which requires the insurer to give
a notice to the insured of its intention to terminate the policy forty-five days before the policy period ends. In the
instant case, petitioner opted not to terminate the policy. Instead, it renewed the policy by sending its agent to
respondent, who was issued a renewal certificate upon delivery of his check payment for the renewal of premium. At
this precise moment the contract of insurance was executed and already in effect. Respondent also claims that it is
standard operating procedure in the provinces to pay insurance premiums by check when collected by insurance
agents.

On the issue of damages, respondent maintains that the amounts awarded were reasonable. He cites numerous
trips he had to make from Cagayan de Oro City to Manila to follow up his rightful claim. He imputes bad faith on
petitioner who made enforcement of his claim difficult in the hope that he would eventually abandon it. He further
emphasizes that the adjusters of the other insurance companies recommended payment of his claim, and they
complied therewith.

In its reply, petitioner alleges that the petition questions the conclusions of law made by the trial court and the
Court of Appeals.

Petitioner invokes respondents admission that his check for the renewal of the policy was received only on 10
April 1990, taking into account that the policy period was 25 March 1990 to 25 March 1991. The official receipt was
5
dated 10 April 1990. Anent respondents testimony that the check was given to petitioners agent, a certain James Uy,
the latter points out that even respondent was not sure if Uy was indeed its agent. It faults respondent for not
producing Uy as his witness and not taking any receipt from him upon presentment of the check. Even assuming that
the check was received a day before the occurrence of the fire, there still could not have been any payment until the
check was cleared.

Moreover, petitioner denies respondents allegation that it intended a renewal of the contract for the renewal
certificate clearly specified the following conditions:

Subject to the payment by the assured of the amount due prior to renewal date, the policy shall be renewed for the
period stated.

Any payment tendered other than in cash is received subject to actual cash collection.

Subject to no loss prior to premium payment. If there be any loss, and is not covered [sic].

Petitioner asserts that an insurance contract can only be enforced upon the payment of the premium, which should
have been made before the renewal period.

Finally, in assailing the excessive damages awarded to respondent petitioner stresses that the policy in issue
was limited to a liability of P200,000; but the trial court granted the following monetary awards: P200,000 as actual
damages; P200,000 as moral damages; P100,000 as exemplary damages; andP50,000 as attorneys fees.

The following issues must be resolved: first, whether there was a valid payment of premium, considering that
respondents check was cashed after the occurrence of the fire; second, whether respondent violated the policy by his
submission of fraudulent documents and non-disclosure of the other existing insurance contracts; and finally, whether
respondent is entitled to the award of damages.

The general rule in insurance laws is that unless the premium is paid the insurance policy is not valid and
binding. The only exceptions are life and industrial life insurance. [6] Whether payment was indeed made is a question
of fact which is best determined by the trial court. The trial court found, as affirmed by the Court of Appeals, that there
was a valid check payment by respondent to petitioner. Well-settled is the rule that the factual findings and
conclusions of the trial court and the Court of Appeals are entitled to great weight and respect, and will not be
disturbed on appeal in the absence of any clear showing that the trial court overlooked certain facts or circumstances
which would substantially affect the disposition of the case. [7] We see no reason to depart from this ruling.

According to the trial court the renewal certificate issued to respondent contained the acknowledgment that
premium had been paid. It is not disputed that the check drawn by respondent in favor of petitioner and delivered to
its agent was honored when presented and petitioner forthwith issued its official receipt to respondent on 10 April
1990. Section 306 of the Insurance Code provides that any insurance company which delivers a policy or contract of
insurance to an insurance agent or insurance broker shall be deemed to have authorized such agent or broker to
receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time of its
issuance or delivery or which becomes due thereon. [8] In the instant case, the best evidence of such authority is the
fact that petitioner accepted the check and issued the official receipt for the payment. It is, as well, bound by its
agents acknowledgment of receipt of payment.

Section 78 of the Insurance Code explicitly provides:

An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until
the premium is actually paid.

6
This Section establishes a legal fiction of payment and should be interpreted as an exception to Section 77. [9]

Is respondent guilty of the policy violations imputed against him? We are not convinced by petitioners
arguments. The submission of the alleged fraudulent documents pertained to respondents income tax returns for
1987 to 1989. Respondent, however, presented a BIR certification that he had paid the proper taxes for the said
years. The trial court and the Court of Appeals gave credence to the certification and it being a question of fact, we
hold that said finding is conclusive.

Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers, non-
disclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is common in fire insurance
policies and is known as the other insurance clause. The purpose for the inclusion of this clause is to prevent an
increase in the moral hazard. We have ruled on its validity and the case of Geagonia v. Court of Appeals[10]clearly
illustrates such principle. However, we see an exception in the instant case.

Citing Section 29[11] of the Insurance Code, the trial court reasoned that respondents failure to disclose was not
intentional and fraudulent. The application of Section 29 is misplaced. Section 29 concerns concealment which is
intentional. The relevant provision is Section 75, which provides that:

A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid the policy.

To constitute a violation the other existing insurance contracts must be upon the same subject matter and with
the same interest and risk. [12] Indeed, respondent acquired several co-insurers and he failed to disclose this
information to petitioner. Nonetheless, petitioner is estopped from invoking this argument. The trial court cited the
testimony of petitioners loss adjuster who admitted previous knowledge of the co-insurers. Thus,

COURT:

Q The matter of additional insurance of other companies, was that ever discussed in your investigation?

A Yes, sir.

Q In other words, from the start, you were aware the insured was insured with other companies like Pioneer and so
on?

A Yes, Your Honor.

Q But in your report you never recommended the denial of the claim simply because of the non-disclosure of other
insurance? [sic]

A Yes, Your Honor.

Q In other words, to be emphatic about this, the only reason you recommended the denial of the claim, you found
three documents to be spurious. That is your only basis?

A Yes, Your Honor.[13] [Emphasis supplied]

Indubitably, it cannot be said that petitioner was deceived by respondent by the latters non-disclosure of the
other insurance contracts when petitioner actually had prior knowledge thereof. Petitioners loss adjuster had known
all along of the other existing insurance contracts, yet, he did not use that as basis for his recommendation of
denial. The loss adjuster, being an employee of petitioner, is deemed a representative of the latter whose awareness

7
of the other insurance contracts binds petitioner. We, therefore, hold that there was no violation of the other insurance
clause by respondent.

Petitioner is liable to pay its share of the loss. The trial court and the Court of Appeals were correct in awarding
P200,000 for this. There is, however, merit in petitioners grievance against the damages and attorneys fees awarded.

There is no legal and factual basis for the award of P200,000 for loss of profit. It cannot be denied that the fire
totally gutted respondents business; thus, respondent no longer had any business to operate. His loss of profit cannot
be shouldered by petitioner whose obligation is limited to the object of insurance, which was the stock-in-trade, and
not the expected loss in income or profit.

Neither can we approve the award of moral and exemplary damages. At the core of this case is petitioners
alleged breach of its obligation under a contract of insurance. Under Article 2220 of the Civil Code, moral damages
may be awarded in breaches of contracts where the defendant acted fraudulently or in bad faith. We find no such
fraud or bad faith. It must again be stressed that moral damages are emphatically not intended to enrich a plaintiff at
the expense of the defendant. Such damages are awarded only to enable the injured party to obtain means, diversion
or amusements that will serve to obviate the moral suffering he has undergone, by reason of the defendants culpable
action. Its award is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and it
must be proportional to the suffering inflicted. [14] When awarded, moral damages must not be palpably and
scandalously excessive as to indicate that it was the result of passion, prejudice or corruption on the part of the trial
court judge.[15]

The law[16] is likewise clear that in contracts and quasi-contracts the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Nothing thereof can be
attributed to petitioner which merely tried to resist what it claimed to be an unfounded claim for enforcement of the fire
insurance policy.

As to attorneys fees, the general rule is that attorneys fees cannot be recovered as part of damages because of
the policy that no premium should be placed on the right to litigate. [17] In short, the grant of attorneys fees as part of
damages is the exception rather than the rule; counsels fees are not awarded every time a party prevails in a suit. It
can be awarded only in the cases enumerated in Article 2208 of the Civil Code, and in all cases it must be
reasonable.[18] Thereunder, the trial court may award attorneys fees where it deems just and equitable that it be so
granted. While we respect the trial courts exercise of its discretion in this case, the award of P50,000 is unreasonable
and excessive. It should be reduced to P10,000.

WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the Court of Appeals in CA-
G.R. No. 40751 is hereby MODIFIED by a) deleting the awards of P200,000 for loss of profit, P200,000 as moral
damages and P100,000 as exemplary damages, and b) reducing the award of attorneys fees from P50,000
to P10,000.

No pronouncement as to costs.

SO ORDERED.

8
 FIRST DIVISION

[G.R. No. L-34768. February 24, 1984.]

JAMES STOKES, as Attorney-in-Fact of Daniel Stephen Adolfson and DANIEL STEPHEN
ADOLFSON, Plaintiffs-Appellees, v. MALAYAN INSURANCE CO., INC., Defendant-
Appellant.

Rodrigo M. Nera for Plaintiffs-Appellees.

Pio B. Salomon, Jr., for Defendant-Appellant.

SYLLABUS

1. MERCANTILE LAW; INSURANCE CONTRACT; COMPLIANCE WITH TERMS THEREOF, A CONDITION

PRECEDENT TO RECOVERY. A contract of insurance is a contract of indemnity upon the terms and conditions
specified therein. When the insurer is called upon to pay in case of loss or damage, he has the right to insist upon
compliance with the terms of the contract. If the insured cannot bring himself within the terms and conditions of the
9
contract, he is not entitled as a rule to recover for the loss or damage suffered. For the terms of the contract
constitute the measure of the insurers liability, and compliance therewith is a condition precedent to the right of
recovery. (Young v. Midland Textile Insurance Co., 30 Phil. 617.)

2. ID.; ID.; ID.; "AUTHORIZED DRIVER" CLAUSE, MEANING. Under the "authorized driver" clause, an authorized
driver must not only be permitted to drive by the insured. It is also essential that he is permitted under the law and
regulations to drive the motor vehicle and is not disqualified from so doing under any enactment or regulation. At the
time of the accident, Stokes had been in the Philippines for more than 90 days. Hence, under the law, he could not
drive a motor vehicle without a Philippine drivers license. He was therefore not an "authorized driver" under the
terms of the insurance policy in question, and MALAYAN was right in denying the claim of the insured.

3. ID.; ID.; ACCEPTANCE OF PREMIUM WITHIN THE STIPULATED PERIOD FOR PAYMENT DOES NOT ESTOP
INSURER FROM INTERPOSING ANY VALID DEFENSE. Acceptance of premium within the stipulated period for
payment thereof, including the agreed period of grace, merely assures continued effectivity of the insurance policy in
accordance with its terms. Such acceptance does not estop the insurer from interposing any valid defense under the
terms of the insurance policy.

4. CIVIL LAW; PRINCIPLE OF ESTOPPEL, DEFINED; NOT APPLICABLE TO CASE AT BAR. The principle of
estoppel is an equitable principle rooted upon natural justice which prevents a person from going back on his own
acts and representations to the prejudice of another whom he has led to rely upon them. The principle does not apply
to the instant case. In accepting the premium payment of the insured, MALAYAN was not guilty of any inequitable act
or representation. There is nothing inconsistent between acceptance of premium due under an insurance policy and
the enforcement of its terms.

DECISION

PLANA, J.:

This is an appeal by Malayan Insurance Company, Inc. (MALAYAN) from a decision of Court of First Instance of
Manila ordering it to pay the insured under a car insurance policy issued by MALAYAN to Daniel Stephen Adolfson
against own damage as well as third party liability.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

The facts are not in dispute, Adolfson had a subsisting MALAYAN car insurance policy with the above coverage on
November 23, 1969 when his car collided with a car owned by Cesar Poblete, resulting in damage to both vehicles.
At the time of the accident, Adolfsons car was being driven by James Stokes, who was authorized to do so by
Adolfson. Stokes, an Irish citizen who had been in the Philippines as a tourist for more than ninety days, had a valid
and subsisting Irish drivers license but without a Philippine drivers license.

After the collision, Adolfson filed a claim with MALAYAN but the latter refused to pay, contending that Stokes was not
an authorized driver under the "Authorized Driver" clause of the insurance policy in relation to Section 21 of the Land
Transportation and Traffic Code.

Under the insurance policy, "authorized driver" refers to

"(a) The insured

"(b) Any person driving on the insureds order or with his permission.

"PROVIDED that the person driving is permitted in accordance with the licensing or other laws or regulations to drive
the motor vehicle and is not disqualified from driving such motor vehicle by order of a court of law or by reason of any
enactment or regulation in that behalf."cralaw virtua1aw library

The cited Section 21 of the Land Transportation and Traffic Code provides:jgc:chanrobles.com.ph

"Operation of motor vehicles by tourists. Bona fide tourists and similar transients who are duly licensed to operate
motor vehicles in their respective countries may be allowed to operate motor vehicles during but not after ninety days
of their sojourn in the Philippines.
10
 x x x

"After ninety days, any tourist or transient desiring to operate motor vehicles shall pay fees and obtain and carry a
license as hereinafter provided." (Emphasis supplied.)

Unable to convince MALAYAN to pay, Stokes and Adolfson brought suit before the Court of First Instance of Manila
and succeeded in getting a favorable judgment, although Stokes had ceased to be authorized to drive a motor
vehicle in the Philippines at the time of the accident, he having stayed therein as a tourist for over 90 days without
having obtained a Philippine drivers license. The Court held that Stokes lack of a Philippine drivers license was not
fatal to the enforcement of the insurance policy; and the MALAYAN was estopped from denying liability under the
insurance policy because it accepted premium payment made by the insured one day after the accident. It
said:jgc:chanrobles.com.ph

"Defendant cannot evade liability under the policy by virtue of the above provision of the Land Transportation and
Traffic Code. This is an insurance case. The basis of insurance contracts is good faith and trust between the insurer
and the insured. The matter of the failure on the part of Stokes to have a Philippine drivers license is not such a
defect that can be considered as fatal to the contract of insurance, because the fact is that Stokes still had a valid and
unexpired Irish license. As a matter of fact, the traffic officer who investigated the incident gave Stokes a traffic
violation receipt and not a ticket for driving without license.

"Then the Court believes that defendant is in estoppel in this case because it allowed the plaintiff to pay the insurance
premium even after the accident occurred. Admitting for the sake of argument that there was a violation of the terms
of the policy before the incident, the admission or acceptance by the insurance company of the premium should be
considered as a waiver on its part to contest the claim of the plaintiffs."cralaw virtua1aw library

In this appeal, the two issues resolved by the court a quo are raised anew. We find the appeal meritorious.

1. A contract of insurance is a contract of indemnity upon the terms and conditions specified therein. When the
insurer is called upon to pay in case of loss or damage, he has the right to insist upon compliance with the terms of
the contract. If the insured cannot bring himself within the terms and conditions of the contract, he is not entitled as a
rule to recover for the loss or damage suffered. For the terms of the contract constitute the measure of the insurers
liability, and compliance therewith is a condition precedent to the right of recovery. (Young v. Midland Textile
Insurance Co., 30 Phil. 617.)

Under the "authorized driver" clause, an authorized driver must not only be permitted to drive by the insured. It is also
essential that he is permitted under the law and regulations to drive the motor vehicle and is not disqualified from so
doing under any enactment or regulation.chanrobles virtual lawlibrary

At the time of the accident, Stokes had been in the Philippines for more than 90 days. Hence, under the law, he could
not drive a motor vehicle without a Philippine drivers license. He was therefore not an "authorized driver" under the
terms of the insurance policy in question, and MALAYAN was right in denying the claim of the insured.cralawnad

2. Acceptance of premium within the stipulated period for payment thereof, including the agreed period of grace,
merely assures continued effectivity of the insurance policy in accordance with its terms. Such acceptance does not
estop the insurer from interposing any valid defense under the terms of the insurance policy.

The principle of estoppel is an equitable principle rooted upon natural justice which prevents a person from going
back on his own acts and representations to the prejudice of another whom he has led to rely upon them. The
principle does not apply to the instant case. In accepting the premium payment of the insured, MALAYAN was not
guilty of any inequitable act or representation. There is nothing inconsistent between acceptance of premium due
under an insurance policy and the enforcement of its terms.chanroblesvirtualawlibrary

WHEREFORE, the appealed judgment is reversed. The complaint is dismissed. Costs against the appellees.

SO ORDERED.

11
 FIRST DIVISION

[G.R. No. L-28772. September 21, 1983.]

ASSOCIATION OF BAPTISTS FOR WORLD EVANGELISM, INC., Plaintiff, v. FIELDMENS
INSURANCE CO., INC., Defendant-Appellant.

SYLLABUS

1. MERCANTILE LAW; INSURANCE; COMPREHENSIVE POLICY; UNLAWFUL AND WRONGFUL TAKING OF

VEHICLE FOR A JOY RIDE CONSTITUTES THEFT WITHIN THE MEANING OF INSURANCE POLICY;
RECOVERY FOR DAMAGE NOT BARRED BY THE ILLEGAL USE OF THE VEHICLE. The Comprehensive
Policy issued by the insurance company includes loss of or damage to the motor vehicle by "burglary . . . or theft." It
is settled that the act of Catiben in taking the vehicle for a joy ride to Toril, Davao City, constitutes theft within the
meaning of the insurance policy and that recovery for damage to the car is not barred by the illegal use of the car by
one of the station boys.

2. ID.; ID.; ID.; ID.; ID.; LIABILITY OF INSURER UNDER THE THEFT CLAUSE OF AN INSURANCE POLICY;

12
PRIOR CONVICTION NOT REQUIRED IN AN ACTION FOR RECOVERY ON AN AUTOMOBILE INSURANCE;
CASE AT BAR. There need be no prior conviction for the crime of theft to make an insurer liable under the theft
clause of the policy. Upon the facts stipulated by the parties it is admitted that Catiben had taken the vehicle for a joy
ride and while the same was in his possession he bumped it against an electric post resulting in damages. That act is
theft within a policy of insurance. In a civil action for recovery on an automobile insurance, the question whether a
person using a certain automobile at the time of the accident stole it or not is to be determined by a fair
preponderance of evidence and not by the rule of criminal law requiring proof of guilt beyond reasonable doubt
(Villacorta v. Insurance Commission, 100 SCRA 467 [1980]). Besides, there is no provision in the policy requiring
prior criminal conviction for theft.

RESOLUTION

MELENCIO-HERRERA, J.:

This case for "Indemnity for Damages and Attorneys Fees" was elevated to this Tribunal by the then Court of Appeals
on a question of law.

The Stipulation of Facts submitted by the parties before the Court of First Instance of Davao, Branch I, in Case No.
3789, reads as follows:jgc:chanrobles.com.ph

"COMES the parties in the above entitled case, through their respective counsels and to this Honorable Court
respectfully submit the following stipulations of facts:chanrob1es virtual 1aw library

1. That plaintiff is a religious corporation duly organized and registered under the laws of the Philippines, while
defendant is also a domestic corporation duly organized and existing under the laws of the Philippines;

2. That plaintiff, having an insurable interest in a Chevrolet Carry-all, 1955 Model, with Motor No. 032433272555 and
Plate No. E-73317 covered by Registration Certificate No. 288141 Rizal, issued by the Davao Motor Vehicles Office
Agency No. 20 and owned by Reverend Clinton Bonnel, insured said vehicle with the defendant under Fieldmens
Insurance Co., Inc. Private Car Comprehensive Policy No. 22 Jl 1107, attached hereto as Annex A to A-2 against
loss or damage up to the amount of P5,000.00;

3. That in the latter part of 1961, through plaintiffs representative, Dr. Antonio Lim, the aforementioned Chevrolet
Carry-all was placed at the Jones Monument Mobilgas Service Station at Davao City, under the care of said stations
operator, Rene Te so that said carry-all could be displayed as being for sale, with the understanding that the latter or
any of his station boys would receive a 2% commission should they sell said vehicle.

4. That on the night of January 18, 1962, Romeo Catiben one of the boys at the aforementioned Jones Monument
Service Station and a nephew of the wife of Rene Te who is residing with them, took the aforementioned chevrolet
carry-all for a joy ride to Toril, Davao City, without the prior permission, authority or consent of either the plaintiff or its
representative Dr. Antonio Lim, or of Rene Te, and on its way back to Davao City, said vehicle, due to some
mechanical defect accidentally bumped an electric post causing actual damages valued at P5,518.61.

5. That the issue before the Honorable Court is whether or not for the damage to the abovementioned Chevrolet
Carry-all to be compensable under the aforementioned Fieldmens Private Car Comprehensive Policy No. 22 JL
11107, there must be a prior criminal conviction of Romeo Catiben for theft.

WHEREFORE, it is respectfully prayed that this Honorable Court render judgment on the facts and issues above
stipulated after the parties shall have submitted their respective memoranda."cralaw virtua1aw library

The Trial Court rendered judgment based on the facts stipulated and ordered defendant insurance company to pay
plaintiff association the amount of P5,000.00 as indemnity for the damage sustained by the vehicle, P2,000.00 for
attorneys fees, and costs. Dissatisfied, the insurance company interposed an appeal to the Appellate Court,
docketed as CA-G.R. No. 33543-R, which as above stated, elevated it to this instance.chanrobles.com:cralaw:red

We affirm. The Comprehensive Policy issued by the insurance company includes loss of or damage to the motor
vehicle by "burglary . . . or theft." It is settled that the act of Catiben in taking the vehicle for a joy ride to Toril, Davao
13
City, constitutes theft within the meaning of the insurance policy and that recovery for damage to the car is not barred
by the illegal use of the car by one of the station boys.

". . . where a car is admittedly as in this case unlawfully and wrongfully taken by some people, be they employees of
the car shop or not to whom it had been entrusted, and taken on a long trip to Montalban without the owners consent
or knowledge, such taking constitutes or partakes of the nature of theft as defined in Article 308 of the Revised Penal
Code, viz.(W)ho are liable for theft. Theft is committed by any person who, with intent to gain but without violence
against or intimidation of persons nor force upon things, shall take personal property of another without the latters
consent, for purposes of recovering the loss under the policy in question."cralaw virtua1aw library

". . . the Court sustains as the better view that which holds that when a person, either with the object of going to a
certain place, or learning how to drive, or enjoying a free ride, takes possession of a vehicle belonging to another,
without the consent of its owner, he is guilty of theft because by taking possession of the personal property belonging
to another and using it, his intent to gain is evident since he derives therefrom utility, satisfaction, enjoyment and
pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds that the use of a thing constitutes gain and
Cuello Calon who calls it hurto de uso. 1

There need be no prior conviction for the crime of theft to make an insurer liable under the theft clause of the policy.
Upon the facts stipulated by the parties it is admitted that Catiben had taken the vehicle for a joy ride and while the
same was in his possession he bumped it against an electric post resulting in damages. That act is theft within a
policy of insurance. In a civil action for recovery on an automobile insurance, the question whether a person using a
certain automobile at the time of the accident stole it or not is to be determined by a fair preponderance of evidence
and not by the rule of criminal law requiring proof of guilt beyond reasonable doubt. 2 Besides, there is no provision in
the policy requiring prior criminal conviction for theft.chanroblesvirtualawlibrary

ACCORDINGLY, finding no error in the judgment appealed from, the same is hereby affirmed.

Costs against defendant Fieldmens Insurance Co., Inc.

SO ORDERED.

FIRST DIVISION

[G.R. No. L-38613. February 25, 1982.]

PACIFIC TIMBER EXPORT CORPORATION, Petitioner, v. THE HONORABLE COURT OF
APPEALS and WORKMENS INSURANCE COMPANY, INC., Respondents.
Jose J. Ferrer, Jr. & Augusto Z. Fajardo for Petitioner.

Augustin J. Guillermo for respondent Workmens Ins. Co., Inc.

SYNOPSIS

After respondent insurance company issued to petitioner a Cover Note for the temporary insurance of 1,250,000
board feet of logs for exportation to Okinawa and Japan, which included loss during loading operations, but before
the issuance of the regular marine cargo policies which covered only loss during transit, thirty pieces of said logs
were lost while being loaded in petitioners vessel. Petitioner sought to recover the loss but private respondent
refused on the ground that although said loss was covered under the Cover Note, nevertheless, the same became
null and void upon the issuance of the marine policies which did not cover said loss. The Court of First Instance of
Manila rendered a decision in favor of petitioner but on appeal, said decision was reversed by the Court of
Appeals.chanroblesvirtual|awlibrary
14
 On review, the Supreme Court held that a Cover Note is not a mere application for insurance but in a real sense a
contract to be integrated to the regular policies subsequently issued and the fact that no separate premium was paid
on the Cover Note before the loss occurred does not militate against recovery thereunder.

Appealed decision, set aside.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE; COVER NOTE; NO SEPARATE PREMIUMS ARE REQUIRED TO BE PAID
THEREON. The fact that no separate premium was paid on the Cover Note before the loss insured against
occurred, does not militate against the validity of petitioners contention that the Cover Note is not without a
consideration, for no such premium could have been paid, since by the nature of the Cover Note it did not contain, as
all Cover Notes do not contain, particulars of the shipment that would serve as basis for the computation of the
premiums. As a logical consequence, no separate premiums are intended or required to be paid on a Cover Note.

2. ID.; ID.; ID.; A CONTRACT AND NOT A MERE APPLICATION FOR INSURANCE; DEEMED INTEGRATED TO
THE REGULAR POLICIES SUBSEQUENTLY ISSUED. Where the note is to be treated as a separate policy
instead of integrating it to the regular policies subsequently issued, the purpose and function of the Cover Note would
be set at naught or rendered meaningless, for it is in a real sense a contract, not a mere application for insurance
which is a mere offer.

3. ID.; ID.; ID.; RISK INSURED AGAINST NOT INCLUDED IN THE REGULAR MARINE INSURANCE POLICIES;
IMMATERIAL AS LOSS CAN BE DETERMINED INDEPENDENTLY; CASE AT BAR. While it may be true that the
marine insurance policies issued were for logs no longer including those which had been lost during loading
operations, this had to be so because the risk insured against is not for loss during loading operations anymore, but
for loss during transit, the logs having already been safely placed aboard. This would make no difference, however,
insofar as the liability on the cover note is concerned, for the number or volume of logs lost can be determined
independently, as in fact it had been so ascertained as the instance of private respondent itself when it sent its own
adjuster to investigate and assess the lost, after the issuance of the marine insurance policies.

4. ID.; ID.; ID.; FUNCTIONS AS A "BINDER" ; SUPPORTED BY PRESUMPTION OF VALIDITY OF POLICY

DELIVERED WITHOUT REQUIRING PAYMENT OF THE PREMIUM. Now payment of premium on the Cover
Note is no cause for the petitioner to lose what is due it as if there had been payment of premium, for non-payment
by it was not chargeable against its fault. This is how the cover note as a "binder" should legally operate; otherwise, it
would serve no practical purpose in the realm of commerce, and is supported by the doctrine that where a policy is
delivered without requiring payment of the premium, the presumption is that a credit was intended and policy is valid
(Miller v. Brooklyn L. Inc., Co. (U.S.) 12 Wall, 285, 20 Led. 39 Am. Jur. New Insurance Sec. 1845, p. 907, note 2;
Sec. 1079, p. 246, note 20.).

5. ID.; ID.; CLAIM ON THE INSURANCE AGREEMENT; DEFENSE OF DELAY MUST BE PROMPTLY AND
SPECIFICALLY ASSERTED; CASE AT BAR. Section 84 of the Insurance Act requires that the ground of delay
must be promptly and specifically asserted when a claim on the insurance agreement is made. The nature of this
specific ground for resisting a claim places the insurer on duty to inquire when the loss took place, so that it could
determine whether delay would be a valid ground upon which to object to a claim against it. In the case at bar, where
the undisputed facts show that instead of invoking the ground of delay in objecting to petitioners claim of recovery on
the cover note, respondent company took steps clearly indicative that this particular ground for objection to the claim
was never in its mind, the Supreme Court is satisfied and convinced, even on the assumption that there was delay,
that waiver can successfully be raised against private Respondent.

DECISION

DE CASTRO, J.:

This petition seeks the review of the decision of the Court of Appeals reversing the decision of the Court of First
Instance of Manila in favor of petitioner and against private respondent which ordered the latter to pay the sum of
P11,042.04 with interest at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the complete
15
payment, the sum of P3,000.00 as attorneys fees and the costs 1 thereby dismissing petitioners complaint with
costs. 2chanroblesvirtual|awlibrary

The findings of fact of the Court of Appeals, which are generally binding upon this Court, except as shall be indicated
in the discussion of the opinion of this Court the substantial correctness of such particular finding having been
disputed, thereby raising a question of law reviewable by this Court 3 are as follows:jgc:chanrobles.com.ph

"On March 19, 1963, the plaintiff secured temporary insurance from the defendant for its exportation of 1,250,000
board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan Bay, Quezon Province to Okinawa
and Tokyo, Japan. The defendant issued on said date Cover Note No. 1010, insuring the said cargo of the plaintiff
"Subject to the Terms and Conditions of the WORKMENS INSURANCE COMPANY, INC. printed Marine Policy form
as filed with and approved by the Office of the Insurance Commissioner" (Exhibit A).

"The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2, 1963. The two
marine policies bore the numbers of 53 HO 1032 and 53 HO 1033 (Exhibits B and C, respectively). Policy No. 53 HO
1032 (Exhibit B) was for 542 pieces of logs equivalent to 499,950 board feet. Policy No. 53 HO 1033 was for 853
pieces of logs equivalent to 695, 548 board feet (Exhibit C). The total cargo insured under the two marine policies
accordingly consisted of 1,395 logs, or the equivalent of 1,195,498 bd. ft.

"After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine policies Nos. 53
HO 1032 and 53 HO 1033, some of the logs intended to be exported were lost during loading operations in the
Diapitan Bay. The logs were to be loaded on the SS Woodlock which Docked about 500 meters from the shortline of
the Diapitan Bay. The logs were taken from the log pond of the plaintiff and from which they were towed in rafts to the
vessel. At about 10:00 oclock a.m. on March 29, 1963, while the logs were alongside the vessel, bad weather
developed resulting in 75 pieces of logs which were rafted together to break loose from each other 45 pieces of logs
were salvaged, but 30 pieces were verified to have been lost or washed away as a result of the accident.

"In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of approximately 32 pieces of logs
during loading of the SS Woodlock. The said letter (Exhibit F) reads as follows:chanrob1es virtual 1aw library

April 4, 1963

Workmens Insurance Company, Inc.

Manila, Philippines

Gentlemen:chanrob1es virtual 1aw library

This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft., Philippine Lauan and Apitong
Logs. We would like to inform you that we have received advance preliminary report from our Office in Diapitan,
Quezon that we have lost approximately 32 pieces of logs during loading of the S.S. Woodlock.

We will send you an accurate report all the details including values as soon as same will be reported to us.

Thank you for your attention, we wish to remain.

Very respectfully yours,

PACIFIC TIMBER EXPORT CORPORATION

(Sgd). EMMANUEL S.ATILANO

Asst. General Manager

Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15, 1963, as shown
by the stamp impression appearing on the left bottom corner of said letter. The plaintiff subsequently submitted a
Claim Statement demanding payment of the loss under Policies Nos. 53 HO 1033, and 53 HO 1033, in the total
amount of P19,286.79 (Exhibit G).

"On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect the loss and
assess the damage. The adjustment company submitted its Report on August 23, 1963 (Exhibit H). In said report,

16
the adjuster found that the loss of 30 pieces of logs is not covered by Policies Nos. 53 HO 1032 and 1033 inasmuch
as said policies covered the actual number of logs loaded on board the SS Woodlock. However, the loss of 30
pieces of logs is within the 1,250,000 bd. ft. covered by Cover Note No. 1010 insured for $70,000.00.

"On September 14, 1963, the adjustment company submitted a computation of the defendants probable liability on
the loss sustained by the shipment, in the total amount of P11,042.04 (Exhibit 4).

"On January 13, 1964, the defendant wrote the plaintiff denying the latters claim, on the ground that defendants
investigation revealed that the entire shipment of logs covered by the two marine policies No. 53 HO 1032 and 53 HO
1033 were received in good order at their point of destination. It was further stated that the said loss may not be
considered as covered under Cover Note No. 1010 because the said Note had become null and void by virtue of the
issuance of Marine Policy Nos. 53 HO 1032 and 1033 (Exhibit J-1). The denial of the claim by the defendant was
brought by the plaintiff to the attention of the Insurance Commissioner by means of a letter dated March 21, 1964
(Exhibit K). In a reply letter dated March 30, 1964, Insurance Commissioner Francisco Y. Mandanas observed that it
is only fair and equitable to indemnify the insured under Cover Note No. 1010, and advised early settlement of the
said marine loss and salvage claim (Exhibit L).

"On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their attorneys, the claim
of the plaintiff is being denied on the ground that the cover note is null and void for lack of valuable consideration
(Exhibit M)." 4

Petitioner assigned as errors of the Court of Appeals, the following:chanrob1es virtual 1aw library
I

"THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND VOID FOR LACK OF
VALUABLE CONSIDERATION BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT PREMIUMS
FOR THE COMPREHENSIVE INSURANCE COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY
PETITIONER AND THAT NO SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS
COVER NOTES.
II

"THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS RELEASED FROM
LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS
BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT PRIVATE RESPONDENT DID NOT
PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF
LOSS AND, CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE
INSURANCE ACT." 5

1. Petitioner contends that the Cover Note was issued with a consideration when, by express stipulation, the cover
note is made subject to the terms and conditions of the marine policies, and the payment of premiums is one of the
terms of the policies. From this undisputed fact, We uphold petitioners submission that the Cover Note was not
without consideration for which the respondent court held the Cover Note as null and void, and denied recovery
therefrom. The fact that no separate premium was paid on the Cover Note before the loss insured against occurred,
does not militate against the validity of petitioners contention, for no such premium could have been paid, since by
the nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the shipment that
would serve as basis for the computation of the premiums. As a logical consequence, no separate premiums are
intended or required to be paid on a Cover Note. This is a fact admitted by an official of respondent company, Juan
Jose Camacho, in charge of issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965).

At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement issued by
private respondent after the issuance of the two regular marine insurance policies, thereby leaving no account unpaid
by petitioner due on the insurance coverage, which must be deemed to include the Cover Note. If the Note is to be
treated as a separate policy instead of integrating it to the regular policies subsequently issued, the purpose and
function of the Cover Note would be set at naught or rendered meaningless, for it is in a real sense a contract, not a
mere application for insurance which is a mere offer. 6

It may be true that the marine insurance policies issued were for logs no longer including those which had been lost
during loading operations. This had to be so because the risk insured against is not for loss during loading operations

17
anymore, but for loss during transit, the logs having already been safely placed aboard. This would make no
difference, however, insofar as the liability on the cover note is concerned, for the number or volume of logs lost can
be determined independently, as in fact it had been so ascertained at the instance of private respondent itself when it
sent its own adjuster to investigate and assess the loss, after the issuance of the marine insurance
policies.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

The adjuster went as far as submitting his report to respondent, as well as its computation of respondents liability on
the insurance coverage. This coverage could not have been no other than what was stipulated in the Cover Note, for
no loss or damage had to be assessed on the coverage arising from the marine insurance policies. For obvious
reasons, it was not necessary to ask petitioner to pay premium on the Cover Note, for the loss insured against having
already occurred, the more practical procedure is simply to deduct the premium from the amount due the petitioner
on the Cover Note. The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose
what is due it as if there had been payment of premium, for non-payment by it was not chargeable against its fault.
Had all the logs been lost during the loading operations, but after the issuance of the Cover Note, liability on the note
would have already arisen even before payment of premium. This is how the cover note as a "binder" should legally
operate; otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine
that where a policy is delivered without requiring payment of the premium, the presumption is that a credit was
intended and policy is valid. 7

2. The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The law requires
this ground of delay to be promptly and specifically asserted when a claim on the insurance agreement is made. The
undisputed facts show that instead of invoking the ground of delay in objecting to petitioners claim of recovery on the
cover note, it took steps clearly indicative that this particular ground for objection to the claim was never in its mind.
The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took place,
so that it could determine whether delay would be a valid ground upon which to object to a claim against it.

As already stated earlier, private respondents reaction upon receipt of the notice of loss, which was on April 15,
1963, was to set in motion from July 1963 what would be necessary to determine the cause and extent of the loss,
with a view to the payment thereof on the insurance agreement. Thus it sent its adjuster to investigate and assess the
loss in July, 1963. The adjuster submitted his report on August 23, 1963 and his computation of respondents liability
on September 14, 1963. From April 15,1963 to July 1963, enough time was available for private respondent to
determine if petitioner was guilty of delay in communicating the loss to respondent company. In the proceedings that
took place later in the Office of the Insurance Commissioner, private respondent should then have raised this ground
of delay to avoid liability. It did not do so. It must be because it did not find any delay, as this Court fails to find a real
and substantial sign thereof. But even on the assumption that there was delay, this Court is satisfied and convinced
that as expressly provided by law, waiver can successfully be raised against private Respondent. Thus Section 84 of
the Insurance Act provides:chanrobles.com.ph : virtual law library

"Section 84. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his
or if he omits to take objection promptly and specifically upon that ground."cralaw virtua1aw library

From what has been said, We find duly substantiated petitioners assignments of error.

ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is reinstated in toto
with the affirmance of this Court. No special pronouncement as to costs.

SO ORDERED.

18
 FIRST DIVISION

[G.R. No. 82036. May 22, 1997.]

TRAVELLERS INSURANCE & SURETY CORPORATION, Petitioner, v. HON. COURT OF
APPEALS and VICENTE MENDOZA, Respondents.
Espinas & Associates Law Office for Petitioner.

Carlos A. Tria for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE; CONTRACT OR POLICY; NECESSITY OF AFFIXING A COPY THEREOF TO

COMPLAINT; CASE AT BENCH. When private respondent filed his amended complaint to implead petitioner as

19
party defendant and therein alleged that petitioner was the third-party liability insurer of the Lady Love taxicab that
fatally hit private respondents mother, private respondent did not attach a copy of the insurance contract to the
amended complaint. Private respondent does not deny this omission. It is significant to point out at this juncture that
the right of a third person to sue the insurer depends on whether the contract of insurance is intended to benefit third
persons also or only the insured. . . Since private respondent failed to attach a copy of the insurance contract to his
complaint, the trial court could not have been able to apprise itself of the real nature and pecuniary limits of
petitioners liability. More importantly, the trial court could not have possibly ascertained the right of private
respondent as third person to sue petitioner as insurer of the Lady Love taxicab because the trial court never saw nor
read the insurance contract and learned of its terms and conditions. Petitioner, understandably, did not volunteer to
present any insurance contract covering the Lady Love taxicab that fatally hit private respondents mother,
considering that petitioner precisely presented the defense of lack of insurance coverage before the trial court.
Neither did the trial court issue a subpoena duces tecum to have the insurance contract produced before it under
pain of contempt. We thus find hardly a basis in the records for the trial court to have validly found petitioner liable
jointly and severally with the owner and the driver of the Lady Love taxicab, for damages accruing to
private Respondent.

2. ID.; ID.; ID.; LIABILITY BASED ON CONTRACT DISTINGUISHED FROM LIABILITY BASED ON TORTS AND
QUASI-DELICTS; CASE AT BAR. Apparently, the trial court did not distinguish between the private respondents
cause of action against the owner and the driver of the Lady Love taxicab and his cause of action against petitioner.
The former is based on torts and quasi-delicts while the latter is based on contract. Confusing these two sources of
obligations as they arise from the same act of the taxicab fatally hitting private respondents mother, and in the face of
overwhelming evidence of the reckless imprudence of the driver of the Lady Love taxicab, the trial court brushed
aside its ignorance of the terms and conditions of the insurance contract and forthwith found all three the driver of
the taxicab, the owner of the taxicab, and the alleged insurer of the taxicab jointly and severally liable for actual,
moral and exemplary damages as well as attorneys fees and litigation expenses. This is clearly a misapplication of
the law by the trial court and respondent appellate court grievously erred in not having reversed the trial court on this
ground.

3. ID.; ID.; ID.; INSURERS LIABILITY BASED THEREON LIMITED TO P50,000.00 IN CASE AT BAR. Assuming
arguendo that petitioner is the insurer of the Lady Love taxicab in question, its liability is limited to only P50,000.00,
this being its standard amount of coverage in vehicle insurance policies. It bears repeating that no copy of the
insurance contract was ever proffered before the trial court by the private respondent, notwithstanding knowledge of
the fact that the latters complaint against petitioner is one under a written contract. Thus, the trial court proceeded to
hold petitioner liable for an award of damages exceeding its limited liability of P50,000.00. This only shows beyond
doubt that the trial court was under the erroneous presumption that petitioner could be found liable absent proof of
contract and based merely on the proof of reckless imprudence on the part of the driver of the Lady Love taxicab that
fatally hit private respondents mother.

4. ID.; ID.; NOTICE OF CLAIM; AN INDISPENSABLE PRE-REQUISITE TO SUE UNDER AN INSURANCE

CONTRACT; REASONS; CASE AT BENCH. Petitioner did not tire in arguing before the trial court and the
respondent appellate court that, assuming arguendo that it had issued the insurance contract over the Lady Love
taxicab, private respondents cause of action against petitioner did not successfully accrue because he failed to file
with petitioner a written notice of claim within six (6) months from the date of the accident as required by Section 384
of the Insurance Code. . . We have certainly ruled with consistence, that the prescriptive period to bring suit in court
under an insurance policy, begins to run front the date of the insurers rejection of the claim filed by the insured, the
beneficiary or any person claiming under an insurance contract. This ruling is premised upon the compliance by the
persons suing under an insurance contract, with the indispensable requirement of having filed the written claim
mandated by Section 384 of the Insurance Code before and after its amendment. Absent such written claim filed by
the person suing under an insurance contract, no cause of action accrues under such insurance contract, considering
that it is the rejection of that claim that triggers the running of the one-year prescriptive period to bring suit in court,
and there can be no opportunity for the insurer to even reject a claim if none has been filed in the first place, as in the
instant case.

DECISION

HERMOSISIMA, JR., J.:

20
The petition herein seeks the review and reversal of the decision 1 of respondent Court of Appeals 2 affirming in toto
the judgment 3 of the Regional Trial Court 4 in an action for damages 5 filed by private respondent Vicente Mendoza,
Jr. as heir of his mother who was killed in a vehicular accident.

Before the trial court, the complainant lumped the erring taxicab driver, the owner of the taxicab, and the alleged
insurer of the vehicle which featured in the vehicular accident into one complaint. The erring taxicab was allegedly
covered by a third-party liability insurance policy issued by petitioner Travellers Insurance & Surety Corporation.
cdtech

The evidence presented before the trial court established the following facts:jgc:chanrobles.com.ph

"At about 5:30 oclock in the morning of July 20, 1980, a 78-year old woman by the name of Feliza Vineza de
Mendoza was on her way to hear mass at the Tayuman Cathedral. While walking along Tayuman corner Gregorio
Perfecto Streets, she was bumped by a taxi that was running fast. Several persons witnessed the accident, among
whom were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno. After the bumping, the old woman was seen
sprawled on the pavement. Right away, the good Samaritan that he was, Marvilla ran towards the old woman and
held her on his lap to inquire from her what had happened, but obviously she was already in shock and could not talk.
At this moment, a private jeep stopped. With the driver of that vehicle, the two helped board the old woman on the
jeep and brought her to the Mary Johnston Hospital in Tondo.

. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street from Pritil, Tondo, to Rizal Avenue
and vice-versa, also witnessed the incident. It was on his return trip from Rizal Avenue when Lopez saw the plaintiff
and his brother who were crying near the scene of the accident. Upon learning that the two were the sons of the old
woman, Lopez told them what had happened. The Mendoza brothers were then able to trace their mother at the Mary
Johnston Hospital where they were advised by the attending physician that they should bring the patient to the
National Orthopedic Hospital because of her fractured bones. Instead, the victim was brought to the U.S.T. Hospital
where she expired at 9:00 oclock that same morning. Death was caused by traumatic shock as a result of the
severe injuries she sustained. . . .

. . . The evidence shows that at the moment the victim was bumped by the vehicle, the latter was running fast, so
much so that because of the strong impact the old woman was thrown away and she fell on the pavement. . . . In
truth, in that related criminal case against defendant Dumlao . . . the trial court found as a fact that therein accused
was driving the subject taxicab in a careless, reckless and imprudent manner and at a speed greater than what was
reasonable and proper without taking the necessary precaution to avoid accident to persons . . . considering the
condition of the traffic at the place at the time aforementioned. . . Moreover, the driver fled from the scene of the
accident and without rendering assistance to the victim. . . .

. . . Three (3) witnesses who were at the scene at the time identified the taxi involved, though not necessarily the
driver thereof. Marvilla saw a lone taxi speeding away just after the bumping which, when it passed by him, said
witness noticed to be a Lady Love Taxi with Plate No. 438, painted maroon, with baggage bar attached on the
baggage compartment and with an antenae[sic] attached at the right rear side. The same descriptions were revealed
by Ernesto Lopez, who further described the taxi to have . . . reflectorized decorations on the edges of the glass at
the back. . . . A third witness in the person of Eulogio Tabalno . . . made similar descriptions although, because of the
fast speed of the taxi, he was only able to detect the last digit of the plate number which is 8. . . . [T]he police
proceeded to the garage of Lady Love Taxi and then and there they took possession of such a taxi and later
impounded it in the impounding area of the agency concerned. . . . [T]he eyewitnesses . . . were unanimous in
pointing to that Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.

. . . During the investigation, defendant Armando Abellon, the registered owner of Lady Love Taxi bearing No. 438-HA
Pilipinas Taxi 1980, certified to the fact that the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao . . . It
was on the basis of this affidavit of the registered owner that caused the police to apprehend Rodrigo Dumlao, and
consequently to have him prosecuted and eventually convicted of the offense . . . [S]aid Dumlao absconded in that
criminal case, specially at the time of the promulgation of the judgment therein so much so that he is now a fugitive
from justice." 6

Private respondent filed a complaint for damages against Armando Abellon as the owner of the Lady Love Taxi and
Rodrigo Dumlao as the driver of the Lady Love taxicab that bumped private respondents mother. Subsequently,
private respondent amended his complaint to include petitioner as the compulsory insurer of the said taxicab under
Certificate of Cover No. 1447785-3.

21
After trial, the trial court rendered judgment in favor of private respondent, the dispositive portion of which
reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more particularly the Heirs of the late Feliza
Vineza de Mendoza, and against defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and Surety
Corporation, by ordering the latter to pay, jointly and severally, the former the following amounts:chanrob1es virtual
1aw library

(a) The sum of P2,924.70, as actual and compensatory damages, with interest thereon at the rate of 12% per annum
from October 17, 1980, when the complaint was filed, until the said amount is fully paid;

(b) P30,000.00 as death indemnity;

(c) P25,000.00 as moral damages;

(d) P10,000.00 as by way of corrective or exemplary damages, and

(e) Another P10,000.00 by way of attorneys fees and other litigation expenses.

Defendants are further ordered to pay, jointly and severally, the costs of this suit.

SO ORDERED." 7

Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The decision of the trial court
was affirmed by respondent appellate court. Petitioners Motion for Reconsideration 8 of September 22, 1987 was
denied in a Resolution 479 dated February 9, 1988.

Hence this petition.

Petitioner mainly contends that it did not issue an insurance policy as compulsory insurer of the Lady Love Taxi and
that, assuming arguendo that it had indeed covered said taxicab for third-party liability insurance, private respondent
failed to file a written notice of claim with petitioner as required by Section 384 of P.D. No. 612, otherwise known as
the Insurance Code.

We find the petition to be meritorious.

I

When private respondent filed his amended complaint to implead petitioner as party defendant and therein alleged
that petitioner was the third-party liability insurer of the Lady Love taxicab that fatally hit private respondents mother,
private respondent did not attach a copy of the insurance contract to the amended complaint. Private respondent
does not deny this omission.

It is significant to point out at this juncture that the right of a third person to sue the insurer depends on whether the
contract of insurance is intended to benefit third persons also or only the insured.

" [A]" policy . . . whereby the insurer agreed to indemnify the insured against all sums . . . which the Insured shall
become legally liable to pay in respect of: (a) death of or bodily injury to any person . . . is one for indemnity against
liability; from the fact then that the insured is liable to the third person, such third person is entitled to sue the insurer.

The right of the person injured to sue the insurer of the party at fault (insured), depends on whether the contract of
insurance is intended to benefit third persons also or on the insured. And the test applied has been this: Where the
contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable can
sue the insurer. Where the contract is for indemnity against actual loss or payment, then third persons cannot
proceed against the insurer, the contract being solely to reimburse the insured for liability actually discharged by him
thru payment to third persons, said third persons recourse being thus limited to the insured alone." 10

Since private respondent failed to attach a copy of the insurance contract to his complaint, the trial court could not
have been able to apprise itself of the real nature and pecuniary limits of petitioners liability. More importantly, the
trial court could not have possibly ascertained the right of private respondent as third person to sue petitioner as

22
insurer of the Lady Love taxicab because the trial court never saw nor read the insurance contract and learned of its
terms and conditions.

Petitioner, understandably, did not volunteer to present any insurance contract covering the Lady Love taxicab that
fatally hit private respondents mother, considering that petitioner precisely presented the defense of lack of insurance
coverage before the trial court. Neither did the trial court issue a subpoena duces tecum to have the insurance
contract produced before it under pain of contempt.

We thus find hardly a basis in the records for the trial court to have validly found petitioner liable jointly and severally
with the owner and the driver of the Lady Love taxicab, for damages accruing to private Respondent.

Apparently, the trial court did not distinguish between the private respondents cause of action against the owner and
the driver of the Lady Love taxicab and his cause of action against petitioner. The former is based on torts and quasi-
delicts while the latter is based on contract. Confusing these two sources of obligations as they arise from the same
act of the taxicab fatally hitting private respondents mother, and in the face of overwhelming evidence of the reckless
imprudence of the driver of the Lady Love taxicab, the trial court brushed aside its ignorance of the terms and
conditions of the insurance contract and forthwith found all three the driver of the taxicab, the owner of the taxicab,
and the alleged insurer of the taxicab jointly and severally liable for actual, moral and exemplary damages as well
as attorneys fees and litigation expenses. This is clearly a misapplication of the law by the trial court, and respondent
appellate court grievously erred in not having reversed the trial court on this ground.chanrobles law library

"While it is true that where the insurance contract provides for indemnity against liability to third persons, such third
persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third-
party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties
found at fault. The liability of the insurer is based on contract; that of the insured is based on tort." 11

Applying this principle underlying solidary obligation and insurance contracts, we ruled in one case
that:jgc:chanrobles.com.ph

"In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other
hand, insurance is defined as a contract whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event.

In the case at bar, the trial court held petitioner together with respondents Sio Choy and Leon Rice Mills Inc. solidarily
liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioners 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 P29,103.00, 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." 12

The above principles take on more significance in the light of the counter-allegation of petitioner that, assuming
arguendo that it is the insurer of the Lady Love taxicab in question, its liability is limited to only P50,000.00, this being
its standard amount of coverage in vehicle insurance policies. It bears repeating that no copy of the insurance
contract was ever proffered before the trial court by the private respondent, notwithstanding knowledge of the fact
that the latters complaint against petitioner is one under a written contract. Thus, the trial court proceeded to hold
petitioner liable for an award of damages exceeding its limited liability of P50,000.00. This only shows beyond doubt
that the trial court was under the erroneous presumption that petitioner could be found liable absent proof of the
contract and based merely on the proof of reckless imprudence on the part of the driver of the Lady Love taxicab that
fatally hit private respondents mother.
II

Petitioner did not tire in arguing before the trial court and the respondent appellate court that, assuming arguendo
that it had issued the insurance contract over the Lady Love taxicab, private respondents cause of action against
petitioner did not successfully accrue because he failed to file with petitioner a written notice of claim within six (6)
months from the date of the accident as required by Section 384 of the Insurance Code.

At the time of the vehicular incident which resulted in the death of private respondents mother, during which time the

23
Insurance Code had not yet been amended by Batas Pambansa (B.P.) Blg. 874, Section 384 provided as
follows:jgc:chanrobles.com.ph

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

In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman, 13 we ruled that the one year
prescription period to bring suit in court against the insurer should be counted from the time that the insurer rejects
the written claim filed therewith by the insured, the beneficiary or the third person interested under the insurance
policy. We explained:jgc:chanrobles.com.ph

"It is very obvious that petitioner company is trying to use Section 384 of the Insurance Code as a cloak to hide itself
from its liabilities. The facts of these cases evidently reflect the deliberate efforts of petitioner company to prevent the
filing of a formal action against it. Bearing in mind that if it succeeds in doing so until one year lapses from the date of
the accident it could set up the defense of prescription, petitioner company made private respondents believe that
their claims would be settled in order that the latter will not find it necessary to immediately bring suit. In violation of
its duties to adopt and implement reasonable standards for the prompt investigation of claims and to effectuate
prompt, fair and equitable settlement of claims, and with manifest bad faith, petitioner company devised means and
ways of stalling the settlement proceedings. . . . [No] steps were taken to process the claim and no rejection of said
claim was ever made even if private respondent had already complied with all the requirements. . . .

This Court has made the observation that some insurance companies have been inventing excuses to avoid their just
obligations and it is only the State that can give the protection which the insuring public needs from possible abuses
of the insurers." 14

It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to categorically provide that
"action or suit for recovery of damage due to loss or injury must be brought in proper cases, with the Commissioner
or the Courts within one year from denial of the claim, otherwise the claimants right of action shall prescribe"
[Emphasis ours]. 15

We have certainly ruled with consistency that the prescriptive period to bring suit in court under an insurance policy,
begins to run from the date of the insurers rejection of the claim filed by the insured, the beneficiary or any person
claiming under an insurance contract. This ruling is premised upon the compliance by the persons suing under an
insurance contract, with the indispensable requirement of having filed the written claim mandated by Section 384 of
the Insurance Code before and after its amendment. Absent such written claim filed by the person suing under an
insurance contract, no cause of action accrues under such insurance contract, considering that it is the rejection of
that claim that triggers the running of the one-year prescriptive period to bring suit in court, and there can be no
opportunity for the insurer to even reject a claim if none has been filed in the first place, as in the instant
case.chanroblesvirtual|awlibrary

"The one-year period should instead be counted from the date of rejection by the insurer as this is the time when the
cause of action accrues. . .

In Eagle Star Insurance Co., Ltd., Et. Al. v. Chia Yu, this Court ruled:chanrob1es virtual 1aw library

The plaintiffs cause of action did not accrue until his claim was finally rejected by the insurance company. This is
because, before such final rejection, there was no real necessity for bringing suit.

The philosophy of the above pronouncement was pointed out in the case of ACCFA v. Alpha Insurance and Surety
Co., viz.:chanrob1es virtual 1aw library

Since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative
obligation of the defendant but also an act or omission of the defendant in violation of said legal right, the cause of
action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty." 16

When petitioner asseverates, thus, that no written claim was filed by private respondent and rejected by petitioner,

24
and private respondent does not dispute such asseveration through a denial in his pleadings, we are constrained to
rule that respondent appellate court committed reversible error in finding petitioner liable under an insurance contract
the existence of which had not at all been proven in court. Even if there were such a contract, private respondents
cause of action can not prevail because he failed to file the written claim mandated by Section 384 of the Insurance
Code. He is deemed, under this legal provision, to have waived his rights as against petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals in CA-G.R. CV No.
09416 and the decision of the Regional Trial Court in Civil Case No. 135486 are REVERSED and SET ASIDE insofar
as Travellers Insurance & Surety Corporation was found jointly and severally liable to pay actual, moral and
exemplary damages, death indemnity, attorneys fees and litigation expenses in Civil Case No. 135486. The
complaint against Travellers Insurance & Surety Corporation in said case is hereby ordered
dismissed.chanrobles.com : virtual law library

No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION

[G.R. No. 94149. May 5, 1992.]

AMERICAN HOME ASSURANCE, COMPANY, Petitioner, v. THE COURT OF APPEALS and
NATIONAL MARINE CORPORATION and/or NATIONAL MARINE CORPORATION
(Manila),Respondents.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PROPER REMEDY FROM FINAL JUDGMENT CONSTITUTING
PLAIN ERRORS OF LAW. The Court of Appeals ruled that appeal is the proper remedy, for aside from the fact that
the two orders dismissing the complaint for lack of cause of action are final orders within the meaning of Rule 41,
Section 2 of the Rules of Court, subject petition raised questions which if at all, constitute plain errors of law or of
judgment not constituting grave abuse of discretion correctible by certiorari. Evidently, the Court of Appeals did not err
25
in dismissing the petition for certiorari for as ruled by this Court, an order of dismissal whether right or wrong is a final
order, hence, a proper subject of appeal, not certiorari (Marahay v. Melicor, 181 SCRA 811 [1990]).

2. CIVIL LAW; COMMON CARRIERS; LIABILITY THEREOF IN CASES OF LOSS, DESTRUCTION OR

DETERIORATION; GOVERNED BY THE LAW OF THE COUNTRY TO WHICH THE GOODS ARE TO BE
TRANSPORTED; APPLICATION IN CASE AT BAR. This Court in National Development Co. v. C.A. (164 SCRA
593 [1988]; citing Eastern Shipping Lines, Inc. v. I.A.C., 150 SCRA 469, 470 [1987] held that "the law of the country to
which the goods are to be transported governs the liability of the common carrier in case of their loss, destruction or
deterioration." (Article 1753, Civil Code). Thus, for cargoes transported to the Philippines as in the case at bar, the
liability of the carrier is governed primarily by the Civil Code and in all matters not regulated by said Code, the rights
and obligations of common carrier shall be governed by the Code of Commerce and by special laws (Article 1766,
Civil Code).

3. ID.; ID.; BOUND TO OBSERVE EXTRAORDINARY DILIGENCE IN THE VIGILANCE OVER THE GOODS AND
THE SAFETY OF THE PASSENGERS TO BE TRANSPORTED; PRESUMPTION IN CASE OF LOSS,
DESTRUCTION OR DETERIORATION. Corollary thereto, the Court held further that under Article 1733 of the Civil
Code, common carriers from the nature of their business and for reasons of public policy are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of passengers transported by them
according to all circumstances of each case. Thus, under Article 1735 of the same Code, in all cases other than those
mentioned in Article 1734 thereof, the common carrier shall be presumed to have been at fault or to have acted
negligently, unless it proves that it has observed the extraordinary diligence required by law.

4. ID.; ID.; CANNOT LIMIT THEIR LIABILITY WHEN INJURY OR LOSS WAS CAUSED BY THEIR OWN
NEGLIGENCE; CASE AT BAR. The Court ruled that common carriers cannot limit their liability for injury or loss of
goods where such injury or loss was caused by its own negligence. Otherwise stated, the law on averages under the
Code of Commerce cannot be applied in determining liability where there is negligence. Under the foregoing principle
and in line with the Civil Codes mandatory requirement of extraordinary diligence on common carriers in the care of
goods placed in their stead, it is but reasonable to conclude that the issue of negligence must first be addressed
before the proper provisions of the Code of Commerce on the extent of liability may be applied. The records show
that upon delivery of the shipment in question at Mayleens warehouse in Manila, 122 bales were found to be
damaged/lost with straps cut or loose, calculated by the so-called "percentage method" at 4,360 kilograms and
amounting to P61,263.41. Instead of presenting proof of the exercise of extraordinary diligence as required by law,
National Marine Corporation (NMC) filed its Motion to Dismiss dated August 7, 1989, hypothetically admitting the truth
of the facts alleged in the complaint to the effect that the loss or damage to the 122 bales was due to the negligence
or fault of NMC. As ruled by this Court, the filing of a motion to dismiss on the ground of lack of cause of action
carries with it the admission of the material facts pleaded in the complaint (Sunbeam Convenience Foods, Inc. v.
C.A., 181 SCRA 443 [1990]). Such being the case, it is evident that the Code of Commerce provisions on averages
cannot apply.

DECISION

PARAS, J.:

This is a petition for review on certiorari which seeks to annul and set aside the (a) decision 1 dated May 30, 1990 of
the Court of Appeals in C.A. G.R. SP. No. 20043 entitled "American Home Assurance Company v. Hon. Domingo D.
Panis, Judge of the Regional Trial Court of Manila, Branch 41 and National Marine Corporation and/or National
Marine Corporation (Manila)", dismissing petitioners petition for certiorari, and (b) resolution 2 dated June 29, 1990
of the Court of Appeals denying petitioners motion for reconsideration.

The undisputed facts of the case are as follows:chanrob1es virtual 1aw library

Both petitioner American Home Assurance Co. and the respondent National Marine Corporation are foreign
corporations licensed to do business in the Philippines, the former through its branch, The American Home
Assurance Company (Philippines), Inc. and the latter through its branch, The National Marine Corporation (Manila)
26
(Rollo, p. 20, Annex L, p. 1).

That on or about June 19, 1988, Cheng Hwa Pulp Corporation shipped 5,000 bales (1,000 ADMT) of bleached kraft
pulp from Haulien, Taiwan on board "SS Kaunlaran", which is owned and operated by herein respondent National
Marine Corporation with Registration No. PID-224. The said shipment was consigned to Mayleen Paper, Inc. of
Manila, which insured the shipment with herein petitioner American Home Assurance Co. as evidenced by Bill of
Lading No. HLMN-01.chanrobles virtual lawlibrary

On June 22, 1988, the shipment arrived in Manila and was discharged into the custody of the Marina Port Services,
Inc., for eventual delivery to the consignee-assured. However, upon delivery of the shipment to Mayleen Paper, Inc.,
it was found that 122 bales had either been damaged or lost. The loss was calculated to be 4,360 kilograms with an
estimated value of P61,263.41.

Mayleen Paper, Inc. then duly demanded indemnification from respondent National Marine Corporation for the
aforesaid damages/losses in the shipment but, for apparently no justifiable reason, said demand was not heeded
(Petition, p. 4).

As the shipment was insured with petitioner in the amount of US $837,500.00, Mayleen Paper, Inc. sought recovery
from the former. Upon demand and submission of proper documentation, American Home Assurance paid Mayleen
Paper, Inc. the adjusted amount of P31.506.75 for the damages/losses suffered by the shipment, hence, the former
was subrogated to the rights and interests of Mayleen Paper, Inc.

On June 6, 1989, the petitioner, as subrogee, then brought suit against respondent for the recovery of the amount of
P31.506.75 and 25% of the total amount due as attorneys fees, by filing a complaint for recovery of sum of money
(Petition, p. 4).

Respondent, National Marine Corporation, filed a motion to dismiss dated August 7, 1989 stating that American
Home Assurance Company had no cause of action based on Article 848 of the Code of Commerce which provides
"that claims for averages shall not be admitted if they do not exceed 5% of the interest which the claimant may have
in the vessel or in the cargo if it be gross average and 1% of the goods damaged if particular average, deducting in
both cases the expenses of appraisal, unless there is an agreement to the contrary." It contended that based on the
allegations of the complaint, the loss sustained in the case was P35,506.75 which is only 18% of P17,420,000.00, the
total value of the cargo.

On the other hand, petitioner countered that Article 848 does not apply as it refers to averages and that a particular
average presupposes that the loss or damage is due to an inherent defect of the goods, an accident of the sea, or a
force majeure or the negligence of the crew of the carrier, while claims for damages due to the negligence of the
common carrier are governed by the Civil Code provisions on Common Carriers.

In its order dated November 23, 1989, the Regional Trial Court sustained private respondents contention. In part it
stated:chanrobles law library : red

"Before the Court for resolution is a motion for reconsideration filed by defendant through counsel dated October 6,
1989.

"The record shows that last August 8, 1989, defendant through counsel filed a motion to dismiss plaintiffs complaint.

"Resolving the said motion last September 18, 1989, the court ruled to defer resolution thereof until after trial on the
merits. In the motion now under consideration, defendant prays for the reconsideration of the order of September 18,
1989 and in lieu thereof, another order be entered dismissing plaintiffs complaint.

"There appears to be good reasons for the court to take a second look at the issues raised by the defendant.

"x x x

"It is not disputed by the defendant that the loss suffered by the shipment is only .18% or less than 1% of the interest
of the consignee on the cargo. Invoking the provision of Article 848 of the Code of Commerce which
reads:chanrob1es virtual 1aw library

Claims for average shall not be admitted if they do not exceed five percent of the interest which the claimant may

27
have in the vessel or cargo if it is gross average, and one percent of the goods damaged if particular average,
deducting in both cases the expenses of appraisal, unless there is an agreement to the contrary. (Emphasis
supplied).

defendant claims that plaintiff is barred from suing for recovery.

"Decisive in this case is whether the loss suffered by the cargo in question is a particular average.

Particular average is a loss happening to the ship, freight, or cargo which is not be (sic) shared by contributing
among all those interested, but must be borne by the owner of the subject to which it occurs. (Blacks Law Dictionary,
Revised Fourth Edition, p. 172, citing Bargett v. Insurance Co. 3 Bosw. [N.Y.] 395).

as distinguished from general average which.

is a contribution by the several interests engaged in the maritime venture to make good the loss of one of them for
the voluntary sacrifice of a part of the ship or cargo to save the residue of the property and the lives of those on
board, or for extraordinary expenses necessarily incurred for the common benefit and safety of all (Ibid., citing
California Canneries Co. v. Canton Ins. Office 25 Cal. App. 303, 143 p. 549-553).

"From the foregoing definition, it is clear that the damage on the cargo in question, is in the nature of the particular
average. Since the loss is less than 1% to the value of the cargo and there appears to be no allegations as to any
agreement defendants and the consignee of the goods to the contrary, by express provision of the law, plaintiff is
barred from suing for recovery.

"WHEREOF, plaintiffs complaint is hereby dismissed for lack of cause of action." (Rollo, p. 27; Annex A, pp. 3-4).

The petitioner then filed a motion for reconsideration of the order of dismissal but same was denied by the court in its
order dated January 26, 1990 (supra).

Instead of filing an appeal from the order of the court a quo dismissing the complaint for recovery of a sum of money,
American Home Assurance Company filed a petition for certiorari with the Court of Appeals to set aside the two
orders of respondent judge in said court (Rollo, p. 25).

But the Court of Appeals in its decision dated May 30, 1990, dismissed the petition as constituting plain errors of law
and not grave abuse of discretion correctible by certiorari (a Special Civil Action). If at all, respondent court ruled that
there are errors of judgment subject to correction by certiorarias a mode of appeal but the appeal is to the Supreme
Court under Section 17 of the Judiciary Act of 1948 as amended by Republic Act No. 5440. Otherwise stated,
respondent Court opined that the proper remedy is a petition for review on certiorari with the Supreme Court on pure
questions of law (Rollo, p. 30).

Hence, this petition.

In a resolution dated December 10, 1990, this Court gave due course to the petition and required both parties to file
their respective memoranda (Rollo, p. 58).

The procedural issue in this case is whether or not certiorari was the proper remedy in the case before the Court of
Appeals.

The Court of Appeals ruled that appeal is the proper remedy, for aside from the fact that the two orders dismissing the
complaint for lack of cause of action are final orders within the meaning of Rule 41, Section 2 of the Rules of Court,
subject petition raised questions which if at all, constitute plain errors of law or of judgment not constituting grave
abuse of discretion correctible by certiorari.

Evidently, the Court of Appeals did not err in dismissing the petition for certiorari for as ruled by this Court, an order of
dismissal whether right or wrong is a final order, hence, a proper subject of appeal, not certiorari (Marahay v. Melicor,
181 SCRA 811 [1990]). However, where the fact remains that respondent Court of Appeals obviously in the broader
interests of justice, nevertheless proceeded to decide the petition for certiorari and ruled on specific points raised
therein in a manner akin to what would have been done on assignments of error in a regular appeal, the petition
therein was therefore disposed of on the merits and not on a dismissal due to erroneous choice of remedies or
technicalities (Cruz v. I.A.C., 169 SCRA 14 [1989]). Hence, a review of the decision of the Court of Appeals on the

28
merits against the petitioner in this case is in order.chanrobles law library

On the main controversy, the pivotal issue to be resolved is the application of the law on averages (Articles 806, 809
and 848 of the Code of Commerce).

Petitioner avers that respondent court failed to consider that respondent National Marine Corporation being a
common carrier, in conducting its business is regulated by the Civil Code primarily and suppletorily by the Code of
Commerce; and that respondent court refused to consider the Bill of Lading as the law governing the parties.

Private respondent countered that in all matters not covered by the Civil Code, the rights and obligations of the
parties shall be governed by the Code of Commerce and by special laws as provided for in Article 1766 of the Civil
Code; that Articles 806, 809 and 848 of the Code of Commerce should be applied suppletorily as they provide for the
extent of the common carriers liability.

This issue has been resolved by this Court in National Development Co. v. C.A. (164 SCRA 593 [1988]; citing
Eastern Shipping Lines, Inc. v. I.A.C., 150 SCRA 469, 470 [1987] where it was held that "the law of the country to
which the goods are to be transported governs the liability of the common carrier in case of their loss, destruction or
deterioration." (Article 1753, Civil Code). Thus, for cargoes transported to the Philippines as in the case at bar, the
liability of the carrier is governed primarily by the Civil Code and in all matters not regulated by said Code, the rights
and obligations of common carrier shall be governed by the Code of Commerce and by special laws (Article 1766,
Civil Code).

Corollary thereto, the Court held further that under Article 1733 of the Civil Code, common carriers from the nature of
their business and for reasons of public policy are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of passengers transported by them according to all circumstances of each case. Thus,
under Article 1735 of the same Code, in all cases other than those mentioned in Article 1734 thereof, the common
carrier shall be presumed to have been at fault or to have acted negligently, unless it proves that it has observed the
extraordinary diligence required by law (Ibid., p. 595).

But more importantly, the Court ruled that common carriers cannot limit their liability for injury or loss of goods where
such injury or loss was caused by its own negligence. Otherwise stated, the law on averages under the Code of
Commerce cannot be applied in determining liability where there is negligence (Ibid., p. 606).

Under the foregoing principle and in line with the Civil Codes mandatory requirement of extraordinary diligence on
common carriers in the care of goods placed in their stead, it is but reasonable to conclude that the issue of
negligence must first be addressed before the proper provisions of the Code of Commerce on the extent of liability
may be applied.

The records show that upon delivery of the shipment in question at Mayleens warehouse in Manila, 122 bales were
found to be damaged/lost with straps cut or loose, calculated by the so-called "percentage method" at 4,360
kilograms and amounting to P61,263.41 (Rollo, p. 68). Instead of presenting proof of the exercise of extraordinary
diligence as required by law, National Marine Corporation (NMC) filed its Motion to Dismiss dated August 7, 1989,
hypothetically admitting the truth of the facts alleged in the complaint to the effect that the loss or damage to the 122
bales was due to the negligence or fault of NMC (Rollo, p. 179). As ruled by this Court, the filing of a motion to
dismiss on the ground of lack of cause of action carries with it the admission of the material facts pleaded in the
complaint (Sunbeam Convenience Foods, Inc. v. C.A., 181 SCRA 443 [1990]). Such being the case, it is evident that
the Code of Commerce provisions on averages cannot apply.chanrobles lawlibrary : rednad

On the other hand, Article 1734 of the Civil Code provides that common carriers are responsible for loss, destruction
or deterioration of the goods, unless due to any of the causes enumerated therein. It is obvious that the case at bar
does not fall under any of the exceptions. Thus, American Home Assurance Company is entitled to reimbursement of
what it paid to Mayleen Paper, Inc. as insurer.

Accordingly, it is evident that the findings of respondent Court of Appeals, affirming the findings and conclusions of
the court a quo are not supported by law and jurisprudence.

PREMISES CONSIDERED, (1) the decisions of both the Court of Appeals and the Regional Trial Court of Manila,
Branch 41, appealed from are REVERSED; and (2) private respondent National Marine Corporation is hereby
ordered to reimburse the subrogee, petitioner American Home Assurance Company, the amount of P31,506.75.

29
SO ORDERED.

30
 SYNOPSIS

This is a petition for review under Rule 45 of the Rules of Court, assailing the decision and resolution of the
Court of Appeals dated May 17, 1994 and January 4, 1994, respectively, in CA G.R. CV No. 18341. The appellate
court affirmed in toto the judgment of the Regional Trial Court of Misamis Oriental in an insurance claim filed by
private respondent against Great Pacific Life Assurance Co.

The Supreme Court found the petition not meritorious. Contrary to petitioners allegations, there was no sufficient
proof that the insured had suffered from hypertension. Aside from the statement of the insureds widow who was not
even sure if the medicines taken by Dr. Leuterio were for hypertension, the petitioner had not proven nor produced
any witness who could attest to Dr. Leuterios medical history. Clearly, it had failed to establish that there was
concealment made by the insured, hence it cannot refuse payment of the claim.

31
 SYLLABUS

1. COMMERCIAL LAW; INSURANCE; MORTGAGE REDEMPTION INSURANCE; RATIONALE. - The rationale of

a group insurance policy of mortgagors, otherwise known as the mortgage redemption insurance, is a device for
the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such
form of contract so that in the event of the unexpected demise of the mortgagor during the subsistence of the
mortgage contract, the proceeds from such insurance will be applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from paying the obligation. In a similar vein, ample protection is
given to the mortgagor under such a concept so that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage indebtedness. Consequently, where
the mortgagor pays the insurance premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor continues to be a party to the
contract. In this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-
payable clause does not make the mortgagee a party to the contract.

2. ID.; ID.; ID.; INSURED MAY BE REGARDED AS REAL PARTY IN INTEREST, ALTHOUGH HE HAS ASSIGNED
THE POLICY FOR PURPOSE OF COLLECTION, OR HAS ASSIGNED AS COLLATERAL SECURITY ANY
JUDGMENT HE MAY OBTAIN. - The insured private respondent did not cede to the mortgagee all his rights or
interests in the insurance, the policy stating that: In the event of the debtors death before his indebtedness with
the Creditor [DBP] shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid
to the creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor. When DBP submitted the insurance claim against petitioner, the latter denied payment
thereof, interposing the defense of concealment committed by the insured. Thereafter, DBP collected the debt
from the mortgagor and took the necessary action of foreclosure on the residential lot of private respondent.
In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. we held: Insured, being the person with whom the
contract was made, is primarily the proper person to bring suit thereon. *** Subject to some exceptions, insured
may thus sue, although the policy is taken wholly or in part for the benefit of another person named or unnamed,
and although it is expressly made payable to another as his interest may appear or otherwise. *** Although a
policy issued to a mortgagor is taken out for the benefit of the mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name, especially where the mortgagees interest is less than the full
amount recoverable under the policy, *** And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the policy for the purpose of
collection, or has assigned as collateral security any judgment he may obtain. And since a policy of insurance
upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest
or not, and such person may recover it whatever the insured might have recovered, the widow of the decedent
Dr. Leuterio may file the suit against the insurer, Grepalife.

3. ID.; ID.; ID.; FRAUDULENT INTENT ON THE PART OF THE INSURED MUST BE ESTABLISHED TO ENTITLE
THE INSURER TO RESCIND THE CONTRACT.- The question of whether there was concealment was aptly
answered by the appellate court, thus: The insured, Dr. Leuterio, had answered in his insurance application that
he was in good health and that he had not consulted a doctor for any of the enumerated ailments, including
hypertension; when he died the attending physician had certified in the death certificate that the former died of
cerebral hemorrhage, probably secondary to hypertension. From this report, the appellant insurance company
refused to pay the insurance claim. Appellant alleged that the insured had concealed the fact that he had
32
 hypertension. Contrary to appellants allegations, there was no sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the insureds widow who was not even sure if the medicines taken by
Dr. Leuterio were for hypertension, the appellant had not proven nor produced any witness who could attest to
Dr. Leuterios medical history x x x Appellant insurance company had failed to establish that there was
concealment made by the insured, hence, it cannot refuse payment of the claim. The fraudulent intent on the
part of the insured must be established to entitle the insurer to rescind the contract. Misrepresentation as a
defense of the insurer to avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer. In the case at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.

SECOND DIVISION

[G.R. No. 113899. October 13, 1999.]

GREAT PACIFIC LIFE ASSURANCE CORP., Petitioner, v. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, Respondents.
DECISION

QUISUMBING, J.:

This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated May 17, 1993, of the Court
of Appeals and its Resolution 2 dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto
the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance claim filed by private
respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial courts decision
reads:chanrobles virtual lawlibrary

"WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy No. G-1907, in relation to Certification B-18558 liable and ordered
to pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the
amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorneys fees and litigation expenses in the complaint and counterclaim, with costs against the defendant and
dismissing the complaint in respect to the plaintiffs, other than the widow-beneficiary, for lack of cause of action." 3

The facts, as found by the Court of Appeals, are as follows:chanroblesvirtual|awlibrary

A contract of group life insurance was executed between petitioner Great Pacific Life Assurance Corporation
(hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife agreed to insure the
lives of eligible housing loan mortgagors of DBP.

On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for membership in
the group life insurance plan. In an application form, Dr. Leuterio answered questions concerning his health condition
as follows:jgc:chanrobles.com.ph

"7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer, diabetes, lung,
kidney or stomach disorder or any other physical impairment?

Answer: No. If so give details ___________.

8. Are you now, to the best of your knowledge, in good health?

Answer: [ x ] Yes [ ] No." 4chanroblesvirtuallawlibrary:red

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio, to the
extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred (P86,200.00) pesos.
33
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP submitted a death
claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically healthy when he applied for
an insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he had been
suffering from hypertension, which caused his death. Allegedly, such non-disclosure constituted concealment that
justified the denial of the claim.

On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a complaint with the
Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific Performance with Damages." 5
During the trial, Dr. Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejias findings, based
partly from the information given by the respondent widow, stated that Dr. Leuterio complained of headaches
presumably due to high blood pressure. The inference was not conclusive because Dr. Leuterio was not autopsied,
hence, other causes were not ruled out.chanroblesvirtual|awlibrary

On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against Grepalife. On
May 17, 1993, the Court of Appeals sustained the trial courts decision. Hence, the present petition. Petitioners
interposed the following assigned errors:jgc:chanrobles.com.ph

"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE DEVELOPMENT BANK
OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE ON THE LIFE OF PLAINTIFFS HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT
[Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.

2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF JURISDICTION OVER THE
SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON OF THE DEFENDANT.

3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP THE AMOUNT OF
P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL AMOUNT
PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANT-
APPELLANT.chanroblesvirtual|awlibrary

4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE
GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE CLAIM ARISING
FROM THE DEATH OF WILFREDO LEUTERIO." 6

Synthesized below are the assigned errors for our resolution:chanrob1es virtual 1aw library

1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group life insurance
contract from a complaint filed by the widow of the decedent/mortgagor?

2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had hypertension, which
would vitiate the insurance contract?

3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six thousand, two hundred
(P86,200.00) pesos without proof of the actual outstanding mortgage payable by the mortgagor to DBP.

Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in interest, hence
the trial court acquired no jurisdiction over the case. It argues that when the Court of Appeals affirmed the trial courts
judgment, Grepalife was held liable to pay the proceeds of insurance contract in favor of DBP, the indispensable party
who was not joined in the suit.chanrobles.com : virtual law library

To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to this type of
contract. The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage redemption
insurance," is a device for the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it
has to enter into such form of contract so that in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. 7 In a similar vein, ample
protection is given to the mortgagor under such a concept so that in the event of death; the mortgage obligation will

34
be extinguished by the application of the insurance proceeds to the mortgage indebtedness. 8 Consequently, where
the mortgagor pays the insurance premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor continues to be a party to the contract. In
this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-payable clause
does not make the mortgagee a party to the contract. 9

Section 8 of the Insurance Code provides:jgc:chanrobles.com.ph

"Unless the policy provides, where a mortgagor of property effects insurance in his own name providing that the loss
shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be
upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior
to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the
hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein named, with the same effect as if it had been performed by the
mortgagor." chanrobles.com : virtual law library

The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance, the policy
stating that: "In the event of the debtors death before his indebtedness with the Creditor [DBP] shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the debtor." 10 When DBP submitted
the insurance claim against petitioner, the latter denied payment thereof, interposing the defense of concealment
committed by the insured. Thereafter, DBP collected the debt from the mortgagor and took the necessary action of
foreclosure on the residential lot of private Respondent. 11 In Gonzales La O v. Yek Tong Lin Fire & Marine Ins. Co.
12 we held:jgc:chanrobles.com.ph

"Insured, being the person with whom the contract was made, is primarily the proper person to bring suit thereon. . . .
Subject to some exceptions, insured may thus sue, although the policy is taken wholly or in part for the benefit of
another person named or unnamed, and although it is expressly made payable to another as his interest may appear
or otherwise. . . . Although a policy issued to a mortgagor is taken out for the benefit of the mortgagee and is made
payable to him, yet the mortgagor may sue thereon in his own name, especially where the mortgagees interest is
less than the full amount recoverable under the policy, . . . .

And in volume 33, page 82, of the same work, we read the following:chanrob1es virtual 1aw library

Insured may be regarded as the real party in interest, although he has assigned the policy for the purpose of
collection, or has assigned as collateral security any judgment he may obtain." 13chanrobles virtual lawlibrary

And since a policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he
has an insurable interest or not, and such person may recover it whatever the insured might have recovered, 14 the
widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.

The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to annul the
insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had hypertension, which might have
caused his death. Concealment exists where the assured had knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally
withholds the same. 15

Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported by the
information given by the widow of the decedent. Grepalife asserts that Dr. Mejias technical diagnosis of the cause of
death of Dr. Leuterio was a duly documented hospital record, and that the widows declaration that her husband had
"possible hypertension several years ago" should not be considered as hearsay, but as part of res gestae.

On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy on the body
of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr. Leuterios any previous
hospital confinement. 16 Dr. Leuterios death certificate stated that hypertension was only "the possible cause of
death." The private respondents statement, as to the medical history of her husband, was due to her unreliable
recollection of events. Hence, the statement of the physician was properly considered by the trial court as
hearsay.chanroblesvirtual|awlibrary

The question of whether there was concealment was aptly answered by the appellate court,

35
thus:jgc:chanrobles.com.ph

"The insured, Dr. Leuterio, had answered in his insurance application that he was in good health and that he had not
consulted a doctor or any of the enumerated ailments, including hypertension; when he died the attending physician
had certified in the death certificate that the former died of cerebral hemorrhage, probably secondary to hypertension.
From this report, the appellant insurance company refused to pay the insurance claim. Appellant alleged that the
insured had concealed the fact that he had hypertension.

Contrary to appellants allegations, there was no sufficient proof that the insured had suffered from hypertension.
Aside from the statement of the insureds widow who was not even sure if the medicines taken by Dr. Leuterio were
for hypertension, the appellant had not proven nor produced any witness who could attest to Dr. Leuterios medical
history. . .
x x x

Appellant insurance company had failed to establish that there was concealment made by the insured, hence, it
cannot refuse payment of the claim." 17chanrobles.com : virtual law library

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract. 18
Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the insurer. 19 In the case at bar, the petitioner failed to
clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.

And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no evidence as to
the amount of Dr. Leuterios outstanding indebtedness to DBP at the time of the mortgagors death. Hence, for private
respondents failure to establish the same, the action for specific performance should be dismissed. Petitioners claim
is without merit. A life insurance policy is a valued policy. 20 Unless the interest of a person insured is susceptible of
exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum
fixed in the policy. 21 The mortgagor paid the premium according to the coverage of his insurance, which states
that:jgc:chanrobles.com.ph

"The policy states that upon receipt of due proof of the Debtors death during the terms of this insurance, a death
benefit in the amount of P86,200.00 shall be paid.chanroblesvirtuallawlibrary:red

In the event of the debtors death before his indebtedness with the creditor shall have been fully paid, an amount to
pay the outstanding indebtedness shall first be paid to the Creditor and the balance of the Sum Assured, if there is
any shall then be paid to the beneficiary/ies designated by the debtor." 22 (Emphasis omitted)

However, we noted that the Court of Appeals decision was promulgated on May 17, 1993. In private respondents
memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of mortgagors outstanding
loan. Considering this supervening event, the insurance proceeds shall inure to the benefit of the heirs of the
deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich itself at the expense of
another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already
foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterios heirs represented by his widow, herein
private respondent Medarda Leuterio.

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. CV
18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance proceeds amounting
to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased),
upon presentation of proof of prior settlement of mortgagors indebtedness to Development Bank of the Philippines.
Costs against petitioner.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

SO ORDERED.

36
 SYNOPSIS

Private respondent William Lines, Inc. was the owner of M/V Manila City, a luxury passenger-cargo vessel,
which caught fire and sank while undergoing dry-docking and repairs within the premises of petitioner Cebu Shipyard
and Engineering Works, Inc. (CSEW) on February 16, 1991. The subject vessel was insured with private respondent
Prudential Guarantee and Assurance Company, Inc. for P45 million. William Lines, Inc. sued CSEW for damages
and impleaded Prudential as co-plaintiff, after the latter had paid William Lines, Inc. the value of the hull and
machinery insurance on the M/V Manila City. As a result of such payment Prudential was subrogated to the claim
of P45 million, representing the value of the said insurance it paid. The trial court rendered a decision against
CSEW. Petitioner appealed to the Court of Appeals which affirmed the decision of the trial court. Petitioner filed a
motion for reconsideration, but was denied by the appellate court. Hence, the present petition. Petitioner faulted the
Court of Appeals for adjudging it negligent and liable for damages to the respondents, William Lines, Inc. and
Prudential for the loss of the vessel. Petitioner maintained that it did not have exclusive control of the vessel and the
trial court and the Court of Appeals erred in applying the doctrine of res ipsa loquitur.

The Supreme Court upheld the trial court and the Court of Appeals in their findings that the vessel caught fire
and sank by reason of the negligence of the workers of CSEW and in applying the doctrine of res ipsa loquitur. The
Court ruled that all the conditions warranting the application of the doctrine of res ipsa loquitur were present, namely:
(1) the accident was of a kind which does not ordinarily occur unless someone is negligent; and (2) that the
instrumentality or agency which caused the injury was under the exclusive control of the person charged with
negligence. The trial court found direct evidence to prove that the workers of CSEW were remiss in their duty of
exercising due diligence in the care of subject vessel. Said direct evidence substantiated the conclusion that CSEW
was really negligent even without applying the doctrine of res ipsa loquitur. The Court discerned no basis for
disturbing the finding of the trial court and the Court of Appeals firmly anchored on enough evidence.

SYLLABUS
37
1. CIVIL LAW; TORTS; DOCTRINE OF RES IPSA LOQUITOR; APPLICABLE IN CASE AT BAR. The finding by
the trial court and the Court of Appeals that M/V Manila City caught fire and sank by reason of the negligence of
the workers of CSEW, when the said vessel was under the exclusive custody and control of CSEW is
accordingly upheld. Under the circumstances of the case, the doctrine of res ipsa loquitur applies. For the
doctrine of res ipsa loquitur to apply to a given situation, the following conditions must concur: (1) the accident
was of a kind which does not ordinarily occur unless someone is negligent; and (2) that the instrumentality or
agency which caused the injury was under the exclusive control of the person charged with negligence. The
facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny. First, the fire
that occurred and consumed M/V Manila City would not have happened in the ordinary course of things if
reasonable care and diligence had been exercised. In other words, some negligence must have occurred.
Second, the agency charged with negligence, as found by the trial court and the Court of Appeals and as shown
by the records, is the herein petitioner, Cebu Shipyard and Engineering Works, Inc., which had control over
subject vessel when it was docked for annual repairs. So also, as found by the regional trial court, other
responsible causes, including the conduct of the plaintiff, and third persons, are sufficiently eliminated by the
evidence.

2. COMMERCIAL LAW; INSURANCE; MARINE INSURANCE; THE INTENTION OF THE PARTIES TO MAKE
EACH OTHER A CO-ASSURED UNDER AN INSURANCE POLICY IS TO BE GLEANED PRINCIPALLY
FROM THE INSURANCE CONTRACT OR POLICY ITSELF AND NOT FROM ANY OTHER CONTRACT OR
AGREEMENT BECAUSE THE INSURANCE POLICY ITSELF DENOMINATES THE ASSURED AND
BENEFICIARIES OF THE INSURANCE. Clause 20 of the Work Order in question is clear in the sense that it
requires William Lines to maintain insurance on the vessel during the period of dry-docking or repair.
Concededly, such a stipulation works to the benefit of CSEW as the shiprepairer. However, the fact that CSEW
benefits from the said stipulation does not automatically make it as a co-assured of William Lines. The intention
of the parties to make each other a co-assured under an insurance policy is to be gleaned principally from the
insurance contract or policy itself and not from any other contract or agreement because the insurance policy
denominates the assured and the beneficiaries of the insurance. The hull and machinery insurance procured by
William Lines, Inc. from Prudential named only William Lines, Inc. as the assured. There was no manifestation
of any intention of William Lines, Inc. to constitute CSEW as a co-assured under subject policy. It is axiomatic
that when the terms of a contract are clear its stipulations control. Thus, when the insurance policy involved
named only William Lines, Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is
unfounded.

3. CIVIL LAW; CONTRACTS; IN DETERMINING WHETHER A PROVISION IN A CONTRACT IS ONE OF

ADHESION, THE FACTS AND CIRCUMSTANCES VIS-A-VIS THE NATURE OF THE PROVISION SOUGHT
TO BE ENFORCED SHOULD BE CONSIDERED, BEARING IN MIND THE PRINCIPLES OF EQUITY AND
FAIR PLAY. Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as
binding as an ordinary contract, the Court recognizes instances when reliance on such contracts cannot be
favored especially where the facts and circumstances warrant that subject stipulations be disregarded. Thus, in
ruling on the validity and applicability of the stipulation limiting the liability of CSEW for negligence to One Million
(P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of the provision sought to be
enforced should be considered, bearing in mind the principles of equity and fair play. It is worthy to note that
M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00) Pesos. To determine the
validity and sustainability of the claim of William Lines, Inc., for a total loss, Prudential conducted its own inquiry.
Upon thorough investigation by its hull surveyor, M/V Manila City was found to be beyond economical salvage
and repair. The evaluation of the average adjuster also reported a constructive total loss. The said claim of

38
 William Lines, Inc., was then found to be valid and compensable such that Prudential paid the latter the total
value of its insurance claim. Furthermore, it was ascertained that the replacement cost of the vessel (the price
of a vessel similar to M/V Manila City), amounts to Fifty Five Million (P5 5,000,000.00) Pesos. Considering the
aforestated circumstances, let alone the fact that negligence on the part of petitioner has been sufficiently
proven, it would indeed be unfair and inequitable to limit the liability of petitioner to One Million Pesos only. As
aptly held by the trial court, it is rather unconscionable if not overstrained. To allow CSEW to limit its liability to
One Million Pesos notwithstanding the fact that the total loss suffered by the assured and paid for by Prudential
amounted to Forty Five Million (P45,000,000.00) Pesos would sanction the exercise of a degree of diligence
short of what is ordinarily required because, then, it would not be difficult for petitioner to escape liability by the
simple expedient of paying an amount very much lower than the actual damage or loss suffered by William
Lines, Inc.

4. REMEDIAL LAW; EVIDENCE; ADMISSIBILITY; OPINION OF EXPERT WITNESS; COURTS ARE NOT BOUND
BY THE TESTIMONIES OF EXPERT WITNESSES; RECEPTION THEREOF IS WITHIN THE DISCRETION OF
THE COURT. Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled
on the inadmissibility of the expert testimonies it (petitioner) introduced on the probable cause and origin of the
fire. Petitioner maintains that the Court of Appeals erred in disregarding the testimonies of the fire experts,
Messrs. David Grey and Gregory Michael Southeard, who testified on the probable origin of the fire in M/V
Manila City. Petitioner avers that since the said fire experts were one in their opinion that the fire did not
originate in the area of Tank Top No. 12 where the JNB workers were doing hotworks but on the crew
accommodation cabins on the portside No. 2 deck, the trial court and the Court of Appeals should have given
weight to such finding based on the testimonies of fire experts; petitioner argues. But courts are not bound by
the testimonies of expert witnesses. Although they may have probative value, reception in evidence of expert
testimonies is within the discretion of the court. Section 49, Rule 130 of the Revised Rules of Court, provides:
SEC. 49. Opinion of expert witness. The opinion of a witness on a matter requiring special knowledge, skill,
experience or training which he is shown to possess, may be received in evidence. The word may signifies that
the use of opinion of an expert witness as evidence is a prerogative of the courts. It is never mandatory for
judges to give substantial weight to expert testimonies. If from the facts and evidence on record, a conclusion is
readily ascertainable, there is no need for the judge to resort to expert opinion evidence. In the case under
consideration, the testimonies of the fire experts were not the only available evidence on the probable cause and
origin of the fire. There were witnesses who were actually on board the vessel when the fire occurred. Between
the testimonies of the fire experts who merely based their findings and opinions on interviews and the
testimonies of those present during the fire, the latter are of more probative value. Verily, the trial court and the
Court of Appeals did not err in giving more weight to said testimonies.

THIRD DIVISION

[G.R. No. 132607. May 5, 1999]

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner, vs. WILLIAM LINES, INC.
and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY, INC., respondents.

39
 DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a reversal of
the decision of the Court of Appeals [1]which affirmed the decision of the trial court of origin finding the petitioner
herein, Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and liable for damages to the private
respondent, William Lines, Inc., and to the insurer, Prudential Guarantee Assurance Company, Inc.

The antecedent facts that matter are as follows:

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

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

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

xxx

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

xxx

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

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

7. Limit of Liability

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

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

(b) awarded against the Assured.[3]

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

40
 On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and CSEW
to discuss the work to be undertaken on the M/V Manila City.

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

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

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

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

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

xxx

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

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

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

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

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

On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering the latter:

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

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

41
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million) as payment, in addition to what it
received from the insurance company to fully cover the injury or loss, in order to replace the M/V MANILA CITY, with
interest at the legal rate until full payment is made;

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

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four Thousand Six Hundred Seventy-seven
Pesos and Ninety-five centavos (P3,054,677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full payment is made;

6. To pay unto plaintiff William Lines, Inc. the sum of Five Hundred Thousand (P500,000.00) Pesos in moral
damages;

7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million (P10,000,000.00) Pesos in attorneys fees; and to
pay the costs of this suit.

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

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

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

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

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

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

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

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

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

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

VI. ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AND THAT CSEW WAS
NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR CONTRACTS, THE
42
COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE CONTRACTUAL
PROVISIONS LIMITING CSEWS LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P1 MILLION IS NOT VALID,
CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE COURT.

Petitioners version of the events that led to the fire runs as follows:

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

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

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

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

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

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

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

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

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

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with Prudential Guarantee,
William Lines filed a claim for constructive total loss, and after a thorough investigation of the surrounding
circumstances of the tragedy, Prudential Guarantee found the said insurance claim to be meritorious and issued a

43
check in favor of William Lines in the amount of P45 million pesos representing the total value of M/V Manila Citys
hull and machinery insurance.[6]

The petition is unmeritorious.

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

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

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

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

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

The facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny. First, the
fire that occurred and consumed M/V Manila City would not have happened in the ordinary course of things if
reasonable care and diligence had been exercised. In other words, some negligence must have occurred. Second,
the agency charged with negligence, as found by the trial court and the Court of Appeals and as shown by the
records, is the herein petitioner, Cebu Shipyard and Engineering Works, Inc., which had control over subject vessel

44
when it was docked for annual repairs.So also, as found by the regional trial court, other responsible causes,
including the conduct of the plaintiff, and third persons, are sufficiently eliminated by the evidence. [11]

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

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

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

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

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

On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the rights of
William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded risk and (2) it is a co-
assured under the Marine Hull Insurance Policy.

It is petitioners submission that the loss of M/V Manila City or damage thereto is expressly excluded from the
coverage of the insurance because the same resulted from want of due diligence by the Assured, Owners or
Managers which is not included in the risks insured against. Again, this theory of petitioner is bereft of any factual or
legal basis. It proceeds from a wrong premise that the fire which gutted subject vessel was caused by the negligence
of the employees of William Lines, Inc. To repeat, the issue of who between the parties was negligent has already
been resolved against Cebu Shipyard and Engineering Works, Inc. Upon proof of payment by Prudential to William
Lines, Inc., the former was subrogated to the right of the latter to indemnification from CSEW. As aptly ruled by the
Court of Appeals, the law on the matter is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the

45
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.[12]

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

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

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

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

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

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

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

xxx

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

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

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

46
 Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as binding as
an ordinary contract, the Court recognizes instances when reliance on such contracts cannot be favored especially
where the facts and circumstances warrant that subject stipulations be disregarded. [16] Thus, in ruling on the validity
and applicability of the stipulation limiting the liability of CSEW for negligence to One Million (P1,000,000.00) Pesos
only, the facts and circumstances vis-a-vis the nature of the provision sought to be enforced should be considered,
bearing in mind the principles of equity and fair play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00)
Pesos. To determine the validity and sustainability of the claim of William Lines, Inc., for a total loss, Prudential
conducted its own inquiry. Upon thorough investigation by its hull surveyor, M/V Manila City was found to be beyond
economical salvage and repair.[17] The evaluation of the average adjuster also reported a constructive total loss.
[18]
The said claim of William Lines, Inc., was then found to be valid and compensable such that Prudential paid the
latter the total value of its insurance claim. Furthermore, it was ascertained that the replacement cost of the vessel
(the price of a vessel similar to M/V Manila City), amounts to Fifty-five Million (P55,000,000.00) Pesos. [19]

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

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

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 105135 June 22, 1995

47
 SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
BACANI, respondents.

QUIASON, J.:

This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside the
Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April
22, 1992, denying reconsideration thereof.

We grant the petition.

On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was issued
Policy No. 3-903-766-X valued at P100,000.00, with double indemnity in case of accidental death. The designated
beneficiary was his mother, respondent Bernarda Bacani.

On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner,
seeking the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its findings
prompted it to reject the claim.

In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts relevant
to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total
premiums paid in the amount of P10,172.00 was attached to said letter.

Petitioner claimed that the insured gave false statements in his application when he answered the following
questions:

5. Within the past 5 years have you:

a) consulted any doctor or other health practitioner?

b) submitted to:

EGG?
X-rays?
blood tests?
other tests?

c) attended or been admitted to any hospital or other medical facility?

6. Have you ever had or sought advice for:

xxx xxx xxx

48
 b) urine, kidney or bladder disorder? (Rollo, p. 53)

The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation with a certain Dr.
Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for cough and flu complications. The
other questions were answered in the negative (Rollo, p. 53).

Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined at
the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased
was subjected to urinalysis, ultra-sonography and hematology tests.

On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando Bacani, filed an action
for specific performance against petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila.
Petitioner filed its answer with counterclaim and a list of exhibits consisting of medical records furnished by the Lung
Center of the Philippines.

On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary Judgment" where
they manifested that they "have no evidence to refute the documentary evidence of concealment/misrepresentation
by the decedent of his health condition (Rollo, p. 62).

Petitioner filed its Request for Admissions relative to the authenticity and due execution of several documents as well
as allegations regarding the health of the insured. Private respondents failed to oppose said request or reply thereto,
thereby rendering an admission of the matters alleged.

Petitioner then moved for a summary judgment and the trial court decided in favor of private respondents. The
dispositive portion of the decision is reproduced as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant,
condemning the latter to pay the former the amount of One Hundred Thousand Pesos (P100,000.00)
the face value of insured's Insurance Policy No. 3903766, and the Accidental Death Benefit in the
amount of One Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the
concept of reasonable attorney's fees and costs of suit.

Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).

In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made in good
faith and under a belief that they need not be disclosed. Moreover, it held that the health history of the insured was
immaterial since the insurance policy was "non-medical".

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court ruled
that petitioner cannot avoid its obligation by claiming concealment because the cause of death was unrelated to the
facts concealed by the insured. It also sustained the finding of the trial court that matters relating to the health history
of the insured were irrelevant since petitioner waived the medical examination prior to the approval and issuance of
the insurance policy. Moreover, the appellate court agreed with the trial court that the policy was "non-medical" (Rollo,
pp. 4-5).

Petitioner's motion for reconsideration was denied; hence, this petition.

II

We reverse the decision of the Court of Appeals.

49
The rule that factual findings of the lower court and the appellate court are binding on this Court is not absolute and
admits of exceptions, such as when the judgment is based on a misappreciation of the facts (Geronimo v. Court of
Appeals, 224 SCRA 494 [1993]).

In weighing the evidence presented, the trial court concluded that indeed there was concealment and
misrepresentation, however, the same was made in "good faith" and the facts concealed or misrepresented were
irrelevant since the policy was "non-medical". We disagree.

Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the
other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no
warranty, and which the other has no means of ascertaining. Said Section provides:

A neglect to communicate that which a party knows and ought to communicate, is called
concealment.

Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon
the party to whom communication is due, in forming his estimate of the disadvantages of the proposed contract or in
making his inquiries (The Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to
his health.

The information which the insured failed to disclose were material and relevant to the approval and issuance of the
insurance policy. The matters concealed would have definitely affected petitioner's action on his application, either by
approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure
may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld
does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which
ensue.

Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he was hospitalized for
two weeks prior to filing his application for insurance, raises grave doubts about his bonafides. It appears that such
concealment was deliberate on his part.

The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of the facts
concealed, is untenable. We reiterate our ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA
316 (1963), that " . . . the waiver of a medical examination [in a non-medical insurance contract] renders even more
material the information required of the applicant concerning previous condition of health and diseases suffered, for
such information necessarily constitutes an important factor which the insurer takes into consideration in deciding
whether to issue the policy or not . . . "

Moreover, such argument of private respondents would make Section 27 of the Insurance Code, which allows the
injured party to rescind a contract of insurance where there is concealment, ineffective (See Vda. de Canilang v.
Court of Appeals, supra).

Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled that
the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure
misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries
(Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).

50
We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by reason of the
concealment employed by the insured. It must be emphasized that rescission was exercised within the two-year
contestability period as recognized in Section 48 of The Insurance Code.

WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED and SET ASIDE.

SO ORDERED.

51
52
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 128833 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D.

LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.

G.R. No. 128834 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, petitioners,

vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.

G.R. No. 128866 April 20, 1998

MALAYAN INSURANCE INC., petitioners,

vs.
GOYU & SONS, INC. respondent.
53
MELO, J.:

The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu &
Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage
contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37%
interest per annum commending July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the
amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary
damages and P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC was fixed at P68,785,069.04 as of April
1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the
common facts and issues involved, their individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation,
RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU's
application for approval by RCBC's executive committee. A credit facility in the amount of P30 million was initially
granted. Upon GOYU's application and Uy's and Lao's recommendation, RCBC's executive committee increased
GOYU's credit facility to P50 million, then to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages
in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these
four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company
approved by RCBC, and subsequently, to endorse and deliver the insurance polices to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance
Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements
in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted
its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the
insurance policies were either attached pursuant to writs of attachments/garnishments issued by various courts or
that the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than
the insured. GOYU filed a complaint for specific performance and damages which was docketed at the Regional Trial
Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the
present G.R. No. 128833 and 128866.

RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the insurance policies, but
said claims were also denied for the same reasons that MICO denied GOYU's claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch
3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company
obtained their respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23,
and ordered that the proceeds of the ten insurance policies be deposited with the said court minus the
aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60
with Branch 3 of the Manila RTC.

54
In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the
amount of P8,696,838.75 (Exhibit "22-Malayan").

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as
follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of
P74,040,518.58 less the amount of P50,000,000.00 which is
deposited with this Court;

b. To pay the plaintiff damages by was of interest for the duration of

the delay since July 27, 1992 (ninety days after defendant insurer's
receipt of the required proof of loss and notice of loss) at the rate of
twice the ceiling prescribed by the Monetary Board, on the following
amounts:

1) P50,000,000.00 from July 27, 1992 up to the

time said amount was deposited with this Court on
January 7, 1994;

2) P24,040,518.58 from July 27, 1992 up to the

time when the writs of attachments were received
by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the

amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorney's fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan
obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the respective promissory notes
(without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interest earned thereon.
55
 (Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amount awarded
in its favor. MICO and RCBC disputed the trial court's findings of liability on their part. The Court of Appeals party
granted GOYU's appeal, but sustained the findings of the trial court with respect to MICO and RCBC's liabilities,
thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of
P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No.
3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said
amount at the rate of thirty-seven (37%) percent per annum which is
twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;

a) To pay the plaintiff actual and compensatory damages in the

amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL

BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorney's fees.

4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its
loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992
without any interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release
to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by
Malayan Insurance Co., Inc., together with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent
reversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of
the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of
herein G.R. No. 128833). At issue in said petition is RCBC's right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of
Sebastian.

56
After a careful reviews of the material facts as found by the two courts below in relation to the pertinent and
applicable laws, we find merit in the submission of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted in
the petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not
RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the
occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several
mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure
the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the
mortgaged property with MICO, an insurance company acceptable to RCBC. Bases on their stipulations in the
mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to
RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject insurance
policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also Exh. "51-RCBC" to "59-
RCBC"), copies of which were delivered to GOYU, RCBC, and MICO. However, because these endorsements do not
bear the signature of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the
endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the same mortgaged
property, such that each one of them may insure the same property for his own sole benefit. There is no question that
GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears that
GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown
by their contemporaneous acts, must be given due consideration in order to better serve the interest of justice and
equity.

It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a
quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular
beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by
the insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a
sister company of RCBC, and not just from any other insurance company. Alchester would not have found out that
the subject pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by
GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of obtaining insurance
coverage in compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not
have endorsed the policies to RCBC had it not been so directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor
RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94
SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good faith and
justice, and its purpose is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied thereon.
The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed
to aid the law in the administration of justice where without its aid injustice might result. It has been
applied by this Court wherever and whenever special circumstances of a case so demand.

(p. 368.)

57
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in
quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine insurance policies in favor of
RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were
sent to RCBC and MICO, while the fourth copies were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU
has not denied having received from Alchester the originals of these documents.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in
the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to
seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above this,
GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the
occurrence of the loss insure against, it was too late for GOYU to disown the endorsements for any imagined or
contrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an
implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least
estopped from assailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these
endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that
there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public
policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar
circumstances obtaining in this case, the Court is bound to recognize RCBC's right to the proceeds of the insurance
polices if not for the actual endorsement of the policies, at least on the basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance
shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of
the circumstances obtaining in the instant case presents a justification to take exception to the strict application of
said provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the
party for whose benefit the insurance policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between
RCBC and GOYU in consideration of and for securing GOYU's credit facilities from RCBC. The mortgage contracts
contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly
covered against any loss by an insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister
company of RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc., and copies
thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC
which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the mortgaged
properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by
Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to be
sufficient compliance with its obligation under the mortgage contracts since RCBC accordingly continued to extend
the benefits of its credits facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the
parties to constitute RCBC as the beneficiary of the various insurance policies obtained by GOYU. The intention of
the parties will have to be given full force and effect particular case. The insurance proceeds may, therefore, be
exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or entity for
whose benefit the polices were clearly intended.

Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged property is
expressed in Article 2127 of the Civil Code which states:
58
 Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
person.

Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to have
been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as shown
below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None

Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92

b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54

c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"

Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43

d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"

Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43

e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76

f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan"

Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00

g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"

Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00

h. Policy Number CI/F-128-03341 None

Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00
59
 i. Policy Number F-114-07402 Exhibit "8-Malayan"
Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20

j. Policy Number F-114-07525 Exhibit "9-Malayan"

Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's witness, Atty.
Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-128-
03341 [(h) above]. Also, one of the endorsement documents, Exhibit "5-Malayan", refers to a certain insurance policy
number ACIA-F-07066, which is not among the insurance policies involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being excessively
payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and
effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYU's other creditors up to the
extent of the GOYU's outstanding obligation in RCBC's favor. Section 53 of the Insurance Code ordains that the
insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for
whose benefit it was made. In this case, to the extent of GOYU's obligation with RCBC, the interest of GOYU in the
subject policies had been transferred to RCBC effective as of the time of the endorsement. These policies may no
longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may
nonetheless forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two
other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYU's other
creditors. To the extent of GOYU's outstanding obligation with RCBC, all the rest of the other insurance policies
above-listed which were endorsed to RCBC, are, therefore, to be released from attachment, garnishment, and levy
by the other creditors of GOYU.

This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation with RCBC
which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount of
GOYU's liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total obligation to RCBC
was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's exclusion of Promissory Note No. 421-
92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-
91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also
because the signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the Court of
Appeals speculated thusly:

. . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in
bank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same
practice of procedure has always been adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents are
spurious, for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument

60
has the burden of proof of showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of
Appeals, 210 SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to
P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when
he answered the queries of the trial court.

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
amounts stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I asked which is
correct, Your Honor.

COURT

Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?

A Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as
hereinabove quotes, GOYU also offered and admitted to RCBC that is obligation be fixed at P116,301,992.60 as
shown in its letter date March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past due account of
this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10,
and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and
in the Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from
the Seaboard and Equitable insurance companies and other legitimate deductions. We accept and
confirm this amount of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

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The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated
after the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus,
careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewalsof
Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for
bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan
represented by these promissory notes were admittedly received by GOYU. There is ample factual and legal basis
for giving GOYU's judicial admission of liability in the amount of P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the
mortgage property will, nonetheless, have to be applied as payment against GOYU's obligation. But, contrary to the
lower courts' findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such
payments had obviously been duly considered by GOYU, in its aforequoted letter date March 9, 1993, wherein it
admitted that its past due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU

as of January 21, 1993: P116,301,992.60

Broken down as follows:

Principal 1 Interest

Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2

LESS:

1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81

2) Proceeds from
Equitable Insurance
Company 2,756,373.00

3) Payment from
foreign department
negotiation: 203,584.89
___________

9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90

The need for the payment of interest due the principal amount of the obligation, which is the cost of money to RCBC,
the primary end and the ultimate reason for RCBC's existence and being, was duly recognized by the trial court when
it ruled favorably on RCBC's counterclaim, ordering GOYU "to pay its loan obligation with RCBC in the amount of
62
P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory
notes (without surcharges and penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p. 479). Inexplicably, the
Court of Appeals, without even laying down the factual or legal justification for its ruling, modified the trial court's
ruling and ordered GOYU "to pay the principal amount of P68,785,069.04 without any interest, surcharges and
penalties" (Rollo, p. 200).

It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment
ofadditional interest, penalties, and charges, in this manner:

Regarding defendant RCBC's commitment not to charge additional interest, penalties and
surcharges, the same does not require that it be embodied in a document or some form of writing to
be binding and enforceable. The principle is well known that generally a verbal agreement or contract
is no less binding and effective than a written one. And the existence of such a verbal agreement has
been amply established by the evidence in this case. In any event, regardless of the existence of
such verbal agreement, it would still be unjust and inequitable for defendant RCBC to charge the
plaintiff with surcharges and penalties considering the latter's pitiful situation. (Emphasis supplied).

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges
and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite
express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of
interest for loans forms a very essential and fundamental element of the banking business, which may truly be
considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will
not charge any interest at all. We fail to find justification for the Court of Appeal's outright deletion of the payment of
interest as agreed upon in the respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court
inEastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the actual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default,i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of
the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may be deemed to have
63
 been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

(pp. 95-97).

There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and
tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed interest rates must be followed. This
is very clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation must be taken into
account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be
deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing,
may have relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot
accept the lower courts' finding that RCBC had thereby ipso facto effectively waived collection of any additional
interests, surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional
interests, surcharges, and penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:

Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges
and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in
another. This provision of law will have to be applied to the established facts of any given case. Given the
circumstance under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable.
The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYU's offer to pay the
amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit "BB"), which RCBC refused, we find it more in
keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time
onward.

Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for denying or withholding
the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the right
to claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights, GOYU lost
its standing as the beneficiary of the said insurance policies.

Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of
insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA. 185
SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a
difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a
claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without
64
reasonable cause as the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42
F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs.
Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in
bad faith delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary of
the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance proceeds,
not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the outcome
herein, justified MICO in withholding payment to GOYU.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two
simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single
cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due consideration to this
argument of GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R. CV
No. 46247, the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the
resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of discretion.

As held in Pea vs. Court of Appeals (245 SCRA 691 [1995]):

It should have been enough, nonetheless, for the appellate court to merely set aside the questioned
ordered of the trial court for having been issued by the latter with grave abuse of discretion. In
likewise enjoining permanently herein petitioner "from entering in and interfering with the use or
occupation and enjoyment of petitioner's (now private respondent) residential house and compound,"
the appellate court in effect, precipitately resolved with finality the case for injunction that was yet to
be heard on the merits by the lower court. Elevated to the appellate court, it might be stressed, were
mere incidents of the principal case still pending with the trial court. In Municipality of Bian, Laguna
vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have "no jurisdiction in
a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself
which was not on appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it has
been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is rendered
moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over the MICO
insurance policies. It is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or
attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of
Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April
3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch
3 of the Manila Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation
the proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis
& Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of P50,505,594.60 (per O.R. No.
3649285);

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 3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests
earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation
in the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each
promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and
penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan
Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its
earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn
interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is
DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastian's right as
attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the Malayan
insurance policies as first mortgagee.

SO ORDERED.

66