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G.R. No.

95546 November 6, 1992

MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,


vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by
American International Underwriters (Phils.), Inc., respondent.

BELLOSILLO, J.:

This case involves a purely legal question: whether payment by installment of the
premiums due on an insurance policy invalidates the contract of insurance, in view of
Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which
provides:

Sec. 77. An insurer is entitled to the payment of the premium as soon as


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

Sometime in early 1982, private respondent American Home Assurance Co. (AHAC),
represented by American International Underwriters (Phils.), Inc., issued in favor of
petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy
No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1
March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The
premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982
and 16 November 1982, all of which were accepted by private respondent.

On 10 February 1983, private respondent issued to petitioner Insurance Policy No.


AH-CPP-9210596, which replaced and renewed the previous policy, for a term
covering 1 March 1983 to 1 March 1984. The premium in the amount of P466,103.05
was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9
September 1983, and 21 November 1983. All payments were likewise accepted by
private respondent.

On 20 January 1984, the policy was again renewed and private respondent issued to
petitioner Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1
March 1985. On this renewed policy, petitioner made two installment payments, both
accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the
second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the
balance of the premium.

Consequently, private respondent filed an action to recover the unpaid balance of


P314,103.05 for Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy
No. AH-CPP-9210651. It explained that it discontinued the payment of premiums
because the policy did not contain a credit clause in its favor and the receipts for the
installment payments covering the policy for 1984-85, as well as the two (2) previous
policies, stated the following reservations:

2. Acceptance of this payment shall not waive any of the company rights to
deny liability on any claim under the policy arising before such payments
or after the expiration of the credit clause of the policy; and

3. Subject to no loss prior to premium payment. If there be any loss such is


not covered.

Petitioner further claimed that the policy was never binding and valid, and no risk
attached to the policy. It then pleaded a counterclaim for P152,000.00 for the
premiums already paid for 1984-85, and in its answer with amended counterclaim,
sought the refund of P924,206.10 representing the premium payments for 1982-85.

After some incidents, petitioner and private respondent moved for summary
judgment.

On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon
the following findings:

While it is true that the receipts issued to the defendant contained the
aforementioned reservations, it is equally true that payment of the
premiums of the three aforementioned policies (being sought to be
refunded) were made during the lifetime or term of said policies, hence, it
could not be said, inspite of the reservations, that no risk attached under
the policies. Consequently, defendant's counterclaim for refund is not
justified.

As regards the unpaid premiums on Insurance Policy No. AH-CPP-


9210651, in view of the reservation in the receipts ordinarily issued by the
plaintiff on premium payments the only plausible conclusion is that
plaintiff has no right to demand their payment after the lapse of the term
of said policy on March 1, 1985. Therefore, the defendant was justified in
refusing to pay the same. 1

Both parties appealed from the judgment of the trial court. Thereafter, the Court of
Appeals rendered a decision 2 modifying that of the trial court by ordering herein
petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or
P314,103.05 plus legal interest until fully paid, and affirming the denial of the
counterclaim. The appellate court thus explained

The obligation to pay premiums when due is ordinarily as indivisible


obligation to pay the entire premium. Here, the parties herein agreed to
make the premiums payable in installments, and there is no pretense that
the parties never envisioned to make the insurance contract binding
between them. It was renewed for two succeeding years, the second and
third policies being a renewal/replacement for the previous one. And the
insured never informed the insurer that it was terminating the policy
because the terms were unacceptable.

While it may be true that under Section 77 of the Insurance Code, the
parties may not agree to make the insurance contract valid and binding
without payment of premiums, there is nothing in said section which
suggests that the parties may not agree to allow payment of the premiums
in installment, or to consider the contract as valid and binding upon
payment of the first premium. Otherwise, we would allow the insurer to
renege on its liability under the contract, had a loss incurred (sic) before
completion of payment of the entire premium, despite its voluntary
acceptance of partial payments, a result eschewed by a basic
considerations of fairness and equity.

To our mind, the insurance contract became valid and binding upon
payment of the first premium, and the plaintiff could not have denied
liability on the ground that payment was not made in full, for the reason
that it agreed to accept installment payment. . . . 3

Petitioner now asserts that its payment by installment of the premiums for the
insurance policies for 1982, 1983 and 1984 invalidated said policies because of the
provisions of Sec. 77 of the Insurance Code, as amended, and by the conditions
stipulated by the insurer in its receipts, disclaiming liability for loss for occurring
before payment of premiums.

It argues that where the premiums is not actually paid in full, the policy would only be
effective if there is an acknowledgment in the policy of the receipt of premium
pursuant to Sec. 78 of the Insurance Code. The absence of an express acknowledgment
in the policies of such receipt of the corresponding premium payments, and
petitioner's failure to pay said premiums on or before the effective dates of said
policies rendered them invalid. Petitioner thus concludes that there cannot be a
perfected contract of insurance upon mere partial payment of the premiums because
under Sec. 77 of the Insurance Code, no contract of insurance is valid and binding
unless the premium thereof has been paid, notwithstanding any agreement to the
contrary. As a consequence, petitioner seeks a refund of all premium payments made
on the alleged invalid insurance policies.

We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that petitioner and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in
1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer
accepted all the installment payments. Such acceptance of payments speaks loudly of
the insurer's intention to honor the policies it issued to petitioner. Certainly, basic
principles of equity and fairness would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later deny liability on the
lame excuse that the premiums were not prepared in full.

We therefore sustain the Court of Appeals. We quote with approval the well-reasoned
findings and conclusion of the appellate court contained in its Resolution denying the
motion to reconsider its Decision

While the import of Section 77 is that prepayment of premiums is strictly


required as a condition to the validity of the contract, We are not prepared
to rule that the request to make installment payments duly approved by
the insurer, would prevent the entire contract of insurance from going into
effect despite payment and acceptance of the initial premium or first
installment. Section 78 of the Insurance Code in effect allows waiver by the
insurer of the condition of prepayment by making an acknowledgment in
the insurance policy of receipt of premium as conclusive evidence of
payment so far as to make the policy binding despite the fact that premium
is actually unpaid. Section 77 merely precludes the parties from
stipulating that the policy is valid even if premiums are not paid, but does
not expressly prohibit an agreement granting credit extension, and such
an agreement is not contrary to morals, good customs, public order or
public policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in installments not so
proscribed. At the very least, both parties should be deemed in estoppel to
question the arrangement they have voluntarily accepted. 4

The reliance by petitioner on Arce vs. Capital Surety and Insurance


Co. 5 is unavailing because the facts therein are substantially different from those in
the case at bar. In Arce, no payment was made by the insured at all despite the grace
period given. In the case before Us, petitioner paid the initial installment and
thereafter made staggered payments resulting in full payment of the 1982 and 1983
insurance policies. For the 1984 policy, petitioner paid two (2) installments although
it refused to pay the balance.

It appearing from the peculiar circumstances that the parties actually intended to
make three (3) insurance contracts valid, effective and binding, petitioner may not be
allowed to renege on its obligation to pay the balance of the premium after the
expiration of the whole term of the third policy (No. AH-CPP-9210651) in March
1985. Moreover, as correctly observed by the appellate court, where the risk is entire
and the contract is indivisible, the insured is not entitled to a refund of the premiums
paid if the insurer was exposed to the risk insured for any period, however brief or
momentary.

WHEREFORE, finding no reversible error in the judgment appealed from, the same is
AFFIRMED. Costs against petitioner.

SO ORDERED

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


UCPB GENERAL INSURANCE CO. INC., petitioner, vs. MASAGANA TELAMART, INC.,
respondent.

RESOLUTION

DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed
decisioni[1] of the Court of Appeals, which affirmed with modification the judgment of
the trial court (a) allowing Respondent to consign the sum of P225,753.95 as full
payment of the premiums for the renewal of the five insurance policies on
Respondents properties; (b) declaring the replacement-renewal policies effective and
binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay
Respondent P18,645,000.00 as indemnity for the burned properties covered by the
renewal-replacement policies. The modification consisted in the (1) deletion of the
trial courts declaration that three of the policies were in force from August 1991 to
August 1992; and (2) reduction of the award of the attorneys fees from 25% to 10% of
the total amount due the Respondent.

The material operative facts upon which the appealed judgment was based are
summarized by the Court of Appeals in its assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5)
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay
City and Manila].

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May
1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties located at
2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13,
1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's
Checks in the total amount of P225,753.45 as renewal premium payments for which
Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by
defendant. On July 14, 1992, Masagana made its formal demand for indemnification
for the burned insured properties. On the same day, defendant returned the five (5)
manager's checks stating in its letter (Exhibit "R"/"8", Record, p. 192) that it was
rejecting Masagana's claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;

b) Defendant had put plaintiff and its alleged broker on notice of non-renewal
earlier; and

c) The properties covered by the said policies were burned in a fire that took place
last June 13, 1992, or before tender of premium payment."

(Record, p. 5)

Hence Masagana filed this case.


The Court of Appeals disagreed with Petitioners stand that Respondents tender of
payment of the premiums on 13 July 1992 did not result in the renewal of the policies,
having been made beyond the effective date of renewal as provided under Policy
Condition No. 26, which states:

26. Renewal Clause. -- Unless the company at least forty five days in advance of the
end of the policy period mails or delivers to the assured at the address shown in the
policy notice of its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the assured shall be entitled to renew
the policy upon payment of the premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that
Respondent, which had procured insurance coverage from Petitioner for a number of
years, had been granted a 60 to 90-day credit term for the renewal of the policies.
Such a practice had existed up to the time the claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued
on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990
under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for
Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on
May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than
60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other
policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May
22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July 19,
1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but
premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X-1").
Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May
22, 1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990
under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover
insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but
premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799
(Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from
January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's
sister company) dated December 10, 1988 but premium therefor was paid only on
February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance
Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25,
1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22,
1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22,
1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance
risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire
Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but premium was paid
only on February 13, 1990 under O.R. No. 39233 for insurance coverage from May 22,
1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was
issued on November 22, 1988 but premium therefor was collected only on March 15,
1989 under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to
December 15, 1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute
preponderant proof that no timely notice of non-renewal was made by Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350)


from Ultramar Reinsurance Brokers that plaintiffs reinsurance facility had been
confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit 11.
Apparently, the notice of non-renewal (Exhibit 7, Record, p. 320) was sent not
earlier than said date, or within 45 days from the expiry dates of the policies as
provided under Policy Condition No. 26; (2) Defendant insurer unconditionally
accepted, and issued an official receipt for, the premium payment on July 1[3],
1992 which indicates defendant's willingness to assume the risk despite only a
67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban
Adjusters and Valuers to investigate plaintiffs claim as shown by the letter dated
July 17, 1992 (Exhibit 11, Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be whether the fire
insurance policies issued by petitioner to the respondent covering the period from
May 22, 1991 to May 22, 1992 had been extended or renewed by an implied credit
arrangement though actual payment of premium was tendered on a later date and
after the occurrence of the (fire) risk insured against. We resolved this issue in the
negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela v.
Court of Appealsii[2]; South Sea Surety and Insurance Co., Inc. v. Court of
Appealsiii[3]; and Tibay v. Court of Appeals.iv[4] Accordingly, we reversed and set
aside the decision of the Court of Appeals.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It
alleges in the motion that we had made in the decision our own findings of facts, which
are not in accord with those of the trial court and the Court of Appeals. The courts
below correctly found that no notice of non-renewal was made within 45 days before
22 May 1992, or before the expiration date of the fire insurance policies. Thus, the
policies in question were renewed by operation of law and were effective and valid on
30 June 1992 when the fire occurred, since the premiums were paid within the 60- to
90-day credit term.

Respondent likewise disagrees with our ruling that parties may neither agree
expressly or impliedly on the extension of credit or time to pay the premium nor
consider a policy binding before actual payment. It urges the Court to take judicial
notice of the fact that despite the express provision of Section 77 of the Insurance
Code, extension of credit terms in premium payment has been the prevalent practice
in the insurance industry. Most insurance companies, including Petitioner, extend
credit terms because Section 77 of the Insurance Code is not a prohibitive injunction
but is merely designed for the protection of the parties to an insurance contract. The
Code itself, in Section 78, authorizes the validity of a policy notwithstanding non-
payment of premiums.

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its
awareness of Section 77 Petitioner persuaded and induced Respondent to believe that
payment of premium on the 60- to 90-day credit term was perfectly alright; in fact it
accepted payments within 60 to 90 days after the due dates. By extending credit and
habitually accepting payments 60 to 90 days from the effective dates of the policies, it
has implicitly agreed to modify the tenor of the insurance policy and in effect waived
the provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.

Petitioner filed an opposition to the Respondents motion for reconsideration. It argues


that both the trial court and the Court of Appeals overlooked the fact that on 6 April
1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal and sent
by personal delivery a copy thereof to Respondents broker, Zuellig. Both courts
likewise ignored the fact that Respondent was fully aware of the notice of non-renewal.
A reading of Section 66 of the Insurance Code readily shows that in order for an
insured to be entitled to a renewal of a non-life policy, payment of the premium due on
the effective date of renewal should first be made. Respondents argument that Section
77 is not a prohibitive provision finds no authoritative support.

Upon a meticulous review of the records and reevaluation of the issues raised in the
motion for reconsideration and the pleadings filed thereafter by the parties, we
resolved to grant the motion for reconsideration. The following facts, as found by the
trial court and the Court of Appeals, are indeed duly established:

1. For years, Petitioner had been issuing fire policies to the Respondent, and these
policies were annually renewed.

2. Petitioner had been granting Respondent a 60- to 90-day credit term within which
to pay the premiums on the renewed policies.

3. There was no valid notice of non-renewal of the policies in question, as there is no


proof at all that the notice sent by ordinary mail was received by Respondent, and the
copy thereof allegedly sent to Zuellig was ever transmitted to Respondent.

4. The premiums for the policies in question in the aggregate amount of P225,753.95
were paid by Respondent within the 60- to 90-day credit term and were duly accepted
and received by Petitioners cashier.

The instant case has to rise or fall on the core issue of whether Section 77 of the
Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioners
advantage despite its practice of granting a 60- to 90-day credit term for the payment
of premiums.

Section 77 of the Insurance Code of 1978 provides:

SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured
is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code)
promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of
Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540,
approved on 21 June 1963, which read:

SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the peril insured against, unless there is clear agreement to grant the
insured credit extension of the premium due. No policy issued by an insurance
company is valid and binding unless and until the premium thereof has been paid.
(Underscoring supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72
expressly permitting an agreement to extend the period to pay the premium. But are
there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or
industrial life policy whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of


premium is conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs.
Court of Appeals,v[5] wherein we ruled that Section 77 may not apply if the parties
have agreed to the payment in installments of the premium and partial payment has
been made at the time of loss. We said therein, thus:

We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that the petitioners and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in
1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted
all the installment payments. Such acceptance of payments speaks loudly of the
insurers intention to honor the policies it issued to petitioner. Certainly, basic
principles of equity and fairness would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later deny liability on the
lame excuse that the premiums were not prepaid in full.

Not only that. In Tuscany, we also quoted with approval the following pronouncement
of the Court of Appeals in its Resolution denying the motion for reconsideration of its
decision:
While the import of Section 77 is that prepayment of premiums is strictly required as
a condition to the validity of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so far
as to make the policy binding despite the fact that premium is actually unpaid. Section
77 merely precludes the parties from stipulating that the policy is valid even if
premiums are not paid, but does not expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary to morals, good customs, public
order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to
allow insured to pay premiums in installments not so prescribed. At the very least,
both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals,
Tuscany has provided a fourth exception to Section 77, namely, that the insurer may
grant credit extension for the payment of the premium. This simply means that if the
insurer has granted the insured a credit term for the payment of the premium and loss
occurs before the expiration of the term, recovery on the policy should be allowed even
though the premium is paid after the loss but within the credit term.

Moreover, there is nothing in Section 77 which prohibits the parties in an insurance


contract to provide a credit term within which to pay the premiums. That agreement
is not against the law, morals, good customs, public order or public policy. The
agreement binds the parties. Article 1306 of the Civil Code provides:

ART. 1306. The contracting parties may establish such stipulations clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy
would not be permitted against Petitioner, which had consistently granted a 60- to 90-
day credit term for the payment of premiums despite its full awareness of Section 77.
Estoppel bars it from taking refuge under said Section, since Respondent relied in good
faith on such practice. Estoppel then is the fifth exception to Section 77.

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET
ASIDE, and a new one is hereby entered DENYING the instant petition for failure of
Petitioner to sufficiently show that a reversible error was committed by the Court of
Appeals in its challenged decision, which is hereby AFFIRMED in toto.

No pronouncement as to cost.

SO ORDERED

[G.R. No. 137172. June 15, 1999]


UCPB GENERAL INSURANCE CO., INC., petitioner, vs. MASAGANA TELAMART, INC.,
respondent.

DECISION

PARDO, J.:

The case is an appeal via certiorari seeking to set aside the decision of the Court of
Appeals,vi[1] affirming with modification that of the Regional Trial Court, Branch 58,
Makati, ordering petitioner to pay respondent the sum of P18,645,000.00, as the
proceeds of the insurance coverage of respondent's property razed by fire; 25% of the
total amount due as attorney's fees and P25,000.00 as litigation expenses, and costs.

The facts are undisputed and may be related as follows:

On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's
various property described therein against fire, for the period from May 22, 1991 to
May 22, 1992.

In March 1992, petitioner evaluated the policies and decided not to renew them upon
expiration of their terms on May 22, 1992. Petitioner advised respondent's broker,
Zuellig Insurance Brokers, Inc. of its intention not to renew the policies.

On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of


the policies at the address stated in the policies.

On June 13, 1992, fire razed respondent's property covered by three of the insurance
policies petitioner issued.

On July 13, 1992, respondent presented to petitioner's cashier at its head office five
(5) manager's checks in the total amount of P225,753.95, representing premium for
the renewal of the policies from May 22, 1992 to May 22, 1993. No notice of loss was
filed by respondent under the policies prior to July 14, 1992.

On July 14, 1992, respondent filed with petitioner its formal claim for indemnification
of the insured property razed by fire.

On the same day, July 14, 1992, petitioner returned to respondent the five (5)
manager's checks that it tendered, and at the same time rejected respondent's claim
for the reasons (a) that the policies had expired and were not renewed, and (b) that
the fire occurred on June 13, 1992, before respondent's tender of premium payment.

On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati
City, a civil complaint against petitioner for recovery of P18,645,000.00, representing
the face value of the policies covering respondent's insured property razed by fire, and
for attorney's fees.vii[2]
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an
answer to the complaint. It alleged that the complaint "fails to state a cause of action";
that petitioner was not liable to respondent for insurance proceeds under the policies
because at the time of the loss of respondent's property due to fire, the policies had
long expired and were not renewed.viii[3]

After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati,
rendered decision, the dispositive portion of which reads:

"WHEREFORE, premises considered, judgment is hereby rendered in favor of the


plaintiff and against the defendant, as follows:

"(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum
of P225,753.95 (refused by the defendant) as full payment of the corresponding
premiums for the replacement-renewal policies for Exhibits A, B, C, D and E;

"(2) Declaring plaintiff to have fully complied with its obligation to pay the premium
thereby rendering the replacement-renewal policy of Exhibits A, B, C, D and E effective
and binding for the duration May 22, 1992 until May 22, 1993; and, ordering
defendant to deliver forthwith to plaintiff the said replacement-renewal policies;

"(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992
and August 9, 1991 to August 9, 1992, respectively; and

"(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00
representing the latter's claim for indemnity under Exhibits A, B & C and/or its
replacement-renewal policies; (b) 25% of the total amount due as and for attorney's
fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the costs of suit.

"All other claims and counterclaims asserted by the parties are denied and/or
dismissed, including plaintiff's claim for interests.

"SO ORDERED.

"Makati, Metro-Manila, March 10, 1993.

"ZOSIMO Z. ANGELES

Judge.ix[4]

In due time, petitioner appealed to the Court of Appeals.x[5]

On September 7, 1998, the Court of Appeals promulgated its decisionxi[6] affirming


that of the Regional Trial Court with the modification that item No. 3 of the dispositive
portion was deleted, and the award of attorney's fees was reduced to 10% of the total
amount due.xii[7]
The Court of Appeals held that following previous practise, respondent was allowed a
sixty (60) to ninety (90) day credit term for the renewal of its policies, and that the
acceptance of the late premium payment suggested an understanding that payment
could be made later.

Hence, this appeal.

By resolution adopted on March 24, 1999, we required respondent to comment on the


petition, not to file a motion to dismiss within ten (10) days from notice.xiii[8] On
April 22, 1999, respondent filed its comment.xiv[9]

Respondent submits that the Court of Appeals correctly ruled that no timely notice of
non-renewal was sent. The notice of non-renewal sent to broker Zuellig which claimed
that it verbally notified the insurance agency but not respondent itself did not suffice.
Respondent submits further that the Court of Appeals did not err in finding that there
existed a sixty (60) to ninety (90) days credit agreement between UCPB and
Masagana, and that, finally, the Supreme Court could not review factual findings of the
lower court affirmed by the Court of Appeals.xv[10]

We give due course to the appeal.

The basic issue raised is whether the fire insurance policies issued by petitioner to the
respondent covering the period May 22, 1991 to May 22, 1992, had expired on the
latter date or had been extended or renewed by an implied credit arrangement though
actual payment of premium was tendered on a later date after the occurrence of the
risk (fire) insured against.

The answer is easily found in the Insurance Code. No, an insurance policy, other than
life, issued originally or on renewal, is not valid and binding until actual payment of
the premium. Any agreement to the contrary is void.xvi[11] The parties may not
agree expressly or impliedly on the extension of credit or time to pay the premium and
consider the policy binding before actual payment.

The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo,xvii[12] cited by the Court of
Appeals, is not applicable. In that case, payment of the premium was in fact actually
made on December 24, 1981, and the fire occurred on January 18, 1982. Here, the
payment of the premium for renewal of the policies was tendered on July 13, 1992, a
month after the fire occurred on June 13, 1992. The assured did not even give the
insurer a notice of loss within a reasonable time after occurrence of the fire.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court
of Appeals in CA-G.R. CV No. 42321. In lieu thereof, the Court renders judgment
dismissing respondent's complaint and petitioner's counterclaims thereto filed with
the Regional Trial Court, Branch 58, Makati City, in Civil Case No. 92-2023. Without
costs.

SO ORDERED.
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 decisionxviii[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. 206-4234498-7, was issued, whereby
petitioner undertook to indemnify respondent for any damage or loss arising from fire
up to P200,000 for the period 25 March 1990 to 25 March 1991.

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

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

The trial court ruled in favor of respondent. It found that respondent paid by way of
check a day before the fire occurred. The check, which was deposited in 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.

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.,xix[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 1249xx[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,xxi[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,xxii[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 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; and P50,000 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.xxiii[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.xxiv[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.xxv[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.

This Section establishes a legal fiction of payment and should be interpreted as an


exception to Section 77.xxvi[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 Appealsxxvii[10] clearly illustrates such principle. However, we see an
exception in the instant case.

Citing Section 29xxviii[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.xxix[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.xxx[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 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.xxxi[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.xxxii[15]

The lawxxxiii[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.xxxiv[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.xxxv[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.

SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO,


VICTORINA M. RORALDO, VIRGILIO M. RORALDO, MYRNA M. RORALDO and
ROSABELLA M. RORALDO, petitioners, vs. COURT OF APPEALS and FORTUNE LIFE
AND GENERAL INSURANCE CO., INC., respondents.

D E C I S I O N*

BELLOSILLO, J.:

May a fire insurance policy be valid, binding and enforceable upon mere partial
payment of premium?
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc.
(FORTUNE) issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay
and/or Nicolas Roraldo on their two-storey residential building located at 5855 Zobel
Street, Makati City, together with all their personal effects therein. The insurance was
for P600,000.00 covering the period from 23 January 1987 to 23 January 1988. On
23 January 1987, of the total premium of P2,983.50, petitioner Violeta Tibay only
paid P600.00 thus leaving a considerable balance unpaid.

On 8 March 1987 the insured building was completely destroyed by fire. Two days
later or on 10 March 1987 Violeta Tibay paid the balance of the premium. On the same
day, she filed with FORTUNE a claim on the fire insurance policy. Her claim was
accordingly referred to its adjuster, Goodwill Adjustment Services, Inc. (GASI), which
immediately wrote Violeta requesting her to furnish it with the necessary documents
for the investigation and processing of her claim. Petitioner forthwith complied. On 28
March 1987 she signed a non-waiver agreement with GASI to the effect that any
action taken by the companies or their representatives in investigating the claim
made by the claimant for his loss which occurred at 5855 Zobel Roxas, Makati on
March 8, 1987, or in the investigating or ascertainment of the amount of actual cash
value and loss, shall not waive or invalidate any condition of the policies of such
companies held by said claimant, nor the rights of either or any of the parties to this
agreement, and such action shall not be, or be claimed to be, an admission of liability
on the part of said companies or any of them.xxxvi[1]

In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of
Policy Condition No. 2 and of Sec. 77 of the Insurance Code. Efforts to settle the case
before the Insurance Commission proved futile. On 3 March 1988 Violeta and the
other petitioners sued FORTUNE for damages in the amount of P600,000.00
representing the total coverage of the fire insurance policy plus 12% interest per
annum, P 100,000.00 moral damages, and attorneys fees equivalent to 20% of the
total claim.

On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for
the total value of the insured building and personal properties in the amount of
P600,000.00 plus interest at the legal rate of 6% per annum from the filing of the
complaint until full payment, and attorneys fees equivalent to 20% of the total amount
claimed plus costs of suit.xxxvii[2]

On 24 March 1995 the Court of Appeals reversed the court a quo by declaring
FORTUNE not to be liable to plaintiff-appellees therein but ordering defendant-
appellant to return to the former the premium of P2,983.50 plus 12% interest from 10
March 1987 until full payment.xxxviii[3]

Hence this petition for review with petitioners contending mainly that contrary to the
conclusion of the appellate court, FORTUNE remains liable under the subject fire
insurance policy inspite of the failure of petitioners to pay their premium in full.

We find no merit in the petition; hence, we affirm the Court of Appeals.


Insurance is a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent
event.xxxix[4] The consideration is the premium, which must be paid at the time and
in the way and manner specified in the policy, and if not so paid, the policy will lapse
and be forfeited by its own terms.xl[5]

The pertinent provisions in the Policy on premium read

THIS POLICY OF INSURANCE WITNESSETH, THAT only after payment to the


Company in accordance with Policy Condition No. 2 of the total premiums by the
insured as stipulated above for the period aforementioned for insuring against Loss or
Damage by Fire or Lightning as herein appears, the Property herein described x x x

2. This policy including any renewal thereof and/or any endorsement thereon is
not in force until the premium has been fully paid to and duly receipted by the
Company in the manner provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent,


broker or Company official, shall be deemed invalid and of no effect.

xxx xxx xxx

Except only in those specific cases where corresponding rules and regulations which
are or may hereafter be in force provide for the payment of the stipulated premiums in
periodic installments at fixed percentage, it is hereby declared, agreed and warranted
that this policy shall be deemed effective, valid and binding upon the Company only
when the premiums therefor have actually been paid in full and duly acknowledged in
a receipt signed by any authorized official or representative/agent of the Company in
such manner as provided herein, (Italics supplied).xli[6]

Clearly the Policy provides for payment of premium in full. Accordingly, where the
premium has only been partially paid and the balance paid only after the peril insured
against has occurred, the insurance contract did not take effect and the insured
cannot collect at all on the policy. This is fully supported by Sec. 77 of the Insurance
Code which provides

SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured
is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies (Italics
supplied).

Apparently the crux of the controversy lies in the phrase unless and until the
premium thereof has been paid. This leads us to the manner of payment envisioned by
the law to make the insurance policy operative and binding. For whatever judicial
construction may be accorded the disputed phrase must ultimately yield to the clear
mandate of the law. The principle that where the law does not distinguish the court
should neither distinguish assumes that the legislature made no qualification on the
use of a general word or expression. In Escosura v. San Miguel Brewery, inc.,xlii[7]
the Court through Mr. Justice Jesus G. Barrera, interpreting the phrase with pay used
in connection with leaves of absence with pay granted to employees, ruled -

x x x the legislative practice seems to be that when the intention is to distinguish


between full and partial payment, the modifying term is used x x x

Citing C. A. No. 647 governing maternity leaves of married women in government, R.


A. No. 679 regulating employment of women and children, R.A. No. 843 granting
vacation and sick leaves to judges of municipal courts and justices of the peace, and
finally, Art. 1695 of the New Civil Code providing that every househelp shall be
allowed four (4) days vacation each month, which laws simply stated with pay, the
Court concluded that it was undisputed that in all these laws the phrase with pay used
without any qualifying adjective meant that the employee was entitled to full
compensation during his leave of absence.

Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite
partial payment of the premium due and the express stipulation thereof to the
contrary, petitioners rely heavily on the 1967 case of Philippine Phoenix and
Insurance Co., Inc. v. Woodworks, Inc.xliii[8] where the Court through Mr. Justice
Arsenio P. Dizon sustained the ruling of the trial court that partial payment of the
premium made the policy effective during the whole period of the policy. In that case,
the insurance company commenced action against the insured for the unpaid balance
on a fire insurance policy. In its defense the insured claimed that nonpayment of
premium produced the cancellation of the insurance contract. Ruling otherwise the
Court held

It is clear x x x that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by
appellee and delivered to appellant, and that on September 22 of the same year, the
latter paid to the former the sum of P3,000.00 on account of the total premium of
P6,051.95 due thereon. There is, consequently, no doubt at all that, as between the
insurer and the insured, there was not only a perfected contract of insurance but a
partially performed one as far as the payment of the agreed premium was concerned.
Thereafter the obligation of the insurer to pay the insured the amount, for which the
policy was issued in case the conditions therefor had been complied with, arose and
became binding upon it, while the obligation of the insured to pay the remainder of the
total amount of the premium due became demandable.

The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute.
For one, the factual scenario is different. In Phoenix it was the insurance company
that sued for the balance of the premium, i.e., it recognized and admitted the existence
of an insurance contract with the insured. In the case before us, there is, quite unlike
in Phoenix, a specific stipulation that (t)his policy xxx is not in force until the
premium has been fully paid and duly receipted by the Company x x x. Resultantly, it
is correct to say that in Phoenix a contract was perfected upon partial payment of the
premium since the parties had not otherwise stipulated that prepayment of the
premium in full was a condition precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding
the remainder of the premium without any other precondition to its enforceability as
in the instant case, the insurer in effect had shown its intention to continue with the
existing contract of insurance, as in fact it was enforcing its right to collect premium,
or exact specific performance from the insured. This is not so here. By express
agreement of the parties, no vinculum juris or bond of law was to be established until
full payment was effected prior to the occurrence of the risk insured against.

In Makati Tuscany Condominium Corp. v. Court of Appealsxliv[9] the parties mutually


agreed that the premiums could be paid in installments, which in fact they did for
three (3) years, hence, this Court refused to invalidate the insurance policy. In giving
effect to the policy, the Court quoted with approval the Court of Appeals

The obligation to pay premiums when due is ordinarily an indivisible obligation to pay
the entire premium. Here, the parties x x x agreed to make the premiums payable in
installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years,
the second and third policies being a renewal/replacement for the previous one. And
the insured never informed the insurer that it was terminating the policy because the
terms were unacceptable.

While it maybe true that under Section 77 of the Insurance Code, the parties may not
agree to make the insurance contract valid and binding without payment of premiums,
there is nothing in said section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract as valid and
binding upon payment of the first premium. Otherwise we would allow the insurer to
renege on its liability under the contract, had a loss incurred (sic) before completion of
payment of the entire premium, despite its voluntary acceptance of partial payments,
a result eschewed by basic considerations of fairness and equity x x x.

These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either
express or implied, of prepayment in full by the insurer: impliedly, by suing for the
balance of the premium as inPhoenix, and expressly, by agreeing to make premiums
payable in installments as in Tuscany. But contrary to the stance taken by petitioners,
there is no waiver express or implied in the case at bench. Precisely, the insurer and
the insured expressly stipulated that (t)his policy including any renewal thereof
and/or any indorsement thereon is not in force until the premium has been fully paid
to and duly receipted by the Company x x x and that this policy shall be deemed
effective, valid and binding upon the Company only when the premiums therefor have
actually been paid in full and duly acknowledged.

Conformably with the aforesaid stipulations explicitly worded and taken in


conjunction with Sec. 77 of the Insurance Code the payment of partial premium by the
assured in this particular instance should not be considered the payment required by
the law and the stipulation of the parties. Rather, it must be taken in the concept of a
deposit to be held in trust by the insurer until such time that the full amount has been
tendered and duly receipted for. In other words, as expressly agreed upon in the
contract, full payment must be made before the risk occurs for the policy to be
considered effective and in force.

Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured
according to law ever resulted from the fractional payment of premium. The insurance
contract itself expressly provided that the policy would be effective only when the
premium was paid in full. It would have been altogether different were it not so
stipulated. Ergo, petitioners had absolute freedom of choice whether or not to be
insured by FORTUNE under the terms of its policy and they freely opted to adhere
thereto.

Indeed, and far more importantly, the cardinal polestar in the construction of an
insurance contract is the intention of the parties as expressed in the policy.xlv[10]
Courts have no other function but to enforce the same. The rule that contracts of
insurance will be construed in favor of the insured and most strongly against the
insurer should not be permitted to have the effect of making a plain agreement
ambiguous and then construe it in favor of the insured.xlvi[11] Verily, it is elemental
law that the payment of premium is requisite to keep the policy of insurance in force.
If the premium is not paid in the manner prescribed in the policy as intended by the
parties the policy is ineffective. Partial payment even when accepted as a partial
payment will not keep the policy alive even for such fractional part of the year as the
part payment bears to the whole payment.xlvii[12]

Applying further the rules of statutory construction, the position maintained by


petitioners becomes even more untenable. The case of South Sea Surety and Insurance
Company, Inc. v. Court of Appeals,xlviii[13] speaks only of two (2) statutory
exceptions to the requirement of payment of the entire premium as a prerequisite to
the validity of the insurance contract. These exceptions are: (a) in case the insurance
coverage relates to life or industrial life (health) insurance when a grace period
applies, and (b) when the insurer makes a written acknowledgment of the receipt of
premium, this acknowledgment being declared by law to, be then conclusive evidence
of the premium payment.xlix[14]

A maxim of recognized practicality is the rule that the expressed exception or


exemption excludes others. Exceptio firm at regulim in casibus non exceptis. The
express mention of exceptions operates to exclude other exceptions; conversely, those
which are not within the enumerated exceptions are deemed included in the general
rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and the law has
not expressly excepted partial payments, there is no valid and binding contract.
Hence, in the absence of clear waiver of prepayment in full by the insurer, the insured
cannot collect on the proceeds of the policy.

In the desire to safeguard the interest of the assured, itmust not be ignored that the
contract of insurance is primarily a risk-distributing device, a mechanism by which all
members of a group exposed to a particular risk contribute premiums to an insurer.
From these contributory funds are paid whatever losses occur due to exposure to the
peril insured against. Each party therefore takes a risk: the insurer, that of being
compelled upon the happening of the contingency to pay the entire sum agreed upon,
and the insured, that of parting with the amount required as premium, without
receiving anything therefor in case the contingency does not happen. To ensure
payment for these losses, the law mandates all insurance companies to maintain a
legal reserve fund in favor of those claiming under their policies.l[15] It should be
understood that the integrity of this fund cannot be secured and maintained if by
judicial fiat partial offerings of premiums were to be construed as a legal nexus
between the applicant and the insurer despite an express agreement to the contrary.
For what could prevent the insurance applicant from deliberately or wilfully holding
back full premium payment and wait for the risk insured against to transpire and then
conveniently pass on the balance of the premium to be deducted from the proceeds of
the insurance? Worse, what if the insured makes an initial payment of only 10%, or
even 1%, of the required premium, and when the risk occurs simply points to the
proceeds from where to source the balance? Can an insurance company then exist and
survive upon the payment of 1%, or even 10%, of the premium stipulated in the policy
on the basis that, after all, the insurer can deduct from the proceeds of the insurance
should the risk insured against occur?

Interpreting the contract of insurance stringently against the insurer but liberally in
favor of the insured despite clearly defined obligations of the parties to the policy can
be carried out to extremes that there is the danger that we may, so to speak, kill the
goose that lays the golden egg. We are well aware of insurance companies falling into
the despicable habit of collecting premiums promptly yet resorting to all kinds of
excuses to deny or delay payment of just insurance claims. But, in this case, the law is
manifestly on the side of the insurer. For as long as the current Insurance Code
remains unchanged and partial payment of premiums is not mentioned at all as among
the exceptions provided in Secs. 77 and 78, no policy of insurance can ever pretend to
be efficacious or effective until premium has been fully paid.

And so it must be. For it cannot be disputed that premium is the elixir vitae of the
insurance business because by law the insurer must maintain a legal reserve fund to
meet its contingent obligations to the public, hence, the imperative need for its prompt
payment and full satisfaction.li[16] It must be emphasized here that all actuarial
calculations and various tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt payment of premiums. Upon this
bedrock insurance firms are enabled to offer the assurance of security to the public at
favorable rates. But once payment of premium is left to the whim and caprice of the
insured, as when the courts tolerate the payment of a mere P600.00 as partial
undertaking out of the stipulated total premium of P2,983.50 and the balance to be
paid even after the risk insured against has occurred, as petitioners have done in this
case, on the principle that the strength of the vinculumjuris is not measured by any
specific amount of premium payment, we will surely wreak havoc on the business and
set to naught what has taken actuarians centuries to devise to arrive at a fair and
equitable distribution of risks and benefits between the insurer and the insured.

The terms of the insurance policy constitute the measure of the insurers liability. In
the absence of statutory prohibition to the contrary, insurance companies have the
same rights as individuals to limit their liability and to impose whatever conditions
they deem best upon their obligations not inconsistent with public policy.lii[17] The
validity of these limitations is by law passed upon by the Insurance Commissioner who
is empowered to approve all forms of policies, certificates or contracts of insurance
which insurers intend to issue or deliver. That the policy contract in the case at bench
was approved and allowed issuance simply reaffirms the validity of such policy,
particularly the provision in question.

WHEREFORE, the petition is DENIED and the assailed Decision of the Court of
Appeals dated 24 March 1995 is AFFIRMED.

SO ORDERED.

G.R. No. L-25317 August 6, 1979

PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, Plaintiff-Appellee, vs.


WOODWORKS, INC., Defendant-Appellant.

Zosimo Rivas for appellant.chanrobles virtual law library

Manuel O. Chan for appellee.

MELENCIO-HERRERA, J.:

This case was certified to this Tribunal by the Court of Appeals in its Resolution of
October 4, 1965 on a pure question of law and "because the issues raised are
practically the same as those in CA-G.R. No. 32017-R" between the same parties, which
case had been forwarded to us on April 1, 1964. The latter case, "Philippine Phoenix
Surety & Insurance Inc. vs. Woodworks, Inc.," docketed in this Court as L-22684, was
decided on August 31, 1967 and has been reported in 20 SCRA
1270.chanroblesvirtualawlibrary chanrobles virtual law library

Specifically, this action is for recovery of unpaid premium on a fire insurance policy
issued by plaintiff, Philippine Phoenix Surety & Insurance Company, in favor of
defendant Woodworks, Inc.chanroblesvirtualawlibrary chanrobles virtual law library

The following are the established facts: chanrobles virtual law library

On July 21, 1960, upon defendant's application, plaintiff issued in its favor Fire
Insurance Policy No. 9749 for P500,000.00 whereby plaintiff insured defendant's
building, machinery and equipment for a term of one year from July 21, 1960 to July
21, 1961 against loss by fire. The premium and other charges including the margin fee
surcharge of P590.76 and the documentary stamps in the amount of P156.60 affixed
on the Policy, amounted to P10,593.36.chanroblesvirtualawlibrary chanrobles virtual
law library
It is undisputed that defendant did not pay the premium stipulated in the Policy when
it was issued nor at any time thereafter.chanroblesvirtualawlibrarychanrobles virtual
law library

On April 19, 1961, or before the expiration of the one-year term, plaintiff notified
defendant, through its Indorsement No. F-6963/61, of the cancellation of the Policy
allegedly upon request of defendant. 1 The latter has denied having made such a
request. In said Indorsement, plaintiff credited defendant with the amount of
P3,110.25 for the unexpired period of 94 days, and claimed the balance of P7,483.11
representing ,learned premium from July 21, 1960 to 18th April 1961 or, say 271
days." On July 6, 1961, plaintiff demanded in writing for the payment of said amount. 2
Defendant, through counsel, disclaimed any liability in its reply- letter of August 15,
1961, contending, in essence, that it need not pay premium "because the Insurer did
not stand liable for any indemnity during the period the premiums were not paid." 3
chanrobles virtual law library

On January 30, 1962, plaintiff commenced action in the Court of First Instance of
Manila, Branch IV (Civil Case No. 49468), to recover the amount of P7,483.11 as
"earned premium." Defendant controverted basically on the theory that its failure "to
pay the premium after the issuance of the policy put an end to the insurance contract
and rendered the policy unenforceable." 4 chanrobles virtual law library

On September 13, 1962, judgment was rendered in plaintiff's favor "ordering


defendant to pay plaintiff the sum of P7,483.11, with interest thereon at the rate of
6%, per annum from January 30, 1962, until the principal shall have been fully paid,
plus the sum of P700.00 as attorney's fees of the plaintiff, and the costs of the suit."
From this adverse Decision, defendant appealed to the Court of Appeals which, as
heretofore stated, certified the case to us on a question of
law.chanroblesvirtualawlibrary chanrobles virtual law library

The errors assigned read:

1. The lower court erred in sustaining that Fire Insurance Policy, Exhibit A, was a
binding contract even if the premium stated in the policy has not been
paid.chanroblesvirtualawlibrary chanrobles virtual law library

2. That the lower court erred in sustaining that the premium in Insurance Policy,
Exhibit B, became an obligation which was demandable even after the period in the
Policy has expired.chanroblesvirtualawlibrary chanrobles virtual law library

3. The lower court erred in not deciding that a premium not paid is not a debt
enforceable by action of the insurer.

We find the appeal meritorious.chanroblesvirtualawlibrary chanrobles virtual law


library

Insurance is "a contract whereby one undertakes for a consideration to indemnify


another against loss, damage or liability arising from an unknown or contingent
event." 5 The consideration is the "premium". "The premium must be paid at the time
and in the way and manner specified in the policy and, if not so paid, the policy will
lapse and be forfeited by its own terms." 6chanrobles virtual law library

The provisions on premium in the subject Policy read:

THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of - MESSRS.


WOODWORKS, INC. - hereinafter called the Insured, paying to the PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC., hereinafter called the Company, the sum of
- PESOS NINE THOUSAND EIGHT HUNDRED FORTY SIX ONLY - the Premium for the
first period hereinafter mentioned. ...chanroblesvirtualawlibrarychanrobles virtual
law library

xxx xxx xxxchanrobles virtual law library

THE COMPANY HEREBY AGREES with the Insured ... that if the Property above
described, or any part thereof, shall be destroyed or damaged by Fire or Lightning
after payment of Premium, at any time between 4:00 o'clock in the afternoon of the
TWENTY FIRST day of JULY One Thousand Nine Hundred and SIXTY and 4:00 o'clock
in the afternoon of the TWENTY FIRST day of JULY One Thousand Nine Hundred and
SIXTY ONE. ... (Emphasis supplied)

Paragraph "2" of the Policy further contained the following condition:

2. No payment in respect of any premium shall be deemed to be payment to the


Company unless a printed form of receipt for the same signed by an Official or duly-
appointed Agent of the Company shall have been given to the Insured.

Paragraph "10" of the Policy also provided:

10. This insurance may be terminated at any time at the request of the Insured, in
which case the Company will retain the customary short period rate for the time the
policy has been in force. This insurance may also at any time be terminated at the
option of the Company, on notice to that effect being given to the Insured, in which
case the Company shall be liable to repay on demand a ratable proportion of the
premium for the unexpired term from the date of the cancelment.

Clearly, the Policy provides for pre-payment of premium. Accordingly; "when the
policy is tendered the insured must pay the premium unless credit is given or there is
a waiver, or some agreement obviating the necessity for prepayment." 7 To constitute
an extension of credit there must be a clear and express agreement therefor."
8chanrobles virtual law library

From the Policy provisions, we fail to find any clear agreement that a credit extension
was accorded defendant. And even if it were to be presumed that plaintiff had
extended credit from the circumstances of the unconditional delivery of the Policy
without prepayment of the premium, yet it is obvious that defendant had not accepted
the insurer's offer to extend credit, which is essential for the validity of such
agreement.

An acceptance of an offer to allow credit, if one was made, is as essential to make a


valid agreement for credit, to change a conditional delivery of an insurance policy to
an unconditional delivery, as it is to make any other contract. Such an acceptance
could not be merely a mental act or state of mind, but would require a promise to pay
made known in some manner to defendant. 9

In this respect, the instant case differs from that involving the same parties entitled
Philippine Phoenix Surety & Insurance Inc. vs. Woodworks, Inc., 10 where recovery of
the balance of the unpaid premium was allowed inasmuch as in that case "there was
not only a perfected contract of insurance but a partially performed one as far as the
payment of the agreed premium was concerned." This is not the situation obtaining
here where no partial payment of premiums has been made
whatsoever.chanroblesvirtualawlibrary chanrobles virtual law library

Since the premium had not been paid, the policy must be deemed to have lapsed.

The non-payment of premiums does not merely suspend but put, an end to an
insurance contract, since the time of the payment is peculiarly of the essence of the
contract. 11 chanrobles virtual law library

... the rule is that under policy provisions that upon the failure to make a payment of a
premium or assessment at the time provided for, the policy shall become void or
forfeited, or the obligation of the insurer shall cease, or words to like effect, because
the contract so prescribes and because such a stipulation is a material and essential
part of the contract. This is true, for instance, in the case of life, health and accident,
fire and hail insurance policies. 12

In fact, if the peril insured against had occurred, plaintiff, as insurer, would have had a
valid defense against recovery under the Policy it had issued. Explicit in the Policy
itself is plaintiff's agreement to indemnify defendant for loss by fire only "after
payment of premium," supra. Compliance by the insured with the terms of the contract
is a condition precedent to the right of recovery.

The burden is on an insured to keep a policy in force by the payment of premiums,


rather than on the insurer to exert every effort to prevent the insured from allowing a
policy to elapse through a failure to make premium payments. The continuance of the
insurer's obligation is conditional upon the payment of premiums, so that no recovery
can be had upon a lapsed policy, the contractual relation between the parties having
ceased. 13

Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting
premiums and invalid for the purpose of indemnity." 14 chanrobles virtual law library

The foregoing findings are buttressed by section 77 of the Insurance Code


(Presidential Decree No. 612, promulgated on December 18, 1974), which now
provides that no contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, notwithstanding any
agreement to the contrary.chanroblesvirtualawlibrary chanrobles virtual law library

WHEREFORE, the judgment appealed from is reversed, and plaintiff's complaint


hereby dismissed.

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,


vs.
HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, petitioner,


vs.
HON. COURT OF APPEALS and NGO HING, respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for
petitioner Company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court
dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases
seek similar relief, through these petitions for certiorari by way of appeal, from the
amended decision of respondent Court of Appeals which affirmed in toto the decision
of the Court of First Instance of Cebu, ordering "the defendants (herein petitioners
Great Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay
plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00 with interest
at 6% from the date of the filing of the complaint, and the sum of P1,077.75, without
interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life)
for a twenty-year endownment policy in the amount of P50,000.00 on the life of his
one-year old daughter Helen Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City
wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon
finally type-wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going
over to the Company, but he reatined the amount of P1,317.00 as his commission for
being a duly authorized agebt of Pacific Life. Upon the payment of the insurance
premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo
Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the
application form his strong recommendation for the approval of the insurance
application. Then on April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter stated that the said
life insurance application for 20-year endowment plan is not available for minors
below seven years old, but Pacific Life can consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical
Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children, pointing out that since
1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4-
M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza
with complication of bronchopneumonia. Thereupon, private respondent sought the
payment of the proceeds of the insurance, but having failed in his effort, he filed the
action for the recovery of the same before the Court of First Instance of Cebu, which
rendered the adverse decision as earlier refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit
E) constituted a temporary contract of the life insurance in question; and (2) whether
private respondent Ngo Hing concealed the state of health and physical condition of
Helen Go, which rendered void the aforesaid Exhibit E.

1. At the back of Exhibit E are condition precedents required before a deposit is


considered a BINDING RECEIPT. These conditions state that:

A. If the Company or its agent, shan have received the premium deposit ...
and the insurance application, ON or PRIOR to the date of medical
examination ... said insurance shan be in force and in effect from the date
of such medical examination, for such period as is covered by the deposit
..., PROVIDED the company shall be satisfied that on said date the
applicant was insurable on standard rates under its rule for the amount of
insurance and the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the
amount of insurance and/or the kind of policy requested in the application
but issue, or offers to issue a policy for a different plan and/or amount ...,
the insurance shall not be in force and in effect until the applicant shall
have accepted the policy as issued or offered by the Company and shall
have paid the full premium thereof. If the applicant does not accept the
policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above,
and the Company declines to approve the application the insurance applied
for shall not have been in force at any time and the sum paid be returned to
the applicant upon the surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt
is intended to be merely a provisional or temporary insurance contract and only upon
compliance of the following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company does not accept the
application and offers to issue a policy for a different plan, the insurance contract shall
not be binding until the applicant accepts the policy offered; otherwise, the deposit
shall be reftmded; and (3) that if the applicant is not ble according to the standard
rates, and the company disapproves the application, the insurance applied for shall
not be in force at any time, and the premium paid shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis of whether or not the
applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding deposit receipt in question
had never become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement is
made between the applicant and the agent, no liability shall attach until the principal
approves the risk and a receipt is given by the agent. The acceptance is merely
conditional and is subordinated to the act of the company in approving or rejecting the
application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure
by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing
over the 20-year endowment life insurance in the amount of P50,000.00 in favor of
the latter's one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have been no
insurance contract duly perfected between thenl Accordingly, the deposit paid by
private respondent shall have to be refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person or
by their agents ... The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be dione, nothing to be
completed, nothing to be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in
agreement."

We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would
not have any adverse effect on the allegedly perfected temporary contract
(Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected
between the parties who had no meeting of their minds. Private respondet, being an
authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware
that said company does not offer the life insurance applied for. When he filed the
insurance application in dispute, private respondent was, therefore, only taking the
chance that Pacific Life will approve the recommendation of Mondragon for the
acceptance and approval of the application in question along with his proposal that the
insurance company starts to offer the 20-year endowment insurance plan for children
less than seven years. Nonetheless, the record discloses that Pacific Life had rejected
the proposal and recommendation. Secondly, having an insurable interest on the life of
his one-year old daughter, aside from being an insurance agent and an offense
associate of petitioner Mondragon, private respondent Ngo Hing must have known and
followed the progress on the processing of such application and could not pretend
ignorance of the Company's rejection of the 20-year endowment life insurance
application.

At this juncture, We find it fit to quote with approval, the very apt observation of then
Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from
his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of


rejection (Exhibit 3-M) nor the reply thereto of appellant Mondragon
reiterating the desire for applicant's father to have the application
considered as one for a 20-year endowment plan was ever duly
communicated to Ngo; Hing, father of the minor applicant. I am not quite
conninced that this was so. Ngo Hing, as father of the applicant herself,
was precisely the "underwriter who wrote this case" (Exhibit H-1). The
unchallenged statement of appellant Mondragon in his letter of May 6,
1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our
associate" and that it was the latter who "insisted that the plan be placed
on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was not
brought home to his knowledge. He must have been duly apprised of the
rejection of the application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing himself who
insisted on the application as originally filed, thereby implictly declining
the offer to consider the application under the Juvenile Triple Action Plan.
Besides, the associate of Mondragon that he was, Ngo Hing should only be
presumed to know what kind of policies are available in the company for
minors below 7 years old. What he and Mondragon were apparently trying
to do in the premises was merely to prod the company into going into the
business of issuing endowment policies for minors just as other insurance
companies allegedly do. Until such a definite policy is however, adopted by
the company, it can hardly be said that it could have been bound at all
under the binding slip for a plan of insurance that it could not have, by
then issued at all. (Amended Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief
that private respondent had deliberately concealed the state of health and piysical
condition of his daughter Helen Go. Wher private regpondeit supplied the required
essential data for the insurance application form, he was fully aware that his one-year
old daughter is typically a mongoloid child. Such a congenital physical defect could
never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad
faith, withheld the fact materal to the risk to be assumed by the insurance compary.
As an insurance agent of Pacific Life, he ought to know, as he surely must have known.
his duty and responsibility to such a material fact. Had he diamond said significant
fact in the insurance application fom Pacific Life would have verified the same and
would have had no choice but to disapprove the application outright.

The contract of insurance is one of perfect good faith uberrima fides meaning good
faith, absolute and perfect candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not
for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de
Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a partY
knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or
unintentional the concealment entitles the insurer to rescind the contract of insurance
(Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs.
Philippine American Life Insurance Company, 7 SCRA 316). Private respondent
appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the
parties with the noncompliance of the conditions provided in the binding receipt, and
concealment, as legally defined, having been comraitted by herein private respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is
hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life
Assurance Company from their civil liabilities as found by respondent Court and
ordering the aforesaid insurance company to reimburse the amount of P1,077.75,
without interest, to private respondent, Ngo Hing. Costs against private respondent.

SO ORDERED.

PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, petitioner, vs.


JUDGE LORE R. VALENCIA-BAGALACSA, Regional Trial Court of Libmanan,
Camarines Sur, Branch 56, and EDUARDO Z. LUMANIOG, CELSO Z. LUMANIOG and
RUBEN Z. LUMANIOG, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Philippine American Life and General Insurance Company prays that the
decision of the Court of Appeals promulgated on April 30, 1999 be reversed and set
aside and that the Complaint filed against it by private respondents Eduardo Z.
Lumaniog, Celso Z. Lumaniog and Ruben Z. Lumaniog before the Regional Trial Court
of Libmanan, Camarines Sur, docketed as Civil Case No. L-787 be ordered dismissed on
ground of prescription of action.

The facts of the case:

On June 20, 1995, private respondents, as legitimate children and forced heirs of their
late father, Faustino Lumaniog, filed with the aforesaid RTC, a complaint for recovery
of sum of money against petitioner alleging that: their father was insured by petitioner
under Life Insurance Policy No. 1305486 with a face value of P50,000.00; their father
died of coronary thrombosis on November 25, 1980; on June 22, 1981, they claimed
and continuously claimed for all the proceeds and interests under the life insurance
policy in the amount of P641,000.00, despite repeated demands for payment and/or
settlement of the claim due from petitioner, the last of which is on December 1, 1994,
petitioner finally refused or disallowed said claim on February 14, 1995;liii[1] and so,
they filed their complaint on June 20, 1995.

Petitioner filed an Answer with Counterclaim and Motion to Dismiss, contending that:
the cause of action of private respondents had prescribed and they are guilty of laches;
it had denied private respondents claim in a letter dated March 12, 1982, signed by its
then Assistant Vice President, Amado Dimalanta, on ground of concealment on the
part of the deceased insured Faustino when he asserted in his application for
insurance coverage that he had not been treated for indication of chest pain,
palpitation, high blood pressure, rheumatic fever, heart murmur, heart attack or other
disorder of the heart or blood vessel when in fact he was a known hypertensive since
1974; private respondents sent a letter dated May 25, 1983liv[2] requesting for
reconsideration of the denial; in a letter dated July 11, 1983, it reiterated its decision
to deny the claim for payment of the proceeds;lv[3] more than ten (10) years later, or
on December 1, 1994, it received a letter from Jose C. Claro, a provincial board
member of the province of Camarines Sur, reiterating the early request for
reconsideration which it denied in a letter dated February 14, 1995.lvi[4]

Private respondents opposed the motion to dismiss.lvii[5]

On June 7, 1996, the RTC issued an Order which reads:


After a perusal of the motion to dismiss filed by defendants counsel and the objection
submitted by plaintiffs counsel, the Court finds that the matters treated in their
respective pleadings are evidentiary in nature, hence, the necessity of a trial on the
merits.

Set therefore the hearing in this case on August 1, 1996 at 8:30 a.m., considering that
the calendar of the Court is already filled up until the end of July. Notify parties and
counsels.

SO ORDERED.lviii[6]

Petitioners motion for reconsideration was denied by the RTC in its Order dated
December 12, 1997 upholding however in the same Order the claim of private
respondents counsel that the running of the 10-year period was stopped on May 25,
1983 when private respondents requested for a reconsideration of the denial and it
was only on February 14, 1995 when petitioner finally decided to deny their claim
that the 10-year period began to run.lix[7]

Petitioner filed a petition for certiorari (docketed as CA-G.R. SP No. 47885) under Rule
65 of the Rules of Court in the Court of Appeals and after the comment of the private
respondents and reply of petitioner, the appellate court rendered its Decision, dated
April 30, 1999, portions of which read as follows:

Thus, this Court of the opinion and so holds that the prescriptive period to bring the
present action commences to run only on February 14, 1995 (Rollo, pp. 25-26), the
date when the petitioner finally rejected the claim of private respondents and not in
1983. The ten year period should instead be counted from the date of rejection by the
insurer in this case February 14, 1995 since this is the time when the cause of action
accrues.

This fact was supported further by the letter of the petitioner to Atty. Claro dated
December 20, 1994, stating that they were reviewing the claim and shall advise Atty.
Claro of their action regarding his request for reconsideration (Id., p. 53).

In the case of Summit Guaranty and Insurance Co., Inc. Vs. De Guzman (151 SCRA
389, 397-398), citing the case of Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, the
Supreme Court held that:

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.

In the same case, the case of ACCFA vs. Alpha Insurance and Surety Co., was likewise
cited where the Supreme Court ruled in this wise:

Since a cause of action requires, as essential elements, not only a legal right of the
plaintiff and a correlative 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.

Hence, We find no grave abuse of discretion committed by the court a quo when it
issued the Orders dated June 7, 1996 and dated December 12, 1997.

WHEREFORE, the instant petition for certiorari with prayer for issuance of temporary
restraining order and/or preliminary injunction is DENIED DUE COURSE and is
accordingly DISMISSED by this Court for lack of merit.

Costs against the petitioner.

SO ORDERED.lx[8]

Hence, the present petition for review. Petitioner posits the following issues:

A. Whether or not the complaint filed by private respondents for payment of life
insurance proceeds is already barred by prescription of action.

B. Whether or not an extrajudicial demand made after an action has prescribed


shall cause the revival of the action.lxi[9]

Private respondents filed their Comment and petitioners, their Reply.

Before we determine whether the Court of Appeals had committed any reversible
error, we must necessarily first ascertain whether or not the RTC committed grave
abuse of discretion in issuing the Orders dated June 7, 1996 and December 12, 1997.

Notably, the RTC was initially correct in issuing the Order dated June 7, 1996 when it
set the case below for hearing as there are matters in the respective pleadings of the
parties that are evidentiary in nature, hence the necessity of a trial on the
meritslxii[10], in effect, denying the motion to dismiss, pursuant to the then
prevailing Section 3, Rule 16, of the Rules of Court, to wit:

Sec. 3. Hearing and order. - After hearing the court may deny or grant the motion or
allow amendment of pleading, or may defer the hearing and determination of the
motion until the trial if the ground alleged therein does not appear to be indubitable.

before it was amended by the 1997 Rules of Civil Procedure, effective July 1,
1997.lxiii[11]

It must be emphasized that petitioner had specifically alleged in the Answer that it
had denied private respondents claim per its letter dated July 11, 1983.lxiv[12]
Hence, due process demands that it be given the opportunity to prove that private
respondents had received said letter, dated July 11, 1983. Said letter is crucial to
petitioners defense that the filing of the complaint for recovery of sum of money in
June, 1995 is beyond the 10-year prescriptive periodlxv[13].
It is for the above reason that the RTC committed a grave abuse of discretion when, in
resolving the motion for reconsideration of petitioner, it arbitrarily ruled in its Order
dated December 12, 1997, that the period of ten (10) years had not yet lapsed. It
based its finding on a mere explanation of the private respondents counsel and not on
evidence presented by the parties as to the date when to reckon the prescriptive
period. Portions of the Order dated December 12, 1997 read:

A perusal of the record will likewise reveal that plaintiffs counsel explained that the
running of the ten (10) year period was stopped on May 25, 1983, upon demand of
Celso Lomaniog for the compliance of the contract and reconsideration of the decision.
Counsel also wrote the President of the Company on December 1, 1994, asking for
reconsideration. The letter was answered by the Assistant Vice President of the Claims
Department of Philamlife, with the advise that the company is reviewing the claim. On
February 14, 1995, Atty. Abis sent a letter to counsel, finally deciding the plaintiffs
claim. Thus, the period of prescription should commence to run only from February
14, 1995, when Atty. Abis finally decided plaintiffs claim.

It is evident from the foregoing that the ten (10) year period for plaintiffs to claim the
insurance proceeds has not yet prescribed. The final determination denying the claim
was made only on February 14, 1995. Hence, when the instant case was filed on June
20, 1995, the ten year period has not yet lapsed. Moreover, defendants counsel failed
to comply with the requirements of the Rules in filing his motion for
reconsideration.lxvi[14] (emphasis supplied)

The ruling of the RTC that the cause of action of private respondents had not
prescribed, is arbitrary and patently erroneous for not being founded on evidence on
record, and therefore, the same is void.lxvii[15]

Consequently, while the Court of Appeals did not err in upholding the June 7, 1986
Order of the RTC, it committed a reversible error when it declared that the RTC did not
commit any grave abuse of discretion in issuing the Order dated December 12, 1997.

The appellate court should have granted the petition for certiorari assailing said Order
of December 12, 1997. Certiorari is an appropriate remedy to assail an interlocutory
order (1) when the tribunal issued such order without or in excess of jurisdiction or
with grave abuse of discretion and (2) when the assailed interlocutory order is
patently erroneous and the remedy of appeal would not afford adequate and
expeditious relief.lxviii[16] Said Order was issued with grave abuse of discretion for
being patently erroneous and arbitrary, thus, depriving petitioner of due process, as
discussed earlier.

WHEREFORE, the petition is partly GRANTED. The assailed decision of the Court of
Appeals dated April 30, 1999 insofar only as it upheld the Order dated December 12,
1997 is REVERSED and SET ASIDE. A new judgment is entered reversing and setting
aside the Order dated December 12, 1997 of the Regional Trial Court of Libmanan,
Camarines Sur (Branch 56) and affirming its Order dated June 20, 1995. Said RTC is
directed to proceed with dispatch with Civil Case No. L-787.
No costs.

SO ORDERED.