Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-15774 November 29, 1920

PILAR C. DE LIM, plaintiff-appellant,

vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Sanz and Luzuriaga for appellant.

Cohn and Fisher for appellee.

MALCOLM, J.:

This is an appeal by plaintiff from an order of the Court of First Instance of Zamboanga sustaining a
demurrer to plaintiff's complaint upon the ground that it fails to state a cause of action.

As the demurrer had the effect of admitting the material facts set forth in the complaint, the facts are
those alleged by the plaintiff. On July 6, 1917, Luis Lim y Garcia of Zamboanga made application to
the Sun Life Assurance Company of Canada for a policy of insurance on his life in the sum of
P5,000. In his application Lim designated his wife, Pilar C. de Lim, the plaintiff herein, as the
beneficiary. The first premium of P433 was paid by Lim, and upon such payment the company
issued what was called a "provisional policy." Luis Lim y Garcia died on August 23, 1917, after the
issuance of the provisional policy but before approval of the application by the home office of the
insurance company. The instant action is brought by the beneficiary, Pilar C. de Lim, to recover from
the Sun Life Assurance Company of Canada the sum of P5,000, the amount named in the
provisional policy.

The "provisional policy" upon which this action rests reads as follows:

Received (subject to the following stipulations and agreements) the sum of four
hundred and thirty-three pesos, being the amount of the first year's premium for a
Life Assurance Policy on the life of Mr. Luis D. Lim y Garcia of Zamboanga for
P5,000, for which an application dated the 6th day of July, 1917, has been made to
the Sun Life Assurance Company of Canada.

The above-mentioned life is to be assured in accordance with the terms and

conditions contained or inserted by the Company in the policy which may be granted
by it in this particular case for four months only from the date of the application,
provided that the Company shall confirm this agreement by issuing a policy on said
application when the same shall be submitted to the Head Office in Montreal. Should
the Company not issue such a policy, then this agreement shall be null and void ab
initio, and the Company shall be held not to have been on the risk at all, but in such
case the amount herein acknowledged shall be returned.
 [SEAL.] (Sgd.) T. B. MACAULAY, President.
(Sgd.) A. F. Peters, Agent.

Our duty in this case is to ascertain the correct meaning of the document above quoted. A perusal of
the same many times by the writer and by other members of the court leaves a decided impression
of vagueness in the mind. Apparently it is to be a provisional policy "for four months only from the
date of this application." We use the term "apparently" advisedly, because immediately following the
words fixing the four months period comes the word "provided" which has the meaning of "if."
Otherwise stated, the policy for four months is expressly made subjected to the affirmative condition
that "the company shall confirm this agreement by issuing a policy on said application when the
same shall be submitted to the head office in Montreal." To reenforce the same there follows the
negative condition —

Should the company not issue such a policy, then this agreement shall be null and void ab initio, and
the company shall be held not to have been on the risk." Certainly, language could hardly be used
which would more clearly stipulate that the agreement should not go into effect until the home office
of the company should confirm it by issuing a policy. As we read and understand the so-called
provisional policy it amounts to nothing but an acknowledgment on behalf of the company, that it has
received from the person named therein the sum of money agreed upon as the first year's premium
upon a policy to be issued upon the application, if the application is accepted by the company.

It is of course a primary rule that a contract of insurance, like other contracts, must be assented to by
both parties either in person or by their agents. So long as an application for insurance has not been
either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be
binding from the date of the application, must have been a completed contract, one that leaves
nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it
shall take effect. There can be no contract of insurance unless the minds of the parties have met in
agreement. Our view is, that a contract of insurance was not here consummated by the parties. lawph!l .net

Appellant relies on Joyce on Insurance. Beginning at page 253, of Volume I, Joyce states the
general rule concerning the agent's receipt pending approval or issuance of policy. The first rule
which Joyce lays down is this: If the act of acceptance of the risk by the agent and the giving by him
of a receipt, is within the scope of the agent's authority, and nothing remains but to issue a policy,
then the receipt will bind the company. This rule does not apply, for while here nothing remained but
to issue the policy, this was made an express condition to the contract. The second rule laid down by
Joyce is this: Where an agreement is made between the applicant and the agent whether by signing
an application containing such condition, or otherwise, that no liability shall attach until the principal
approves the risk and a receipt is given buy the agent, such acceptance is merely conditional, and it
subordinated to the act of the company in approving or rejecting; so in life insurance a "binding slip"
or "binding receipt" does not insure of itself. This is the rule which we believe applies to the instant
case. The third rule announced by Joyce is this: Where the acceptance by the agent is within the
scope of his authority a receipt containing a contract for insurance for a specific time which is not
absolute but conditional, upon acceptance or rejection by the principal, covers the specified period
unless the risk is declined within that period. The case cited by Joyce to substantiate the last
principle is that a Goodfellow vs. Times & Beacon Assurance Com. (17 U. C. Q. B., 411), not
available.

The two cases most nearly in point come from the federal courts and the Supreme Court of
Arkansas.

In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489} the facts were that the
amount of the first premium had been paid to an insurance agent and a receipt given therefor. The
receipt, however, expressly declared that if the application was accepted by the company, the
insurance shall take effect from the date of the application but that if the application was not
accepted, the money shall be returned. The trite decision of the circuit court of appeal was, "On the
conceded facts of this case, there was no contract to life insurance perfected and the judgment of
the circuit court must be affirmed."

In the case of Cooksey vs. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the person applying for
the life insurance paid and amount equal to the first premium, but the application and the receipt for
the money paid, stipulated that the insurance was to become effective only when the application was
approved and the policy issued. The court held that the transaction did not amount to an agreement
for preliminary or temporary insurance. It was said:

It is not an unfamiliar custom among life insurance companies in the operation of the business, upon
receipt of an application for insurance, to enter into a contract with the applicant in the shape of a so-
called "binding receipt" for temporary insurance pending the consideration of the application, to last
until the policy be issued or the application rejected, and such contracts are upheld and enforced
when the applicant dies before the issuance of a policy or final rejection of the application. It is held,
too, that such contracts may rest in parol. Counsel for appellant insists that such a preliminary
contract for temporary insurance was entered into in this instance, but we do not think so. On the
contrary, the clause in the application and the receipt given by the solicitor, which are to be read
together, stipulate expressly that the insurance shall become effective only when the "application
shall be approved and the policy duly signed by the secretary at the head office of the company and
issued." It constituted no agreement at all for preliminary or temporary insurance; Mohrstadt vs.
Mutual Life Ins. Co., 115 Fed., 81, 52 C. C. A., 675; Steinle vs. New York Life Ins. Co., 81 Fed., 489,
26 C. C. A., 491." (See further Weinfeld vs. Mutual Reserve Fund Life Ass'n. [1892], 53 Fed, 208'
Mohrstadt vs. Mutual Life Insurance Co. [1902], 115 Fed., 81; Insurance co. vs. Young's
Administrator [1875], 90 U. S., 85; Chamberlain vs. Prudential Insurance Company of America
[1901], 109 Wis., 4; Shawnee Mut. Fire Ins. Co. vs. McClure [1913], 39 Okla., 509; Dorman vs.
Connecticut Fire Ins. Co. [1914], 51 contra, Starr vs. Mutual Life Ins. Co. [1905], 41 Wash., 228.)

We are of the opinion that the trial court committed no error in sustaining the demurrer and
dismissing the case. It is to be noted, however, that counsel for appellee admits the liability of the
company for the return of the first premium to the estate of the deceased. It is not to be doubted but
that the Sun Life Assurance Company of Canada will immediately, on the promulgation of this
decision, pay to the estate of the late Luis Lim y Garcia the of P433.

The order appealed from, in the nature of a final judgment is affirmed, without special finding as to
costs in this instance. So ordered.

Mapa, C.J., Johnson, Araullo, Avanceña and Villamor, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-
appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Jose A. Espiritu for appellant.

Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer
to recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased
for a life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.

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

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

PROVISIONAL RECEIPT Pesos 6,000

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

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

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

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

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

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

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

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

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

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

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

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

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

Johnson, J., dissents.
 FIRST DIVISION

[G.R. No. 112329. January 28, 2000]

VIRGINIA A. PEREZ, petitioner, vs. COURT OF APPEALS and BF LIFEMAN

INSURANCE CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

A contract of insurance, like all other contracts, must be assented to by both parties, either in
person or through their agents and so long as an application for insurance has not been either
accepted or rejected, it is merely a proposal or an offer to make a contract.

Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9,
1993 in CA-G.R. CV 35529 entitled, "BF Lifeman Insurance Corporations, Plaintiff-Appellant
versus Virginia A. Perez, Defendant-Appellee," which declared Insurance Policy 056300
for P50,000.00 issued by private respondent corporation in favor of the deceased Primitivo B.
Perez, null and void and rescinded, thereby reversing the decision rendered by the Regional Trial
Court of Manila, Branch XVI.

The facts of the case as summarized by respondent Court of Appeals are not in dispute.

Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980
for P20,000.00. Sometime in October 1987, an agent of the insurance corporation, Rodolfo
Lalog, visited Perez in Guinayangan, Quezon and convinced him to apply for additional
insurance coverage of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the
premium were paid annually.

On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional
insurance coverage of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivos
wife, paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the amount received was a
"deposit."[1] Unfortunately, Lalog lost the application form accomplished by Perez and so on
October 28, 1987, he asked the latter to fill up another application form.[2] On November 1, 1987,
Perez was made to undergo the required medical examination, which he passed.[3]

Pursuant to the established procedure of the company, Lalog forwarded the application for
additional insurance of Perez, together with all its supporting papers, to the office of BF Lifeman
Insurance Corporation at Gumaca, Quezon which office was supposed to forward the papers to
the Manila office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized
during a storm. At the time of his death, his application papers for the additional insurance
of P50,000.00 were still with the Gumaca office. Lalog testified that when he went to follow up
the papers, he found them still in the Gumaca office and so he personally brought the papers to
the Manila office of BF Lifeman Insurance Corporation. It was only on November 27, 1987 that
said papers were received in Manila.

Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation
approved the application and issued the corresponding policy for the P50,000.00 on December 2,
1987.[4]

Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first insurance policy for P20,000.00 (double
indemnity in case of accident) but the insurance company refused to pay the claim under the
additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view
of a triple indemnity rider on the insurance policy. In its letter of January 29, 1988 to Virginia A.
Perez, the insurance company maintained that the insurance for P50,000.00 had not been
perfected at the time of the death of Primitivo Perez. Consequently, the insurance company
refunded the amount of P2,075.00 which Virginia Perez had paid.

On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint
against Virginia A. Perez seeking the rescission and declaration of nullity of the insurance
contract in question.

Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his
prestations under the contract and all the elements of a valid contract are present. She then filed a
counterclaim against private respondent for the collection of P150,000.00 as actual
damages, P100,000.00 as exemplary damages, P30,000.00 as attorneys fees and P10,000.00 as
expenses for litigation.

On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive
portion of which reads as follows:

WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor

of defendant Virginia A. Perez, ordering the plaintiff BF Lifeman Insurance
Corporation to pay to her the face value of BF Lifeman Insurance Policy No.
056300, plus double indemnity under the SARDI or in the total amount
of P150,000.00 (any refund made and/or premium deficiency to be deducted
therefrom).

SO ORDERED.[5]

The trial court, in ruling for petitioner, held that the premium for the additional insurance
of P50,000.00 had been fully paid and even if the sum of P2,075.00 were to be considered
merely as partial payment, the same does not affect the validity of the policy. The trial court
further stated that the deceased had fully complied with the requirements of the insurance
company. He paid, signed the application form and passed the medical examination. He should
not be made to suffer the subsequent delay in the transmittal of his application form to private
respondents head office since these were no longer within his control.

The Court of Appeals, however, reversed the decision of the trial court saying that the insurance
contract for P50,000.00 could not have been perfected since at the time that the policy was
issued, Primitivo was already dead.[6] Citing the provision in the application form signed by
Primitivo which states that:

"x x x there shall be no contract of insurance unless and until a policy is issued on
this application and that the policy shall not take effect until the first premium has
been paid and the policy has been delivered to and accepted by me/us in person
while I/we, am/are in good health"

the Court of Appeals held that the contract of insurance had to be assented to by both parties and
so long as the application for insurance has not been either accepted or rejected, it is merely an
offer or proposal to make a contract.

Petitioners motion for reconsideration having been denied by respondent court, the instant
petition for certiorari was filed on the ground that there was a consummated contract of
insurance between the deceased and BF Lifeman Insurance Corporation and that the condition
that the policy issued by the corporation be delivered and received by the applicant in good
health, is potestative, being dependent upon the will of the insurance company, and is therefore
null and void.

The petition is bereft of merit.

Insurance is a contract whereby, for a stipulated consideration, one party undertakes to

compensate the other for loss on a specified subject by specified perils.[7] A contract, on the other
hand, is a meeting of the minds between two persons whereby one binds himself, with respect to
the other to give something or to render some service.[8] Under Article 1318 of the Civil Code,
there is no contract unless the following requisites concur:

(1).......Consent of the contracting parties;

(2).......Object certain which is the subject matter of the contract;

(3).......Cause of the obligation which is established.

Consent must be manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance
absolute.

When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of
his medical examination, his application was subject to the acceptance of private respondent BF
Lifeman Insurance Corporation. The perfection of the contract of insurance between the
deceased and respondent corporation was further conditioned upon compliance with the
following requisites stated in the application form:

"there shall be no contract of insurance unless and until a policy is issued on this
application and that the said policy shall not take effect until the premium has
been paid and the policy delivered to and accepted by me/us in person while I/We,
am/are in good health."[9]

The assent of private respondent BF Lifeman Insurance Corporation therefore was not given
when it merely received the application form and all the requisite supporting papers of the
applicant. Its assent was given when it issues a corresponding policy to the applicant. Under the
abovementioned provision, it is only when the applicant pays the premium and receives and
accepts the policy while he is in good health that the contract of insurance is deemed to have
been perfected.

It is not disputed, however, that when Primitivo died on November 25, 1987, his application
papers for additional insurance coverage were still with the branch office of respondent
corporation in Gumaca and it was only two days later, or on November 27, 1987, when Lalog
personally delivered the application papers to the head office in Manila. Consequently, there was
absolutely no way the acceptance of the application could have been communicated to the
applicant for the latter to accept inasmuch as the applicant at the time was already dead. In the
case of Enriquez vs. Sun Life Assurance Co. of Canada,[10]recovery on the life insurance of the
deceased was disallowed on the ground that the contract for annuity was not perfected since it
had not been proved satisfactorily that the acceptance of the application ever reached the
knowledge of the applicant.

Petitioner insists that the condition imposed by respondent corporation that a policy must have
been delivered to and accepted by the proposed insured in good health is potestative being
dependent upon the will of the corporation and is therefore null and void.

We do not agree.

A potestative condition depends upon the exclusive will of one of the parties. For this reason, it
is considered void. Article 1182 of the New Civil Code states: When the fulfillment of the
condition depends upon the sole will of the debtor, the conditional obligation shall be void.

In the case at bar, the following conditions were imposed by the respondent company for the
perfection of the contract of insurance:

(a).......a policy must have been issued;

(b).......the premiums paid; and

(c).......the policy must have been delivered to and accepted by the applicant while
he is in good health.
The condition imposed by the corporation that the policy must have been delivered to and
accepted by the applicant while he is in good health can hardly be considered as a potestative or
facultative condition. On the contrary, the health of the applicant at the time of the delivery of
the policy is beyond the control or will of the insurance company. Rather, the condition is a
suspensive one whereby the acquisition of rights depends upon the happening of an event which
constitutes the condition. In this case, the suspensive condition was the policy must have been
delivered and accepted by the applicant while he is in good health. There was non-fulfillment of
the condition, however, inasmuch as the applicant was already dead at the time the policy was
issued. Hence, the non-fulfillment of the condition resulted in the non-perfection of the
contract.

As stated above, a contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application for insurance has not been either
accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be
binding from the date of application, must have been a completed contract, one that leaves
nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it
shall take effect. There can be no contract of insurance unless the minds of the parties have met
in agreement.[11]

Prescinding from the foregoing, respondent corporation cannot be held liable for gross
negligence. It should be noted that an application is a mere offer which requires the overt act of
the insurer for it to ripen into a contract. Delay in acting on the application does not constitute
acceptance even though the insured has forwarded his first premium with his application. The
corporation may not be penalized for the delay in the processing of the application papers.
Moreover, while it may have taken some time for the application papers to reach the main office,
in the case at bar, the same was acted upon less than a week after it was received. The processing
of applications by respondent corporation normally takes two to three weeks, the longest being a
month.[12] In this case, however, the requisite medical examination was undergone by the
deceased on November 1, 1987; the application papers were forwarded to the head office on
November 27, 1987; and the policy was issued on December 2, 1987. Under these
circumstances, we hold that the delay could not be deemed unreasonable so as to constitute gross
negligence.

A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy
056300 for P50,000.00 null and void and rescinded. The Court of Appeals corrected this in its
Resolution of the motion for reconsideration filed by petitioner, thus:

"Anent the appearance of the word rescinded in the dispositive portion of the
decision, to which defendant-appellee attaches undue significance and makes
capital of, it is clear that the use of the words and rescinded is, as it is hereby
declared, a superfluity. It is apparent from the context of the decision that the
insurance policy in question was found null and void, and did not have to be
rescinded."[13]

True, rescission presupposes the existence of a valid contract. A contract which is null and void
is no contract at all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is
AFFIRMED insofar as it declared Insurance Policy No. 056300 for P50,000.00 issued by BF
Lifeman Insurance Corporation of no force and effect and hence null and void. No costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.2/18/00 11:28 AM

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-109937 March 21, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by
CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION INSURANCE POOL, respondents.

Office of the Legal Counsel for petitioner.

Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.

QUIASON, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to reverse and
set aside the decision of the Court of Appeals in CA-G.R CV No. 26434 and its resolution denying
reconsideration thereof.

We affirm the decision of the Court of Appeals with modification.

In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law, applied for
a loan of P500,000.00 with the Development Bank of the Philippines (DBP), Basilan Branch. As the
principal mortgagor, Dans, then 76 years of age, was advised by DBP to obtain a mortgage
redemption insurance (MRI) with the DBP Mortgage Redemption Insurance Pool (DBP MRI Pool).

A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and
released on August 11, 1987. From the proceeds of the loan, DBP deducted the amount of
P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans accomplished and
submitted the "MRI Application for Insurance" and the "Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was
credited by DBP to the savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was
advised of the credit.

On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this information
to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP that Dans was not
eligible for MRI coverage, being over the acceptance age limit of 60 years at the time of application.

On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's MRI
application. The DBP offered to refund the premium of P1,476.00 which the deceased had paid, but
Candida Dans refused to accept the same, demanding payment of the face value of the MRI or an
amount equivalent to the loan. She, likewise, refused to accept an ex gratia settlement of
P30,000.00, which the DBP later offered.

On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a complaint
with the Regional Trial Court, Branch I, Basilan, against DBP and the insurance pool for "Collection
of Sum of Money with Damages." Respondent Estate alleged that Dans became insured by the DBP
MRI Pool when DBP, with full knowledge of Dans' age at the time of application, required him to
apply for MRI, and later collected the insurance premium thereon. Respondent Estate therefore
prayed: (1) that the sum of P139,500.00, which it paid under protest for the loan, be reimbursed; (2)
that the mortgage debt of the deceased be declared fully paid; and (3) that damages be awarded.

The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a cross-
claim against the latter.

At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits submitted by
respondent Estate. As a result of these admissions, the trial court narrowed down the issues and,
without opposition from the parties, found the case ripe for summary judgment. Consequently, the
trial court ordered the parties to submit their respective position papers and documentary evidence,
which may serve as basis for the judgment.

On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against
DBP. The DBP MRI Pool, however, was absolved from liability, after the trial court found no privity of
contract between it and the deceased. The trial court declared DBP in estoppel for having led Dans
into applying for MRI and actually collecting the premium and the service fee, despite knowledge of
his age ineligibility. The dispositive portion of the decision read as follows:

WHEREFORE, in view of the foregoing consideration and in the furtherance of

justice and equity, the Court finds judgment for the plaintiff and against Defendant
DBP, ordering the latter:

1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of
interest as amortization payment paid under protest;

2. To consider the mortgage loan of P300,000.00 including all interest accumulated

or otherwise to have been settled, satisfied or set-off by virtue of the insurance
coverage of the late Juan B. Dans;

3. To pay plaintiff the amount of P10,000.00 as attorney's fees;

 4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other
expenses, and other relief just and equitable.

The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed.
The Cross-claim of Defendant DBP is likewise dismissed (Rollo, p. 79)

The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the appellate
court affirmed in toto the decision of the trial court. The DBP's motion for reconsideration was denied
in a resolution dated April 20, 1993.

Hence, this recourse.

II

When Dans applied for MRI, he filled up and personally signed a "Health Statement for DBP MRI
Pool" (Exh. "5-Bank") with the following declaration:

I hereby declare and agree that all the statements and answers contained herein are
true, complete and correct to the best of my knowledge and belief and form part of
my application for insurance. It is understood and agreed that no insurance coverage
shall be effected unless and until this application is approved and the full premium is
paid during my continued good health (Records, p. 40).

Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the application
shall be approved by the insurance pool; and (2) when the full premium is paid during the continued
good health of the applicant. These two conditions, being joined conjunctively, must concur.

Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The pool,
however, did not approve the application of Dans. There is also no showing that it accepted the sum
of P1,476.00, which DBP credited to its account with full knowledge that it was payment for Dan's
premium. There was, as a result, no perfected contract of insurance; hence, the DBP MRI Pool
cannot be held liable on a contract that does not exist.

The liability of DBP is another matter.

It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure MRI
coverage. Instead of allowing Dans to look for his own insurance carrier or some other form of
insurance policy, DBP compelled him to apply with the DBP MRI Pool for MRI coverage. When
Dan's loan was released on August 11, 1987, DBP already deducted from the proceeds thereof the
MRI premium. Four days latter, DBP made Dans fill up and sign his application for MRI, as well as
his health statement. The DBP later submitted both the application form and health statement to the
DBP MRI Pool at the DBP Main Building, Makati Metro Manila. As service fee, DBP deducted 10
percent of the premium collected by it from Dans.

In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the second as an
insurance agent.

As an insurance agent, DBP made Dans go through the motion of applying for said insurance,
thereby leading him and his family to believe that they had already fulfilled all the requirements for
the MRI and that the issuance of their policy was forthcoming. Apparently, DBP had full knowledge
that Dan's application was never going to be approved. The maximum age for MRI acceptance is 60
years as clearly and specifically provided in Article 1 of the Group Mortgage Redemption Insurance
Policy signed in 1984 by all the insurance companies concerned (Exh. "1-Pool").

Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not personally
liable to the party with whom he contracts, unless he expressly binds himself or exceeds the limits of
his authority without giving such party sufficient notice of his powers."

The DBP is not authorized to accept applications for MRI when its clients are more than 60 years of
age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible for MRI coverage because of his
advanced age, DBP exceeded the scope of its authority when it accepted Dan's application for MRI
by collecting the insurance premium, and deducting its agent's commission and service fee.

The liability of an agent who exceeds the scope of his authority depends upon whether the third
person is aware of the limits of the agent's powers. There is no showing that Dans knew of the
limitation on DBP's authority to solicit applications for MRI.

If the third person dealing with an agent is unaware of the limits of the authority conferred by the
principal on the agent and he (third person) has been deceived by the non-disclosure thereof by the
agent, then the latter is liable for damages to him (V Tolentino, Commentaries and Jurisprudence on
the Civil Code of the Philippines, p. 422 [1992], citing Sentencia [Cuba] of September 25, 1907). The
rule that the agent is liable when he acts without authority is founded upon the supposition that there
has been some wrong or omission on his part either in misrepresenting, or in affirming, or concealing
the authority under which he assumes to act (Francisco, V., Agency 307 [1952], citing Hall v.
Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of the limits of the agency carries with
it the implication that a deception was perpetrated on the unsuspecting client, the provisions of
Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.

Article 19 provides:

Every person must, in the exercise of his rights and in the performance of his duties,
act with justice give everyone his due and observe honesty and good faith.

Article 20 provides:

Every person who, contrary to law, willfully or negligently causes damage to another,
shall indemnify the latter for the same.

Article 21 provides:

Any person, who willfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for the damage.

The DBP's liability, however, cannot be for the entire value of the insurance policy. To assume that
were it not for DBP's concealment of the limits of its authority, Dans would have secured an MRI
from another insurance company, and therefore would have been fully insured by the time he died,
is highly speculative. Considering his advanced age, there is no absolute certainty that Dans could
obtain an insurance coverage from another company. It must also be noted that Dans died almost
immediately, i.e., on the nineteenth day after applying for the MRI, and on the twenty-third day from
the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has
duly proved (Civil Code of the Philippines, Art. 2199). Damages, to be recoverable, must not only be
capable of proof, but must be actually proved with a reasonable degree of certainty (Refractories
Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine
Publishing Co., 34 Phil. 447 [1916]). Speculative damages are too remote to be included in an
accurate estimate of damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).

While Dans is not entitled to compensatory damages, he is entitled to moral damages. No proof of
pecuniary loss is required in the assessment of said kind of damages (Civil Code of Philippines, Art.
2216). The same may be recovered in acts referred to in Article 2219 of the Civil Code.

The assessment of moral damages is left to the discretion of the court according to the
circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering that DBP had
offered to pay P30,000.00 to respondent Estate in ex gratia settlement of its claim and that DBP's
non-disclosure of the limits of its authority amounted to a deception to its client, an award of moral
damages in the amount of P50,000.00 would be reasonable.

The award of attorney's fees is also just and equitable under the circumstances (Civil Code of the
Philippines, Article 2208 [11]).

WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV

No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent Estate of
Juan B. Dans the amount of P1,476.00 with legal interest from the date of the filing of the complaint
until fully paid; and (2) to PAY said Estate the amount of Fifty Thousand Pesos (P50,000.00) as
moral damages and the amount of Ten Thousand Pesos (P10,000.00) as attorney's fees. With costs
against petitioner.

SO ORDERED.

Cruz, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 85296 May 14, 1990

ZENITH INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS and LAWRENCE FERNANDEZ, respondents.

Vicente R. Layawen for petitioner.

Lawrence L. Fernandez & Associates for private respondent.

MEDIALDEA, J.:

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

The antecedent facts are as follows:

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

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

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

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

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

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

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

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

6. Costs. (p. 9, Rollo)

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

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

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

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

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

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

The Motion for Reconsideration of the decision of the Court of Appeals dated August 17, 1988 was
denied on September 29, 1988, for lack of merit. Hence, the instant petition was filed by Zenith on
October 18, 1988 on the allegation that respondent Court of Appeals' decision and resolution ran
counter to applicable decisions of this Court and that they were rendered without or in excess of
jurisdiction. The issues raised by petitioners in this petition are:
 a) The legal basis of respondent Court of Appeals in awarding moral damages,
exemplary damages and attomey's fees in an amount more than that prayed for in
the complaint.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2) P10,000.00 as moral damages;

3) P5,000.00 as attorney's fees;

4) P3,000.00 as litigation expenses; and

5) Costs.
ACCORDINGLY, the appealed decision is MODIFIED as above stated.

SO ORDERED.

Narvasa, Cruz and Griño-Aquino, JJ., concur.

Gancayco, J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-44059 October 28, 1977

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,

vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:

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

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

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

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the benefit of marriage.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts
that she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T.
Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance
Co., Ltd. commenced an action for Interpleader before the Court of First Instance of Rizal on April
29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a
pre-trial order was entered reading as follows: ñé+.£ªw ph!1

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

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

SO ORDERED.

On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T.
Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds to the estate of the deceased insured. The trial
court held:ñé+.£ªw ph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).
 It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant Carponia T.
Ebrado were living together as husband and wife without being legally married and
that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado
was valid and still existing at the time the insurance in question was purchased there
is no question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds of
the insurance upon the death of the insured.

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

We affirm the judgment of the lower court.

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

The following donations shall be void:

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

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

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

of his office.

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

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

3. Policy considerations and dictates of morality rightly justify the institution of a barrier between
common law spouses in record to Property relations since such hip ultimately encroaches upon the
nuptial and filial rights of the legitimate family There is every reason to hold that the bar in donations
between legitimate spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration As above pointed out, a beneficiary in a
fife insurance policy is no different from a donee. Both are recipients of pure beneficence. So long as
manage remains the threshold of family laws, reason and morality dictate that the impediments
imposed upon married couple should likewise be imposed upon extra-marital relationship. If
legitimate relationship is circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 7 this Court, through
Justice Fernando, said: ñé+.£ªw ph!1

If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no
se enganen desponjandose el uno al otro por amor que han de consuno' (According
to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem);
then there is very reason to apply the same prohibitive policy to persons living
together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32
ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the
condition 6f those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.

It is hardly necessary to add that even in the absence of the above pronouncement,
any other conclusion cannot stand the test of scrutiny. It would be to indict the frame
of the Civil Code for a failure to apply a laudable rule to a situation which in its
essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it as
what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an adherence
to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons
who were guilty of adultery or concubinage at the time of the donation," Article 739 itself provides: ñé+.£ªw ph!1

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

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

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

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

SO ORDERED.

Teehankee (Chairman), Makasiar, Muñ;oz Palma, Fernandez and Guerrero, JJ., concur. 1äw phï1.ñët
 SECOND DIVISION

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

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER

INSURANCE CORPORATION, respondent.

DECISION
PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised
Rules of Court by petitioner GULF RESORTS, INC., against respondent
PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the
appellate court decision which dismissed its two appeals and affirmed the
[1]

judgment of the trial court.

For review are the warring interpretations of petitioner and respondent on
the scope of the insurance companys liability for earthquake damage to
petitioners properties. Petitioner avers that, pursuant to its earthquake shock
endorsement rider, Insurance Policy No. 31944 covers all damages to the
properties within its resort caused by earthquake. Respondent contends that
the rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate
court are as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU
from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1,
2, 3 and 4 respectively), the risk of loss from earthquake shock was extended only to
plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1;
D-1, and E and two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in
those policies referred to the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and
F-2); that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-
4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1)
and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-
1, Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the
time of issue read that plaintiff renewed its policy with AHAC (AIU) for the period of
March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which
carried the entry under Endorsement/Warranties at Time of Issue, which read
Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00
and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:

Item -P7,691,000.00 - on the Clubhouse only

@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:

a) Tilter House- P19,800.00- 0.551%

b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. H) provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy
No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991
for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the
policy in question, contained on the right-hand upper portion of page 7 thereof, the
following:

Rate-Various

Premium - P37,420.60 F/L

2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs. C,
D, E, F, G and H), the premium against the peril of earthquake shock is the same, that
is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-
1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944
issued by defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the

sum included additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this policy due to the contrary, that this insurance covers
loss or damage to shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-
C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
plaintiffs properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged. [2]

After the earthquake, petitioner advised respondent that it would be making

a claim under its Insurance Policy No. 31944 for damages on its properties.
Respondent instructed petitioner to file a formal claim, then assigned the
investigation of the claim to an independent claims adjuster, Bayne Adjusters
and Surveyors, Inc. On July 30, 1990, respondent, through its adjuster,
[3]

requested petitioner to submit various documents in support of its claim. On

August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its Vice-
President A.R. de Leon, rendered a preliminary report finding extensive
[4] [5]

damage caused by the earthquake to the clubhouse and to the two swimming
pools. Mr. de Leon stated that except for the swimming pools, all affected items
have no coverage for earthquake shocks. On August 11, 1990, petitioner filed
[6]

its formal demand for settlement of the damage to all its properties in the Agoo
[7]

Playa Resort. On August 23, 1990, respondent denied petitioners claim on the
ground that its insurance policy only afforded earthquake shock coverage to the
two swimming pools of the resort. Petitioner and respondent failed to arrive at
[8]

a settlement. Thus, on January 24, 1991, petitioner filed a complaint with the
[9] [10]

regional trial court of Pasig praying for the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured

properties, with interest thereon, as computed under par. 29 of the policy
(Annex B) until fully paid;
 2.) The sum of P428,842.00 per month, representing continuing losses
sustained by plaintiff on account of defendants refusal to pay the claims;

3.) The sum of P500,000.00, by way of exemplary damages;

4.) The sum of P500,000.00 by way of attorneys fees and expenses of

litigation;

5.) Costs. [11]

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

On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:

The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits C, D, E, F and G). From this fact the Court must consequently agree with
the position of defendant that the endorsement rider (Exhibit 7-C) means that only the
two swimming pools were insured against earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools
had earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the swimming
pools was appraised by defendants adjuster at P386,000.00, defendant must, by virtue
of the contract of insurance, pay plaintiff said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As
to the counterclaims of defendant, the Court does not agree that the action filed by
plaintiff is baseless and highly speculative since such action is a lawful exercise of the
plaintiffs right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of

THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date
of the filing of the Complaint until defendants obligation to plaintiff is fully paid.

No pronouncement as to costs. [13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an

appeal with the Court of Appeals based on the following assigned errors: [14]

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT

CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS
UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND
THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE
OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS

RIGHT TO RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944;
EXH I) BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS
ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE
EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-

APPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST
COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower
courts failure to award it attorneys fees and damages on its compulsory
counterclaim.
After review, the appellate court affirmed the decision of the trial court and
ruled, thus:

However, after carefully perusing the documentary evidence of both parties, We are
not convinced that the last two (2) insurance contracts (Exhs. G and H), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance
contract with Philippine Charter Insurance Corporation is said to have been based and
copied (Exh. I), covered an extended earthquake shock insurance on all the insured
properties.

xxx

We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools, as
the Court a quo and this Court correctly found it to be liable only, it then cannot be
said that it was in default and therefore liable for interest.

Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the

rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et
al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award
(Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiff-
appellants action is not baseless and highly speculative, We find that the Court a quo
did not err in granting the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED
and judgment of the Trial Court hereby AFFIRMED in toto. No costs. [15]

Petitioner filed the present petition raising the following issues: [16]

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT

UNDER RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE
TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED

PETITIONERS PRAYER FOR DAMAGES WITH INTEREST THEREON
AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF
LITIGATION.

Petitioner contends:
 First, that the policys earthquake shock endorsement clearly covers all of
the properties insured and not only the swimming pools. It used the words any
property insured by this policy, and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states
that it is [s]ubject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA
Warranty & Annual Payment Agreement On Long Term Policies. [17]

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

First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioners insured
properties other than on the two swimming pools. Petitioner admitted that from
1984 to 1988, only the two swimming pools were insured against earthquake
shock. From 1988 until 1990, the provisions in its policy were practically
identical to its earlier policies, and there was no increase in the premium paid.
AHAC-AIU, in a letter by its representative Manuel C. Quijano, categorically
[19]

stated that its previous policy, from which respondents policy was copied,
covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount
of P393.00 shows that the policy only covered earthquake shock damage on
the two swimming pools. The amount was the same amount paid by petitioner
for earthquake shock coverage on the two swimming pools from 1990-1991. No
additional premium was paid to warrant coverage of the other properties in the
resort.
Third, the deletion of the phrase pertaining to the limitation of the
earthquake shock endorsement to the two swimming pools in the policy
schedule did not expand the earthquake shock coverage to all of petitioners
properties. As per its agreement with petitioner, respondent copied its policy
from the AHAC-AIU policy provided by petitioner. Although the first five policies
contained the said qualification in their riders title, in the last two policies, this
qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda III,
stated that such deletion was a mere inadvertence. This inadvertence did not
make the policy incomplete, nor did it broaden the scope of the endorsement
whose descriptive title was merely enumerated. Any ambiguity in the policy can
be easily resolved by looking at the other provisions, specially the enumeration
of the items insured, where only the two swimming pools were noted as covered
for earthquake shock damage.
 Fourth, in its Complaint, petitioner alleged that in its policies from 1984
through 1988, the phrase Item 5 P393,000.00 on the two swimming pools only
(against the peril of earthquake shock only) meant that only the swimming pools
were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two
swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective,
premiums must be paid for all the properties covered. In all of its seven
insurance policies, petitioner only paid P393.00 as premium for coverage of the
swimming pools against earthquake shock. No other premium was paid for
earthquake shock coverage on the other properties. In addition, the use of the
qualifier ANY instead of ALL to describe the property covered was done
deliberately to enable the parties to specify the properties included for
earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its
properties must be included in the earthquake shock coverage. Petitioners own
evidence shows that it only required respondent to follow the exact provisions
of its previous policy from AHAC-AIU. Respondent complied with this
requirement. Respondents only deviation from the agreement was when it
modified the provisions regarding the replacement cost endorsement. With
regard to the issue under litigation, the riders of the old policy and the policy in
issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner
as would estop it from maintaining that only the two swimming pools were
covered for earthquake shock. The adjusters letter notifying petitioner to
present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the
phrase Item 5 Only after the descriptive name or title of the Earthquake Shock
Endorsement. However, the words of the policy reflect the parties clear intention
to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its
conditions. It did not object to any deficiency nor did it institute any action to
reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and
litigation expenses. Since respondent was willing and able to pay for the
damage caused on the two swimming pools, it cannot be considered to be in
default, and therefore, it is not liable for interest.
 We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution
of the case at bar.
First, in the designation of location of risk, only the two swimming pools
were specified as included, viz:

ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only) [20]

Second, under the breakdown for premium payments, it was stated that:
[21]

PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

xxx

3 393,000.00 0.100%-E/S 393.00 [22]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:--

(a) Earthquake, volcanic eruption or other convulsion of nature. [23]

Fourth, the rider attached to the policy, titled Extended Coverage

Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and Smoke),
stated, viz:

ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE

SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION
OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY
HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE
ABOVE NAMED x x x AND TO PAY THE PREMIUM.

Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . .
. . . . . . . . . . . additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this Policy to the contrary, that this insurance covers loss
or damage (including loss or damage by fire) to any of the property insured by this
Policy occasioned by or through or in consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as
they may be hereby expressly varied) and that any reference therein to loss or damage
by fire should be deemed to apply also to loss or damage occasioned by or through or
in consequence of Earthquake. [24]

Petitioner contends that pursuant to this rider, no qualifications were placed

on the scope of the earthquake shock coverage. Thus, the policy extended
earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined
and interpreted in consonance with each other. All its parts are reflective of
[25]

the true intent of the parties. The policy cannot be construed piecemeal. Certain
stipulations cannot be segregated and then made to control; neither do
particular words or phrases necessarily determine its character. Petitioner
cannot focus on the earthquake shock endorsement to the exclusion of the
other provisions. All the provisions and riders, taken and interpreted together,
indubitably show the intention of the parties to extend earthquake shock
coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the
clear intent of the parties to extend earthquake shock coverage only to the two
swimming pools. Section 2(1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or
contingent event. Thus, an insurance contract exists where the following
elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated

peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual

losses among a large group of persons bearing a similar risk; and
 5. In consideration of the insurer's promise, the insured pays a
premium. (Emphasis ours)
[26]

An insurance premium is the consideration paid an insurer for undertaking

to indemnify the insured against a specified peril. In fire, casualty, and marine
[27]

insurance, the premium payable becomes a debt as soon as the risk

attaches. In the subject policy, no premium payments were made with regard
[28]

to earthquake shock coverage, except on the two swimming pools. There is no

mention of any premium payable for the other resort properties with regard to
earthquake shock. This is consistent with the history of petitioners previous
insurance policies from AHAC-AIU. As borne out by petitioners witnesses:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance
policy during the period from March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty,
there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two
swimming pools only?
A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally
arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of
course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.
 Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
1989, did you give written instruction to Forte Insurance Agency advising it that the
earthquake shock coverage must extend to all properties of Agoo Playa Resort in
La Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other properties of
the company.
Q. And that instruction, according to you, was very important because in April 1987
there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future],
is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions
with respect to your instructions that all properties must be covered again by
earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I
was contented already that the previous limitation pertaining to the two swimming
pools was already removed.

Petitioner also cited and relies on the attachment of the phrase Subject to:
Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual
Payment Agreement on Long Term Policies to the insurance policy as
[29]

proof of the intent of the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the descriptive titles of the
riders, clauses, warranties or endorsements to which the policy is subject, as
required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the
qualification limiting the coverage to the two swimming pools. The earthquake
shock endorsement cannot stand alone. As explained by the testimony of Juan
Baranda III, underwriter for AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA III [30]

TSN, August 11, 1992

pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you
have occasion to review of (sic) these six (6) policies issued by your company [in
favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is,
on the basis on (sic) the wordings indicated in Exhibits C to H respectively what
was the extent of the coverage [against] the peril of earthquake shock as provided
for in each of the six (6) policies?

xxx

WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming pools
only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis.
For swimming pools we do cover earthquake shock. For building we covered it for
full earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are
covered by a general insurance?
WITNESS:
 Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the
thing that comes to my mind is either insuring a swimming pool, foundations, they
are normally affected by earthquake but not by fire, sir.

DIRECT EXAMINATION OF JUAN BARANDA III

TSN, August 11, 1992
pp. 23-25

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E
and F inclusive [remained] its coverage against earthquake shock to two (2)
swimming pools only but that Exhibits G and H respectively entend the coverage
against earthquake shock to all the properties indicated in the respective
schedules attached to said policies, what can you say about that testimony of
plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the
other half of it. I assure you that this one covers the two swimming pools with
respect to earthquake shock endorsement. Based on it, if we are going to look at
the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We are not only going
to consider the two (2) swimming pools of the other as stated in the policy. As I
see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are
going to do some computation based on the rates you will arrive at the same
premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6

ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was
placed, is it not?
A. Yes, sir.
 ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you
have pointed to during your direct-examination, the phrase Item no. 5 only
meaning to (sic) the two (2) swimming pools was deleted from the policies issued
by AIU, is it not?

xxx

ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of the
previous policies that we have issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents
contemporaneous and subsequent acts to the issuance of the insurance policy
falsely gave the petitioner assurance that the coverage of the earthquake shock
endorsement included all its properties in the resort. Respondent only insured
the properties as intended by the petitioner. Petitioners own witness testified to
this agreement, viz:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did
you tell Atty. Omlas (sic) to copy from Exhibit H for purposes of procuring the
policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions
as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they
will be charging will be limited to this one. I (sic) can even be lesser.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 12-14
 Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
provisions and scope of coverage of Exhibits I and H sometime in the third week of
March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy
wordings as well as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already
that the policy wordings and rates were copied from the insurance policy I sent
them but it was only when this case erupted that we discovered some
discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit I and those indicated in
Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly
the same P393,000.00 on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this provision will have to be
placed here because this particular provision under the peril of earthquake shock
only is requested because this is an insurance policy and therefore cannot be
insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty.
Umlas were not proved. Atty. Umlas categorically denied having given such
assurances.
Finally, petitioner puts much stress on the letter of respondents independent
claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the
representative of Bayne Adjusters and Surveyors, Inc., respondent never
meant to lead petitioner to believe that the endorsement for earthquake shock
covered properties other than the two swimming pools, viz:

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne

Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26

Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy
of the insurance coverage policy and it was indicated under Item 3 specifically that
the coverage is only for earthquake shock. Then, I remember I had a talk with Atty.
Umlas (sic), and I relayed to him what I had found out in the policy and he
confirmed to me indeed only Item 3 which were the two swimming pools have
coverage for earthquake shock.
 xxx

Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except
for the swimming pools all affected items have no coverage for earthquake shock?

xxx

A. I based my statement on my findings, because upon my examination of the policy I

found out that under Item 3 it was specific on the wordings that on the two
swimming pools only, then enclosed in parenthesis (against the peril[s] of
earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items have no
computation for payment of premiums.

In sum, there is no ambiguity in the terms of the contract and its riders.
Petitioner cannot rely on the general rule that insurance contracts are contracts
of adhesion which should be liberally construed in favor of the insured and
strictly against the insurer company which usually prepares it. A contract of
[31]

adhesion is one wherein a party, usually a corporation, prepares the stipulations

in the contract, while the other party merely affixes his signature or his
"adhesion" thereto. Through the years, the courts have held that in these type
of contracts, the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it. Thus, these
contracts are viewed as traps for the weaker party whom the courts of justice
must protect. Consequently, any ambiguity therein is resolved against the
[32]

insurer, or construed liberally in favor of the insured. [33]

The case law will show that this Court will only rule out blind adherence to
terms where facts and circumstances will show that they are basically one-
sided. Thus, we have called on lower courts to remain careful in scrutinizing
[34]

the factual circumstances behind each case to determine the efficacy of the
claims of contending parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al., the parties, who were acute
[35]

businessmen of experience, were presumed to have assented to the assailed

documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at
bar. Petitioner cannot claim it did not know the provisions of the policy. From
the inception of the policy, petitioner had required the respondent to
copy verbatim the provisions and terms of its latest insurance policy from
AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in
securing the insurance policy of petitioner, is reflective of petitioners
knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC [36]

TSN, September 23, 1991

pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact provisions
of the previous insurance policy we had with American Home Assurance
Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted
in the American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU
Policy No. 206-4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied

AIU Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is
true that there was variance in some terms, specifically in the replacement cost
endorsement, but the principal provisions of the policy remained essentially
similar to AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or
"contract of adhesion" rule in this case as the parties intent to limit the coverage
of the policy to the two swimming pools only is not ambiguous. [37]

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The

petition for certiorari is dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 81026 April 3, 1990

PAN MALAYAN INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.

Regulus E. Cabote & Associates for petitioner.

Benito P. Fabie for private respondents.

CORTES, J.:

Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the
Court of Appeals which upheld an order of the trial court dismissing for no cause of action
PANMALAY's complaint for damages against private respondents Erlinda Fabie and her driver.

The principal issue presented for resolution before this Court is whether or not the insurer
PANMALAY may institute an action to recover the amount it had paid its assured in settlement of an
insurance claim against private respondents as the parties allegedly responsible for the damage
caused to the insured vehicle.

On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against
private respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a
Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the name of Canlubang
Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness,
recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the
insured car was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed
the cost of repair of the insured car and, therefore, was subrogated to the rights of CANLUBANG
against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite repeated
demands, defendants, failed and refused to pay the claim of PANMALAY.

Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion
thereto. In compliance therewith, PANMALAY clarified, among others, that the damage caused to
the insured car was settled under the "own damage", coverage of the insurance policy, and that the
driver of the insured car was, at the time of the accident, an authorized driver duly licensed to drive
the vehicle. PANMALAY also submitted a copy of the insurance policy and the Release of Claim and
Subrogation Receipt executed by CANLUBANG in favor of PANMALAY.

On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had
no cause of action against them. They argued that payment under the "own damage" clause of the
insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification
thereunder was made on the assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an
order dated June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19,
1986, the RTC denied PANMALAY's motion for reconsideration.

On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November
27, 1987. Consequently, PANMALAY filed the present petition for review.

After private respondents filed its comment to the petition, and petitioner filed its reply, the Court
considered the issues joined and the case submitted for decision.

Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition.

PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had
indemnified CANLUBANG for the damage to the insured car resulting from a traffic accident
allegedly caused by the negligence of the driver of private respondent, Erlinda Fabie. PANMALAY
contended, therefore, that its cause of action against private respondents was anchored upon Article
2207 of the Civil Code, which reads:

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

PANMALAY is correct.

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured
property is destroyed or damaged through the fault or negligence of a party other than the assured,
then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to
recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the
insurer to the assured operates as an equitable assignment to the former of all remedies which the
latter may have against the third party whose negligence or wrongful act caused the loss. The right
of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by the insurer
[Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964,
12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427,
April 7, 1976, 70 SCRA 323].

There are a few recognized exceptions to this rule. For instance, if the assured by his own act
releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of
subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312,
29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co.,
229 F 2d 705 (1956)]. Similarly, where the insurer pays the assured the value of the lost goods
without notifying the carrier who has in good faith settled the assured's claim for loss, the settlement
is binding on both the assured and the insurer, and the latter cannot bring an action against the
carrier on his right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)].
And where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby
effecting "voluntary payment", the former has no right of subrogation against the third party liable for
the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September
5, 1967, 21 SCRA 12].

None of the exceptions are availing in the present case.

The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally
subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not
have any cause of action against private respondents. On the one hand, the trial court held that
payment by PANMALAY of CANLUBANG's claim under the "own damage" clause of the insurance
policy was an admission by the insurer that the damage was caused by the assured and/or its
representatives. On the other hand, the Court of Appeals in applying the ejusdem generis rule held
that Section III-1 of the policy, which was the basis for settlement of CANLUBANG's claim, did not
cover damage arising from collision or overturning due to the negligence of third parties as one of
the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article 2207 and
claim reimbursement from private respondents as alleged wrongdoers or parties responsible for the
damage.

The above conclusion is without merit.

It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy
implies damage to the insured car caused by the assured itself, instead of third parties, proceeds
from an incorrect comprehension of the phrase "own damage" as used by the insurer. When
PANMALAY utilized the phrase "own damage" — a phrase which, incidentally, is not found in the
insurance policy — to define the basis for its settlement of CANLUBANG's claim under the policy, it
simply meant that it had assumed to reimburse the costs for repairing the damage to the insured
vehicle [See PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, p. 1;
Record, p. 31]. It is in this sense that the so-called "own damage" coverage under Section III of the
insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability"
coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from
Section IV-2 which refer to "Property Damage" coverage (liabilities arising from damage caused by
the insured vehicle to the properties of third parties).

Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section
III-1 of the policy does not include to the insured vehicle arising from collision or overturning due to
the negligent acts of the third party. Not only does it stem from an erroneous interpretation of the
provisions of the section, but it also violates a fundamental rule on the interpretation of property
insurance contracts.

It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed
according to the sense and meaning of the terms which the parties thereto have used. In the case of
property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the
assured, determine the import of the various terms and provisions embodied in the policy. It is only
when the terms of the policy are ambiguous, equivocal or uncertain, such that the parties
themselves disagree about the meaning of particular provisions, that the courts will intervene. In
such an event, the policy will be construed by the courts liberally in favor of the assured and strictly
against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R., No. L-
27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No.
L-43706, November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R.
No. L-41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].

Section III-1 of the insurance policy which refers to the conditions under which the insurer
PANMALAY is liable to indemnify the assured CANLUBANG against damage to or loss of the
insured vehicle, reads as follows:

SECTION III — LOSS OR DAMAGE

 1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: —

(a) by accidental collision or overturning, or collision or overturning consequent upon

mechanical breakdown or consequent upon wear and tear;

(b) by fire, external explosion, self ignition or lightning or burglary, housebreaking or

theft;

(c) by malicious act;

(d) whilst in transit (including the processes of loading and unloading) incidental to
such transit by road, rail, inland, waterway, lift or elevator.

xxx xxx xxx

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

PANMALAY contends that the coverage of insured risks under the above section, specifically
Section III-1(a), is comprehensive enough to include damage to the insured vehicle arising from
collision or overturning due to the fault or negligence of a third party. CANLUBANG is apparently of
the same understanding. Based on a police report wherein the driver of the insured car reported that
after the vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20],
CANLUBANG filed its claim with PANMALAY for indemnification of the damage caused to its car. It
then accepted payment from PANMALAY, and executed a Release of Claim and Subrogation
Receipt in favor of latter.

Considering that the very parties to the policy were not shown to be in disagreement regarding the
meaning and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for the
appellate court to indulge in contract construction, to apply the ejusdem generis rule, and to ascribe
meaning contrary to the clear intention and understanding of these parties.

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

Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the
insured vehicle due to negligent or careless acts of third parties is not listed under the general and
specific exceptions to the coverage of insured risks which are enumerated in detail in the insurance
policy itself [See Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of
Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the
coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that
insisted upon by respondents herein. By arguing that this section covers losses or damages due not
only to malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a
more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping
with the rationale behind the various rules on the interpretation of insurance contracts favoring the
assured or beneficiary so as to effect the dominant purpose of indemnity or payment [SeeCalanoc v.
Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc.,
G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July
16, 1984, 130 SCRA 327].

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

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

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

WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for
damages against private respondents is hereby REINSTATED. Let the case be remanded to the
lower court for trial on the merits.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-52756 October 12, 1987

MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,

vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

PADILLA, J:

Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979, ordering petitioner
Manila Mahogany Manufacturing Corporation to pay private respondent Zenith Insurance Corporation the sum of Five Thousand Pesos
(P5,000.00) with 6% annual interest from 18 January 1973, attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and
the resolution of the same Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's decision.

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with
respondent insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a
truck owned by San Miguel Corporation. For the damage caused, respondent company paid
petitioner five thousand pesos (P5,000.00) in amicable settlement. Petitioner's general manager
executed a Release of Claim, subrogating respondent company to all its right to action against San
Miguel Corporation.

On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand

reimbursement from San Miguel Corporation of the amount it had paid petitioner. Insurance
Adjusters, Inc. refused reimbursement, alleging that San Miguel Corporation had already paid
petitioner P4,500.00 for the damages to petitioner's motor vehicle, as evidenced by a cash voucher
and a Release of Claim executed by the General Manager of petitioner discharging San Miguel
Corporation from "all actions, claims, demands the rights of action that now exist or hereafter [sic]
develop arising out of or as a consequence of the accident."

Respondent insurance company thus demanded from petitioner reimbursement of the sum of
P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit
in the City Court of Manila for the recovery of P4,500.00. The City Court ordered petitioner to pay
respondent P4,500.00. On appeal the Court of First Instance of Manila affirmed the City Court's
decision in toto, which CFI decision was affirmed by the Court of Appeals, with the modification that
petitioner was to pay respondent the total amount of P5,000.00 that it had earlier received from the
respondent insurance company.

Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent
company as the subrogation in the Release of Claim it executed in favor of respondent was
conditioned on recovery of the total amount of damages petitioner had sustained. Since total
damages were valued by petitioner at P9,486.43 and only P5,000.00 was received by petitioner from
respondent, petitioner argues that it was entitled to go after San Miguel Corporation to claim the
additional P4,500.00 eventually paid to it by the latter, without having to turn over said amount to
respondent. Respondent of course disputes this allegation and states that there was no qualification
to its right of subrogation under the Release of Claim executed by petitioner, the contents of said
deed having expressed all the intents and purposes of the parties.

To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner
cites Art. 2207 of the Civil Code, which states:

If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of
contract complained of the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Petitioner also invokes Art. 1304 of the Civil Code, stating.

A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit.

We find petitioners arguments to be untenable and without merit. In the absence of any other
evidence to support its allegation that a gentlemen's agreement existed between it and respondent,
not embodied in the Release of Claim, such ease of Claim must be taken as the best evidence of the
intent and purpose of the parties. Thus, the Court of Appeals rightly stated:

Petitioner argues that the release claim it executed subrogating Private respondent
to any right of action it had against San Miguel Corporation did not preclude Manila
Mahogany from filing a deficiency claim against the wrongdoer. Citing Article 2207,
New Civil Code, to the effect that if the amount paid by an insurance company does
not fully cover the loss, the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss, petitioner claims a preferred right to retain the
amount coming from San Miguel Corporation, despite the subrogation in favor of
Private respondent.

Although petitioners right to file a deficiency claim against San Miguel Corporation is
with legal basis, without prejudice to the insurer's right of subrogation, nevertheless
when Manila Mahogany executed another release claim (Exhibit K) discharging San
Miguel Corporation from "all actions, claims, demands and rights of action that now
exist or hereafter arising out of or as a consequence of the accident" after the insurer
had paid the proceeds of the policy- the compromise agreement of P5,000.00 being
based on the insurance policy-the insurer is entitled to recover from the insured the
amount of insurance money paid (Metropolitan Casualty Insurance Company of New
York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and
Insolvency Law with comments and annotations, H.B. Perez 1976, p. 151). Since
petitioner by its own acts released San Miguel Corporation, thereby defeating private
respondents, the right of subrogation, the right of action of petitioner against the
insurer was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54
O.G. 391) Otherwise stated: private respondent may recover the sum of P5,000.00 it
had earlier paid to petitioner. 1

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

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

The decision of the respondent court ordering petitioner to pay respondent company, not the
P4,500.00 as originally asked for, but P5,000.00, the amount respondent company paid petitioner as
insurance, is also in accord with law and jurisprudence. In disposing of this issue, the Court of
Appeals held:

... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation
under its clear right to file a deficiency claim for damages incurred, against the
wrongdoer, should the insurance company not fully pay for the injury caused (Article
2207, New Civil Code). However, when petitioner released San Miguel Corporation
from any liability, petitioner's right to retain the sum of P5,000.00 no longer existed,
thereby entitling private respondent to recover the same. (Emphasis supplied)

As has been observed:

... The right of subrogation can only exist after the insurer has paid the otherwise the
insured will be deprived of his right to full indemnity. If the insurance proceeds are
not sufficient to cover the damages suffered by the insured, then he may sue the
party responsible for the damage for the the [sic] remainder. To the extent of the
amount he has already received from the insurer enjoy's [sic] the right of subrogation.

Since the insurer can be subrogated to only such rights as the insured may
have, should the insured, after receiving payment from the insurer, release the
wrongdoer who caused the loss, the insurer loses his rights against the latter. But in
such a case, the insurer will be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the consent of the
insurer. 4(Emphasis supplied.)

And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still,
the respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by
the insurer. The Court of Appeals rightly reasoned as follows:

It is to be noted that private respondent, in its companies, prays for the recovery, not
of P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel
Corporation had paid to petitioner. On this score, We believe the City Court and
Court of First Instance erred in not awarding the proper relief. Although private
respondent prays for the reimbursement of P4,500.00 paid by San Miguel
Corporation, instead of P5,000.00 paid under the insurance policy, the trial court
should have awarded the latter, although not prayed for, under the general prayer in
the complaint "for such further or other relief as may be deemed just or equitable,
(Rule 6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ;
Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).

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

Yap (Chairman), Melencio-Herrera, Paras and Sarmiento, JJ., concur.

THIRD DIVISION

[G.R. No. 150094. August 18, 2004]

FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME

ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,
INC., respondents.

DECISION
PANGANIBAN, J.:

Basic is the requirement that before suing to recover loss of or damage to

transported goods, the plaintiff must give the carrier notice of the loss or
damage, within the period prescribed by the Warsaw Convention and/or the
airway bill.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court,

[1]

challenging the June 4, 2001 Decision and the September 21, 2001
[2]

Resolution of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed
[3]

Decision disposed as follows:

WHEREFORE, premises considered, the present appeal is hereby DISMISSED for

lack of merit. The appealed Decision of Branch 149 of the Regional Trial Court of
Makati City in Civil Case No. 95-1219,entitled American Home Assurance Co. and
PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or
CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.), is
hereby AFFIRMED and REITERATED.

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

The assailed Resolution denied petitioners Motion for Reconsideration.

 The Facts

The antecedent facts are summarized by the appellate court as follows:

On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of

Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an agent of
[Petitioner] Federal Express Corporation, a shipment of 109 cartons of veterinary
biologicals for delivery to consignee SMITHKLINE and French Overseas Company
in Makati City, Metro Manila. The shipment was covered by Burlington Airway Bill
No. 11263825 with the words, REFRIGERATE WHEN NOT IN TRANSIT and
PERISHABLE stamp marked on its face. That same day, Burlington insured the
cargoes in the amount of $39,339.00 with American Home Assurance Company
(AHAC). The following day, Burlington turned over the custody of said cargoes to
Federal Express which transported the same to Manila. The first shipment, consisting
of 92 cartons arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT and
was immediately stored at [Cargohaus Inc.s] warehouse. While the second, consisting
of 17 cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 0071-
30NRT which was likewise immediately stored at Cargohaus warehouse. Prior to the
arrival of the cargoes, Federal Express informed GETC Cargo International
Corporation, the customs broker hired by the consignee to facilitate the release of its
cargoes from the Bureau of Customs, of the impending arrival of its clients cargoes.

On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the
cargoes arrived in Manila, a non-licensed customs broker who was assigned by GETC
to facilitate the release of the subject cargoes, found out, while he was about to cause
the release of the said cargoes, that the same [were] stored only in a room with two (2)
air conditioners running, to cool the place instead of a refrigerator. When he asked an
employee of Cargohaus why the cargoes were stored in the cool room only, the latter
told him that the cartons where the vaccines were contained specifically indicated
therein that it should not be subjected to hot or cold temperature. Thereafter,
DIONEDA, upon instructions from GETC, did not proceed with the withdrawal of the
vaccines and instead, samples of the same were taken and brought to the Bureau of
Animal Industry of the Department of Agriculture in the Philippines by
SMITHKLINE for examination wherein it was discovered that the ELISA reading of
vaccinates sera are below the positive reference serum.

As a consequence of the foregoing result of the veterinary biologics test,

SMITHKLINE abandoned the shipment and, declaring total loss for the unusable
shipment, filed a claim with AHAC through its representative in the Philippines, the
Philam Insurance Co., Inc. (PHILAM) which recompensed SMITHKLINE for the
whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED
THIRTY NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for
damages against the [petitioner] imputing negligence on either or both of them in the
handling of the cargo.

Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being
held solidarily liable for the loss as follows:

WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner

and its Co-Defendant Cargohaus] are directed to pay [respondents], jointly and
severally, the following:

1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest
from the time of the filing of the complaint to the time the same is fully paid.

2. Attorneys fees in the amount of P50,000.00 and

3. Costs of suit.

SO ORDERED.

Aggrieved, [petitioner] appealed to [the CA]. [5]

Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture

(Animal and Plant Health Inspection Service) was found by the CA to be
inadmissible in evidence. Despite this ruling, the appellate court held that the
shipping Receipts were a prima facie proof that the goods had indeed been
delivered to the carrier in good condition. We quote from the ruling as follows:

Where the plaintiff introduces evidence which shows prima facie that the goods were
delivered to the carrier in good condition [i.e., the shipping receipts], and that the
carrier delivered the goods in a damaged condition, a presumption is raised that the
damage occurred through the fault or negligence of the carrier, and this casts upon the
carrier the burden of showing that the goods were not in good condition when
delivered to the carrier, or that the damage was occasioned by some cause excepting
the carrier from absolute liability. This the [petitioner] failed to discharge. x x x.
[6]

Found devoid of merit was petitioners claim that respondents had no

personality to sue. This argument was supposedly not raised in the Answer or
during trial.
 Hence, this Petition. [7]

The Issues

In its Memorandum, petitioner raises the following issues for our

consideration:
I.

Are the decision and resolution of the Honorable Court of Appeals proper subject for
review by the Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?

II.

Is the conclusion of the Honorable Court of Appeals petitioners claim that respondents
have no personality to sue because the payment was made by the respondents to
Smithkline when the insured under the policy is Burlington Air Express is devoid of
merit correct or not?

III.

Is the conclusion of the Honorable Court of Appeals that the goods were received in
good condition, correct or not?

IV.

Are Exhibits F and G hearsay evidence, and therefore, not admissible?

V.

Is the Honorable Court of Appeals correct in ignoring and disregarding respondents

own admission that petitioner is not liable? and

VI.

Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention? [8]

Simply stated, the issues are as follows: (1) Is the Petition proper for review
by the Supreme Court? (2) Is Federal Express liable for damage to or loss of
the insured goods?

This Courts Ruling

 The Petition has merit.

Preliminary Issue:
Propriety of Review

The correctness of legal conclusions drawn by the Court of Appeals from

undisputed facts is a question of law cognizable by the Supreme Court. [9]

In the present case, the facts are undisputed. As will be shown shortly,
petitioner is questioning the conclusions drawn from such facts. Hence, this
case is a proper subject for review by this Court.

Main Issue:
Liability for Damages

Petitioner contends that respondents have no personality to sue -- thus, no

cause of action against it -- because the payment made to Smithkline was
erroneous.
Pertinent to this issue is the Certificate of Insurance (Certificate) that both
[10]

opposing parties cite in support of their respective positions. They differ only in
their interpretation of what their rights are under its terms. The determination of
those rights involves a question of law, not a question of fact. As distinguished
from a question of law which exists when the doubt or difference arises as to
what the law is on a certain state of facts -- there is a question of fact when the
doubt or difference arises as to the truth or the falsehood of alleged facts; or
when the query necessarily invites calibration of the whole evidence
considering mainly the credibility of witnesses, existence and relevancy of
specific surrounding circumstance, their relation to each other and to the whole
and the probabilities of the situation.
[11]

Proper Payee

The Certificate specifies that loss of or damage to the insured cargo is

payable to order x x x upon surrender of this Certificate. Such wording conveys
the right of collecting on any such damage or loss, as fully as if the property
were covered by a special policy in the name of the holder itself. At the back of
the Certificate appears the signature of the representative of Burlington. This
document has thus been duly indorsed in blank and is deemed a bearer
instrument.
Since the Certificate was in the possession of Smithkline, the latter had the
right of collecting or of being indemnified for loss of or damage to the insured
shipment, as fully as if the property were covered by a special policy in the name
of the holder. Hence, being the holder of the Certificate and having an insurable
interest in the goods, Smithkline was the proper payee of the insurance
proceeds.

Subrogation

Upon receipt of the insurance proceeds, the consignee (Smithkline)

executed a subrogation Receipt in favor of respondents. The latter were thus
[12]

authorized to file claims and begin suit against any such carrier, vessel, person,
corporation or government. Undeniably, the consignee had a legal right to
receive the goods in the same condition it was delivered for transport to
petitioner. If that right was violated, the consignee would have a cause of action
against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage
to the insured goods, the insurers entitlement to subrogation pro tanto -- being
of the highest equity -- equips it with a cause of action in case of a contractual
breach or negligence. Further, the insurers subrogatory right to sue for
[13]

recovery under the bill of lading in case of loss of or damage to the cargo is
jurisprudentially upheld.[14]

In the exercise of its subrogatory right, an insurer may proceed against an

erring carrier. To all intents and purposes, it stands in the place and in
substitution of the consignee. A fortiori, both the insurer and the consignee are
bound by the contractual stipulations under the bill of lading.
[15]

Prescription of Claim

From the initial proceedings in the trial court up to the present, petitioner
has tirelessly pointed out that respondents claim and right of action are already
barred. The latter, and even the consignee, never filed with the carrier any
written notice or complaint regarding its claim for damage of or loss to the
subject cargo within the period required by the Warsaw Convention and/or in
the airway bill. Indeed, this fact has never been denied by respondents and is
plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner,
states:

6. No action shall be maintained in the case of damage to or partial loss of the

shipment unless a written notice, sufficiently describing the goods concerned, the
approximate date of the damage or loss, and the details of the claim, is presented by
shipper or consignee to an office of Burlington within (14) days from the date the
goods are placed at the disposal of the person entitled to delivery, or in the case of
total loss (including non-delivery) unless presented within (120) days from the date of
issue of the [Airway Bill]. [16]

Relevantly, petitioners airway bill states:

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

Article 26 of the Warsaw Convention, on the other hand, provides:

ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods
without complaint shall be prima facie evidence that the same have been delivered in
good condition and in accordance with the document of transportation.

(2) In case of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within 3 days from the
date of receipt in the case of baggage and 7 days from the date of receipt in the case of
goods. In case of delay the complaint must be made at the latest within 14 days from
the date on which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or
by separate notice in writing dispatched within the times aforesaid.

(4) Failing complaint within the times aforesaid, no action shall lie against the carrier,
save in the case of fraud on his part.
[18]

Condition Precedent

In this jurisdiction, the filing of a claim with the carrier within the time
limitation therefor actually constitutes a condition precedent to the accrual of a
right of action against a carrier for loss of or damage to the goods. The shipper
[19]

or consignee must allege and prove the fulfillment of the condition. If it fails to
do so, no right of action against the carrier can accrue in favor of the former.
The aforementioned requirement is a reasonable condition precedent; it does
not constitute a limitation of action. [20]

The requirement of giving notice of loss of or injury to the goods is not an

empty formalism. The fundamental reasons for such a stipulation are (1) to
inform the carrier that the cargo has been damaged, and that it is being charged
with liability therefor; and (2) to give it an opportunity to examine the nature and
extent of the injury. This protects the carrier by affording it an opportunity to
make an investigation of a claim while the matter is fresh and easily investigated
so as to safeguard itself from false and fraudulent claims. [21]

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

damage suffered. [23]

Being a condition precedent, the notice must precede a suit for

enforcement. In the present case, there is neither an allegation nor a showing
[24]

of respondents compliance with this requirement within the prescribed period.

While respondents may have had a cause of action then, they cannot now
enforce it for their failure to comply with the aforesaid condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other
issues raised by petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. --
petitioners co-defendant in respondents Complaint below -- has been adjudged
by the trial court as liable for, inter alia, actual damages in the amount of the
peso equivalent of US $39,339. This judgment was affirmed by the Court of
[25]

Appeals and is already final and executory. [26]

WHEREFORE, the Petition is GRANTED, and the assailed

Decision REVERSED insofar as it pertains to Petitioner Federal Express
Corporation. No pronouncement as to costs.
SO ORDERED.
Corona, and Carpio-Morales, JJ., concur.
Sandoval-Gutierrez, J., on leave.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22146 September 5, 1967

SVERIGES ANGFARTYGS ASSURANS FORENING, plaintiff-appellant,

vs.
QUA CHEE GAN, defendant-appellee.

Ross, Selph & Carrascoso for plaintiff-appellant.

Ponce Enrile, S. Reyna, Monticello & Belo for defendant-appellee.

BENGZON, J.P., J.

On August 23 and 24, 1947, defendant Qua Chee Gan, a sole proprietorship, shipped on board the
S.S. NAGARA, as per bills of lading Exhs. A and B, 2,032,000 kilos of bulk copra at Siain, Quezon,
consigned to DAL International Trading Co., in Gdynia, Poland. The vessel first called at the port of
Karlshamn, Sweden, where it unloaded 969,419 kilos of bulk copra. Then, it proceeded to Gdynia
where it unloaded the remaining copra shipment. The actual outturn weights in the latter port
showed that only 1,569,429 kilos were discharged.

Because of the alleged confirmed cargo shortage, the Polish cargo insurers had to indemnify the
consignee for the value thereof. Thereafter, the former sued the shipowner, the Swedish East Asia
Company, in Gothenburg, Sweden. The latter, in turn sued, defendant and had it summoned to
Gothenburg. Defendant, however, refused to submit to that court's jurisdiction and its objection was
sustained.
In March, 1951, a settlement was effected between the Polish cargo insurers and the shipowner.
Plaintiff, as the indemnity insurer for the latter, paid approximately $60,733.53 to the Polish insurers.
On August 16, 1954, claiming to have been subogated to the rights of the carrier, plaintiff sued
defendant before the Court of First Instance of Manila to recover U.S. $60,733.53 plus 17%
exchange tax, with legal interest, as the value of the alleged cargo short shipment, and P10,000 as
attorney's fees. Defendant answered in due time and countered with a P15,000 counterclaim for
attorney's fees.

On August 1, 1955, defendant filed a motion to dismiss on the ground of prescription under the
Carriage of Goods by Sea Act. The lower court sustained the motion and plaintiff appealed here. We
reversed the order of dismissal and remanded the case for further proceedings.1

After trial, the lower court on September 28, 1963, rendered its decision dismissing the complaint
and awarding P10,000 as attorney's fees to defendant. It ruled (a) that there was no short shipment
on defendant's part; (b) that plaintiff's insurance policy did not cover the short shipment, and (c)
defendant was merely acting as an agent of Louis Dreyfus & Co., who was the real shipper.

Taking issue with all the foregoing, plaintiff has interposed the present appeal to Us on questions of
fact and law, the amount involved exceeding P200,000.00.

Was the non-presentation of the insurance policy fatal to plaintiff's case? The lower court ruled so,
reasoning that unless the same — as the best evidence — were presented, it could not be
conclusively determined if "liability for short shipment" was a covered risk. And the rule is that an
insurer who pays the insured for loss or liability not covered by the policy is not subrogated to the
latter.2 However, even assuming that there was unwarranted — or "volunteer" — payment, plaintiff
could still recover what it paid — in effect — to the carrier from defendant shipper under Art. 1236 of
the Civil Code which allows a third person who pays on behalf of another to recover from the latter,
although there is no subrogation. But since the payment here was without the knowledge and
consent of defendant, plaintiff's right of recovery is defeasible by the former's defenses since the
Code is clear that the recovery is only up to the amount by which the defendant was benefited.

This brings Us to the crux of the case: Was there a short-shipment? To support its case, plaintiff
theorizes that defendant had two shipments at Siain, Quezon province (1) 812,800 kilos for
Karlshamn and (2) 2,032,000 kilos for Gdynia. The Karlshamn shipment was asserted to have been
covered by a separate bill of lading which, however, was allegedly lost subsequently. Thus, the
696,419 kilos of copra unloaded in Karlshamn was not part of the Gdynia shipment and cannot
explain the confirmed shortage at the latter port.

Plaintiff's cause of action suffers from several fatal defects and inconsistencies. The alleged
shipment of 812,800 kilos for Karlshamn is contradicted by plaintiff's admission in paragraphs 2 and
3 of its complaint that defendant shipped only 2,032,000 kilos of copra at Siain, purportedly for both
Gdynia and Karlshamn.3 Needless to state, plaintiff is bound by such judicial admission.4 Moreover,
the alleged existence of the Karlshamn bills of lading is negatived by the fact that Exhibits A and B
— the bills of lading presented by plaintiff — show that the 2,032,000 kilos of copra loaded in Siain
were for Gdynia only. Further destroying its case is the testimony of plaintiff's own witness, Mr. Claro
Pasicolan, who on direct examination affirmed5 that these two exhibits connstituted the complete set
of documents which the shipping agent in charge of the vessel S.S. NAGARA issued covering the
copra cargo loaded at Siain. In view of this admission and for want of evidentiary support, plaintiff's
belated claim that there is another complete set of documents can not be seriously taken. 1awphîl.nèt

Lastly, if there really was a separate bill of lading for the Karlshamn shipment, plaintiff could not have
failed to present a copy thereof. Mr. Pasicolan testified6 that the shipping agent makes 20 copies of
the documents of which three signed ones are given to the shipper and the rest, marked as non-
negotiable bills of lading — like Exhibits A and B — are kept on its file. For the three signed copies to
be lost, We may believe, but not for all the remaining 17 other copies. Under the circumstances it is
more reasonable to hold that there was no separate shipment intended for Karlshamn, Sweden.

As a corollary to the foregoing conclusion, it stands to reason that the copra unloaded in Karlshamn
formed part of the same — and only — shipment of defendant intended for Gdynia. Now the fact that
the sum total of the cargo unloaded at Karlshamn and Gdynia would exceed what appears to have
been loaded at Siain by as much as 233,848 kilos can only show that defendant really overshipped,
not shortshipped. And while this would not tally with defendant's claim of having weighed the copra
cargo 100% at Siain, thus exposing a flaw in defendant's case, yet it is elementary that plaintiff must
rely on the strength of its own case to recover, and not bank on the weakness of the defense.
Plaintiff here failed to establish its case by preponderance on evidence.

On the question whether defendant is the real shipper or merely an agent of Louis Dreyfus & Co.,
suffice it to say that altho on Exhibits A and B his name appears as the shipper, yet the very loading
certificate, Exhibit 3 [5-Deposition of Horle], issued and signed by the Chief Mate and Master of the
S.S. NAGARA shows that defendant was acting merely for account of Louis Dreyfus & Co. The other
documentary exhibits7 confirm this. Anyway, in whatever capacity defendant is considered, it cannot
be liable since no shortshipment was shown.

Plaintiff's action against defendant cannot, however, be considered as clearly unfounded as to

warrant an award of attorney's fees as damages to defendant under par. 4, Art. 2208 of the Civil
Code. The facts do not show that plaintiff's cause of action was so frivolous or untenable as to
amount to gross and evident bad faith.8

WHEREFORE, but for the award of attorney's fees to defendant which is eliminated, the decision
appealed from is, in all other respects, hereby affirmed.

Costs against plaintiff-appellant. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ. concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-24043 April 25, 1968

RIZAL SURETY & INSURANCE COMPANY, plaintiff-appellant,

vs.
MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants-appellees.

Gil R. Carlos and Associates for plaintiff-appellant.

D. F. Macaranas and M. C. Gonzales for defendants-appellees.

FERNANDO, J.:

In this suit for the recovery of the amount paid by the plaintiff, Rizal Surety and Insurance Company,
to the consignee based on the applicable Civil Code provision,1 which speak to the effect that the
Insurance Company "shall be subrogated to the rights of the insured," it is its contention that it is
entitled to the amount paid by it in full, by virtue of the insurance contract. The lower court, however,
relying on the limited liability clause on a management contract with the defendants, could not go
along with such a theory. Hence, this appeal.

The facts were stipulated. The more pertinent follows: That on or about November 29, 1960, the
vessel, SS Flying Trader, loaded on board at Genoa, Italy for shipment to Manila, Philippines,
among other cargoes, 6 cases OMH, Special Single Colour Offset Press Machine, for which Bill of
Lading No. 1 was issued, consigned to Suter Inc.; that such vessel arrived at the Port of Manila,
Philippines on or about January 16, 1961 and subsequently discharged complete and in good order
the aforementioned shipment into the custody of defendant Manila Port Service as arrastre operator;
that in the course of the handling, one of the six cases identified as Case No. 2143 containing the
OMH, Special Single Colour Offset Press, while the same was being lifted and loaded by the crane
of the Manila Port Service into the consignee's truck, it was dropped by the crane and as a
consequence, the machine was heavily damaged for which plaintiff as insurer paid to the consignee,
Suter Inc. the amount of P16,500.00, representing damages by way of costs of replacement parts
and repairs to put the machine in working condition, plus the sum of P180.70 which plaintiff paid to
the International Adjustment Bureau as adjuster's fee for the survey conducted on the damaged
cargo or a total of P16,680.70 representing plaintiff's liability under the insurance contract; and that
the arrastre charges in this particular shipment was paid on the weight or measurement basis
whichever is higher, and not on the value thereof.2

Clause 15 of the management contract which as admitted by the plaintiff, appeared "at the dorsal
part of the Delivery Permit" and was "used in taking delivery of the subject shipment from the
defendants' (Manila Port Service and Manila Railroad Co.) custody and control, issued in the name
of consignee's broker," contained what was referred to as "an important notice." Such permit "is
presented subject to all the terms and conditions of the Management Contract between the Bureau
of Customs and Manila Port Service and amendments thereto or alterations thereof, particularly but
not limited to paragraph 15 thereof limiting the Company liability to P500.00 per package, unless the
value of the goods is otherwise, specified, declared or manifested and the corresponding arrastre
charges have been paid. . . ."3
On the above facts and relying on Bernabe & Co. v. Delgado Brothers, Inc.,4 the lower court
rendered the judgment "ordering defendants, jointly and severally, to pay plaintiff the amount of Five
Hundred Pesos (P500.00), with legal interest thereon from January 13, 1962, the date of the filing of
the complaint, with costs against said defendants."5

As noted at the outset, in this appeal, the point is pressed that under the applicable Civil Code
provision, plaintiff-appellant Insurance Company could recover in full. The literal language of Article
2207, however, does not warrant such an interpretation. It is there made clear that in the event that
the property has been insured and the Insurance Company has paid the indemnity for the injury or
loss sustained, it "shall be subrogated to the rights of the insured against the wrong-doer or the
person who has violated the contract."

Plaintiff-appellant Insurance Company, therefore, cannot recover from defendants an amount

greater than that to which the consignee could lawfully lay claim. The management contract is clear.
The amount is limited to Five Hundred Pesos (P500.00). Such a stipulation has invariably received
the approval of this Court from the leading case of Bernabe & Co. v. Delgado Bros., Inc.6 Such a
decision was quoted with approval in the following subsequent cases: Atlantic Mutual Insurance Co.
v. Manila Port Service,7 Insurance Service Co. of North America v. Manila Port Service,8 Insurance
Company of North America v. U.S. Lines, Co.,9 and Insurance Company of North America v. Manila
Port Service.10

In one of them, Atlantic Mutual Insurance Company v. Manila Port Service, this Court, through the
then Justice, now Chief Justice, Concepcion, restated the doctrine thus: "Plaintiff maintains that, not
being a party to the management contract, the consignee — into whose shoes plaintiff had stepped
in consequence of said payment — is not subject to the provisions of said stipulation, and that the
same is furthermore invalid. The lower court correctly rejected this pretense because, having taken
delivery of the shipment aforementioned by virtue of a delivery permit, incorporating thereto, by
reference, the provisions of said management contract, particularly paragraph 15 thereof, the gist of
which was set forth in the permit, the consignee became bound by said provisions, and because it
could have avoided the application of said maximum limit of P500.00 per package by stating the true
value thereof in its claim for delivery of the goods in question, which, admittedly, the consignee failed
to do. . . ."11

Plaintiff-appellant Rizal Surety and Insurance Company, having been subrogated merely to the
rights of the consignee, its recovery necessarily should be limited to what was recoverable by the
insured. The lower court therefore did not err when in the decision appealed from, it limited the
amount which defendants were jointly and severally to pay plaintiff-appellants to "Five Hundred
Pesos (P500.00) with legal interest thereon from January 31, 1962, the date of the filing of the
complaint, . . . ."

WHEREFORE, the decision appealed from is affirmed. With costs against Rizal Surety and
Insurance Company.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Angeles, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 87958 April 26, 1990

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURG, PA/AMERICAN

INTERNATIONAL UNDERWRITER (PHIL.) INC., petitioners,
vs.
STOLT-NIELSEN PHILIPPINES, INC. and COURT OF APPEALS, respondents.

Fajardo Law Offices for petitioners.

Sycip, Salazar, Hernandez & Gatmaitan for Stolt-Nielsen Phil., Inc.

MELENCIO-HERRERA, J.:

We uphold the ruling of respondent Court of Appeals that the claim or dispute herein is arbitrable.

On 9 January 1985, United Coconut Chemicals, Inc. (hereinafter referred to as SHIPPER) shipped
404.774 metric tons of distilled C6-C18 fatty acid on board MT "Stolt Sceptre," a tanker owned by
Stolt-Nielsen Philippines Inc. (hereinafter referred to as CARRIER), from Bauan, Batangas,
Philippines, consigned to "Nieuwe Matex" at Rotterdam, Netherlands, covered by Tanker Bill of
Lading BL No. BAT-1. The shipment was insured under a marine cargo policy with Petitioner
National Union Fire Insurance Company of Pittsburg (hereinafter referred to as INSURER), a non-life
American insurance corporation, through its settling agent in the Philippines, the American
International Underwriters (Philippines), Inc., the other petitioner herein.

It appears that the Bill of Lading issued by the CARRIER contained a general statement of
incorporation of the terms of a Charter Party between the SHIPPER and Parcel Tankers, Inc.,
entered into in Greenwich, Connecticut, U.S.A.

Upon receipt of the cargo by the CONSIGNEE in the Netherlands, it was found to be discolored and
totally contaminated. The claim filed by the SHIPPER-ASSURED with the CARRIER having been
denied, the INSURER indemnified the SHIPPER pursuant to the stipulation in the marine cargo
policy covering said shipment.

On 21 April 1986, as subrogee of the SHIPPER-ASSURED, the INSURER filed suit against the
CARRIER, before the Regional Trial Court of Makati, Branch 58 (RTC), for recovery of the sum of
P1,619,469.21, with interest, representing the amount the INSURER had paid the SHIPPER-
ASSURED. The CARRIER moved to dismiss/suspend the proceedings on the ground that the RTC
had no jurisdiction over the claim the same being an arbitrable one; that as subrogee of the
SHIPPER-ASSURED, the INSURER is subject to the provisions of the Bill of Lading, which includes
a provision that the shipment is carried under and pursuant to the terms of the Charter Party, dated
21 December 1984, between the SHIPPER-ASSURED and Parcel Tankers, Inc. providing for
arbitration.
The INSURER opposed the dismissal/suspension of the proceedings on the ground that it was not
legally bound to submit the claim for arbitration inasmuch as the arbitration clause provided in the
Charter Party was not incorporated into the Bill of Lading, and that the arbitration clause is void for
being unreasonable and unjust. On 28 July 1987, the RTC 1 denied the Motion, but subsequently
reconsidered its action on 19 November 1987, and deferred resolution on the Motion to
Dismiss/Suspend Proceedings until trial on the merits "since the ground alleged in said motion does
not appear to be indubitable."

The CARRIER then resorted to a Petition for Certiorari and Prohibition with prayer for Preliminary
Injunction and/or Temporary Restraining Order before the respondent Appellate Court seeking the
annulment of the 19 November 1987 RTC Order. On 12 April 1989, the respondent
Court 2 promulgated the Decision now under review, with the following dispositive tenor:

WHEREFORE', the order of respondent Judge dated November 19, 1987 deferring
resolution on petitioner Stolt-Nielsen's Motion to Dismiss/Suspend Proceedings is hereby
SET ASIDE; private respondent NUFIC (the INSURER) is ordered to refer its claims for
arbitration; and respondent Judge is directed to suspend the proceedings in Civil case No.
13498 pending the return of the corresponding arbitral award.

On 21 August 1989, we resolved to give due course and required the parties to submit their
respective Memoranda, which they have done, the last filed having been Noted on 23 October 1989.

First, herein petitioner-INSURER alleges that the RTC Order deferring resolution of the CARRIER's
Motion to Dismiss constitutes an interlocutory order, which can not be the subject of a special civil
action on certiorari and prohibition.

Generally, this would be true. However, the case before us falls under the exception. While a Court
Order deferring action on a motion to dismiss until the trial is interlocutory and cannot be challenged
until final judgment, still, where it clearly appears that the trial Judge or Court is proceeding in excess
or outside of its jurisdiction, the remedy of prohibition would lie since it would be useless and a waste
of time to go ahead with the proceedings (University of Sto. Tomas vs. Villanueva, 106 Phil. 439,
[1959] citing Philippine International Fair, Inc., et al., vs. Ibanez, et al., 94 Phil. 424 [1954]; Enrique
vs. Macadaeg, et al., 84 Phil. 674 [1949]; San Beda College vs. CIR, 97 Phil. 787 [1955]). Even a
cursory reading of the subject Bill of Lading, in relation to the Charter Party, reveals the Court's
patent lack of jurisdiction to hear and decide the claim.

We proceed to the second but more crucial issue: Are the terms of the Charter Party, particularly the
provision on arbitration, binding on the INSURER?

The INSURER postulates that it cannot be bound by the Charter Party because, as insurer, it is
subrogee only with respect to the Bill of Lading; that only the Bill of Lading should regulate the
relation among the INSURER, the holder of the Bill of Lading, and the CARRIER; and that in order to
bind it, the arbitral clause in the Charter Party should have been incorporated into the Bill of Lading.

We rule against that submission.

The pertinent portion of the Bill of Lading in issue provides in part:

This shipment is carried under and pursuant to the terms of the Charter dated December
21st 1984 at Greenwich, Connecticut, U.S.A. between Parcel Tankers. Inc. and United
Coconut Chemicals, Ind. as Charterer and all the terms whatsoever of the said
Charter except the rate and payment of freight specified therein apply to and govern the
 rights of the parties concerned in this shipment. Copy of the Charter may be obtained from
the Shipper or Charterer. (Emphasis supplied)

While the provision on arbitration in the Charter Party reads:

H. Special Provisions.

xxx xxx xxx

4. Arbitration. Any dispute arising from the making, performance or termination of this
Charter Party shall be settled in New York, Owner and Charterer each appointing an
arbitrator, who shall be a merchant, broker or individual experienced in the shipping
business; the two thus chosen, if they cannot agree, shall nominate a third arbitrator who
shall be an admiralty lawyer. Such arbitration shall be conducted in conformity with the
provisions and procedure of the United States arbitration act, and a judgment of the court
shall be entered upon any award made by said arbitrator. Nothing in this clause shall be
deemed to waive Owner's right to lien on the cargo for freight, deed of freight, or demurrage.

Clearly, the Bill of Lading incorporates by reference the terms of the Charter Party. It is settled law
that the charter may be made part of the contract under which the goods are carried by an
appropriate reference in the Bill of Lading (Wharton Poor, Charter Parties and Ocean Bills of Lading
(5th ed., p. 71). This should include the provision on arbitration even without a specific stipulation to
that effect. The entire contract must be read together and its clauses interpreted in relation to one
another and not by parts. Moreover, in cases where a Bill of Lading has been issued by a carrier
covering goods shipped aboard a vessel under a charter party, and the charterer is also the holder
of the bill of lading, "the bill of lading operates as the receipt for the goods, and as document of title
passing the property of the goods, but not as varying the contract between the charterer and the
shipowner" (In re Marine Sulphur Queen, 460 F 2d 89, 103 [2d Cir. 1972]; Ministry of Commerce vs.
Marine Tankers Corp. 194 F. Supp 161, 163 [S.D.N.Y. 1960]; Greenstone Shipping Co., S.A. vs.
Transworld Oil, Ltd., 588 F Supp [D.El. 1984]). The Bill of Lading becomes, therefore, only a receipt
and not the contract of carriage in a charter of the entire vessel, for the contract is the Charter Party
(Shell Oil Co. vs. M/T Gilda, 790 F 2d 1209, 1212 [5th Cir. 1986]; Home Insurance Co. vs. American
Steamship Agencies, Inc., G.R. No. L-25599, 4 April 1968, 23 SCRA 24), and is the law between the
parties who are bound by its terms and condition provided that these are not contrary to law, morals,
good customs, public order and public policy (Article 1306, Civil Code).

As the respondent Appellate Court found, the INSURER "cannot feign ignorance of the arbitration
clause since it was already charged with notice of the existence of the charter party due to an
appropriate reference thereof in the bill of lading and, by the exercise of ordinary diligence, it could
have easily obtained a copy thereof either from the shipper or the charterer.

We hold, therefore, that the INSURER cannot avoid the binding effect of the arbitration clause. By
subrogation, it became privy to the Charter Party as fully as the SHIPPER before the latter was
indemnified, because as subrogee it stepped into the shoes of the SHIPPER-ASSURED and is
subrogated merely to the latter's rights. It can recover only the amount that is recoverable by the
assured. And since the right of action of the SHIPPER-ASSURED is governed by the provisions of
the Bill of Lading, which includes by reference the terms of the Charter Party, necessarily, a suit by
the INSURER is subject to the same agreements (see St. Paul Fire and Marine Insurance Co. vs.
Macondray, G.R. No. L-27796, 25 March 1976, 70 SCRA 122).
Stated otherwise, as the subrogee of the SHIPPER, the INSURER is contractually bound by the
terms of the Charter party. Any claim of inconvenience or additional expense on its part should not
1âw phi1

render the arbitration clause unenforceable.

Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in
our jurisdiction (Chapter 2, Title XIV, Book IV, Civil Code). Republic Act No. 876 (The Arbitration
Law) also expressly authorizes arbitration of domestic disputes. Foreign arbitration as a system of
settling commercial disputes of an international character was likewise recognized when the
Philippines adhered to the United Nations "Convention on the Recognition and the Enforcement of
Foreign Arbitral Awards of 1958," under the 10 May 1965 Resolution No. 71 of the Philippine
Senate, giving reciprocal recognition and allowing enforcement of international arbitration
agreements between parties of different nationalities within a contracting state. Thus, it pertinently
provides:

1. Each Contracting State shall recognize an agreement in writing under which the parties
undertake to submit to arbitration all or any differences which have arisen or which may arise
between them in respect of a defined legal relationship, whether contractual or not,
concerning a subject matter capable of settlement by arbitration.

2. The term "agreement in writing" shall include an arbitral clause in a contract or an

arbitration agreement, signed by the parties or contained in an exchange of letters or
telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which
the parties have made an agreement within the meaning of this article, shall, at the request
of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is
null and void, inoperative or incapable of being performed.

It has not been shown that the arbitral clause in question is null and void, inoperative, or incapable of
being performed. Nor has any conflict been pointed out between the Charter Party and the Bill of
Lading.

In fine, referral to arbitration in New York pursuant to the arbitration clause, and suspension of the
proceedings in Civil Case No. 13498 below, pending the return of the arbitral award, is, indeed
called for.

WHEREFORE, finding no reversible error in respondent Appellate Court's 12 April 1989 Decision,
the instant Petition for Review on certiorari is DENIED and the said judgment is hereby AFFIRMED.
Costs against petitioners.

SO ORDERED.

Padilla, Sarmiento and Regalado JJ., concur. Paras, J., took no part.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-27796 March 25, 1976

ST. PAUL FIRE & MARINE INSURANCE CO., plaintiff-appellant,

vs.
MACONDRAY & CO., INC., BARBER STEAMSHIP LINES, INC., WILHELM WILHELMSEN
MANILA PORT SERVICE and/or MANILA RAILROAD COMPANY, defendants-appellees.

Chuidian Law Office for appellant.

Salcedo, Del Rosario Bito & Mesa for appellee Macondray & Co., Inc., Barber Steamship Lines, Inc.
and Wilhelm Wilhelmsen

Macaranas & Abrenica for appellee Manila Port Service and/or Manila Railroad Company.

ANTONIO, J.:

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

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

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

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

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

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

After due trial, the lower court, on March 10, 1965 rendered judgment ordering defendants
Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm Wilhelmsen to pay to the plaintiff,
jointly and severally, the sum of P300.00, with legal interest thereon from the filing of the complaint
until fully paid, and defendants Manila Railroad Company and Manila Port Service to pay to plaintiff,
jointly and severally, the sum of P809.67, with legal interest thereon from the filing of the complaint
until fully paid, the costs to be borne by all the said defendants. 3

On April 12, 1965, plaintiff, contending that it should recover the amount of $1,134.46, or its
equivalent in pesos at the rate of P3.90, instead of P2.00, for every US$1.00, filed a motion for
reconsideration, but this was denied by the lower court on May 5, 1965. Hence, the present appeal.

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

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

The appeal is without merit.

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

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

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

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

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

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

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

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

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

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

Barredo, Aquino, Concepcion, Jr. and and Martin, JJ., concur.

Justice Enrique M. Fernando (Chairman), is on leave.

Justice Ruperto G. Martin was designated to sit in the Second Division.

 THIRD DIVISION

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

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs. WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and
ASSURANCE COMPANY, INC., respondents.

DECISION
PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court
seeking a reversal of the decision of the Court of Appeals[1] which affirmed the decision of the trial
court of origin finding the petitioner herein, Cebu Shipyard and Engineering Works, Inc. (CSEW)
negligent and liable for damages to the private respondent, William Lines, Inc., and to the insurer,
Prudential Guarantee Assurance Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in
the business of dry-docking and repairing of marine vessels while the private respondent,
Prudential Guarantee and Assurance, Inc. (Prudential), also a domestic corporation is in the non-
life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It was the owner of M/V
Manila City, a luxury passenger-cargo vessel, which caught fire and sank on February 16, 1991.
At the time of the unfortunate occurrence sued upon, subject vessel was insured with Prudential
for P45,000,000.00 pesos for hull and machinery. The Hull Policy included an Additional Perils
(INCHMAREE) Clause covering loss of or damage to the vessel through the negligence of, among
others, ship repairmen. The Policy provided as follows:

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

xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers

are not an Assured hereunder.

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

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

7. Limit of Liability

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

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

(b) awarded against the Assured.[3]

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu
Shipyard in Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives of William
Lines, Inc. and CSEW to discuss the work to be undertaken on the M/V Manila City.
The contracts, denominated as Work Orders, were signed thereafter, with the following
stipulations:

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

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

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

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

xxx

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

While the M/V Manila City was undergoing dry-docking and repairs within the premises of
CSEW, the master, officers and crew of M/V Manila City stayed in the vessel, using their cabins
as living quarters. Other employees hired by William Lines to do repairs and maintenance work
on the vessel were also present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire
and sank, resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW,
alleging that the fire which broke out in M/V Manila City was caused by CSEWs negligence and
lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after
the latter had paid William Lines, Inc. the value of the hull and machinery insurance on the M/V
Manila City. As a result of such payment Prudential was subrogated to the claim of P45 million,
representing the value of the said insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing
as follows:

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

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

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

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

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

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

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

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

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the
pendency of the appeal, CSEW and William Lines presented a Joint Motion for Partial Dismissal
with prejudice, on the basis of the amicable settlement inked between Cebu Shipyard and William
Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as
CSEW and William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial
court, ruling thus:

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

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

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN

HOLDING THAT CSEW HAD MANAGEMENT AND
SUPERVISORY CONTROL OF THE M/V MANILA CITY AT THE TIME THE
FIRE BROKE OUT.
II. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
APPLYING THE DOCTRINE OF RES IPSA LOQUITUR AGAINST CSEW.

III. THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND

THEREBY LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED ON
FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.

IV. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN

RULING CSEWS EXPERT EVIDENCE AS INADMISSIBLE OR OF NO
PROBATIVE VALUE.

V. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN

RULING THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION
AGAINST ITS OWN INSURED.

VI. ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF

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

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

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

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

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

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

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

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

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

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

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

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was
insured with Prudential Guarantee, William Lines filed a claim for constructive total
loss, and after a thorough investigation of the surrounding circumstances of the
tragedy, Prudential Guarantee found the said insurance claim to be meritorious and
issued a check in favor of William Lines in the amount of P45 million pesos
representing the total value of M/V Manila Citys hull and machinery insurance.[6]

The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages
to the respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is
petitioners submission that the finding of negligence by the Court of Appeals is not supported by
the evidence on record, and contrary to what the Court of Appeals found, petitioner did not have
management and control over M/V Manila City. Although it was brought to the premises of CSEW
for annual repair, William Lines, Inc. retained control over the vessel as the ship captain remained
in command and the ships crew were still present. While it imposed certain rules and regulations
on William Lines, it was in the exercise of due diligence and not an indication of CSEWs exclusive
control over subject vessel. Thus, CSEW maintains that it did not have exclusive control over the
M/V Manila City and the trial court and the Court of Appeals erred in applying the doctrine of res
ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule that factual
findings by the Court of Appeals are conclusive on the parties and are not reviewable by this Court.
They are entitled to great weight and respect, even finality, especially when, as in this case, the
Court of Appeals affirmed the factual findings arrived at by the trial court.[7] When supported by
sufficient evidence, findings of fact by the Court of Appeals affirming those of the trial court, are
not to be disturbed on appeal. The rationale behind this doctrine is that review of the findings of
fact of the Court of Appeals is not a function that the Supreme Court normally undertakes.[8]
Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the
fire which caused the total loss of subject M/V Manila City was due to the negligence of the
employees and workers of CSEW. Both courts found that the M/V Manila City was under the
custody and control of petitioner CSEW, when the ill-fated vessel caught fire. The decisions of
both the lower court and the Court of Appeals set forth clearly the evidence sustaining their finding
of actionable negligence on the part of CSEW. This factual finding is accorded great weight and
is conclusive on the parties. The court discerns no basis for disturbing such finding firmly anchored
on enough evidence. As held in the case of Roblett Industrial Construction Corporation vs. Court
of Appeals, in the absence of any showing that the trial court failed to appreciate facts and
circumstances of weight and substance that would have altered its conclusion, no compelling
reason exists for the Court to impinge upon matters more appropriately within its province.[9]
Furthermore, in petitions for review on certiorari, only questions of law may be put into issue.
Questions of fact cannot be entertained. The finding of negligence by the Court of Appeals is a
question which this Court cannot look into as it would entail going into factual matters on which
the finding of negligence was based. Such an approach cannot be allowed by this Court in the
absence of clear showing that the case falls under any of the exceptions[10] to the well-established
principle.
The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and
sank by reason of the negligence of the workers of CSEW, when the said vessel was under the
exclusive custody and control of CSEW is accordingly upheld. Under the circumstances of the
case, the doctrine of res ipsa loquitur applies. For the doctrine of res ipsa loquitur to apply to a
given situation, the following conditions must concur: (1) the accident was of a kind which does
not ordinarily occur unless someone is negligent; and (2) that the instrumentality or agency which
caused the injury was under the exclusive control of the person charged with negligence.
The facts and evidence on record reveal the concurrence of said conditions in the case under
scrutiny. First, the fire that occurred and consumed M/V Manila City would not have happened in
the ordinary course of things if reasonable care and diligence had been exercised. In other words,
some negligence must have occurred. Second, the agency charged with negligence, as found by
the trial court and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu
Shipyard and Engineering Works, Inc., which had control over subject vessel when it was docked
for annual repairs. So also, as found by the regional trial court, other responsible causes, including
the conduct of the plaintiff, and third persons, are sufficiently eliminated by the evidence.[11]
What is more, in the present case the trial court found direct evidence to prove that the workers
and/or employees of CSEW were remiss in their duty of exercising due diligence in the care of
subject vessel. The direct evidence substantiates the conclusion that CSEW was really
negligent. Thus, even without applying the doctrine of res ipsa loquitur, in light of the direct
evidence on record, the ineluctable conclusion is that the petitioner, Cebu Shipyard and
Engineering Works, Inc., was negligent and consequently liable for damages to the respondent,
William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously
ruled on the inadmissibility of the expert testimonies it (petitioner) introduced on the probable
cause and origin of the fire. Petitioner maintains that the Court of Appeals erred in disregarding
the testimonies of the fire experts, Messrs. David Grey and Gregory Michael Southeard, who
testified on the probable origin of the fire in M/V Manila City. Petitioner avers that since the said
fire experts were one in their opinion that the fire did not originate in the area of Tank Top No. 12
where the JNB workers were doing hotworks but on the crew accommodation cabins on the
portside No. 2 deck, the trial court and the Court of Appeals should have given weight to such
finding based on the testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they may have
probative value, reception in evidence of expert testimonies is within the discretion of the
court. Section 49, Rule 130 of the Revised Rules of Court, provides:

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

The word may signifies that the use of opinion of an expert witness as evidence is a prerogative of
the courts. It is never mandatory for judges to give substantial weight to expert testimonies. If from
the facts and evidence on record, a conclusion is readily ascertainable, there is no need for the
judge to resort to expert opinion evidence. In the case under consideration, the testimonies of the
fire experts were not the only available evidence on the probable cause and origin of the fire. There
were witnesses who were actually on board the vessel when the fire occurred. Between the
testimonies of the fire experts who merely based their findings and opinions on interviews and the
testimonies of those present during the fire, the latter are of more probative value. Verily, the trial
court and the Court of Appeals did not err in giving more weight to said testimonies.
 On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated
to the rights of William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was
an excluded risk and (2) it is a co-assured under the Marine Hull Insurance Policy.
It is petitioners submission that the loss of M/V Manila City or damage thereto is expressly
excluded from the coverage of the insurance because the same resulted from want of due diligence
by the Assured, Owners or Managers which is not included in the risks insured against. Again, this
theory of petitioner is bereft of any factual or legal basis. It proceeds from a wrong premise that
the fire which gutted subject vessel was caused by the negligence of the employees of William
Lines, Inc. To repeat, the issue of who between the parties was negligent has already been resolved
against Cebu Shipyard and Engineering Works, Inc. Upon proof of payment by Prudential to
William Lines, Inc., the former was subrogated to the right of the latter to indemnification from
CSEW. As aptly ruled by the Court of Appeals, the law on the matter is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury.[12]

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

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

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

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

xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers

are not an Assured hereunder.[15] (emphasis supplied)

As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under
the policy, it would nullify any claim of William Lines, Inc. from Prudential for any loss or damage
caused by the negligence of CSEW. Certainly, no shipowner would agree to make a shiprepairer
a co-assured under such insurance policy; otherwise, any claim for loss or damage under the policy
would be invalidated. Such result could not have been intended by William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore liable to William
Lines, Inc., by stipulation in the Contract or Work Order its liability is limited to One Million
(P1,000,000.00) Pesos only, and Prudential a mere subrogee of William Lines, Inc., should only
be entitled to collect the sum stipulated in the said contract.
Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per
se; as binding as an ordinary contract, the Court recognizes instances when reliance on such
contracts cannot be favored especially where the facts and circumstances warrant that subject
stipulations be disregarded.[16] Thus, in ruling on the validity and applicability of the stipulation
limiting the liability of CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts
and circumstances vis-a-vis the nature of the provision sought to be enforced should be considered,
bearing in mind the principles of equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million
(P45,000,000.00) Pesos. To determine the validity and sustainability of the claim of William
Lines, Inc., for a total loss, Prudential conducted its own inquiry. Upon thorough investigation by
its hull surveyor, M/V Manila City was found to be beyond economical salvage and repair.[17] The
evaluation of the average adjuster also reported a constructive total loss.[18] The said claim of
William Lines, Inc., was then found to be valid and compensable such that Prudential paid the
latter the total value of its insurance claim. Furthermore, it was ascertained that the replacement
cost of the vessel (the price of a vessel similar to M/V Manila City), amounts to Fifty-five Million
(P55,000,000.00) Pesos.[19]
Considering the aforestated circumstances, let alone the fact that negligence on the part of
petitioner has been sufficiently proven, it would indeed be unfair and inequitable to limit the
liability of petitioner to One Million Pesos only. As aptly held by the trial court, it is rather
unconscionable if not overstrained. To allow CSEW to limit its liability to One Million Pesos
notwithstanding the fact that the total loss suffered by the assured and paid for by Prudential
amounted to Forty Five Million (P45,000,000.00) Pesos would sanction the exercise of a degree
of diligence short of what is ordinarily required because, then, it would not be difficult for
petitioner to escape liability by the simple expedient of paying an amount very much lower than
the actual damage or loss suffered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated
September 3, 1997, and Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Romero (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-27427 April 7, 1976

FIREMAN'S FUND INSURANCE COMPANY and FIRESTONE TIRE AND RUBBER COMPANY
OF THE PHILIPPINES, plaintiffs-appellants,
vs.
JAMILA & COMPANY, INC. and FIRST QUEZON CITY INSURANCE CO., INC., defendants-
appellees.

Conrado R. Ayuyao for plaintiffs-appellees.

Ponciano U. Pitargue for defendant-appellee First quezon City Insurance Co., Inc.

Fernando B. Zamora for defendant-appellee Jamila & Company, Inc.

AQUINO, J.:

Fireman's Fund and Insurance Company (Fireman's Fund for short) and Firestone Tire and Rubber
Company of the Philippines appealed from the order dated October 18, 1966 of the Court of First
Instance of Manila, dismissing their complaint against Jamila & Co., Inc. (hereinafter called Jamila)
for the recovery of the sum of P11,925.00 plus interest, damages and attorney's fees (Civil Case No.
65658).

The gist of the complaint is that Jamila or the Veterans Philippine Scouts Security Agency contracted
to supply security guards to Firestone; that Jamila assumed responsibility for the acts of its security
guards; that First Quezon City Insurance Co., Inc. executed a bond in the sum of P20,000.00 to
guarantee Jamila's obligations under that contract; that on May 18, 1963 properties of Firestone
valued at P11,925.00 were lost allegedly due to the acts of its employees who connived with
Jamila's security guard; that Fireman's Fund, as insurer, paid to Firestone the amount of the loss;
that Fireman's Fund was subrogated to Firestone's right to get reimbursement from Jamila, and that
Jamila and its surety, First Quezon City Insurance Co., Inc., failed to pay the amount of the loss in
spite of repeated demands.

Upon defendants' motions, the lower court in its order of July 22, 1966 dismissed the complaint as to
Jamila on the ground that there was no allegation that it had consented to the subrogation and,
therefore, Fireman's Fund had no cause of action against it.

In the same order the lower court dismissed the complaint as to First Quezon City Insurance Co.,
Inc. on the ground of res judicata. It appears that the same action was previously filed in Civil Case
No. 56311 which was dismiss because of the failure of the same plaintiffs and their counsel to
appear at the pre trial.

Firestone and Fireman's Fund moved for the reconsideration of the order of dismissal. The lower
court on September 3, 1966 set aside its order of dismissal. It sustained plaintiffs' contention that
there was no res judicataas to First Quezon City Insurance Co., Inc. because Civil Case No. 56311
was dismissed without prejudice. Later, First Quezon City Insurance Co., Inc. filed its answer to the
complaint.

However, due to inadvertence, the lower court did not state in its order of September 3, 1966 why it
set aside its prior order dismissing the complaint with respect to Jamila.

What is now to be recounted shows the lack of due care on the part of the lower court and the
opposing lawyers in their management of the case. Such lack of due care has given the case a
farcical ambiance and might partially explain the long delay in its adjudication.

Jamila, upon noticing that the order of September 3, 1966 had obliterated its victory without any
reason therefor, filed a motion for reconsideration. It had originally moved for the dismissal of the
complaint on the ground of lack of cause of action. Its contention was based on two grounds, to wit:
(1) that the complaint did not allege that Firestone, pursuant to the contractual stipulation quoted in
the complaint, had investigated the loss and that Jamila was represented in the investigation and (2)
that Jamila did not consent to the subrogation of Fireman's Fund to Firestone's right to get
reimbursement from Jamila and its surety. The lower court in its order of dismissal had sustained
the second ground.

Jamila in its motion for the reconsideration of the order of September 3, 1966 invoked the first
ground which had never been passed upon by the lower court. Firestone and Fireman's Fund in their
opposition joined battle, in a manner of speaking, on that first ground.

But the lower court in its order of October 18, 1966, granting Jamila's motion for reconsideration,
completely ignored that first ground. It reverted to the second ground which was relied upon in its
order of September 3, 1966. The lower court reiterated its order of July 22, 1966 that Fireman's Fund
had no cause of action against Jamila because Jamila did not consent to the subrogation. The court
did not mention Firestone, the co-plaintiff of Fireman's Fund.

At this juncture, it may be noted that motions for reconsideration become interminable when the
court's orders follow a seesaw pattern. That phenomenon took place in this case.

Firestone and Fireman's Fund filed a motion for the reconsideration of the lower court's order of
October 18, 1966 on the ground that Fireman's Fund Insurance Company was suing on the basis
of legal subrogation whereas the lower court erroneously predicated its dismissal order on the theory
that there was no conventional subrogation because the debtor's consent was lacking.

The plaintiffs cited article 2207 of the Civil Code which provides that "if the plaintiff's property has
been insured, and he has received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the
contract".

The lower court denied plaintiffs' motion. They filed a second motion for reconsideration. In that
motion they sensibly called the lower court's attention to the fact that the issue of subrogation was of
no moment because Firestone, the subrogor, is a party-plaintiff and could sue directly Jamila in its
own right. Without resolving that contention, the lower court denied plaintiffs' second motion for
reconsideration.

In this appeal Firestone and Fireman's Fund contend that the trial court's dismissal of their complaint
is contrary to the aforementioned article 2207 which provides for legal subrogation.

Jamila, in reply, stubbornly argues that legal subrogation under article 2207 requires the debtor's
consent; that legal subrogation takes place in the cases mentioned in article 1302 of the Civil Code
and the instant case is not among the three cases enumerated in that article, and that there could be
no subrogation in this case because according to the plaintiffs the contract between. Jamila and
Firestone was entered into on June 1, 1965 but the loss complained of occurred on May 18, 1963.

With respect to the factual point raised by Jamila, it should be stated that plaintiffs' counsel
gratuitously alleged in their brief that Firestone and Jamila entered into a "contract of guard services"
on June 1, 1965. That allegation, which was uncalled for because it is not found in the complaint,
created confusion which heretofore did not exist. No copy of the contract was annexed to the
complaint.

That confusing statement was an obvious error since it was expressly alleged in the complaint that
the loss occurred on May 18, 1963. The fact that such an error was committed is another instance
substantiating our previous observation that plaintiffs' counsel had not exercised due care in the
presentation of his case.

The issue is whether the complaint of Firestone and Fireman's Fund states a cause of action against
Jamila.

We hold that Firestone is really a nominal, party in this case. It had already been indemnified for the
loss which it had sustained. Obviously, it joined as a party-plaintiff in order to help Fireman's Fund to
recover the amount of the loss from Jamila and First Quezon City Insurance Co., Inc. Firestone had
tacitly assigned to Fireman's Fund its cause of action against Jamila for breach of contract. Sufficient
ultimate facts are alleged in the complaint to sustain that cause of action.

On the other hand, Fireman's Fund's action against Jamila is squarely sanctioned by article 2207. As
the insurer, Fireman's Fund is entitled to go after the person or entity that violated its contractual
commitment to answer for the loss insured against (Cf. Philippine Air Lines, Inc. vs. Heald Lumber
Co., 101 Phil. 1032; Rizal Surety & Insurance Co. vs. Manila Railroad Company, L-24043, April 25,
1968, 23 SCRA 205).

The trial court erred in applying to this case the rules on novation. The plaintiffs in alleging in their
complaint that Fireman's Fund "became a party in interest in this case by virtue of a subrogation right
given in its favor by" Firestone, were not relying on the novation by change of creditors as
contemplated in articles 1291 and 1300 to 1303 of the Civil Code but rather on article 2207.

Article 2207 is a restatement of a settled principle of American jurisprudence. Subrogation has been
referred to as the doctrine of substitution. It "is an arm of equity that may guide or even force one to
pay a debt for which an obligation was incurred but which was in whole or in part paid by another"
(83 C.J.S. 576, 678, note 16, citing Fireman's Fund Indemnity Co. vs. State Compensation
Insurance Fund, 209 Pac. 2d 55).

"Subrogation is founded on principles of justice and equity, and its operation is governed by
principles of equity. It rests on the principle that substantial justice should be attained regardless of
form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties
without regard to form"(83 C.J.S. 579- 80)

Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530,
77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any
right of action which the insured may have against the third person whose. negligence or wrongful
act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan
Assurance Co., 283 U. S. 294, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of the insured
but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d 746,
note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

"Although many policies including policies in the standard form, now provide for subrogation, and
thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal
effect of payment inures to the insurer without any formal assignment or any express stipulation to
that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays
for the loss, such payment operates as an equitable assignment to the insurer of the property and all
remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor
does it grow out of, any privity of contract, or upon written assignment of claim, and payment to the
insured makes the insurer an assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating
Co., 264 N. C. 456,142 SE 2d 18).

Whether the plaintiffs would be able to prove their cause of action against Jamila is another
question.

Finding the trial court's order of dismissal to be legally untenable, the same is set aside with costs
against defendant-appellee Jamila & Co., Inc.

SO ORDERED.

Barredo, Antonio, Concepcion, Jr. and Martin, JJ., concur.

Fernando, J., is on leave.

Martin, J., was designated to take part in this case.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-52732 August 29, 1988

F.F. CRUZ and CO., INC., petitioner,

vs.
THE COURT OF APPEALS, GREGORIO MABLE as substituted by his wife LUZ ALMONTE
MABLE and children DOMING, LEONIDAS, LIGAYA, ELENA, GREGORIO, JR., SALOME,
ANTONIO, and BERNARDO all surnamed MABLE, respondents.

Luis S. Topacio for petitioner.

Mauricio M. Monta for respondents.

CORTES, J.:

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

The essential facts of the case are not disputed.

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

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

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

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

1. Ordering the defendant to pay to the plaintiffs the amount of P80,000.00 for
damages suffered by said plaintiffs for the loss of their house, with interest of 6%
from the date of the filing of the Complaint on January 23, 1975, until fully paid;
 2. Ordering the defendant to pay to the plaintiffs the sum of P50,000.00 for the loss
of plaintiffs' furnitures, religious images, silverwares, chinawares, jewelries, books,
kitchen utensils, clothing and other valuables, with interest of 6% from date of the
filing of the Complaint on January 23, 1975, until fully paid;

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

4. With costs against the defendant;

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

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

WHEREFORE, the decision declaring the defendants liable is affirmed. The

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

A motion for reconsideration was filed on December 3, 1979 but was denied in a resolution dated
February 18, 1980. Hence, petitioner filed the instant petition for review on February 22, 1980. After
the comment and reply were filed, the Court resolved to deny the petition for lack of merit on June
11, 1980.

However, petitioner filed a motion for reconsideration, which was granted, and the petition was given
due course on September 12, 1980. After the parties filed their memoranda, the case was submitted
for decision on January 21, 1981.

Petitioner contends that the Court of Appeals erred:

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

2. In awarding excessive and/or unproved damages.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company is subrogated to the rights of the
insured against the wrongdoer or the person who violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the loss or
injury. (Emphasis supplied.]

The law is clear and needs no interpretation. Having been indemnified by their insurer, private
respondents are only entitled to recover the deficiency from petitioner.

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

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

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

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18965 October 30, 1964

COMPAÑIA MARITIMA, petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, respondent.

Rafael Dinglasan for petitioner.

Ozaeta Gibbs & Ozaeta for respondent.

BAUTISTA ANGELO, J.:

Sometime in October, 1952, Macleod and Company of the Philippines contracted by telephone the
services of the Compañia Maritima, a shipping corporation, for the shipment of 2,645 bales of hemp
from the former's Sasa private pier at Davao City to Manila and for their subsequent transhipment to
Boston, Massachusetts, U.S.A. on board the S.S. Steel Navigator. This oral contract was later on
confirmed by a formal and written booking issued by Macleod's branch office in Sasa and
handcarried to Compañia Maritima's branch office in Davao in compliance with which the latter sent
to Macleod's private wharf LCT Nos. 1023 and 1025 on which the loading of the hemp was
completed on October 29, 1952. These two lighters were manned each by a patron and an assistant
patron. The patrons of both barges issued the corresponding carrier's receipts and that issued by the
patron of Barge No. 1025 reads in part:

Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND
COMPANY OF PHILIPPINES, Sasa Davao, for transhipment at Manila onto S.S. Steel
Navigator.

FINAL DESTINATION: Boston.

Thereafter, the two loaded barges left Macleod's wharf and proceeded to and moored at the
government's marginal wharf in the same place to await the arrival of the S.S. Bowline Knot
belonging to Compañia Maritima on which the hemp was to be loaded. During the night of October
29, 1952, or at the early hours of October 30, LCT No. 1025 sank, resulting in the damage or loss of
1,162 bales of hemp loaded therein. On October 30, 1952, Macleod promptly notified the carrier's
main office in Manila and its branch in Davao advising it of its liability. The damaged hemp was
brought to Odell Plantation in Madaum, Davao, for cleaning, washing, reconditioning, and redrying.
During the period from November 1-15, 1952, the carrier's trucks and lighters hauled from Odell to
Macleod at Sasa a total of 2,197.75 piculs of the reconditioned hemp out of the original cargo of
1,162 bales weighing 2,324 piculs which had a total value of 116,835.00. After reclassification, the
value of the reconditioned hemp was reduced to P84,887.28, or a loss in value of P31,947.72.
Adding to this last amount the sum of P8,863.30 representing Macleod's expenses in checking,
grading, rebating, and other fees for washing, cleaning and redrying in the amount of P19.610.00,
the total loss adds up to P60,421.02.

All abaca shipments of Macleod, including the 1,162 bales loaded on the carrier's LCT No. 1025,
were insured with the Insurance Company of North America against all losses and damages. In due
time, Macleod filed a claim for the loss it suffered as above stated with said insurance company, and
after the same had been processed, the sum of P64,018.55 was paid, which was noted down in a
document which aside from being a receipt of the amount paid, was a subrogation agreement
between Macleod and the insurance company wherein the former assigned to the latter its rights
over the insured and damaged cargo. Having failed to recover from the carrier the sum of
P60,421.02, which is the only amount supported by receipts, the insurance company instituted the
present action on October 28, 1953. After trial, the court a quo rendered judgment ordering the
carrier to pay the insurance company the sum of P60,421.02, with legal interest thereon from the
date of the filing of the complaint until fully paid, and the costs. This judgment was affirmed by the
Court of Appeals on December 14, 1960. Hence, this petition for review.

The issues posed before us are: (1) Was there a contract of carriage between the carrier and the
shipper even if the loss occurred when the hemp was loaded on a barge owned by the carrier which
was loaded free of charge and was not actually loaded on the S.S. Bowline Knot which would carry
the hemp to Manila and no bill of lading was issued therefore?; (2) Was the damage caused to the
cargo or the sinking of the barge where it was loaded due to a fortuitous event, storm or natural
disaster that would exempt the carrier from liability?; (3) Can respondent insurance company sue the
carrier under its insurance contract as assignee of Macleod in spite of the fact that the liability of the
carrier as insurer is not recognized in this jurisdiction?; (4) Has the Court of Appeals erred in
regarding Exhibit NNN-1 as an implied admission by the carrier of the correctness and sufficiency of
the shipper's statement of accounts contrary to the burden of proof rule?; and (5) Can the insurance
company maintain this suit without proof of its personality to do so?

1. This issue should be answered in the affirmative. As found by the Court of Appeals, Macleod and
Company contracted by telephone the services of petitioner to ship the hemp in question from the
former's private pier at Sasa, Davao City, to Manila, to be subsequently transhipped to Boston,
Massachusetts, U.S.A., which oral contract was later confirmed by a formal and written booking
issued by the shipper's branch office, Davao City, in virtue of which the carrier sent two of its lighters
to undertake the service. It also appears that the patrons of said lighters were employees of the
carrier with due authority to undertake the transportation and to sign the documents that may be
necessary therefor so much so that the patron of LCT No. 1025 signed the receipt covering the
cargo of hemp loaded therein as follows: .

Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND
COMPANY OF PHILIPPINES, Sasa Davao, for transhipment at Manila onto S.S. Steel
Navigator.

FINAL DESTINATION: Boston.

The fact that the carrier sent its lighters free of charge to take the hemp from Macleod's wharf at
Sasa preparatory to its loading onto the ship Bowline Knot does not in any way impair the contract of
carriage already entered into between the carrier and the shipper, for that preparatory step is but
part and parcel of said contract of carriage. The lighters were merely employed as the first step of
the voyage, but once that step was taken and the hemp delivered to the carrier's employees, the
rights and obligations of the parties attached thereby subjecting them to the principles and usages of
the maritime law. In other words, here we have a complete contract of carriage the consummation of
which has already begun: the shipper delivering the cargo to the carrier, and the latter taking
possession thereof by placing it on a lighter manned by its authorized employees, under which
Macleod became entitled to the privilege secured to him by law for its safe transportation and
delivery, and the carrier to the full payment of its freight upon completion of the voyage.

The receipt of goods by the carrier has been said to lie at the foundation of the contract to
carry and deliver, and if actually no goods are received there can be no such contract. The
 liability and responsibility of the carrier under a contract for the carriage of goods commence
on their actual delivery to, or receipt by, the carrier or an authorized agent. ... and delivery to
a lighter in charge of a vessel for shipment on the vessel, where it is the custom to deliver in
that way, is a good delivery and binds the vessel receiving the freight, the liability
commencing at the time of delivery to the lighter. ... and, similarly, where there is a contract
to carry goods from one port to another, and they cannot be loaded directly on the vessel
and lighters are sent by the vessel to bring the goods to it, the lighters are for the time its
substitutes, so that the bill of landing is applicable to the goods as soon as they are placed
on the lighters. (80 C.J.S., p. 901, emphasis supplied)

... The test as to whether the relation of shipper and carrier had been established is, Had the
control and possession of the cotton been completely surrendered by the shipper to the
railroad company? Whenever the control and possession of goods passes to the carrier and
nothing remains to be done by the shipper, then it can be said with certainty that the relation
of shipper and carrier has been established. Railroad Co. v. Murphy, 60 Ark. 333, 30 S.W.
419, 46 A. St. Rep. 202; Pine Bluff & Arkansas River Ry. v. MaKenzie, 74 Ark. 100, 86 S.W.
834; Matthews & Hood v. St. L., I.M. & S.R. Co., 123 Ark. 365, 185 S.W. 461, L.R.A. 1916E,
1194. (W.F. Bogart & Co., et al. v. Wade, et al., 200 S.W. 148).

The claim that there can be no contract of affreightment because the hemp was not actually loaded
on the ship that was to take it from Davao City to Manila is of no moment, for, as already stated, the
delivery of the hemp to the carrier's lighter is in line with the contract. In fact, the receipt signed by
the patron of the lighter that carried the hemp stated that he was receiving the cargo "in behalf of
S.S. Bowline Knot in good order and condition." On the other hand, the authorities are to the effect
that a bill of lading is not indispensable for the creation of a contract of carriage.

Bill of lading not indispensable to contract of carriage. — As to the issuance of a bill of

lading, although article 350 of the Code of Commerce provides that "the shipper as well as
the carrier of merchandise or goods may mutua-lly demand that a bill of lading is not
indispensable. As regards the form of the contract of carriage it can be said that provided
that there is a meeting of the minds and from such meeting arise rights and obligations, there
should be no limitations as to form." The bill of lading is not essential to the contract,
although it may become obligatory by reason of the regulations of railroad companies, or as
a condition imposed in the contract by the agreement of the parties themselves. The bill of
lading is juridically a documentary proof of the stipulations and conditions agreed upon by
both parties. (Del Viso, pp. 314-315; Robles vs. Santos, 44 O.G. 2268). In other words, the
Code does not demand, as necessary requisite in the contract of transportation, the delivery
of the bill of lading to the shipper, but gives right to both the carrier and the shipper to
mutually demand of each other the delivery of said bill. (Sp. Sup. Ct. Decision, May 6, 1895).
(Martin, Philippine Commercial Laws, Vol. II, Revised Edition, pp. 12-13)

The liability of the carrier as common carrier begins with the actual delivery of the goods for
transportation, and not merely with the formal execution of a receipt or bill of lading; the
issuance of a bill of lading is not necessary to complete delivery and acceptance. Even
where it is provided by statute that liability commences with the issuance of the bill of lading,
actual delivery and acceptance are sufficient to bind the carrier. (13 C.J.S., p. 288)

2. Petitioner disclaims responsibility for the damage of the cargo in question shielding itself behind
the claim of force majeure or storm which occurred on the night of October 29, 1952. But the
evidence fails to bear this out.
Rather, it shows that the mishap that caused the damage or loss was due, not to force majeure, but
to lack of adequate precautions or measures taken by the carrier to prevent the loss as may be
inferred from the following findings of the Court of Appeals:

Aside from the fact that, as admitted by appellant's own witness, the ill-fated barge had
cracks on its bottom (pp. 18-19, t.s.n., Sept. 13, 1959) which admitted sea water in the same
manner as rain entered "thru tank man-holes", according to the patron of LCT No. 1023 (exh.
JJJ-4) — conclusively showing that the barge was not seaworthy — it should be noted that
on the night of the nautical accident there was no storm, flood, or other natural disaster or
calamity. Certainly, winds of 11 miles per hour, although stronger than the average 4.6 miles
per hour then prevailing in Davao on October 29, 1952 (exh. 5), cannot be classified as
storm. For according to Beaufort's wind scale, a storm has wind velocities of from 64 to 75
miles per hour; and by Philippine Weather Bureau standards winds should have a velocity of
from 55 to 74 miles per hour in order to be classified as storm (Northern Assurance Co., Ltd.
vs. Visayan Stevedore Transportation Co., CA-G.R. No. 23167-R, March 12, 1959).

The Court of Appeals further added: "the report of R. J. del Pan & Co., Inc., marine surveyors,
attributes the sinking of LCT No. 1025 to the 'non-water-tight conditions of various buoyancy
compartments' (exh. JJJ); and this report finds confirmation on the above-mentioned admission of
two witnesses for appellant concerning the cracks of the lighter's bottom and the entrance of the rain
water 'thru manholes'." We are not prepared to dispute this finding of the Court of Appeals.

3. There can also be no doubt that the insurance company can recover from the carrier as assignee
of the owner of the cargo for the insurance amount it paid to the latter under the insurance contract.
And this is so because since the cargo that was damaged was insured with respondent company
and the latter paid the amount represented by the loss, it is but fair that it be given the right to
recover from the party responsible for the loss. The instant case, therefore, is not one between the
insured and the insurer, but one between the shipper and the carrier, because the insurance
company merely stepped into the shoes of the shipper. And since the shipper has a direct cause of
action against the carrier on account of the damage of the cargo, no valid reason is seen why such
action cannot be asserted or availed of by the insurance company as a subrogee of the shipper. Nor
can the carrier set up as a defense any defect in the insurance policy not only because it is not a
privy to it but also because it cannot avoid its liability to the shipper under the contract of carriage
which binds it to pay any loss that may be caused to the cargo involved therein. Thus, we find fitting
the following comments of the Court of Appeals:

It was not imperative and necessary for the trial court to pass upon the question of whether
or not the disputed abaca cargo was covered by Marine Open Cargo Policy No. MK-134
isued by appellee. Appellant was neither a party nor privy to this insurance contract, and
therefore cannot avail itself of any defect in the policy which may constitute a valid reason for
appellee, as the insurer, to reject the claim of Macleod, as the insured. Anyway, whatever
defect the policy contained, if any, is deemed to have been waived by the subsequent
payment of Macleod's claim by appellee. Besides, appellant is herein sued in its capacity as
a common carrier, and appellee is suing as the assignee of the shipper pursuant to exhibit
MM. Since, as above demonstrated, appellant is liable to Macleod and Company of the
Philippines for the los or damage to the 1,162 bales of hemp after these were received in
good order and condition by the patron of appellant's LCT No. 1025, it necessarily follows
that appellant is likewise liable to appellee who, as assignee of Macleod, merely stepped into
the shoes of and substi-tuted the latter in demanding from appellant the payment for the loss
and damage aforecited.
4. It should be recalled in connection with this issue that during the trial of this case the carrier asked
the lower court to order the production of the books of accounts of the Odell Plantation containing
the charges it made for the loss of the damaged hemp for verification of its accountants, but later it
desisted therefrom on the claim that it finds their production no longer necessary. This desistance
notwithstanding, the shipper however pre-sented other documents to prove the damage it suffered in
connection with the cargo and on the strength thereof the court a quo ordered the carrier to pay the
sum of P60,421.02. And after the Court of Appeals affirmed this award upon the theory that the
desistance of the carrier from producing the books of accounts of Odell Plantation implies an
admission of the correctness of the statements of accounts contained therein, petitioner now
contends that the Court of Appeals erred in basing the affirmance of the award on such erroneous
interpretation.

There is reason to believe that the act of petitioner in waiving its right to have the books of accounts
of Odell Plantation presented in court is tantamount to an admission that the statements contained
therein are correct and their verification not necessary because its main defense here, as well as
below, was that it is not liable for the loss because there was no contract of carriage between it and
the shipper and the loss caused, if any, was due to a fortuitous event. Hence, under the carrier's
theory, the correctness of the account representing the loss was not so material as would
necessitate the presentation of the books in question. At any rate, even if the books of accounts
were not produced, the correctness of the accounts cannot now be disputed for the same is
supported by the original documents on which the entries in said books were based which were
presented by the shipper as part of its evidence. And according to the Court of Appeals, these
documents alone sufficiently establish the award of P60,412.02 made in favor of respondent.

5. Finally, with regard to the question concerning the personality of the insurance company to
maintain this action, we find the same of no importance, for the attorney himself of the carrier
admitted in open court that it is a foreign corporation doing business in the Philippines with a
personality to file the present action.

WHEREFORE, the decision appealed from is affirmed, with costs against petitioner.

Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal, Bengzon,
J.P. and Zaldivar JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-8151 December 16, 1955

VIRGINIA CALANOC, petitioner,

vs.
COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE CO., respondents.

Lucio Javillonar for petitioner.

J. A. Wolfson, Manuel Y. Mecias, Emilio Abello and Anselmo A. Reyes for respondents.

BAUTISTA ANGELO, J.:

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

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

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

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

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

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

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

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

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

Insurance is, in its nature, complex and difficult for the layman to understand. Policies are
prepared by experts who know and can anticipate the bearings and possible complications of
every contingency. So long as insurance companies insist upon the use of ambiguous,
intricate and technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance, construe every
ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA
1917A, 1237.)lawphi1.net

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

We are therefore persuaded to conclude that the circumstances unfolded in the present case do not
warrant the finding that the death of the unfortunate victim comes within the purview of the exception
clause of the supplementary policy and, hence, do not exempt the company from liability.
Wherefore, reversing the decision appealed from, we hereby order the company to pay petitioner-
appellant the amount of P2,000, with legal interest from January 26, 1951 until fully paid, with costs.

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

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-25579 March 29, 1972

EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN and
GRACIA T. BIAGTAN, plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.

Tanopo, Millora, Serafica, and Sañez for plaintiff-appellees.

Araneta, Mendoza and Papa for defendant-appellant.

MAKALINTAL, J.:p

This is an appeal from the decision of the Court of First Instance of Pangasinan in its Civil Case No. D-1700.

The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife Assurance
Company under Policy No. 398075 for the sum of P5,000.00 and, under a supplementary contract
denominated "Accidental Death Benefit Clause, for an additional sum of P5,000.00 if "the death of
the Insured resulted directly from bodily injury effected solely through external and violent means
sustained in an accident ... and independently of all other causes." The clause, however,expressly
provided that it would not apply where death resulted from an injury"intentionally inflicted by another
party."

On the night of May 20, 1964, or during the first hours of the following day a band of robbers entered
the house of the insured Juan S. Biagtan. What happened then is related in the decision of the trial
court as follows:

...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said
life policy and supplementary contract were in full force and effect, the house of
insured Juan S. Biagtan was robbed by a band of robbers who were charged in and
convicted by the Court of First Instance of Pangasinan for robbery with homicide; that
 in committing the robbery, the robbers, on reaching the staircase landing on the
second floor, rushed towards the door of the second floor room, where they suddenly
met a person near the door of oneof the rooms who turned out to be the insured
Juan S. Biagtan who received thrusts from their sharp-pointed instruments, causing
wounds on the body of said Juan S. Biagtan resulting in his death at about 7 a.m. on
the same day, May 21, 1964;

Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid
the basic amount of P5,000.00 but refused to pay the additional sum of P5,000.00 under the
accidental death benefit clause, on the ground that the insured's death resulted from injuries
intentionally inflicted by third parties and therefore was not covered. Plaintiffs filed suit to recover,
and after due hearing the court a quo rendered judgment in their favor. Hence the present appeal by
the insurer.

The only issue here is whether under the facts are stipulated and found by the trial court the wounds
received by the insured at the hands of the robbers — nine in all, five of them mortal and four non-
mortal — were inflicted intentionally. The court, in ruling negatively on the issue, stated that since the
parties presented no evidence and submitted the case upon stipulation, there was no "proof that the
act of receiving thrust (sic) from the sharp-pointed instrument of the robbers was intended to inflict
injuries upon the person of the insured or any other person or merely to scare away any person so
as to ward off any resistance or obstacle that might be offered in the pursuit of their main objective
which was robbery."

The trial court committed a plain error in drawing the conclusion it did from the admitted facts. Nine
wounds were inflicted upon the deceased, all by means of thrusts with sharp-pointed instruments
wielded by the robbers. This is a physical fact as to which there is no dispute. So is the fact that five
of those wounds caused the death of the insured. Whether the robbers had the intent to kill or
merely to scare the victim or to ward off any defense he might offer, it cannot be denied that the act
itself of inflicting the injuries was intentional. It should be noted that the exception in the accidental
benefit clause invoked by the appellant does not speak of the purpose — whether homicidal or not
— of a third party in causing the injuries, but only of the fact that such injuries have been
"intentionally" inflicted — this obviously to distinguish them from injuries which, although received at
the hands of a third party, are purely accidental. This construction is the basic idea expressed in the
coverage of the clause itself, namely, that "the death of the insured resulted directly from bodily
injury effected solely through external and violent means sustained in an accident ... and
independently of all other causes." A gun which discharges while being cleaned and kills a
bystander; a hunter who shoots at his prey and hits a person instead; an athlete in a competitive
game involving physical effort who collides with an opponent and fatally injures him as a result:
these are instances where the infliction of the injury is unintentional and therefore would be within
the coverage of an accidental death benefit clause such as thatin question in this case. But where a
gang of robbers enter a house and coming face to face with the owner, even if unexpectedly, stab
him repeatedly, it is contrary to all reason and logic to say that his injuries are not intentionally
inflicted, regardless of whether they prove fatal or not. As it was, in the present case they did prove
fatal, and the robbers have been accused and convicted of the crime of robbery with homicide.

The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in support of
its decision. The facts in that case, however, are different from those obtaining here. The insured
there was a watchman in a certain company, who happened to be invited by a policeman to come
along as the latter was on his way to investigate a reported robbery going on in a private house. As
the two of them, together with the owner of the house, approached and stood in front of the main
gate, a shot was fired and it turned out afterwards that the watchman was hit in the abdomen, the
wound causing his death. Under those circumstances this Court held that it could not be said that
the killing was intentional for there was the possibility that the malefactor had fired the shot to scare
people around for his own protection and not necessarrily to kill or hit the victim. A similar possibility
is clearly ruled out by the facts in the case now before Us. For while a single shot fired from a
distance, and by a person who was not even seen aiming at the victim, could indeed have been fired
without intent to kill or injure, nine wounds inflicted with bladed weapons at close range cannot
conceivably be considered as innocent insofar as such intent is concerned. The manner of execution
of the crime permits no other conclusion.

Court decisions in the American jurisdiction, where similar provisions in accidental death benefit
clauses in insurance policies have been construed, may shed light on the issue before Us. Thus, it
has been held that "intentional" as used in an accident policy excepting intentional injuries inflicted
by the insured or any other person, etc., implies the exercise of the reasoning faculties,
consciousness and volition.1 Where a provision of the policy excludes intentional injury, it is the
intention of the person inflicting the injury that is controlling.2 If the injuries suffered by the insured
clearly resulted from the intentional act of a third person the insurer is relieved from liability as
stipulated.3

In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am. St. Rep. 484,
the insured was waylaid and assassinated for the purpose of robbery. Two (2) defenses were
interposed to the action to recover indemnity, namely: (1) that the insured having been killed by
intentional means, his death was not accidental, and (2) that the proviso in the policy expressly
exempted the insurer from liability in case the insured died from injuries intentionally inflicted by
another person. In rendering judgment for the insurance company the Court held that while the
assassination of the insured was as to him an unforeseen event and therefore accidental, "the
clause of the proviso that excludes the (insurer's) liability, in case death or injury is intentionally
inflicted by another person, applies to this case."

In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the insured was
shot three times by a person unknown late on a dark and stormy night, while working in the coal
shed of a railroad company. The policy did not cover death resulting from "intentional injuries
inflicted by the insured or any other person." The inquiry was as to the question whether the shooting
that caused the insured's death was accidental or intentional; and the Court found that under the
facts, showing that the murderer knew his victim and that he fired with intent to kill, there could be no
recovery under the policy which excepted death from intentional injuries inflicted by any person.

WHEREFORE, the decision appealed from is reversed and the complaint dismissed, without
pronouncement as to costs.

Zaldivar, Castro, Fernando and Villamor, JJ., concur.

Makasiar, J., reserves his vote.

Separate Opinions
BARREDO, J., concurring —

During the deliberations in this case, I entertained some doubts as to the correctness and validity of
the view upheld in the main opinion penned by Justice Makalintal. Further reflection has convinced
me, however, that there are good reasons to support it.

At first blush, one would feel that every death not suicidal should be considered accidental, for the
purposes of an accident insurance policy or a life insurance policy with a double indemnity clause in
case death results from accident. Indeed, it is quite logical to think that any event whether caused by
fault, negligence, intent of a third party or any unavoidable circumstance, normally unforeseen by the
insured and free from any possible connivance on his part, is an accident in the generally accepted
sense of the term. And if I were convinced that in including in the policy the provision in question,
both the insurer and the insured had in mind to exclude thereby from the coverage of the policy only
suicide whether unhelped or helped somehow by a third party, I would disregard the American
decisions cited and quoted in the main opinion as not even persuasive authorities. But examining the
unequivocal language of the provision in controversy and considering that the insured accepted the
policy without asking that it be made clear that the phrase "injury intentionally inflicted by a third
party" should be understood to refer only to injuries inflicted by a third party without any wilful
intervention on his part (of the insured) or, in other words, without any connivance with him (the
insured) in order to augment the proceeds of the policy for his benificiaries, I am inclined to agree
that death caused by criminal assault is not covered by the policies of the kind here in question,
specially if the assault, as a matter of fact, could have been more or less anticipated, as when the
insured happens to have violent enemies or is found in circumstances that would make his life fair
game of third parties.

As to the rest, I have no doubt that the killing of the insured in this case is as intentional as any
intentional act can be, hence this concurrence.

TEEHANKEE, J., dissenting:

The sole issue at bar is the correctness in law of the lower court's appealed decision adjudging
defendant insurance company liable, under its supplementary contract denominated "Accidental
Death Benefit Clause" with the deceased insured, to plaintiffs-beneficiaries (excluding plaintiff Emilia
T. Biagtan) in an additional amount of P5,000.00 (with corresponding legal interest) and ruling that
defendant company had failed to present any evidence to substantiate its defense that the insured's
death came within the stipulated exceptions.

Defendant's accidental death benefit clause expressly provides:

ACCIDENTAL DEATH BENEFIT. (hereinafter called the benefit). Upon receipt and
approval of due proof that the death of the Insured resulted directly from bodily injury
effected solely through external and violent means sustained in an accident, within
ninety days after the date of sustaining such injury, and independently of all other
causes, this Company shall pay, in addition to the sum insured specified on the first
page of this Policy, a further sum equal to said sum insured payable at the same time
and in the same manner as said sum insured, provided, that such death occurred
during the continuance of this Clause and of this Policy and before the sixtieth
birthday of the Insured."1

A long list of exceptions and an Automatic Discontinuance clause immediately follow thereafter,
thus:
 EXCEPTIONS. The Benefit shall not apply if the Insured's death shall result, either
directly or indirectly, from any one of the following causes:

(1) Self-destruction or self-inflicted injuries, whether the Insured be sane or insane;

(2) Bodily or mental infirmity or disease of any kind;

(3) Poisoning or infection, other than infection occurring simultaneously with and in
consequence of a cut or wound sustained in an accident;

(4) Injuries of which there is no visible contusions or wound on the exterior of the
body, drowning and internal injuries revealed by autopsy excepted;

(5) Any injuries received (a) while on police duty in any military, naval or police
organization; (b) in any riot, civil commotion, insurrection or war or any act incident
thereto; (c) while travelling as a passenger or otherwise in any form of submarine
transportation, or while engaging in submarine operations; (d) in any violation of the
law by the Insured or assault provoked by the Insured; (e) that has been inflicted
intentionally by a third party, either with or without provocation on the part of the
Insured, and whether or not the attack or the defense by the third party was caused
by a violation of the law by the Insured;

(6) Operating or riding in or descending from any kind of aircraft if the Insured is a
pilot, officer or member of the crew of the aircraft or is giving or receiving any kind of
training or instruction or has any duties aboard the aircraft or requiring descent
therefrom; and

(7) Atomic energy explosion of any nature whatsoever.

The Company, before making any payment under this Clause, shall have the right
and opportunity to examine the body and make an autopsy thereof.

AUTOMATIC DISCONTINUANCE. This Benefit shall automatically terminate and the

additional premium therefor shall cease to be payable when and if:

(1) This Policy is surrendered for cash, paid-up insurance or extended term
insurance; or

(2) The benefit under the Total and Permanent Disability Waiver of Premium
Certificate is granted to the insured; or

(3) The Insured engages in military, naval or aeronautic service in time of war; or

(4) The policy anniversary immediately preceding the sixtieth birthday of the Insured
is reached.2

It is undisputed that, as recited in the lower court's decision, the insured met his death, as follows:
"that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said life policy and
supplementary contract were in full force and effect, the house of insured Juan S. Biagtan was
robbed by a band of robbers who were charged in and convicted by the Court of First Instance of
Pangasinan for robbery with homicide; that in committing the robbery, the robbers, on reaching the
staircase landing of the second floor, rushed towards the doors of the second floor room, where they
suddenly met a person near the door of one of the rooms who turned out to be the insured Juan S.
Biagtan who received thrust from their sharp-pointed instruments, causing wounds on the body of
said Juan S. Biagtan resulting in his death at about 7 a.m. on the same day, May 21, 1964." 3

Defendant company, while admitting the above-recited circumstances under which the insured met
his death, disclaimed liability under its accidental death benefit clause under paragraph 5 of its
stipulated "Exceptions" on its theory that the insured's death resulted from injuries "intentionally
inflicted by a third party," i.e. the robbers who broke into the insured's house and inflicted fatal
injuries on him.

The case was submitted for decision upon the parties' stipulation of facts that (1) insurance
companies such as the Lincoln National Life Insurance Co. and Sun Life Assurance Co. of Canada
with which the deceased insured Juan S. Biagtan was also insured for much larger sums under
similar contracts with accidental death benefit provisions have promptly paid the benefits thereunder
to plaintiffs-beneficiaries; (2) the robbers who caused the insured's death were charged in and
convicted by the Court of First Instance of Pangasinan for the crime of robbery with homicide; and
(3) the injuries inflicted on the insured by the robbers consisted of five mortal and four non-mortal
wounds.4

The lower court thereafter rendered judgment against defendant, as follows:

There is no doubt that the insured, Juan S. Biagtan, met his death as a result of the
wounds inflicted upon him by the malefactors on the early morning of May 21, 1964
by means of thrusts from sharp-pointed instruments delivered upon his person, and
there is likewise no question that the thrusts were made on the occasion of the
robbery. However, it is defendants' position that the killing of the insured was
intentionally done by the malefactors, who were charged with and convicted of the
crime of robbery with homicide by the Court of First Instance of Pangasinan.

It must be noted here that no evidence whatsoever was presented by the parties who
submitted the case for resolution upon the stipulation of facts presented by them.
Thus, the court does not have before it proof that the act of receiving thrust(s) from
the sharp-pointed instrument of the robbers was intended to inflict injuries upon the
person of the insured or any other person or merely to scare away any person so as
to ward off any resistance or obstacle that might be offered in the pursuit of their
main objective which was robbery. It was held that where a provision of the policy
excludes intentional injury, it is the intention of the person inflicting the injury that is
controlling ... and to come within the exception, the act which causes the injury must
be wholly intentional, not merely partly.

The case at bar has some similarity with the case of Virginia Calanoc vs. Court of
Appeals, et al., L-8151, promulgated December 16, 1965, where the Supreme Court
ruled that "the shot (which killed the insured) was merely to scare away the people
around for his own protection and not necessarily to kill or hit the victim."

In the Calanoc case, one Melencio Basilio, a watchman of a certain company, took
out life insurance from the Philippine American Life Insurance Company in the
amount of P2,000.00 to which was attached a supplementary contract covering
death by accident. Calanoc died of gunshot wounds on the occasion of a robbery
committed in the house of a certain Atty. Ojeda in Manila. The insured's widow was
paid P2,000.00, the face value of the policy, but when she demanded payment of the
additional sum of P2,000.00 representing the value of the supplemental policy, the
company refused alleging, as main defense, that the deceased died because he was
murdered by a person who took part in the commission of the robbery and while
making an arrest as an officer of the law which contingencies were (as in this case)
expressly excluded in the contract and have the effect of exempting the company
from liability.

The facts in the Calanoc case insofar as pertinent to this case are, as found by the
Court of Appeals in its decision which findings of fact were adopted by the Supreme
Court, as follows:

"...that on the way to the Ojeda residence (which was then being
robbed by armed men), the policeman and Atty. Ojeda passed by
Basilio (the insured) and somehow or other invited the latter to come
along; that as the three approached the Ojeda residence and stood in
front of the main gate which was covered by galvanized iron, the
fence itself being partly concrete and partly adobe stone, a shot was
fired; ... that it turned out afterwards that the special watchman
Melencio Basilio was hit in the abdomen, the wound causing his
instantaneous death ..."

The Court of Appeals arrived at the conclusion that the death of Basilio, although
unexpected, was not caused by an accident, being a voluntary and intentional act on
the part of the one who robbed, or one of those who robbed, the house of Atty.
Ojeda.

In reversing this conclusion of the Court of Appeals, the Supreme Court said in part:

"... Nor can it be said that the killing was intentional for there is the
possibility that the malefactors had fired the shot merely to scare
away the people around for his own protection and not necessarily to
kill or hit the victim. In any event, while the act may not exempt the
triggerman from ability for the damage done, the fact remains that the
happening was a pure accidentt on the part of the victim."

With this ruling of the Supreme Court, and the utter absence of evidence in this case
as to the real intention of the malefactors in making a thrust with their sharp-pointed
instrument on any person, the victim in particular, the case falls squarely within the
ruling in the Calanoc vs. Court of Appeals case.

It is the considered view of this Court that the insured died because of an
accident which happened on the occasion of the robbery being committed in his
house. His death was not sought (at least no evidence was presented to show it
was), and therefore was fortuitous. "Accident" was defined as that which happens by
chance or fortuitously, without intention or design, and which is unexpected, unusual
and unforeseen, or that which takes place without one's foresight or expectation —
an event that proceeds from an unknown cause, or is an unusual effect of a known
cause, and therefore not expected. (29 Am. Jur. 706).

There is no question that the defense set up by the defendant company is one of
those included among the risks excluded in the supplementary contract. However,
there is no evidence here that the thrusts with sharp-pointed instrument (which led to
 the death of the insured) was "intentional," (sic) so as to exempt the company from
liability. It could safely be assumed that it was purely accidental considering that the
principal motive of the culprits was robbery, the thrusts being merely intended to
scare away persons who might offer resistance or might obstruct them from pursuing
their main objective which was robbery.5

It is respectfully submitted that the lower court committed no error in law in holding defendant
insurance company liable to plaintiffs-beneficiaries under its accidental death benefit clause, by
virtue of the following considerations:

1. The case of Calanoc cited by the lower court is indeed controlling here.6 This Court, there
construing a similar clause, squarely ruled that fatal injuries inflicted upon an insured by a
malefactor(s) during the latter's commission of a crime are deemed accidental and within the
coverage of such accidental death benefit clauses and the burden of proving that the killing was
intentional so as to have it fall within the stipulated exception of having resulted from injuries
"intentionally inflicted by a third party" must be discharged by the insurance company. This Court
there clearly held that in such cases where the killing does not amount to murder, it must be held to
be a "pure accident" on the part of the victim, compensable with double-indemnity, even though the
malefactor is criminally liable for his act. This Court rejected the insurance-company's contrary claim,
thus:

Much less can it be pretended that Basilio died in the course of an assault or murder
considering the very nature of these crimes. In the first place, there is no proof that
the death of Basilio is the result of either crime for the record is barren of any
circumstance showing how the fatal shot was fired. Perhaps this may be clarified in
the criminal case now pending in court a regards the incident but before that is done
anything that might be said on the point would be a mere conjecture. Nor can it be
said that the killing was intentional for there is the possibility that the malefactor had
fired the shot merely to scare away the people around for his own protection and not
necessarily to kill or hit the victim. In any event, while the act may not exempt the
triggerman from liability for the damage done, the fact remains that the happening
was a pure accident on the part of the victim. The victim could have been either the
policeman or Atty. Ojeda for it cannot be pretended that the malefactor aimed at the
deceased precisely because he wanted to take his life. 7

2. Defendant company patently failed to discharge its burden of proving that the fatal injuries were inflicted upon the deceased intentionally,
i.e. deliberately. The lower court correctly held that since the case was submitted upon the parties' stipulation of facts which did not cover the
malefactors' intent at all, there was an "utter absence of evidence in this case as to the real intention of the malefactors in making a thrust
with their sharp-pointed instrument(s) on any person, the victim in particular." From the undisputed facts, supra,8 the robbers had "rushed
towards the doors of the second floor room, where they suddenly met a person ... who turned out to be the insured Juan S. Biagtan who
received thrusts from their pointed instruments." The thrusts were indeed properly termed "purely accidental" since they seemed to be a
reflex action on the robbers' part upon their being surprised by the deceased. To argue, as defendant does, that the robbers' intent to kill
must necessarily be deduced from the four mortal wounds inflicted upon the deceased is to beg the question. Defendant must suffer the
consequences of its failure to discharge its burden of proving by competent evidence, e.g. the robbers' or eyewitnesses' testimony, that the
fatal injuries were intentionally inflicted upon the insured so as to exempt itself from liability.

3. Furthermore, plaintiffs-appellees properly assert in their brief that the sole error assigned by
defendant company, to wit, that the fatal injuries were not accidental as held by the lower court but
should be held to have been intentionally inflicted, raises a question of fact — which defendant is
now barred from raising, since it expressly limited its appeal to this Court purely "on questions of
law", per its noitice of appeal,9 Defendant is therefore confined to "raising only questions of law" and
"no other questions" under Rule 42, section 2 of the Rules of Court 10 and is deemed to have
conceded the findings of fact of the trial court, since he thereby waived all questions of facts. 11
4. It has long been an established rule of construction of so-called contracts of adhesion such as
insurance contracts, where the insured is handed a printed insurance policy whose fine-print
language has long been selected with great care and deliberation by specialists and legal advisers
employed by and acting exclusively in the interest of the insurance company, that the terms and
phraseology of the policy, particularly of any exception clauses, must be clearly expressed so as to
be easily understood by the insured and any "ambiguous, equivocal or uncertain terms" are to be
"construed strictly and most strongly against the insurer and liberally in favor of the insured so as to
effect the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is
involved.

The Court so expressly held in Calanoc that:

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

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

"An insurer should not be allowed, by the use of obscure phrases and exceptions, to
defeat the very purpose for which the policy was procured." (Moore vs. Aetna Life
Insurance Co., LRA 1915D, 164). 12

The Court has but recently reiterated this doctrine in Landicho vs. GSIS 13 and again applied the
provisions of Article 1377 of our Civil Code that "The interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity."

5. The accidental death benefit clause assuring the insured's beneficiaries of double indemnity, upon
payment of an extra premium, in the event that the insured meets violent accidental death is
contractually stipulated as follows in the policy: "that the death of the insured resulted directly from
bodily injury effected solely through external and violent means sustained in an accident," supra. The
policy then lists numerous exceptions, which may be classified as follows:
— Injuries effected through non-external means which are excepted: self-destruction, bodily or
mental infirmity or disease, poisoning or infection, injuries with no visible contusions or exterior
wounds (exceptions 1 to 4 of policy clause);

— Injuries caused by some act of the insured which is proscribed by the policy, and are therefore
similarly exepted: injuries received while on police duty, while travelling in any form of submarine
transportation, or in any violation of law by the insured or assault provoked by the insured, or in any
aircraft if the insured is a pilot or crew member; [exceptions 5 (a), (c) and (d), and 6 of the policy
clause]; and

— Accidents expressly excluded: where death resulted in any riot, civil commotion, insurrection or
war or atomic energy explosion. (Exceptions 5[b] and 7 of policy clause).

The only exception which is not susceptible of classification is that provided in paragraph 5 (e), the
very exception herein involved, which would also except injuries "inflicted intentionally by a third
party, either with or without provocation on the part of the insured, and whether or not the attack or
the defense by the third party was caused by a violation of the law by the insured."

This ambiguous clause conflicts with all the other four exceptions in the same paragraph 5
particularly that immediately preceding it in item (d) which excepts injuries received where the
insured has violated the law or provoked the injury, while this clause, construed as the insurance
company now claims, would seemingly except also all other injuries, intentionally inflicted by a third
party, regardless of any violation of law or provocation by the insured, and defeat the very purpose
of the policy of giving the insured double indemnity in case of accidental death by "external and
violent means" — in the very language of the policy."

It is obvious from the very classification of the exceptions and applying the rule of noscitus a
sociis that the double-indemnity policy covers the insured against accidental death, whether caused
by fault, negligence or intent of a third party which is unforeseen and unexpected by the insured. All
the associated words and concepts in the policy plainly exclude the accidental death from the
coverage of the policy only where the injuries are self-inflicted or attended by some proscribed act of
the insured or are incurred in some expressly excluded calamity such as riot, war or atomic
explosion.

Finally, the untenability of herein defendant insurer's claim that the insured's death fell within the
exception is further heightened by the stipulated fact that two other insurance companies which
likewise covered the insured for which larger sums under similar accidental death benefit clauses
promptly paid the benefits thereof to plaintiffs-beneficiaries.

I vote accordingly for the affirmance in toto of the appealed decision, with costs against defendant-
appellant.

Concepcion, C.J. and Reyes, J.B.L., J., concur.

Separate Opinions

BARREDO, J., concurring —

During the deliberations in this case, I entertained some doubts as to the correctness and validity of
the view upheld in the main opinion penned by Justice Makalintal. Further reflection has convinced
me, however, that there are good reasons to support it.

At first blush, one would feel that every death not suicidal should be considered accidental, for the
purposes of an accident insurance policy or a life insurance policy with a double indemnity clause in
case death results from accident. Indeed, it is quite logical to think that any event whether caused by
fault, negligence, intent of a third party or any unavoidable circumstance, normally unforeseen by the
insured and free from any possible connivance on his part, is an accident in the generally accepted
sense of the term. And if I were convinced that in including in the policy the provision in question,
both the insurer and the insured had in mind to exclude thereby from the coverage of the policy only
suicide whether unhelped or helped somehow by a third party, I would disregard the American
decisions cited and quoted in the main opinion as not even persuasive authorities. But examining the
unequivocal language of the provision in controversy and considering that the insured accepted the
policy without asking that it be made clear that the phrase "injury intentionally inflicted by a third
party" should be understood to refer only to injuries inflicted by a third party without any wilful
intervention on his part (of the insured) or, in other words, without any connivance with him (the
insured) in order to augment the proceeds of the policy for his benificiaries, I am inclined to agree
that death caused by criminal assault is not covered by the policies of the kind here in question,
specially if the assault, as a matter of fact, could have been more or less anticipated, as when the
insured happens to have violent enemies or is found in circumstances that would make his life fair
game of third parties.

As to the rest, I have no doubt that the killing of the insured in this case is as intentional as any
intentional act can be, hence this concurrence.

TEEHANKEE, J., dissenting:

The sole issue at bar is the correctness in law of the lower court's appealed decision adjudging
defendant insurance company liable, under its supplementary contract denominated "Accidental
Death Benefit Clause" with the deceased insured, to plaintiffs-beneficiaries (excluding plaintiff Emilia
T. Biagtan) in an additional amount of P5,000.00 (with corresponding legal interest) and ruling that
defendant company had failed to present any evidence to substantiate its defense that the insured's
death came within the stipulated exceptions.

Defendant's accidental death benefit clause expressly provides:

ACCIDENTAL DEATH BENEFIT. (hereinafter called the benefit). Upon receipt and
approval of due proof that the death of the Insured resulted directly from bodily injury
effected solely through external and violent means sustained in an accident, within
ninety days after the date of sustaining such injury, and independently of all other
causes, this Company shall pay, in addition to the sum insured specified on the first
page of this Policy, a further sum equal to said sum insured payable at the same time
and in the same manner as said sum insured, provided, that such death occurred
during the continuance of this Clause and of this Policy and before the sixtieth
birthday of the Insured."1

A long list of exceptions and an Automatic Discontinuance clause immediately follow thereafter,
thus:

EXCEPTIONS. The Benefit shall not apply if the Insured's death shall result, either
directly or indirectly, from any one of the following causes:
 (1) Self-destruction or self-inflicted injuries, whether the Insured be sane or insane;

(2) Bodily or mental infirmity or disease of any kind;

(3) Poisoning or infection, other than infection occurring simultaneously with and in
consequence of a cut or wound sustained in an accident;

(4) Injuries of which there is no visible contusions or wound on the exterior of the
body, drowning and internal injuries revealed by autopsy excepted;

(5) Any injuries received (a) while on police duty in any military, naval or police
organization; (b) in any riot, civil commotion, insurrection or war or any act incident
thereto; (c) while travelling as a passenger or otherwise in any form of submarine
transportation, or while engaging in submarine operations; (d) in any violation of the
law by the Insured or assault provoked by the Insured; (e) that has been inflicted
intentionally by a third party, either with or without provocation on the part of the
Insured, and whether or not the attack or the defense by the third party was caused
by a violation of the law by the Insured;

(6) Operating or riding in or descending from any kind of aircraft if the Insured is a
pilot, officer or member of the crew of the aircraft or is giving or receiving any kind of
training or instruction or has any duties aboard the aircraft or requiring descent
therefrom; and

(7) Atomic energy explosion of any nature whatsoever.

The Company, before making any payment under this Clause, shall have the right
and opportunity to examine the body and make an autopsy thereof.

AUTOMATIC DISCONTINUANCE. This Benefit shall automatically terminate and the

additional premium therefor shall cease to be payable when and if:

(1) This Policy is surrendered for cash, paid-up insurance or extended term
insurance; or

(2) The benefit under the Total and Permanent Disability Waiver of Premium
Certificate is granted to the insured; or

(3) The Insured engages in military, naval or aeronautic service in time of war; or

(4) The policy anniversary immediately preceding the sixtieth birthday of the Insured
is reached.2

It is undisputed that, as recited in the lower court's decision, the insured met his death, as follows:
"that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said life policy and
supplementary contract were in full force and effect, the house of insured Juan S. Biagtan was
robbed by a band of robbers who were charged in and convicted by the Court of First Instance of
Pangasinan for robbery with homicide; that in committing the robbery, the robbers, on reaching the
staircase landing of the second floor, rushed towards the doors of the second floor room, where they
suddenly met a person near the door of one of the rooms who turned out to be the insured Juan S.
Biagtan who received thrust from their sharp-pointed instruments, causing wounds on the body of
said Juan S. Biagtan resulting in his death at about 7 a.m. on the same day, May 21, 1964." 3

Defendant company, while admitting the above-recited circumstances under which the insured met
his death, disclaimed liability under its accidental death benefit clause under paragraph 5 of its
stipulated "Exceptions" on its theory that the insured's death resulted from injuries "intentionally
inflicted by a third party," i.e. the robbers who broke into the insured's house and inflicted fatal
injuries on him.

The case was submitted for decision upon the parties' stipulation of facts that (1) insurance
companies such as the Lincoln National Life Insurance Co. and Sun Life Assurance Co. of Canada
with which the deceased insured Juan S. Biagtan was also insured for much larger sums under
similar contracts with accidental death benefit provisions have promptly paid the benefits thereunder
to plaintiffs-beneficiaries; (2) the robbers who caused the insured's death were charged in and
convicted by the Court of First Instance of Pangasinan for the crime of robbery with homicide; and
(3) the injuries inflicted on the insured by the robbers consisted of five mortal and four non-mortal
wounds.4

The lower court thereafter rendered judgment against defendant, as follows:

There is no doubt that the insured, Juan S. Biagtan, met his death as a result of the
wounds inflicted upon him by the malefactors on the early morning of May 21, 1964
by means of thrusts from sharp-pointed instruments delivered upon his person, and
there is likewise no question that the thrusts were made on the occasion of the
robbery. However, it is defendants' position that the killing of the insured was
intentionally done by the malefactors, who were charged with and convicted of the
crime of robbery with homicide by the Court of First Instance of Pangasinan.

It must be noted here that no evidence whatsoever was presented by the parties who
submitted the case for resolution upon the stipulation of facts presented by them.
Thus, the court does not have before it proof that the act of receiving thrust(s) from
the sharp-pointed instrument of the robbers was intended to inflict injuries upon the
person of the insured or any other person or merely to scare away any person so as
to ward off any resistance or obstacle that might be offered in the pursuit of their
main objective which was robbery. It was held that where a provision of the policy
excludes intentional injury, it is the intention of the person inflicting the injury that is
controlling ... and to come within the exception, the act which causes the injury must
be wholly intentional, not merely partly.

The case at bar has some similarity with the case of Virginia Calanoc vs. Court of
Appeals, et al., L-8151, promulgated December 16, 1965, where the Supreme Court
ruled that "the shot (which killed the insured) was merely to scare away the people
around for his own protection and not necessarily to kill or hit the victim."

In the Calanoc case, one Melencio Basilio, a watchman of a certain company, took
out life insurance from the Philippine American Life Insurance Company in the
amount of P2,000.00 to which was attached a supplementary contract covering
death by accident. Calanoc died of gunshot wounds on the occasion of a robbery
committed in the house of a certain Atty. Ojeda in Manila. The insured's widow was
paid P2,000.00, the face value of the policy, but when she demanded payment of the
additional sum of P2,000.00 representing the value of the supplemental policy, the
company refused alleging, as main defense, that the deceased died because he was
murdered by a person who took part in the commission of the robbery and while
making an arrest as an officer of the law which contingencies were (as in this case)
expressly excluded in the contract and have the effect of exempting the company
from liability.

The facts in the Calanoc case insofar as pertinent to this case are, as found by the
Court of Appeals in its decision which findings of fact were adopted by the Supreme
Court, as follows:

"...that on the way to the Ojeda residence (which was then being
robbed by armed men), the policeman and Atty. Ojeda passed by
Basilio (the insured) and somehow or other invited the latter to come
along; that as the three approached the Ojeda residence and stood in
front of the main gate which was covered by galvanized iron, the
fence itself being partly concrete and partly adobe stone, a shot was
fired; ... that it turned out afterwards that the special watchman
Melencio Basilio was hit in the abdomen, the wound causing his
instantaneous death ..."

The Court of Appeals arrived at the conclusion that the death of Basilio, although
unexpected, was not caused by an accident, being a voluntary and intentional act on
the part of the one who robbed, or one of those who robbed, the house of Atty.
Ojeda.

In reversing this conclusion of the Court of Appeals, the Supreme Court said in part:

"... Nor can it be said that the killing was intentional for there is the
possibility that the malefactors had fired the shot merely to scare
away the people around for his own protection and not necessarily to
kill or hit the victim. In any event, while the act may not exempt the
triggerman from ability for the damage done, the fact remains that the
happening was a pure accidentt on the part of the victim."

With this ruling of the Supreme Court, and the utter absence of evidence in this case
as to the real intention of the malefactors in making a thrust with their sharp-pointed
instrument on any person, the victim in particular, the case falls squarely within the
ruling in the Calanoc vs. Court of Appeals case.

It is the considered view of this Court that the insured died because of an
accident which happened on the occasion of the robbery being committed in his
house. His death was not sought (at least no evidence was presented to show it
was), and therefore was fortuitous. "Accident" was defined as that which happens by
chance or fortuitously, without intention or design, and which is unexpected, unusual
and unforeseen, or that which takes place without one's foresight or expectation —
an event that proceeds from an unknown cause, or is an unusual effect of a known
cause, and therefore not expected. (29 Am. Jur. 706).

There is no question that the defense set up by the defendant company is one of
those included among the risks excluded in the supplementary contract. However,
there is no evidence here that the thrusts with sharp-pointed instrument (which led to
the death of the insured) was "intentional," (sic) so as to exempt the company from
liability. It could safely be assumed that it was purely accidental considering that the
 principal motive of the culprits was robbery, the thrusts being merely intended to
scare away persons who might offer resistance or might obstruct them from pursuing
their main objective which was robbery.5

It is respectfully submitted that the lower court committed no error in law in holding defendant
insurance company liable to plaintiffs-beneficiaries under its accidental death benefit clause, by
virtue of the following considerations:

1. The case of Calanoc cited by the lower court is indeed controlling here.6 This Court, there
construing a similar clause, squarely ruled that fatal injuries inflicted upon an insured by a
malefactor(s) during the latter's commission of a crime are deemed accidental and within the
coverage of such accidental death benefit clauses and the burden of proving that the killing was
intentional so as to have it fall within the stipulated exception of having resulted from injuries
"intentionally inflicted by a third party" must be discharged by the insurance company. This Court
there clearly held that in such cases where the killing does not amount to murder, it must be held to
be a "pure accident" on the part of the victim, compensable with double-indemnity, even though the
malefactor is criminally liable for his act. This Court rejected the insurance-company's contrary claim,
thus:

Much less can it be pretended that Basilio died in the course of an assault or murder
considering the very nature of these crimes. In the first place, there is no proof that
the death of Basilio is the result of either crime for the record is barren of any
circumstance showing how the fatal shot was fired. Perhaps this may be clarified in
the criminal case now pending in court a regards the incident but before that is done
anything that might be said on the point would be a mere conjecture. Nor can it be
said that the killing was intentional for there is the possibility that the malefactor had
fired the shot merely to scare away the people around for his own protection and not
necessarily to kill or hit the victim. In any event, while the act may not exempt the
triggerman from liability for the damage done, the fact remains that the happening
was a pure accident on the part of the victim. The victim could have been either the
policeman or Atty. Ojeda for it cannot be pretended that the malefactor aimed at the
deceased precisely because he wanted to take his life. 7

2. Defendant company patently failed to discharge its burden of proving that the fatal injuries were
inflicted upon the deceased intentionally, i.e. deliberately. The lower court correctly held that since
the case was submitted upon the parties' stipulation of facts which did not cover the malefactors'
intent at all, there was an "utter absence of evidence in this case as to the real intention of the
malefactors in making a thrust with their sharp-pointed instrument(s) on any person, the victim in
particular." From the undisputed facts, supra,8 the robbers had "rushed towards the doors of the
second floor room, where they suddenly met a person ... who turned out to be the insured Juan S.
Biagtan who received thrusts from their pointed instruments." The thrusts were indeed properly
termed "purely accidental" since they seemed to be a reflex action on the robbers' part upon their
being surprised by the deceased. To argue, as defendant does, that the robbers' intent to kill must
necessarily be deduced from the four mortal wounds inflicted upon the deceased is to beg the
question. Defendant must suffer the consequences of its failure to discharge its burden of proving by
competent evidence, e.g. the robbers' or eyewitnesses' testimony, that the fatal injuries
were intentionally inflicted upon the insured so as to exempt itself from liability.

3. Furthermore, plaintiffs-appellees properly assert in their brief that the sole error assigned by
defendant company, to wit, that the fatal injuries were not accidental as held by the lower court but
should be held to have been intentionally inflicted, raises a question of fact — which defendant is
now barred from raising, since it expressly limited its appeal to this Court purely "on questions of
law", per its noitice of appeal,9 Defendant is therefore confined to "raising only questions of law" and
"no other questions" under Rule 42, section 2 of the Rules of Court 10 and is deemed to have
conceded the findings of fact of the trial court, since he thereby waived all questions of facts. 11

4. It has long been an established rule of construction of so-called contracts of adhesion such as
insurance contracts, where the insured is handed a printed insurance policy whose fine-print
language has long been selected with great care and deliberation by specialists and legal advisers
employed by and acting exclusively in the interest of the insurance company, that the terms and
phraseology of the policy, particularly of any exception clauses, must be clearly expressed so as to
be easily understood by the insured and any "ambiguous, equivocal or uncertain terms" are to be
"construed strictly and most strongly against the insurer and liberally in favor of the insured so as to
effect the dominant purpose of indemnity or payment to the insured, especially where a forfeiture is
involved.

The Court so expressly held in Calanoc that:

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

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

"An insurer should not be allowed, by the use of obscure phrases and exceptions, to
defeat the very purpose for which the policy was procured." (Moore vs. Aetna Life
Insurance Co., LRA 1915D, 164). 12

The Court has but recently reiterated this doctrine in Landicho vs. GSIS 13 and again applied the
provisions of Article 1377 of our Civil Code that "The interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity."

5. The accidental death benefit clause assuring the insured's beneficiaries of double indemnity, upon
payment of an extra premium, in the event that the insured meets violent accidental death is
contractually stipulated as follows in the policy: "that the death of the insured resulted directly from
bodily injury effected solely through external and violent means sustained in an accident," supra. The
policy then lists numerous exceptions, which may be classified as follows:

— Injuries effected through non-external means which are excepted: self-destruction, bodily or
mental infirmity or disease, poisoning or infection, injuries with no visible contusions or exterior
wounds (exceptions 1 to 4 of policy clause);

— Injuries caused by some act of the insured which is proscribed by the policy, and are therefore
similarly exepted: injuries received while on police duty, while travelling in any form of submarine
transportation, or in any violation of law by the insured or assault provoked by the insured, or in any
aircraft if the insured is a pilot or crew member; [exceptions 5 (a), (c) and (d), and 6 of the policy
clause]; and

— Accidents expressly excluded: where death resulted in any riot, civil commotion, insurrection or
war or atomic energy explosion. (Exceptions 5[b] and 7 of policy clause).

The only exception which is not susceptible of classification is that provided in paragraph 5 (e), the
very exception herein involved, which would also except injuries "inflicted intentionally by a third
party, either with or without provocation on the part of the insured, and whether or not the attack or
the defense by the third party was caused by a violation of the law by the insured."

This ambiguous clause conflicts with all the other four exceptions in the same paragraph 5
particularly that immediately preceding it in item (d) which excepts injuries received where the
insured has violated the law or provoked the injury, while this clause, construed as the insurance
company now claims, would seemingly except also all other injuries, intentionally inflicted by a third
party, regardless of any violation of law or provocation by the insured, and defeat the very purpose
of the policy of giving the insured double indemnity in case of accidental death by "external and
violent means" — in the very language of the policy."

It is obvious from the very classification of the exceptions and applying the rule of noscitus a
sociis that the double-indemnity policy covers the insured against accidental death, whether caused
by fault, negligence or intent of a third party which is unforeseen and unexpected by the insured. All
the associated words and concepts in the policy plainly exclude the accidental death from the
coverage of the policy only where the injuries are self-inflicted or attended by some proscribed act of
the insured or are incurred in some expressly excluded calamity such as riot, war or atomic
explosion.

Finally, the untenability of herein defendant insurer's claim that the insured's death fell within the
exception is further heightened by the stipulated fact that two other insurance companies which
likewise covered the insured for which larger sums under similar accidental death benefit clauses
promptly paid the benefits thereof to plaintiffs-beneficiaries.

I vote accordingly for the affirmance in toto of the appealed decision, with costs against defendant-
appellant.

Concepcion, C.J. and Reyes, J.B.L., J., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-4611 December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES
AND CO., LTD., defendant-appellant.

Delgado, Flores & Macapagal for appellant.

Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile & Contreras
for appellee.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of
said province, seeking to recover the proceeds of certain fire insurance policies totalling P370,000,
issued by the Law Union & Rock Insurance Co., Ltd., upon certain bodegas and merchandise of the
insured that were burned on June 21, 1940. The records of the original case were destroyed during
the liberation of the region, and were reconstituted in 1946. After a trial that lasted several years, the
Court of First Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads
as follows:

Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the
latter to pay the former —

(a) Under the first cause of action, the sum of P146,394.48;

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;

(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the
Insurance Act from September 26, 1940, until each is paid, with costs against the defendant.

The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on
Appeal, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas
(designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of
stocks of copra and of hemp, baled and loose, in which the appellee dealth extensively. They had
been, with their contents, insured with the defendant Company since 1937, and the lose made
payable to the Philippine National Bank as mortgage of the hemp and crops, to the extent of its
interest. On June, 1940, the insurance stood as follows:

Policy No. Property Insured Amount

2637164 (Exhibit
Bodega No. 1 (Building) P15,000.00
"LL")

Bodega No. 2 (Building) 10,000.00

2637165 (Exhibit Bodega No. 3 (Building) 25,000.00

"JJ") Bodega No. 4 (Building) 10,000.00
Hemp Press — moved by steam engine 5,000.00
2637345 (Exhibit Merchandise contents (copra and empty sacks of
150,000.00
"X") Bodega No. 1)

2637346 (Exhibit
Merchandise contents (hemp) of Bodega No. 3 150,000.00
"Y")

2637067 (Exhibit
Merchandise contents (loose hemp) of Bodega No. 4 5,000.00
"GG")

Total P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost
one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored
theren. Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day,
the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and
photograph the premises, pored over the books of the insured and conducted an extensive
investigation. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but
reduced to the full amount of the insurance, P370,000), the Insurance Company resisted payment,
claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been
deliberately caused by the insured or by other persons in connivance with him.

With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his
brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of
arson, it being claimed that they had set fire to the destroyed warehouses to collect the insurance.
They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW).
Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the
Court below, with the result noted at the start of this opinion. The Philippine National Bank's
complaint in intervention was dismissed because the appellee had managed to pay his indebtedness
to the Bank during the pendecy of the suit, and despite the fire losses.

In its first assignment of error, the insurance company alleges that the trial Court should have held
that the policies were avoided for breach of warranty, specifically the one appearing on a rider
pasted (with other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders
were attached for the first time in 1939, and the pertinent portions read as follows:

Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the
premises insured hereby, and it being declared and understood that there is an ample and
constant water supply with sufficient pressure available at all seasons for the same, it is
hereby warranted that the said appliances shall be maintained in efficient working order
during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed
on the premium chargeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall
measurement of building, protected, with not less than 100 feet of hose piping and nozzles
for every two hydrants kept under cover in convenient places, the hydrants being supplied
with water pressure by a pumping engine, or from some other source, capable of discharging
at the rate of not less than 200 gallons of water per minute into the upper story of the highest
building protected, and a trained brigade of not less than 20 men to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640
feet, the appellee should have eleven (11) fire hydrants in the compound, and that he actually had
only two (2), with a further pair nearby, belonging to the municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to
claim violation of the so-called fire hydrants warranty, for the reason that knowing fully all that the
number of hydrants demanded therein never existed from the very beginning, the appellant
neverthless issued the policies in question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to
claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal
defect, of which it was informed, and after it had misled the defendant into believing that the policies
were effective.

The insurance company was aware, even before the policies were issued, that in the premises
insured there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned
by the municipality of TAbaco, contrary to the requirements of the warranty in question. Such fact
appears from positive testimony for the insured that appellant's agents inspected the premises; and
the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such
inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the
discount on the premium to which the insured was entitled, since the discount depended on the
number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which
the policies were expressly made subject). The law, supported by a long line of cases, is expressed
by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance,
has knowledge of existing facts which, if insisted on, would invalidate the contract from its
very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent
with the facts, and the insurer is stopped thereafter from asserting the breach of such
conditions. The law is charitable enough to assume, in the absence of any showing to the
contrary, that an insurance company intends to executed a valid contract in return for the
premium received; and when the policy contains a condition which renders it voidable at its
inception, and this result is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than to have deceived the
insured into thinking he is insured when in fact he is not, and to have taken his money
without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept
one's money for a policy of insurance which it then knows to be void and of no effect, though
it knows as it must, that the assured believes it to be valid and binding, is so contrary to the
dictates of honesty and fair dealing, and so closely related to positive fraud, as to the
abhorent to fairminded men. It would be to allow the company to treat the policy as valid long
enough to get the preium on it, and leave it at liberty to repudiate it the next moment. This
cannot be deemed to be the real intention of the parties. To hold that a literal construction of
the policy expressed the true intention of the company would be to indict it, for fraudulent
purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial
Union Assurance Co., 96 Atl. 540, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened
by the fact that after the insured had incurred the expense of installing the two hydrants, the
company collected the premiums and issued him a policy so worded that it gave the insured a
discount much smaller than that he was normaly entitledto. According to the "Scale of Allowances," a
policy subject to a warranty of the existence of one fire hydrant for every 150 feet of external wall
entitled the insured to a discount of 7 1/2 per cent of the premium; while the existence of "hydrants,
in compund" (regardless of number) reduced the allowance on the premium to a mere 2 1/2 per
cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances
reduced the risk of loss. But the appellant company, in the particular case now before us, so worded
the policies that while exacting the greater number of fire hydrants and appliances, it kept the
premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double
benefit. No reason is shown why appellant's premises, that had been insured with appellant for
several years past, suddenly should be regarded in 1939 as so hazardous as to be accorded a
treatment beyond the limits of appellant's own scale of allowances. Such abnormal treatment of the
insured strongly points at an abuse of the insurance company's selection of the words and terms of
the contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the appellant as not
applicable to the present case. It is not a question here whether or not the parties may vary a written
contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of
inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud
or imposition on the insured.

Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment. — It
is a well settled rule of law that an insurer which with knowledge of facts entitling it to treat a
policy as no longer in force, receives and accepts a preium on the policy, estopped to take
advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an
action to recover for a loss thereafter occurring and at the same time treat it as valid for the
purpose of earning and collecting further premiums." (29 Am. Jur., 653, p. 657.)

It would be unconscionable to permit a company to issue a policy under circumstances which

it knew rendered the policy void and then to accept and retain premiums under such a void
policy. Neither law nor good morals would justify such conduct and the doctrine of equitable
estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa.
Super Ct. 457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly
interpreted aganst the prty that caused them, 1the "memo of warranty" invoked by appellant bars the
latter from questioning the existence of the appliances called for in the insured premises, since its
initial expression, "the undernoted appliances for the extinction of fire being kept on the premises
insured hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of the
existence of such appliances which appellant cannot now contradict, should the parol evidence rule
apply.

The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally
rejected, since the appellant's argument thereon is based on the assumption that the insured was
bound to maintain no less than eleven hydrants (one per 150 feet of wall), which requirement
appellant is estopped from enforcing. The supposed breach of the wter pressure condition is made
to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds;
appellant thereupon inferring that the maximum quantity obtainable from the hydrants was 100
gallons a minute, when the warranty called for 200 gallons a minute. The transcript shows, however,
that Serra repeatedly refused and professed inability to estimate the rate of discharge of the water,
and only gave the "5-gallon per 3-second" rate because the insistence of appellant's counsel forced
the witness to hazard a guess. Obviously, the testimony is worthless and insufficient to establish the
violation claimed, specially since the burden of its proof lay on appellant.

As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was
organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which
the warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for
his compound alone a fire fighting force that many municipalities in the Islands do not even possess.
There is no merit in appellant's claim that subordinate membership of the business manager (Co
Cuan) in the fire brigade, while its direction was entrusted to a minor employee unders the testimony
improbable. A business manager is not necessarily adept at fire fighting, the qualities required being
different for both activities.

Under the second assignment of error, appellant insurance company avers, that the insured violated
the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline,
since appellee admitted that there were 36 cans (latas) of gasoline in the building designed as
"Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that gasoline is
not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The
cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their
liquid products having a flash point below 300o Fahrenheit", and is decidedly ambiguous and
uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or kerosene. And how
many insured, it may well be wondered, are in a position to understand or determine "flash point
below 003o Fahrenheit. Here, again, by reason of the exclusive control of the insurance company
over the terms and phraseology of the contract, the ambiguity must be held strictly against the
insurer and liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175;
29 Am. Jur. 180).

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

An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat
the very purpose for which the policy was procured (Moore vs. Aetna Life Insurance Co.,
LRA 1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not be expressed
clearly and unmistakably, in the language and terms that the general public can readily understand,
without resort to obscure esoteric expression (now derisively termed "gobbledygook"). We reiterate
the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):

If the company intended to rely upon a condition of that character, it ought to have been
plainly expressed in the policy.

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

Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad,

habra de ser tenido en cuenta que al seguro es, practicamente un contrato de los llamados
de adhesion y por consiguiente en caso de duda sobre la significacion de las clausulas
generales de una poliza — redactada por las compafijas sin la intervencion alguna de sus
clientes — se ha de adoptar de acuerdo con el articulo 1268 del Codigo Civil, la
interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la empresa
aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of Spain 13
Dec. 1934)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but
equally so for the insurer; in fact, it is mere so for the latter, since its dominant bargaining position
carries with it stricter responsibility.

Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only
incidental to his business, being no more than a customary 2 day's supply for the five or six motor
vehicles used for transporting of the stored merchandise (t. s. n., pp. 1447-1448). "It is well settled
that the keeping of inflammable oils on the premises though prohibited by the policy does not void it
if such keeping is incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555,
560); and "according to the weight of authority, even though there are printed prohibitions against
keeping certain articles on the insured premises the policy will not be avoided by a violation of these
prohibitions, if the prohibited articles are necessary or in customary use in carrying on the trade or
business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section
966b). It should also be noted that the "Hemp Warranty" forbade storage only "in the building to
which this insurance applies and/or in any building communicating therewith", and it is undisputed
that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned
and where the gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer the books,
vouchers, etc. demanded by them was found unsubstantiated by the trial Court, and no reason has
been shown to alter this finding. The insured gave the insurance examiner all the date he asked for
(Exhibits AA, BB, CCC and Z), and the examiner even kept and photographed some of the
examined books in his possession. What does appear to have been rejected by the insured was the
demand that he should submit "a list of all books, vouchers, receipts and other records" (Age 4,
Exhibit 9-c); but the refusal of the insured in this instance was well justified, since the demand for a
list of all the vouchers (which were not in use by the insured) and receipts was positively
unreasonable, considering that such listing was superfluous because the insurer was not denied
access to the records, that the volume of Qua Chee Gan's business ran into millions, and that the
demand was made just after the fire when everything was in turmoil. That the representatives of the
insurance company were able to secure all the date they needed is proved by the fact that the
adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit L of the criminal
case) that did not differ from that submitted by the insured (Exhibit J) except for the valuation of the
merchandise, as expressly found by the Court in the criminal case for arson. (Decision, Exhibit WW).

How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the
decision of the arson case (Exhibit WW) acquiting Qua Choc Gan, appellee in the present
proceedings. The decision states (Exhibit WW, p. 11):

Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi
como su existencia de copra y abaca en las bodega al tiempo del incendio durante el
periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que Qua
Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun Steward al
llegar a este conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que le
ha entregado el mismo acusado Que Choc Gan en relacion con sus libros y lo ha
encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que no
estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el balance
mercado exhibit J que fue preparado por el mismo testigo.

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the
insurer, the Court referred the controversy to a government auditor, Apolonio Ramos; but the latter
reached a different result from the other two. Not only that, but Ramos reported two different
valuations that could be reached according to the methods employed (Exhibit WW, p. 35):

La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para
promovar el comercio y la finanza, pero en el caso presente ha resultado un tanto
cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los
contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado
las mismas partidas y los mismos libros dichos contadores hayan de llegara dos
conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la
comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que,
segun este ultimo, su comprobacion ha dado lugar a dos resultados diferentes dependiendo
del metodo que se emplea.

Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer
attempted to bolster its case with alleged photographs of certain pages of the insurance book
(destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B) and allegedly showing
abnormal purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained
unconvinced of the authenticity of those photographs, and rejected them, because they were not
mentioned not introduced in the criminal case; and considering the evident importance of said
exhibits in establishing the motive of the insured in committing the arson charged, and the absence
of adequate explanation for their omission in the criminal case, we cannot say that their rejection in
the civil case constituted reversible error.

The next two defenses pleaded by the insurer, — that the insured connived at the loss and that the
fraudulently inflated the quantity of the insured stock in the burnt bodegas, — are closely related to
each other. Both defenses are predicted on the assumption that the insured was in financial
difficulties and set the fire to defraud the insurance company, presumably in order to pay off the
Philippine National Bank, to which most of the insured hemp and copra was pledged. Both defenses
are fatally undermined by the established fact that, notwithstanding the insurer's refusal to pay the
value of the policies the extensive resources of the insured (Exhibit WW) enabled him to pay off the
National Bank in a short time; and if he was able to do so, no motive appears for attempt to defraud
the insurer. While the acquittal of the insured in the arson case is not res judicata on the present civil
action, the insurer's evidence, to judge from the decision in the criminal case, is practically identical
in both cases and must lead to the same result, since the proof to establish the defense of
connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that
required in order to convict the insured of the crime of arson"(Bachrach vs. British American
Assurance Co., 17 Phil. 536).

As to the defense that the burned bodegas could not possibly have contained the quantities of copra
and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates,
inferences and conclusionsAs to the defense that the burned bodegas could not possibly have
contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost
exclusively on the estimates, inferences and conclusions of its adjuster investigator, Alexander D.
Stewart, who examined the premises during and after the fire. His testimony, however, was based
on inferences from the photographs and traces found after the fire, and must yield to the
contradictory testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan
Department of the National Bank's Legaspi branch, Porfirio Barrios, and of Bank Appraiser Loreto
Samson, who actually saw the contents of the bodegas shortly before the fire, while inspecting them
for the mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these
witnesses, and the appellant insurer has failed to substantiate its charges aganst their character. In
fact, the insurer's repeated accusations that these witnesses were later "suspended for fraudulent
transactions" without giving any details, is a plain attempt to create prejudice against them, without
the least support in fact.

Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp
burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the refusal of the Court below to
accept its inferences from the remains shown in the photographs of the burned premises. It appears,
likewise, that the adjuster's calculations of the maximum contents of the destroyed warehouses
rested on the assumption that all the copra and hemp were in sacks, and on the result of his
experiments to determine the space occupied by definite amounts of sacked copra. The error in the
estimates thus arrived at proceeds from the fact that a large amount of the insured's stock were in
loose form, occupying less space than when kept in sacks; and from Stewart's obvious failure to give
due allowance for the compression of the material at the bottom of the piles (t. s. n., pp. 1964, 1967)
due to the weight of the overlying stock, as shown by engineer Bolinas. It is probable that the errors
were due to inexperience (Stewart himself admitted that this was the first copra fire he had
investigated); but it is clear that such errors render valueles Stewart's computations. These were in
fact twice passed upon and twice rejected by different judges (in the criminal and civil cases) and
their concordant opinion is practically conclusive.

The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since
the opinions stated therein were based on ex parte investigations made at the back of the insured;
and the appellant did not present at the trial the original testimony and documents from which the
conclusions in the report were drawn.lawphi1.net

Appellant insurance company also contends that the claims filed by the insured contained false and
fraudulent statements that avoided the insurance policy. But the trial Court found that the
discrepancies were a result of the insured's erroneous interpretation of the provisions of the
insurance policies and claim forms, caused by his imperfect knowledge of English, and that the
misstatements were innocently made and without intent to defraud. Our review of the lengthy record
fails to disclose reasons for rejecting these conclusions of the Court below. For example, the
occurrence of previous fires in the premises insured in 1939, altho omitted in the claims, Exhibits EE
and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously with
them), KK and WW. Considering that all these claims were submitted to the smae agent, and that
this same agent had paid the loss caused by the 1939 fire, we find no error in the trial Court's
acceptance of the insured's explanation that the omission in Exhibits EE and FF was due to
inadvertance, for the insured could hardly expect under such circumstances, that the 1939 would
pass unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent of the
hemo stock, was explained by the insured as caused by his belief that he was entitled to include in
the claim his expected profit on the 70 per cent of the hemp, because the same was already
contracted for and sold to other parties before the fire occurred. Compared with other cases of over-
valuation recorded in our judicial annals, the 20 per cent excess in the case of the insured is not by
itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134,
the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire
Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China Ins. Co., 47
Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled
P31,860.85 while the goods insured were inventoried at O13,113. Certainly, the insured's overclaim
of 20 per cent in the case at bar, duly explained by him to the Court a quo, appears puny by
comparison, and can not be regarded as "more than misstatement, more than inadvertence of
mistake, more than a mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun
Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the
overchange of 20 per cent was claimed only on a part (70 per cent) of the hemp stock; had the
insured acted with fraudulent intent, nothing prevented him from increasing the value of all of his
copra, hemp and buildings in the same proportion. This also applies to the alleged fraudulent claim
for burned empty sacks, that was likewise explained to our satisfaction and that of the trial Court.
The rule is that to avoid a policy, the false swearing must be wilful and with intent to defraud (29 Am.
Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent would not
authorize the collection of the expected profit under the terms of the polices, and the trial Court
correctly deducte the same from its award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed.
Costs against the appellant. So ordered.

Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador, and Concepcion, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-16138 April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
FIRST NATIONAL SURETY & ASSURANCE CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16139 April 29, 1961.

DIOSDADO C. TY, plaintiff-appellant,

vs.
ASSOCIATED INSURANCE & SURETY CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16140 April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
UNITED INSURANCE CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16141 April 29, 1961.

DIOSDADO C. TY. plaintiff-appellant,

vs.
PHILIPPINE SURETY & INSURANCE CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16142 April 29, 1961.

DIOSDADO C. TY, plaintiff-appellant,

vs.
RELIANCE SURETY & INSURANCE CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16143 April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,
vs.
FAR EASTERN SURETY & INSURANCE CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16144 April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
CAPITAL INSURANCE & SURETY CO., INC., defendant-appellee.

x---------------------------------------------------------x

G.R. No. L-16145 April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
CAPITAL INSURANCE & SURETY CO., INC., defendant-appellee.

V. B. Gesunundo for plaintiff-appellant.

M. Perez Cardenas for defendant-appellee.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Gregorio S. Narvasa,
presiding, dismissing the actions filed in the above-entitled cases.

The facts found by the trial court, which are not disputed in this appeal, are as follows:

At different times within a period of two months prior to December 24, 1953, the plaintiff
herein Diosdado C. Ty, employed as operator mechanic foreman in the Broadway Cotton
Factory, in Grace Park, Caloocan, Rizal, at a monthly salary of P185.00, insured himself in
18 local insurance companies, among which being the eight above named defendants, which
issued to him personal accident policies, upon payment of the premium of P8.12 for each
policy. Plaintiff's beneficiary was his employer, Broadway Cotton Factory, which paid the
insurance premiums.

On December 24, 1953, a fire broke out which totally destroyed the Broadway Cotton
Factory. Fighting his way out of the factory, plaintiff was injured on the left hand by a heavy
object. He was brought to the Manila Central University hospital, and after receiving first aid
there, he went to the National Orthopedic Hospital for treatment of his injuries which were as
follows:

1. Fracture, simple, proximal phalanx index finger, left;

2. Fracture, compound, comminuted, proximal phalanx, middle finger, left and 2nd phalanx,
simple;

3. Fracture, compound, comminute phalanx, 4th finger, left;

 4. Fracture, simple, middle phalanx, middle finger, left;

5. Lacerated wound, sutured, volar aspect, small finger, left;

6. Fracture, simple, chip, head, 1st phalanx, 5th digit, left. He underwent medical treatment in
the Orthopedic Hospital from December 26, 1953 to February 8, 1954. The above-described
physical injuries have caused temporary total disability of plaintiff's left hand. Plaintiff filed the
corresponding notice of accident and notice of claim with all of the abovenamed defendants
to recover indemnity under Part II of the policy, which is similarly worded in all of the policies,
and which reads pertinently as follows:

INDEMNITY FOR TOTAL OR PARTIAL DISABILITY

If the Insured sustains any Bodily Injury which is effected solely through violent, external,
visible and accidental means, and which shall not prove fatal but shall result, independently
of all other causes and within sixty (60) days from the occurrence thereof, in Total or Partial
Disability of the Insured, the Company shall pay, subject to the exceptions as provided for
hereinafter, the amount set opposite such injury:

PARTIAL DISABILITY

LOSS OF:

xxx xxx xxx

Either hand ............................................................................ P650.00

xxx xxx xxx

... The loss of a hand shall mean the loss by amputation through the bones of the wrist....

Defendants rejected plaintiff's claim for indemnity for the reason that there being no
severance of amputation of the left hand, the disability suffered by him was not covered by
his policy. Hence, plaintiff sued the defendants in the Municipal Court of this City, and from
the decision of said Court dismissing his complaints, plaintiff appealed to this Court.
(Decision of the Court of First Instance of Manila, pp. 223-226, Records).

In view of its finding, the court absolved the defendants from the complaints. Hence this appeal.

The main contention of appellant in these cases is that in order that he may recover on the
insurance policies issued him for the loss of his left hand, it is not necessary that there should be an
amputation thereof, but that it is sufficient if the injuries prevent him from performing his work or
labor necessary in the pursuance of his occupation or business. Authorities are cited to the effect
that "total disability" in relation to one's occupation means that the condition of the insurance is such
that common prudence requires him to desist from transacting his business or renders him incapable
of working. (46 C.J.S., 970). It is also argued that obscure words or stipulations should be
interpreted against the person who caused the obscurity, and the ones which caused the obscurity in
the cases at bar are the defendant insurance companies.

While we sympathize with the plaintiff or his employer, for whose benefit the policies were issued,
we can not go beyond the clear and express conditions of the insurance policies, all of which define
partial disability as loss of either hand by amputation through the bones of the wrist." There was no
such amputation in the case at bar. All that was found by the trial court, which is not disputed on
appeal, was that the physical injuries "caused temporary total disability of plaintiff's left hand." Note
that the disability of plaintiff's hand was merely temporary, having been caused by fracture of the
index, the middle and the fourth fingers of the left hand.

We might add that the agreement contained in the insurance policies is the law between the parties.
As the terms of the policies are clear, express and specific that only amputation of the left hand
should be considered as a loss thereof, an interpretation that would include the mere fracture or
other temporary disability not covered by the policies would certainly be unwarranted.

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

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes and Dizon,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-21574 June 30, 1966

SIMON DE LA CRUZ, plaintiff and appellee,

vs.
THE CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.

Achacoso, Nera and Ocampo for defendant and appellant.

Agustin M. Gramata for plaintiff and appellee.

BARRERA, J.:

This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision of the Court of
First Instance of Pangasinan (in Civ Case No. U-265), ordering it to indemnify therein plaintiff Simon
de la Cruz for the death of the latter's son, to pay the burial expenses, and attorney's fees.

Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the
holder of an accident insurance policy (No. ITO-BFE-170) underwritten by the Capital Insurance &
Surety Co., Inc., for the period beginning November 13, 1956 to November 12, 1957. On January 1,
1957, in connection with the celebration of the New Year, the Itogon-Suyoc Mines, Inc. sponsored a
boxing contest for general entertainment wherein the insured Eduardo de la Cruz, a non-
professional boxer participated. In the course of his bout with another person, likewise a non-
professional, of the same height, weight, and size, Eduardo slipped and was hit by his opponent on
the left part of the back of the head, causing Eduardo to fall, with his head hitting the rope of the ring.
He was brought to the Baguio General Hospital the following day. The cause of death was reported
as hemorrhage, intracranial, left.

Simon de la Cruz, the father of the insured and who was named beneficiary under the policy,
thereupon filed a claim with the insurance company for payment of the indemnity under the
insurance policy. As the claim was denied, De la Cruz instituted the action in the Court of First
Instance of Pangasinan for specific performance. Defendant insurer set up the defense that the
death of the insured, caused by his participation in a boxing contest, was not accidental and,
therefore, not covered by insurance. After due hearing the court rendered the decision in favor of the
plaintiff which is the subject of the present appeal.

It is not disputed that during the ring fight with another non-professional boxer, Eduardo slipped,
which was unintentional. At this opportunity, his opponent landed on Eduardo's head a blow, which
sent the latter to the ropes. That must have caused the cranial injury that led to his death. Eduardo
was insured "against death or disability caused by accidental means". Appellant insurer now
contends that while the death of the insured was due to head injury, said injury was sustained
because of his voluntary participation in the contest. It is claimed that the participation in the boxing
contest was the "means" that produced the injury which, in turn, caused the death of the insured.
And, since his inclusion in the boxing card was voluntary on the part of the insured, he cannot be
considered to have met his death by "accidental means". 1äwphï1.ñët

The terms "accident" and "accidental", as used in insurance contracts, have not acquired any
technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus,
the terms have been taken to mean that which happen by chance or fortuitously, without intention
and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes
place without one's foresight or expectation — an event that proceeds from an unknown cause, or is
an unusual effect of a known cause and, therefore, not expected.1

Appellant however, would like to make a distinction between "accident or accidental" and "accidental
means", which is the term used in the insurance policy involved here. It is argued that to be
considered within the protection of the policy, what is required to be accidental is the means that
caused or brought the death and not the death itself. It may be mentioned in this connection, that the
tendency of court decisions in the United States in recent years is to eliminate the fine distinction
between the terms "accidental" and "accidental means" and to consider them as legally
synonymous.2 But, even if we take appellant's theory, the death of the insured in the case at bar
would still be entitled to indemnification under the policy. The generally accepted rule is that, death
or injury does not result from accident or accidental means within the terms of an
accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by anything
unforeseen except the death or injury.3 There is no accident when a deliberate act is performed
unless some additional, unexpected, independent, and unforeseen happening occurs which
produces or brings about the result of injury or death.4 In other words, where the death or injury is
not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs in
the doing of the act which produces the injury, the resulting death is within the protection of policies
insuring against death or injury from accident.

In the present case, while the participation of the insured in the boxing contest is voluntary, the injury
was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw
him to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the
deceased, perhaps he could not have received that blow in the head and would not have died. The
fact that boxing is attended with some risks of external injuries does not make any injuries received
in the course of the game not accidental. In boxing as in other equally physically rigorous sports,
such as basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever does,
the injury or death can only be accidental or produced by some unforeseen happening or event as
what occurred in this case.

Furthermore, the policy involved herein specifically excluded from its coverage —

(e) Death or disablement consequent upon the Insured engaging in football, hunting,
pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or
motorcycling.

Death or disablement resulting from engagement in boxing contests was not declared outside of the
protection of the insurance contract. Failure of the defendant insurance company to include death
resulting from a boxing match or other sports among the prohibitive risks leads inevitably to the
conclusion that it did not intend to limit or exempt itself from liability for such death.5

Wherefore, in view of the foregoing considerations, the decision appealed from is hereby affirmed,
with costs against appellant. so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-23491 July 31, 1968

TAURUS TAXI CO., INC., FELICITAS V. MONJE, ET AL., plaintiffs-appellees,

vs.
THE CAPITAL INSURANCE & SURETY CO., INC., defendant-appellant.

Vergara and Dayot for plaintiffs-appellees.

Achacoso, Nera and Ocampo for defendant-appellant.

FERNANDO, J.:

The principal legal question in this appeal from a lower court decision, ordering defendant-appellant
The Capital Insurance & Surety Co., Inc. to pay the plaintiff-appellee Taurus Taxi Co., Inc. as well as
plaintiffs-appellees, widow and children of the deceased Alfredo Monje, who, in his lifetime, was
employed as a taxi driver of such plaintiff-appellee, "the sum of P5,000.00 with interest thereon at
the legal rate from the filing of the complaint until fully paid," with P500.00 as attorney's fees and the
costs of the suit, is whether or not a provision in the insurance contract that defendant-appellant will
indemnify any authorized driver provided that [he] is not entitled to any indemnity under any other
policy, it being shown that the deceased was paid his workman's compensation from another
insurance policy, should defeat such a right to recover under the insurance contract subject of this
suit. The lower court answered in the negative. Its holding cannot be successfully impugned.
The appealed decision stated at the outset that the motion for judgment on the pleadings filed by the
plaintiffs was granted, the defendant having no objection and the issue presented being capable of
resolution without the need of presenting any evidence. Then the decision continues: "Alfredo Monje,
according to the complaint, was employed as taxi driver by the plaintiff Taurus Taxi Co., Inc. On
December 6, 1962, the taxi he was driving collided with a Transport Taxicab at the intersection of
Old Sta. Mesa and V. Mapa Streets, Manila, resulting in his death. At the time of the accident, there
was subsisting and in force Commercial Vehicle Comprehensive Policy No. 101, 737 ... issued by
the defendant to the Taurus Taxi Co., Inc. The amount for which each passenger, including the
driver, is insured is P5,000.00. After the issuance of policy No. 101, 737, the defendant issued the
Taurus Taxi Co., Inc. Indorsement No. 1 which forms part of the policy ... " 1 Reference was then
made to plaintiff-appellee Felicitas Monje being the widow of the taxi driver, the other plaintiffs-
appellees with the exception of the Taurus Taxi Co., Inc., being the children of the couple. After
which it was noted that plaintiff Taurus Taxi Co., Inc. made representations "for the payment of the
insurance benefit corresponding to her and her children since it was issued in its name, benefit
corresponding to her and her children, ... but despite demands ... the defendant refused and still
refuses to pay them." 2

On the above facts, the liability apparently clear, the defenses interposed by defendant insurance
company being in the opinion of the lower court without merit, the aforesaid judgment was rendered.
This being a direct appeal, to us on questions of law, the facts as found by the lower court cannot be
controverted.

Defendant-appellant Capital Insurance & Surety Co. Inc. alleged as the first error of the lower court
its failure to hold "that in view of the fact that the deceased Alfredo Monje was entitled to indemnity
under another insurance policy issued by Ed. A. Keller Co., Ltd., the heirs of the said deceased are
not entitled to indemnity under the insurance policy issued by appellant for the reason that the latter
policy contains a stipulation that "the company will indemnify any authorized driver provided that
such authorized driver is not entitled to indemnity under any other policy." " 3 In the discussion of the
above error, defendant-appellant stated the following: "The facts show that at the time of his death,
the deceased Alfredo Monje, as authorized driver and employee of plaintiff Taurus Taxi Co., Inc.,
was entitled to indemnity under another insurance policy, then subsisting, which was Policy No.
50PH-1605 issued by Ed. A. Keller Co., Ltd. to plaintiff Taurus Taxi Co., Inc. As a matter of fact, the
indemnity to which the deceased Alfredo Monje was entitled under the said Policy No. 50PH-1605
was paid by Ed. A. Keller Co., Ltd. to the heirs of Alfredo Monje on December 28, 1962, as
evidenced by the records of W.C.C. Case No. A88637 entitled "Felicitas V. Monje, et al. vs. Taurus
Taxi Co., Inc.", Regional Office No. 4, Department of Labor, Manila ... " 4

The above defense, based on a fact which was not disputed, was raised and rightfully rejected by
the lower court. From its own version, defendant-appellant would seek to escape liability on the plea
that the workman's compensation to which the deceased driver was rightfully entitled was settled by
the employer through a policy issued by another insurance firm. What was paid therefore was not
indemnity but compensation.

Since what is prohibited by the insurance policy in question is that any "authorized driver of plaintiff
Taurus Taxi Co., Inc." should not be "entitled to any indemnity under any policy", it would appear
indisputable that the obligation of defendant-appellant under the policy had not in any wise been
extinguished. It is too well-settled to need the citation of authorities that what the law requires enters
into and forms part of every contract. The Workmen's Compensation Act, explicitly requires that an
employee suffering any injury or death arising out of or in the course of employment be
compensated. The fulfillment of such statutory obligation cannot be the basis for evading the clear,
explicit and mandatory terms of a policy.
In the same way as was held in Benguet Consolidated, Inc. v. Social Security System 5 that sickness
benefits under the Social Security Act may be recovered simultaneously with disability benefits
under the Workmen's Compensation Act, the previous payment made of the compensation under
such legislation is no obstacle by virtue of a clause like that invoked by defendant-appellant to the
payment of indemnity under the insurance policy.

Assuming however that there is a doubt concerning the liability of defendant-appellant insurance
firm, nonetheless, it should be resolved against its pretense and in favor of the insured. It was the
holding in Eagle Star Insurance, Ltd. v. Chia Yu 6 that courts are to regard "with extreme jealousy"
limitations of liability found in insurance policies and to construe them in such a way as to preclude
the insurer from non-compliance with his obligation. In other words, to quote a noted authority on the
subject, "a contract of insurance couched in language chosen by the insurer is, if open to the
construction contended for by the insured, to be construed most strongly, or strictly, against the
insurer and liberally in favor of the contention of the insured, which means in accordance with the
rule contra proferentem."7 Enough has been said therefore to dispose of the first assigned error.

The point is made in the second alleged error that the lower court ought to have held "that by joining
the heirs of Alfredo Monje as a party plaintiff, plaintiff Taurus Taxi Co., Inc. committed a breach of
policy condition and thus forfeited whatever benefits, if any, to which it might be entitled under
appellant's policy." 8 The basis for such an allegation is one of the conditions set forth in the policy.
Thus: " "5. No admission, offer, promise or payment shall be made by or on behalf of the insured
without the written consent of the Company which shall be entitled if it so desires to take over and
conduct in his name the defense or settlement of any claim or to prosecute in his name for its own
benefit any claim for indemnity or damages or otherwise and shall have full discretion in the conduct
of any proceedings and in the settlement of any claim and the Insured shall give all such information
and assistance as the Company may require ... " 9

Such a plea is even less persuasive. It is understandable then why the lower court refused to be
swayed by it. The plaintiff Taurus Taxi Co., inc. had to join the suit on behalf of the real beneficiaries,
the heirs of the deceased driver, who are the other plaintiffs as it was a party to the policy.

Moreover, as noted in the decision appealed from: "The institution of the action cannot possibly be
construed as an admission, offer, promise, or payment by the company, for it merely seeks to
enforce, by court action, the only legal remedy available to it, its rights under the contract of
insurance to which it is a party. To consider, furthermore, the commencement of an action by the
insured, alone or with others, as a breach of the policy, resulting in forfeiture of the benefits
thereunder, to place in the hands of the insurer the power to nullify at will the whole contract of
insurance by the simple expedient of refusing to make payment and compelling the insured to bring
a suit to enforce the policy." 10

To so construe the policy to yield a contrary result is to put a premium on technicality. If such a
defense is not frowned upon and rejected, the time will come when the confidence on the part of the
public in the good faith of insurance firms would be minimized, if not altogether lost. Such a
deplorable consequence ought to be avoided and a construction of any stipulation that would be
fraught with such a risk repudiated. What the lower court did then cannot be characterized as error.

The third error assigned, namely, that the lower court should have considered the filing of the
complaint against defendant-appellant as unjust and unwarranted, is, in the light of the above,
clearly without merit.

WHEREFORE, the appealed decision of the lower court ordering defendant-appellant "to pay the
plaintiffs the sum of P5,000.00 with interest thereon at the legal rate from the filing of the complaint
until fully paid, P500.00 as attorney's fees," 11 with costs is affirmed. Costs against defendant-
appellant.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Angeles, JJ., concur.
Castro, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-25920 January 30, 1970

CCC INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS (Fourth Division) and CARLOS F. ROBES, respondents.

Kalaw and Felipe for petitioner.

Adalia B. Francisco for respondents.

REYES, J.B.L., J.:

Petition for review of the decision of the Court of Appeals, affirming that of the Court of First Instance
of Rizal (Quezon City) allowing insurance indemnification of plaintiff for his damaged car and the
payment of attorney's fees.

The following facts are not in dispute:

On 1 March 1961, Carlos F. Robes took an insurance, with the CCC Insurance Corporation, on his
Dodge Kingsway car against loss or damage through accident for an amount not exceeding
P8,000.00 (Policy No. M1156). On 25 June 1961, and during the effectivity of the policy, the insured
vehicle, while being driven by the owner's driver, became involved in a vehicular collision along Rizal
Avenue Extension, Potrero, Malabon, Rizal. The car was damaged, and the repair was estimated to
cost P5,300.00.

As the insurance company refused either to pay for the repair or to cause the restoration of the car
to its original condition, Robes instituted Civil Case No. Q-6063 in the Court of First Instance of Rizal
for recovery not only of the amount necessary for the repair of the insured car but also of actual and
moral damages, attorneys' fees and costs. Resisting plaintiff's claim, the insurance company
disclaimed liability for payment, alleging that there had been violation of the insurance contract
because the one driving the car at the time of the incident was not an "authorized driver."
After due hearing, judgment was rendered for the plaintiff, and defendant insurer was ordered to pay
unto the former the cost of repair of the car in the sum of P5,031.28; the sum of P150.00, for the
hauling and impounding of the car at the repair shop; P2,000.00 as actual damages; and P1,000.00
as attorneys' fees, plus costs.

The insurance company went to the Court of Appeals, raising inter alia the questions of the
qualification of plaintiff's driver to operate the insured vehicle and the correctness of the trial court's
award to plaintiff of the amount of P5,013.28 as cost of repairs, and of actual damages and
attorneys' fees. In its decision of 31 January 1966, the Court of Appeals affirmed the ruling of the
lower court except the award of actual damages in the sum of P2,000.00, which was eliminated on
the ground that it was too speculative. Not content, the insurance company filed the present petition
for review of the aforesaid decision of the Court of Appeals on two grounds: (1) that the proceedings
observed in the trial court were irregular and invalid; and (2) that the damage to the insured car was
not covered by the insurance policy because at the time of the accident it was being driven by one
who was not an authorized driver.

The second issue constitutes the main contention of herein appellant, and will be considered first. It
is vigorously urged by the insurer that the one driving the insured vehicle at the time of the accident
was not an authorized driver thereof within the purview of the following provision of the insurance
policy:

AUTHORIZED DRIVER:

Any of the following: (a) The insured;

(b) Any person driving on the Insured's order or with his permission, provided that the
person driving ispermitted in accordance with licensing laws or regulations to drive
the motor vehicle covered by this Policy, or has been so permitted and is not
disqualified by order of a court of law or by reason of any enactment or regulation
from driving such Motor Vehicle. (Emphasis ours)

It has been found as a fact by the Court of Appeals that Domingo Reyes, the, driver who was at the
wheel of the insured car at the time of the accident, does not know how to read and write; that he
was able to secure a driver's license, without passing any examination therefor, by paying P25.00 to
a certain woman; and that the Cavite agency of the Motor Vehicles Office has certified not having
issued Reyes' purported driver's license No. 271703 DP.

In holding that the damage sustained by the car comes within the coverage of the insurance policy,
the Court of Appeals argued that since Reyes' purported driver's license (Exhibit "A") bears all the
earmarks of a duly issued license, then it is a public document, and petitioner insurance company
then has the burden of disproving its genuineness, which the latter has failed to do. In this respect
the Court of Appeals ruled:

... . The fact that the Cavite Agency of the Motor Vehicles Office states that Driver's
License No. 271703 DP was not issued by that office, does not remove the possibility
that said office may have been mistaken or that said license was issued by another
agency. Indeed Exhibit 13 shows that a certain Gloria Presa made the notation
thereon "no license issued" and which notation was the basis of the 1st Indorsement,
Exhibit 12, signed by the MVO Cavite City Agency's officer-in-charge. Neither Gloria
Presa nor the officer-in-charge Marciano A. Monzon was placed on the witness stand
to be examined in order to determine whether said license is indeed void. As it is, as
heretofore pointed out, the fact remains that Domingo Reyes is in possession of a
 driver's license issued by the Motor Vehicles Office which on its face appears to have
been regularly issued.

In effect, the Court of Appeals found that the driver's license No. 271703 DP was genuine, that is,
one really issued by the Motor Vehicles Office or its authorized deputy; and this finding of fact is now
conclusive and may not be questioned in this appeal.

Nevertheless, the appellant insurer insists that, under the established facts of this case, Reyes,
being admittedly one who cannot read and write, who has never passed any examination for drivers,
and has not applied for a license from the duly constituted government agency entrusted with the
duty of licensing drivers, cannot be considered an authorized driver.

The fatal flaw in appellant's argument is that it studiously ignores the provisions of law existing at the
time of the mishap. Under Section 24 of the Revised Motor Vehicles Law, Act 3992 of the Philippine
Legislature, as amended by Republic Acts Nos. 587, 1204 and 2863,1

An examination or demonstration to show any applicant's ability to operate motor

vehicles may also be required in the discretion of the Chief, Motor Vehicles Office or
his deputies. (Emphasis supplied)

and reinforcing such discretion, Section 26 of the Act prescribes further:

SEC. 26. Issuance of chauffeur's license; professional badge: If, after examination, or
without the same, the Chief, Motor Vehicles Office or his deputies, believe the
applicant to possess the necessary qualifications and knowledge, they shall issue to
such applicant a license to operate as chauffeur ... (Emphasis supplied)

It is thus clear that the issuance of a driving license without previous examination does not
necessarily imply that the license issued is invalid. As the law stood in 1961, when the claim arose,
the examinations could be dispensed with in the discretion of the Motor Vehicles Office official
officials. Whether discretion was abused in issuing the license without examination is not a proper
subject of inquiry in these proceedings, though, as a matter of legislative policy, the discretion should
be eliminated. There is no proof that the owner of the automobile knew that the circumstance
surrounding such issuance showed that it was irregular.

The issuance of the license is proof that the Motor Vehicles Office official considered Reyes, the
driver of the insured- appellee, qualified to operate motor vehicles, and the insured was entitled to
rely upon such license. In this connection, it should be observed that the chauffeur, Reyes, had been
driving since 1957,2 and without mishap, for all the record shows. Considering that, as pointed out by the
Court of Appeals, the weight of authority is in favor of a liberal interpretation of the insurance policy for the
benefit of the party insured, and strictly against the insurer, We find no reason to diverge from the
conclusion reached by the Court of Appeals that no breach was committed of the above-quoted provision
of the policy.

The next issue assigned is anchored on the fact that the decision of the trial court was based on
evidence presented to and received by the clerk of court who acted as commissioner, although
allegedly, there was no written court order constituting him as such commissioner, no written request
for his commission was made by the parties; he did not take an oath prior to entering into the
discharge of his commission; no written report of his findings was ever submitted to the court; and no
notice thereof was sent to the parties, contrary to the specific provisions of Rule 33 of the Rules of
Court.
Actually there is nothing basically wrong with the practice of delegating to a commissioner, usually
the clerk of court, who is a duly sworn court officer, the reception of both parties and for him to
submit a report thereon to the court. In fact, this procedure is expressly sanctioned by Revised Rule
33 of the Rules of Court.3 Petitioner's objection in this case, however, is directed not against its referral
to the clerk of court but against the alleged non-observance of the prescribed steps in connection with
such delegation.

We find no cause sufficient to invalidate the proceedings had in the trial court. We note that this
issue was brought up by the appellant insurance company or the first time only in its motion for
reconsideration filed in the Court of Appeals. It was not raised in the trial court, where the defect
could still be remedied. This circumstance precludes ventilation of the issue of validity of the hearing
at this stage; for, if such irregularity is to vitiate the proceeding, the question should have been
seasonably raised, i.e., either before the parties proceeded with the hearing or before the court
handed down its ruling.4 It is a procedural point that can be waived by consent of the parties, express or
implied.5

For the same reason, appellant cannot insist now on the annulment of the proceeding on the basis
of alleged lack of written consent of the parties to the commission, or of an order appointing the clerk
as commissioner, or of notice of the submission of his report to the court. Furthermore, appellant has
presented no proof that the clerk of court committed any mistake or abuse in the performance of the
task entrusted to him, or that the trial court was not able to properly appreciate the evidence in the
case because it was received by another person. If indeed there were errors at all, they would be
non-prejudicial and could not justify the holding of a new trial, as urged by herein petitioner. 6

WHEREFORE, the decision of the Court of Appeals is affirmed, with costs against appellant CCC
Insurance Corporation.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Teehankee and Barredo,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 92383 July 17, 1992

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:
The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of
P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his
wife Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed that
there was no suicide. It argued, however that there was no accident either.

Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6,
1982, at about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon, Lim
was in a happy mood (but not drunk) and was playing with his handgun, from which he had
previously removed the magazine. As she watched television, he stood in front of her and pointed
the gun at her. She pushed it aside and said it might he loaded. He assured her it was not and then
pointed it to his temple. The next moment there was an explosion and Lim slumped to the floor. He
was dead before he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was
sustained. 2 The petitioner was sentenced to pay her P200,000.00, representing the face value of the
policy, with interest at the legal rate; P10,000.00 as moral damages; P5,000.00 as exemplary
damages; P5,000.00 as actual and compensatory damages; and P5,000.00 as attorney's fees, plus
the costs of the suit. This decision was affirmed on appeal, and the motion for reconsideration was
denied. 3 The petitioner then came to this Court to fault the Court of Appeals for approving the
payment of the claim and the award of damages.

The term "accident" has been defined as follows:

The words "accident" and "accidental" have never acquired any technical signification in law, and
when used in an insurance contract are to be construed and considered according to the ordinary
understanding and common usage and speech of people generally. In-substance, the courts are
practically agreed that the words "accident" and "accidental" mean that which happens by chance or
fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen. The
definition that has usually been adopted by the courts is that an accident is an event that takes place
without one's foresight or expectation — an event that proceeds from an unknown cause, or is an
unusual effect of a known case, and therefore not expected. 4

An accident is an event which happens without any human agency or, if happening through human
agency, an event which, under the circumstances, is unusual to and not expected by the person to
whom it happens. It has also been defined as an injury which happens by reason of some violence
or casualty to the injured without his design, consent, or voluntary co-operation. 5

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was
indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says that
"there is no accident when a deliberate act is performed unless some additional, unexpected,
independent and unforeseen happening occurs which produces or brings about their injury or death."
There was such a happening. This was the firing of the gun, which was the additional unexpected
and independent and unforeseen occurrence that led to the insured person's death.

The petitioner also cites one of the four exceptions provided for in the insurance contract and
contends that the private petitioner's claim is barred by such provision. It is there stated:

Exceptions —

The company shall not be liable in respect of

1. Bodily injury
 xxx xxx xxx

b. consequent upon

i) The insured person attempting to commit suicide or willfully exposing himself to

needless peril except in an attempt to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends
that the insured willfully exposed himself to needless peril and thus removed himself from the
coverage of the insurance policy.

It should be noted at the outset that suicide and willful exposure to needless peril are in pari
materia because they both signify a disregard for one's life. The only difference is in degree, as
suicide imports a positive act of ending such life whereas the second act indicates a reckless risking
of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand
meters above the ground and without any safety device may not actually be intending to commit
suicide, but his act is nonetheless suicidal. He would thus be considered as "willfully exposing
himself to needless peril" within the meaning of the exception in question.

The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully
exposed himself to needless peril and so came under the exception. The theory is that a gun is per
se dangerous and should therefore be handled cautiously in every case.

That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the
magazine from the gun and believed it was no longer dangerous. He expressly assured her that the
gun was not loaded. It is submitted that Lim did not willfully expose himself to needless peril when he
pointed the gun to his temple because the fact is that he thought it was not unsafe to do so. The act
was precisely intended to assure Nalagon that the gun was indeed harmless.

The contrary view is expressed by the petitioner thus:

Accident insurance policies were never intended to reward the insured for his
tendency to show off or for his miscalculations. They were intended to provide for
contingencies. Hence, when I miscalculate and jump from the Quezon Bridge into the
Pasig River in the belief that I can overcome the current, I have wilfully exposed
myself to peril and must accept the consequences of my act. If I drown I cannot go to
the insurance company to ask them to compensate me for my failure to swim as well
as I thought I could. The insured in the case at bar deliberately put the gun to his
head and pulled the trigger. He wilfully exposed himself to peril.

The Court certainly agrees that a drowned man cannot go to the insurance company to ask for
compensation. That might frighten the insurance people to death. We also agree that under the
circumstances narrated, his beneficiary would not be able to collect on the insurance policy for it is
clear that when he braved the currents below, he deliberately exposed himself to a known peril.

The private respondent maintains that Lim did not. That is where she says the analogy fails. The
petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge that the currents below
were dangerous. By contrast, Lim did not know that the gun he put to his head was loaded.

Lim was unquestionably negligent and that negligence cost him his own life. But it should not
prevent his widow from recovering from the insurance policy he obtained precisely against accident.
There is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity
agreed upon if the insured is shown to have contributed to his own accident. Indeed, most accidents
are caused by negligence. There are only four exceptions expressly made in the contract to relieve
the insurer from liability, and none of these exceptions is applicable in the case at bar. **

It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of
the assured. There is no reason to deviate from this rule, especially in view of the circumstances of
this case as above analyzed.

On the second assigned error, however, the Court must rule in favor of the petitioner. The basic
issue raised in this case is, as the petitioner correctly observed, one of first impression. It is evident
that the petitioner was acting in good faith then it resisted the private respondent's claim on the
ground that the death of the insured was covered by the exception. The issue was indeed debatable
and was clearly not raised only for the purpose of evading a legitimate obligation. We hold therefore
that the award of moral and exemplary damages and of attorney's fees is unjust and so must be
disapproved.

In order that a person may be made liable to the payment of moral damages, the law
requires that his act be wrongful. The adverse result of an action does not per
se make the act wrongful and subject the act or to the payment of moral damages.
The law could not have meant to impose a penalty on the right to litigate; such right
is so precious that moral damages may not be charged on those who may exercise it
erroneously. For these the law taxes costs. 7

The fact that the results of the trial were adverse to Barreto did not alone make his
act in bringing the action wrongful because in most cases one party will lose; we
would be imposing an unjust condition or limitation on the right to litigate. We hold
that the award of moral damages in the case at bar is not justified by the facts had
circumstances as well as the law.

If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses,
since it is not the fact of winning alone that entitles him to recover such damages of
the exceptional circumstances enumerated in Art. 2208. Otherwise, every time a
defendant wins, automatically the plaintiff must pay attorney's fees thereby putting a
premium on the right to litigate which should not be so. For those expenses, the law
deems the award of costs as sufficient. 8

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable to the private
respondent in the sum of P200,000.00 representing the face value of the insurance contract, with interest at the legal rate from the date of
the filing of the complaint until the full amount is paid, but MODIFIED with the deletion of all awards for damages, including attorney's fees,
except the costs of the suit.

SO ORDERED.

Griño-Aquino, Medialdea and Bellosillo, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 96452 May 7, 1992

PERLA COMPANIA DE SEGUROS, INC. petitioner,

vs.
THE COURT OF APPEALS, HERMINIO LIM and EVELYN LIM, respondents.

G.R. No. 96493 May 7, 1992

FCP CREDIT CORPORATION, petitioner,

vs.

THE COURT OF APPEALS, Special Third Division, HERMINIO LIM and EVELYN
LIM, respondents.

Yolanda Quisumbing-Javellana and Nelson A. Loyola for petitioner.

Wilson L. Tee for respondents Herminio and Evelyn Lim.

NOCON, J.:

These are two petitions for review on certiorari, one filed by Perla Compania de Seguros, Inc. in
G.R. No. 96452, and the other by FCP Credit Corporation in G.R. No. 96493, both seeking to annul
and set aside the decision dated July 30, 1990 1 of the Court of Appeals in CA-G.R. No. 13037,
which reversed the decision of the Regional Trial Court of Manila, Branch VIII in Civil Case No. 83-
19098 for replevin and damages. The dispositive portion of the decision of the Court of Appeals
reads, as follows:

WHEREFORE, the decision appealed from is reversed; and appellee Perla

Compania de Seguros, Inc. is ordered to indemnify appellants Herminio and Evelyn
Lim for the loss of their insured vehicle; while said appellants are ordered to pay
appellee FCP Credit Corporation all the unpaid installments that were due and
payable before the date said vehicle was carnapped; and appellee Perla Compania
de Seguros, Inc. is also ordered to pay appellants moral damages of P12,000.00 for
the latter's mental sufferings, exemplary damages of P20,000.00 for appellee Perla
Compania de Seguros, Inc.'s unreasonable refusal on sham grounds to honor the
just insurance claim of appellants by way of example and correction for public good,
and attorney's fees of P10,000.00 as a just and equitable reimbursement for the
expenses incurred therefor by appellants, and the costs of suit both in the lower court
and in this appeal. 2
The facts as found by the trial court are as follows:

On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed a
promissory note in favor Supercars, Inc. in the sum of P77,940.00, payable in monthly installments
according to the schedule of payment indicated in said note, 3 and secured by a chattel mortgage
over a brand new red Ford Laser 1300 5DR Hatchback 1981 model with motor and serial No.
SUPJYK-03780, which is registered under the name of private respondent Herminio Lim 4 and
insured with the petitioner Perla Compania de Seguros, Inc. (Perla for brevity) for comprehensive
coverage under Policy No. PC/41PP-QCB-43383. 5

On the same date, Supercars, Inc., with notice to private respondents spouses, assigned to
petitioner FCP Credit Corporation (FCP for brevity) its rights, title and interest on said promissory
note and chattel mortgage as shown by the Deed of Assignment. 6

At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at the back of
Broadway Centrum along N. Domingo Street, Quezon City. Private respondent Evelyn Lim, who was
driving said car before it was carnapped, immediately called up the Anti-Carnapping Unit of the
Philippine Constabulary to report said incident and thereafter, went to the nearest police substation
at Araneta, Cubao to make a police report regarding said incident, as shown by the certification
issued by the Quezon City police. 7

On November 10, 1982, private respondent Evelyn Lim reported said incident to the Land
Transportation Commission in Quezon City, as shown by the letter of her counsel to said office, 8 in
compliance with the insurance requirement. She also filed a complaint with the Headquarters, Constabulary Highway Patrol Group. 9

On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla but said
claim was denied on November 18, 1982 10 on the ground that Evelyn Lim, who was using the
vehicle before it was carnapped, was in possession of an expired driver's license at the time of the
loss of said vehicle which is in violation of the authorized driver clause of the insurance policy, which
states, to wit:

AUTHORIZED DRIVER:

Any of the following: (a) The Insured (b) Any person driving on the Insured's order, or
with his permission. Provided that the person driving is permitted, in accordance with
the licensing or other laws or regulations, to drive the Scheduled Vehicle, or has
been permitted and is not disqualified by order of a Court of Law or by reason of any
enactment or regulation in that behalf. 11

On November 17, 1982, private respondents requests from petitioner FCP for a suspension of
payment on the monthly amortization agreed upon due to the loss of the vehicle and, since the
carnapped vehicle insured with petitioner Perla, said insurance company should be made to pay the
remaining balance of the promissory note and the chattel mortgage contract.

Perla, however, denied private respondents' claim. Consequently, petitioner FCP demanded that
private respondents pay the whole balance of the promissory note or to return the vehicle 12 but the
latter refused.

On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in turn filed an
amended third party complaint against petitioner Perla on December 8, 1983. After trial on the
merits, the trial court rendered a decision, the dispositive portion which reads:
 WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:

1. Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and severally,
plaintiff the sum of P55,055.93 plus interest thereon at the rate of 24% per
annum from July 2, 1983 until fully paid;

2. Ordering defendants to pay plaintiff P50,000.00 as and for attorney's fees; and the
costs of suit.

Upon the other hand, likewise, ordering the DISMISSAL of the Third-Party Complaint
filed against Third-Party Defendant. 13

Not satisfied with said decision, private respondents appealed the same to the Court of Appeals,
which reversed said decision.

After petitioners' separate motions for reconsideration were denied by the Court of Appeals in its
resolution of December 10, 1990, petitioners filed these separate petitions for review on certiorari.

Petitioner Perla alleged that there was grave abuse of discretion on the part of the appellate court in
holding that private respondents did not violate the insurance contract because the authorized driver
clause is not applicable to the "Theft" clause of said Contract.

For its part, petitioner FCP raised the issue of whether or not the loss of the collateral exempted the
debtor from his admitted obligations under the promissory note particularly the payment of interest,
litigation expenses and attorney's fees.

We find no merit in Perla's petition.

The comprehensive motor car insurance policy issued by petitioner Perla undertook to indemnify the
private respondents against loss or damage to the car (a) by accidental collision or overturning, or
collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft; and (c) by
malicious act.14

Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's
consent or knowledge, such taking constitutes theft, and, therefore, it is the "THEFT"' clause, and
not the "AUTHORIZED DRIVER" clause that should apply. As correctly stated by the respondent
court in its decision:

. . . Theft is an entirely different legal concept from that of accident. Theft is

committed by a person with the intent to gain or, to put it in another way, with the
concurrence of the doer's will. On the other hand, accident, although it may proceed
or result from negligence, is the happening of an event without the concurrence of
the will of the person by whose agency it was caused. (Bouvier's Law Dictionary, Vol.
I, 1914 ed., p. 101).

Clearly, the risk against accident is distinct from the risk against theft. The
"authorized driver clause" in a typical insurance policy is in contemplation or
anticipation of accident in the legal sense in which it should be understood, and not
in contemplation or anticipation of an event such as theft. The distinction — often
seized upon by insurance companies in resisting claims from their assureds —
 between death occurring as a result of accident and death occurring as a result of
intent may, by analogy, apply to the case at bar. Thus, if the insured vehicle had
figured in an accident at the time she drove it with an expired license, then, appellee
Perla Compania could properly resist appellants' claim for indemnification for the loss
or destruction of the vehicle resulting from the accident. But in the present case. The
loss of the insured vehicle did not result from an accident where intent was involved;
the loss in the present case was caused by theft, the commission of which was
attended by intent. 15

It is worthy to note that there is no causal connection between the possession of a valid driver's
license and the loss of a vehicle. To rule otherwise would render car insurance practically a sham
since an insurance company can easily escape liability by citing restrictions which are not applicable
or germane to the claim, thereby reducing indemnity to a shadow.

We however find the petition of FCP meritorious.

This Court agrees with petitioner FCP that private respondents are not relieved of their obligation to
pay the former the installments due on the promissory note on account of the loss of the automobile.
The chattel mortgage constituted over the automobile is merely an accessory contract to the
promissory note. Being the principal contract, the promissory note is unaffected by whatever befalls
the subject matter of the accessory contract. Therefore, the unpaid balance on the promissory note
should be paid, and not just the installments due and payable before the automobile was carnapped,
as erronously held by the Court of Appeals.

However, this does not mean that private respondents are bound to pay the interest, litigation
expenses and attorney's fees stipulated in the promissory note. Because of the peculiar relationship
between the three contracts in this case, i.e., the promissory note, the chattel mortgage contract and
the insurance policy, this Court is compelled to construe all three contracts as intimately interrelated
to each other, despite the fact that at first glance there is no relationship whatsoever between the
parties thereto.

Under the promissory note, private respondents are obliged to pay Supercars, Inc. the amount
stated therein in accordance with the schedule provided for. To secure said promissory note, private
respondents constituted a chattel mortgage in favor of Supercars, Inc. over the automobile the
former purchased from the latter. The chattel mortgage, in turn, required private respondents to
insure the automobile and to make the proceeds thereof payable to Supercars, Inc. The promissory
note and chattel mortgage were assigned by Supercars, Inc. to petitioner FCP, with the knowledge
of private respondents. Private respondents were able to secure an insurance policy from petitioner
Perla, and the same was made specifically payable to petitioner FCP. 16

The insurance policy was therefore meant to be an additional security to the principal contract, that
is, to insure that the promissory note will still be paid in case the automobile is lost through accident
or theft. The Chattel Mortgage Contract provided that:

THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE
THE PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST
LOSS OR DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE
YEAR FROM DATE HEREOF AND EVERY YEAR THEREAFTER UNTIL THE
MORTGAGE OBLIGATION IS FULLY PAID WITH AN INSURANCE COMPANY OR
COMPANIES ACCEPTABLE TO THE MORTGAGEE IN AN AMOUNT NOT LESS
THAN THE OUTSTANDING BALANCE OF THE MORTGAGE OBLIGATION; THAT
HE/IT WILL MAKE ALL LOSS, IF ANY, UNDER SUCH POLICY OR POLICIES,
 PAYABLE TO THE MORTGAGE OR ITS ASSIGNS AS ITS INTERESTS MAY
APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE
MORTGAGEE, . . . . 17

It is clear from the abovementioned provision that upon the loss of the insured vehicle, the insurance
company Perla undertakes to pay directly to the mortgagor or to their assignee, FCP, the
outstanding balance of the mortgage at the time of said loss under the mortgage contract. If the
claim on the insurance policy had been approved by petitioner Perla, it would have paid the
proceeds thereof directly to petitioner FCP, and this would have had the effect of extinguishing
private respondents' obligation to petitioner FCP. Therefore, private respondents were justified in
asking petitioner FCP to demand the unpaid installments from petitioner Perla.

Because petitioner Perla had unreasonably denied their valid claim, private respondents should not
be made to pay the interest, liquidated damages and attorney's fees as stipulated in the promissory
note. As mentioned above, the contract of indemnity was procured to insure the return of the money
loaned from petitioner FCP, and the unjustified refusal of petitioner Perla to recognize the valid claim
of the private respondents should not in any way prejudice the latter.

Private respondents can not be said to have unduly enriched themselves at the expense of petitioner
FCP since they will be required to pay the latter the unpaid balance of its obligation under the
promissory note.

In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring
petitioner Perla to indemnify private respondents for the loss of their insured vehicle. However, the
latter should be ordered to pay petitioner FCP the amount of P55,055.93, representing the unpaid
installments from December 30, 1982 up to July 1, 1983, as shown in the statement of account
prepared by petitioner FCP, 18 plus legal interest from July 2, 1983 until fully paid.

As to the award of moral damages, exemplary damages and attorney's fees, private respondents are
legally entitled to the same since petitioner Perla had acted in bad faith by unreasonably refusing to
honor the insurance claim of the private respondents. Besides, awards for moral and exemplary
damages, as well as attorney's fees are left to the sound discretion of the Court. Such discretion, if
well exercised, will not be disturbed on appeal. 19

WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require private
respondents to pay petitioner FCP the amount of P55,055.93, with legal interest from July 2, 1983
until fully paid. The decision appealed from is hereby affirmed as to all other respects. No
pronouncement as to costs.

SO ORDERED.

Melencio-Herrera, Paras, Padilla and Regalado, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,

vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is
liable under the Money, Security, and Payroll Robbery policy it issued to the private respondent or
whether recovery thereunder is precluded under the general exceptions clause thereof. Both the trial
court and the Court of Appeals held that there should be recovery. The petitioner contends
otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by
private respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner
Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum
of P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of
Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to
its head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch
146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following
stipulation of facts:

1. The plaintiff was insured by the defendants and an insurance

policy was issued, the duplicate original of which is hereto attached
as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring

cash in the sum of P725,000.00 under the custody of its teller,
Maribeth Alampay, from its Pasay Branch to its Head Office at 8737
Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was
robbed of the said cash. The robbery took place while the armored
car was traveling along Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de

Vera, escorted by Security Guard Saturnino Atiga Y Rosete. Driver
Magalong was assigned by PRC Management Systems with the
plaintiff by virtue of an Agreement executed on August 7, 1983, a
duplicate original copy of which is hereto attached as Exhibit "B";
 4. The Security Guard Atiga was assigned by Unicorn Security
Services, Inc. with the plaintiff by virtue of a contract of Security
Service executed on October 25, 1982, a duplicate original copy of
which is hereto attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities,

the driver Magalong and guard Atiga were charged, together with
Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe, with
violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of
Pasay City. A copy of the complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the

aforesaid persons with the said crime before Branch 112 of the
Regional Trial Court of Pasay City. A copy of the said information is
hereto attached as Exhibit "E." The case is still being tried as of this
date;

7. Demands were made by the plaintiff upon the defendant to pay the
amount of the loss of P725,000.00, but the latter refused to pay as
the loss is excluded from the coverage of the insurance policy,
attached hereto as Exhibit "A," specifically under page 1 thereof,
"General Exceptions" Section (b), which is marked as Exhibit "A-1,"
and which reads as follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or

criminal act of the insured or any officer, employee,
partner, director, trustee or authorized
representative of the Insured whether acting alone or
in conjunction with others. . . .

8. The plaintiff opposes the contention of the defendant and contends

that Atiga and Magalong are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the robbery.1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion
thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against
defendant, and

(a) orders defendant to pay plaintiff the net amount of

P540,000.00 as liability under Policy No. 0207 (as
mitigated by the P40,000.00 special clause deduction
and by the recovered sum of P145,000.00), with
interest thereon at the legal rate, until fully paid;
 (b) orders defendant to pay plaintiff the sum of
P30,000.00 as and for attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It
Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged
Magalong and Atiga, their services as armored car driver and as security guard
having been merely offered by PRC Management and by Unicorn Security and which
latter firms assigned them to plaintiff. The wages and salaries of both Magalong and
Atiga are presumably paid by their respective firms, which alone wields the power to
dismiss them. Magalong and Atiga are assigned to plaintiff in fulfillment of
agreements to provide driving services and property protection as such — in a
context which does not impress the Court as translating into plaintiff's power to
control the conduct of any assigned driver or security guard, beyond perhaps entitling
plaintiff to request are replacement for such driver guard. The finding is accordingly
compelled that neither Magalong nor Atiga were plaintiff's "employees" in avoidance
of defendant's liability under the policy, particularly the general exceptions therein
embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and
guard Atiga were the "authorized representatives" of plaintiff. They were merely an
assigned armored car driver and security guard, respectively, for the June 29, 1987
money transfer from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly
— it was teller Maribeth Alampay who had "custody" of the P725,000.00 cash being
transferred along a specified money route, and hence plaintiff's then designated
"messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were
neither employees nor authorized representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured

and strictly against the insurance company (New Life Enterprises vs. Court of
Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA
554). Contracts of insurance, like other contracts, are to be construed according to
the sense and meaning of the terms which the parties themselves have used. If such
terms are clear and unambiguous, they must be taken and understood in their plain,
ordinary and popular sense (New Life Enterprises Case, supra, p. 676; Sun
Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain,

ordinary and simple. No other interpretation is necessary. The word "employee" must
be taken to mean in the ordinary sense.
 The Labor Code is a special law specifically dealing with/and specifically designed to
protect labor and therefore its definition as to employer-employee relationships
insofar as the application/enforcement of said Code is concerned must necessarily
be inapplicable to an insurance contract which defendant-appellant itself had
formulated. Had it intended to apply the Labor Code in defining what the word
"employee" refers to, it must/should have so stated expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-

appellee bank because it has no power to hire or to dismiss said driver and security
guard under the contracts (Exhs. 8 and C) except only to ask for their replacements
from the contractors.5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and
the Court of Appeals erred in holding it liable under the insurance policy because the loss falls within
the general exceptions clause considering that driver Magalong and security guard Atiga were
Producers' authorized representatives or employees in the transfer of the money and payroll from its
branch office in Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from
one branch to another, they effectively and necessarily became its authorized representatives in the
care and custody of the money. Assuming that they could not be considered authorized
representatives, they were, nevertheless, employees of Producers. It asserts that the existence of an
employer-employee relationship "is determined by law and being such, it cannot be the subject of
agreement." Thus, if there was in reality an employer-employee relationship between Producers, on
the one hand, and Magalong and Atiga, on the other, the provisions in the contracts of Producers
with PRC Management System for Magalong and with Unicorn Security Services for Atiga which
state that Producers is not their employer and that it is absolved from any liability as an employer,
would not obliterate the relationship.

Fortune points out that an employer-employee relationship depends upon four standards: (1) the
manner of selection and engagement of the putative employee; (2) the mode of payment of wages;
(3) the presence or absence of a power to dismiss; and (4) the presence and absence of a power to
control the putative employee's conduct. Of the four, the right-of-control test has been held to be the
decisive factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and
exercised by Producers. Fortune further insists that PRC Management System and Unicorn Security
Services are but "labor-only" contractors under Article 106 of the Labor Code which provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting where the

person supplying workers to an employer does not have substantial capital or
investment in the form of tools, equipment, machineries, work premises, among
others, and the workers recruited and placed by such persons are performing
activities which are directly related to the principal business of such employer. In
such cases, the person or intermediary shall be considered merely as an agent of the
employer who shall be responsible to the workers in the same manner and extent as
if the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is
equivalent to a finding that there is an employer-employee relationship between the owner of the
project and the employees of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its employees since it had
nothing to do with their selection and engagement, the payment of their wages, their dismissal, and
the control of their conduct. Producers argued that the rule in International Timber Corp. is not
applicable to all cases but only when it becomes necessary to prevent any violation or circumvention
of the Labor Code, a social legislation whose provisions may set aside contracts entered into by
parties in order to give protection to the working man.

Producers further asseverates that what should be applied is the rule in American President Lines
vs. Clave, 8 to wit:

In determining the existence of employer-employee relationship, the following

elements are generally considered, namely: (1) the selection and engagement of the
employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power to
control the employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned
Magalong as the driver of Producers' armored car and was responsible for his faithful discharge of
his duties and responsibilities, and since Producers paid the monthly compensation of P1,400.00 per
driver to PRC Management Systems and not to Magalong, it is clear that Magalong was not
Producers' employee. As to Atiga, Producers relies on the provision of its contract with Unicorn
Security Services which provides that the guards of the latter "are in no sense employees of the
CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance
policy which is a form of casualty insurance. Section 174 of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from
accident or mishap, excluding certain types of loss which by law or custom are
considered as falling exclusively within the scope of insurance such as fire or marine.
It includes, but is not limited to, employer's liability insurance, public liability
insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft
insurance, personal accident and health insurance as written by non-life insurance
companies, and other substantially similar kinds of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to robbery insurance in particular. These
contracts are, therefore, governed by the general provisions applicable to all types of insurance.
Outside of these, the rights and obligations of the parties must be determined by the terms of their
contract, taking into consideration its purpose and always in accordance with the general principles
of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud
the insurer — the moral hazard — is so great that insurers have found it necessary to fill up their
policies with countless restrictions, many designed to reduce this hazard. Seldom does the insurer
assume the risk of all losses due to the hazards insured against." 10 Persons frequently excluded
under such provisions are those in the insured's service and employment. 11 The purpose of the
exception is to guard against liability should the theft be committed by one having unrestricted
access to the property. 12 In such cases, the terms specifying the excluded classes are to be given
their meaning as understood in common speech. 13 The terms "service" and "employment" are
generally associated with the idea of selection, control, and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved
against the insurer, 15 or it should be construed liberally in favor of the insured and strictly against the
insurer. 16 Limitations of liability should be regarded with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without
saying then that if the terms of the contract are clear and unambiguous, there is no room for
construction and such terms cannot be enlarged or diminished by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It
is settled that the terms of the policy constitute the measure of the insurer's liability. 20 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.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as
employees or authorized representatives of Producers under paragraph (b) of the general
exceptions clause of the policy which, for easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or
authorized representative of the Insured whether acting alone or in
conjunction with others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of the terms "employee"
and "authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from
protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons
granted or having unrestricted access to Producers' money or payroll. When it used then the term
"employee," it must have had in mind any person who qualifies as such as generally and universally
understood, or jurisprudentially established in the light of the four standards in the determination of
the employer-employee relationship, 21 or as statutorily declared even in a limited sense as in the
case of Article 106 of the Labor Code which considers the employees under a "labor-only" contract
as employees of the party employing them and not of the party who supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security
Services are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of
Magalong. Notwithstanding such express assumption of PRC Management Systems and
Unicorn Security Services that the drivers and the security guards each shall supply to
Producers are not the latter's employees, it may, in fact, be that it is because the contracts
are, indeed, "labor-only" contracts. Whether they are is, in the light of the criteria provided for
in Article 106 of the Labor Code, a question of fact. Since the parties opted to submit the
case for judgment on the basis of their stipulation of facts which are strictly limited to the
insurance policy, the contracts with PRC Management Systems and Unicorn Security
Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the
 City Fiscal of Pasay City, there is a paucity of evidence as to whether the contracts between
Producers and PRC Management Systems and Unicorn Security Services are "labor-only"
contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and
PRC Management Systems and Unicorn Security Services were truly independent contractors, we
are satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its
Pasay City branch to its head office in Makati, its "authorized representatives" who served as such
with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific
duty to safely transfer the money to its head office, with Alampay to be responsible for its custody in
transit; Magalong to drive the armored vehicle which would carry the money; and Atiga to provide
the needed security for the money, the vehicle, and his two other companions. In short, for these
particular tasks, the three acted as agents of Producers. A "representative" is defined as one who
represents or stands in the place of another; one who represents others or another in a special
capacity, as an agent, and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court
of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No.
1817 is DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo and Kapunan, JJ., concur.

Padilla, J., took no part.

Quiason, J., is on leave.

 FIRST DIVISION

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

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER

INSURANCE AND SURETY CORPORATION AND THE
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., respondents.

DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the
Court of Appeals in CA-G.R. SP No. 60144, affirming the Decision[2] dated May
3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both
decisions held that there was no violation of the Insurance Code and the
respondents do not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance
and Surety Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.[3] Pioneer also issued receipts evidencing
payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection
of sum of money to recover the latters unpaid balance. White Gold on the other
hand, filed a complaint before the Insurance Commission claiming that
Steamship Mutual violated Sections 186[4] and 187[5] of the Insurance Code,
while Pioneer violated Sections 299,[6] 300[7] and 301[8] in relation to Sections
302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was
no need for Steamship Mutual to secure a license because it was not engaged
in the insurance business. It explained that Steamship Mutual was a Protection
and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another
license as insurance agent and/or a broker for Steamship Mutual because
Steamship Mutual was not engaged in the insurance business. Moreover,
Pioneer was already licensed, hence, a separate license solely as agent/broker
of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner.
In its decision, the appellate court distinguished between P & I Clubs vis--
vis conventional insurance. The appellate court also held that Pioneer merely
acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed
by the appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT

STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE
GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS
AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A
LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS

BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED
IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT

PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR
AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF

RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.[9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need
a license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual
admits it does not have a license to do business in the Philippines although
Pioneer is its resident agent. This relationship is reflected in the certifications
issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the
insurance business. To buttress its assertion, it cites the definition of a P & I
Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals[10] as an association
composed of shipowners in general who band together for the specific purpose
of providing insurance cover on a mutual basis against liabilities incidental to
shipowning that the members incur in favor of third parties. It stresses that as a
P & I Club, Steamship Mutuals primary purpose is to solicit and provide
protection and indemnity coverage and for this purpose, it has engaged the
services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is
not engaged in the insurance business in the Philippines. It is merely an
association of vessel owners who have come together to provide mutual
protection against liabilities incidental to shipowning.[11] Respondents
aver Hyopsung is inapplicable in this case because the issue in Hyopsung was
the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an
insurance business or transacting an insurance business. These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a

vocation and not as merely incidental to any other legitimate business or
activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the
meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions, or that no separate
or direct consideration is received therefor, shall not preclude the existence of
an insurance business.[12]
 The test to determine if a contract is an insurance contract or not, depends
on the nature of the promise, the act required to be performed, and the exact
nature of the agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes requisite. It is not by
what it is called.[13]
Basically, an insurance contract is a contract of indemnity. In it, one
undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured
against marine losses, such as the losses incident to a marine
adventure.[15] Section 99[16] of the Insurance Code enumerates the coverage of
marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where
the members are both the insurer and insured. In it, the members all contribute,
by a system of premiums or assessments, to the creation of a fund from which
all losses and liabilities are paid, and where the profits are divided among
themselves, in proportion to their interest.[17] Additionally, mutual insurance
associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the
third party is anyone other than the P & I Club and the members.[19] By definition
then, Steamship Mutual as a P & I Club is a mutual insurance association
engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit
without the requisite certificate of authority mandated by Section 187 [20] of the
Insurance Code. It maintains a resident agent in the Philippines to solicit
insurance and to collect payments in its behalf. We note that Steamship Mutual
even renewed its P & I Club cover until it was cancelled due to non-payment of
the calls. Thus, to continue doing business here, Steamship Mutual or through
its agent Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State
is necessary. Thus, no insurer or insurance company is allowed to engage in
the insurance business without a license or a certificate of authority from the
Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special
license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the
certificate of registration[22] issued by the Insurance Commission. It has been
licensed to do or transact insurance business by virtue of the certificate of
authority[23] issued by the same agency. However, a Certification from the
Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a
separate license to act as insurance agent for Steamship Mutual. Section 299
of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation

or procurement of applications for insurance, or receive for services in obtaining
insurance, any commission or other compensation from any insurance company doing
business in the Philippines or any agent thereof, without first procuring a license so to
act from the Commissioner, which must be renewed annually on the first day of
January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and

removal of its directors and officers. Regrettably, we are not the forum for these
issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated
July 30, 2002 of the Court of Appeals affirming the Decision dated May 3, 2000
of the Insurance Commission is hereby REVERSED AND SET ASIDE. The
Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer
Insurance and Surety Corporation are ORDERED to obtain licenses and to
secure proper authorizations to do business as insurer and insurance agent,
respectively. The petitioners prayer for the revocation of Pioneers Certificate of
Authority and removal of its directors and officers, is DENIED. Costs against
respondents.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,
JJ., concur.
 FIRST DIVISION

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF

APPEALS and JULITA TRINOS, respondents.

DECISION
YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health
care coverage with petitioner Philamcare Health Systems, Inc. In the standard
application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer?
(If Yes, give details).[1]

The application was approved for a period of one year from March 1, 1988 to March
1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the
agreement, respondents husband was entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein. He was also entitled to avail of out-
patient benefits such as annual physical examinations, preventive health care and other
out-patient services.
Upon the termination of the agreement, the same was extended for another year
from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The
amount of coverage was increased to a maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined
at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While
her husband was in the hospital, respondent tried to claim the benefits under the health
care agreement. However, petitioner denied her claim saying that the Health Care
Agreement was void. According to petitioner, there was a concealment regarding
Ernanis medical history. Doctors at the MMC allegedly discovered at the time of
Ernanis confinement that he was hypertensive, diabetic and asthmatic, contrary to his
answer in the application form. Thus, respondent paid the hospitalization expenses
herself, amounting to about P76,000.00.
 After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent
was constrained to bring him back to the Chinese General Hospital where he died on
the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorneys fees. After trial, the
lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid
to plaintiff who paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to

plaintiff;

4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted
all awards for damages and absolved petitioner Reverente.[4] Petitioners motion for
reconsideration was denied.[5]Hence, petitioner brought the instant petition for review,
raising the primary argument that a health care agreement is not an insurance contract;
hence the incontestability clause under the Insurance Code[6]does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-
ups and hospitalization which a member may immediately enjoy so long as he is alive
upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also
points out that only medical and hospitalization benefits are given under the agreement
without any indemnification, unlike in an insurance contract where the insured is
indemnified for his loss. Moreover, since Health Care Agreements are only for a period
of one year, as compared to insurance contracts which last longer, [7] petitioner argues
that the incontestability clause does not apply, as the same requires an effectivity period
of at least two years. Petitioner further argues that it is not an insurance company, which
is governed by the Insurance Commission, but a Health Maintenance Organization
under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. An insurance contract exists
where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.[8]
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest against
him, may be insured against. Every person has an insurable interest in the life
and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining the
health care agreement was his own health. The health care agreement was in the nature
of non-life insurance, which is primarily a contract of indemnity.[9] Once the member
incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same to the extent agreed
upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners required
respondents husband to sign an express authorization for any person, organization or
entity that has any record or knowledge of his health to furnish any and all information
relative to any hospitalization, consultation, treatment or any other medical advice or
examination.[10] Specifically, the Health Care Agreement signed by respondents
husband states:

We hereby declare and agree that all statement and answers contained herein and in
any addendum annexed to this application are full, complete and true and bind all
parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied
for is actually paid during the lifetime and good health of proposed Members; that no
information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime relative to any
information acquired by him in his professional capacity upon any question affecting
the eligibility for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be a ratification of any
correction in or addition to this application as stated in the space for Home Office
Endorsement.[11] (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicants medical history, thus:

I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare Health
Systems, Inc. any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. This authorization is in
connection with the application for health care coverage only. A photographic copy of
this authorization shall be as valid as the original.[12] (Underscoring ours)

Petitioner cannot rely on the stipulation regarding Invalidation of agreement which

reads:

Failure to disclose or misrepresentation of any material information by the member in

the application or medical examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation would have resulted in
the declination of the applicant by Philamcare or the assessment of a higher
Membership Fee for the benefit or benefits applied for.[13]
 The answer assailed by petitioner was in response to the question relating to the
medical history of the applicant. This largely depends on opinion rather than fact,
especially coming from respondents husband who was not a medical doctor. Where
matters of opinion or judgment are called for, answers made in good faith and without
intent to deceive will not avoid a policy even though they are untrue.[14]Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or

judgment of the insured will not avoid the policy if there is no actual fraud in inducing
the acceptance of the risk, or its acceptance at a lower rate of premium, and this is
likewise the rule although the statement is material to the risk, if the statement is
obviously of the foregoing character, since in such case the insurer is not justified in
relying upon such statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is fraudulently and
intentionally states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the facts
within his knowledge, since in such case the intent to deceive the insurer is obvious
and amounts to actual fraud.[15] (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.[16] Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate, petitioner is liable for
claims made under the contract. Having assumed a responsibility under the agreement,
petitioner is bound to answer the same to the extent agreed upon. In the end, the liability
of the health care provider attaches once the member is hospitalized for the disease or
injury covered by the agreement or whenever he avails of the covered benefits which
he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to
rescind a contract of insurance. The right to rescind should be exercised previous to the
commencement of an action on the contract.[17] In this case, no rescission was
made. Besides, the cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or
more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code
and upon request of insured, to furnish facts on which cancellation is based.[18]

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

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health
Systems Inc. had twelve months from the date of issuance of the Agreement within
which to contest the membership of the patient if he had previous ailment of asthma,
and six months from the issuance of the agreement if the patient was sick of diabetes
or hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.[23]

Finally, petitioner alleges that respondent was not the legal wife of the deceased
member considering that at the time of their marriage, the deceased was previously
married to another woman who was still alive. The health care agreement is in the nature
of a contract of indemnity. Hence, payment should be made to the party who incurred
the expenses. It is not controverted that respondent paid all the hospital and medical
expenses. She is therefore entitled to reimbursement. The records adequately prove the
expenses incurred by respondent for the deceaseds hospitalization, medication and the
professional fees of the attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.