G.R. No. 125678 March 18, 2002
00 as exemplary damages
PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
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, respondent’s 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 Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s
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 attorney’s 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.
to plaintiff;
4. Defendants to pay attorney’s 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 Petitioner’s 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.1âwphi1.nêt
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 insurer’s 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 respondent’s 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 respondent’s husband concealed a material fact in his application. It appears that
in the application for health coverage, petitioners required respondent’s 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 respondent’s 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 applicant’s 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 respondent’s 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 respondent’s 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 deceased’s hospitalization, medication and the professional
fees of the attending physicians.24
No medical examination shall be required for amounts of insurance up to
P50,000.00. However, a declaration of good health shall be required for all Lot
Purchasers as part of the application. The Company reserves the right to require
further evidence of insurability satisfactory to the Company in respect of the
following:
1. Any amount of insurance in excess of P50,000.00.

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of
Appeals dated December 14, 1995 is AFFIRMED. 2. Any lot purchaser who is more than 55 years of age.

SO ORDERED. LIFE INSURANCE BENEFIT.

Davide, Jr., C.J., Puno, and Kapunan, JJ., concur. The Life Insurance coverage of any Lot Purchaser at any time shall be the amount
of the unpaid balance of his loan (including arrears up to but not exceeding 2
months) as reported by the Assured to the Company or the sum of P100,000.00,
whichever is smaller. Such benefit shall be paid to the Assured if the Lot Purchaser
dies while insured under the Policy.
G.R. No. 166245 April 9, 2008
EFFECTIVE DATE OF BENEFIT.
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent. The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if the
application of the Lot Purchaser is not approved by the Company.3
DECISION
Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together with
VELASCO, JR., J.: a copy of the application of each purchaser, and the amounts of the respective unpaid balances of all
insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter dated
December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982. One of
The Case those included in the list as "new business" was a certain John Chuang. His balance of payments was
PhP 100,000. On August 2, 1984, Chuang died.
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the
November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
the inaction of the insurer on the insurance application be considered as approval of the application? Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate of Death;
(2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of
The Facts Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.

On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered
into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal
Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased
burial lots from it on installment basis would be insured by Philamlife. The amount of insurance coverage
depended upon the existing balance of the purchased burial lots. The policy was to be effective for a
period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the following
documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant (with form
attached); (2) Assured’s Certificate (with form attached); (3) Application for Insurance accomplished and
signed by the insured, Chuang, while still living; and (4) Statement of Account showing the unpaid
balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was
received by Philamlife on November 15, 1984.

ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of
age, is indebted to the Assured for the unpaid balance of his loan with the Assured,
and is accepted for Life Insurance coverage by the Company on its effective date
is eligible for insurance under the Policy.
After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s insurance claim.
This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on April 25,
1986.8
In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a letter dated May 20,
1986,9 a portion of which reads:

EVIDENCE OF INSURABILITY. The deceased was 59 years old when he entered into Contract #9558 and 9529
with Eternal Gardens Memorial Park in October 1982 for the total maximum
 insurable amount of P100,000.00 each. No application for Group Insurance was
submitted in our office prior to his death on August 2, 1984.
In accordance with our Creditor’s Group Life Policy No. P-1920, under Evidence
of Insurability provision, "a declaration of good health shall be required for all Lot
Purchasers as party of the application." We cite further the provision on Effective
Date of Coverage under the policy which states that "there shall be no insurance
if the application is not approved by the Company." Since no application had been
submitted by the Insured/Assured, prior to his death, for our approval but was
submitted instead on November 15, 1984, after his death, Mr. John Uy Chuang
was not covered under the Policy. We wish to point out that Eternal Gardens being
the Assured was a party to the Contract and was therefore aware of these pertinent
provisions.
With regard to our acceptance of premiums, these do not connote our approval per
se of the insurance coverage but are held by us in trust for the payor until the
prerequisites for insurance coverage shall have been met. We will however, return
all the premiums which have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money
against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant
PHILAMLIFE, to pay the sum of P100,000.00, representing the proceeds of the
Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and, to pay
the sum of P10,000.00 as attorney’s fees.
SO ORDERED.
The RTC found that Eternal submitted Chuang’s application for insurance which he accomplished before
his death, as testified to by Eternal’s witness and evidenced by the letter dated December 29, 1982,
stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further ruled that due
to Philamlife’s inaction from the submission of the requirements of the group insurance on December 29,
1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s acceptance of the premiums during
the same period, Philamlife was deemed to have approved Chuang’s application. The RTC said that
since the contract is a group life insurance, once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No.
57810 is REVERSED and SET ASIDE, and the complaint is DISMISSED. No
costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuang’s application was not enclosed in Eternal’s
letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted application
form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no application
form, Chuang was not covered by Philamlife’s insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not
therefore determined by this Honorable Court, or has decided it in a way not in
accord with law or with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent
PhilamLife before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court
dated May 29, 1996.
The Court’s Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the
CA and first level courts, considering their findings of facts are conclusive and binding on this Court.
However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of facts are conflicting;
(6) when in making its findings the [CA] went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings [of the CA] are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they are
based; (9) when the facts set forth in the petition as well as in the petitioner’s main
and reply briefs are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and contradicted by the
evidence on record; and (11) when the Court of Appeals manifestly overlooked
certain relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review
them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternal’s letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was
apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of
the insurance application which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that
Eternal must present evidence showing that Philamlife received a copy of Chuang’s insurance
application.
The evidence on record supports Eternal’s position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such
stamp of receipt has the effect of acknowledging receipt of the letter together with the attachments. Such
receipt is an admission by Philamlife against its own interest. 13 The burden of evidence has shifted to
Philamlife, which must prove that the letter did not contain Chuang’s insurance application. However,
Philamlife failed to do so; thus, Philamlife is deemed to have received Chuang’s insurance application.
To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter is stamped as
received, the contents of the letter are correct and accounted for.
Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to inconsistencies
is groundless. The trial court is in the best position to determine the reliability and credibility of the
witnesses, because it has the opportunity to observe firsthand the witnesses’ demeanor, conduct, and
attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court,
unless some facts or circumstances of weight and substance have been overlooked, misapprehended,
or misinterpreted,14 that, if considered, might affect the result of the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no
overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new
coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of
this form and the original of this is submitted to Philamlife together with the monthly
remittances and the second copy is remained or retained with the marketing
department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely
asking for the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with
that payment together with the new clients all the originals I see to it before I sign
the transmittal letter the originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled out
the application form, these are minor inconsistencies that do not affect the credibility of the witnesses.
Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate any suspicion that
the testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the
prosecution’s evidence as a whole or reflect on the witnesses’ honesty. The test is
whether the testimonies agree on essential facts and whether the respective
versions corroborate and substantially coincide with each other so as to make a
consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is not at
issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternal’s witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life
Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if the
application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became effective
upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve
the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest.
Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be construed liberally in
favor of the insured and strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to
preclude the insurer from noncompliance with its obligations.19 (Emphasis
supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with
 his obligation. Being a contract of adhesion, the terms of an insurance contract are
to be construed strictly against the party which prepared the contract, the insurer.
By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted
against the insurer and liberally in favor of the insured, especially to avoid
forfeiture.20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10,
1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a party’s
purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser
is created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the
insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective
Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance
contract. Moreover, the mere inaction of the insurer on the insurance application must not work to
prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The termination
of the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance contracts
are contracts of adhesion containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of insurance. As such,
insurance contracts are imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of
insurance applicants, insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor the application as a
valid, binding, and effective insurance contract.21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810
is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138 is
MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the
Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP
100,000 from the time of extra-judicial demand by Eternal until Philamlife’s receipt
of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of
PhP 100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorney’s fees in the amount of PhP 10,000.
No costs.
SO ORDERED.
Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur.
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in
the sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street,
Binondo Manila. On February 27, 1942, or during the Japanese military occupation, the building and
insured merchandise were burned. In due time the respondent submitted to the petitioner its claim under
the policy. The salvage goods were sold at public auction and, after deducting their value, the total loss
suffered by the respondent was fixed at P92,650. The petitioner refused to pay the claim on the ground
that the policy in favor of the respondent had ceased to be in force on the date the United States declared
war against Germany, the respondent Corporation (though organized under and by virtue of the laws of
the Philippines) being controlled by the German subjects and the petitioner being a company under
American jurisdiction when said policy was issued on October 1, 1941. The petitioner, however, in
pursuance of the order of the Director of Bureau of Financing, Philippine Executive Commission, dated
April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose
of recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is
that the insured merchandise were burned up after the policy issued in 1941 in favor of the respondent
corporation has ceased to be effective because of the outbreak of the war between the United States
and Germany on December 10, 1941, and that the payment made by the petitioner to the respondent
corporation during the Japanese military occupation was under pressure. After trial, the Court of First
Instance of Manila dismissed the action without pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of Manila was affirmed, with costs. The case is now
before us on appeal by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent corporation became
an enemy when the United States declared war against Germany, relying on English and American
cases which held that a corporation is a citizen of the country or state by and under the laws of which it
was created or organized. It rejected the theory that nationality of private corporation is determine by the
character or citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation were German
subjects. This being so, we have to rule that said respondent became an enemy corporation upon the
outbreak of the war between the United States and Germany. The English and American cases relied
upon by the Court of Appeals have lost their force in view of the latest decision of the Supreme Court of
the United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed.
Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In "Enemy
Corporation" by Martin Domke, a paper presented to the Second International Conference of the Legal
Profession held at the Hague (Netherlands) in August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies, namely managed under the
influence of individuals or corporations, themselves considered as enemies. It was
the English courts which first the Daimler case applied this new concept of "piercing
the corporate veil," which was adopted by the peace of Treaties of 1919 and the
Mixed Arbitral established after the First World War.
 The United States of America did not adopt the control test during the First World
War. Courts refused to recognized the concept whereby American-registered
corporations could be considered as enemies and thus subject to domestic
legislation and administrative measures regarding enemy property.
World War II revived the problem again. It was known that German and other
enemy interests were cloaked by domestic corporation structure. It was not only
by legal ownership of shares that a material influence could be exercised on the
management of the corporation but also by long term loans and other factual
situations. For that reason, legislation on enemy property enacted in various
countries during World War II adopted by statutory provisions to the control test
and determined, to various degrees, the incidents of control. Court decisions were
rendered on the basis of such newly enacted statutory provisions in determining
enemy character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act
during the last war, include as did other legislations the applications of the control
test and again, as in World War I, courts refused to apply this concept whereby the
enemy character of an American or neutral-registered corporation is determined
by the enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United
States allowed to large degree the determination of enemy interest in domestic
corporations and thus the application of the control test. Court decisions
sanctioned such administrative practice enacted under the First War Powers Act
of 1941, and more recently, on December 8, 1947, the Supreme Court of the
United States definitely approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss corporation allegedly controlled by
German interest, the Court: "The property of all foreign interest was placed within
the reach of the vesting power (of the Alien Property Custodian) not to appropriate
friendly or neutral assets but to reach enemy interest which masqueraded under
those innocent fronts. . . . The power of seizure and vesting was extended to all
property of any foreign country or national so that no innocent appearing device
could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed
decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9)
299, we already held that China Banking Corporation came within the meaning of the word "enemy" as
used in the Trading with the Enemy Acts of civilized countries not only because it was incorporated under
the laws of an enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a
public enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.
Effect of war, generally. — All intercourse between citizens of belligerent powers
which is inconsistent with a state of war is prohibited by the law of nations. Such
prohibition includes all negotiations, commerce, or trading with the enemy; all acts
which will increase, or tend to increase, its income or resources; all acts of
voluntary submission to it; or receiving its protection; also all acts concerning the
transmission of money or goods; and all contracts relating thereto are thereby
nullified. It further prohibits insurance upon trade with or by the enemy, upon the
life or lives of aliens engaged in service with the enemy; this for the reason that the
subjects of one country cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien subjects, or to do anything
detrimental too their country's interest. The purpose of war is to cripple the power
and exhaust the resources of the enemy, and it is inconsistent that one country
should destroy its enemy's property and repay in insurance the value of what has
been so destroyed, or that it should in such manner increase the resources of the
enemy, or render it aid, and the commencement of war determines, for like
reasons, all trading intercourse with the enemy, which prior thereto may have been
lawful. All individuals therefore, who compose the belligerent powers, exist, as to
each other, in a state of utter exclusion, and are public enemies. (6 Couch, Cyc. of
Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for
some other specified term it is plain that when the parties become alien enemies,
the contractual tie is broken and the contractual rights of the parties, so far as not
vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance policy
issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid
and enforcible, and since the insured goods were burned after December 10, 1941, and during the war,
the respondent was not entitled to any indemnity under said policy from the petitioner. However,
elementary rules of justice (in the absence of specific provision in the Insurance Law) require that the
premium paid by the respondent for the period covered by its policy from December 11, 1941, should be
returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether
the policy in question became null and void upon the declaration of war between the United States and
Germany on December 10, 1941, and its judgment in favor of the respondent corporation was predicated
on its conclusion that the policy did not cease to be in force. The Court of Appeals necessarily assumed
that, even if the payment by the petitioner to the respondent was involuntary, its action is not tenable in
view of the ruling on the validity of the policy. As a matter of fact, the Court of Appeals held that "any
intimidation resorted to by the appellee was not unjust but the exercise of its lawful right to claim for and
received the payment of the insurance policy," and that the ruling of the Bureau of Financing to the effect
that "the appellee was entitled to payment from the appellant was, well founded." Factually, there can be
no doubt that the Director of the Bureau of Financing, in ordering the petitioner to pay the claim of the
respondent, merely obeyed the instruction of the Japanese Military Administration, as may be seen from
the following: "In view of the findings and conclusion of this office contained in its decision on
Administrative Case dated February 9, 1943 copy of which was sent to your office and the concurrence
therein of the Financial Department of the Japanese Military Administration, and following the instruction
of said authority, you are hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc.
The payment of said claim, however, should be made by means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the circumstances
on this case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines
currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay
to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine
currency, that should be returned by the petitioner for the unexpired term of the policy in question,
beginning December 11, 1941. Without costs. So ordered.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.
G.R. No. L-1669 August 31, 1950
PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670 August 31, 1950
AGUSTINA PERALTA, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for decision of the question
whether the beneficiary in a life insurance policy may recover the amount thereof although the insured
died after repeatedly failing to pay the stipulated premiums, such failure having been caused by the last
war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life
Insurance Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued on
September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio Constantino
for a term of twenty years. The first premium covered the period up to September 26, 1942. The plaintiff
Paz Lopez de Constantino was regularly appointed beneficiary. The policy contained these stipulations,
among others:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application here for a copy of which is attached hereto and is hereby made a part
hereof made a part hereof, and of the payment in advance during the lifetime and
good health of the Insured of the annual premium of One Hundred fifty-eight and
4/100 pesos Philippine currency1 and of the payment of a like amount upon each
twenty-seventh day of September hereafter during the term of Twenty years or
until the prior death of the Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any unpunctuality in making any
such payment shall cause this policy to lapse unless and except as kept in force
by the Grace Period condition or under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its branch office in Manila
by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of the
spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium stipulated in the
policy was regularly paid from August 1, 1938, up to and including September 30, 1941. Effective August
1, 1941, the mode of payment of premiums was changed from annual to quarterly, so that quarterly
premiums were paid, the last having been delivered on November 18, 1941, said payment covering the
period up to January 31, 1942. No further payments were handed to the insurer. Upon the Japanese
occupation, the insured and the insurer became separated by the lines of war, and it was impossible and
illegal for them to deal with each other. Because the insured had borrowed on the policy an mount of
P234.00 in January, 1941, the cash surrender value of the policy was sufficient to maintain the policy in
force only up to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff Agustina
Peralta is his beneficiary. Her demand for payment met with defendant's refusal, grounded on non-
payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application herefor, a copy of which is attached hereto and is hereby made apart
hereof, and of the payment in advance during the life time and good health of the
Insured of the annual premium of Two hundred and 43/100 pesos Philippine
currency and of the payment of a like amount upon each first day of August
hereafter during the term of Twenty years or until the prior death of either of the
Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any unpunctuality in making any
such payment shall cause this policy to lapse unless and except as kept in force
by the Grace Period condition or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies minus
all sums due for premiums in arrears. They allege that non-payment of the premiums was caused by the
closing of defendant's offices in Manila during the Japanese occupation and the impossible
circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this court has had the
benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has received
careful consideration, inasmuch as it affects the interest of thousands of policy-holders and the
obligations of many insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the
Civil Code.2 Act No. 2427 was largely copied from the Civil Code of California.3 And this court has
heretofore announced its intention to supplement the statutory laws with general principles prevailing on
the subject in the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are
contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right to
impose such reasonable conditions at the time of the making of the contract as they may deem wise and
necessary. The rate of premium is measured by the character of the risk assumed. The insurance
company, for a comparatively small consideration, undertakes to guarantee the insured against loss or
damage, upon the terms and conditions agreed upon, and upon no other, and when called upon to pay,
in case of loss, the insurer, therefore, may justly insists upon a fulfillment of these terms. If the insured
cannot bring himself within the conditions of the policy, he is not entitled for the loss. The terms of the
policy constitute the measure of the insurer's liability, and in order to recover the insured must show
himself within those terms; and if it appears that the contract has been terminated by a violation, on the
part of the insured, of its conditions, then there can be no right of recovery. The compliance of the insured
with the terms of the contract is a condition precedent to the right of recovery."
Recall of the above pronouncements is appropriate because the policies in question stipulate that "all
premium payments are due in advance and any unpunctuality in making any such payment shall cause
this policy to lapse." Wherefore, it would seem that pursuant to the express terms of the policy, non-
payment of premium produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are
binding upon the parties and should be enforced by the courts, if the evidence
brings the case clearly within their meaning and intent. It tends to bring the law
itself into disrepute when, by astute and subtle distinctions, a plain case is
attempted to be taken without the operation of a clear, reasonable and material
obligation of the contract. Mack vs. Rochester German Ins. Co., 106 N.Y., 560,
564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because
the premium had not been paid within the time fixed, since by its express terms, non-payment of any
premium when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This
goes to show that although we take the view that insurance policies should be conserved5 and should
not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason
alone refuse to enforce an insurance contract according to its meaning. (45 C.J.S.,
p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of non-
payment of premiums occasioned by war, the American cases may be divided into three groups,
according as they support the so-called Connecticut Rule, the New York Rule, or the United States Rule.
The first holds the view that "there are two elements in the consideration for which the annual premium
is paid — First, the mere protection for the year, and second, the privilege of renewing the contract for
In another part of the decision, the United States Supreme Court considers and rejects what is, in effect,
each succeeding year by paying the premium for that year at the time agreed upon. According to this
the New York theory in the following words and phrases:
view of the contract, the payment of premiums is a condition precedent, the non-performance would be
illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war between states
in which the parties reside merely suspends the contracts of the life insurance, and that, upon tender of
all premiums due by the insured or his representatives after the war has terminated, the contract revives
and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by reason
of non-payments is peculiarly of the essence of the contract. It additionally holds that it would be unjust
to allow the insurer to retain the reserve value of the policy, which is the excess of the premiums paid
over the actual risk carried during the years when the policy had been in force. This rule was announced
in the well-known Statham6 case which, in the opinion of Professor Vance, is the correct rule.7
The appellants and some amici curiae contend that the New York rule should be applied here. The
appellee and other amici curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories. Besides the respect and
high regard we have always entertained for decisions of the Supreme Court of the United States, we
cannot resist the conviction that the reasons expounded in its decision of the Statham case are logically
and judicially sound. Like the instant case, the policy involved in the Statham decision specifies that non-
payment on time shall cause the policy to cease and determine. Reasoning out that punctual payments
were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business
of life insurance. All the calculations of the insurance company are based on the
hypothesis of prompt payments. They not only calculate on the receipt of the
premiums when due, but on compounding interest upon them. It is on this basis
that they are enabled to offer assurance at the favorable rates they do. Forfeiture
for non-payment is an necessary means of protecting themselves from
embarrassment. Unless it were enforceable, the business would be thrown into
confusion. It is like the forfeiture of shares in mining enterprises, and all other
hazardous undertakings. There must be power to cut-off unprofitable members, or
the success of the whole scheme is endangered. The insured parties are
associates in a great scheme. This associated relation exists whether the company
be a mutual one or not. Each is interested in the engagements of all; for out of the
co-existence of many risks arises the law of average, which underlies the whole
business. An essential feature of this scheme is the mathematical calculations
referred to, on which the premiums and amounts assured are based. And these
calculations, again, are based on the assumption of average mortality, and of
prompt payments and compound interest thereon. Delinquency cannot be
tolerated nor redeemed, except at the option of the company. This has always
been the understanding and the practice in this department of business. Some
companies, it is true, accord a grace of thirty days, or other fixed period, within
which the premium in arrear may be paid, on certain conditions of continued good
health, etc. But this is a matter of stipulation, or of discretion, on the part of the
particular company. When no stipulation exists, it is the general understanding that
time is material, and that the forfeiture is absolute if the premium be not paid. The
extraordinary and even desperate efforts sometimes made, when an insured
person is in extremes to meet a premium coming due, demonstrates the common
view of this matter.
The case, therefore, is one in which time is material and of the essence and of the
essence of the contract. Non-payment at the day involves absolute forfeiture if
such be the terms of the contract, as is the case here. Courts cannot with safety
vary the stipulation of the parties by introducing equities for the relief of the insured
against their own negligence.
The truth is, that the doctrine of the revival of contracts suspended during the war
is one based on considerations of equity and justice, and cannot be invoked to
revive a contract which it would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of
the contract, another strong reason exists why the policy should not be revived.
The parties do not stand on equal ground in reference to such a revival. It would
operate most unjustly against the company. The business of insurance is founded
on the law of average; that of life insurance eminently so. The average rate of
mortality is the basis on which it rests. By spreading their risks over a large number
of cases, the companies calculate on this average with reasonable certainty and
safety. Anything that interferes with it deranges the security of the business. If
every policy lapsed by reason of the war should be revived, and all the back
premiums should be paid, the companies would have the benefit of this average
amount of risk. But the good risks are never heard from; only the bar are sought to
be revived, where the person insured is either dead or dying. Those in health can
get the new policies cheaper than to pay arrearages on the old. To enforce a revival
of the bad cases, whilst the company necessarily lose the cases which are
desirable, would be manifestly unjust. An insured person, as before stated, does
not stand isolated and alone. His case is connected with and co-related to the
cases of all others insured by the same company. The nature of the business, as
a whole, must be looked at to understand the general equities of the parties.
The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if, as
alleged, the consequences of war should not prejudice the insured, neither should they bear down on
the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the insured
to pay premiums was excused during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after the
first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of the
insurer.
Under an Oklahoma decision, the annual premium due is not a debt. It is not an
obligation upon which the insurer can maintain an action against insured; nor is its
settlement governed by the strict rule controlling payments of debts. So, the court
in a Kentucky case declares, in the opinion, that it is not a debt. . . . The fact that it
is payable annually or semi-annually, or at any other stipulated time, does not of
itself constitute a promise to pay, either express or implied. In case of non-payment
the policy is forfeited, except so far as the forfeiture may be saved by agreement,
by waiver, estoppel, or by statute. The payment of the premium is entirely optional,
while a debt may be enforced at law, and the fact that the premium is agreed to be
paid is without force, in the absence of an unqualified and absolute agreement to
pay a specified sum at some certain time. In the ordinary policy there is no promise
to pay, but it is optional with the insured whether he will continue the policy or forfeit
it. (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)
It is well settled that a contract of insurance is sui generis. While the insured by an
observance of the conditions may hold the insurer to his contract, the latter has not
the power or right to compel the insured to maintain the contract relation with it
longer than he chooses. Whether the insured will continue it or not is optional with
him. There being no obligation to pay for the premium, they did not constitute a
debt. (Noble vs. Southern States M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.)
(Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions but also for times of war,
because the policies contained provisions applicable expressly to wartime days. The logical inference,
therefore, is that the parties contemplated uninterrupted operation of the contract even if armed conflict
should ensue.
For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since the
Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation of rules
relating to insurance is in direct proportion to the growth of the business. If there were only 100 men, for
example, insured by a Company or a mutual Association, the death of one will distribute the insurance
proceeds among the remaining 99 policy-holders. Because the loss which each survivor will bear will be
relatively great, death from certain agreed or specified causes may be deemed not a compensable loss.
But if the policy-holders of the Company or Association should be 1,000,000 individuals, it is clear that
the death of one of them will not seriously prejudice each one of the 999,999 surviving insured. The loss
to be borne by each individual will be relatively small."
The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be
considered will not be the death of one but the death of ten thousand, since the proportion of 1 to 100
should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such a
vital defense of insurance companies that since the very beginning, said Act no. 2427 expressly
preserved it, by providing that after the policy shall have been in force for two years, it shall become
incontestable (i.e. the insurer shall have no defense) except for fraud, non-payment of premiums, and
military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress recently
amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the defense of
nonpayment of premiums was preserved. Thus the fundamental character of the undertaking to pay
premiums and the high importance of the defense of non-payment thereof, was specifically recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is in
effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that the first
policy had no reserve value, and that the equitable values of the second had been practically returned
to the insured in the form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all liability on the policies
in question, is hereby affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated May 17, 1993,
of the Court of Appeals and its Resolution 2 dated January 4, 1994 in CA-G.R. CV No. 18341. The
appellate court affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in
an insurance claim filed by private respondent against Great Pacific Life Assurance Co. The dispositive
portion of the trial court's decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT
PACIFIC LIFE ASSURANCE CORPORATION as insurer under its
Group policy No. G-1907, in relation to Certification B-18558 liable and
ordered to pay to the DEVELOPMENT BANK OF THE PHILIPPINES
as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY
SIX THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing
the claims for damages, attorney's fees and litigation expenses in the
complaint and counterclaim, with costs against the defendant and
dismissing the complaint in respect to the plaintiffs, other than the
widow-beneficiary, for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP).
Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician
for a heart condition, high blood pressure, cancer,
 diabetes, lung; kidney or stomach disorder or any
other physical impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in
good health?
Answer: [x] Yes [ ] NO. 4 INSURANCE PLAN BETWEEN DEFENDANT-
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio,
to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.1âwphi1.nêt
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP
submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted
that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific
Performance with Damages." 5 During the trial, Dr. Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia's findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes were not
ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court's decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING
DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES
(DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE ON
THE LIFE OF PLAINTIFF'S HUSBAND
WILFREDO LEUTERIO ONE OF ITS LOAN
BORROWERS, INSTEAD OF DISMISSING THE
CASE AGAINST DEFENDANT-APPELLANT
[Petitioner Grepalife] FOR LACK OF CAUSE OF
ACTION.
2. THE LOWER COURT ERRED IN NOT
DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR
NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP
THE AMOUNT OF P86,200.00 IN THE
ABSENCE OF ANY EVIDENCE TO SHOW HOW
MUCH WAS THE ACTUAL AMOUNT PAYABLE
TO DBP IN ACCORDANCE WITH ITS GROUP
INSURANCE CONTRACT WITH DEFENDANT-
APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING
THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF
WILFREDO LEUTERIO IN HIS APPLICATION
FOR MEMBERSHIP IN THE GROUP LIFE
APPELLANT OF THE INSURANCE CLAIM
ARISING FROM THE DEATH OF WILFREDO
LEUTERIO. 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding
petitioner liable to DBP as beneficiary in a group
life insurance contract from a complaint filed by
the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not
finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance
contract?
3. Whether the Court of Appeals erred in holding
Grepalife liable in the amount of eighty six
thousand, two hundred (P86,200.00) pesos
without proof of the actual outstanding mortgage
payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of
Appeals affirmed the trial court's judgment, Grepalife was held liable to pay the proceeds of insurance
contract in favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to
this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the
"mortgage redemption insurance," is a device for the protection of both the mortgagee and the mortgagor.
On the part of the mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from
such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation. 7 In a similar vein, ample protection is given to the mortgagor under
such a concept so that in the event of death; the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness. 8 Consequently, where the
mortgagor pays the insurance premium under the group insurance policy, making the loss payable to
the mortgagee, the insurance is on the mortgagor's interest, and the mortgagor continues to be a party
to the contract. In this type of policy insurance, the mortgagee is simply an appointee of the insurance
fund, such loss-payable clause does not make the mortgagee a party to the contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects
insurance in his own name providing that the loss shall be payable to
the mortgagee, or assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the mortgagor, who does
 not cease to be a party to the original contract, and any act of his, prior
to the loss, which would otherwise avoid the insurance, will have the
same effect, although the property is in the hands of the mortgagee, but
any act which, under the contract of insurance, is to be performed by
the mortgagor, may be performed by the mortgagee therein named,
with the same effect as if it had been performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance,
the policy stating that: "In the event of the debtor's death before his indebtedness with the Creditor [DBP]
shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor." 10 When DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment committed by the insured. Thereafter,
DBP collected the debt from the mortgagor and took the necessary action of foreclosure on the residential
lot of private respondent. 11 In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. 12 we held:
Insured, being the person with whom the contract was made, is
primarily the proper person to bring suit thereon. * * * Subject to some
exceptions, insured may thus sue, although the policy is taken wholly
or in part for the benefit of another person named or unnamed, and
although it is expressly made payable to another as his interest may
appear or otherwise. * * * Although a policy issued to a mortgagor is
taken out for the benefit of the mortgagee and is made payable to him,
yet the mortgagor may sue thereon in his own name, especially where
the mortgagee's interest is less than the full amount recoverable under
the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has
assigned the policy for the purpose of collection, or has assigned as
collateral security any judgment he may obtain. 13
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might
have recovered, 14 the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense
to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had
knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the same. 15
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported
by the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia's technical
diagnosis of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the
widow's declaration that her husband had "possible hypertension several years ago" should not be
considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy
on the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of
Dr. Leuterio's any previous hospital confinement. 16 Dr. Leuterio's death certificate stated that
hypertension was only "the possible cause of death." The private respondent's statement, as to the
medical history of her husband, was due to her unreliable recollection of events. Hence, the statement
of the physician was properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance application
that he was in good health and that he had not consulted a doctor or
any of the enumerated ailments, including hypertension; when he died
the attending physician had certified in the death certificate that the
former died of cerebral hemorrhage, probably secondary to
hypertension. From this report, the appellant insurance company
refused to pay the insurance claim. Appellant alleged that the insured
had concealed the fact that he had hypertension.
Contrary to appellant's allegations, there was no sufficient proof that the
insured had suffered from hypertension. Aside from the statement of
the insured's widow who was not even sure if the medicines taken by
Dr. Leuterio were for hypertension, the appellant had not proven nor
produced any witness who could attest to Dr. Leuterio's medical history
...
xxx xxx xxx
Appellant insurance company had failed to establish that there was
concealment made by the insured, hence, it cannot refuse payment of
the claim. 17
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.18 Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. 19 In
the case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore
liable to pay the proceeds of the insurance.1âwphi1.nêt
And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's outstanding indebtedness to DBP at the time of the
mortgagor's death. Hence, for private respondent's failure to establish the same, the action for specific
performance should be dismissed. Petitioner's claim is without merit. A life insurance policy is a valued
policy. 20 Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtor's death
during the terms of this insurance, a death benefit in the amount of
P86,200.00 shall be paid.
In the event of the debtor's death before his indebtedness with the
creditor shall have been fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the Creditor and the balance of the
Sum Assured, if there is any shall then be paid to the beneficiary/ies
designated by the debtor." 22 (Emphasis omitted)
However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private
respondent's memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction
of mortgagor's outstanding loan. Considering this supervening event, the insurance proceeds shall inure
to the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should
not unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it
cannot collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now
rightly belong to Dr. Leuterio's heirs represented by his widow, herein private respondent Medarda
Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in
CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of
the insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of
mortgagor's indebtedness to Development Bank of the Philippines. Costs against petitioner.1âwphi1.nêt
SO ORDERED.
G.R. No. 181132 June 5, 2009
HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN
MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents.
DECISION
NACHURA, J.:
This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set aside
the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No. 85948,
dismissing petitioners’ appeal for lack of jurisdiction.
The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch 29, for
revocation and/or reduction of insurance proceeds for being void and/or inofficious, with prayer for a
temporary restraining order (TRO) and a writ of preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto Maramag (Loreto),
while respondents were Loreto’s illegitimate family; (2) Eva de Guzman Maramag (Eva) was a concubine
of Loreto and a suspect in the killing of the latter, thus, she is disqualified to receive any proceeds from
his insurance policies from Insular Life Assurance Company, Ltd. (Insular)4 and Great Pacific Life
Assurance Corporation (Grepalife);5 (3) the illegitimate children of Loreto—Odessa, Karl Brian, and
Trisha Angelie—were entitled only to one-half of the legitime of the legitimate children, thus, the proceeds
released to Odessa and those to be released to Karl Brian and Trisha Angelie were inofficious and should
be reduced; and (4) petitioners could not be deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among others, that
part of the insurance proceeds had already been released in favor of Odessa, while the rest of the
proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon the appointment
of their legal guardian. Petitioners also prayed for the total amount of ₱320,000.00 as actual litigation
expenses and attorney’s fees.
In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa, Karl
Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the insurance
proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto, it
disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie,
as the remaining designated beneficiaries; and that it released Odessa’s share as she was of age, but
withheld the release of the shares of minors Karl Brian and Trisha Angelie pending submission of letters
of guardianship. Insular alleged that the complaint or petition failed to state a cause of action insofar as
it sought to declare as void the designation of Eva as beneficiary, because Loreto revoked her
designation as such in Policy No. A001544070 and it disqualified her in Policy No. A001693029; and
insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie,
considering that no settlement of Loreto’s estate had been filed nor had the respective shares of the
heirs been determined. Insular further claimed that it was bound to honor the insurance policies
designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance
Code.
In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not designated as an
insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were denied
because Loreto was ineligible for insurance due to a misrepresentation in his application form that he
was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in September
2001; that the case was premature, there being no claim filed by the legitimate family of Loreto; and that
the law on succession does not apply where the designation of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to petitioners,
summons by publication was resorted to. Still, the illegitimate family of Loreto failed to file their answer.
Hence, the trial court, upon motion of petitioners, declared them in default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in their
respective answers be resolved first. The trial court ordered petitioners to comment within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal –
whether the complaint itself was proper or not – and that the designation of a beneficiary is an act of
liberality or a donation and, therefore, subject to the provisions of Articles 7528 and 7729 of the Civil
Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the estate or to the heirs of the insured. Grepalife also
reiterated that it had disqualified Eva as a beneficiary when it ascertained that Loreto was legally married
to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads –
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and Grepalife
is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The action shall proceed
with respect to the other defendants Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.10
In so ruling, the trial court ratiocinated thus –
Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic) special laws.
Matters not expressly provided for in such special laws shall be regulated by this Code. The principal law
on insurance is the Insurance Code, as amended. Only in case of deficiency in the Insurance Code that
the Civil Code may be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the insurance proceeds shall
be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall be applied exclusively to
the proper interest of the person in whose name or for whose benefit it is made, unless otherwise
specified in the policy. Since the defendants are the ones named as the primary beneficiary (sic) in the
insurances (sic) taken by the deceased Loreto C. Maramag and there is no showing that herein plaintiffs
were also included as beneficiary (sic) therein the insurance proceeds shall exclusively be paid to them.
This is because the beneficiary has a vested right to the indemnity, unless the insured reserves the right
to change the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary succession in
order to defeat the right of herein defendants to collect the insurance indemnity. The beneficiary in a
contract of insurance is not the donee spoken in the law of donation. The rules on testamentary
succession cannot apply here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which can be subject to
collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon Employees’ Association v.
Juanita Golpeo, et al., the Honorable Supreme Court made the following pronouncements[:]
"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs exclusively to
the defendant as his individual and separate property, we agree that the proceeds of an insurance policy
belong exclusively to the beneficiary and not to the estate of the person whose life was insured, and that
such proceeds are the separate and individual property of the beneficiary and not of the heirs of the
person whose life was insured, is the doctrine in America. We believe that the same doctrine obtains in
these Islands by virtue of Section 428 of the Code of Commerce x x x."
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no sufficient cause
of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for the reduction and/or
declaration of inofficiousness of donation as primary beneficiary (sic) in the insurances (sic) of the late
Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the named beneficiary (sic)
in the insurances (sic) taken by the late Loreto C. Maramag is his concubine Eva Verna De Guzman.
Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary
of a life insurance policy of the person who cannot make any donation to him, according to said article
(Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the insurance contract
will still remain valid, but the indemnity must go to the legal heirs and not to the concubine, for evidently,
what is prohibited under Art. 2012 is the naming of the improper beneficiary. In such case, the action for
the declaration of nullity may be brought by the spouse of the donor or donee, and the guilt of the donor
and donee may be proved by preponderance of evidence in the same action (Comment of Edgardo L.
Paras, Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna de
Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late Loreto C.
Maramag is void under Art. 739 of the Civil Code, the insurance indemnity that should be paid to her
must go to the legal heirs of the deceased which this court may properly take cognizance as the action
for the declaration for the nullity of a void donation falls within the general jurisdiction of this Court. 11
Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main, that the
petition failed to state a cause of action. Insular further averred that the proceeds were divided among
the three children as the remaining named beneficiaries. Grepalife, for its part, also alleged that the
premiums paid had already been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that whether the complaint
may be dismissed for failure to state a cause of action must be determined solely on the basis of the
allegations in the complaint, such that the defenses of Insular and Grepalife would be better threshed
out during trial.1avvphi1
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by defendants
Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the Resolution of this Court
dated 21 September 2004 which ordered the prosecution of the case against defendant Eva Verna De
Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case against them is hereby ordered
DISMISSED.
SO ORDERED.14
In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the
allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular disqualified
her as a beneficiary in the other policy such that the entire proceeds would be paid to the illegitimate
children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases
where there are no beneficiaries designated, or when the only designated beneficiary is disqualified, that
the proceeds should be paid to the estate of the insured. As to the claim that the proceeds to be paid to
Loreto’s illegitimate children should be reduced based on the rules on legitime, the trial court held that
the distribution of the insurance proceeds is governed primarily by the Insurance Code, and the
provisions of the Civil Code are irrelevant and inapplicable. With respect to the Grepalife policy, the trial
court noted that Eva was never designated as a beneficiary, but only Odessa, Karl Brian, and Trisha
Angelie; thus, it upheld the dismissal of the case as to the illegitimate children. It further held that the
matter of Loreto’s misrepresentation was premature; the appropriate action may be filed only upon denial
of the claim of the named beneficiaries for the insurance proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of
jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a cause
of action involved a pure question of law. The appellate court also noted that petitioners did not file within
the reglementary period a motion for reconsideration of the trial court’s Resolution, dated September 21,
2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the said
Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of
action, may the Court consider matters which were not alleged in the Complaint,
particularly the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to state
a cause of action, did not the Regional Trial Court engage in the examination and
determination of what were the facts and their probative value, or the truth thereof,
when it premised the dismissal on allegations of the defendants in their answer –
which had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
insurance for the concubine?15
In essence, petitioners posit that their petition before the trial court should not have been dismissed for
failure to state a cause of action because the finding that Eva was either disqualified as a beneficiary by
the insurance companies or that her designation was revoked by Loreto, hypothetically admitted as true,
was raised only in the answers and motions for reconsideration of both Insular and Grepalife. They argue
that for a motion to dismiss to prosper on that ground, only the allegations in the complaint should be
considered. They further contend that, even assuming Insular disqualified Eva as a beneficiary, her share
should not have been distributed to her children with Loreto but, instead, awarded to them, being the
legitimate heirs of the insured deceased, in accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial court’s finding that the petition failed to state a
cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads –
SECTION 1. Grounds. – Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of another.16 A complaint states
a cause of action when it contains the three (3) elements of a cause of action—(1) the legal right of the
plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the defendant in
violation of the legal right. If any of these elements is absent, the complaint becomes vulnerable to a
motion to dismiss on the ground of failure to state a cause of action.17
When a motion to dismiss is premised on this ground, the ruling thereon should be based only on the
facts alleged in the complaint. The court must resolve the issue on the strength of such allegations,
assuming them to be true. The test of sufficiency of a cause of action rests on whether, hypothetically
admitting the facts alleged in the complaint to be true, the court can render a valid judgment upon the
same, in accordance with the prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no hypothetical admission
of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the
parties or in the course of the hearings related to the case.18
In this case, it is clear from the petition filed before the trial court that, although petitioners are the
legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies issued by
Insular and Grepalife. The basis of petitioners’ claim is that Eva, being a concubine of Loreto and a
suspect in his murder, is disqualified from being designated as beneficiary of the insurance policies, and
that Eva’s children with Loreto, being illegitimate children, are entitled to a lesser share of the proceeds
of the policies. They also argued that pursuant to Section 12 of the Insurance Code,19 Eva’s share in the
proceeds should be forfeited in their favor, the former having brought about the death of Loreto. Thus,
they prayed that the share of Eva and portions of the shares of Loreto’s illegitimate children should be
awarded to them, being the legitimate heirs of Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable judgment in light
of Article 2011 of the Civil Code which expressly provides that insurance contracts shall be governed by
special laws, i.e., the Insurance Code. Section 53 of the Insurance Code states—
SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the person
in whose name or for whose benefit it is made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are either
the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the maturation of the
policy.20 The exception to this rule is a situation where the insurance contract was intended to benefit
third persons who are not parties to the same in the form of favorable stipulations or indemnity. In such
a case, third parties may directly sue and claim from the insurer.21
Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are not
entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no legal obligation
to turn over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary in one policy
and her disqualification as such in another are of no moment considering that the designation of the
illegitimate children as beneficiaries in Loreto’s insurance policies remains valid. Because no legal
proscription exists in naming as beneficiaries the children of illicit relationships by the insured,22 the
shares of Eva in the insurance proceeds, whether forfeited by the court in view of the prohibition on
donations under Article 739 of the Civil Code or by the insurers themselves for reasons based on the
insurance contracts, must be awarded to the said illegitimate children, the designated beneficiaries, to
the exclusion of petitioners. It is only in cases where the insured has not designated any beneficiary,23
or when the designated beneficiary is disqualified by law to receive the proceeds, 24 that the insurance
policy proceeds shall redound to the benefit of the estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the same
light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the appellate court had
no jurisdiction to take cognizance of the appeal; the issue of failure to state a cause of action is a question
of law and not of fact, there being no findings of fact in the first place.25
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.
G.R. No. 183526 August 25, 2009
VIOLETA R. LALICAN, Petitioner,
vs.
THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY THE PRESIDENT
VICENTE R. AVILON, Respondent.
DECISION
CHICO-NAZARIO, J.:
Challenged in this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court are the Decision2
dated 30 August 2007 and the Orders dated 10 April 20083 and 3 July 20084 of the Regional Trial Court
(RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its assailed Decision, the RTC dismissed the
claim for death benefits filed by petitioner Violeta R. Lalican (Violeta) against respondent Insular Life
Assurance Company Limited (Insular Life); while in its questioned Orders dated 10 April 2008 and 3 July
2008, respectively, the RTC declared the finality of the aforesaid Decision and denied petitioner’s Notice
of Appeal.
The factual and procedural antecedents of the case, as culled from the records, are as follows:
Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April 1997, Insular
Life, through Josephine Malaluan (Malaluan), its agent in Gapan City, issued in favor of Eulogio Policy
No. 9011992,5 which contained a 20-Year Endowment Variable Income Package Flexi Plan worth
₱500,000.00,6 with two riders valued at ₱500,000.00 each.7 Thus, the value of the policy amounted to
₱1,500,000.00. Violeta was named as the primary beneficiary.
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a quarterly basis in the
amount of ₱8,062.00, payable every 24 April, 24 July, 24 October and 24 January of each year, until the
end of the 20-year period of the policy. According to the Policy Contract, there was a grace period of 31
days for the payment of each premium subsequent to the first. If any premium was not paid on or before
the due date, the policy would be in default, and if the premium remained unpaid until the end of the
grace period, the policy would automatically lapse and become void.8
Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he failed to pay the
premium due on 24 January 1998, even after the lapse of the grace period of 31 days. Policy No.
9011992, therefore, lapsed and became void.
Eulogio submitted to the Cabanatuan District Office of Insular Life, through Malaluan, on 26 May 1998,
an Application for Reinstatement9 of Policy No. 9011992, together with the amount of ₱8,062.00 to pay
for the premium due on 24 January 1998. In a letter10 dated 17 July 1998, Insular Life notified Eulogio
that his Application for Reinstatement could not be fully processed because, although he already
deposited ₱8,062.00 as payment for the 24 January 1998 premium, he left unpaid the overdue interest
thereon amounting to ₱322.48. Thus, Insular Life instructed Eulogio to pay the amount of interest and to
file another application for reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums
that subsequently became due on 24 April 1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluan’s house and submitted a second Application for
Reinstatement11 of Policy No. 9011992, including the amount of ₱17,500.00, representing payments for
the overdue interest on the premium for 24 January 1998, and the premiums which became due on 24
April 1998 and 24 July 1998. As Malaluan was away on a business errand, her husband received
Eulogio’s second Application for Reinstatement and issued a receipt for the amount Eulogio deposited.
A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory arrest secondary
to electrocution.
Without knowing of Eulogio’s death, Malaluan forwarded to the Insular Life Regional Office in the City of
San Fernando, on 18 September 1998, Eulogio’s second Application for Reinstatement of Policy No.
9011992 and ₱17,500.00 deposit. However, Insular Life no longer acted upon Eulogio’s second
Application for Reinstatement, as the former was informed on 21 September 1998 that Eulogio had
already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full proceeds of Policy
No. 9011992.
In a letter12 dated 14 January 1999, Insular Life informed Violeta that her claim could not be granted
since, at the time of Eulogio’s death, Policy No. 9011992 had already lapsed, and Eulogio failed to
reinstate the same. According to the Application for Reinstatement, the policy would only be considered
reinstated upon approval of the application by Insular Life during the applicant’s "lifetime and good
health," and whatever amount the applicant paid in connection thereto was considered to be a deposit
only until approval of said application. Enclosed with the 14 January 1999 letter of Insular Life to Violeta
was DBP Check No. 0000309734, for the amount of ₱25,417.00, drawn in Violeta’s favor, representing
the full refund of the payments made by Eulogio on Policy No. 9011992.
On 12 February 1998, Violeta requested a reconsideration of the disallowance of her claim. In a letter13
dated 10 March 1999, Insular Life stated that it could not find any reason to reconsider its decision
rejecting Violeta’s claim. Insular Life again tendered to Violeta the above-mentioned check in the amount
of ₱25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the Cabanatuan
District Office of Insular Life. Violeta’s counsel subsequently sent a letter14 dated 8 July 1999 to Insular
Life, demanding payment of the full proceeds of Policy No. 9011992. On 11 August 1999, Insular Life
responded to the said demand letter by agreeing to conduct a re-evaluation of Violeta’s claim.
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the RTC, on 11 October
1999, a Complaint for Death Claim Benefit,15 which was docketed as Civil Case No. 2177. Violeta alleged
that Insular Life engaged in unfair claim settlement practice and deliberately failed to act with reasonable
promptness on her insurance claim. Violeta prayed that Insular Life be ordered to pay her death claim
benefits on Policy No. 9011992, in the amount of ₱1,500,000.00, plus interests, attorney’s fees, and cost
of suit.
Insular Life filed with the RTC an Answer with Counterclaim,16 asserting that Violeta’s Complaint had no
legal or factual bases. Insular Life maintained that Policy No. 9011992, on which Violeta sought to
recover, was rendered void by the non-payment of the 24 January 1998 premium and non-compliance
with the requirements for the reinstatement of the same. By way of counterclaim, Insular Life prayed that
Violeta be ordered to pay attorney’s fees and expenses of litigation incurred by the former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for the reinstatement
of Policy No. 9011992 had been complied with and the defenses put up by Insular Life were purely
invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life.
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to have the same
reinstated:
[The] arguments [of Insular Life] are not without basis. When the premiums for April 24 and July 24, 1998
were not paid by [Eulogio] even after the lapse of the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and conditions of the contract between [Insular Life] and
[Eulogio] which are written in [the] Policy provisions of Policy No. 9011992 x x x.17
The RTC, taking into account the clear provisions of the Policy Contract between Eulogio and Insular
Life and the Application for Reinstatement Eulogio subsequently signed and submitted to Insular Life,
held that Eulogio was not able to fully comply with the requirements for the reinstatement of Policy No.
9011992:
The well-settled rule is that a contract has the force of law between the parties. In the instant case, the
terms of the insurance contract between [Eulogio] and [Insular Life] were spelled out in the policy
provisions of Insurance Policy No. 9011992. There is likewise no dispute that said insurance contract is
by nature a contract of adhesion[,] which is defined as "one in which one of the contracting parties
imposes a ready-made form of contract which the other party may accept or reject but cannot modify."
(Polotan, Sr. vs. CA, 296 SCRA 247).
xxxx
The New Lexicon Webster’s Dictionary defines ambiguity as the "quality of having more than one
meaning" and "an idea, statement or expression capable of being understood in more than one sense."
In Nacu vs. Court of Appeals, 231 SCRA 237 (1994), the Supreme Court stated that[:]
"Any ambiguity in a contract, whose terms are susceptible of different interpretations as a result thereby,
must be read and construed against the party who drafted it on the assumption that it could have been
avoided by the exercise of a little care."
In the instant case, the dispute arises from the afore-quoted provisions written on the face of the second
application for reinstatement. Examining the said provisions, the court finds the same clearly written in
terms that are simple enough to admit of only one interpretation. They are clearly not ambiguous,
equivocal or uncertain that would need further construction. The same are written on the very face of the
application just above the space where [Eulogio] signed his name. It is inconceivable that he signed it
without reading and understanding its import.1avvphi1
Similarly, the provisions of the policy provisions (sic) earlier mentioned are written in simple and clear
layman’s language, rendering it free from any ambiguity that would require a legal interpretation or
construction. Thus, the court believes that [Eulogio] was well aware that when he filed the said application
for reinstatement, his lapsed policy was not automatically reinstated and that its approval was subject to
certain conditions. Nowhere in the policy or in the application for reinstatement was it ever mentioned
that the payment of premiums would have the effect of an automatic and immediate renewal of the lapsed
policy. Instead, what was clearly stated in the application for reinstatement is that pending approval
thereof, the premiums paid would be treated as a "deposit only and shall not bind the company until this
application is finally approved during my/our" lifetime and good health[.]"
Again, the court finds nothing in the aforesaid provisions that would even suggest an ambiguity either in
the words used or in the manner they were written. [Violeta] did not present any proof that [Eulogio] was
not conversant with the English language. Hence, his having personally signed the application for
reinstatement[,] which consisted only of one page, could only mean that he has read its contents and
that he understood them. x x x
Therefore, consistent with the above Supreme Court ruling and finding no ambiguity both in the policy
provisions of Policy No. 9011992 and in the application for reinstatement subject of this case, the court
finds no merit in [Violeta’s] contention that the policy provision stating that [the lapsed policy of Eulogio]
should be reinstated during his lifetime is ambiguous and should be construed in his favor. It is true that
[Eulogio] submitted his application for reinstatement, together with his premium and interest payments,
to [Insular Life] through its agent Josephine Malaluan in the morning of September 17, 1998.
Unfortunately, he died in the afternoon of that same day. It was only on the following day, September 18,
1998 that Ms. Malaluan brought the said document to [the regional office of Insular Life] in San Fernando,
Pampanga for approval. As correctly pointed out by [Insular Life] there was no more application to
approve because the applicant was already dead and no insurance company would issue an insurance
policy to a dead person.18 (Emphases ours.)
The RTC, in the end, explained that:
While the court truly empathizes with the [Violeta] for the loss of her husband, it cannot express the same
by interpreting the insurance agreement in her favor where there is no need for such interpretation. It is
conceded that [Eulogio’s] payment of overdue premiums and interest was received by [Insular Life]
through its agent Ms. Malaluan. It is also true that [the] application for reinstatement was filed by [Eulogio]
a day before his death. However, there is nothing that would justify a conclusion that such receipt
amounted to an automatic reinstatement of the policy that has already lapsed. The evidence suggests
clearly that no such automatic renewal was contemplated in the contract between [Eulogio] and [Insular
Life]. Neither was it shown that Ms. Malaluan was the officer authorized to approve the application for
reinstatement and that her receipt of the documents submitted by [Eulogio] amounted to its approval. 19
(Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered and finding that [Violeta] has failed to establish by
preponderance of evidence her cause of action against the defendant, let this case be, as it is hereby
DISMISSED.20
On 14 September 2007, Violeta filed a Motion for Reconsideration21 of the afore-mentioned RTC
Decision. Insular Life opposed22 the said motion, averring that the arguments raised therein were merely
a rehash of the issues already considered and addressed by the RTC. In an Order23 dated 8 November
2007, the RTC denied Violeta’s Motion for Reconsideration, finding no cogent and compelling reason to
disturb its earlier findings. Per the Registry Return Receipt on record, the 8 November 2007 Order of the
RTC was received by Violeta on 3 December 2007.
In the interim, on 22 November 2007, Violeta filed with the RTC a Reply24 to the Motion for
Reconsideration, wherein she reiterated the prayer in her Motion for Reconsideration for the setting aside
of the Decision dated 30 August 2007. Despite already receiving on 3 December 2007, a copy of the
RTC Order dated 8 November 2007, which denied her Motion for Reconsideration, Violeta still filed with
the RTC, on 26 February 2008, a Reply Extended Discussion elaborating on the arguments she had
previously made in her Motion for Reconsideration and Reply.
On 10 April 2008, the RTC issued an Order,25 declaring that the Decision dated 30 August 2007 in Civil
Case No. 2177 had already attained finality in view of Violeta’s failure to file the appropriate notice of
appeal within the reglementary period. Thus, any further discussions on the issues raised by Violeta in
her Reply and Reply Extended Discussion would be moot and academic.
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion, 26 praying that the Order
dated 10 April 2008 be set aside and that she be allowed to file an appeal with the Court of Appeals.
In an Order27 dated 3 July 2008, the RTC denied Violeta’s Notice of Appeal with Motion given that the
Decision dated 30 August 2007 had long since attained finality.
Violeta directly elevated her case to this Court via the instant Petition for Review on Certiorari, raising
the following issues for consideration:
1. Whether or not the Decision of the court a quo dated August 30, 2007, can still
be reviewed despite having allegedly attained finality and despite the fact that the
mode of appeal that has been availed of by Violeta is erroneous?
2. Whether or not the Regional Trial Court in its original jurisdiction has decided
the case on a question of law not in accord with law and applicable decisions of
the Supreme Court?
Violeta insists that her former counsel committed an honest mistake in filing a Reply, instead of a Notice
of Appeal of the RTC Decision dated 30 August 2007; and in the computation of the reglementary period
for appealing the said judgment. Violeta claims that her former counsel suffered from poor health, which
rapidly deteriorated from the first week of July 2008 until the latter’s death just shortly after the filing of
the instant Petition on 8 August 2008. In light of these circumstances, Violeta entreats this Court to admit
and give due course to her appeal even if the same was filed out of time.
Violeta further posits that the Court should address the question of law arising in this case involving the
interpretation of the second sentence of Section 19 of the Insurance Code, which provides:
Section. 19. x x x [I]nterest in the life or health of a person insured must exist when the insurance takes
effect, but need not exist thereafter or when the loss occurs.
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own life when he
reinstated Policy No. 9011992 just before he passed away on 17 September 1998. The RTC should
have construed the provisions of the Policy Contract and Application for Reinstatement in favor of the
insured Eulogio and against the insurer Insular Life, and considered the special circumstances of the
case, to rule that Eulogio had complied with the requisites for the reinstatement of Policy No. 9011992
prior to his death, and that Violeta is entitled to claim the proceeds of said policy as the primary
beneficiary thereof.
The Petition lacks merit.
At the outset, the Court notes that the elevation of the case to us via the instant Petition for Review on
Certiorari is not justified. Rule 41, Section 1 of the Rules of Court, 28 provides that no appeal may be
taken from an order disallowing or dismissing an appeal. In such a case, the aggrieved party may file a
Petition for Certiorari under Rule 65 of the Rules of Court.29
Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had long become final
and executory. Violeta filed a Motion for Reconsideration thereof, but the RTC denied the same in an
Order dated 8 November 2007. The records of the case reveal that Violeta received a copy of the 8
November 2007 Order on 3 December 2007. Thus, Violeta had 15 days30 from said date of receipt, or
until 18 December 2007, to file a Notice of Appeal. Violeta filed a Notice of Appeal only on 20 May 2008,
more than five months after receipt of the RTC Order dated 8 November 2007 denying her Motion for
Reconsideration.
Violeta’s claim that her former counsel’s failure to file the proper remedy within the reglementary period
was an honest mistake, attributable to the latter’s deteriorating health, is unpersuasive.
Violeta merely made a general averment of her former counsel’s poor health, lacking relevant details
and supporting evidence. By Violeta’s own admission, her former counsel’s health rapidly deteriorated
only by the first week of July 2008. The events pertinent to Violeta’s Notice of Appeal took place months
before July 2008, i.e., a copy of the RTC Order dated 8 November 2007, denying Violeta’s Motion for
Reconsideration of the Decision dated 30 August 2007, was received on 3 December 2007; and Violeta’s
Notice of Appeal was filed on 20 May 2008. There is utter lack of proof to show that Violeta’s former
counsel was already suffering from ill health during these times; or that the illness of Violeta’s former
counsel would have affected his judgment and competence as a lawyer.
Moreover, the failure of her former counsel to file a Notice of Appeal within the reglementary period binds
Violeta, which failure the latter cannot now disown on the basis of her bare allegation and self-serving
pronouncement that the former was ill. A client is bound by his counsel’s mistakes and negligence.31
The Court, therefore, finds no reversible error on the part of the RTC in denying Violeta’s Notice of Appeal
for being filed beyond the reglementary period. Without an appeal having been timely filed, the RTC
Decision dated 30 August 2007 in Civil Case No. 2177 already became final and executory.
A judgment becomes "final and executory" by operation of law. Finality becomes a fact when the
reglementary period to appeal lapses and no appeal is perfected within such period. As a consequence,
no court (not even this Court) can exercise appellate jurisdiction to review a case or modify a decision
that has become final.32 When a final judgment is executory, it becomes immutable and unalterable. It
may no longer be modified in any respect either by the court, which rendered it or even by this Court.
The doctrine is founded on considerations of public policy and sound practice that, at the risk of
occasional errors, judgments must become final at some definite point in time.33
The only recognized exceptions to the doctrine of immutability and unalterability are the correction of
clerical errors, the so-called nunc pro tunc entries, which cause no prejudice to any party, and void
judgments.34 The instant case does not fall under any of these exceptions.
Even if the Court ignores the procedural lapses committed herein, and proceeds to resolve the
substantive issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of law, particularly, whether Eulogio
had an existing insurable interest in his own life until the day of his death.
An insurable interest is one of the most basic and essential requirements in an insurance contract. In
general, an insurable interest is that interest which a person is deemed to have in the subject matter
insured, where he has a relation or connection with or concern in it, such that the person will derive
pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer
pecuniary loss or damage from its destruction, termination, or injury by the happening of the event
insured against.35 The existence of an insurable interest gives a person the legal right to insure the
subject matter of the policy of insurance.36 Section 10 of the Insurance Code indeed provides that every
person has an insurable interest in his own life.37 Section 19 of the same code also states that an interest
in the life or health of a person insured must exist when the insurance takes effect, but need not exist
thereafter or when the loss occurs.38
Upon more extensive study of the Petition, it becomes evident that the matter of insurable interest is
entirely irrelevant in the case at bar. It is actually beyond question that while Eulogio was still alive, he
had an insurable interest in his own life, which he did insure under Policy No. 9011992. The real point of
contention herein is whether Eulogio was able to reinstate the lapsed insurance policy on his life before
his death on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous declaration of the RTC in its 30 August 2007
Decision that Policy No. 9011992 lapsed because of Eulogio’s non-payment of the premiums which
became due on 24 April 1998 and 24 July 1998. Policy No. 9011992 had lapsed and become void earlier,
on 24 February 1998, upon the expiration of the 31-day grace period for payment of the premium, which
fell due on 24 January 1998, without any payment having been made.
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogio’s filing of his first
Application for Reinstatement with Insular Life, through Malaluan, on 26 May 1998, constitutes an
admission that Policy No. 9011992 had lapsed by then. Insular Life did not act on Eulogio’s first
Application for Reinstatement, since the amount Eulogio simultaneously deposited was sufficient to cover
only the ₱8,062.00 overdue premium for 24 January 1998, but not the ₱322.48 overdue interests
thereon. On 17 September 1998, Eulogio submitted a second Application for Reinstatement to Insular
Life, again through Malaluan, depositing at the same time ₱17,500.00, to cover payment for the overdue
interest on the premium for 24 January 1998, and the premiums that had also become due on 24 April
1998 and 24 July 1998. On the very same day, Eulogio passed away.
To reinstate a policy means to restore the same to premium-paying status after it has been permitted to
lapse.39 Both the Policy Contract and the Application for Reinstatement provide for specific conditions
for the reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified the following conditions for reinstatement
should the policy lapse:
10. REINSTATEMENT
You may reinstate this policy at any time within three years after it lapsed if the following conditions are
met: (1) the policy has not been surrendered for its cash value or the period of extension as a term
insurance has not expired; (2) evidence of insurability satisfactory to [Insular Life] is furnished; (3)
overdue premiums are paid with compound interest at a rate not exceeding that which would have been
applicable to said premium and indebtedness in the policy years prior to reinstatement; and (4)
indebtedness which existed at the time of lapsation is paid or renewed.40
Additional conditions for reinstatement of a lapsed policy were stated in the Application for Reinstatement
which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until this application is approved by the
Company during my/our lifetime and good health and until all other Company requirements for the
reinstatement of said Policy are fully satisfied.
I/We further agree that any payment made or to be made in connection with this application shall be
considered as deposit only and shall not bind the Company until this application is finally approved by
the Company during my/our lifetime and good health. If this application is disapproved, I/We also agree
to accept the refund of all payments made in connection herewith, without interest, and to surrender the
receipts for such payment.41 (Emphases ours.)
In the instant case, Eulogio’s death rendered impossible full compliance with the conditions for
reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his Application for
Reinstatement and deposit the amount for payment of his overdue premiums and interests thereon with
Malaluan; but Policy No. 9011992 could only be considered reinstated after the Application for
Reinstatement had been processed and approved by Insular Life during Eulogio’s lifetime and good
health.
Relevant herein is the following pronouncement of the Court in Andres v. The Crown Life Insurance
Company,42 citing McGuire v. The Manufacturer's Life Insurance Co.43:
"The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written
application does not give the insured absolute right to such reinstatement by the mere filing of an
application. The insurer has the right to deny the reinstatement if it is not satisfied as to the insurability
of the insured and if the latter does not pay all overdue premium and all other indebtedness to the insurer.
After the death of the insured the insurance Company cannot be compelled to entertain an application
for reinstatement of the policy because the conditions precedent to reinstatement can no longer be
determined and satisfied." (Emphases ours.)
FIRST DIVISION

It does not matter that when he died, Eulogio’s Application for Reinstatement and deposits for the
overdue premiums and interests were already with Malaluan. Insular Life, through the Policy Contract, G.R. No. 147839 June 8, 2006
expressly limits the power or authority of its insurance agents, thus:
GAISANO CAGAYAN, INC. Petitioner,
Our agents have no authority to make or modify this contract, to extend the time limit for payment of vs.
premiums, to waive any lapsation, forfeiture or any of our rights or requirements, such powers being INSURANCE COMPANY OF NORTH AMERICA, Respondent.
limited to our president, vice-president or persons authorized by the Board of Trustees and only in
writing.44 (Emphasis ours.) DECISION

Malaluan did not have the authority to approve Eulogio’s Application for Reinstatement. Malaluan still
had to turn over to Insular Life Eulogio’s Application for Reinstatement and accompanying deposits, for
processing and approval by the latter.
The Court agrees with the RTC that the conditions for reinstatement under the Policy Contract and
Application for Reinstatement were written in clear and simple language, which could not admit of any
meaning or interpretation other than those that they so obviously embody. A construction in favor of the
insured is not called for, as there is no ambiguity in the said provisions in the first place. The words
thereof are clear, unequivocal, and simple enough so as to preclude any mistake in the appreciation of
the same.
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of the Court
of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the
Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action
for damages of Insurance Company of North America (respondent) against Gaisano Cagayan, Inc.
(petitioner); and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.
The factual background of the case is as follows:

Violeta did not adduce any evidence that Eulogio might have failed to fully understand the import and
meaning of the provisions of his Policy Contract and/or Application for Reinstatement, both of which he
voluntarily signed. While it is a cardinal principle of insurance law that a policy or contract of insurance
is to be construed liberally in favor of the insured and strictly as against the insurer company, yet,
contracts of insurance, like other contracts, are to be construed according to the sense and meaning of
the terms, which the parties themselves have used. If such terms are clear and unambiguous, they must
be taken and understood in their plain, ordinary and popular sense.45
Eulogio’s death, just hours after filing his Application for Reinstatement and depositing his payment for
overdue premiums and interests with Malaluan, does not constitute a special circumstance that can
persuade this Court to already consider Policy No. 9011992 reinstated. Said circumstance cannot
override the clear and express provisions of the Policy Contract and Application for Reinstatement, and
operate to remove the prerogative of Insular Life thereunder to approve or disapprove the Application for
Reinstatement. Even though the Court commiserates with Violeta, as the tragic and fateful turn of events
leaves her practically empty-handed, the Court cannot arbitrarily burden Insular Life with the payment of
proceeds on a lapsed insurance policy. Justice and fairness must equally apply to all parties to a case.
Courts are not permitted to make contracts for the parties. The function and duty of the courts consist
simply in enforcing and carrying out the contracts actually made.46
Policy No. 9011992 remained lapsed and void, not having been reinstated in accordance with the Policy
Contract and Application for Reinstatement before Eulogio’s death. Violeta, therefore, cannot claim any
death benefits from Insular Life on the basis of Policy No. 9011992; but she is entitled to receive the full
refund of the payments made by Eulogio thereon.
WHEREFORE, premises considered, the Court DENIES the instant Petition for Review on Certiorari
under Rule 45 of the Rules of Court. The Court AFFIRMS the Orders dated 10 April 2008 and 3 July
2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177, denying petitioner Violeta R. Lalican’s
Notice of Appeal, on the ground that the Decision dated 30 August 2007 subject thereof, was already
final and executory. No costs.
SO ORDERED.
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc.
(LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and
LSPI separately obtained from respondent fire insurance policies with book debt endorsements. The
insurance policies provide for coverage on "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still appearing in the Book of
Account of the Insured 45 days after the time of the loss covered under this Policy."3 The policies also
provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect
of the merchandise sold and delivered by the Insured which are outstanding at the
date of loss for a period in excess of six (6) months from the date of the covering
invoice or actual delivery of the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days
after the close of every calendar month all amount shown in their books of accounts
as unpaid and thus become receivable item from their customers and dealers. x x
x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in
the items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered
by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC
and LSPI filed with respondent their claims under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery
of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities event or force
majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract
committed by it since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI
never communicated to it that they insured their properties; that it never consented to paying the claim
of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on the merits
ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that the
fire was purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner;
that it has not been established that petitioner is the debtor of IMC and LSPI; that since the sales invoices
state that "it is further agreed that merely for purpose of securing the payment of purchase price, the
above-described merchandise remains the property of the vendor until the purchase price is fully paid",
IMC and LSPI retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting
aside the decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a
new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-
appellant to the insured Inter Capitol Marketing Corporation, plus legal interest
from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-
appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of
demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity
and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso
contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the general
rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the
loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the delivery
of the lost goods but the payment of its unpaid account and as such the obligation to pay is not
extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the
right to go against petitioner; that, being a fire insurance with book debt endorsements, what was insured
was the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April
11, 2001.13
Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE
WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN
THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be
over credit since an insurance "on credit" belies not only the nature of fire insurance but the express
terms of the policies; that it was not credit that was insured since respondent paid on the occasion of the
loss of the insured goods to fire and not because of the non-payment by petitioner of any obligation; that,
even if the insurance is deemed as one over credit, there was no loss as the accounts were not yet due
since no prior demands were made by IMC and LSPI against petitioner for payment of the debt and such
demands came from respondent only after it had already paid IMC and LSPI under the fire insurance
policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI
assumed the risk of loss when they secured fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner
upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment between
respondent and its insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting its interest to
keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors
who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the
ready-made clothing materials since it failed to overcome the presumption of liability under Article 126516
of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide stringent
measures of caution, care and maintenance on its property because electric wires do not usually short
circuit unless there are defects in their installation or when there is lack of proper maintenance and
supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing to pay
respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation
expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the
CA is limited to reviewing questions of law which involves no examination of the probative value of the
evidence presented by the litigants or any of them.18 The Supreme Court is not a trier of facts; it is not
its function to analyze or weigh evidence all over again.19 Accordingly, findings of fact of the appellate
court are generally conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved
by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there
is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when in making its findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the
findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA
erred in construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC
and LSPI since such insurance applies to loss of the ready-made clothing materials sold and delivered
to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines."23 ; and defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered
under this Policy."24 Nowhere is it provided in the questioned insurance policies that the subject of the
insurance is the goods sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
into it any alleged intention of the parties, the terms are to be understood literally just as they appear on
the face of the contract.25 Thus, what were insured against were the accounts of IMC and LSPI with
petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of
the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods
by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the
payment of the purchase price the above described merchandise remains the property of the vendor
until the purchase price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance
of the contract and the ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the
time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is
borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full
payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest
is not determined by concept of title, but whether insured has substantial economic interest in the
property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real
or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable
interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest
is requisite to the existence of such an interest, it is sufficient that the insured is so situated with reference
to the property that he would be liable to loss should it be injured or destroyed by the peril against which
it is insured.29 Anyone has an insurable interest in property who derives a benefit from its existence or
would suffer loss from its destruction.30 Indeed, a vendor or seller retains an insurable interest in the
property sold so long as he has any interest therein, in other words, so long as he would suffer by its
destruction, as where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain
to the unpaid accounts appearing in their Books of Account 45 days after the time of the loss covered by
the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of the
Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation
consists in the payment of money, the failure of the debtor to make the payment even by reason of a
fortuitous event shall not relieve him of his liability.33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when
the obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable
even in case of fortuitous event. It does not apply when the obligation is pecuniary in nature. 34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction
of anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense
that the object thereof is designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of anything of the same
kind even without the debtor's fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based on the principle that the genus of a thing can never
perish. Genus nunquan perit.36 An obligation to pay money is generic; therefore, it is not excused by
fortuitous loss of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case.
What is relevant here is whether it has been established that petitioner has outstanding accounts with
IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show
that petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the
check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in
favor of respondent upon receipt of the insurance proceeds. All these documents have been properly
identified, presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim.41 Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. 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. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary
weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General
Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI.
It only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was
offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which
LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
the MODIFICATION that the order to pay the amount of P535,613.00 to respondent is DELETED for
lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
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+.£ªwph!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+.£ªwph!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+.£ªwph!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+.£ªwph!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+.£ªwph!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.
G.R. No. 168115 June 8, 2007
VICENTE ONG LIM SING, JR., petitioner,
vs.
FEB LEASING & FINANCE CORPORATION, respondent.
DECISION
NACHURA, J.:
This is a petition for review on certiorari assailing the Decision1 dated March 15, 2005 and the Resolution2
dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.
The facts are as follows:
On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease3 of equipment and
motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim)
executed an Individual Guaranty Agreement4 with FEB to guarantee the prompt and faithful performance
of the terms and conditions of the aforesaid lease agreement. Corresponding Lease Schedules with
Delivery and Acceptance Certificates5 over the equipment and motor vehicles formed part of the
agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross monthly rental of One
Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (₱170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears, including
penalty charges and insurance premiums, amounted to Three Million Four Hundred Fourteen Thousand
Four Hundred Sixty-Eight and 75/100 Pesos (₱3,414,468.75). On August 23, 2000, FEB sent a letter to
JVL demanding payment of the said amount. However, JVL failed to pay.6
On December 6, 2000, FEB filed a Complaint7 with the Regional Trial Court of Manila, docketed as Civil
Case No. 00-99451, for sum of money, damages, and replevin against JVL, Lim, and John Doe.
In the Amended Answer,8 JVL and Lim admitted the existence of the lease agreement but asserted that
it is in reality a sale of equipment on installment basis, with FEB acting as the financier. JVL and Lim
claimed that this intention was apparent from the fact that they were made to believe that when full
payment was effected, a Deed of Sale will be executed by FEB as vendor in favor of JVL and Lim as
vendees.9 FEB purportedly assured them that documenting the transaction as a lease agreement is just
an industry practice and that the proper documentation would be effected as soon as full payment for
every item was made. They also contended that the lease agreement is a contract of adhesion and
should, therefore, be construed against the party who prepared it, i.e., FEB.
In upholding JVL and Lim’s stance, the trial court stressed the contradictory terms it found in the lease
agreement. The pertinent portions of the Decision dated November 22, 2002 read:
A profound scrutiny of the provisions of the contract which is a contract of adhesion at once exposed the
use of several contradictory terms. To name a few, in Section 9 of the said contract – disclaiming
warranty, it is stated that the lessor is not the manufacturer nor the latter’s agent and therefore does not
guarantee any feature or aspect of the object of the contract as to its merchantability. Merchantability is
a term applied in a contract of sale of goods where conditions and warranties are made to apply. Article
1547 of the Civil Code provides that unless a contrary intention appears an implied warranty on the part
of the seller that he has the right to sell and to pass ownership of the object is furnished by law together
with an implied warranty that the thing shall be free from hidden faults or defects or any charge or
encumbrance not known to the buyer.
In an adhesion contract which is drafted and printed in advance and parties are not given a real arms’
length opportunity to transact, the Courts treat this kind of contract strictly against their architects for the
reason that the party entering into this kind of contract has no choice but to accept the terms and
conditions found therein even if he is not in accord therewith and for that matter may not have understood
all the terms and stipulations prescribed thereat. Contracts of this character are prepared unilaterally by
the stronger party with the best legal talents at its disposal. It is upon that thought that the Courts are
called upon to analyze closely said contracts so that the weaker party could be fully protected.
Another instance is when the alleged lessee was required to insure the thing against loss, damage or
destruction.
In property insurance against loss or other accidental causes, the assured must have an insurable
interest, 32 Corpus Juris 1059.
xxxx
It has also been held that the test of insurable interest in property is whether the assured has a right, title
or interest therein that he will be benefited by its preservation and continued existence or suffer a direct
pecuniary loss from its destruction or injury by the peril insured against. If the defendants were to be
regarded as only a lessee, logically the lessor who asserts ownership will be the one directly benefited
or injured and therefore the lessee is not supposed to be the assured as he has no insurable interest.
There is also an observation from the records that the actual value of each object of the contract would
be the result after computing the monthly rentals by multiplying the said rentals by the number of months
specified when the rentals ought to be paid.
Still another observation is the existence in the records of a Deed of Absolute Sale by and between the
same parties, plaintiff and defendants which was an exhibit of the defendant where the plaintiff sold to
the same defendants one unit 1995 Mitsubishi L-200 STRADA DC PICK UP and in said Deed, The Court
noticed that the same terms as in the alleged lease were used in respect to warranty, as well as liability
in case of loss and other conditions. This action of the plaintiff unequivocally exhibited their real intention
to execute the corresponding Deed after the defendants have paid in full and as heretofore discussed
and for the sake of emphasis the obscurity in the written contract cannot favor the party who caused the
obscurity.
Three Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight Pesos and 75/100
(Php3,414,468.75), with interest at the rate of twelve percent (12%) per annum starting from the date of
judicial demand on 06 December 2000, until full payment thereof. Costs against appellees.
SO ORDERED.17
Lim filed the instant Petition for Review on Certiorari under Rule 45

Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon the intention contending that:
of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be
contrary to the evident intention of the parties, their contemporaneous and subsequent acts shall be
principally considered. If the doubts are cast upon the principal object of the contract in such a way that I
it cannot be known what may have been the intention or will of the parties, the contract shall be null and
void.10
The Honorable Court of Appeals erred when it failed to consider that the undated complaint was filed by
Saturnino J. Galang, Jr., without any authority from respondent’s Board of Directors and/or Secretary’s
Thus, the court concluded with the following disposition: Certificate.

In this case, which is held by this Court as a sale on installment there is no chattel mortgage on the thing II
sold, but it appears amongst the Complaint’s prayer, that the plaintiff elected to exact fulfillment of the
obligation.
The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the 1997 Rules
of Civil Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004).
For the vehicles returned, the plaintiff can only recover the unpaid balance of the price because of the
previous payments made by the defendants for the reasonable use of the units, specially so, as it
III
appears, these returned vehicles were sold at auction and that the plaintiff can apply the proceeds to the
balance. However, with respect to the unreturned units and machineries still in the possession of the
defendants, it is this Court’s view and so hold that the defendants are liable therefore and accordingly The Honorable Court of Appeals erred in not dismissing the appeal for failure of the respondent to file
are ordered jointly and severally to pay the price thereof to the plaintiff together with attorney’s fee and on time its appellant’s brief and to separately rule on the petitioner’s motion to dismiss.
the costs of suit in the sum of Php25,000.00.
IV
SO ORDERED.11
The Honorable Court of Appeals erred in finding that the contract between the parties is one of a financial
On December 27, 2002, FEB filed its Notice of Appeal.12 Accordingly, on January 17, 2003, the court lease and not of a contract of sale.
issued an Order13 elevating the entire records of the case to the CA. FEB averred that the trial court
erred:
V

A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal properties
on installment and not of lease; The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to the
respondent are "rentals" and not installments paid for the purchase price of the subject motor vehicles,
heavy machines and equipment.
B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not R.A. No.
8556;
VI

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the price because
of the previous payments made by the defendants for the reasonable use of the units; The Honorable Court of Appeals erred in ruling that the previous contract of sale involving the pick-up
vehicle is of no consequence.

D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente Ong Lim, Jr.
to the Plaintiff-Appellant.14 VII

On March 15, 2005, the CA issued its Decision15 declaring the transaction between the parties as a The Honorable Court of Appeals failed to take into consideration that the contract of lease, a contract of
financial lease agreement under Republic Act (R.A.) No. 8556.16 The fallo of the assailed Decision reads: adhesion, concealed the true intention of the parties, which is a contract of sale.

WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November 2002 VIII
rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451 is REVERSED
and SET ASIDE, and a new judgment is hereby ENTERED ordering appellees JVL Food Products and
Vicente Ong Lim, Jr. to solidarily pay appellant FEB Leasing and Finance Corporation the amount of
The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable interest over
the subject personal properties.
IX
The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its usage of the
term merchantability.18
We affirm the ruling of the appellate court.
First, Lim can no longer question Galang’s authority as FEB’s authorized representative in filing the suit
against Lim. Galang was the representative of FEB in the proceedings before the trial court up to the
appellate court. Petitioner never placed in issue the validity of Galang’s representation before the trial
and appellate courts. Issues raised for the first time on appeal are barred by estoppel. Arguments not
raised in the original proceedings cannot be considered on review; otherwise, it would violate basic
principles of fair play.19
Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters
agreed upon during the pre-trial conference, or in not dismissing the appeal for failure of FEB to file its
brief on time, or in not ruling separately on the petitioner’s motion to dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of
the duty to reconcile both the need to speedily put an end to litigation and the parties’ right to due process.
In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve
the demands of substantial justice and equity.20 In Aguam v. Court of Appeals , the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred
on the court, not a duty. The "discretion must be a sound one, to be exercised in accordance with the
tenets of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities,
however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's
primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike
duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to
justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded
the amplest opportunity for the proper and just determination of his cause, free from the unacceptable
plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the
policy of the court is to encourage hearings of appeals on their merits and the rules of procedure ought
not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not
override substantial justice. It is a far better and more prudent course of action for the court to excuse a
technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather
than dispose of the case on technicality and cause a grave injustice to the parties, giving a false
impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of
justice.21
Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract is not
void per se. It is as binding as any ordinary contract. A party who enters into an adhesion contract is free
to reject the stipulations entirely.22 If the terms thereof are accepted without objection, then the contract
serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement between
them, and that no representations have been made other than as set forth herein. This Agreement shall
not be amended or altered in any manner, unless such amendment be made in writing and signed by
the parties hereto.
Petitioner’s claim that the real intention of the parties was a contract of sale of personal property on
installment basis is more likely a mere afterthought in order to defeat the rights of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance Certificates is,
in point of fact, a financial lease within the purview of R.A. No. 8556. Section 3(d) thereof defines
"financial leasing" as:
[A] mode of extending credit through a non-cancelable lease contract under which the lessor purchases
or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business
and office machines, and other movable or immovable property in consideration of the periodic payment
by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase
price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory
period of not less than two (2) years during which the lessee has the right to hold and use the leased
property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase
the leased property from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly periodic
payment of ₱170,494.00. The periodic payment by petitioner is sufficient to amortize at least 70% of the
purchase price or acquisition cost of the said movables in accordance with the Lease Schedules with
Delivery and Acceptance Certificates. "The basic purpose of a financial leasing transaction is to enable
the prospective buyer of equipment, who is unable to pay for such equipment in cash in one lump sum,
to lease such equipment in the meantime for his use, at a fixed rental sufficient to amortize at least 70%
of the acquisition cost (including the expenses and a margin of profit for the financial lessor) with the
expectation that at the end of the lease period the buyer/financial lessee will be able to pay any remaining
balance of the purchase price."23
The allegation of petitioner that the rent for the use of each movable constitutes the value of the vehicle
or equipment leased is of no moment. The law on financial lease does not prohibit such a circumstance
and this alone does not make the transaction between the parties a sale of personal property on
installment. In fact, the value of the lease, usually constituting the value or amount of the property
involved, is a benefit allowed by law to the lessor for the use of the property by the lessee for the duration
of the lease. It is recognized that the value of these movables depreciates through wear and tear upon
use by the lessee. In Beltran v. PAIC Finance Corporation,24 we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading company.
Neither is it an ordinary leasing company; it does not make its profit by buying equipment and repeatedly
leasing out such equipment to different users thereof. But a financial lease must be preceded by a
purchase and sale contract covering the equipment which becomes the subject matter of the financial
lease. The financial lessor takes the role of the buyer of the equipment leased. And so the formal or
documentary tie between the seller and the real buyer of the equipment, i.e., the financial lessee, is
apparently severed. In economic reality, however, that relationship remains. The sale of the equipment
by the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to
secure the repayment over time of the purchase price of the equipment, plus financing charges, through
the payment of lease rentals; that legal title is the upfront security held by the financial lessor, a security
probably superior in some instances to a chattel mortgagee's lien.25
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered into the
lease contract with full knowledge of its terms and conditions. The contract was in force for more than
four years. Since its inception on March 9, 1995, JVL and Lim never questioned its provisions. They only
attacked the validity of the contract after they were judicially made to answer for their default in the
payment of the agreed rentals.
It is settled that the parties are free to agree to such stipulations, clauses, terms, and conditions as they
may want to include in a contract. As long as such agreements are not contrary to law, morals, good
customs, public policy, or public order, they shall have the force of law between the parties.26 Contracting
parties may stipulate on terms and conditions as they may see fit and these have the force of law between
them.27

The stipulation in Section 1428 of the lease contract, that the equipment shall be insured at the cost and
expense of the lessee against loss, damage, or destruction from fire, theft, accident, or other insurable
risk for the full term of the lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable
interest in the equipment and motor vehicles leased. Section 17 of the Insurance Code provides that the
measure of an insurable interest in property is the extent to which the insured might be damnified by loss
or injury thereof. It cannot be denied that JVL will be directly damnified in case of loss, damage, or
destruction of any of the properties leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the
merchantability of the equipment is a valid stipulation. Section 9.1 of the lease contract is stated as:

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT IT
HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT THERE ARE NO
WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY
FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS,
SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER THE
EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATIONS OR
CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR APPARATUS OR SPECIAL
METHODS.29

In the financial lease agreement, FEB did not assume responsibility as to the quality, merchantability, or
capacity of the equipment. This stipulation provides that, in case of defect of any kind that will be found
by the lessee in any of the equipment, recourse should be made to the manufacturer. "The financial
lessor, being a financing company, i.e., an extender of credit rather than an ordinary equipment rental
company, does not extend a warranty of the fitness of the equipment for any particular use. Thus, the
financial lessee was precisely in a position to enforce such warranty directly against the supplier of the
equipment and not against the financial lessor. We find nothing contra legem or contrary to public policy
in such a contractual arrangement."30

Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a contract
of sale on installment in the same manner that a previous transaction between the parties over a 1995
Mitsubishi L-200 Strada DC-Pick-Up was initially covered by an agreement denominated as a lease and
eventually became the subject of a Deed of Absolute Sale.

We join the CA in rejecting this view because to allow the transaction involving the pick-up to be read
into the terms of the lease agreement would expand the coverage of the agreement, in violation of Article
1372 of the New Civil Code. 31 The lease contract subject of the complaint speaks only of a lease. Any
agreement between the parties after the lease contract has ended is a different transaction altogether
and should not be included as part of the lease. Furthermore, it is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall control. No amount of extrinsic aid is necessary in
order to determine the parties' intent.32

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in CA-
G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23, 2005 are AFFIRMED. Costs
against petitioner.

SO ORDERED.