insurance- full text- warranty and premium

8/13/2019 Insurance- Full Text- Warranty and Premium

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FIRST DIVISION

[G.R. No. 138941. October 8, 2001.]

AMERICAN HOME ASSURANCE COMPANY,petitioner, vs. TANTUCO ENTERPRISES, INC.,respondent.

Redentor A. Salonga for petitioner.

Gilbert D. Camaligan for private respondent.

SYNOPSIS

Respondent insured against fire its two oil mills with the petitioner. Thefirst oil mill was covered by Fire Insurance Policy No. 306-7432324-3 for theperiod March 1, 1991 to 1992 while the second oil mill, which commonlyreferred to as the new oil mill was covered by Policy No. 306-7432321-9 alsofor the same term. Unfortunately, on September 30, 1991, the new oil millwas destroyed by fire. Respondent claimed for the insurance proceeds fromthe petitioner but it was rejected by the latter for the reason that the burnedoil mill was not covered by any insurance policy. According to petitioner, the

oil mill gutted by the fire was not the one described by the specific boundariesin the contested policy. In further attempt to avoid liability, petitioner claimedthat respondent forfeited the renewal policy for its failure to pay the fullamount of the premium and breached the Fire Extinguishing AppliancesWarranty. Hence, respondent filed a complaint for specific performance anddamages with the Regional Trial Court of Lucena City. After trial, the courtrendered judgment in favor of respondent. On appeal, the Court of Appealsupheld the decision of the RTC.

Hence, this petition for review on certiorari.

In construing the words used descriptive of a building insured, thegreatest liberality is shown by the courts in giving effect to the insurance. Inview of the custom of insurance agents to examine buildings before writingpolicies upon them, and since a mistake as to the identity and character ofthe building is extremely unlikely, the courts are inclined to consider that thepolicy of insurance covers any building which the parties manifestly intendedto insure, however inaccurate the description may be. Notwithstanding,


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therefore, the misdescription in the policy in this case, it is beyond dispute,that what the parties manifestly intended to insure was the new oil mill. If theparties really intended to protect the first oil mill, then there is no need tospecify it as new. Indeed, it would be absurd to assume that respondentwould protect its first oil mill for different amounts and leave uncovered itssecond one. The first oil mill is already covered under the policy issued by thepetitioner. It is unthinkable for respondent to obtain the other policy from thevery same company. The latter ought to know that a second agreement overthat same realty results in its overinsurance.

On the supposed respondent's insufficient premium payment, the Courtfound that the said issue was never raised at the pre-trial proceedings. Nordid the petitioner present during the trial any witness to testify thatrespondent indeed failed to pay the full amount of the premium. As to thealleged breach of the warranty, the Court found that the respondent was able

to comply with the warranty.

Petition dismissed.

SYLLABUS

1.COMMERCIAL LAW; INSURANCE; FIRE INSURANCE; MISDESCRIPTION IN THEPOLICY OF THE BUILDING INSURED; INSURANCE POLICY COVERS ANYBUILDING WHICH THE PARTIES MANIFESTLY INTENDED TO INSURE,HOWEVER INACCURATE THE DESCRIPTION MAY BE; CASE AT BAR. In

construing the words used descriptive of a building insured, the greatestliberality is shown by the courts in giving effect to the insurance. In view of thecustom of insurance agents to examine buildings before writing policies uponthem, and since a mistake as to the identity and character of the building isextremely unlikely, the courts are inclined to consider that the policy of insurancecovers any building which the parties manifestly intended to insure, howeverinaccurate the description may be. Notwithstanding, therefore, themisdescription in the policy, it is beyond dispute, to our mind, that what theparties manifestly intended to insure was the new oil mill. This is obvious fromthe categorical statement embodied in the policy, extending its protection: "Onmachineries and equipment with complete accessories usual to a coconut oil millincluding stocks of copra, copra cake and copra mills whilst contained in the newoil mill building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM,LUCENA CITY UNBLOCKED." If the parties really intended to protect the first oilmill, then there is no need to specify it as new. Indeed, it would be absurd toassume that respondent would protect its first oil mill for different amounts andleave uncovered its second one. As mentioned earlier, the first oil mill is already


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covered under Policy No. 306-7432324-4 issued by the petitioner. It isunthinkable for respondent to obtain the other policy from the verysame company. The latter ought to know that a second agreement over thatsame realty results in its overinsurance. cECTaD

2.ID.; ID.; ID.; ID.; CONTRACTUAL INTENTION; PURPOSE AND OBJECT OF THECONTRACT WILL BE CONSIDERED BY THE COURT IN THE DETERMINATIONTHEREOF; DOUBT TO BE RESOLVED AGAINST INSURER; CASE AT BAR.

Anent petitioner's argument that the respondent is barred by estoppel fromclaiming that the description of the insured oil mill in the policy was wrong, wefind that the same proceeds from a wrong assumption. Evidence on recordreveals that respondent's operating manager, Mr. Edison Tantuco, notified Mr.Borja (the petitioner's agent with whom respondent negotiated for the contract)about the inaccurate description in the policy. However, Mr. Borja assured

Mr. Tantuco that the use of the adjective new will distinguish the insuredproperty. The assuranceconvinced respondent that, despite the impreciseness inthe specification of the boundaries, the insurance will cover the new oil mill. Weagain stress that the object of the court in construing a contract is to ascertainthe intent of the parties to the contract and to enforce the agreement which theparties have entered into. In determining what the parties intended, the courtswill read and construe the policy as a whole and if possible, give effect to all theparts of the contract, keeping in mind always, however, the prime rule that inthe event of doubt, this doubt is to be resolved against the insurer. Indetermining the intent of the parties to the contract, the courts will consider the

purpose and object of the contract.

3.ID.; ID.; ID.; PREMIUM; ISSUE AS TO INADEQUATE PAYMENT THEREOF WASNEVER RAISED BY PETITIONER IN THE PRE-TRIAL PROCEEDING. It is truethat the asseverations petitioner made in paragraph 24 of its Answer ostensiblyspoke of the policy's condition for payment of the renewal premium on time andrespondent's non-compliance with it. Yet, it did not contain any specific anddefinite allegation that respondent did not pay the premium, or that it did notpay the full amount, or that it did not pay the amount on time. Likewise, whenthe issues to be resolved in the trial court were formulated at the pre-trial

proceedings, the question of the supposed inadequate payment was neverraised. Most significant to point, petitioner fatally neglected to present, duringthe whole course of the trial, any witness to testify that respondent indeed failedto pay the full amount of the premium. The thrust of the cross-examination ofMr. Borja, on the other hand, was not for the purpose of proving this fact.Though it briefly touched on the alleged deficiency, such was made in the courseof discussing a discount or rebate, which the agent apparently gave the


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respondent. Certainly, the whole tenor of Mr. Borja's testimony, both duringdirect and cross examinations, implicitly assumed a valid and subsistinginsurance policy. It must be remembered that he was called to the standbasically to demonstrate that an existing policy issued by the petitioner coversthe burned building.

4.ID.; ID.; ID.; FIRE EXTINGUISHING APPLIANCES WARRANTY; NOT VIOLATEDBY RESPONDENT IN CASE AT BAR; WARRANTY; NOT ONLY STRICTLYCONSTRUED AGAINST THE INSURER BUT SHOULD BE REASONABLYINTERPRETED. Petitioner contends that respondent violated the express termsof the Fire Extinguishing Appliances Warranty. Petitioner argues that thewarranty clearly obligates the insured to maintain all the appliances specifiedtherein. The breach occurred when the respondent failed to install internal firehydrants inside the burned building as warranted. This fact was admitted by the

oil mill's expeller operator, Gerardo Zarsuela. Again, the argument lacks merit.We agree with the appellate court's conclusion that the aforementioned warrantydid not require respondent to provide for all the fire extinguishing appliancesenumerated therein. Additionally, we find that neither did it require that theappliances are restricted to those mentioned in the warranty. In other words,what the warranty mandates is that respondent should maintain in efficientworking condition within the premises of the insured property, fire fightingequipments such as, but not limited to, those identified in the list, which willserve as the oil mill's first line of defense in case any part of it bursts into flame.To be sure, respondent was able to comply with the warranty. Within the vicinity

of the new oil mill can be found the following devices: numerous portable fireextinguishers, two fire hoses, fire hydrant, and an emergency fire engine. All ofthese equipments were in efficient working order when the fire occurred. Itought to be remembered that not only are warranties strictly construed againstthe insurer, but they should, likewise, by themselves be reasonably interpreted.That reasonableness is to be ascertained in light of the factual conditionsprevailing in each case. Here, we find that there is no more need for an internalhydrant considering that inside the burned building were: (1) numerous portablefire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has aconnection to one of the external hydrants.

5.REMEDIAL LAW; EVIDENCE; ADMISSIBILITY; PAROLE EVIDENCE RULE;EXCEPTIONS; APPLICABLE TO CASE AT BAR; EVIDENCEALIUNDE; MAY BE

ADMITTED TO EXPLAIN THE IMPERFECTION IN THE DESCRIPTION OF THEPROPERTY INSURED AND TO CLARIFY THE INTENT OF THE PARTIES. Theimperfection in the description of the insured oil mill's boundaries can be


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attributed to a misunderstanding between the petitioner's general agent, Mr.Alfredo Borja, and its policy issuing clerk, who made the error of copying theboundaries of the first oil mill when typing the policy to be issued for the newone. As testified to by Mr. Borja: . . . . It is thus clear that the source of thediscrepancy happened during the preparation of the written contract. These factslead us to hold that the present case falls within one of the recognizedexceptions to the parole evidence rule. Under the Rules of Court, a party maypresent evidence to modify, explain or add to the terms of the written agreementif he puts in issue in his pleading, among others, its failure to express the trueintent and agreement of the parties thereto. Here, the contractual intention ofthe parties cannot be understood from a mere reading of the instrument. Thus,while the contract explicitly stipulated that it was for the insurance of the new oilmill, the boundary description written on the policy concededly pertains to thefirst oil mill. This irreconcilable difference can only be clarified by admitting

evidence aliunde, which will explain the imperfection and clarify the intent of theparties.

D E C I S I O N

PUNO,J p:

Before us is a Petition for Review on Certiorariassailing the Decision of the Court

of Appeals in CA-G.R. CV No. 52221 promulgated on January 14, 1999, whichaffirmed in totothe Decision of the Regional Trial Court, Branch 53, Lucena Cityin Civil Case No. 92-51 dated October 16, 1995.

Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling andrefining industry. It owns two oil mills. Both are located at factory compound atIyam, Lucena City. It appears that respondent commenced its businessoperations with only one oil mill. In 1988, it started operating its second oil mill.The latter came to be commonly referred to as the new oil mill.

The two oil mills were separately covered by fire insurance policies issued bypetitioner American Home Assurance Co., Philippine Branch.1The first oil millwas insured for three million pesos (P3,000,000.00) under Policy No. 306-7432324-3 for the period March 1, 1991 to 1992.2The new oil mill was insuredfor six million pesos (P6,000,000.00) under Policy No. 306-7432321-9 for thesame term.3Official receipts indicating payment for the full amount of thepremium were issued by the petitioner's agent.4
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A fire that broke out in the early morning of September 30, 1991 gutted andconsumed the new oil mill. Respondent immediately notified the petitioner of theincident. The latter then sent its appraisers who inspected the burned premisesand the properties destroyed. Thereafter, in a letter dated October 15, 1991,petitioner rejected respondent's claim for the insurance proceeds on the groundthat no policy was issued by it covering the burned oil mill. It stated that thedescription of the insured establishment referred to another building thus: "Ourpolicy nos. 306-7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend insurancecoverage to your oil mill under Building No. 5, whilst the affected oil mill wasunder Building No. 14. "5TAIDHa

A complaint for specific performance and damages was consequently institutedby the respondent with the RTC, Branch 53 of Lucena City. On October 16, 1995,after trial, the lower court rendered a Decision finding the petitioner liable on the

insurance policy thus:

"WHEREFORE, judgment is rendered in favor of the plaintiff orderingdefendant to pay plaintiff:

(a)P4,406,536.40 representing damages for loss by fire of its insuredproperty with interest at the legal rate;

(b)P80,000.00 for litigation expenses;

(c)P300,000.00 for and as attorney's fees; and

(d)Pay the costs.

SO ORDERED."6

Petitioner assailed this judgment before the Court of Appeals. The appellatecourt upheld the same in a Decision promulgated on January 14, 1999, thepertinent portion of which states:

"WHEREFORE, the instant appeal is hereby DISMISSED for lack of meritand the trial court's Decision dated October 16, 1995 is hereby

AFFIRMED in toto.

SO ORDERED."7

Petitioner moved for reconsideration. The motion, however, was deniedfor lack of merit in a Resolution promulgated on June 10, 1999.
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Hence, the present course of action, where petitioner ascribes to theappellate court the following errors:

"(1)The Court of Appeals erred in its conclusion that the issue of non-payment of the premium was beyond its jurisdiction because it was

raised for the first time on appeal."8

"(2)The Court of Appeals erred in its legal interpretation of 'FireExtinguishing Appliances Warranty' of the policy."9

"(3) With due respect, the conclusion of the Court of Appeals giving noregard to the parole evidence rule and the principle of estoppel iserroneous."10

The petition is devoid of merit.

The primary reason advanced by the petitioner in resisting the claim ofthe respondent is that the burned oil mill is not covered by any insurancepolicy. According to it, the oil mill insured is specifically described in the policyby its boundaries in the following manner:

"Front: by a driveway thence at 18 meters distance by Bldg. No. 2.

Right: by an open space thence by Bldg. No. 4.

Left: Adjoining thence an imperfect wall by Bldg. No. 4.

Rear: by an open space thence at 8 meters distance."

However, it argues that this specific boundary description clearly pertains, notto the burned oil mill, but to the other mill. In other words, the oil mill guttedby fire was not the one described by the specific boundaries in the contestedpolicy.

What exacerbates respondent's predicament, petitioner posits, is that it did nothave the supposed wrong description or mistake corrected. Despite the fact thatthe policy in question was issued way back in 1988, or about three years beforethe fire, and despite the "Important Notice" in the policy that "Please read andexamine the policy and if incorrect, return it immediately foralteration,"respondent apparently did not call petitioner's attention with respectto the misdescription.

By way of conclusion, petitioner argues that respondent is "barred by the paroleevidence rule from presenting evidence (other than the policy in question) of its
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self-serving intention (sic) that it intended really to insure the burned oil mill,"just as it is "barred by estoppelfrom claiming that the description of the insuredoil mill in the policy was wrong, because it retained the policy without having thesame corrected before the fire by an endorsement in accordance with itsCondition No. 28."

These contentions can not pass judicial muster.

In construing the words used descriptive of a building insured, the greatestliberality is shown by the courts in giving effect to the insurance.11In view ofthe custom of insurance agents to examine buildings before writing policies uponthem, and since a mistake as to the identity and character of the building isextremely unlikely, the courts are inclined to consider that the policy of insurancecovers any building which the parties manifestly intended to insure, howeverinaccurate the description may be.12

Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute,to our mind, that what the parties manifestly intended to insure was the new oilmill. This is obvious from the categorical statement embodied in the policy,extending its protection:

"On machineries and equipment with complete accessories usual to acoconut oil mill including stocks of copra, copra cake and copra millswhilst contained in the new oil millbuilding, situate (sic) at UNNO.

ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY

UNBLOCKED.''13(emphasis supplied.)

If the parties really intended to protect the first oil mill, then there is no needto specify it as new.

Indeed, it would be absurd to assume that respondent would protect its first oilmill for different amounts and leave uncovered its second one. As mentionedearlier, the first oil mill is already covered under Policy No. 306-7432324-4 issuedby the petitioner. It is unthinkable for respondent to obtain the other policy fromthe very same company. The latter ought to know that a second agreement over

that same realty results in its overinsurance.

The imperfection in the description of the insured oil mill's boundaries can beattributed to a misunderstanding between the petitioner's general agent, Mr.

Alfredo Borja, and its policy issuing clerk, who made the error of copying theboundaries of the first oil mill when typing the policy to be issued for the newone. As testified to by Mr. Borja: DHSEcI
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"Atty. G. Camaligan:

Q:What did you do when you received the report?

A:I told them as will be shown by the map the intention really of Mr.

Edison Tantuco is to cover the new oil mill that is why when Ipresented the existing policy of the old policy, the policy issuingclerk just merely (sic) copied the wording from the old policy andwhat she typed is that the description of the boundaries from theold policy was copied but she inserted covering the new oil milland to me at that time the important thing is that it covered thenew oil mill because it is just within one compound and there areonly two oil mill[s] and so just enough, I had the policy prepared.In fact, two policies were prepared having the same date one forthe old one and the other for the new oil mill and exactly thesame policy period, sir."14(emphasis supplied)

It is thus clear that the source of the discrepancy happened during thepreparation of the written contract.

These facts lead us to hold that the present case falls within one of therecognized exceptions to the parole evidence rule. Under the Rules of Court, aparty may present evidence to modify, explain or add to the terms of the writtenagreement if he puts in issue in his pleading, among others, its failure to express

the true intent and agreement of the parties thereto.15Here, the contractualintention of the parties cannot be understood from a mere reading of theinstrument. Thus, while the contract explicitly stipulated that it was for theinsurance of the new oil mill, the boundary description written on the policyconcededly pertains to the first oil mill. This irreconcilable difference can only beclarified by admitting evidence aliunde, which will explain the imperfection andclarify the intent of the parties.

Anent petitioner's argument that the respondent is barred by estoppel fromclaiming that the description of the insured oil mill in the policy was wrong, we

find that the same proceeds from a wrong assumption. Evidence on recordreveals that respondent's operating manager, Mr. Edison Tantuco, notified Mr.Borja (the petitioner's agent with whom respondent negotiated for the contract)about the inaccurate description in the policy. However, Mr. Borja assuredMr. Tantuco that the use of the adjective newwill distinguish the insuredproperty. The assurance convinced respondent, despite the impreciseness in the
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specification of the boundaries, the insurance will cover the new oil mill. This canbe seen from the testimony on cross of Mr. Tantuco:

"ATTY. SALONGA:

Q:You mentioned, sir, that at least in so far as Exhibit A is concern youhave read what the policy contents. (sic)

Kindly take a look in the page of Exhibit A which was marked as ExhibitA-2 particularly the boundaries of the property insured by theinsurance policy Exhibit A, will you tell us as the manager ofthe company whether the boundaries stated in Exhibit A-2 are the

boundaries of the old (sic) mill that was burned or not.

A:It was not, I called up Mr. Borja regarding this matter and he told methat what is important is the word new oil mill.Mr. Borja said, asa matter of fact, you can never insured (sic) one property withtwo (2) policies, you will only do that if you will make to increasethe amount and it is by indorsement not by another policy, sir."16

We again stress that the object of the court in construing a contract is toascertain the intent of the parties to the contract and to enforce the agreementwhich the parties have entered into. In determining what the parties intended,the courts will read and construe the policy as a whole and if possible, give effectto all the parts of the contract, keeping in mind always, however, the prime rulethat in the event of doubt, this doubt is to be resolved against the insurer. Indetermining the intent of the parties to the contract, the courts will consider thepurpose and object of the contract.17

In a further attempt to avoid liability, petitioner claims that respondent forfeitedthe renewal policy for its failure to pay the full amount of the premium andbreach of the Fire Extinguishing Appliances Warranty.

The amount of the premium stated on the face of the policy was P89,770.20.From the admission of respondent's own witness, Mr. Borja, which the petitionercited, the former only paid it P75,147.00, leaving a difference of P14,623.20. Thedeficiency, petitioner argues, suffices to invalidate the policy, in accordancewith Section 77 of the Insurance Code.18

The Court of Appeals refused to consider this contention of the petitioner. It heldthat this issue was raised for the first time on appeal, hence, beyond its

jurisdiction to resolve, pursuant to Rule 46, Section 18 of the Rules of Court.19
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Petitioner, however, contests this finding of the appellate court. It insists that theissue was raised in paragraph 24 of its Answer, viz.:

"24.Plaintiff has not complied with the condition of the policy andrenewal certificate that the renewal premium should be paid on or

before renewal date."

Petitioner adds that the issue was the subject of the cross-examinationof Mr. Borja, who acknowledged that the paid amount was lacking byP14,623.20 by reason of a discount or rebate, which rebate under Sec. 361 ofthe Insurance Code is illegal.

The argument fails to impress. It is true that the asseverations petitioner madein paragraph 24 of its Answer ostensibly spoke of the policy's condition forpayment of the renewal premium on time and respondent's non-compliance with

it. Yet, it did not contain any specific and definite allegation that respondent didnot pay the premium, or that it did not pay the full amount, or that it did not paythe amount on time.

Likewise, when the issues to be resolved in the trial court were formulated at thepre-trial proceedings, the question of the supposed inadequate payment wasnever raised. Most significant to point, petitioner fatally neglected to present,during the whole course of the trial, any witness to testify that respondentindeed failed to pay the full amount of the premium. The thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of proving

this fact. Though it briefly touched on the alleged deficiency, such was made inthe course of discussing a discount or rebate, which the agent apparently gavethe respondent. Certainly, the whole tenor of Mr. Borja's testimony, both duringdirect and cross examinations, implicitly assumed a valid and subsistinginsurance policy. It must be remembered that he was called to the standbasically to demonstrate that an existing policy issued by the petitioner coversthe burned building.

Finally, petitioner contends that respondent violated the express terms of theFire Extinguishing Appliances Warranty. The said warranty provides:

"WARRANTED that during the currency of this Policy, Fire ExtinguishingAppliances as mentioned below shall be maintained in efficient workingorder on the premises to which insurance applies:

-PORTABLE EXTINGUISHERS


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-INTERNAL HYDRANTS

-EXTERNAL HYDRANTS

-FIRE PUMP

-24-HOUR SECURITY SERVICES

BREACH of this warranty shall render this policy null and void andthe Company shall no longer be liable for any loss which may occur."20

Petitioner argues that the warranty clearly obligates the insured to maintain allthe appliances specified therein. The breach occurred when the respondent failedto install internal fire hydrants inside the burned building as warranted. This factwas admitted by the oil mill's expeller operator, Gerardo Zarsuela.

Again, the argument lacks merit. We agree with the appellate court's conclusionthat the aforementioned warranty did not require respondent to provide for allthe fire extinguishing appliances enumerated therein. Additionally, we find thatneither did it require that the appliances are restricted to those mentioned in thewarranty. In other words, what the warranty mandates is that respondent shouldmaintain in efficient working condition within the premises of the insuredproperty, fire fighting equipments such as, but not limited to, those identified inthe list, which will serve as the oil mill's first line of defense in case any part of itbursts into flame.

To be sure, respondent was able to comply with the warranty. Within the vicinityof the new oil mill can be found the following devices: numerous portable fireextinguishers, two fire hoses,21fire hydrant,22and an emergency fireengine.23All of these equipments were in efficient working order when the fireoccurred.

It ought to be remembered that not only are warranties strictly construedagainst the insurer, but they should, likewise, by themselves be reasonablyinterpreted.24That reasonableness is to be ascertained in light of the factual

conditions prevailing in each case. Here, we find that there is no more need foran internal hydrant considering that inside the burned building were: (1)numerous portable fire extinguishers, (2) an emergency fire engine, and (3) afire hose which has a connection to one of the external hydrants.

IN VIEW WHEREOF, finding no reversible error in the impugned Decision, theinstant petition is hereby DISMISSED
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SO ORDERED.

Davide Jr., C.J., Pardoand Ynares-Santiago, JJ., concur.

Kapunan, J.,is on official leave.

EN BANC

[G.R. No. 33637. December 31, 1931.]

ANG GIOK CHIP, doing business under the name and styleof Hua Bee Kong Si,plaintiff-appellee, vs. SPRINGFIELD FIRE

& MARINE INSURANCE COMPANY,defendant-appellant.

C. A. Sobral,for appellant.

Paredes & Buencamino, for appellee.

Gibbs & McDonough andRoman Ozaeta as amici curiae.

SYLLABUS

1.INSURANCE; SECTION 65, INSURANCE ACT, ACT NO. 2427, ASAMENDED, CONSTRUED; VALIDITY OF A WARRANTY IN THE FORM OF ARIDER TO AN INSURANCE POLICY. A warranty referred to in the policy asforming part of the contract of insurance and in the form of a rider to theinsurance policy is valid and sufficient under section 65 of the Insurance Act.

2.ID.; ID.; ID. A rider attached to the policy of insurance is a part ofthe contract, to the same extent and with like effect as if actually embodiedtherein.

3.ID.; ID.; ID.

An express warranty must appear upon the face ofthe policy of insurance, or be clearly incorporated therein and made a partthereof by explicit reference, or by words clearly evidencing such intention.

4.ID.; ID.; ID.; ACCEPTANCE OF POLICY. The receipt of a policy ofinsurance by the insured without objection binds the acceptor and the insuredto the terms thereof.


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5.STATUTES; CONSTRUCTION OF STATUTES ADOPTED FROM OTHERSTATES. The Philippine law on insurance was taken verbatim from the lawof California. Accordingly, the courts of the Philippines should follow infundamental points at least, the construction placed by California courts on aCalifornia law.

D E C I S I O N

MALCOLM,J p:

An important question in the law of insurance, not heretoforeconsidered in this jurisdiction and, according to our information, not directlyresolved in California from which State the Philippine Insurance Act wastaken, must be decided on this appeal for the future guidance of trial courtsand of insurance companies doing business in the Philippine Islands. Thisquestion, flatly stated, is whether a warranty referred to in the policy asforming part of the contract of insurance and in the form of a rider to theinsurance policy, is null and void because not complying with the PhilippineInsurance Act. The court has had the benefit of instructive briefs andmemoranda from the parties and has also been assisted by a well preparedbrief submitted on behalf of amici curiae.

The admitted facts are these: Ang Giok Chip doing business under the

name and style of Hua Bee Kong Si was formerly the owner of a warehousesituated at No. 643 Calle Reina Regente, City of Manila. The contents of thewarehouse were insured with three insurance companies for the total sum ofP60,000. One insurance policy, in the amount of P10,000, was taken out withthe Springfield Fire & Marine Insurance Company. The warehouse wasdestroyed by fire on January 11, 1928, while the policy issued by the lattercompany was in force.

Predicated on this policy the plaintiff instituted action in the Court ofFirst Instance of Manila against the defendant to recover a proportional part

of the loss coming to P8,170.59. Four special defenses were interposed onbehalf of the insurance company, one being planted on a violation ofwarranty F fixing the amount of hazardous goods which might be stored inthe insured building. The trial judge in his decision found against theinsurance company on all points, and gave judgment in favor of the plaintifffor the sum of P8,188.74. From this judgment the insurance company has


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appealed, and it is to the first and fourth errors assigned that we wouldaddress particular attention.

Considering the result at which we arrived, it is unnecessary for us todiscuss three of the four special defenses which were made by the insurance

company. We think, however, that it would be a reasonable deduction toconclude that more than 3 per cent of the total value of the merchandisecontained in the warehouse constituted hazardous goods, and that this percent reached as high as 39. We place reliance on the consular invoices and onthe testimony of the adjuster, Herridge. Having thus swept to one side allintervening obstacles, the legal question recurs, as stated in the beginning ofthis decision, of whether or not warranty F was null and void.

To place this question in its proper light, we turn to the policy issued bythe Springfield Fire & Marine Insurance Company in favor of the plaintiff. Thedescription of the risk in this policy is as follows:

"Ten thousand pesos Philippine Currency. On general non-hazardous merchandise,chiefly consisting of chucherias, also produce,Cacao, Flour, all the property of the Insured, or held by them in trust, oncommission or on joint account with others, or for which he isresponsible, while contained during the currency of this policy in thegodown, situate No. 643 Calle Reina Regente. . . .

"This policy is subject to the hereon attached 'Ordinary ShortPeriod Rate Scale' Warranties A & F, Co-insurances Clause 'and ThreeFourths Loss Clause,'which are forming part of same. Co-insurancedeclared:

"P20,000. Sun Insurance Office Ltd. (K & S)." (Italics inserted.)Securely pasted on the left hand margin of the face of the policy are fivewarranties and special clauses. One of them is warranty F, specificallyreferred to on the face of the policy, reading in part as follows:

"WARRANTY F

"It is hereby declared and agreed that during the currency of thispolicy no hazardous goods be stored in the Building to which thisinsurance applies or in any building communicating therewith, provided,always, however, that the Insured be permitted to store a small quantity

of the hazardous goods specified below, but not exceeding in all 3 percent of the total value of the whole of the goods or merchandisecontained in said warehouse, viz;. . . "

The applicable law is found in the Insurance Act, Act No. 2427, asamended, section 65 reading:

"Every express warranty, made at or before the execution of a policy,must be contained in the policy itself, or in another instrument signed by the


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insured and referred to in the policy, as making a part of it." As the Philippinelaw was taken verbatim from the law of California, in accordance with wellsettled canons of statutory construction, the court should follow infundamental points, at least, the construction placed by California courts on aCalifornia law. Unfortunately the researches of counsel reveal no authoritycoming from the courts of California which is exactly on all fours with the casebefore us. However, there are certain considerations lying at the basis ofCalifornia law and certain indications in the California decisions which pointthe way for the decision in this case.

Section 65 of the Philippine Insurance Act corresponds to section 2605of the Civil Code of California. The comments of the Code Examiners ofCalifornia disclose that the language of section 2605 was quite different fromthat under the Code as adopted in 1872. That language was found too harshas to insurance companies. The Code Examiners' notes state: "The

amendment restores the law as it existed previous to the Code: SeeParsonson Maritime Law, 106, and Phillips on Insurance, sec. 756." The passagereferred to in Phillips on Insurance, was worded by the author as follows:

"Any express warranty or condition is always a part of the policy, but,like any other part of an express contract, may be written in the margin, orcontained in proposals or documents expressly referred to in the policy, andso made a part of it." The annotator of the Civil Code of California, aftersetting forth these facts, adds:

". . . The section as it now reads is in harmony with the rule that

a warranty may be contained in another instrument than the policywhen expressly referred to in the policy as forming a part thereof: . . ."

What we have above stated has been paraphrased from the decision ofthe California Court of Appeals in the case of Isaac Upham Co. vs.UnitedStates Fidelity & Guaranty Co. ([1922], 211 Pac., 809), and thus discloses theattitude of the California courts. Likewise in the Federal courts, in the case ofConner vs. Manchester Assur. Co. ([1904], 130 Fed., 743), section 2605 ofthe Civil Code of California came under observation, and it was said that it "isin effect an affirmance of the generally accepted doctrine applicable to suchcontracts."

We, therefore, think it wrong to hold that the California law representsa radical departure from the basic principles governing the law of insurance.We are more inclined to believe that the codification of the law of Californiahad exactly the opposite purpose, and that in the language of the Federalcourt it was but an affirmance of the generally accepted doctrine applicable tosuch contracts. This being true, we turn to two of such well recognized


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doctrines. In the first place, it is well settled that a rider attached to a policy isa part of the contract, to the same extent and with like effect as if actuallyembodied therein. (I Couch, Cyclopedia of Insurance Law, sec. 159.) In thesecond place, it is equally well settled that an express warranty must appearupon the face of the policy, or be clearly incorporated therein and made apart thereof by explicit reference, or by words clearly evidencing suchintention. (4 Couch, Cyclopedia of Insurance Law, sec. 862.)

Section 65 of the Insurance Act and its counterpart, section 2605 of theCivil Code of California, will bear analysis as tested by reason and authority.The law says that every express warranty must be "contained in the policyitself." The word "contained," according to the dictionaries, means "included,""inclosed," "embraced," "comprehend," etc. When, therefore, the courtsspeak of a rider attached to the policy, and thus "embodied" therein, or of awarranty "incorporated" in the policy, it is believed that the phrase "contained

in the policy itself" must necessarily include such rider and warranty. As to thealternative relating to "another instrument," "instrument" as here used couldnot mean a mere slip of paper like a rider, but something akin to the policyitself, which in section 48 of the Insurance Act is defined as "The writteninstrument, in which a contract of insurance is set forth." In California, everypaper writing is not necessarily an "instrument" within the statutory meaningof the term. The word "instrument" has a well defined definition in California,and as used in the Codes invariably means some written paper or instrumentsigned and delivered by one person to another, transferring the title to, orgiving a lien, on property, or giving a right to debt or duty. (Hoag vs. Howard

[1880], 55 Cal., 564; People vs. Fraser [1913], 137 Pac., 276.) In otherwords, the rider, warranty F, is contained in the policy itself, because by thecontract of insurance agreed to by the parties it is made to form a part of thesame, but is not another instrument signed by the insured and referred to inthe policy as forming a part of it.

Again, referring to the jurisprudence of California, another rule ofinsurance adopted in that State is in point. It is admitted that the policybefore us was accepted by the plaintiff. The receipt of this policy by the

insured without objection binds both the acceptor and the insured to theterms thereof. The insured may not therafter be heard to say that he did notread the policy or know its terms, since it is his duty to read his policy and itwill be assumed that he did so. In California Jurisprudence, vol. 14, p. 427,from which these statements are taken with citations to California decisions, itis added that it has been held that where the holder of a policy discovers amistake made by himself and the local agent in attaching the wrong rider to


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his application, elects to retain the policy issued to him, and neither requeststhe issuance of a different one nor offers to pay the premium requisite toinsure against the risk which he believed the rider to cover, he therebyaccepts the policy.

We are given to understand, and there is no indication to the contrary,that we have here a standard insurance policy. We are further given tounderstand, and there is no indication to the contrary, that the issuance ofthe policy in this case with its attached rider conforms to well establishedpractice in the Philippines and elsewhere. We are further given to understand,and there is no indication to the contrary, that there are no less than sixty-nine insurance companies doing business in the Philippine Islands withoutstanding policies more or less similar to the one involved in this case, andthat to nullify such policies would place an unnecessary hindrance in thetransactions of insurance business in the Philippines. These are matters of

public policy. We cannot believe that it was ever the legislative intention toinsert in the Philippine Law on Insurance an oddity, an incongruity, entirelyout of harmony with the law as found in other jurisdictions, and destructive ofgood business practice.

We have studied this case carefully and having done so have reachedthe definite conclusion that warranty F, a rider attached to the face of theinsurance policy, and referred to in the contract of insurance, is valid andsufficient under section 65 of the Insurance Act. Accordingly, sustaining thefirst and fourth errors assigned, and it being unnecessary to discuss the

remaining errors, the result will be to reverse the judgment appealed fromand to order the dismissal of the complaint, without special pronouncementas to costs in either instance.

Street, Villamor, Ostrandand Romualdez, JJ., concur.

Separate Opinions

VILLA-REAL,J., dissenting:

I fully concur in the dissenting opinion penned by Justice Imperial, andfurther say that a rider or slip attached to an insurance policy, thoughreferred to therein as making a part of it, is not one of the forms prescribedby section 65 of the Insurance Law in which an express warranty may bemade to appear validly so as to be binding between the insurer and theinsured. There are two, and only two forms provided in said section by whichan express warranty may be made to appear validly, to wit: by embodiment


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either in the insurance policy itself or in another instrument signed by theinsured and referred to in the policy as making a part of it.

Now the question arises as to whether the rider or slip containing saidwarranty F attached to the policy in question and referred to therein as

making a part thereof is one of the two forms provided in said section 65 ofthe Insurance Law.

It is admitted that it is not the second form, because not being signedby the insured it does not constitute an instrument. (Hoag vs.Howard [1880],55 Cal., 564; People vs. Fraser [1913], 137 Pac., 276.)

Is it the first form required by law, that is, is it contained in the policyitself? It is so contended in the majority opinion and authorities are cited insupport of such contention.

In 1 Couch, Cyclopedia of Insurance Law, par. 159, it is said that "as a

general rule, a rider or slip attached to a policy or certificate of insuranceis, prima facieat least, a part of the contract to the same extent, and with likeeffect, as if actually embodied therein, provided, of course, that it does notviolate any statutory inhibition, and has been lawfully, and sufficientlyattached, . . ." (See also32 Corpus Juris, 1159, par. 270).

Does the attachment of a rider or slip containing an express warrantycontravene the provisions of section 65 of the Insurance Law? When the law,in order to protect the insured, requires that an express warranty becontained in the policy or in another instrument referred to therein as makinga part thereof, it could not have been its intention to permit that such expresswarranty be contained in a piece of paper not signed by the insured althoughit is attached to the policy and referred to therein as making a part thereof,because it would be contrary to the requirement that such express warrantybe contained in an instrument signed by the insured. It is a general rule ofstatutory construction that a law should not be so construed as to produce anabsurd result. It would certainly be an absurdity if section 65 of the InsuranceLaw were construed as requiring that an express warranty be contained onlyin the policy or in another instrument signed by the insured and referred totherein as making a part thereof for the protection of such insured, and at the

same time permitting that such express warranty be contained in a piece ofpaper not signed by the insured but simply attached to the policy and referredto therein as making a part thereof, thus opening the door to fraud, itbeing easy to detach such rider or slip and change it with another, which isprecisely what the law is trying to prevent. It will thus be seen that theattachment of a rider or slip containing an express warranty to a policy,


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although referred to therein as making a part thereof, is contrary to theevident intent and purpose of section 65 of the Insurance Law.

In the case of Isaac Upham Co. vs.United States Fidelity & GuarantyCo. (211 Pac., 809), cited in the majority opinion, the question was whether a

warranty contained in an application for insurance, which was not referred toin the policy as making a part thereof, incorporated said warranty in the saidpolicy and was valid. The Supreme Court of California held that it was not, forlack of such reference. Of course an application for insurance is a documenttherein if referred to in the policy as making a part thereof, will be consideredas contained therein in accordance with law.

In the case of Connervs. Manchester Assur. Co. (130 Fed., 743), alsocited in the majority opinion, the question was whether an open policy was awarranty and the Circuit Court of Appeals for the Northern District ofCalifornia held that it was not, and further said that "section 2605 of the Civil

Code of California (from which section 65 of the Insurance Law was taken)was evidently intended to express in statutory form the rule that no expresswarranty made by the insured shall affect the contract of insurance, unless itbe contained in the policy or in the application, or some other instrumentsigned by the insured and made a part of the contract, and is in effect anaffirmance of the generally accepted doctrine applicable to such contracts." Itwill be seen from this statement that the court in enumerating the forms inwhich an express warranty may be expressed or made to appear does notmention any paper which is not signed by the insured.

The fact that for many years it has been the practice of the insurancecompanies to use riders or slips of papers containing express warrantieswithout the signature of the insured in violation of the law is no reason whysuch practice should be permitted to continue when its legality is questioned.

In view of the foregoing consideration, I am constrained to dissentfrom the opinion of the majority.

IMPERIAL,J., dissenting:

The decision of this case depended principally, but wholly, on the

validity of the warranty F, Exhibit A-2. This instrument consists of a slip ofpaper pasted on the margin of a page of the fire insurance policy. It containsthe stipulation that the insured is permitted to store in the building concernedthe hazardous goods specified, to an amount not exceeding three per cent ofthe total value of the merchandise stored. The policy makes reference to thisrider as follows: "This policy is subject to the hereon attached 'Ordinary ShortPeriod Rate Scale,' Warranties A and F, Co-insurances clause and 'Three


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Fourths Loss Clause' which are forming part of the same"; but the rider is notsigned by the insured.

Section 65 of Act No. 2427 (Insurance Law) reads as follows:

"Every express warranty, made at or before the execution of the

policy, must be contained in the policy itself, or in another instrumentsigned by the insured and referred to in the policy, as making a part ofit."

An express warranty, then, made at or before the execution of thepolicy, like warranty F, is valid only if it is contained in the policy itself, or inanother instrument signed by the insured and referred to in the policy asforming a part thereof. Examining warranty F, it may be seen that it does notform an integral part of the policy but appeals on another slip of paper pastedon the policy; it is therefore an instrument other than the policy and comesunder the second paragraph provided for in section 65. And, according to this

provision, warranty F cannot be valid or binding, for the simple reason that itis not signed by the insured, and has no weight, notwithstanding the fact thatreference is made to it in a general way in the body of the policy. Thisreference is not equivalent to including it in the policy, for the simple reason,as we have said, that it was made in a general way. It is mentioned simply aswarranty Fa, without giving any idea of its contents. The term of the ridermight be changed and the heading "Warranty F" retained, and, following theappellant's line of reasoning, it might, with equal plausibility, be defended asthe express warranty agreed upon, because it was headed "Warranty F." It is

just such alterations as this that the law seeks to prevent in requiring that allwarranties of the kind are to be signed by the insured and referred to in thepolicy.

Setting aside for the moment the legal question of the validity of thewarranty, and assuming warranty F to be valid, we have to consider anothercircumstance which indicates that the insured did not violate it. The trial courtfound that at the time of the fire, the inflammable goods in the warehousesor building of the insured did not exceed the amount permitted by theinsurance company, that is, three per cent of the total value of themerchandise stored. This finding is borne out by the evidence, and there is noreason for changing it and making another.

Avancea, C.J.,concur.


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EN BANC

[G.R. No. 9370. March 31, 1915.]

K. S. YOUNG,plaintiff-appellee, vs. THE MIDLAND TEXTILEINSURANCE COMPANY,defendant-appellant.

Bruce, Lawrence, Ross & Block for appellant

Thos. D. Aitken for appellee.

SYLLABUS

1.INSURANCE; EFFECT OF VIOLATION OF CONTRACT OF.

Contractsof insurance are contracts of indemnity, Upon the terms and conditionsspecified therein. Parties have a right to impose such reasonable conditions atthe time of the making of the contract as they deem wise and necessary. Therate of premium is measured by the character of the risk assumed. Theinsurer, for a comparatively small consideration, undertakes to guarantee theinsured against loss or damage, upon the terms and conditions agreed upon,and upon no other. When the insurer is called upon to pay, in case of loss, hemay justly insist upon a fulfillment of the terms of the contract. If the insuredcannot bring himself within the terms and conditions of the contract, he is not

entitled to recover for any loss suffered. The terms of the contract constitutethe measure of the insurer's liability. If the contract has been terminated, bya violation of its terms on the part of the insured, there can be no recovery.Compliance with the terms of the contract is a condition precedent to theright of recovery. Courts cannot make contracts for the parties. Whilecontracts of insurance are construed most favorably to the insured yet theymust be construed according to the sense and meaning of the terms whichthe parties themselves have used. Astute and subtle distinctions should notbe permitted, when the language of the contract is plain and unambiguous.Such distinctions tend to bring the law itself into disrepute.

2.ID.; "STORED;" STORING. The word "stored" has been defined tobe a deposit in a store or warehouse for preservation or safe keeping; to putaway for future use, especially for future consumption; to place in awarehouse or other place of deposit for safe keeping. Said definition does notinclude a deposit in a store, in small quantities, for daily use. "Daily use"


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precludes the idea of deposit for preservation or safe keeping, as well as adeposit for future consumption or safe keeping.

3.ID.; VIOLATION OF TERMS OF CONTRACT WHICH DOES NOTCONTRIBUTE TO LOSS OR INJURY. A violation of the terms of a contract

of insurance, by either party, will constitute the basis for a termination of thecontractual relations, at the election of the other. The right to terminate thecontractual relations exists even though the violation was not the direct causeof the loss. In the present case, the deposit of the "hazardous goods," in thebuilding insured, was a violation of the terms of the contract. Although thehazardous goods did not contribute to the loss, the insurer, at his election,was relieved from liability Said deposit created a new risk, not included in theterms of the contract. The insurer had neither been paid, nor had he enteredinto a contract, to cover the increased risk.

D E C I S I O N

JOHNSON,J p:

The purpose of the present action is to recover the sum of P3,000 uponan insurance policy. The lower court rendered a judgment in favor of theplaintiff and against the defendant for the sum of P2,708.78, and costs. Fromthat judgment the defendant appealed to this court.

The undisputed facts upon which said action is based are as follows:

1.The plaintiff conducted a candy and fruit store on the Escolta, in thecity of Manila, and occupied a building at '321 Calle Claveria, as a residenceandbodega (storehouse).

2.On the 29th of May, 1912, the defendant, in consideration of thepayment of a premium of P60, entered into a contract of insurance with theplaintiff (policy No. 509105) by the terms of which the defendant company,upon certain conditions, promised to pay to the plaintiff the sum of P3,000, in

case said residence and bodega and contents should be destroyed by fire. 3.One of the conditions of said contract of insurance is found in

"warranty B" and is as follows: "WarrantyB. It is hereby declared and agreedthat during the pendency of this policy no hazardous goods be stored or keptfor sale, and no hazardous trade or process be carried on, in the building towhich this insurance applies, or in any building connected therewith."


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4.On the 4th or 5th of February, 1913, the plaintiff placed in saidresidence and bodega three boxes, 18 by 18 by 20 inches measurement,which belonged to him and which were filled with fireworks.

5.On the 18th day of March, 1913, said residence and bodegaand the

contents thereof were partially destroyed6.Said fireworks had been given to the plaintiff by the former owner of

the Luneta Candy Store; that the plaintiff intended to use the same in thecelebration of the Chinese new year; that the authorities of the city of Manilahad prohibited the use of fireworks on said occasion, and that the plaintiffthen placed the same in said bodega, where they remained from the 4th or5th of February, 1913, until after the fire of the 18th of March, 1913.

7.Both of the parties agree that said fireworks come within the phrase"hazardous goods," mentioned in said "warranty B" of the policy.

8.That said fireworks were found in a part of the building not destroyedby the fire; that they in no way contributed to the fire, or to the lossoccasioned thereby.

The only question presented by the parties is whether or not theplacing of said fireworks in the building insured, under the conditions aboveenumerated, they being "hazardous goods," is a violation of the terms of thecontract of insurance and especially of "warranty B." "Warranty B" providesthat "no hazardous goods be stored" in the building insured. It is admitted byboth parties that the fireworks are "hazardous goods." The defendant allegedthat they were "stored." The plaintiff contends that under all the facts andcircumstances of the case, they were not "stored" in said building, and thatthe placing of them in the building was not a violation of the terms of thecontract. Both the plaintiff and defendant agree that if they were "hazardousgoods," and if they were "stored," then the act of the plaintiff was a violationof the terms of the contract of insurance and the defendant was justified inrepudiating its liability thereunder.

This leads us to a consideration of the meaning of the word "stored" asused in said "warranty B." While the word "stored" has been variously definedby authors, as well as by courts, we have found no case exactly analogous to

the present. The plaintiff says that he placed said fireworks inthe bodegaafter he had been notified that he could not use them on theChinese new year, in order that he might later send them to a friend in theprovinces. Whether a particular article is "stored" or not must, in some degreedepend upon the intention of the parties. The interpretation of the word"stored" is quite difficult, in view of the many decisions upon the variousconditions presented. Nearly all of the cases cited by the lower court are


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cases where the article was being put to some reasonable and actual use,which might easily have been permitted by the terms of the policy, and withinthe intention of the parties and excepted from the operation of the warranty,like the present. Said decisions are upon cases like:

1.Where merchants have had or kept the "hazardous" articles in smallquantities, and for actual daily use, for sale, .such as gasoline, gunpowder,etc.;

2.Where such articles have been brought on the premises for actualuse thereon, and in small quantities, such as oil, paints, etc; and

3.Where such articles or goods were used for lighting purposes, and insmall quantities.

The author of the Century Dictionary defines the word "store" to be adeposit in a store or warehouse for preservation or safe keeping; to put away

for future use, especially for future consumption; to place in a warehouse orother place of deposit for safe keeping. See also the definitions given by theStandard Dictionary, to the same effect.

Said definitions, of course, do not include a deposit in a store, in smallquantities, for daily use. "Daily use" precludes the idea of a deposit forpreservation or safe keeping, as well as a deposit for future consumption, orsafe keeping.

In the present case no claim is made that the "hazardous goods" wereplaced in the bodega for present or daily use. It is admitted that they were

placed in the bodega "for future use," or for future consumption, or for safekeeping. The plaintiff makes no claim that he deposited them there with anyother idea than "for future use" for future consumption. It seems clear tous that the "hazardous goods" in question were "stored" in the bodega, asthat word is generally defined. That being true, suppose the defendant hadmade an examination of the premises, even in the absence of a fire, and hadfound the "hazardous goods" there, under the conditions above described,would it not have been justified, then and there, in declaring the policy nulland of no effect by reason of a violation of its terms on the part of theplaintiff ? If it might, then may it not repudiate its liability, even after the fire?

If the "warranty" is a term of the contract, will not its violation cause a breachand justify noncompliance or a repudiation?

Contracts of insurance are contracts of indemnity upon the terms andconditions specified in the policy. The parties have a right to impose suchreasonable conditions at the time of the making of the contract as they maydeem wise and necessary. The rate of premium is measured by the characterof the risk assumed. The insurance company, for a comparatively small


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consideration, undertakes to guarantee the insured against loss or damage,upon the terms and conditions agreed upon, and upon no other, and whencalled upon to pay, in case of loss, the insurer, therefore, may justly insistupon a fulfillment of these terms. If the insured cannot bring himself withinthe conditions of the policy, he is not entitled to recover for the loss. Theterms of the policy constitute the measure of the insurer's liability, and inorder to recover the insured must show himself within those terms; and if itappears that the contract has been terminated by a violation, on the part ofthe insured, of its conditions, then there can be no right of recovery . Thecompliance of the insured with the terms of the contract is a conditionprecedent to the right of recovery. If the insured has violated or failed toperform the conditions of the contract, and such a violation or want ofperformance has not been waived by the insurer, then the insured cannotrecover. Courts are not permitted to make contracts for the parties. The

function and duty of the courts consist simply in enforcing and carrying outthe contracts actually made. While it is true, as a general rule, that contractsof insurance are construed most favorably to the insured, yet contracts ofinsurance, like other contracts, are to be construed according to the senseand meaning of the terms which the parties themselves have used. If suchterms are clear and unambiguous they must be taken and understood in theirplain, ordinary and popular sense. (Imperial Fire Ins. Co.vs. County of Coos,151 U. S., 452; Kyte vs. Commercial Union Assurance Co., 149 Mass., 116,122.) The conditions of contracts of insurance, when plainly expressed in apolicy, 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 tendsto bring the law itself into disrepute when, by astute and subtle distinctions, aplain case is attempted to be taken without the operation of a clear,reasonable, and material obligation of the contract. (Mackvs. RochesterGerman Ins. Co., 106 N. Y., 560, 564.)

The appellant argues, however, that in view of the fact that the"storing" of the fireworks on the premises of the insured did not contribute in

any way to the damage occasioned by the fire, he should be permitted to

recover

that the "storing" of the "hazardous goods" in no way causedinjury to the defendant company. That argument, however, is beside thequestion, if the "storing" was a violation of the terms of the contract. Theviolation of the terms of the contract, by virtue of the provisions of the policyitself, terminated, at the election of either party, the contractual relations.(Kyte vs. Commercial Union Assurance Co., 149 Mass., 116, 122.) The plaintiffpaid a premium based upon the risk at the time the policy was issued.


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Certainly it cannot be denied that the placing of the firecrackers in thebuilding insured increased the risk. The plaintiff had not paid a premiumbased upon the increased risk, neither had the defendant issued a policy uponthe theory of a different risk. The plaintiff was enjoying, if his contention maybe allowed, the benefits of an insurance policy upon one risk, whereas, as amatter of fact, it was issued upon an entirely different risk. The defendanthad neither been paid nor had issued a policy to cover the increased risk. Anincrease of risk which is substantial and which is continued for a considerableperiod of time, is a direct and certain injury to the insurer, and changes thebasis upon which the contract of insurance rests. (Kyte vs. Commercial Union

Assurance Co. (supra); Frost's Detroit Lumber Works vs. Millers' Mutual Ins.Co., 37 Minn., 300, 302; Moore vs. Phoenix Ins. Co., 62 N. H., 240; Ferree vs.Oxford Fire & Life Ins. Co., 67 Pa. State, 373.)

Therefore and for the foregoing reasons, the judgment of the lower

court is hereby revoked and the defendant is hereby relieved from anyresponsibility under said complaint, and, without any finding as to costs, it isso ordered.

Arellano, C.J., Torres, Carson, TrentandAraullo, JJ.,concur.

Moreland, J.,concurs in the result.

FIRST DIVISION

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

QUA CHEE GAN,plaintiff-appellee, vs. LAW UNION AND ROCKINSURANCE CO., LTD., represented by its agent, WARNER,BARNES AND CO., LTD.,defendant-appellant.

Delgado, Flores & Macapagal for appellant.

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

SYLLABUS

1.INSURANCE; BREACH OF WARRANTY; WHEN INSURER BARREDFROM CLAIMING POLICIES VOID "AB INITIO." The insurer is barred by


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estoppel to claim violation of the so-called fire hydrant warranty where,knowing fully well that the number of hydrants demanded in the warrantynever existed from the very beginning, it nevertheless issued the policiessubject to such warranty, and received the corresponding premiums.

2.ID.; ID.; EVIDENCE; PAROL EVIDENCE RULE NOT APPLICABLE.

The parol evidence rule is not applicable to the present case. It is not aquestion here whether or not the parties may vary a written contract by oralevidence; but whether testimony is receivable so that a party may be, byreason of inequitable contract shown, estopped from enforcing forfeitures inits favor, in order to forestall fraud or imposition on the insured.

3.ID.; AMBIGUITIES IN THE TERMS OF THE CONTRACT, HOWCONSTRUED. The contract of insurance is one of perfect good faith(uberrimae fidei) not for the insured alone, but equally so for the insurer; infact, it is more so for the latter, since its dominant bargaining position carries

with it stricter responsibility. By reason of the exclusive control of theinsurance company over the terms and phraseology of the insurance contract,the ambiguity must be strictly interpreted against the insurer and liberally infavor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).

4.ID.; ID.; WARRANTY AGAINST STORAGE OF GASOLINE. In thepresent case, gasoline is not specifically mentioned among the prohibitedarticles listed in the so-called "hemp warranty." The clause relied upon by theinsurer speaks of "oils" and is decidedly ambiguous and uncertain; for in

ordinary parlance, "oils" mean "lubricants" and not gasoline or kerosene.Besides, the gasoline kept by the insured was only incidental to his business,being no more than a customary 2 days supply for the five or six motorvehicles used for transporting of the stored merchandise, and it is well settledrule that the keeping of inflammable oils on the premises, through prohibitedby the policy, does not void it if such keeping is incidental to the business.(Bachrach vs. British American Ass. Co., 17 Phil. 555, 660.)

5.ID.; FALSE CLAIMS THAT AVOIDS THE POLICY. The rule is that toavoid a policy, the claim filed by the insured must contain false and fraudulentstatements with intent to defraud the insurer.

6.CRIMINAL PROCEDURE; ACQUITTAL OF INSURED IN ARSON CASEEFFECT ON CIVIL ACTION. While the acquittal of the insured in the arsonis not res judicataon the present civil action, the insurer's evidence, to judgefrom the decision in the criminal case, is practically identical in both cases andmust lead to the same result, since the proof to establish the defense ifconnivance at the fire in order to defraud the insurer "cannot be materially


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hemp and copra, to the extent of its interest. On June, 1940, the insurancestood as follows:

Policy No.Property Insured Amount

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

2637165 (Exhibit "JJ")Bodega No. 2 (Building)10,000.00

Bodega No. 3 (Building)25,000.00

Bodega No. 4 (Building)10,000.00

Hemp Press moved by

steam engine 5,000.00

2637345 (Exhibit "X")Merchandise contents

(copra and empty sacks of

Bodega No. 1)150,000.00

2637346 (Exhibit "Y")Merchandise contents

(hemp) of Bodega No. 3150,000.00

2637067 (Exhibit "GG")Merchandise contents

(loose hemp) of Bodega

No. 4 5,000.00

______________

TotalP370,000.00

Fire of undetermined origin that broke out in the early morning of July21, 1940, and lasted almost one week, gutted and completely destroyed

Bodegas Nos. 1, 3 and 4, with the merchandise stored therein. Plaintiff-appellee informed the insurer by telegram on the same date; and on the nextday, the fire adjusters engaged by appellant insurance company arrived andproceeded to examine and photograph the premises, pored over the books ofthe insured and conducted an extensive investigation. The plaintiff havingsubmitted the corresponding fire claims, totalling P398,562.81 (but reduced tothe full amount of the insurance, P370,000), the Insurance Company resistedpayment, claiming violation of warranties and conditions, filing of fraudulentclaims, and that the fire had been deliberately caused by the insured or byother persons in connivance with him.

With counsel for the insurance company acting as private prosecutor,Qua Chee Gan, with his brother, Qua Chee Pao, and some employees of his,were indicted and tried in 1940 for the crime of arson, it being claimed thatthey had set fire to the destroyed warehouses to collect the insurance. Theywere, however, acquitted by the trial court in a final decision dated July 9,1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance money


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proceeded to its trial and termination in the Court below, with the resultnoted at the start of this opinion. The Philippine National Bank's complaint inintervention was dismissed because the appellee had managed to pay hisindebtedness to the Bank during the pendency of the suit, and despite the firelosses.

In its first assignment of error, the insurance company alleges that thetrial Court should have held that the policies were avoided for breach ofwarranty, specifically the one appearing on a rider pasted (with other similarriders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders wereattached for the first time in 1939, and the pertinent portions read as follows:

"Memo. of Warranty.The undernoted Appliances for theextinction of fire being kept on the premises insured hereby, and itbeing declared and understood that there is an ample end constantwater supply with sufficient pressure available at all seasons for the

same, it is hereby warranted that the said appliances shall bemaintained in efficient working order during the currency of this policy,by reason whereof a discount of 2 1/2 per cent is allowed on thepremium chargeable under this policy.

Hydrantsin the compound, not less in number than one for each150 feet of external wall measurement of buildings, protected, with notless than 100 feet of hose piping and nozzles for every two hydrantskept under cover in convenient places, the hydrants being supplied withwater pressure by a pumping engine, or from some other source,capable of discharging at the rate of not less than 200 gallons of water

per minute into the upper story of the highest building protected, and atrained brigade of not less than 20 men to work the same.'"

It is argued that since the bodegas insured had an external wallperimeter of 500 meters or 1,640 feet, the appellee should have eleven (11)fire hydrants in the compound, and that he actually had only two (2), with afurther pair nearby, belonging to the municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred bywaiver (or rather estoppel) to claim violation of the so- called fire hydrantswarranty, for the reason that knowing fully all that the number of hydrants

demanded therein never

insurance- full text- warranty and premium

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