insurance law 8312015

Republic of the PhilippinesSUPREME COURT

ManilaEN BANCG.R. No. L-8151 December 16, 1955VIRGINIA CALANOC, petitioner, vs.COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE CO., respondents.Lucio Javillonar for petitioner.J. A. Wolfson, Manuel Y. Mecias, Emilio Abello and Anselmo A. Reyes for respondents. BAUTISTA ANGELO, J.:

This suit involves the collection of P2,000 representing the value of a supplemental policy covering accidental death which was

secured by one Melencio Basilio from the Philippine American Life Insurance Company. The case originated in the Municipal

Court of Manila and judgment being favorable to the plaintiff it was appealed to the court of first instance. The latter court

affirmed the judgment but on appeal to the Court of Appeals the judgment was reversed and the case is now before us on a

petition for review.

Melencio Basilio was a watchman of the Manila Auto Supply located at the corner of Avenida Rizal and Zurbaran. He secured a

life insurance policy from the Philippine American Life Insurance Company in the amount of P2,000 to which was attached a

supplementary contract covering death by accident. On January 25, 1951, he died of a gunshot wound on the occasion of a

robbery committed in the house of Atty. Ojeda at the corner of Oroquieta and Zurbaan streets. Virginia Calanoc, the widow, was

paid the sum of P2,000, face value of the policy, but when she demanded the payment of the additional sum of P2,000

representing the value of the supplemental policy, the company refused alleging, as main defense, that the deceased died

because he was murdered by a person who took part in the commission of the robbery and while making an arrest as an officer

of the law which contingencies were expressly excluded in the contract and have the effect of exempting the company from

liability.

The pertinent facts which need to be considered for the determination of the questions raised are those reproduced in the

decision of the Court of Appeals as follows:

The circumstances surrounding the death of Melencio Basilio show that when he was killed at about seven o'clock in the

night of January 25, 1951, he was on duty as watchman of the Manila Auto Supply at the corner of Avenida Rizal and

Zurbaran; that it turned out that Atty. Antonio Ojeda who had his residence at the corner of Zurbaran and Oroquieta, a

block away from Basilio's station, had come home that night and found that his house was well-lighted, but with the

windows closed; that getting suspicious that there were culprits in his house, Atty. Ojeda retreated to look for a

policeman and finding Basilio in khaki uniform, asked him to accompany him to the house with the latter refusing on the

ground that he was not a policeman, but suggesting that Atty. Ojeda should ask the traffic policeman on duty at the

corner of Rizal Avenue and Zurbaran; that Atty. Ojeda went to the traffic policeman at said corner and reported the

matter, asking the policeman to come along with him, to which the policeman agreed; that on the way to the Ojeda

residence, the policeman and Atty. Ojeda passed by Basilio and somehow or other invited the latter to come along; that

as the tree approached the Ojeda residence and stood in front of the main gate which was covered with galvanized iron,

the fence itself being partly concrete and partly adobe stone, a shot was fired; that immediately after the shot, Atty.

Ojeda and the policeman sought cover; that the policeman, at the request of Atty. Ojeda, left the premises to look for

reinforcement; that it turned out afterwards that the special watchman Melencio Basilio was hit in the abdomen, the

wound causing his instantaneous death; that the shot must have come from inside the yard of Atty. Ojeda, the bullet

passing through a hole waist-high in the galvanized iron gate; that upon inquiry Atty. Ojeda found out that the savings of

his children in the amount of P30 in coins kept in his aparador contained in stockings were taken away, the aparador

having been ransacked; that a month thereafter the corresponding investigation conducted by the police authorities led

to the arrest and prosecution of four persons in Criminal Case No. 15104 of the Court of First Instance of Manila for

'Robbery in an Inhabited House and in Band with Murder'.

It is contended in behalf of the company that Basilio was killed which "making an arrest as an officer of the law" or as a result of

an "assault or murder" committed in the place and therefore his death was caused by one of the risks excluded by the

supplementary contract which exempts the company from liability. This contention was upheld by the Court of Appeals and, in

reaching this conclusion, made the following comment:

Insurance Law Cases 1

From the foregoing testimonies, we find that the deceased was a watchman of the Manila Auto Supply, and, as such, he

was not boud to leave his place and go with Atty. Ojeda and Policeman Magsanoc to see the trouble, or robbery, that

occurred in the house of Atty. Ojeda. In fact, according to the finding of the lower court, Atty. Ojeda finding Basilio in

uniform asked him to accompany him to his house, but the latter refused on the ground that he was not a policeman

and suggested to Atty. Ojeda to ask help from the traffic policeman on duty at the corner of Rizal Avenue and Zurbaran,

but after Atty. Ojeda secured the help of the traffic policeman, the deceased went with Ojeda and said traffic policeman

to the residence of Ojeda, and while the deceased was standing in front of the main gate of said residence, he was shot

and thus died. The death, therefore, of Basilio, although unexpected, was not caused by an accident, being a voluntary

and intentional act on the part of the one wh robbed, or one of those who robbed, the house of Atty. Ojeda. Hence, it is

out considered opinion that the death of Basilio, though unexpected, cannot be considered accidental, for his death

occurred because he left his post and joined policeman Magsanoc and Atty. Ojeda to repair to the latter's residence to

see what happened thereat. Certainly, when Basilio joined Patrolman Magsanoc and Atty. Ojeda, he should have

realized the danger to which he was exposing himself, yet, instead of remaining in his place, he went with Atty. Ojeda

and Patrolman Magsanoc to see what was the trouble in Atty. Ojeda's house and thus he was fatally shot.

We dissent from the above findings of the Court of Appeals. For one thing, Basilio was a watchman of the Manila Auto Supply

which was a block away from the house of Atty. Ojeda where something suspicious was happening which caused the latter to ask

for help. While at first he declied the invitation of Atty. Ojeda to go with him to his residence to inquire into what was going on

because he was not a regular policeman, he later agreed to come along when prompted by the traffic policeman, and upon

approaching the gate of the residence he was shot and died. The circumstance that he was a mere watchman and had no duty to

heed the call of Atty. Ojeda should not be taken as a capricious desire on his part to expose his life to danger considering the fact

that the place he was in duty-bound to guard was only a block away. In volunteering to extend help under the situation, he might

have thought, rightly or wrongly, that to know the truth was in the interest of his employer it being a matter that affects the

security of the neighborhood. No doubt there was some risk coming to him in pursuing that errand, but that risk always existed it

being inherent in the position he was holding. He cannot therefore be blamed solely for doing what he believed was in keeping

with his duty as a watchman and as a citizen. And he cannot be considered as making an arrest as an officer of the law, as

contended, simply because he went with the traffic policeman, for certainly he did not go there for that purpose nor was he

asked to do so by the policeman.

Much less can it be pretended that Basilio died in the course of an assault or murder considering the very nature of these crimes.

In the first place, there is no proof that the death of Basilio is the result of either crime for the record is barren of any

circumstance showing how the fatal shot was fired. Perhaps this may be clarified in the criminal case now pending in court as

regards the incident but before that is done anything that might be said on the point would be a mere conjecture. Nor can it be

said that the killing was intentional for there is the possibility that the malefactor had fired the shot merely to scare away the

people around for his own protection and not necessarily to kill or hit the victim. In any event, while the act may not excempt the

triggerman from liability for the damage done, the fact remains that the happening was a pure accident on the part of the victim.

The victim could have been either the policeman or Atty. Ojeda for it cannot be pretended that the malefactor aimed at the

deceased precisely because he wanted to take his life.

We take note that these defenses are included among the risks exluded in the supplementary contract which enumerates the

cases which may exempt the company from liability. While as a general rule "the parties may limit the coverage of the policy to

certain particular accidents and risks or causes of loss, and may expressly except other risks or causes of loss therefrom" (45 C. J.

S. 781-782), however, it is to be desired that the terms and phraseology of the exception clause be clearly expressed so as to be

within the easy grasp and understanding of the insured, for if the terms are doubtful or obscure the same must of necessity be

interpreted or resolved aganst the one who has caused the obscurity. (Article 1377, new Civil Code) And so it has bene generally

held that the "terms in an insurance policy, which are ambiguous, equivacal, or uncertain . . . are to be construed strictly and most

strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to

the insured, especially where a forfeiture is involved" (29 Am. Jur., 181), and the reason for this rule is that he "insured usually

has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great

care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of, the insurance

company." (44 C. J. S., p. 1174.)


Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by experts who

know and can anticipate the bearings and possible complications of every contingency. So long as insurance companies

insist upon the use of ambiguous, intricate and technical provisions, which conceal rather than frankly disclose, their

own intentions, the courts must, in fairness to those who purchase insurance, construe every ambiguity in favor of the

insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)lawphi1.net

An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose for which

the policy was procured. (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264.)

We are therefore persuaded to conclude that the circumstances unfolded in the present case do not warrant the finding that the

death of the unfortunate victim comes within the purview of the exception clause of the supplementary policy and, hence, do not

exempt the company from liability.

Wherefore, reversing the decision appealed from, we hereby order the company to pay petitioner-appellant the amount of

P2,000, with legal interest from January 26, 1951 until fully paid, with costs.

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



ManilaEN BANC G.R. No. L-25579 March 29, 1972EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN and GRACIA T. BIAGTAN, plaintiffs-appellees, vs.THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.Tanopo, Millora, Serafica, and Sañez for plaintiff-appellees.Araneta, Mendoza and Papa for defendant-appellant.

MAKALINTAL, J.:p

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

The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife Assurance Company under Policy No. 398075 for

the sum of P5,000.00 and, under a supplementary contract denominated "Accidental Death Benefit Clause, for an additional sum

of P5,000.00 if "the death of the Insured resulted directly from bodily injury effected solely through external and violent means

sustained in an accident ... and independently of all other causes." The clause, however,expressly provided that it would not

apply where death resulted from an injury"intentionally inflicted by another party."

On the night of May 20, 1964, or during the first hours of the following day a band of robbers entered the house of the insured

Juan S. Biagtan. What happened then is related in the decision of the trial court as follows:

...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said life policy and

supplementary contract were in full force and effect, the house of insured Juan S. Biagtan was robbed by a band

of robbers who were charged in and convicted by the Court of First Instance of Pangasinan for robbery with

homicide; that in committing the robbery, the robbers, on reaching the staircase landing on the second floor,

rushed towards the door of the second floor room, where they suddenly met a person near the door of oneof

the rooms who turned out to be the insured Juan S. Biagtan who received thrusts from their sharp-pointed

instruments, causing wounds on the body of said Juan S. Biagtan resulting in his death at about 7 a.m. on the

same day, May 21, 1964;

Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid the basic amount of

P5,000.00 but refused to pay the additional sum of P5,000.00 under the accidental death benefit clause, on the ground that the

insured's death resulted from injuries intentionally inflicted by third parties and therefore was not covered. Plaintiffs filed suit to

recover, and after due hearing the court a quo rendered judgment in their favor. Hence the present appeal by the insurer.

The only issue here is whether under the facts are stipulated and found by the trial court the wounds received by the insured at

the hands of the robbers — nine in all, five of them mortal and four non-mortal — were inflicted intentionally. The court, in ruling

negatively on the issue, stated that since the parties presented no evidence and submitted the case upon stipulation, there was

no "proof that the act of receiving thrust (sic) from the sharp-pointed instrument of the robbers was intended to inflict injuries

upon the person of the insured or any other person or merely to scare away any person so as to ward off any resistance or

obstacle that might be offered in the pursuit of their main objective which was robbery."

The trial court committed a plain error in drawing the conclusion it did from the admitted facts. Nine wounds were inflicted upon

the deceased, all by means of thrusts with sharp-pointed instruments wielded by the robbers. This is a physical fact as to which

there is no dispute. So is the fact that five of those wounds caused the death of the insured. Whether the robbers had the intent

to kill or merely to scare the victim or to ward off any defense he might offer, it cannot be denied that the act itself of inflicting

the injuries was intentional. It should be noted that the exception in the accidental benefit clause invoked by the appellant does

not speak of the purpose — whether homicidal or not — of a third party in causing the injuries, but only of the fact that such

injuries have been "intentionally" inflicted — this obviously to distinguish them from injuries which, although received at the

hands of a third party, are purely accidental. This construction is the basic idea expressed in the coverage of the clause itself,

namely, that "the death of the insured resulted directly from bodily injury effected solely through external and violent means

sustained in an accident ... and independently of all other causes." A gun which discharges while being cleaned and kills a


bystander; a hunter who shoots at his prey and hits a person instead; an athlete in a competitive game involving physical effort

who collides with an opponent and fatally injures him as a result: these are instances where the infliction of the injury is

unintentional and therefore would be within the coverage of an accidental death benefit clause such as thatin question in this

case. But where a gang of robbers enter a house and coming face to face with the owner, even if unexpectedly, stab him

repeatedly, it is contrary to all reason and logic to say that his injuries are not intentionally inflicted, regardless of whether they

prove fatal or not. As it was, in the present case they did prove fatal, and the robbers have been accused and convicted of the

crime of robbery with homicide.

The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in support of its decision. The facts in that

case, however, are different from those obtaining here. The insured there was a watchman in a certain company, who happened

to be invited by a policeman to come along as the latter was on his way to investigate a reported robbery going on in a private

house. As the two of them, together with the owner of the house, approached and stood in front of the main gate, a shot was

fired and it turned out afterwards that the watchman was hit in the abdomen, the wound causing his death. Under those

circumstances this Court held that it could not be said that the killing was intentional for there was the possibility that the

malefactor had fired the shot to scare people around for his own protection and not necessarrily to kill or hit the victim. A similar

possibility is clearly ruled out by the facts in the case now before Us. For while a single shot fired from a distance, and by a person

who was not even seen aiming at the victim, could indeed have been fired without intent to kill or injure, nine wounds inflicted

with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned. The

manner of execution of the crime permits no other conclusion.

Court decisions in the American jurisdiction, where similar provisions in accidental death benefit clauses in insurance policies

have been construed, may shed light on the issue before Us. Thus, it has been held that "intentional" as used in an accident policy

excepting intentional injuries inflicted by the insured or any other person, etc., implies the exercise of the reasoning faculties,

consciousness and volition. 1 Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting

the injury that is controlling. 2 If the injuries suffered by the insured clearly resulted from the intentional act of a third person the

insurer is relieved from liability as stipulated. 3

In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am. St. Rep. 484, the insured was waylaid and

assassinated for the purpose of robbery. Two (2) defenses were interposed to the action to recover indemnity, namely: (1) that

the insured having been killed by intentional means, his death was not accidental, and (2) that the proviso in the policy expressly

exempted the insurer from liability in case the insured died from injuries intentionally inflicted by another person. In rendering

judgment for the insurance company the Court held that while the assassination of the insured was as to him an unforeseen

event and therefore accidental, "the clause of the proviso that excludes the (insurer's) liability, in case death or injury is

intentionally inflicted by another person, applies to this case."

In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the insured was shot three times by a person

unknown late on a dark and stormy night, while working in the coal shed of a railroad company. The policy did not cover death

resulting from "intentional injuries inflicted by the insured or any other person." The inquiry was as to the question whether the

shooting that caused the insured's death was accidental or intentional; and the Court found that under the facts, showing that

the murderer knew his victim and that he fired with intent to kill, there could be no recovery under the policy which excepted

death from intentional injuries inflicted by any person.

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

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

Makasiar, J., reserves his vote.



ManilaSECOND DIVISION G.R. No. 100970 September 2, 1992FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs.THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.Aquino and Associates for petitioner.Public Attorney's Office for private respondent.

NOCON, J.:

This is a petition for certiorari with a prayer for the issuance of a restraining order and preliminary mandatory injunction to annul

and set aside the decision of the Court of Appeals dated July 11, 1991, 1 affirming the decision dated March 20, 1990 of the

Insurance Commission 2 in ordering petitioner Finman General Assurance Corporation to pay private respondent Julia Surposa the

proceeds of the personal accident Insurance policy with interest.

It appears on record that on October 22, 1986, deceased, Carlie Surposa was insured with petitioner Finman General Assurance

Corporation under Finman General Teachers Protection Plan Master Policy No. 2005 and Individual Policy No. 08924 with his

parents, spouses Julia and Carlos Surposa, and brothers Christopher, Charles, Chester and Clifton, all surnamed, Surposa, as

beneficiaries. 3

While said insurance policy was in full force and effect, the insured, Carlie Surposa, died on October 18, 1988 as a result of a stab

wound inflicted by one of the three (3) unidentified men without provocation and warning on the part of the former as he and his

cousin, Winston Surposa, were waiting for a ride on their way home along Rizal-Locsin Streets, Bacolod City after attending the

celebration of the "Maskarra Annual Festival."

Thereafter, private respondent and the other beneficiaries of said insurance policy filed a written notice of claim with the

petitioner insurance company which denied said claim contending that murder and assault are not within the scope of the

coverage of the insurance policy.

On February 24, 1989, private respondent filed a complaint with the Insurance Commission which subsequently rendered a

decision, the pertinent portion of which reads:

In the light of the foregoing. we find respondent liable to pay complainant the sum of P15,000.00 representing

the proceeds of the policy with interest. As no evidence was submitted to prove the claim for mortuary aid in

the sum of P1,000.00, the same cannot be entertained.

WHEREFORE, judgment is hereby rendered ordering respondent to pay complainant the sum of P15,000.00

with legal interest from the date of the filing of the complaint until fully satisfied. With costs. 4

On July 11, 1991, the appellate court affirmed said decision.

Hence, petitioner filed this petition alleging grove abuse of discretion on the part of the appellate court in applying the principle

of "expresso unius exclusio alterius" in a personal accident insurance policy since death resulting from murder and/or assault are

impliedly excluded in said insurance policy considering that the cause of death of the insured was not accidental but rather a

deliberate and intentional act of the assailant in killing the former as indicated by the location of the lone stab wound on the

insured. Therefore, said death was committed with deliberate intent which, by the very nature of a personal accident insurance

policy, cannot be indemnified.

We do not agree.

The terms "accident" and "accidental" as used in insurance contracts have not acquired any technical meaning,

and are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to

mean that which happen by chance or fortuitously, without intention and design, and which is unexpected,

unusual, and unforeseen. An accident is an event that takes place without one's foresight or expectation — an

event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not

expected.


. . . The generally accepted rule is that, death or injury does not result from accident or accidental means within

the terms of an accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by

anything unforeseen except the death or injury. There is no accident when a deliberate act is performed unless

some additional, unexpected, independent, and unforeseen happening occurs which produces or brings about

the result of injury or death. In other words, where the death or injury is not the natural or probable result of

the insured's voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury,

the resulting death is within the protection of the policies insuring against death or injury from accident. 5

As correctly pointed out by the respondent appellate court in its decision:

In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an assault or murder as a

result of his voluntary act considering the very nature of these crimes. In the first place, the insured and his

companion were on their way home from attending a festival. They were confronted by unidentified persons.

The record is barren of any circumstance showing how the stab wound was inflicted. Nor can it be pretended

that the malefactor aimed at the insured precisely because the killer wanted to take his life. In any event, while

the act may not exempt the unknown perpetrator from criminal liability, the fact remains that the happening

was a pure accident on the part of the victim. The insured died from an event that took place without his

foresight or expectation, an event that proceeded from an unusual effect of a known cause and, therefore, not

expected. Neither can it be said that where was a capricious desire on the part of the accused to expose his life

to danger considering that he was just going home after attending a festival. 6

Furthermore, the personal accident insurance policy involved herein specifically enumerated only ten (10) circumstances wherein

no liability attaches to petitioner insurance company for any injury, disability or loss suffered by the insured as a result of any of

the stimulated causes. The principle of " expresso unius exclusio alterius" — the mention of one thing implies the exclusion of

another thing — is therefore applicable in the instant case since murder and assault, not having been expressly included in the

enumeration of the circumstances that would negate liability in said insurance policy cannot be considered by implication to

discharge the petitioner insurance company from liability for, any injury, disability or loss suffered by the insured. Thus, the

failure of the petitioner insurance company to include death resulting from murder or assault among the prohibited risks leads

inevitably to the conclusion that it did not intend to limit or exempt itself from liability for such death.

Article 1377 of the Civil Code of the Philippines provides that:

The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the

obscurity.

Moreover,

it is well settled that contracts of insurance are to be construed liberally in favor of the insured and strictly

against the insurer. Thus ambiguity in the words of an insurance contract should be interpreted in favor of its

beneficiary. 7

WHEREFORE, finding no irreversible error in the decision of the respondent Court of Appeals, the petition for certiorari with

restraining order and preliminary injunction is hereby DENIED for lack of merit.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Melo, JJ., concur.



ManilaFIRST DIVISION G.R. No. 85296 May 14, 1990ZENITH INSURANCE CORPORATION, petitioner, vs.COURT OF APPEALS and LAWRENCE FERNANDEZ, respondents.Vicente R. Layawen for petitioner.Lawrence L. Fernandez & Associates for private respondent.

MEDIALDEA, J.:

Assailed in this petition is the decision of the Court of Appeals in CA-G.R. C.V. No. 13498 entitled, "Lawrence L. Fernandez,

plaintiff-appellee v. Zenith Insurance Corp., defendant-appellant" which affirmed in toto the decision of the Regional Trial Court

of Cebu, Branch XX in Civil Case No. CEB-1215 and the denial of petitioner's Motion for Reconsideration.

The antecedent facts are as follows:

On January 25, 1983, private respondent Lawrence Fernandez insured his car for "own damage" under private car Policy No.

50459 with petitioner Zenith Insurance Corporation. On July 6, 1983, the car figured in an accident and suffered actual damages

in the amount of P3,640.00. After allegedly being given a run around by Zenith for two (2) months, Fernandez filed a complaint

with the Regional Trial Court of Cebu for sum of money and damages resulting from the refusal of Zenith to pay the amount

claimed. The complaint was docketed as Civil Case No. CEB-1215. Aside from actual damages and interests, Fernandez also

prayed for moral damages in the amount of P10,000.00, exemplary damages of P5,000.00, attorney's fees of P3,000.00 and

litigation expenses of P3,000.00.

On September 28, 1983, Zenith filed an answer alleging that it offered to pay the claim of Fernandez pursuant to the terms and

conditions of the contract which, the private respondent rejected. After the issues had been joined, the pre-trial was scheduled

on October 17, 1983 but the same was moved to November 4, 1983 upon petitioner's motion, allegedly to explore ways to settle

the case although at an amount lower than private respondent's claim. On November 14, 1983, the trial court terminated the

pre-trial. Subsequently, Fernandez presented his evidence. Petitioner Zenith, however, failed to present its evidence in view of its

failure to appear in court, without justifiable reason, on the day scheduled for the purpose. The trial court issued an order on

August 23, 1984 submitting the case for decision without Zenith's evidence (pp. 10-11, Rollo). Petitioner filed a petition

for certiorari with the Court of Appeals assailing the order of the trial court submitting the case for decision without petitioner's

evidence. The petition was docketed as C.A.-G.R. No. 04644. However, the petition was denied due course on April 29, 1986 (p.

56, Rollo).

On June 4, 1986, a decision was rendered by the trial court in favor of private respondent Fernandez. The dispositive portion of

the trial court's decision provides:

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

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

interest rates;

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

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

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

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

6. Costs. (p. 9, Rollo)

Upon motion of Fernandez and before the expiration of the period to appeal, the trial court, on June 20, 1986, ordered the

execution of the decision pending appeal. The order was assailed by petitioner in a petition forcertiorari with the Court of

Appeals on October 23, 1986 in C.A. G.R. No. 10420 but which petition was also dismissed on December 24, 1986 (p. 69, Rollo).


On June 10, 1986, petitioner filed a notice of appeal before the trial court. The notice of appeal was granted in the same order

granting private respondent's motion for execution pending appeal. The appeal to respondent court assigned the following

errors:

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

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

decision.

III. The lower court erred in awarding moral damages, attorneys fees and exemplary damages, the worst is that,

the court awarded damages more than what are prayed for in the complaint. (p. 12,Rollo)

On August 17, 1988, the Court of Appeals rendered its decision affirming in toto the decision of the trial court. It also ruled that

the matter of the trial court's denial of Fernandez's right to adduce evidence is a closed matter in view of its (CA) ruling in AC-G.R.

04644 wherein Zenith's petition questioning the trial court's order submitting the case for decision without Zenith's evidence,

was dismissed.

The Motion for Reconsideration of the decision of the Court of Appeals dated August 17, 1988 was denied on September 29,

1988, for lack of merit. Hence, the instant petition was filed by Zenith on October 18, 1988 on the allegation that respondent

Court of Appeals' decision and resolution ran counter to applicable decisions of this Court and that they were rendered without

or in excess of jurisdiction. The issues raised by petitioners in this petition are:

a) The legal basis of respondent Court of Appeals in awarding moral damages, exemplary damages and

attomey's fees in an amount more than that prayed for in the complaint.

b) The award of actual damages of P3,460.00 instead of only P1,927.50 which was arrived at after deducting

P250.00 and P274.00 as deductible franchise and 20% depreciation on parts as agreed upon in the contract of

insurance.

Petitioner contends that while the complaint of private respondent prayed for P10,000.00 moral damages, the lower court

awarded twice the amount, or P20,000.00 without factual or legal basis; while private respondent prayed for P5,000.00

exemplary damages, the trial court awarded P20,000.00; and while private respondent prayed for P3,000.00 attorney's fees, the

trial court awarded P5,000.00.

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

petitioner.

The award of damages in case of unreasonable delay in the payment of insurance claims is governed by the Philippine Insurance

Code, which provides:

Sec. 244. In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty

of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the

claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance

company shall be adjudged to pay damages which shall consist of attomey's fees and other expenses incurred

by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice

the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date

following the time prescribed in section two hundred forty-two or in section two hundred forty-three, as the

case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time

prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment.

It is clear that under the Insurance Code, in case of unreasonable delay in the payment of the proceeds of an insurance policy, the

damages that may be awarded are: 1) attorney's fees; 2) other expenses incurred by the insured person by reason of such

unreasonable denial or withholding of payment; 3) interest at twice the ceiling prescribed by the Monetary Board of the amount

of the claim due the injured; and 4) the amount of the claim.

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

"The purpose of moral damages is essentially indemnity or reparation, not punishment or correction. Moral damages are

emphatically not intended to enrich a complainant at the expense of a defendant, they are awarded only to enable the injured

party to obtain means, diversions or amusements that will serve to alleviate the moral suffering he has undergone by reason of

the defendant's culpable action." (J. Cezar S. Sangco, Philippine Law on Torts and Damages, Revised Edition, p. 539) (See also R

and B Surety & Insurance Co., Inc. v. IAC, G.R. No. 64515, June 22, 1984; 129 SCRA 745). While it is true that no proof of pecuniary


loss is necessary in order that moral damages may be adjudicated, the assessment of which is left to the discretion of the court

according to the circumstances of each case (Art. 2216, New Civil Code), it is equally true that in awarding moral damages in case

of breach of contract, there must be a showing that the breach was wanton and deliberately injurious or the one responsible

acted fraudently or in bad faith (Perez v. Court of Appeals, G.R. No. L-20238, January 30,1965; 13 SCRA 137; Solis v. Salvador, G.R.

No. L-17022, August 14, 1965; 14 SCRA 887). In the instant case, there was a finding that private respondent was given a "run-

around" for two months, which is the basis for the award of the damages granted under the Insurance Code for unreasonable

delay in the payment of the claim. However, the act of petitioner of delaying payment for two months cannot be considered as so

wanton or malevolent to justify an award of P20,000.00 as moral damages, taking into consideration also the fact that the actual

damage on the car was only P3,460. In the pre-trial of the case, it was shown that there was no total disclaimer by respondent.

The reason for petitioner's failure to indemnify private respondent within the two-month period was that the parties could not

come to an agreement as regards the amount of the actual damage on the car. The amount of P10,000.00 prayed for by private

respondent as moral damages is equitable.

On the other hand, exemplary or corrective damages are imposed by way of example or correction for the public good (Art. 2229,

New Civil Code of the Philippines). In the case of Noda v. Cruz-Arnaldo, G.R. No. 57322, June 22,1987; 151 SCRA 227, exemplary

damages were not awarded as the insurance company had not acted in wanton, oppressive or malevolent manner. The same is

true in the case at bar.

The amount of P5,000.00 awarded as attomey's fees is justified under the circumstances of this case considering that there were

other petitions filed and defended by private respondent in connection with this case.

As regards the actual damages incurred by private respondent, the amount of P3,640.00 had been established before the trial

court and affirmed by the appellate court. Respondent appellate court correctly ruled that the deductions of P250.00 and

P274.00 as deductible franchise and 20% depreciation on parts, respectively claimed by petitioners as agreed upon in the

contract, had no basis. Respondent court ruled:

Under its second assigned error, defendant-appellant puts forward two arguments, both of which are entirely

without merit. It is contented that the amount recoverable under the insurance policy defendant-appellant

issued over the car of plaintiff-appellee is subject to deductible franchise, and . . . .

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

Therefore, the award of moral damages is reduced to P10,000.00 and the award of exemplary damages is hereby deleted. The

awards due to private respondent Fernandez are as follows:

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

the time of submission of proof of loss;

2) P10,000.00 as moral damages;

3) P5,000.00 as attorney's fees;

4) P3,000.00 as litigation expenses; and

5) Costs.

ACCORDINGLY, the appealed decision is MODIFIED as above stated.

SO ORDERED.

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

Gancayco, J., is on leave.



ManilaFIRST DIVISION

G.R. No. 92383 July 17, 1992SUN INSURANCE OFFICE, LTD., petitioner, vs.THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:

The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two months later, he

was dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on the policy but her claim was

rejected. The petitioner agreed that there was no suicide. It argued, however that there was no accident either.

Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10 o'clock in the

evening, after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with

his handgun, from which he had previously removed the magazine. As she watched television, he stood in front of her and

pointed the gun at her. She pushed it aside and said it might he loaded. He assured her it was not and then pointed it to his

temple. The next moment there was an explosion and Lim slumped to the floor. He was dead before he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2 The petitioner was sentenced

to pay her P200,000.00, representing the face value of the policy, with interest at the legal rate; P10,000.00 as moral damages;

P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory damages; and P5,000.00 as attorney's fees, plus the

costs of the suit. This decision was affirmed on appeal, and the motion for reconsideration was denied. 3 The petitioner then

came to this Court to fault the Court of Appeals for approving the payment of the claim and the award of damages.

The term "accident" has been defined as follows:

The words "accident" and "accidental" have never acquired any technical signification in law, and when used in an insurance

contract are to be construed and considered according to the ordinary understanding and common usage and speech of people

generally. In-substance, the courts are practically agreed that the words "accident" and "accidental" mean that which happens by

chance or fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen. The definition that has

usually been adopted by the courts is that an accident is an event that takes place without one's foresight or expectation — an

event that proceeds from an unknown cause, or is an unusual effect of a known case, and therefore not expected. 4

An accident is an event which happens without any human agency or, if happening through human agency, an event which,

under the circumstances, is unusual to and not expected by the person to whom it happens. It has also been defined as an injury

which happens by reason of some violence or casualty to the injured without his design, consent, or voluntary co-operation. 5

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was indeed an accident. The

petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says that "there is no accident when a deliberate act is

performed unless some additional, unexpected, independent and unforeseen happening occurs which produces or brings about

their injury or death." There was such a happening. This was the firing of the gun, which was the additional unexpected and

independent and unforeseen occurrence that led to the insured person's death.

The petitioner also cites one of the four exceptions provided for in the insurance contract and contends that the private

petitioner's claim is barred by such provision. It is there stated:

Exceptions —

The company shall not be liable in respect of

1. Bodily injury

xxx xxx xxx

b. consequent upon


i) The insured person attempting to commit suicide or willfully exposing himself to needless peril except in an

attempt to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that the insured willfully

exposed himself to needless peril and thus removed himself from the coverage of the insurance policy.

It should be noted at the outset that suicide and willful exposure to needless peril are in pari materia because they both signify a

disregard for one's life. The only difference is in degree, as suicide imports a positive act of ending such life whereas the second

act indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand

meters above the ground and without any safety device may not actually be intending to commit suicide, but his act is

nonetheless suicidal. He would thus be considered as "willfully exposing himself to needless peril" within the meaning of the

exception in question.

The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully exposed himself to needless

peril and so came under the exception. The theory is that a gun is per se dangerous and should therefore be handled cautiously in

every case.

That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the magazine from the gun and

believed it was no longer dangerous. He expressly assured her that the gun was not loaded. It is submitted that Lim did not

willfully expose himself to needless peril when he pointed the gun to his temple because the fact is that he thought it was not

unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless.

The contrary view is expressed by the petitioner thus:

Accident insurance policies were never intended to reward the insured for his tendency to show off or for his

miscalculations. They were intended to provide for contingencies. Hence, when I miscalculate and jump from

the Quezon Bridge into the Pasig River in the belief that I can overcome the current, I have wilfully exposed

myself to peril and must accept the consequences of my act. If I drown I cannot go to the insurance company to

ask them to compensate me for my failure to swim as well as I thought I could. The insured in the case at bar

deliberately put the gun to his head and pulled the trigger. He wilfully exposed himself to peril.

The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That might frighten

the insurance people to death. We also agree that under the circumstances narrated, his beneficiary would not be able to collect

on the insurance policy for it is clear that when he braved the currents below, he deliberately exposed himself to a known peril.

The private respondent maintains that Lim did not. That is where she says the analogy fails. The petitioner's hypothetical

swimmer knew when he dived off the Quezon Bridge that the currents below were dangerous. By contrast, Lim did not know that

the gun he put to his head was loaded.

Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from recovering

from the insurance policy he obtained precisely against accident. There is nothing in the policy that relieves the insurer of the

responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed, most

accidents are caused by negligence. There are only four exceptions expressly made in the contract to relieve the insurer from

liability, and none of these exceptions is applicable in the case at bar. **

It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured. There is no

reason to deviate from this rule, especially in view of the circumstances of this case as above analyzed.

On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue raised in this case is, as the

petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good faith then it resisted the

private respondent's claim on the ground that the death of the insured was covered by the exception. The issue was indeed

debatable and was clearly not raised only for the purpose of evading a legitimate obligation. We hold therefore that the award of

moral and exemplary damages and of attorney's fees is unjust and so must be disapproved.

In order that a person may be made liable to the payment of moral damages, the law requires that his act be

wrongful. The adverse result of an action does not per se make the act wrongful and subject the act or to the

payment of moral damages. The law could not have meant to impose a penalty on the right to litigate; such

right is so precious that moral damages may not be charged on those who may exercise it erroneously. For

these the law taxes costs. 7


The fact that the results of the trial were adverse to Barreto did not alone make his act in bringing the action

wrongful because in most cases one party will lose; we would be imposing an unjust condition or limitation on

the right to litigate. We hold that the award of moral damages in the case at bar is not justified by the facts had

circumstances as well as the law.

If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not the fact of

winning alone that entitles him to recover such damages of the exceptional circumstances enumerated in Art.

2208. Otherwise, every time a defendant wins, automatically the plaintiff must pay attorney's fees thereby

putting a premium on the right to litigate which should not be so. For those expenses, the law deems the award

of costs as sufficient. 8

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable to the private

respondent in the sum of P200,000.00 representing the face value of the insurance contract, with interest at the legal rate from

the date of the filing of the complaint until the full amount is paid, but MODIFIED with the deletion of all awards for damages,

including attorney's fees, except the costs of the suit.

SO ORDERED.

Griño-Aquino, Medialdea and Bellosillo, JJ., concur.



ManilaFIRST DIVISIONG.R. No. L-54171 October 28, 1980JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA, petitioner, vs.THE INSURANCE COMMISSION and EMPIRE INSURANCE COMPANY, respondents. TEEHANKEE, Acting C.J.:

The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and holds that where the insured's

car is wrongfully taken without the insured's consent from the car service and repair shop to whom it had been entrusted for

check-up and repairs (assuming that such taking was for a joy ride, in the course of which it was totally smashed in an accident),

respondent insurer is liable and must pay insured for the total loss of the insured vehicle under the theft clause of the policy.

The undisputed facts of the case as found in the appealed decision of April 14, 1980 of respondent insurance commission are as

follows:

Complainant [petitioner] was the owner of a Colt Lancer, Model 1976, insured with respondent company under

Private Car Policy No. MBI/PC-0704 for P35,000.00 — Own Damage; P30,000.00 — Theft; and P30,000.00 —

Third Party Liability, effective May 16, 1977 to May 16, 1978. On May 9, 1978, the vehicle was brought to the

Sunday Machine Works, Inc., for general check-up and repairs. On May 11, 1978, while it was in the custody of

the Sunday Machine Works, the car was allegedly taken by six (6) persons and driven out to Montalban, Rizal.

While travelling along Mabini St., Sitio Palyasan, Barrio Burgos, going North at Montalban, Rizal, the car figured

in an accident, hitting and bumping a gravel and sand truck parked at the right side of the road going south. As a

consequence, the gravel and sand truck veered to the right side of the pavement going south and the car

veered to the right side of the pavement going north. The driver, Benito Mabasa, and one of the passengers

died and the other four sustained physical injuries. The car, as well, suffered extensive damage. Complainant,

thereafter, filed a claim for total loss with the respondent company but claim was denied. Hence, complainant,

was compelled to institute the present action.

The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire Insurance Company admittedly

undertook to indemnify the petitioner-insured against loss or damage to the car (a) by accidental collision or overturning, or

collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external

explosion, self-ignition or lightning or burglary, housebreaking or theft; and (c) by malicious act.

Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the total loss of the vehicle against

private respondent, sustaining respondent insurer's contention that the accident did not fall within the provisions of the policy

either for the Own Damage or Theft coverage, invoking the policy provision on "Authorized Driver" clause. 1

Respondent commission upheld private respondent's contention on the "Authorized Driver" clause in this wise: "It must be

observed that under the above-quoted provisions, the policy limits the use of the insured vehicle to two (2) persons only, namely:

the insured himself or any person on his (insured's) permission. Under the second category, it is to be noted that the words "any

person' is qualified by the phrase

... on the insured's order or with his permission.' It is therefore clear that if the person driving is other than the

insured, he must have been duly authorized by the insured, to drive the vehicle to make the insurance company

liable for the driver's negligence. Complainant admitted that she did not know the person who drove her

vehicle at the time of the accident, much less consented to the use of the same (par. 5 of the complaint). Her

husband likewise admitted that he neither knew this driver Benito Mabasa (Exhibit '4'). With these declarations


of complainant and her husband, we hold that the person who drove the vehicle, in the person of Benito

Mabasa, is not an authorized driver of the complainant. Apparently, this is a violation of the 'Authorized Driver'

clause of the policy.

Respondent commission likewise upheld private respondent's assertion that the car was not stolen and therefore not covered by

the Theft clause, ruling that "The element of 'taking' in Article 308 of the Revised Penal Code means that the act of depriving

another of the possession and dominion of a movable thing is coupled ... with the intention. at the time of the 'taking', of

withholding it with the character of permanency (People vs. Galang, 7 Appt. Ct. Rep. 13). In other words, there must have been

shown a felonious intent upon the part of the taker of the car, and the intent must be an intent permanently to deprive the

insured of his car," and that "Such was not the case in this instance. The fact that the car was taken by one of the residents of the

Sunday Machine Works, and the withholding of the same, for a joy ride should not be construed to mean 'taking' under Art. 308

of the Revised Penal Code. If at all there was a 'taking', the same was merely temporary in nature. A temporary taking is held not

a taking insured against (48 A LR 2d., page 15)."

The Court finds respondent commission's dismissal of the complaint to be contrary to the evidence and the law.

First, respondent commission's ruling that the person who drove the vehicle in the person of Benito Mabasa, who, according to

its finding, was one of the residents of the Sunday Machine Works, Inc. to whom the car had been entrusted for general check-up

and repairs was not an "authorized driver" of petitioner-complainant is too restrictive and contrary to the established principle

that insurance contracts, being contracts of adhesion where the only participation of the other party is the signing of his

signature or his "adhesion" thereto, "obviously call for greater strictness and vigilance on the part of courts of justice with a view

of protecting the weaker party from abuse and imposition, and prevent their becoming traps for the unwary. 2

The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a person other than the insured

owner, who drives the car on the insured's order, such as his regular driver, or with his permission, such as a friend or member of

the family or the employees of a car service or repair shop must be duly licensed drivers and have no disqualification to drive a

motor vehicle.

A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his car key to the shop owner

and employees who are presumed to have the insured's permission to drive the car for legitimate purposes of checking or road-

testing the car. The mere happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit or

unauthorized purpose in violation of the trust reposed in the shop by the insured car owner does not mean that the "authorized

driver" clause has been violated such as to bar recovery, provided that such employee is duly qualified to drive under a valid

driver's license.

The situation is no different from the regular or family driver, who instead of carrying out the owner's order to fetch the children

from school takes out his girl friend instead for a joy ride and instead wrecks the car. There is no question of his being an

"authorized driver" which allows recovery of the loss although his trip was for a personal or illicit purpose without the owner's

authorization.

Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft clause, not the "authorized

driver" clause, that applies), where a car is admittedly as in this case unlawfully and wrongfully taken by some people, be they

employees of the car shop or not to whom it had been entrusted, and taken on a long trip to Montalban without the owner's

consent or knowledge, such taking constitutes or partakes of the nature of theft as defined in Article 308 of the Revised Penal

Code, viz. "Who are liable for theft. — Theft is committed by any person who, with intent to gain but without violence against or

intimidation of persons nor force upon things, shall take personal property of another without the latter's consent," for purposes

of recovering the loss under the policy in question.

The Court rejects respondent commission's premise that there must be an intent on the part of the taker of the car "permanently

to deprive the insured of his car" and that since the taking here was for a "joy ride" and "merely temporary in nature," a

"temporary taking is held not a taking insured against."

The evidence does not warrant respondent commission's findings that it was a mere "joy ride". From the very investigator's

report cited in its comment, 3 the police found from the waist of the car driver Benito Mabasa Bartolome who smashed the car

and was found dead right after the incident "one cal. 45 Colt. and one apple type grenade," hardly the materials one would bring

along on a "joy ride". Then, again, it is equally evident that the taking proved to be quite permanent rather than temporary, for

the car was totally smashed in the fatal accident and was never returned in serviceable and useful condition to petitioner-owner.


Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy ride", the Court sustains as the

better view that which holds that when a person, either with the object of going to a certain place, or learning how to drive, or

enjoying a free ride, takes possession of a vehicle belonging to another, without the consent of its owner, he is guilty of theft

because by taking possession of the personal property belonging to another and using it, his intent to gain is evident since he

derives therefrom utility, satisfaction, enjoyment and pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds that

the use of a thing constitutes gain and Cuello Calon who calls it "hurt de uso. " 4

The insurer must therefore indemnify the petitioner-owner for the total loss of the insured car in the sum of P35,000.00 under

the theft clause of the policy, subject to the filing of such claim for reimbursement or payment as it may have as subrogee against

the Sunday Machine Works, Inc.

ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing private respondent to pay

petitioner the sum of P35,000.00 with legal interest from the filing of the complaint until full payment is made and to pay the

costs of suit.

SO ORDERED.

Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.



ManilaTHIRD DIVISION G.R. No. 60506 August 6, 1992FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, LEONILA M. MALLARI, GILDA ANTONIO and the minors LEAH, LOPE, JR., and ELVIRA, all surnamed MAGLANA, herein represented by their mother, FIGURACION VDA. DE MAGLANA, petitioners, vs.HONORABLE FRANCISCO Z. CONSOLACION, Presiding Judge of Davao City, Branch II, and AFISCO INSURANCE CORPORATION, respondents.ROMERO, J.:

The nature of the liability of an insurer sued together with the insured/operator-owner of a common carrier which figured in an

accident causing the death of a third person is sought to be defined in this petition for certiorari.

The facts as found by the trial court are as follows:

. . . Lope Maglana was an employee of the Bureau of Customs whose work station was at Lasa, here in Davao

City. On December 20, 1978, early morning, Lope Maglana was on his way to his work station, driving a

motorcycle owned by the Bureau of Customs. At Km. 7, Lanang, he met an accident that resulted in his death.

He died on the spot. The PUJ jeep that bumped the deceased was driven by Pepito Into, operated and owned

by defendant Destrajo. From the investigation conducted by the traffic investigator, the PUJ jeep was

overtaking another passenger jeep that was going towards the city poblacion. While overtaking, the PUJ jeep of

defendant Destrajo running abreast with the overtaken jeep, bumped the motorcycle driven by the deceased

who was going towards the direction of Lasa, Davao City. The point of impact was on the lane of the motorcycle

and the deceased was thrown from the road and met his untimely death. 1

Consequently, the heirs of Lope Maglana, Sr., here petitioners, filed an action for damages and attorney's fees against operator

Patricio Destrajo and the Afisco Insurance Corporation (AFISCO for brevity) before the then Court of First Instance of Davao,

Branch II. An information for homicide thru reckless imprudence was also filed against Pepito Into.

During the pendency of the civil case, Into was sentenced to suffer an indeterminate penalty of one (1) year, eight (8) months and

one (1) day of prision correccional, as minimum, to four (4) years, nine (9) months and eleven (11) days of prision correccional, as

maximum, with all the accessory penalties provided by law, and to indemnify the heirs of Lope Maglana, Sr. in the amount of

twelve thousand pesos (P12,000.00) with subsidiary imprisonment in case of insolvency, plus five thousand pesos (P5,000.00) in

the concept of moral and exemplary damages with costs. No appeal was interposed by accused who later applied for probation. 2

On December 14, 1981, the lower court rendered a decision finding that Destrajo had not exercised sufficient diligence as the

operator of the jeepney. The dispositive portion of the decision reads:

WHEREFORE, the Court finds judgment in favor of the plaintiffs against defendant Destrajo, ordering him to pay

plaintiffs the sum of P28,000.00 for loss of income; to pay plaintiffs the sum of P12,000.00 which amount shall

be deducted in the event judgment in Criminal Case No. 3527-D against the driver, accused Into, shall have

been enforced; to pay plaintiffs the sum of P5,901.70 representing funeral and burial expenses of the deceased;

to pay plaintiffs the sum of P5,000.00 as moral damages which shall be deducted in the event judgment ( sic) in

Criminal Case No. 3527-D against the driver, accused Into; to pay plaintiffs the sum of P3,000.00 as attorney's

fees and to pay the costs of suit.


The defendant insurance company is ordered to reimburse defendant Destrajo whatever amounts the latter

shall have paid only up to the extent of its insurance coverage.

SO ORDERED. 3

Petitioners filed a motion for the reconsideration of the second paragraph of the dispositive portion of the decision contending

that AFISCO should not merely be held secondarily liable because the Insurance Code provides that the insurer's liability is "direct

and primary and/or jointly and severally with the operator of the vehicle, although only up to the extent of the insurance

coverage." 4 Hence, they argued that the P20,000.00 coverage of the insurance policy issued by AFISCO, should have been

awarded in their favor.

In its comment on the motion for reconsideration, AFISCO argued that since the Insurance Code does not expressly provide for a

solidary obligation, the presumption is that the obligation is joint.

In its Order of February 9, 1982, the lower court denied the motion for reconsideration ruling that since the insurance contract "is

in the nature of suretyship, then the liability of the insurer is secondary only up to the extent of the insurance coverage." 5

Petitioners filed a second motion for reconsideration reiterating that the liability of the insurer is direct, primary and solidary with

the jeepney operator because the petitioners became direct beneficiaries under the provision of the policy which, in effect, is a

stipulation pour autrui. 6 This motion was likewise denied for lack of merit.

Hence, petitioners filed the instant petition for certiorari which, although it does not seek the reversal of the lower court's

decision in its entirety, prays for the setting aside or modification of the second paragraph of the dispositive portion of said

decision. Petitioners reassert their position that the insurance company is directly and solidarily liable with the negligent operator

up to the extent of its insurance coverage.

We grant the petition.

The particular provision of the insurance policy on which petitioners base their claim is as follows:

Sec. 1 — LIABILITY TO THE PUBLIC1. The Company will, subject to the Limits of Liability, pay all sums necessary to discharge liability of the insured in respect of(a) death of or bodily injury to any THIRD PARTY(b) . . . .2. . . . .3. In the event of the death of any person entitled to indemnity under this Policy, the Company will, in respect of the liability incurred to such person indemnify his personal representatives in terms of, and subject to the terms and conditions hereof. 7

The above-quoted provision leads to no other conclusion but that AFISCO can be held directly liable by petitioners. As this Court

ruled in Shafer vs. Judge, RTC of Olongapo City, Br. 75, "[w]here an insurance policy insures directly against liability, the insurer's

liability accrues immediately upon the occurrence of the injury or even upon which the liability depends, and does not depend on

the recovery of judgment by the injured party against the insured." 8 The underlying reason behind the third party liability (TPL)

of the Compulsory Motor Vehicle Liability Insurance is "to protect injured persons against the insolvency of the insured who

causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy . . ." 9 Since

petitioners had received from AFISCO the sum of P5,000.00 under the no-fault clause, AFISCO's liability is now limited to

P15,000.00.

However, we cannot agree that AFISCO is likewise solidarily liable with Destrajo. In Malayan Insurance Co., Inc. v. Court of

Appeals, 10 this Court had the opportunity to resolve the issue as to the nature of the liability of the insurer and the insured vis-a-

vis the third party injured in an accident. We categorically ruled thus:

While it is true that where the insurance contract provides for indemnity against liability to third persons, such

third persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts

against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or

the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on

tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos (the injured third party), but

it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors,

namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with

said, two (2) respondents by reason of the indemnity contract against third party liability — under which an


insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary

obligation and insurance contracts. (emphasis supplied)

The Court then proceeded to distinguish the extent of the liability and manner of enforcing the same in ordinary contracts from

that of insurance contracts. While in solidary obligations, the creditor may enforce the entire obligation against one of the

solidary debtors, in an insurance contract, the insurer undertakes for a consideration to indemnify the insured against loss,

damage or liability arising from an unknown or contingent event. 11 Thus, petitioner therein, which, under the insurance contract

is liable only up to P20,000.00, can not be made solidarily liable with the insured for the entire obligation of P29,013.00 otherwise

there would result "an evident breach of the concept of solidary obligation."

Similarly, petitioners herein cannot validly claim that AFISCO, whose liability under the insurance policy is also P20,000.00, can be

held solidarily liable with Destrajo for the total amount of P53,901.70 in accordance with the decision of the lower court. Since

under both the law and the insurance policy, AFISCO's liability is only up to P20,000.00, the second paragraph of the dispositive

portion of the decision in question may have unwittingly sown confusion among the petitioners and their counsel. What should

have been clearly stressed as to leave no room for doubt was the liability of AFISCO under the explicit terms of the insurance

contract.

In fine, we conclude that the liability of AFISCO based on the insurance contract is direct, but not solidary with that of Destrajo

which is based on Article 2180 of the Civil Code. 12 As such, petitioners have the option either to claim the P15,000 from AFISCO

and the balance from Destrajo or enforce the entire judgment from Destrajo subject to reimbursement from AFISCO to the

extent of the insurance coverage.

While the petition seeks a definitive ruling only on the nature of AFISCO's liability, we noticed that the lower court erred in the

computation of the probable loss of income. Using the formula: 2/3 of (80-56) x P12,000.00, it awarded P28,800.00. 13 Upon

recomputation, the correct amount is P192,000.00. Being a "plain error," we opt to correct the same. 14 Furthermore, in

accordance with prevailing jurisprudence, the death indemnity is hereby increased to P50,000.00. 15

WHEREFORE, premises considered, the present petition is hereby GRANTED. The award of P28,800.00 representing loss of

income is INCREASED to P192,000.00 and the death indemnity of P12,000.00 to P50,000.00.

SO ORDERED.



ManilaSECOND DIVISION G.R. No. 96452 May 7, 1992PERLA COMPANIA DE SEGUROS, INC. petitioner, vs.THE COURT OF APPEALS, HERMINIO LIM and EVELYN LIM, respondents.G.R. No. 96493 May 7, 1992FCP CREDIT CORPORATION, petitioner,vs.THE COURT OF APPEALS, Special Third Division, HERMINIO LIM and EVELYN LIM, respondents.Yolanda Quisumbing-Javellana and Nelson A. Loyola for petitioner.Wilson L. Tee for respondents Herminio and Evelyn Lim.

NOCON, J.:

These are two petitions for review on certiorari, one filed by Perla Compania de Seguros, Inc. in G.R. No. 96452, and the other by

FCP Credit Corporation in G.R. No. 96493, both seeking to annul and set aside the decision dated July 30, 1990 1 of the Court of

Appeals in CA-G.R. No. 13037, which reversed the decision of the Regional Trial Court of Manila, Branch VIII in Civil Case No. 83-

19098 for replevin and damages. The dispositive portion of the decision of the Court of Appeals reads, as follows:

WHEREFORE, the decision appealed from is reversed; and appellee Perla Compania de Seguros, Inc. is ordered

to indemnify appellants Herminio and Evelyn Lim for the loss of their insured vehicle; while said appellants are

ordered to pay appellee FCP Credit Corporation all the unpaid installments that were due and payable before

the date said vehicle was carnapped; and appellee Perla Compania de Seguros, Inc. is also ordered to pay

appellants moral damages of P12,000.00 for the latter's mental sufferings, exemplary damages of P20,000.00

for appellee Perla Compania de Seguros, Inc.'s unreasonable refusal on sham grounds to honor the just

insurance claim of appellants by way of example and correction for public good, and attorney's fees of

P10,000.00 as a just and equitable reimbursement for the expenses incurred therefor by appellants, and the

costs of suit both in the lower court and in this appeal. 2

The facts as found by the trial court are as follows:

On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed a promissory note in favor Supercars,

Inc. in the sum of P77,940.00, payable in monthly installments according to the schedule of payment indicated in said note, 3 and

secured by a chattel mortgage over a brand new red Ford Laser 1300 5DR Hatchback 1981 model with motor and serial No.

SUPJYK-03780, which is registered under the name of private respondent Herminio Lim 4 and insured with the petitioner Perla

Compania de Seguros, Inc. (Perla for brevity) for comprehensive coverage under Policy No. PC/41PP-QCB-43383. 5

On the same date, Supercars, Inc., with notice to private respondents spouses, assigned to petitioner FCP Credit Corporation (FCP

for brevity) its rights, title and interest on said promissory note and chattel mortgage as shown by the Deed of Assignment. 6


At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at the back of Broadway Centrum along N.

Domingo Street, Quezon City. Private respondent Evelyn Lim, who was driving said car before it was carnapped, immediately

called up the Anti-Carnapping Unit of the Philippine Constabulary to report said incident and thereafter, went to the nearest

police substation at Araneta, Cubao to make a police report regarding said incident, as shown by the certification issued by the

Quezon City police. 7

On November 10, 1982, private respondent Evelyn Lim reported said incident to the Land Transportation Commission in Quezon

City, as shown by the letter of her counsel to said office, 8 in compliance with the insurance requirement. She also filed a

complaint with the Headquarters, Constabulary Highway Patrol Group. 9

On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla but said claim was denied on November

18, 1982 10 on the ground that Evelyn Lim, who was using the vehicle before it was carnapped, was in possession of an expired

driver's license at the time of the loss of said vehicle which is in violation of the authorized driver clause of the insurance policy,

which states, to wit:

AUTHORIZED DRIVER:

Any of the following: (a) The Insured (b) Any person driving on the Insured's order, or with his

permission. Provided that the person driving is permitted, in accordance with the licensing or other laws or

regulations, to drive the Scheduled Vehicle, or has been permitted and is not disqualified by order of a Court of

Law or by reason of any enactment or regulation in that behalf. 11

On November 17, 1982, private respondents requests from petitioner FCP for a suspension of payment on the monthly

amortization agreed upon due to the loss of the vehicle and, since the carnapped vehicle insured with petitioner Perla, said

insurance company should be made to pay the remaining balance of the promissory note and the chattel mortgage contract.

Perla, however, denied private respondents' claim. Consequently, petitioner FCP demanded that private respondents pay the

whole balance of the promissory note or to return the vehicle 12 but the latter refused.

On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in turn filed an amended third party

complaint against petitioner Perla on December 8, 1983. After trial on the merits, the trial court rendered a decision, the

dispositive portion which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:

1. Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and severally, plaintiff the sum of

P55,055.93 plus interest thereon at the rate of 24% per annum from July 2, 1983 until fully paid;

2. Ordering defendants to pay plaintiff P50,000.00 as and for attorney's fees; and the costs of suit.

Upon the other hand, likewise, ordering the DISMISSAL of the Third-Party Complaint filed against Third-Party

Defendant. 13

Not satisfied with said decision, private respondents appealed the same to the Court of Appeals, which reversed said decision.

After petitioners' separate motions for reconsideration were denied by the Court of Appeals in its resolution of December 10,

1990, petitioners filed these separate petitions for review on certiorari.

Petitioner Perla alleged that there was grave abuse of discretion on the part of the appellate court in holding that private

respondents did not violate the insurance contract because the authorized driver clause is not applicable to the "Theft" clause of

said Contract.

For its part, petitioner FCP raised the issue of whether or not the loss of the collateral exempted the debtor from his admitted

obligations under the promissory note particularly the payment of interest, litigation expenses and attorney's fees.

We find no merit in Perla's petition.

The comprehensive motor car insurance policy issued by petitioner Perla undertook to indemnify the private respondents against

loss or damage to the car (a) by accidental collision or overturning, or collision or overturning consequent upon mechanical

breakdown or consequent upon wear and tear; (b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking

or theft; and (c) by malicious act. 14

Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's consent or knowledge, such taking

constitutes theft, and, therefore, it is the "THEFT"' clause, and not the "AUTHORIZED DRIVER" clause that should apply. As

correctly stated by the respondent court in its decision:


. . . Theft is an entirely different legal concept from that of accident. Theft is committed by a person with the

intent to gain or, to put it in another way, with the concurrence of the doer's will. On the other hand, accident,

although it may proceed or result from negligence, is the happening of an event without the concurrence of the

will of the person by whose agency it was caused. (Bouvier's Law Dictionary, Vol. I, 1914 ed., p. 101).

Clearly, the risk against accident is distinct from the risk against theft. The "authorized driver clause" in a typical

insurance policy is in contemplation or anticipation of accident in the legal sense in which it should be

understood, and not in contemplation or anticipation of an event such as theft. The distinction — often seized

upon by insurance companies in resisting claims from their assureds — between death occurring as a result of

accident and death occurring as a result of intent may, by analogy, apply to the case at bar. Thus, if the insured

vehicle had figured in an accident at the time she drove it with an expired license, then, appellee Perla

Compania could properly resist appellants' claim for indemnification for the loss or destruction of the vehicle

resulting from the accident. But in the present case. The loss of the insured vehicle did not result from an

accident where intent was involved; the loss in the present case was caused by theft, the commission of which

was attended by intent. 15

It is worthy to note that there is no causal connection between the possession of a valid driver's license and the loss of a vehicle.

To rule otherwise would render car insurance practically a sham since an insurance company can easily escape liability by citing

restrictions which are not applicable or germane to the claim, thereby reducing indemnity to a shadow.

We however find the petition of FCP meritorious.

This Court agrees with petitioner FCP that private respondents are not relieved of their obligation to pay the former the

installments due on the promissory note on account of the loss of the automobile. The chattel mortgage constituted over the

automobile is merely an accessory contract to the promissory note. Being the principal contract, the promissory note is

unaffected by whatever befalls the subject matter of the accessory contract. Therefore, the unpaid balance on the promissory

note should be paid, and not just the installments due and payable before the automobile was carnapped, as erronously held by

the Court of Appeals.

However, this does not mean that private respondents are bound to pay the interest, litigation expenses and attorney's fees

stipulated in the promissory note. Because of the peculiar relationship between the three contracts in this case, i.e., the

promissory note, the chattel mortgage contract and the insurance policy, this Court is compelled to construe all three contracts

as intimately interrelated to each other, despite the fact that at first glance there is no relationship whatsoever between the

parties thereto.

Under the promissory note, private respondents are obliged to pay Supercars, Inc. the amount stated therein in accordance with

the schedule provided for. To secure said promissory note, private respondents constituted a chattel mortgage in favor of

Supercars, Inc. over the automobile the former purchased from the latter. The chattel mortgage, in turn, required private

respondents to insure the automobile and to make the proceeds thereof payable to Supercars, Inc. The promissory note and

chattel mortgage were assigned by Supercars, Inc. to petitioner FCP, with the knowledge of private respondents. Private

respondents were able to secure an insurance policy from petitioner Perla, and the same was made specifically payable to

petitioner FCP. 16

The insurance policy was therefore meant to be an additional security to the principal contract, that is, to insure that the

promissory note will still be paid in case the automobile is lost through accident or theft. The Chattel Mortgage Contract provided

that:

THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE THE PROPERTY/IES HEREIN-ABOVE

MORTGAGED TO BE INSURED AGAINST LOSS OR DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF

ONE YEAR FROM DATE HEREOF AND EVERY YEAR THEREAFTER UNTIL THE MORTGAGE OBLIGATION IS FULLY

PAID WITH AN INSURANCE COMPANY OR COMPANIES ACCEPTABLE TO THE MORTGAGEE IN AN AMOUNT NOT

LESS THAN THE OUTSTANDING BALANCE OF THE MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE ALL LOSS, IF

ANY, UNDER SUCH POLICY OR POLICIES, PAYABLE TO THE MORTGAGE OR ITS ASSIGNS AS ITS INTERESTS MAY

APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE MORTGAGEE, . . . . 17

It is clear from the abovementioned provision that upon the loss of the insured vehicle, the insurance company Perla undertakes

to pay directly to the mortgagor or to their assignee, FCP, the outstanding balance of the mortgage at the time of said loss under


the mortgage contract. If the claim on the insurance policy had been approved by petitioner Perla, it would have paid the

proceeds thereof directly to petitioner FCP, and this would have had the effect of extinguishing private respondents' obligation to

petitioner FCP. Therefore, private respondents were justified in asking petitioner FCP to demand the unpaid installments from

petitioner Perla.

Because petitioner Perla had unreasonably denied their valid claim, private respondents should not be made to pay the interest,

liquidated damages and attorney's fees as stipulated in the promissory note. As mentioned above, the contract of indemnity was

procured to insure the return of the money loaned from petitioner FCP, and the unjustified refusal of petitioner Perla to

recognize the valid claim of the private respondents should not in any way prejudice the latter.

Private respondents can not be said to have unduly enriched themselves at the expense of petitioner FCP since they will be

required to pay the latter the unpaid balance of its obligation under the promissory note.

In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring petitioner Perla to indemnify

private respondents for the loss of their insured vehicle. However, the latter should be ordered to pay petitioner FCP the amount

of P55,055.93, representing the unpaid installments from December 30, 1982 up to July 1, 1983, as shown in the statement of

account prepared by petitioner FCP, 18 plus legal interest from July 2, 1983 until fully paid.

As to the award of moral damages, exemplary damages and attorney's fees, private respondents are legally entitled to the same

since petitioner Perla had acted in bad faith by unreasonably refusing to honor the insurance claim of the private respondents.

Besides, awards for moral and exemplary damages, as well as attorney's fees are left to the sound discretion of the Court. Such

discretion, if well exercised, will not be disturbed on appeal. 19

WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require private respondents to pay petitioner

FCP the amount of P55,055.93, with legal interest from July 2, 1983 until fully paid. The decision appealed from is hereby

affirmed as to all other respects. No pronouncement as to costs.

SO ORDERED.

Melencio-Herrera, Paras, Padilla and Regalado, JJ., concur.



ManilaFIRST DIVISION G.R. No. 114427 February 6, 1995ARMANDO GEAGONIA, petitioner, vs.COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of Appeals in CA-G.R. SP No. 31916, entitled

"Country Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of the Insurance Commission in I.C.

Case No. 3340 which awarded the claim of petitioner Armando Geagonia against private respondent Country Bankers Insurance

Corporation.

The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22 December

1989, he obtained from the private respondent fire insurance policy No. F-14622 2 for P100,000.00. The period of the policy was

from 22 December 1989 to 22 December 1990 and covered the following: "Stock-in-trade consisting principally of dry goods such

as RTW's for men and women wear and other usual to assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was the

co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized as

follows:

Zenco Sales, Inc. P55,698.00F. Legaspi Gen. Merchandise 86,432.50Cebu Tesing Textiles 250,000.00 (on credit)

—————P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances already affected, or which may

subsequently be effected, covering any of the property or properties consisting of stocks in trade, goods in

process and/or inventories only hereby insured, and unless such notice be given and the particulars of such

insurance or insurances be stated therein or endorsed in this policy pursuant to Section 50 of the Insurance

Code, by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this

policy shall be deemed forfeited, provided however, that this condition shall not apply when the total insurance

or insurances in force at the time of the loss or damage is not more than P200,000.00.

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco, Agusan del Sur. The

petitioner's insured stock-in-trade were completely destroyed prompting him to file with the private respondent a claim under


the policy. On 28 December 1990, the private respondent denied the claim because it found that at the time of the loss the

petitioner's stocks-in-trade were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00

each, issued by the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the

insured was "Messrs. Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may appear

subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. — Phils. First CEB/F 24758. 4

The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.

The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission (Case No. 3340) for the

recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs of litigation. He attached as

Annex "AM" 6 thereof his letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the said

letter that at the time he obtained the private respondent's fire insurance policy he knew that the two policies issued by the PFIC

were already in existence; however, he had no knowledge of the provision in the private respondent's policy requiring him to

inform it of the prior policies; this requirement was not mentioned to him by the private respondent's agent; and had it been

mentioned, he would not have withheld such information. He further asserted that the total of the amounts claimed under the

three policies was below the actual value of his stocks at the time of loss, which was P1,000,000.00.

In its answer, 7 the private respondent specifically denied the allegations in the complaint and set up as its principal defense the

violation of Condition 3 of the policy.

In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not violate Condition 3 as he had no

knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which

procured the PFIC policies without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor, had

insurable interest on the stocks. These findings were based on the petitioner's testimony that he came to know of the PFIC

policies only when he filed his claim with the private respondent and that Cebu Tesing Textile obtained them and paid for their

premiums without informing him thereof. The Insurance Commission then decreed:

WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant the sum of

P100,000.00 with legal interest from the time the complaint was filed until fully satisfied plus the amount of

P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of respondent is hereby dismissed.

Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in its resolution of 20

August 1993, 10 the private respondent appealed to the Court of Appeals by way of a petition for review. The petition was

docketed as CA-G.R. SP No. 31916.

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance Commission because it found

that the petitioner knew of the existence of the two other policies issued by the PFIC. It said:

It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken in the

name of private respondent [petitioner herein]. The policy states that "DISCOUNT MART (MR. ARMANDO

GEAGONIA, PROP)" was the assured and that "TESING TEXTILES" [was] only the mortgagee of the goods.

In addition, the premiums on both policies were paid for by private respondent, not by the Tesing Textiles

which is alleged to have taken out the other insurance without the knowledge of private respondent. This is

shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both invoices, Tesing Textiles is

indicated to be only the mortgagee of the goods insured but the party to which they were issued were the

"DISCOUNT MART (MR. ARMANDO GEAGONIA)."

In is clear that it was the private respondent [petitioner herein] who took out the policies on the same property

subject of the insurance with petitioner. Hence, in failing to disclose the existence of these insurances private

respondent violated Condition No. 3 of Fire Policy No. 1462. . . .

Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by his letter

to petitioner [of 18 January 1991. The body of the letter reads as follows;]

xxx xxx xxx

Please be informed that I have no knowledge of the provision requiring me to inform your

office about my

prior insurance under FGA-28146 and F-CEB-24758. Your representative did not mention


about said requirement at the time he was convincing me to insure with you. If he only die or

even inquired if I had other existing policies covering my establishment, I would have told him

so. You will note that at the time he talked to me until I decided to insure with your company

the two policies aforementioned were already in effect. Therefore I would have no reason to

withhold such information and I would have desisted to part with my hard earned peso to pay

the insurance premiums [if] I know I could not recover anything.

Sir, I am only an ordinary businessman interested in protecting my investments. The actual

value of my stocks damaged by the fire was estimated by the Police Department to be

P1,000,000.00 (Please see xerox copy of Police Report Annex "A"). My Income Statement as of

December 31, 1989 or five months before the fire, shows my merchandise inventory was

already some P595,455.75. . . . These will support my claim that the amount claimed under

the three policies are much below the value of my stocks lost.

xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know that there were other insurances

taken on the stock-in-trade and seriously puts in question his credibility.

His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He contends therein

that the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of jurisdiction:

A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; ANDC — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE RESPONDENT.

The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior knowledge of the two

insurance policies issued by the PFIC when he obtained the fire insurance policy from the private respondent, thereby, for not

disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he is precluded from recovering therefrom.

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of 18 January

1991, is without merit. The petitioner claims that the said letter was not offered in evidence and thus should not have been

considered in deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to

the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It has attained

the status of a judicial admission and since its due execution and authenticity was not denied by the other party, the petitioner is

bound by it even if it were not introduced as an independent evidence. 13

As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two policies. The

Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner in his letter to the private

respondent of 18 January 1991, which was quoted in the challenged decision of the Court of Appeals. These divergent findings of

fact constitute an exception to the general rule that in petitions for review under Rule 45, only questions of law are involved and

findings of fact by the Court of Appeals are conclusive and binding upon this Court. 14

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18 January 1991

to the private respondent conclusively proves this knowledge. His testimony to the contrary before the Insurance Commissioner

and which the latter relied upon cannot prevail over a written admission made ante litem motam. It was, indeed, incredible that

he did not know about the prior policies since these policies were not new or original. Policy No. GA-28144 was a renewal of

Policy No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F-24792.

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its incorporation in the

policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a] policy may declare that a violation of specified

provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy." Such a condition is a

provision which invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is

commonly known as the additional or "other insurance" clause and has been upheld as valid and as a warranty that no other

insurance exists. Its violation would thus avoid the

policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject matter, the same interest

therein, and the same risk. 17


As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both

interests may be one policy, or each may take out a separate policy covering his interest, either at the same or at separate

times. 18 The mortgagor's insurable interest covers the full value of the mortgaged property, even though the mortgage debt is

equivalent to the full value of the property. 19 The mortgagee's insurable interest is to the extent of the debt, since the property is

relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable

interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the

mortgaged property. 20 Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and

the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The mortgagee may

be made the beneficial payee in several ways. He may become the assignee of the policy with the consent of the insurer; or the

mere pledgee without such consent; or the original policy may contain a mortgage clause; or a rider making the policy payable to

the mortgagee "as his interest may appear" may be attached; or a "standard mortgage clause," containing a collateral

independent contract between the mortgagee and insurer, may be attached; or the policy, though by its terms payable

absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's

benefit, in which case the mortgagee acquires an equitable lien upon the proceeds. 21

In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear, the

mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract

himself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. 22 This kind of policy

covers only such interest as the mortgagee has at the issuing of the policy.23

On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement

by which the mortgagor is to pay the premiums upon such insurance. 24 It has been noted, however, that although the mortgagee

is himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and

obtains on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable

clause. 25

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause which reads:

Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may appear subject to the

terms of this policy.

This is clearly a simple loss payable clause, not a standard mortgage clause.

It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety Corp. vs. Ng

Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:

The insured shall give notice to the company of any insurance or insurances already effected, or which may

subsequently be effected covering any of the property hereby insured, and unless such notice be given and the

particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the

Company before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited.

or in the 1930 case of Santa Ana vs. Commercial Union Assurance

Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects thereby assured must

be declared by the insured in writing and he must cause the company to add or insert it in the policy, without which

such policy shall be null and void, and the insured will not be entitled to indemnity in case of loss," Condition 3in the

private respondent's policy No. F-14622 does not absolutely declare void any violation thereof. It expressly provides that

the condition "shall not apply when the total insurance or insurances in force at the time of the loss or damage is not

more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured and strictly

against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was endeavoring to

secure when he applied for insurance. It is also a cardinal principle of law that forfeitures are not favored and that any

construction which would result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is

possible to construe the policy in a manner which would permit recovery, as, for example, by finding a waiver for such

forfeiture. 29 Stated differently, provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance

policies should be construed most strictly against those for whose benefits they are inserted, and most favorably toward those


against whom they are intended to operate. 30 The reason for this is that, except for riders which may later be inserted, the

insured sees the contract already in its final form and has had no voice in the selection or arrangement of the words employed

therein. On the other hand, the language of the contract was carefully chosen and deliberated upon by experts and legal advisers

who had acted exclusively in the interest of the insurers and the technical language employed therein is rarely understood by

ordinary laymen. 31

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from ambiguity and

must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to double

insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies obtained.

The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the property or

properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the portion regarding the

insured's declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of

P50,000.00. A double insurance exists where the same person is insured by several insurers separately in respect of the same

subject and interest. As earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged property are

distinct and separate. Since the two policies of the PFIC do not cover the same interest as that covered by the policy of the

private respondent, no double insurance exists. The non-disclosure then of the former policies was not fatal to the petitioner's

right to recover on the private respondent's policy.

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the time of

loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to a loss not

exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of

"other insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration of fraud. When a property

owner obtains insurance policies from two or more insurers in a total amount that exceeds the property's value, the insured may

have an inducement to destroy the property for the purpose of collecting the insurance. The public as well as the insurer is

interested in preventing a situation in which a fire would be profitable to the insured. 32

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 31916 is SET ASIDE

and the decision of the Insurance Commission in Case No. 3340 is REINSTATED.

Costs against private respondent Country Bankers Insurance Corporation.

SO ORDERED.

Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.



ManilaFIRST DIVISION G.R. No. 115278 May 23, 1995FORTUNE INSURANCE AND SURETY CO., INC., petitioner, vs.COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is liable under the Money,

Security, and Payroll Robbery policy it issued to the private respondent or whether recovery thereunder is precluded under the

general exceptions clause thereof. Both the trial court and the Court of Appeals held that there should be recovery. The

petitioner contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private respondent Producers Bank

of the Philippines (hereinafter Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a

complaint for recovery of the sum of P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a

robbery of Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to its head office in

Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch 146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following stipulation of facts:

1. The plaintiff was insured by the defendants and an insurance policy was issued, the

duplicate original of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in the sum of

P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its

Head Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was robbed of

the said cash. The robbery took place while the armored car was traveling along Taft Avenue

in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by Security

Guard Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC Management Systems

with the plaintiff by virtue of an Agreement executed on August 7, 1983, a duplicate original

copy of which is hereto attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the plaintiff

by virtue of a contract of Security Service executed on October 25, 1982, a duplicate original

copy of which is hereto attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver Magalong and

guard Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo Aquino and


John Doe, with violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay

City. A copy of the complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid persons with the

said crime before Branch 112 of the Regional Trial Court of Pasay City. A copy of the said

information is hereto attached as Exhibit "E." The case is still being tried as of this date;

7. Demands were made by the plaintiff upon the defendant to pay the amount of the loss of

P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of the

insurance policy, attached hereto as Exhibit "A," specifically under page 1 thereof, "General

Exceptions" Section (b), which is marked as Exhibit "A-1," and which reads as follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the

insured or any officer, employee, partner, director, trustee or authorized

representative of the Insured whether acting alone or in conjunction with

others. . . .

8. The plaintiff opposes the contention of the defendant and contends that Atiga and

Magalong are not its "officer, employee, . . . trustee or authorized representative . . . at the

time of the robbery. 1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against defendant, and

(a) orders defendant to pay plaintiff the net amount of P540,000.00 as

liability under Policy No. 0207 (as mitigated by the P40,000.00 special clause

deduction and by the recovered sum of P145,000.00), with interest thereon

at the legal rate, until fully paid;

(b) orders defendant to pay plaintiff the sum of P30,000.00 as and for

attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong and Atiga, their

services as armored car driver and as security guard having been merely offered by PRC Management and by

Unicorn Security and which latter firms assigned them to plaintiff. The wages and salaries of both Magalong and

Atiga are presumably paid by their respective firms, which alone wields the power to dismiss them. Magalong

and Atiga are assigned to plaintiff in fulfillment of agreements to provide driving services and property

protection as such — in a context which does not impress the Court as translating into plaintiff's power to

control the conduct of any assigned driver or security guard, beyond perhaps entitling plaintiff to request are

replacement for such driver guard. The finding is accordingly compelled that neither Magalong nor Atiga were

plaintiff's "employees" in avoidance of defendant's liability under the policy, particularly the general exceptions

therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and guard Atiga were the

"authorized representatives" of plaintiff. They were merely an assigned armored car driver and security guard,

respectively, for the June 29, 1987 money transfer from plaintiff's Pasay Branch to its Makati Head Office. Quite

plainly — it was teller Maribeth Alampay who had "custody" of the P725,000.00 cash being transferred along a

specified money route, and hence plaintiff's then designated "messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No. 32946. In its

decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.


The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither employees nor

authorized representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the

insurance company (New Life Enterprises vs. Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs.

Court of Appeals, 211 SCRA 554). Contracts of insurance, like other contracts, are to be construed according to

the sense and meaning of the terms which the parties themselves have used. If such terms are clear and

unambiguous, they must be taken and understood in their plain, ordinary and popular sense (New Life

Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain, ordinary and simple. No

other interpretation is necessary. The word "employee" must be taken to mean in the ordinary sense.

The Labor Code is a special law specifically dealing with/and specifically designed to protect labor and therefore

its definition as to employer-employee relationships insofar as the application/enforcement of said Code is

concerned must necessarily be inapplicable to an insurance contract which defendant-appellant itself had

formulated. Had it intended to apply the Labor Code in defining what the word "employee" refers to, it

must/should have so stated expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-appellee bank because it has no

power to hire or to dismiss said driver and security guard under the contracts (Exhs. 8 and C) except only to ask

for their replacements from the contractors. 5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the Court of Appeals erred

in holding it liable under the insurance policy because the loss falls within the general exceptions clause considering that driver

Magalong and security guard Atiga were Producers' authorized representatives or employees in the transfer of the money and

payroll from its branch office in Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one branch to another, they

effectively and necessarily became its authorized representatives in the care and custody of the money. Assuming that they could

not be considered authorized representatives, they were, nevertheless, employees of Producers. It asserts that the existence of

an employer-employee relationship "is determined by law and being such, it cannot be the subject of agreement." Thus, if there

was in reality an employer-employee relationship between Producers, on the one hand, and Magalong and Atiga, on the other,

the provisions in the contracts of Producers with PRC Management System for Magalong and with Unicorn Security Services for

Atiga which state that Producers is not their employer and that it is absolved from any liability as an employer, would not

obliterate the relationship.

Fortune points out that an employer-employee relationship depends upon four standards: (1) the manner of selection and

engagement of the putative employee; (2) the mode of payment of wages; (3) the presence or absence of a power to dismiss;

and (4) the presence and absence of a power to control the putative employee's conduct. Of the four, the right-of-control test

has been held to be the decisive factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and

exercised by Producers. Fortune further insists that PRC Management System and Unicorn Security Services are but "labor-only"

contractors under Article 106 of the Labor Code which provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting where the person supplying workers

to an employer does not have substantial capital or investment in the form of tools, equipment, machineries,

work premises, among others, and the workers recruited and placed by such persons are performing activities

which are directly related to the principal business of such employer. In such cases, the person or intermediary

shall be considered merely as an agent of the employer who shall be responsible to the workers in the same

manner and extent as if the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling in International Timber

Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is equivalent to a finding that there is an employer-

employee relationship between the owner of the project and the employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had nothing to do with their

selection and engagement, the payment of their wages, their dismissal, and the control of their conduct. Producers argued that

the rule in International Timber Corp. is not applicable to all cases but only when it becomes necessary to prevent any violation or


circumvention of the Labor Code, a social legislation whose provisions may set aside contracts entered into by parties in order to

give protection to the working man.

Producers further asseverates that what should be applied is the rule in American President Lines vs. Clave, 8 to wit:

In determining the existence of employer-employee relationship, the following elements are generally

considered, namely: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the

power of dismissal; and (4) the power to control the employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong as the driver of

Producers' armored car and was responsible for his faithful discharge of his duties and responsibilities, and since Producers paid

the monthly compensation of P1,400.00 per driver to PRC Management Systems and not to Magalong, it is clear that Magalong

was not Producers' employee. As to Atiga, Producers relies on the provision of its contract with Unicorn Security Services which

provides that the guards of the latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance policy which is a form of

casualty insurance. Section 174 of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding

certain types of loss which by law or custom are considered as falling exclusively within the scope of insurance

such as fire or marine. It includes, but is not limited to, employer's liability insurance, public liability insurance,

motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and

health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance.

(emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other provisions applicable

to casualty insurance or to robbery insurance in particular. These contracts are, therefore, governed by the general provisions

applicable to all types of insurance. Outside of these, the rights and obligations of the parties must be determined by the terms of

their contract, taking into consideration its purpose and always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the insurer — the moral

hazard — is so great that insurers have found it necessary to fill up their policies with countless restrictions, many designed to

reduce this hazard. Seldom does the insurer assume the risk of all losses due to the hazards insured against." 10 Persons

frequently excluded under such provisions are those in the insured's service and employment. 11 The purpose of the exception is

to guard against liability should the theft be committed by one having unrestricted access to the property. 12 In such cases, the

terms specifying the excluded classes are to be given their meaning as understood in common speech. 13 The terms "service" and

"employment" are generally associated with the idea of selection, control, and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the insurer, 15 or it should

be construed liberally in favor of the insured and strictly against the insurer. 16 Limitations of liability should be regarded with

extreme jealousy and must be construed

in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without saying then that if the terms

of the contract are clear and unambiguous, there is no room for construction and such terms cannot be enlarged or diminished

by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is settled that the terms of

the policy constitute the measure of the insurer's liability. 20 In the absence of statutory prohibition to the contrary, insurance

companies have the same rights as individuals to limit their liability and to impose whatever conditions they deem best upon

their obligations not inconsistent with public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as employees or authorized

representatives of Producers under paragraph (b) of the general exceptions clause of the policy which, for easy reference, is again

quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx


(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any

officer, employee, partner, director, trustee or authorized representative of the Insured

whether acting alone or in conjunction with others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of the terms "employee" and "authorized

representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from protection and coverage

losses arising from dishonest, fraudulent, or criminal acts of persons granted or having unrestricted access to Producers' money

or payroll. When it used then the term "employee," it must have had in mind any person who qualifies as such as generally and

universally understood, or jurisprudentially established in the light of the four standards in the determination of the employer-

employee relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of the Labor Code which

considers the employees under a "labor-only" contract as employees of the party employing them and not of the party who

supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services are "labor-only"

contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of Magalong. Notwithstanding such

express assumption of PRC Management Systems and Unicorn Security Services that the drivers and the security guards

each shall supply to Producers are not the latter's employees, it may, in fact, be that it is because the contracts are,

indeed, "labor-only" contracts. Whether they are is, in the light of the criteria provided for in Article 106 of the Labor

Code, a question of fact. Since the parties opted to submit the case for judgment on the basis of their stipulation of facts

which are strictly limited to the insurance policy, the contracts with PRC Management Systems and Unicorn Security

Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the City Fiscal of Pasay City,

there is a paucity of evidence as to whether the contracts between Producers and PRC Management Systems and

Unicorn Security Services are "labor-only" contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC Management Systems

and Unicorn Security Services were truly independent contractors, we are satisfied that Magalong and Atiga were, in respect of

the transfer of Producer's money from its Pasay City branch to its head office in Makati, its "authorized representatives" who

served as such with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to

safely transfer the money to its head office, with Alampay to be responsible for its custody in transit; Magalong to drive the

armored vehicle which would carry the money; and Atiga to provide the needed security for the money, the vehicle, and his two

other companions. In short, for these particular tasks, the three acted as agents of Producers. A "representative" is defined as

one who represents or stands in the place of another; one who represents others or another in a special capacity, as an agent,

and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 32946 dated 3 May

1994 as well as that of Branch 146 of the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The

complaint in Civil Case No. 1817 is DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo and Kapunan, JJ., concur.

Padilla, J., took no part.

Quiason, J., is on leave.



ManilaFIRST DIVISIONG.R. No. L-34200 September 30, 1982REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants, vs.MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE OF RIZAL, BRANCH V, QUEZON CITY, respondents-appellees.K.V. Faylona for petitioners-appellants.L. L. Reyes for respondents-appellees.

VASQUEZ, J.:

The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance Rizal, Branch V,

Quezon City, to be taken directly to the Supreme Court is whether or not the acceptance by the private respondent insurance

corporation of the premium and the issuance of the corresponding certificate of insurance should be deemed a waiver of the

exclusionary condition of overage stated in the said certificate of insurance.

The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent insurance corporation

for insurance coverage against accident and injuries. She filled up the blank application form given to her and filed the same with

the respondent insurance corporation. In the said application form which was dated April 15, 1969, she gave the date of her birth

as July 11, 1904. On the same date, she paid the sum of P20.00 representing the premium for which she was issued the

corresponding receipt signed by an authorized agent of the respondent insurance corporation. (Rollo, p. 27.) Upon the filing of

said application and the payment of the premium on the policy applied for, the respondent insurance corporation issued to

Carmen O. Lapuz its Certificate of Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90 days.

On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a vehicular accident in

the North Diversion Road.

On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the policy, filed her

claim for the proceeds of the insurance, submitting all the necessary papers and other requisites with the private respondent. Her

claim having been denied, Regina L. Edillon instituted this action in the Court of First Instance of Rizal on August 27, 1969.

In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in the Certificate of

Insurance, excluding its liability to pay claims under the policy in behalf of "persons who are under the age of sixteen (16) years of

age or over the age of sixty (60) years ..." It is pointed out that the insured being over sixty (60) years of age when she applied for

the insurance coverage, the policy was null and void, and no risk on the part of the respondent insurance corporation had arisen

therefrom.

The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the petitioner to pay

attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the private respondent; and ordered the private

respondent to return the sum of TWENTY (P20.00) PESOS received by way of premium on the insurancy policy. It was reasoned

out that a policy of insurance being a contract of adhesion, it was the duty of the insured to know the terms of the contract he or

she is entering into; the insured in this case, upon learning from its terms that she could not have been qualified under the


conditions stated in said contract, what she should have done is simply to ask for a refund of the premium that she paid. It was

further argued by the trial court that the ruling calling for a liberal interpretation of an insurance contract in favor of the insured

and strictly against the insurer may not be applied in the present case in view of the peculiar facts and circumstances obtaining

therein.

We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the insurance

company. Her application for insurance coverage which was on a printed form furnished by private respondent and which

contained very few items of information clearly indicated her age of the time of filing the same to be almost 65 years of age.

Despite such information which could hardly be overlooked in the application form, considering its prominence thereon and its

materiality to the coverage applied for, the respondent insurance corporation received her payment of premium and issued the

corresponding certificate of insurance without question. The accident which resulted in the death of the insured, a risk covered

by the policy, occurred on May 31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There was

sufficient time for the private respondent to process the application and to notice that the applicant was over 60 years of age and

thereby cancel the policy on that ground if it was minded to do so. If the private respondent failed to act, it is either because it

was willing to waive such disqualification; or, through the negligence or incompetence of its employees for which it has only itself

to blame, it simply overlooked such fact. Under the circumstances, the insurance corporation is already deemed in estoppel. It

inaction to revoke the policy despite a departure from the exclusionary condition contained in the said policy constituted a

waiver of such condition, as was held in the case of "Que Chee Gan vs. Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case

involved a claim on an insurance policy which contained a provision as to the installation of fire hydrants the number of which

depended on the height of the external wan perimeter of the bodega that was insured. When it was determined that the bodega

should have eleven (11) fire hydrants in the compound as required by the terms of the policy, instead of only two (2) that it had,

the claim under the policy was resisted on that ground. In ruling that the said deviation from the terms of the policy did not

prevent the claim under the same, this Court stated the following:

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim

violation of the so-called fire hydrants warranty, for the reason that knowing fully an that the number of

hydrants demanded therein never existed from the very beginning, the appellant nevertheless issued the

policies in question subject to such warranty, and received the corresponding premiums. It would be perilously

close to conniving at fraud upon the insured to allow appellant to claim now as void ab initio the policies that it

had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had

misled the defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there

were only two fire hydrants installed by Que Chee Gan and two others nearby, owned by the municipality of

Tabaco, contrary to the requirements of the warranty in question. Such fact appears from positive testimony

for the insured that appellant's agents inspected the premises; and the simple denials of appellant's

representative (Jamiczon) can not overcome that proof. That such inspection was made it moreover rendered

probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was

entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available

(See"'Scale of Allowances" to which the policies were expressly made subject). The law, supported by a long

line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance,

has knowledge of existing facts which, if insisted on, would invalidate the contract from its

very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent

with the known facts, and the insurer is stopped thereafter from asserting the breach of such

conditions. The law is charitable enough to assume, in the absence of any showing to the

contrary, that an insurance company intends to execute a valid contract in return for the

premium received; and when the policy contains a condition which renders it voidable at its

inception, and this result is known to the insurer, it will be presumed to have intended to

waive the conditions and to execute a binding contract, rather than to have deceived the


insured into thinking he is insured when in fact he is not, and to have taken is money without

consideration.' (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept

one's money for a policy of insurance which it then knows to be void and of no effect, though

it knows as it must, that the assured believes it to be valid and binding, is so contrary to the

dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorent

to fairminded men. It would be to allow the company to treat the policy as valid long enough

to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot

be deemed to be the real intention of the parties. To hold that a literal construction of the

policy expressed the true intention of the company would be to indict it, for fraudulent

purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union

Assurance Co., 96 Atl. 540, 543544).

A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134, which involved a

violation of the provision of the policy requiring the payment of premiums before the insurance shall become effective. The

company issued the policy upon the execution of a promissory note for the payment of the premium. A check given subsequent

by the insured as partial payment of the premium was dishonored for lack of funds. Despite such deviation from the terms of the

policy, the insurer was held liable.

Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to pay the

insurance premium within thirty (30) days from the effective date of policy. By so doing, it has impliedly agreed

to modify the tenor of the insurance policy and in effect, waived the provision therein that it would only pay for

the loss or damage in case the same occurs after the payment of the premium. Considering that the insurance

policy is silent as to the mode of payment, Capital Insurance is deemed to have accepted the promissory note in

payment of the premium. This rendered the policy immediately operative on the date it was delivered. The

view taken in most cases in the United States:

... is that although one of conditions of an insurance policy is that "it shall not be valid or

binding until the first premium is paid", if it is silent as to the mode of payment, promissory

notes received by the company must be deemed to have been accepted in payment of the

premium. In other words, a requirement for the payment of the first or initial premium in

advance or actual cash may be waived by acceptance of a promissory note...

WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private respondent insurance

corporation is hereby ordered to pay to the petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance

Certificate No. 128866 with interest at the legal rate from May 31, 1969 until fully paid, the further sum of TWO THOUSAND

(P2,000.00) PESOS as and for attorney's fees, and the costs of suit.

SO ORDERED.

Teehankee (Chairman), Makasiar, Plana, Relova and Gutierrez, Jr., JJ., concur.

Melencio-Herrera, J., took no part.



ManilaTHIRD DIVISIONG.R. No. 78860 May 28, 1990PERLA COMPANIA DE SEGUROS, INC., petitioner, vs.HONORABLE COURT OF APPEALS and MILAGROS CAYAS, respondents.Yabut, Arandia & Associates for petitioner.Dolorfino and Dominguez Law Offices for private respondent.

FERNAN, C.J.:

This is a petition for review on certiorari of the decision of the Court of Appeals 1 affirming in toto the decision of the Regional

Trial Court of Cavite, Branch XVI, 2 the dispositive portion of which states:

IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering defendant Perla Compania de Seguros, Inc.

to pay plaintiff Milagros Cayas the sum of P50,000.00 under its maximum liability as provided for in the

insurance policy; and the sum of P5,000.00 as reasonable attorney's fee with costs against said defendant.

SO ORDERED. 3

Private respondent Milagros Cayas was the registered owner of a Mazda bus with serial No. TA3H4 P-000445 and plate No. PUB-

4G-593. 4 Said passenger vehicle was insured with Perla Compania de Seguros, Inc. (PCSI) under policy No. LTO/60CC04241 issued

on February 3, 1978. 5

On December 17, 1978, the bus figured in an accident in Naic, Cavite injuring several of its passengers. One of them, 19-year old

Edgardo Perea, sued Milagros Cayas for damages in the Court of First Instance of Cavite, Branch 6 docketed as Civil Case No. NC-

794; while three others, namely: Rosario del Carmen, Ricardo Magsarili and Charlie Antolin, agreed to a settlement of P4,000.00

each with Milagros Cayas.

At the pre-trial of Civil Case No. NC-794, Milagros Cayas failed to appear and hence, she was declared as in default. After trial, the

court rendered a decision 7 in favor of Perea with its dispositive portion reading thus:

WHEREFORE, under our present imperatives, judgment is hereby rendered in favor of the plaintiffs and against

the defendant Milagros Cayas who is hereby ordered to compensate the plaintiff' Edgar Perea with damages in

the sum of Ten Thousand (Pl0,000.00) Pesos for the medical predicament he found himself as damaging

consequences of defendant Milagros Cayas complete lack of diligence of a good father of a family' when she

secured the driving services of one Oscar Figueroa on December, 17, 1978; the sum of Ten Thousand

(P10,000.00) Pesos for exemplary damages; the sum of Five Thousand (P5,000.00) Pesos for moral damages;

the sum of Seven Thousand (P7,000.00) Pesos for Attorney's fees, under the imperatives of the monetary

power of the peso today;

With costs against the defendant.

SO ORDERED.


When the decision in Civil Case No. NC-794 was about to be executed against her, Milagros Cayas filed a complaint against PCSI in

the Office of the Insurance Commissioner praying that PCSI be ordered to pay P40,000.00 for all the claims against her arising

from the vehicular accident plus legal and other expenses. 8Realizing her procedural mistake, she later withdrew said complaint. 9

Consequently, on November 11, 1981, Milagros Cayas filed a complaint for a sum of money and damages against PCSI in the

Court of First Instance of Cavite (Civil Case No. N-4161). She alleged therein that to satisfy the judgment in Civil Case No. NC-794,

her house and lot were levied upon and sold at public auction for P38,200; 10 that to avoid numerous suits and the "detention" of

the insured vehicle, she paid P4,000 to each of the following injured passengers: Rosario del Carmen, Ricardo Magsarili and

Charlie Antolin; that she could not have suffered said financial setback had the counsel for PCSI, who also represented her,

appeared at the trial of Civil Case No. NC-794 and attended to the claims of the three other victims; that she sought

reimbursement of said amounts from the defendant, which notwithstanding the fact that her claim was within its contractual

liability under the insurance policy, refused to make such re-imbursement; that she suffered moral damages as a consequence of

such refusal, and that she was constrained to secure the services of counsel to protect her rights. She prayed that judgment be

rendered directing PCSI to pay her P50,000 for compensation of the injured victims, such sum as the court might approximate as

damages, and P6,000 as attorney's fees.

In view of Milagros Cayas' failure to prosecute the case, the court motu propio ordered its dismissal without prejudice. 11 Alleging

that she had not received a copy of the answer to the complaint, and that "out of sportsmanship", she did not file a motion to

hold PCSI in default, Milagros Cayas moved for the reconsideration of the dismissal order. Said motion for reconsideration was

acted upon favorably by the court in its order of March 31, 1982.

About two months later, Milagros Cayas filed a motion to declare PCSI in default for its failure to file an answer. The motion was

granted and plaintiff was allowed to adduce evidence ex-parte. On July 13, 1982, the court rendered judgment by default

ordering PCSI to pay Milagros Cayas P50,000 as compensation for the injured passengers, P5,000 as moral damages and P5,000

as attorney's fees.

Said decision was set aside after the PCSI filed a motion therefor. Trial of the case ensued. In due course, the court promulgated a

decision in Civil Case No. N-4161, the dispositive portion of which was quoted earlier, finding that:

In disavowing its obligation to plaintiff under the insurance policy, defendant advanced the proposition that

before it can be made to pay, the liability must first be determined in an appropriate court action. And so

plaintiffs liability was determined in that case filed against her by Perea in the Naic CFI. Still, despite this

determination of liability, defendant sought escape from its obligation by positing the theory that plaintiff

Milagros Cayas lost the Naic case due to her negligence because of which, efforts exerted by defendant's

lawyers in protecting Cayas' rights proved futile and rendered nugatory. Blame was laid entirely on plaintiff by

defendant for losing the Naic case. Defendant labored under the impression that had Cayas cooperated fully

with defendant's lawyers, the latter could have won the suit and thus relieved of any obligation to Perea

Defendant's posture is stretching the factual circumstances of the Naic case too far. But even accepting

defendant's postulate, it cannot be said, nor was it shown positively and convincingly, that if the Naic case had

proceeded on trial on the merits, a decision favorable to Milagros Cayas could have been obtained. Nor was it

definitely established that if the pre-trial was undertaken in that case, defendant's lawyers could have mitigated

the claim for damages by Perea against Cayas. 12

The court, however, held that inasmuch as Milagros Cayas failed to establish that she underwant moral suffering and mental

anguish to justify her prayer for damages, there should be no such award. But, there being proof that she was compelled to

engage the services of counsel to protect her rights under the insurance policy, the court allowed attorney's fees in the amount

of P5,000.

PCSI appealed to the Court of Appeals, which, in its decision of May 8, 1987 affirmed in toto the lower court's decision. Its motion

for reconsideration having been denied by said appellate court, PCSI filed the instant petition charging the Court of Appeals with

having erred in affirming in toto the decision of the lower court.

At the outset, we hold as factual and therefore undeserving of this Court's attention, petitioner's assertions that private

respondent lost Civil Case No. NC-794 because of her negligence and that there is no proof that the decision in said case has been

executed. Said contentions, having been raised and threshed out in the Court of Appeals and rejected by it, may no longer be

addressed to this Court.


Petitioner's other contentions are primarily concerned with the extent of its liability to private respondent under the insurance

policy. This, we consider to be the only issue in this case.

Petitioner seeks to limit its liability only to the payment made by private respondent to Perea and only up to the amount of

P12,000.00. It altogether denies liability for the payments made by private respondents to the other three (3) injured passengers

Rosario del Carmen, Ricardo Magsarili and Charlie Antolin in the amount of P4,000.00 each or a total of P12,000.00.

There is merit in petitioner's assertions.

The insurance policy involved explicitly limits petitioner's liability to P12,000.00 per person and to P50,000.00 per

accident. 13 Pertinent provisions of the policy also state:

SECTION I-Liability to the Public

xxx xxx xxx

3. The Limit of Liability stated in Schedule A as applicable (a) to THIRD PARTY is the limit of the

Company's liability for all damages arising out of death, bodily injury and damage to property

combined so sustained as the result of any one accident; (b) "per person" for PASSENGER

liability is the limit of the Company's liability for all damages arising out of death or bodily

injury sustained by one person as the result of any one accident: (c) "per accident" for

PASSENGER liability is, subject to the above provisions respecting per person, the total limit of

the Company's liability for all such damages arising out of death or bodily injury sustained by

two or more persons as the result of any one accident.

Conditions Applicable to All Sections

xxx xxx xxx

5. No admission, offer, promise or payment shall be made by or on behalf of the insured

without the written consent of the Company which shall be entitled, if it so desires, to take

over and conduct in his (sic) name the defense or settlement of any claim, or to prosecute in

his (sic) name for its own benefit any claim for indemnity or damages or otherwise, and shall

have full discretion in the conduct of any proceedings in the settlement of any claim, and the

insured shall give all such information and assistance as the Company may require. If the

Company shall make any payment in settlement of any claim, and such payment includes any

amount not covered by this Policy, the Insured shall repay the Company the amount not so

covered.

We have ruled in Stokes vs. Malayan Insurance Co., Inc., 14 that the terms of the contract constitute the measure of the insurer's

liability and compliance therewith is a condition precedent to the insured's right of recovery from the insurer.

In the case at bar, the insurance policy clearly and categorically placed petitioner's liability for all damages arising out of death or

bodily injury sustained by one person as a result of any one accident at P12,000.00. Said amount complied with the minimum

fixed by the law then prevailing, Section 377 of Presidential Decree No. 612 (which was retained by P.D. No. 1460, the Insurance

Code of 1978), which provided that the liability of land transportation vehicle operators for bodily injuries sustained by a

passenger arising out of the use of their vehicles shall not be less than P12,000. In other words, under the law,

the minimum liability is P12,000 per passenger. Petitioner's liability under the insurance contract not being less than P12,000.00,

and therefore not contrary to law, morals, good customs, public order or public policy, said stipulation must be upheld as

effective, valid and binding as between the parties. 15

In like manner, we rule as valid and binding upon private respondent the condition above-quoted requiring her to secure the

written permission of petitioner before effecting any payment in settlement of any claim against her. There is nothing

unreasonable, arbitrary or objectionable in this stipulation as would warrant its nullification. The same was obviously designed to

safeguard the insurer's interest against collusion between the insured and the claimants.

In her cross-examination before the trial court, Milagros Cayas admitted, thus:

Atty. Yabut:

q With respect to the other injured passengers of your bus wherein you made payments you did not

secure the consent of defendant (herein petitioner) Perla Compania de Seguros when you made those

payments?


a I informed them about that

q But they did not give you the written authority that you were supposed to pay those claims?

a No, sir . l6

It being specifically required that petitioner's written consent be first secured before any payment in settlement of any claim

could be made, private respondent is precluded from seeking reimbursement of the payments made to del Carmen, Magsarili

and Antolin in view of her failure to comply with the condition contained in the insurance policy.

Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the

present case. 17 Thus, it was error on the part of the trial and appellate courts to have disregarded the stipulations of the parties

and to have substituted their own interpretation of the insurance policy. In Phil. American General Insurance Co., Inc vs.

Mutuc, 18 we ruled that contracts which are the private laws of the contracting parties should be fulfilled according to the literal

sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of the contracting parties, for

contracts are obligatory, no matter what form they may be, whenever the essential requisites for their validity are present.

Moreover, we stated in Pacific Oxygen & Acetylene Co. vs. Central Bank," 19 that the first and fundamental duty of the courts is

the application of the law according to its express terms, interpretation being called for only when such literal application is

impossible.

We observe that although Milagros Cayas was able to prove a total loss of only P44,000.00, petitioner was made liable for the

amount of P50,000.00, the maximum liability per accident stipulated in the policy. This is patent error. An insurance indemnity,

being merely an assistance or restitution insofar as can be fairly ascertained, cannot be availed of by any accident victim or

claimant as an instrument of enrichment by reason of an accident.20

Finally, we find no reason to disturb the award of attorney's fees.

WHEREFORE, the decision of the Court of Appeals is hereby modified in that petitioner shall pay Milagros Cayas the amount of

Twelve Thousand Pesos (P12,000. 00) plus legal interest from the promulgation of the decision of the lower court until it is fully

paid and attorney's fees in the amount of P5,000.00. No pronouncement as to costs.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes JJ., concur.



ManilaFIRST DIVISIONG.R. No. L-39419 April 12, 1982MAPALAD AISPORNA, petitioner, vs.THE COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, respondents.

DE CASTRO, J.:

In this petition for certiorari, petitioner-accused Aisporna seeks the reversal of the decision dated August 14, 1974 1 in CA-G.R. No.

13243-CR entitled "People of the Philippines, plaintiff-appellee, vs. Mapalad Aisporna, defendant-appellant" of respondent Court

of Appeals affirming the judgment of the City Court of Cabanatuan 2 rendered on August 2, 1971 which found the petitioner guilty

for having violated Section 189 of the Insurance Act (Act No. 2427, as amended) and sentenced her to pay a fine of P500.00 with

subsidiary imprisonment in case of insolvency, and to pay the costs.

Petitioner Aisporna was charged in the City Court of Cabanatuan for violation of Section 189 of the Insurance Act on November

21, 1970 in an information 3 which reads as follows:

That on or before the 21st day of June, 1969, in the City of Cabanatuan, Republic of the Philippines, and within

the jurisdiction of this Honorable Court, the above-named accused, did then and there, wilfully, unlawfully and

feloniously act as agent in the solicitation or procurement of an application for insurance by soliciting therefor

the application of one Eugenio S. Isidro, for and in behalf of Perla Compania de Seguros, Inc., a duly organized

insurance company, registered under the laws of the Republic of the Philippines, resulting in the issuance of a

Broad Personal Accident Policy No. 28PI-RSA 0001 in the amount not exceeding FIVE THOUSAND PESOS

(P5,000.00) dated June 21, 1969, without said accused having first secured a certificate of authority to act as

such agent from the office of the Insurance Commissioner, Republic of the Philippines.

CONTRARY TO LAW.

The facts, 4 as found by the respondent Court of Appeals are quoted hereunder:

IT RESULTING: That there is no debate that since 7 March, 1969 and as of 21 June, 1969, appellant's husband,

Rodolfo S. Aisporna was duly licensed by Insurance Commission as agent to Perla Compania de Seguros, with

license to expire on 30 June, 1970, Exh. C; on that date, at Cabanatuan City, Personal Accident Policy, Exh. D

was issued by Perla thru its author representative, Rodolfo S. Aisporna, for a period of twelve (12) months with

beneficiary as Ana M. Isidro, and for P5,000.00; apparently, insured died by violence during lifetime of policy,

and for reasons not explained in record, present information was filed by Fiscal, with assistance of private

prosecutor, charging wife of Rodolfo with violation of Sec. 189 of Insurance Law for having, wilfully, unlawfully,

and feloniously acted, "as agent in the solicitation for insurance by soliciting therefore the application of one

Eugenio S. Isidro for and in behalf of Perla Compaña de Seguros, ... without said accused having first secured a

certificate of authority to act as such agent from the office of the Insurance Commission, Republic of the

Philippines."

and in the trial, People presented evidence that was hardly disputed, that aforementioned policy was issued

with active participation of appellant wife of Rodolfo, against which appellant in her defense sought to show


that being the wife of true agent, Rodolfo, she naturally helped him in his work, as clerk, and that policy was

merely a renewal and was issued because Isidro had called by telephone to renew, and at that time, her

husband, Rodolfo, was absent and so she left a note on top of her husband's desk to renew ...

Consequently, the trial court found herein petitioner guilty as charged. On appeal, the trial court's decision was affirmed by the

respondent appellate court finding the petitioner guilty of a violation of the first paragraph of Section 189 of the Insurance Act.

Hence, this present recourse was filed on October 22, 1974. 5

In its resolution of October 28, 1974, 6 this Court resolved, without giving due course to this instant petition, to require the

respondent to comment on the aforesaid petition. In the comment 7 filed on December 20, 1974, the respondent, represented by

the Office of the Solicitor General, submitted that petitioner may not be considered as having violated Section 189 of the

Insurance Act. 8 On April 3, 1975, petitioner submitted his Brief 9 while the Solicitor General, on behalf of the respondent, filed a

manifestation 10 in lieu of a Brief on May 3, 1975 reiterating his stand that the petitioner has not violated Section 189 of the

Insurance Act.

In seeking reversal of the judgment of conviction, petitioner assigns the following errors 11 allegedly committed by the appellate

court:

1. THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT RECEIPT OF COMPENSATION IS NOT AN

ESSENTIAL ELEMENT OF THE CRIME DEFINED BY THE FIRST PARAGRAPH OF SECTION 189 OF THE INSURANCE

ACT.

2. THE RESPONDENT COURT OF APPEALS ERRED IN GIVING DUE WEIGHT TO EXHIBITS F, F-1, TO F-17, INCLUSIVE

SUFFICIENT TO ESTABLISH PETITIONER'S GUILT BEYOND REASONABLE DOUBT.

3. THE RESPONDENT COURT OF APPEALS ERRED IN NOT ACQUITTING HEREIN PETITIONER.

We find the petition meritorious.

The main issue raised is whether or not a person can be convicted of having violated the first paragraph of Section 189 of the

Insurance Act without reference to the second paragraph of the same section. In other words, it is necessary to determine

whether or not the agent mentioned in the first paragraph of the aforesaid section is governed by the definition of an insurance

agent found on its second paragraph.

The pertinent provision of Section 189 of the Insurance Act reads as follows:

No insurance company doing business within the Philippine Islands, nor any agent thereof, shall pay any

commission or other compensation to any person for services in obtaining new insurance, unless such person

shall have first procured from the Insurance Commissioner a certificate of authority to act as an agent of such

company as hereinafter provided. No person shall act as agent, sub-agent, or broker in the solicitation of

procurement of applications for insurance, or receive for services in obtaining new insurance, any commission

or other compensation from any insurance company doing business in the Philippine Islands, or agent thereof,

without first procuring a certificate of authority so to act from the Insurance Commissioner, which must be

renewed annually on the first day of January, or within six months thereafter. Such certificate shall be issued by

the Insurance Commissioner only upon the written application of persons desiring such authority, such

application being approved and countersigned by the company such person desires to represent, and shall be

upon a form approved by the Insurance Commissioner, giving such information as he may require. The

Insurance Commissioner shall have the right to refuse to issue or renew and to revoke any such certificate in his

discretion. No such certificate shall be valid, however, in any event after the first day of July of the year

following the issuing of such certificate. Renewal certificates may be issued upon the application of the

company.

Any person who for compensation solicits or obtains insurance on behalf of any insurance company, or

transmits for a person other than himself an application for a policy of insurance to or from such company or

offers or assumes to act in the negotiating of such insurance, shall be an insurance agent within the intent of

this section, and shall thereby become liable to all the duties, requirements, liabilities, and penalties to which an

agent of such company is subject.

Any person or company violating the provisions of this section shall be fined in the sum of five hundred pesos.

On the conviction of any person acting as agent, sub-agent, or broker, of the commission of any offense


connected with the business of insurance, the Insurance Commissioner shall immediately revoke the certificate

of authority issued to him and no such certificate shall thereafter be issued to such convicted person.

A careful perusal of the above-quoted provision shows that the first paragraph thereof prohibits a person from acting as agent,

sub-agent or broker in the solicitation or procurement of applications for insurance without first procuring a certificate of

authority so to act from the Insurance Commissioner, while its second paragraph defines who is an insurance agent within the

intent of this section and, finally, the third paragraph thereof prescribes the penalty to be imposed for its violation.

The respondent appellate court ruled that the petitioner is prosecuted not under the second paragraph of Section 189 of the

aforesaid Act but under its first paragraph. Thus —

... it can no longer be denied that it was appellant's most active endeavors that resulted in issuance of policy to

Isidro, she was there and then acting as agent, and received the pay thereof — her defense that she was only

acting as helper of her husband can no longer be sustained, neither her point that she received no

compensation for issuance of the policy because

any person who for compensation solicits or obtains insurance on behalf of any insurance

company or transmits for a person other than himself an application for a policy of insurance

to or from such company or offers or assumes to act in the negotiating of such insurance, shall

be an insurance agent within the intent of this section, and shall thereby become liable to all

the duties, requirements, liabilities, and penalties, to which an agent of such company is

subject. paragraph 2, Sec. 189, Insurance Law,

now it is true that information does not even allege that she had obtained the insurance,

for compensation

which is the gist of the offense in Section 189 of the Insurance Law in its 2nd paragraph, but what appellant

apparently overlooks is that she is prosecuted not under the 2nd but under the 1st paragraph of Sec. 189

wherein it is provided that,

No person shall act as agent, sub-agent, or broker, in the solicitation or procurement of

applications for insurance, or receive for services in obtaining new insurance any commission

or other compensation from any insurance company doing business in the Philippine Island,

or agent thereof, without first procuring a certificate of authority to act from the insurance

commissioner, which must be renewed annually on the first day of January, or within six

months thereafter.

therefore, there was no technical defect in the wording of the charge, so that Errors 2 and 4 must be

overruled. 12

From the above-mentioned ruling, the respondent appellate court seems to imply that the definition of an insurance agent under

the second paragraph of Section 189 is not applicable to the insurance agent mentioned in the first paragraph. Parenthetically,

the respondent court concludes that under the second paragraph of Section 189, a person is an insurance agent if he solicits and

obtains an insurance for compensation, but, in its first paragraph, there is no necessity that a person solicits an insurance for

compensation in order to be called an insurance agent.

We find this to be a reversible error. As correctly pointed out by the Solicitor General, the definition of an insurance agent as

found in the second paragraph of Section 189 is intended to define the word "agent" mentioned in the first and second

paragraphs of the aforesaid section. More significantly, in its second paragraph, it is explicitly provided that the definition of an

insurance agent is within the intent of Section 189. Hence —

Any person who for compensation ... shall be an insurance agent within the intent of this section, ...

Patently, the definition of an insurance agent under the second paragraph holds true with respect to the agent mentioned in the

other two paragraphs of the said section. The second paragraph of Section 189 is a definition and interpretative clause intended

to qualify the term "agent" mentioned in both the first and third paragraphs of the aforesaid section.

Applying the definition of an insurance agent in the second paragraph to the agent mentioned in the first and second paragraphs

would give harmony to the aforesaid three paragraphs of Section 189. Legislative intent must be ascertained from a

consideration of the statute as a whole. The particular words, clauses and phrases should not be studied as detached and isolated

expressions, but the whole and every part of the statute must be considered in fixing the meaning of any of its parts and in order


to produce harmonious whole. 13 A statute must be so construed as to harmonize and give effect to all its provisions whenever

possible. 14 The meaning of the law, it must be borne in mind, is not to be extracted from any single part, portion or section or

from isolated words and phrases, clauses or sentences but from a general consideration or view of the act as a whole. 15 Every

part of the statute must be interpreted with reference to the context. This means that every part of the statute must be

considered together with the other parts, and kept subservient to the general intent of the whole enactment, not separately and

independently. 16 More importantly, the doctrine of associated words (Noscitur a Sociis) provides that where a particular word or

phrase in a statement is ambiguous in itself or is equally susceptible of various meanings, its true meaning may be made clear and

specific by considering the company in which it is found or with which it is associated. 17

Considering that the definition of an insurance agent as found in the second paragraph is also applicable to the agent mentioned

in the first paragraph, to receive a compensation by the agent is an essential element for a violation of the first paragraph of the

aforesaid section. The appellate court has established ultimately that the petitioner-accused did not receive any compensation

for the issuance of the insurance policy of Eugenio Isidro. Nevertheless, the accused was convicted by the appellate court for,

according to the latter, the receipt of compensation for issuing an insurance policy is not an essential element for a violation of

the first paragraph of Section 189 of the Insurance Act.

We rule otherwise. Under the Texas Penal Code 1911, Article 689, making it a misdemeanor for any person for direct or indirect

compensation to solicit insurance without a certificate of authority to act as an insurance agent, an information, failing to allege

that the solicitor was to receive compensation either directly or indirectly, charges no offense. 18 In the case of Bolen vs.

Stake, 19 the provision of Section 3750, Snyder's Compiled Laws of Oklahoma 1909 is intended to penalize persons only who acted

as insurance solicitors without license, and while acting in such capacity negotiated and concluded insurance contracts for

compensation. It must be noted that the information, in the case at bar, does not allege that the negotiation of an insurance

contracts by the accused with Eugenio Isidro was one for compensation. This allegation is essential, and having been omitted, a

conviction of the accused could not be sustained. It is well-settled in Our jurisprudence that to warrant conviction, every element

of the crime must be alleged and proved. 20

After going over the records of this case, We are fully convinced, as the Solicitor General maintains, that accused did not violate

Section 189 of the Insurance Act.

WHEREFORE, the judgment appealed from is reversed and the accused is acquitted of the crime charged, with costs de oficio.

SO ORDERED.

Teehankee (Acting C.J.,) Makasiar, De Castro, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.

Plana, J., took no part.


FIRST DIVISION[G.R. No. 154514. July 28, 2005]WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP

MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.D E C I S I O N

QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming

the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was

no violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The

Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety

Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance. [3] Pioneer also issued receipts

evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the

coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latters unpaid

balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship Mutual

violated Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections 299,[6] 300[7] and 301[8] in relation to

Sections 302 and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a license

because it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection and Indemnity Club (P

& I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a broker for Steamship Mutual because

Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence, a separate license

solely as agent/broker of Steamship Mutual was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court distinguished

between P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer merely acted as a collection agent

of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE

GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT

SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS

ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS

AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR


THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS

AND DIRECTORS OF RESPONDENT PIONEER.[9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the

Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business

in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the Insurance

Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites

the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals[10] as an association composed of shipowners in

general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to

shipowning that the members incur in favor of third parties. It stresses that as a P & I Club, Steamship Mutuals primary purpose is

to solicit and provide protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its

agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the

Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against liabilities

incidental to shipowning.[11] Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the

jurisdiction of the court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business or transacting an insurance

business. These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any

other legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an

insurance business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade

the provisions of this Code.

. . .

The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or

transactions, or that no separate or direct consideration is received therefor, shall not preclude the existence of an insurance

business.[12]

The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required

to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circumstances under

which the performance becomes requisite. It is not by what it is called.[13]

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify another

against loss, damage or liability arising from an unknown or contingent event.[14]

In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to a

marine adventure.[15] Section 99[16] of the Insurance Code enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured. In

it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and

liabilities are paid, and where the profits are divided among themselves, in proportion to their interest. [17] Additionally, mutual

insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs.[18]

A P & I Club is a form of insurance against third party liability, where the third party is anyone other than the P & I Club and

the members.[19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine

insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority

mandated by Section 187[20] of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to


collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to

non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a

license from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance

company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance

Commission.[21]

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration [22] issued by the Insurance

Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority [23] issued by the

same agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be an

agent/broker of Steamship Mutual.[24]

Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for

Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for

insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance company

doing business in the Philippines or any agent thereof, without first procuring a license so to act from the Commissioner, which

must be renewed annually on the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and officers.

Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the

Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual

Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to

secure proper authorizations to do business as insurer and insurance agent, respectively. The petitioners prayer for the

revocation of Pioneers Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents.


REPUBLIC OF THE PHILIPPINES, G.R. No. 158085

Represented by the COMMISSIONER

OF INTERNAL REVENUE, Present:

Petitioner,

- versus -

SUNLIFE ASSURANCE Promulgated:

COMPANY OF CANADA,

Respondent. October 14, 2005

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court that it is a bona fide

cooperative, respondent is entitled to exemption from the payment of taxes on life insurance premiums and documentary

stamps. Not being governed by the Cooperative Code of the Philippines, it is not required to be registered with the Cooperative

Development Authority in order to avail itself of the tax exemptions. Significantly, neither the Tax Code nor the Insurance Code

mandates this administrative registration.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the January 23, 2003

Decision[2] and the April 21, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 69125. The dispositive portion of the

Decision reads as follows:

WHEREFORE, the petition for review is hereby DENIED.[4]

The Facts

The antecedents, as narrated by the CA, are as follows:

Sun Life is a mutual life insurance company organized and existing under the laws of Canada. It is

registered and authorized by the Securities and Exchange Commission and the Insurance Commission to engage

in business in the Philippines as a mutual life insurance company with principal office at Paseo de Roxas, Legaspi

Village, Makati City.

On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue] (CIR) its insurance

premium tax return for the third quarter of 1997 and paid the premium tax in the amount of P31,485,834.51.

For the period covering August 21 to December 18, 1997, petitioner filed with the CIR its [documentary stamp

tax (DST)] declaration returns and paid the total amount of P30,000,000.00.

On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its decision in Insular Life Assurance

Co. Ltd. v. [CIR], which held that mutual life insurance companies are purely cooperative companies and are

exempt from the payment of premium tax and DST. This pronouncement was later affirmed by this court in [CIR]


v. Insular Life Assurance Company, Ltd. Sun Life surmised that[,] being a mutual life insurance company, it was

likewise exempt from the payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with the

CIR an administrative claim for tax credit of its alleged erroneously paid premium tax and DST for the aforestated

tax periods.

For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year period to file

a claim for tax credit or refund dwindling away and about to expire, Sun Life filed with the CTA a petition for

review on August 23, 1999. In its petition, it prayed for the issuance of a tax credit certificate in the amount

of P61,485,834.51 representing P31,485,834.51 of erroneously paid premium tax for the third quarter of 1997

and P30,000[,000].00 of DST on policies of insurance from August 21 to December 18, 1997. Sun Life stood firm

on its contention that it is a mutual life insurance company vested with all the characteristic features and

elements of a cooperative company or association as defined in [S]ection 121 of the Tax Code. Primarily, the

management and affairs of Sun Life were conducted by its members; secondly, it is operated with money

collected from its members; and, lastly, it has for its purpose the mutual protection of its members and not for

profit or gain.

In its answer, the CIR, then respondent, raised as special and affirmative defenses the following:

7. Petitioners (Sun Lifes) alleged claim for refund is subject to administrative

routinary investigation/examination by respondents (CIRs) Bureau.

8. Petitioner must prove that it falls under the exception provided for under Section

121 (now 123) of the Tax Code to be exempted from premium tax and be entitled to the

refund sought.

9. Claims for tax refund/credit are construed strictly against the claimants thereof as

they are in the nature of exemption from payment of tax.

10. In an action for tax credit/refund, the burden is upon the taxpayer to establish its

right thereto, and failure to sustain this burden is fatal to said claim x x x.

11. It is incumbent upon petitioner to show that it has complied with the provisions

of Section 204[,] in relation to Section 229, both in the 1997 Tax Code.

On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its earlier findings

in Insular Life Assurance Company, Ltd. v. [CIR], which it found to be on all fours with the present action, the

CTA ruled:

The [CA] has already spoken. It ruled that a mutual life insurance company is a purely

cooperative company[;] thus, exempted from the payment of premium and documentary

stamp taxes. Petitioner Sun Life is without doubt a mutual life insurance company. x x x.

x x x x x x x x x

Being similarly situated with Insular, Petitioner at bar is entitled to the same

interpretation given by this Court in the earlier cases of The Insular Life Assurance Company,

Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the [CA] in the case entitled [CIR] vs. The

Insular Life Assurance Company, Ltd., C.A. G.R. SP No. 46516, September 29, 1998. Petitioner

Sun Life as a mutual life insurance company is[,] therefore[,] a cooperative company or

association and is exempted from the payment of premium tax and [DST] on policies of

insurance pursuant to Section 121 (now Section 123) and Section 199[1]) (now Section 199[a])

of the Tax Code.

Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to have

registered, foremost, with the Cooperative Development Authority before it could enjoy the exemptions from

premium tax and DST extended to purely cooperative companies or associations under [S]ections 121 and 199

of the Tax Code. For its failure to register, it could not avail of the exemptions prayed for. Moreover, the CIR

alleged that Sun Life failed to prove that ownership of the company was vested in its members who are

entitled to vote and elect the Board of Trustees among [them]. The CIR further claimed that change in the 1997


Tax Code subjecting mutual life insurance companies to the regular corporate income tax rate reflected the

legislatures recognition that these companies must be earning profits.

Notwithstanding these arguments, the CTA denied the CIRs motion for reconsideration.

Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition on the sole

ground that:

The Tax Court erred in granting the refund[,] because respondent does not fall under the

exception provided for under Section 121 (now 123) of the Tax Code to be exempted from

premium tax and DST and be entitled to the refund.

The CIR repleads the arguments it raised with the CTA and proposes further that the [CA] decision in [CIR] v.

Insular Life Assurance Company, Ltd. is not controlling and cannot constitute res judicata in the present action. At

best, the pronouncements are merely persuasive as the decisions of the Supreme Court alone have a universal and

mandatory effect.[5]

Ruling of the Court of Appeals

In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly licensed to engage in mutual

life insurance business in the Philippines. Thus, respondent was deemed exempt from premium and documentary stamp taxes,

because its affairs are managed and conducted by its members with money collected from among themselves, solely for their

own protection, and not for profit. Its members or policyholders constituted both insurer and insured who contribute, by a

system of premiums or assessments, to the creation of a fund from which all losses and liabilities were paid. The dividends it

distributed to them were not profits, but returns of amounts that had been overcharged them for insurance.

For having satisfactorily shown with substantial evidence that it had erroneously paid and seasonably filed its claim for premium

and documentary stamp taxes, respondent was entitled to a refund, the CA ruled.

Hence, this Petition.[6]

The Issues

Petitioner raises the following issues for our consideration:

I.

Whether or not respondent is a purely cooperative company or association under Section 121 of the National

Internal Revenue Code and a fraternal or beneficiary society, order or cooperative company on the lodge

system or local cooperation plan and organized and conducted solely by the members thereof for the exclusive

benefit of each member and not for profit under Section 199 of the National Internal Revenue Code.

II.

Whether or not registration with the Cooperative Development Authority is a sine qua non requirement to be

entitled to tax exemption.

III.

Whether or not respondent is exempted from payment of tax on life insurance premiums and documentary

stamp tax.[7]

We shall tackle the issues seriatim.

The Courts Ruling

The Petition has no merit.

First Issue:

Whether Respondent Is a Cooperative

The Tax Code defines a cooperative as an association conducted by the members thereof with the money collected from among

themselves and solely for their own protection and not for profit.[8] Without a doubt, respondent is a cooperative engaged in a

mutual life insurance business.

First, it is managed by its members. Both the CA and the CTA found that the management and affairs of respondent were

conducted by its member-policyholders.[9]

A stock insurance company doing business in the Philippines may alter its organization and transform itself into a mutual

insurance company.[10] Respondent has been mutualized or converted from a stock life insurance company to a nonstock mutual

life insurance corporation[11] pursuant to Section 266 of the Insurance Code of 1978.[12] On the basis of its bylaws, its ownership


has been vested in its member-policyholders who are each entitled to one vote;[13] and who, in turn, elect from among

themselves the members of its board of trustees. [14] Being the governing body of a nonstock corporation, the board exercises

corporate powers, lays down all corporate business policies, and assumes responsibility for the efficiency of management.[15]

Second, it is operated with money collected from its members. Since respondent is composed entirely of members who are also

its policyholders, all premiums collected obviously come only from them.[16]

The member-policyholders constitute both insurer and insured[17] who contribute, by a system of premiums or assessments, to

the creation of a fund from which all losses and liabilities are paid. [18] The premiums[19] pooled into this fund are earmarked for

the payment of their indemnity and benefit claims.

Third, it is licensed for the mutual protection of its members, not for the profit of anyone.

As early as October 30, 1947, the director of commerce had already issued a license to respondent -- a corporation organized and

existing under the laws of Canada -- to engage in business in the Philippines. [20] Pursuant to Section 225 of Canadas Insurance

Companies Act, the Canadian minister of state (for finance and privatization) also declared in its Amending Letters Patent that

respondent would be a mutual company effective June 1, 1992.[21] In the Philippines, the insurance commissioner also granted it

annual Certificates of Authority to transact life insurance business, the most relevant of which were dated July 1, 1997 and July 1,

1998.[22]

A mutual life insurance company is conducted for the benefit of its member-policyholders, [23] who pay into its capital by way of

premiums. To that extent, they are responsible for the payment of all its losses. [24] The cash paid in for premiums and the

premium notes constitute their assets x x x.[25] In the event that the company itself fails before the terms of the policies expire,

the member-policyholders do not acquire the status of creditors.[26] Rather, they simply become debtors for whatever premiums

that they have originally agreed to pay the company, if they have not yet paid those amounts in full, for [m]utual companies x x x

depend solely upon x x x premiums.[27] Only when the premiums will have accumulated to a sum larger than that required to pay

for company losses will the member-policyholders be entitled to a pro rata division thereof as profits.[28]

Contributing to its capital, the member-policyholders of a mutual company are obviously also its owners. [29] Sustaining a dual

relationship inter se, they not only contribute to the payment of its losses, but are also entitled to a proportionate share[30] and

participate alike[31] in its profits and surplus.

Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual company be larger than

might reasonably be expected to carry the insurance, in order to constitute a margin of safety. The table of mortality used will

show an admittedly higher death rate than will probably prevail; the assumed interest rate on the investments of the company is

made lower than is expected to be realized; and the provision for contingencies and expenses, made greater than would

ordinarily be necessary.[32] This course of action is taken, because a mutual company has no capital stock and relies solely upon its

premiums to meet unexpected losses, contingencies and expenses.

Certainly, many factors are considered in calculating the insurance premium. Since they vary with the kind of insurance taken and

with the group of policyholders insured, any excess in the amount anticipated by a mutual company to cover the cost of

providing for the insurance over its actual realized cost will also vary. If a member-policyholder receives an excess payment, then

the apportionment must have been based upon a calculation of the actual cost of insurance that the company has provided for

that particular member-policyholder. Accordingly, in apportioning divisible surpluses, any mutual company uses a contribution

method that aims to distribute those surpluses among its member-policyholders, in the same proportion as they have

contributed to the surpluses by their payments.[33]

Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to apply them in order to

reduce a subsequent premium, purchase additional insurance, or accelerate the payment period. Although the premium made at

the beginning of a year is more than necessary to provide for the cost of carrying the insurance, the member-policyholder will

nevertheless receive the benefit of the overcharge by way of dividends, at the end of the year when the cost is actually

ascertained. The declaration of a dividend upon a policy reduces pro tanto the cost of insurance to the holder of the policy. That

is its purpose and effect.[34]

A stipulated insurance premium cannot be increased, but may be lessened annually by so much as the experience of the

preceding year has determined it to have been greater than the cost of carrying the insurance x x x. [35] The difference between

that premium and the cost of carrying the risk of loss constitutes the so-called dividend which, however, is not in any real sense a


dividend.[36] It is a technical term that is well understood in the insurance business to be widely different from that to which it is

ordinarily attached.

The so-called dividend that is received by member-policyholders is not a portion of profits set aside for distribution to the

stockholders in proportion to their subscription to the capital stock of a corporation.[37] One, a mutual company has no capital

stock to which subscription is necessary; there are no stockholders to speak of, but only members. And , two, the amount they

receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character. It

remains an overpayment, a benefit to which the member-policyholder is equitably entitled.[38]

Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own members. It does not operate for

profit, but for the mutual benefit of its member-policyholders. They receive their insurance at cost, while reasonably and

properly guarding and maintaining the stability and solvency of the company. [39] The economic benefits filter to the cooperative

members. Either equally or proportionally, they are distributed among members in correlation with the resources of the

association utilized.[40]

It does not follow that because respondent is registered as a nonstock corporation and thus exists for a purpose other than

profit, the company can no longer make any profits. [41] Earning profits is merely its secondary, not primary, purpose. In fact, it

may not lawfully engage in any business activity for profit, for to do so would change or contradict its nature [42] as a non-profit

entity.[43] It may, however, invest its corporate funds in order to earn additional income for paying its operating expenses and

meeting benefit claims. Any excess profit it obtains as an incident to its operations can only be used, whenever necessary or

proper, for the furtherance of the purpose for which it was organized.[44]

Second Issue:

Whether CDA Registration Is Necessary

Under the Tax Code although respondent is a cooperative, registration with the Cooperative Development Authority (CDA) [45] is

not necessary in order for it to be exempt from the payment of both percentage taxes on insurance premiums, under Section

121; and documentary stamp taxes on policies of insurance or annuities it grants, under Section 199.

First, the Tax Code does not require registration with the CDA. No tax provision requires a mutual life insurance company to

register with that agency in order to enjoy exemption from both percentage and documentary stamp taxes.

A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of the Certificate of

Registration with the CDA,[46]before the issuance of a tax exemption certificate. That provision cannot prevail over the clear

absence of an equivalent requirement under the Tax Code. One, as we will explain below, the Circular does not apply to

respondent, but only to cooperatives that need to be registered under the Cooperative Code. Two, it is a mere issuance directing

all internal revenue officers to publicize a new tax legislation. Although the Circular does not derogate from their authority to

implement the law, it cannot add a registration requirement,[47] when there is none under the law to begin with.

Second, the provisions of the Cooperative Code of the Philippines[48] do not apply. Let us trace the Codes development in our

history.

As early as 1917, a cooperative company or association was already defined as one conducted by the members thereof with

money collected from among themselves and solely for their own protection and not profit. [49] In 1990, it was further defined by

the Cooperative Code as a duly registered association of persons, with a common bond of interest, who have voluntarily joined

together to achieve a lawful common social or economic end, making equitable contributions to the capital required and

accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles.[50]

The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973, Presidential Decree (PD) No. 175

was signed into law by then President Ferdinand E. Marcos in order to strengthen the cooperative movement. [51] The promotion

of cooperative development was one of the major programs of the New Society under his administration. It sought to improve

the countrys trade and commerce by enhancing agricultural production, cottage industries, community development, and

agrarian reform through cooperatives.[52]

The whole cooperative system, with its vertical and horizontal linkages -- from the market cooperative of agricultural products to

cooperative rural banks, consumer cooperatives and cooperative insurance -- was envisioned to offer considerable economic

opportunities to people who joined cooperatives.[53] As an effective instrument in redistributing income and wealth,[54] cooperatives were promoted primarily to support the agrarian reform program of the government.[55]


Notably, the cooperative under PD 175 referred only to an organization composed primarily of small producers and consumers

who voluntarily joined to form a business enterprise that they themselves owned, controlled, and patronized. [56] The Bureau of

Cooperatives Development -- under the Department of Local Government and Community Development (later Ministry of

Agriculture)[57] -- had the authority to register, regulate and supervise only the following cooperatives: (1) barrio associations

involved in the issuance of certificates of land transfer; (2) local or primary cooperatives composed of natural persons and/or

barrio associations; (3) federations composed of cooperatives that may or may not perform business activities; and (4) unions of

cooperatives that did not perform any business activities.[58] Respondent does not fall under any of the above-mentioned types of

cooperatives required to be registered under PD 175.

When the Cooperative Code was enacted years later, all cooperatives that were registered under PD 175 and previous laws were

also deemed registered with the CDA.[59] Since respondent was not required to be registered under the old law on cooperatives, it

followed that it was not required to be registered even under the new law.

Furthermore, only cooperatives to be formed or organized under the Cooperative Code needed registration with the CDA.[60] Respondent already existed before the passage of the new law on cooperatives. It was not even required to organize under

the Cooperative Code, not only because it performed a different set of functions, but also because it did not operate to serve the

same objectives under the new law -- particularly on productivity, marketing and credit extension.[61]

The insurance against losses of the members of a cooperative referred to in Article 6(7) of the Cooperative Code is not the same

as the life insurance provided by respondent to member-policyholders. The former is a function of a service cooperative, [62] the

latter is not. Cooperative insurance under the Code is limited in scope and local in character. It is not the same as mutual life

insurance.

We have already determined that respondent is a cooperative. The distinguishing feature of a cooperative enterprise [63] is the

mutuality of cooperation among its member-policyholders united for that purpose.[64] So long as respondent meets this essential

feature, it does not even have to use[65] and carry the name of a cooperative to operate its mutual life insurance business. Gratia

argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege merely because it failed to

register. The nature of its operations is clear; its purpose well-defined. Exemption when granted cannot prevail over

administrative convenience.

Third, not even the Insurance Code requires registration with the CDA. The provisions of this Code primarily govern insurance

contracts; only if a particular matter in question is not specifically provided for shall the provisions of the Civil Code on contracts

and special laws govern.[66]

True, the provisions of the Insurance Code relative to the organization and operation of an insurance company also apply to

cooperative insurance entities organized under the Cooperative Code.[67] The latter law, however, does not apply to respondent,

which already existed as a cooperative company engaged in mutual life insurance prior to the laws passage of that law. The

statutes prevailing at the time of its organization and mutualization were the Insurance Code and the Corporation Code, which

imposed no registration requirement with the CDA.

Third Issue:

Whether Respondent Is Exempted

from Premium Taxes and DST

Having determined that respondent is a cooperative that does not have to be registered with the CDA, we hold that it is entitled

to exemption from both premium taxes and documentary stamp taxes (DST).

The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative companies from the 5 percent percentage

tax on insurance premiums. On the other hand, Section 199 also exempts from the DST, policies of insurance or annuities made

or granted by cooperative companies. Being a cooperative, respondent is thus exempt from both types of taxes.

It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of 10 percent imposed upon the gross

investment income of mutual life insurance companies -- domestic[68] and foreign[69] -- the provisions of Section 121 and 199

remain unchanged.[70]

Having been seasonably filed and amply substantiated, the claim for exemption in the amount of P61,485,834.51, representing

percentage taxes on insurance premiums and documentary stamp taxes on policies of insurance or annuities that were paid by

respondent in 1997, is in order. Thus, the grant of a tax credit certificate to respondent as ordered by the appellate court was

correct.


WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are AFFIRMED. No

pronouncement as to costs.

SO ORDERED.

FIRST DIVISION

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare

Health Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer,

liver disease, asthma or peptic ulcer? (If Yes, give details).[1]

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued

Health Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of hospitalization

benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of out-patient benefits such as annual

physical examinations, preventive health care and other out-patient services.

Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990,

then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.[2]During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one

month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health

care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner,

there was a concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis

confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent

paid the hospitalization expenses herself, amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted

at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the

morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the

Chinese General Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against

petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement

of her expenses plus moral damages and attorneys fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus

interest, until the amount is fully paid to plaintiff who paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;


4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved

petitioner Reverente.[4] Petitioners motion for reconsideration was denied.[5]Hence, petitioner brought the instant petition for

review, raising the primary argument that a health care agreement is not an insurance contract; hence the incontestability clause

under the Insurance Code[6]does not apply.

Petitioner argues that the agreement grants living benefits, such as medical check-ups and hospitalization which a member

may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner

also points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike

in an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a

period of one year, as compared to insurance contracts which last longer,[7] petitioner argues that the incontestability clause does

not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance

company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the

Department of Health.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance

contract exists where the following elements concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons

bearing a similar risk; and

5. In consideration of the insurers promise, the insured pays a premium.[8]

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a

person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life

and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary

interest;

(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which

death or illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own

health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. [9] Once the

member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care

provider must pay for the same to the extent agreed upon under the contract.

Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the application

for health coverage, petitioners required respondents husband to sign an express authorization for any person, organization or

entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization,

consultation, treatment or any other medical advice or examination.[10] Specifically, the Health Care Agreement signed by

respondents husband states:

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application

are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract

of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the

mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information

acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that

any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information


acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed

Members and that the acceptance of any Agreement issued on this application shall be a ratification of any correction in or

addition to this application as stated in the space for Home Office Endorsement.[11] (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the

applicants medical history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________

to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or

any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A

photographic copy of this authorization shall be as valid as the original.[12] (Underscoring ours)

Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:

Failure to disclose or misrepresentation of any material information by the member in the application or medical examination,

whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of

Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed

material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher

Membership Fee for the benefit or benefits applied for.[13]

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This

largely depends on opinion rather than fact, especially coming from respondents husband who was not a medical doctor. Where

matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy

even though they are untrue.[14]Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the

policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is

likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in

such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear

distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of

expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within

his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.[16] Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to

establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without

the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility under the

agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider

attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the

covered benefits which he has prepaid.

Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract of insurance. The

right to rescind should be exercised previous to the commencement of an action on the contract. [17] In this case, no rescission was

made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following

conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts

on which cancellation is based.[18]

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on

liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. [19] Being a

contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the

contract the insurer.[20] By reason of the exclusive control of the insurance company over the terms and phraseology of the

insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to

avoid forfeiture.[21] This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service


contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible

of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should

be strictly construed against the provider.[22]

Anent the incontestability of the membership of respondents husband, we quote with approval the following findings of the

trial court:(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from

the date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of

asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods

having expired, the defense of concealment or misrepresentation no longer lie.[23]

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of

their marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the

nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted

that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately

prove the expenses incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the

attending physicians.[24]

FIRST DIVISION


[G.R. No. 119176. March 19, 2002]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-

CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents.

D E C I S I O N

KAPUNAN, J.:

This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals

dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case

No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a domestic

corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to

1984, private respondent issued a special kind of life insurance policy known as the Junior Estate Builder Policy, the

distinguishing feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon

attainment of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year

1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured.

In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par

value of P5,000,000.00. The actual value of said shares, represented by its book value, was P19,307,500.00. Documentary stamp

taxes were paid based only on the par value of P5,000,000.00 and not on the book value.

Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of

(a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and

(b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The computation of the

deficiency documentary stamp taxes is as follows:

On Policies Issued:

Total policy issued during the year P1,360,054,000.00Documentary stamp tax due thereon(P1,360,054,000.00 divided byP200.00 multiplied by P0.35) P 2,380,094.50Less: Payment P 1,915,495.75Deficiency P 464,598.75Add: Compromise Penalty 300.00-----------------------

TOTAL AMOUNT DUE & COLLECTIBLE P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of

Tax Appeals, docketed as CTA Case No. 4583.


On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends,

as well as on the insurance policy. The dispositive portion of the CTAs decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total

of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from

collecting said deficiency documentary stamp taxes for the same are considered withdrawn.

SO ORDERED.[1]

Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a

decision affirming the CTAs decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the

same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary

stamp tax due on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the

Court of Appeals decision states:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment

on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private

respondent is ordered to pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock

dividends it issued. No costs pronouncement.

SO ORDERED.[2]

A motion for reconsideration of the decision having been denied, [3] both the Commissioner of Internal Revenue and private

respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private

respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the

stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the

Court of Appeals decision which invalidated the deficiency assessment on the insurance policy,attributing the following errors:

THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE

POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49

OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.

THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE

INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE

CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A

SINGULAR TRANSACTION.[4]

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:

Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers,

and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be

levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp

taxes prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same

wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine

sources or the property is situated in the Philippines, and at the same time such act is done or transaction had : Provided, That

whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not

exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp

taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal

Revenue Code which states in part:

Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same

may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary

stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such

policy.

Petitioner claims that the automatic increase clause in the subject insurance policy is separate and distinct from the main

agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-

issued when the additional obligation was assumed upon the effectivity of this automatic increase clause in 1984; hence, a

deficiency assessment based on the additional insurance not covered in the main policy is in order.


The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the issuance of the insurance

policy and that the automatic increase clause is an integral part of that policy.

The petition is impressed with merit.

Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of

insurance is set forth.[5] Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain

any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.[6] It is

thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or

contract of insurance.

The subject insurance policy at the time it was issued contained an automatic increase clause. Although the clause was to

take effect only in 1984, it was written into the policy at the time of its issuance.The distinctive feature of the junior estate

builder policy called the automatic increase clause already formed part and parcel of the insurance contract, hence, there was no

need for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured

reached a certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction

had and the tax base for the computation of documentary stamp taxes on life insurance policies under Section 183 is the amount

fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary measurement. [7] What then is the amount

fixed in the policy?Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases

will take effect in the future by reason of the automatic increase clause embodied in the policy without the need of another

contract.

Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its

effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount

insured by the policy at the time of its issuance necessarily included the additional sum covered by the automatic increase clause

because it was already determinable at the time the transaction was entered into and formed part of the policy.

The automatic increase clause in the policy is in the nature of a conditional obligation under Article 1181, [8] by which the

increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant

case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation,[9] but still a part of the

insurance sold to which private respondent was liable for the payment of the documentary stamp tax.

The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original

insurance coverage, but on the increase of the amount insured upon the effectivity of the Junior Estate Builder Policy.

Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited, [10] tax laws cannot

be circumvented in order to evade the payment of just taxes. In the case at bar,to claim that the increase in the amount insured

(by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the

computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be

computed on the basis of the amount insured by the policy.

WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it

affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private

respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by

respondent.

SO ORDERED.

Davide, Jr., C.J., (Chairman), and Ynares-Santiago, J., concur.

Puno, J., on official leave.



ManilaEN BANCG.R. No. L-15895 November 29, 1920RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant, vs.SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.Jose A. Espiritu for appellant.Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to recover from the

defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. The trial court gave judgment

for the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance Company of

Canada through its office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the manager of the company's

Manila office and was given a receipt reading as follows:

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

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia solicitada por dicho Don

Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central de la Compañia.

The application was immediately forwarded to the head office of the company at Montreal, Canada. On November 26, 1917, the

head office gave notice of acceptance by cable to Manila. (Whether on the same day the cable was received notice was sent by

the Manila office of Herrer that the application had been accepted, is a disputed point, which will be discussed later.) On

December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila

office of the company stating that Herrer desired to withdraw his application. The following day the local office replied to Mr.

Torres, stating that the policy had been issued, and called attention to the notification of November 26, 1917. This letter was

received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance of his application. To

resolve this question, we propose to go directly to the evidence of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial testified that he

prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and handed it to the local manager, Mr. E. E.

White, for signature. The witness admitted on cross-examination that after preparing the letter and giving it to he manager, he

new nothing of what became of it. The local manager, Mr. White, testified to having received the cablegram accepting the

application of Mr. Herrer from the home office on November 26, 1917. He said that on the same day he signed a letter notifying

Mr. Herrer of this acceptance. The witness further said that letters, after being signed, were sent to the chief clerk and placed on


the mailing desk for transmission. The witness could not tell if the letter had every actually been placed in the mails. Mr. Tuason,

who was the chief clerk, on November 26, 1917, was not called as a witness. For the defense, attorney Manuel Torres testified to

having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a life annuity, and

that he said that the only document relating to the transaction in his possession was the provisional receipt. Rafael Enriquez, the

administrator of the estate, testified that he had gone through the effects of the deceased and had found no letter of notification

from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer that his

application had been accepted, was prepared and signed in the local office of the insurance company, was placed in the ordinary

channels for transmission, but as far as we know, was never actually mailed and thus was never received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be applied to the facts. In

order to reach our legal goal, the obvious signposts along the way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of Commerce and the

Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III and Section III of Title III of Book III, which

dealt with insurance contracts. In the Civil Code there formerly existed and presumably still exist, Chapters II and IV, entitled

insurance contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there was, however, in force

the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health insurance. The Act expressly repealed Title VIII of

Book II and Section III of Title III of Book III of the code of Commerce. The law of insurance is consequently now found in the

Insurance Act and the Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be followed in order that there

may be a contract of insurance. On the other hand, the Civil Code, in article 1802, not only describes a contact of life annuity

markedly similar to the one we are considering, but in two other articles, gives strong clues as to the proper disposition of the

case. For instance, article 16 of the Civil Code provides that "In matters which are governed by special laws, any deficiency of the

latter shall be supplied by the provisions of this Code." On the supposition, therefore, which is incontestable, that the special law

on the subject of insurance is deficient in enunciating the principles governing acceptance, the subject-matter of the Civil code, if

there be any, would be controlling. In the Civil Code is found article 1262 providing that "Consent is shown by the concurrence of

offer and acceptance with respect to the thing and the consideration which are to constitute the contract. An acceptance made

by letter shall not bind the person making the offer except from the time it came to his knowledge. The contract, in such case, is

presumed to have been entered into at the place where the offer was made." This latter article is in opposition to the provisions

of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the only duty remaining is

for the court to apply the law as it is found. The legislature in its wisdom having enacted a new law on insurance, and expressly

repealed the provisions in the Code of Commerce on the same subject, and having thus left a void in the commercial law, it would

seem logical to make use of the only pertinent provision of law found in the Civil code, closely related to the chapter concerning

life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the date it came to his

knowledge, may not be the best expression of modern commercial usage. Still it must be admitted that its enforcement avoids

uncertainty and tends to security. Not only this, but in order that the principle may not be taken too lightly, let it be noticed that

it is identical with the principles announced by a considerable number of respectable courts in the United States. The courts who

take this view have expressly held that an acceptance of an offer of insurance not actually or constructively communicated to the

proposer does not make a contract. Only the mailing of acceptance, it has been said, completes the contract of insurance, as

the locus poenitentiae is ended when the acceptance has passed beyond the control of the party. (I Joyce, The Law of Insurance,

pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of the Civil Code

providing that an acceptance made by letter shall not bind the person making the offer except from the time it came to his

knowledge. The pertinent fact is, that according to the provisional receipt, three things had to be accomplished by the insurance

company before there was a contract: (1) There had to be a medical examination of the applicant; (2) there had to be approval of

the application by the head office of the company; and (3) this approval had in some way to be communicated by the company to

the applicant. The further admitted facts are that the head office in Montreal did accept the application, did cable the Manila


office to that effect, did actually issue the policy and did, through its agent in Manila, actually write the letter of notification and

place it in the usual channels for transmission to the addressee. The fact as to the letter of notification thus fails to concur with

the essential elements of the general rule pertaining to the mailing and delivery of mail matter as announced by the American

courts, namely, when a letter or other mail matter is addressed and mailed with postage prepaid there is a rebuttable

presumption of fact that it was received by the addressee as soon as it could have been transmitted to him in the ordinary course

of the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will not be

presumed to have been received by the addressee unless it is shown that it was deposited in the post-office, properly addressed

and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved satisfactorily that

the acceptance of the application ever came to the knowledge of the applicant.lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with legal interest from

November 20, 1918, until paid, without special finding as to costs in either instance. So ordered.

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

Johnson, J., dissents.


ManilaFIRST DIVISIONG.R. No. L-31845 April 30, 1979GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner, vs.HONORABLE COURT OF APPEALS, respondents.G.R. No. L-31878 April 30, 1979LAPULAPU D. MONDRAGON, petitioner, vs.HON. COURT OF APPEALS and NGO HING, respondents.Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner Company.Voltaire Garcia for petitioner Mondragon.Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April 29, 1970, (Rollo, No. L-31878,

p. 58), because the petitioners in both cases seek similar relief, through these petitions for certiorari by way of appeal, from the

amended decision of respondent Court of Appeals which affirmed in toto the decision of the Court of First Instance of Cebu,

ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay

plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00 with interest at 6% from the date of the filing of the

complaint, and the sum of P1,077.75, without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific Life Assurance

Company (hereinafter referred to as Pacific Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life of

his one-year old daughter Helen Go. Said respondent supplied the essential data which petitioner Lapulapu D. Mondragon,

Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form in his own handwriting (Exhibit I-M).

Mondragon finally type-wrote the data on the application form which was signed by private respondent Ngo Hing. The latter paid

the annual premuim the sum of P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as his

commission for being a duly authorized agebt of Pacific Life. Upon the payment of the insurance premuim, the binding deposit

receipt (Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the bottom of the

back page of the application form his strong recommendation for the approval of the insurance application. Then on April 30,

1957, Mondragon received a letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The letter stated that

the said life insurance application for 20-year endowment plan is not available for minors below seven years old, but Pacific Life

can consider the same under the Juvenile Triple Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical

Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner Mondragon to private

respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the approval of


the 20-year endowment insurance plan to children, pointing out that since 1954 the customers, especially the Chinese, were

asking for such coverage (Exhibit 4-M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of bronchopneumonia.

Thereupon, private respondent sought the payment of the proceeds of the insurance, but having failed in his effort, he filed the

action for the recovery of the same before the Court of First Instance of Cebu, which rendered the adverse decision as earlier

refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a temporary contract of the

life insurance in question; and (2) whether private respondent Ngo Hing concealed the state of health and physical condition of

Helen Go, which rendered void the aforesaid Exhibit E.

1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT. These conditions

state that:

A. If the Company or its agent, shan have received the premium deposit ... and the insurance application, ON or

PRIOR to the date of medical examination ... said insurance shan be in force and in effect from the date of such

medical examination, for such period as is covered by the deposit ...,PROVIDED the company shall be satisfied

that on said date the applicant was insurable on standard rates under its rule for the amount of insurance and

the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the amount of insurance and/or the kind

of policy requested in the application but issue, or offers to issue a policy for a different plan and/or amount ...,

the insurance shall not be in force and in effect until the applicant shall have accepted the policy as issued

or offered by the Company and shall have paid the full premium thereof. If the applicant does not accept the

policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and the Company declines to approve

the application the insurance applied for shall not have been in force at any time and the sum paid be returned

to the applicant upon the surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be merely a provisional or

temporary insurance contract and only upon compliance of the following conditions: (1) that the company shall be satisfied that

the applicant was insurable on standard rates; (2) that if the company does not accept the application and offers to issue a policy

for a different plan, the insurance contract shall not be binding until the applicant accepts the policy offered; otherwise, the

deposit shall be reftmded; and (3) that if the applicant is not ble according to the standard rates, and the company disapproves

the application, the insurance applied for shall not be in force at any time, and the premium paid shall be returned to the

applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an acknowledgment, on

behalf of the company, that the latter's branch office had received from the applicant the insurance premium and had accepted

the application subject for processing by the insurance company; and that the latter will either approve or reject the same on the

basis of whether or not the applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the insurance

application of respondent Ngo Hing, the binding deposit receipt in question had never become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure outright. As held

by this Court, where an agreement is made between the applicant and the agent, no liability shall attach until the principal

approves the risk and a receipt is given by the agent. The acceptance is merely conditional and is subordinated to the act of the

company in approving or rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by

itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved the

insurance application in question on the ground that it is not offering the twenty-year endowment insurance policy to children

less than seven years of age. What it offered instead is another plan known as the Juvenile Triple Action, which private

respondent failed to accept. In the absence of a meeting of the minds between petitioner Pacific Life and private respondent Ngo

Hing over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the latter's one-year old daughter, and

with the non-compliance of the abovequoted conditions stated in the disputed binding deposit receipt, there could have been no


insurance contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have to be refunded

by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other contracts, must be

assented to by both parties either in person or by their agents ... The contract, to be binding from the date of the application,

must have been a completed contract, one that leaves nothing to be dione, nothing to be completed, nothing to be passed upon,

or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in

agreement."

We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate to him the

rejection of the insurance application would not have any adverse effect on the allegedly perfected temporary contract

(Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected between the parties who had no meeting of

their minds. Private respondet, being an authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware that

said company does not offer the life insurance applied for. When he filed the insurance application in dispute, private respondent

was, therefore, only taking the chance that Pacific Life will approve the recommendation of Mondragon for the acceptance and

approval of the application in question along with his proposal that the insurance company starts to offer the 20-year

endowment insurance plan for children less than seven years. Nonetheless, the record discloses that Pacific Life had rejected the

proposal and recommendation. Secondly, having an insurable interest on the life of his one-year old daughter, aside from being

an insurance agent and an offense associate of petitioner Mondragon, private respondent Ngo Hing must have known and

followed the progress on the processing of such application and could not pretend ignorance of the Company's rejection of the

20-year endowment life insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate Justice Ruperto G.

Martin who later came up to this Court, from his dissenting opinion to the amended decision of the respondent court which

completely reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the reply

thereto of appellant Mondragon reiterating the desire for applicant's father to have the application considered

as one for a 20-year endowment plan was ever duly communicated to Ngo; Hing, father of the minor applicant.

I am not quite conninced that this was so. Ngo Hing, as father of the applicant herself, was precisely the

"underwriter who wrote this case" (Exhibit H-1). The unchallenged statement of appellant Mondragon in his

letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our associate" and that it was

the latter who "insisted that the plan be placed on the 20-year endowment plan." Under these circumstances, it

is inconceivable that the progress in the processing of the application was not brought home to his knowledge.

He must have been duly apprised of the rejection of the application for a 20-year endowment plan otherwise

Mondragon would not have asserted that it was Ngo Hing himself who insisted on the application as originally

filed, thereby implictly declining the offer to consider the application under the Juvenile Triple Action Plan.

Besides, the associate of Mondragon that he was, Ngo Hing should only be presumed to know what kind of

policies are available in the company for minors below 7 years old. What he and Mondragon were apparently

trying to do in the premises was merely to prod the company into going into the business of issuing endowment

policies for minors just as other insurance companies allegedly do. Until such a definite policy is however,

adopted by the company, it can hardly be said that it could have been bound at all under the binding slip for a

plan of insurance that it could not have, by then issued at all. (Amended Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private respondent had deliberately

concealed the state of health and piysical condition of his daughter Helen Go. Wher private regpondeit supplied the required

essential data for the insurance application form, he was fully aware that his one-year old daughter is typically a mongoloid child.

Such a congenital physical defect could never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad

faith, withheld the fact materal to the risk to be assumed by the insurance compary. As an insurance agent of Pacific Life, he

ought to know, as he surely must have known. his duty and responsibility to such a material fact. Had he diamond said significant

fact in the insurance application fom Pacific Life would have verified the same and would have had no choice but to disapprove

the application outright.


The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and perfect candor or

openness and honesty; the absence of any concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not for

the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect

to communicate that which a partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or

unintentional the concealment entitles the insurer to rescind the contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court

of Appeals, et al, 105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent

appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the parties with the noncompliance of the

conditions provided in the binding receipt, and concealment, as legally defined, having been comraitted by herein private

respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered absolving petitioners

Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil liabilities as found by respondent Court and

ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without interest, to private respondent, Ngo

Hing. Costs against private respondent.

SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera, JJ., concur.Fernandez, J., took no part.


ManilaFIRST DIVISION G.R. No. L-109937 March 21, 1994DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION INSURANCE POOL, respondents.Office of the Legal Counsel for petitioner.Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.

QUIASON, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside the decision of the

Court of Appeals in CA-G.R CV No. 26434 and its resolution denying reconsideration thereof.

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

I

In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law, applied for a loan of P500,000.00 with

the Development Bank of the Philippines (DBP), Basilan Branch. As the principal mortgagor, Dans, then 76 years of age, was

advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP Mortgage Redemption Insurance Pool (DBP MRI

Pool).

A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and released on August 11, 1987. From

the proceeds of the loan, DBP deducted the amount of P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans

accomplished and submitted the "MRI Application for Insurance" and the "Health Statement for DBP MRI Pool."

On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was credited by DBP to the savings

account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was advised of the credit.

On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this information to the DBP MRI Pool. On

September 23, 1987, the DBP MRI Pool notified DBP that Dans was not eligible for MRI coverage, being over the acceptance age

limit of 60 years at the time of application.

On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's MRI application. The DBP offered to

refund the premium of P1,476.00 which the deceased had paid, but Candida Dans refused to accept the same, demanding

payment of the face value of the MRI or an amount equivalent to the loan. She, likewise, refused to accept an ex

gratia settlement of P30,000.00, which the DBP later offered.

On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a complaint with the Regional Trial Court,

Branch I, Basilan, against DBP and the insurance pool for "Collection of Sum of Money with Damages." Respondent Estate alleged


that Dans became insured by the DBP MRI Pool when DBP, with full knowledge of Dans' age at the time of application, required

him to apply for MRI, and later collected the insurance premium thereon. Respondent Estate therefore prayed: (1) that the sum

of P139,500.00, which it paid under protest for the loan, be reimbursed; (2) that the mortgage debt of the deceased be declared

fully paid; and (3) that damages be awarded.

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

At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits submitted by respondent Estate. As a result

of these admissions, the trial court narrowed down the issues and, without opposition from the parties, found the case ripe for

summary judgment. Consequently, the trial court ordered the parties to submit their respective position papers and

documentary evidence, which may serve as basis for the judgment.

On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against DBP. The DBP MRI Pool,

however, was absolved from liability, after the trial court found no privity of contract between it and the deceased. The trial court

declared DBP in estoppel for having led Dans into applying for MRI and actually collecting the premium and the service fee,

despite knowledge of his age ineligibility. The dispositive portion of the decision read as follows:

WHEREFORE, in view of the foregoing consideration and in the furtherance of justice and equity, the Court finds

judgment for the plaintiff and against Defendant DBP, ordering the latter:

1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of interest as amortization

payment paid under protest;

2. To consider the mortgage loan of P300,000.00 including all interest accumulated or otherwise to have been

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

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

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

and equitable.

The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The Cross-claim of Defendant

DBP is likewise dismissed (Rollo, p. 79)

The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the appellate court affirmed in toto the

decision of the trial court. The DBP's motion for reconsideration was denied in a resolution dated April 20, 1993.

Hence, this recourse.

II

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

following declaration:

I hereby declare and agree that all the statements and answers contained herein are true, complete and correct

to the best of my knowledge and belief and form part of my application for insurance. It is understood and

agreed that no insurance coverage shall be effected unless and until this application is approved and the full

premium is paid during my continued good health (Records, p. 40).

Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the application shall be approved by the

insurance pool; and (2) when the full premium is paid during the continued good health of the applicant. These two conditions,

being joined conjunctively, must concur.

Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The pool, however, did not approve the

application of Dans. There is also no showing that it accepted the sum of P1,476.00, which DBP credited to its account with full

knowledge that it was payment for Dan's premium. There was, as a result, no perfected contract of insurance; hence, the DBP

MRI Pool cannot be held liable on a contract that does not exist.

The liability of DBP is another matter.

It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure MRI coverage. Instead of allowing Dans

to look for his own insurance carrier or some other form of insurance policy, DBP compelled him to apply with the DBP MRI Pool

for MRI coverage. When Dan's loan was released on August 11, 1987, DBP already deducted from the proceeds thereof the MRI

premium. Four days latter, DBP made Dans fill up and sign his application for MRI, as well as his health statement. The DBP later

submitted both the application form and health statement to the DBP MRI Pool at the DBP Main Building, Makati Metro Manila.

As service fee, DBP deducted 10 percent of the premium collected by it from Dans.


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

As an insurance agent, DBP made Dans go through the motion of applying for said insurance, thereby leading him and his family

to believe that they had already fulfilled all the requirements for the MRI and that the issuance of their policy was forthcoming.

Apparently, DBP had full knowledge that Dan's application was never going to be approved. The maximum age for MRI

acceptance is 60 years as clearly and specifically provided in Article 1 of the Group Mortgage Redemption Insurance Policy signed

in 1984 by all the insurance companies concerned (Exh. "1-Pool").

Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not personally liable to the party with

whom he contracts, unless he expressly binds himself or exceeds the limits of his authority without giving such party sufficient

notice of his powers."

The DBP is not authorized to accept applications for MRI when its clients are more than 60 years of age (Exh. "1-Pool"). Knowing

all the while that Dans was ineligible for MRI coverage because of his advanced age, DBP exceeded the scope of its authority

when it accepted Dan's application for MRI by collecting the insurance premium, and deducting its agent's commission and

service fee.

The liability of an agent who exceeds the scope of his authority depends upon whether the third person is aware of the limits of

the agent's powers. There is no showing that Dans knew of the limitation on DBP's authority to solicit applications for MRI.

If the third person dealing with an agent is unaware of the limits of the authority conferred by the principal on the agent and he

(third person) has been deceived by the non-disclosure thereof by the agent, then the latter is liable for damages to him (V

Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, p. 422 [1992], citing Sentencia [Cuba] of

September 25, 1907). The rule that the agent is liable when he acts without authority is founded upon the supposition that there

has been some wrong or omission on his part either in misrepresenting, or in affirming, or concealing the authority under which

he assumes to act (Francisco, V., Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of

the limits of the agency carries with it the implication that a deception was perpetrated on the unsuspecting client, the provisions

of Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.

Article 19 provides:

Every person must, in the exercise of his rights and in the performance of his duties, act with justice give

everyone his due and observe honesty and good faith.


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

for the same.


Any person, who willfully causes loss or injury to another in a manner that is contrary to morals, good customs

or public policy shall compensate the latter for the damage.

The DBP's liability, however, cannot be for the entire value of the insurance policy. To assume that were it not for DBP's

concealment of the limits of its authority, Dans would have secured an MRI from another insurance company, and therefore

would have been fully insured by the time he died, is highly speculative. Considering his advanced age, there is no absolute

certainty that Dans could obtain an insurance coverage from another company. It must also be noted that Dans died almost

immediately, i.e., on the nineteenth day after applying for the MRI, and on the twenty-third day from the date of release of his

loan.

One is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved (Civil Code of the

Philippines, Art. 2199). Damages, to be recoverable, must not only be capable of proof, but must be actually proved with a

reasonable degree of certainty (Refractories Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee v.

Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative damages are too remote to be included in an accurate estimate of

damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).

While Dans is not entitled to compensatory damages, he is entitled to moral damages. No proof of pecuniary loss is required in

the assessment of said kind of damages (Civil Code of Philippines, Art. 2216). The same may be recovered in acts referred to in

Article 2219 of the Civil Code.

The assessment of moral damages is left to the discretion of the court according to the circumstances of each case (Civil Code of

the Philippines, Art. 2216). Considering that DBP had offered to pay P30,000.00 to respondent Estate in ex gratia settlement of its


claim and that DBP's non-disclosure of the limits of its authority amounted to a deception to its client, an award of moral

damages in the amount of P50,000.00 would be reasonable.

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

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

No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent Estate of Juan B. Dans the amount of

P1,476.00 with legal interest from the date of the filing of the complaint until fully paid; and (2) to PAY said Estate the amount of

Fifty Thousand Pesos (P50,000.00) as moral damages and the amount of Ten Thousand Pesos (P10,000.00) as attorney's fees.

With costs against petitioner.

SO ORDERED.

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

FIRST DIVISION

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare

Health Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer,

liver disease, asthma or peptic ulcer? (If Yes, give details).[1]

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued

Health Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of hospitalization

benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of out-patient benefits such as annual

physical examinations, preventive health care and other out-patient services.

Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990,

then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.[2]

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for

one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the

health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to

petitioner, there was a concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of

Ernanis confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus,

respondent paid the hospitalization expenses herself, amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted

at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the

morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the

Chinese General Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against

petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement

of her expenses plus moral damages and attorneys fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus

interest, until the amount is fully paid to plaintiff who paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;


3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved

petitioner Reverente.[4] Petitioners motion for reconsideration was denied.[5]Hence, petitioner brought the instant petition for

review, raising the primary argument that a health care agreement is not an insurance contract; hence the incontestability clause

under the Insurance Code[6]does not apply.

Petitioner argues that the agreement grants living benefits, such as medical check-ups and hospitalization which a member

may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner

also points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike

in an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a

period of one year, as compared to insurance contracts which last longer,[7] petitioner argues that the incontestability clause does

not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance

company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the

Department of Health.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance

contract exists where the following elements concur:






5. In consideration of the insurers promise, the insured pays a premium.[8]

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a

person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life

and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary

interest;

(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which

death or illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own

health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. [9] Once the

member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care

provider must pay for the same to the extent agreed upon under the contract.

Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the application

for health coverage, petitioners required respondents husband to sign an express authorization for any person, organization or

entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization,

consultation, treatment or any other medical advice or examination.[10] Specifically, the Health Care Agreement signed by

respondents husband states:

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application

are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract

of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the

mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information

acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that


any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information

acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed

Members and that the acceptance of any Agreement issued on this application shall be a ratification of any correction in or

addition to this application as stated in the space for Home Office Endorsement.[11] (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the

applicants medical history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________

to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or

any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A

photographic copy of this authorization shall be as valid as the original.[12] (Underscoring ours)

Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:

Failure to disclose or misrepresentation of any material information by the member in the application or medical examination,

whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of

Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed

material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher

Membership Fee for the benefit or benefits applied for.[13]

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This

largely depends on opinion rather than fact, especially coming from respondents husband who was not a medical doctor. Where

matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy

even though they are untrue.[14]Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the

policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is

likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in

such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear

distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of

expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within

his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.[16] Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to

establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without

the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility under the

agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider

attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the

covered benefits which he has prepaid.

Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract of insurance. The

right to rescind should be exercised previous to the commencement of an action on the contract. [17] In this case, no rescission was

made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following

conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts

on which cancellation is based.[18]

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on

liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. [19] Being a

contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the

contract the insurer.[20] By reason of the exclusive control of the insurance company over the terms and phraseology of the

insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to


avoid forfeiture.[21] This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service

contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible

of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should

be strictly construed against the provider.[22]

Anent the incontestability of the membership of respondents husband, we quote with approval the following findings of the

trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date

of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and

six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired,

the defense of concealment or misrepresentation no longer lie.[23]

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of

their marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the

nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted

that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately

prove the expenses incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the

attending physicians.[24]

SECOND DIVISION


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

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

D E C I S I O N

PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner GULF RESORTS, INC.,

against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court decision [1] which

dismissed its two appeals and affirmed the judgment of the trial court.

For review are the warring interpretations of petitioner and respondent on the scope of the insurance companys liability for

earthquake damage to petitioners properties. Petitioner avers that, pursuant to its earthquake shock endorsement rider,

Insurance Policy No. 31944 covers all damages to the properties within its resort caused by earthquake. Respondent contends

that the rider limits its liability for loss to the two swimming pools of petitioner.

The facts as established by the court a quo, and affirmed by the appellate court are as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort insured originally with

the American Home Assurance Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from 1984-85; 1985-

86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was

extended only to plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and two (2)

swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2) swimming pools only (Exhs. 1-B, 2-

B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering the period March 14,

1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-1,

Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the time of issue read that plaintiff renewed its

policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which

carried the entry under Endorsement/Warranties at Time of Issue, which read Endorsement to Include Earthquake Shock (Exh. 6-

B-1) in the amount of P10,700.00 and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:

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

@ .392%;1,500,000.00 - on the furniture, etc.

contained in the buildingabove-mentioned@ .490%;

393,000.00- on the two swimmingpools, only (against theperil of earthquakeshock only) @ 0.100%


116,600.00- other buildings includeas follows:

a) Tilter House- P19,800.00- 0.551%b) Power House- P41,000.00- 0.551%c) House Shed- P55,000.00 -0.540%P100,000.00 for furniture, fixtures,

lines air-con andoperating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-4568061-9 (Exh. H) provided

that the policy wording and rates in said policy be copied in the policy to be issued by defendant; that defendant issued Policy

No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium

of P45,159.92 (Exh. I); that in the computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in

question, contained on the right-hand upper portion of page 7 thereof, the following:

Rate-Various

Premium - P37,420.60 F/L2,061.52 Typhoon1,030.76 EC393.00 ES

Doc. Stamps 3,068.10F.S.T. 776.89Prem. Tax 409.05

TOTAL 45,159.92;that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against earthquake shock (ES); that in

all the six insurance policies (Exhs. C, D, E, F, G and H), the premium against the peril of earthquake shock is the same, that

is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and

H) and in Policy No. 31944 issued by defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the sum included additional premium the Company agrees,

notwithstanding what is stated in the printed conditions of this policy due to the contrary, that this insurance covers loss or

damage to shock to any of the property insured by this Policy occasioned by or through or in consequence of earthquake (Exhs. 1-

D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990 an earthquake struck

Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No. 31944 issued by defendant, including the two

swimming pools in its Agoo Playa Resort were damaged.[2]

After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance Policy No. 31944

for damages on its properties. Respondent instructed petitioner to file a formal claim, then assigned the investigation of the claim

to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster,

requested petitioner to submit various documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc.,

through its Vice-President A.R. de Leon,[4]rendered a preliminary report[5] finding extensive damage caused by the earthquake to

the clubhouse and to the two swimming pools. Mr. de Leon stated that except for the swimming pools, all affected items have no

coverage for earthquake shocks.[6] On August 11, 1990, petitioner filed its formal demand[7] for settlement of the damage to all its

properties in the Agoo Playa Resort. On August 23, 1990, respondent denied petitioners claim on the ground that its insurance

policy only afforded earthquake shock coverage to the two swimming pools of the resort. [8] Petitioner and respondent failed to

arrive at a settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint[10] with the regional trial court of Pasig praying for

the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest thereon, as

computed under par. 29 of the policy (Annex B) until fully paid;

2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account of defendants

refusal to pay the claims;

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

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

5.) Costs.[11]

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

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


The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of earthquake shock, the same

premium it paid against earthquake shock only on the two swimming pools in all the policies issued by AHAC(AIU) (Exhibits C, D,

E, F and G). From this fact the Court must consequently agree with the position of defendant that the endorsement rider (Exhibit

7-C) means that only the two swimming pools were insured against earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language used in an insurance

contract or application is such as to create ambiguity the same should be resolved against the party responsible therefor, i.e., the

insurance company which prepared the contract. To the mind of [the] Court, the language used in the policy in litigation is clear

and unambiguous hence there is no need for interpretation or construction but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools had earthquake shock coverage and were

heavily damaged by the earthquake which struck on July 16, 1990. Defendant having admitted that the damage to the swimming

pools was appraised by defendants adjuster at P386,000.00, defendant must, by virtue of the contract of insurance, pay plaintiff

said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is liable only for the

damage caused to the two (2) swimming pools and that defendant has made known to plaintiff its willingness and readiness to

settle said liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to the counterclaims of

defendant, the Court does not agree that the action filed by plaintiff is baseless and highly speculative since such action is a lawful

exercise of the plaintiffs right to come to Court in the honest belief that their Complaint is meritorious. The prayer, therefore, of

defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED EIGHTY SIX THOUSAND

PESOS (P386,000.00) representing damage to the two (2) swimming pools, with interest at 6% per annum from the date of the

filing of the Complaint until defendants obligation to plaintiff is fully paid.

No pronouncement as to costs.[13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of Appeals based on the

following assigned errors:[14]

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO

SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE

ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER UNDER DEFENDANT-APPELLEES POLICY

(NO. 31944; EXH I) BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE CIRCUMSTANCES

SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH

INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it attorneys fees and

damages on its compulsory counterclaim.

After review, the appellate court affirmed the decision of the trial court and ruled, thus:

However, after carefully perusing the documentary evidence of both parties, We are not convinced that the last two (2)

insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance

contract with Philippine Charter Insurance Corporation is said to have been based and copied (Exh. I), covered an extended

earthquake shock insurance on all the insured properties.

x x x

We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the imposition of interest 24% on

the insurance claim and 6% on loss of income allegedly amounting toP4,280,000.00. Since the defendant-appellant has expressed

its willingness to pay the damage caused on the two (2) swimming pools, as the Court a quo and this Court correctly found it to

be liable only, it then cannot be said that it was in default and therefore liable for interest.

Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the award thereof is subject to the

sound discretion of the court. Thus, if such discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et

al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception rather than a rule, it is necessary for the

court to make findings of facts and law that would bring the case within the exception and justify the grant of such award


(Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002).

Therefore, holding that the plaintiff-appellants action is not baseless and highly speculative, We find that the Court a quo did not

err in granting the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial Court hereby

AFFIRMED in toto. No costs.[15]

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

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS INSURANCE POLICY NO. 31944, ONLY

THE TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST

THE RISK OF EARTHQUAKE SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR DAMAGES WITH INTEREST THEREON

AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF LITIGATION.

Petitioner contends:

First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not only the swimming

pools. It used the words any property insured by this policy, and it should be interpreted as all inclusive.

Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the body of the

insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock

Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies.[17]

Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake shock

endorsement.

Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted the said

qualification.

Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the insurance policy,

because the rider is the more deliberate expression of the agreement of the contracting parties.

Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties enumerated at the time

of issue.

Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and against

respondent. It was respondent which caused the ambiguity when it made the policy in issue.

Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be interpreted as a caveat

on the standard fire insurance policy, such as to remove the two swimming pools from the coverage for the risk of fire. It should

not be used to limit the respondents liability for earthquake shock to the two swimming pools only.

Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the extended

coverage. The premium for the earthquake shock coverage was already included in the premium paid for the policy.

Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake shock coverage to

all insured properties. When it secured an insurance policy from respondent, petitioner told respondent that it wanted an exact

replica of its latest insurance policy from American Home Assurance Company (AHAC-AIU), which covered all the resorts

properties for earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent assured

petitioner that it was covered for earthquake shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,

likewise requested petitioner to submit the necessary documents for its building claims and other repair costs. Thus, under the

doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to petitioner covered all of the properties within

the resort.

Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised Rules of Court as

its remedy, and there is no need for calibration of the evidence in order to establish the facts upon which this petition is based.

On the other hand, respondent made the following counter arguments:[18]

First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage against earthquake

shock to petitioners insured properties other than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only

the two swimming pools were insured against earthquake shock. From 1988 until 1990, the provisions in its policy were

practically identical to its earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a letter [19] by its


representative Manuel C. Quijano, categorically stated that its previous policy, from which respondents policy was copied,

covered only earthquake shock for the two swimming pools.

Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only covered

earthquake shock damage on the two swimming pools. The amount was the same amount paid by petitioner for earthquake

shock coverage on the two swimming pools from 1990-1991. No additional premium was paid to warrant coverage of the other

properties in the resort.

Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the two swimming

pools in the policy schedule did not expand the earthquake shock coverage to all of petitioners properties. As per its agreement

with petitioner, respondent copied its policy from the AHAC-AIU policy provided by petitioner. Although the first five policies

contained the said qualification in their riders title, in the last two policies, this qualification in the title was deleted. AHAC-AIU,

through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not make the policy

incomplete, nor did it broaden the scope of the endorsement whose descriptive title was merely enumerated. Any ambiguity in

the policy can be easily resolved by looking at the other provisions, specially the enumeration of the items insured, where only

the two swimming pools were noted as covered for earthquake shock damage.

Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item 5 P393,000.00 on

the two swimming pools only (against the peril of earthquake shock only) meant that only the swimming pools were insured for

earthquake damage. The same phrase is used in toto in the policies from 1989 to 1990, the only difference being the designation

of the two swimming pools as Item 3.

Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the properties covered.

In all of its seven insurance policies, petitioner only paidP393.00 as premium for coverage of the swimming pools against

earthquake shock. No other premium was paid for earthquake shock coverage on the other properties. In addition, the use of the

qualifier ANY instead of ALL to describe the property covered was done deliberately to enable the parties to specify the

properties included for earthquake coverage.

Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in the earthquake

shock coverage. Petitioners own evidence shows that it only required respondent to follow the exact provisions of its previous

policy from AHAC-AIU. Respondent complied with this requirement. Respondents only deviation from the agreement was when it

modified the provisions regarding the replacement cost endorsement. With regard to the issue under litigation, the riders of the

old policy and the policy in issue are identical.

Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from maintaining that only the

two swimming pools were covered for earthquake shock. The adjusters letter notifying petitioner to present certain documents

for its building claims and repair costs was given to petitioner before the adjuster knew the full coverage of its policy.

Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the descriptive name or title

of the Earthquake Shock Endorsement. However, the words of the policy reflect the parties clear intention to limit earthquake

shock coverage to the two swimming pools.

Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any deficiency nor

did it institute any action to reform the policy. The policy binds the petitioner.

Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since respondent was

willing and able to pay for the damage caused on the two swimming pools, it cannot be considered to be in default, and

therefore, it is not liable for interest.

We hold that the petition is devoid of merit.

In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.

First, in the designation of location of risk, only the two swimming pools were specified as included, viz:

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

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

PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

x x x

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


Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly of any of

the following occurrences, namely:--

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

Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils of Explosion, Aircraft,

Vehicle and Smoke), stated, viz:

ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN

CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE

INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.

Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . . additional premium the

Company agrees, notwithstanding what is stated in the printed conditions of this Policy to the contrary, that this insurance covers

loss or damage (including loss or damage by fire) to any of the property insured by this Policy occasioned by or through or in

consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby expressly varied) and that

any reference therein to loss or damage by fire should be deemed to apply also to loss or damage occasioned by or through or in

consequence of Earthquake.[24]

Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the earthquake shock

coverage. Thus, the policy extended earthquake shock coverage to all of the insured properties.

It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance with each other.[25] All its parts are reflective of the true intent of the parties. The policy cannot be construed piecemeal. Certain stipulations

cannot be segregated and then made to control; neither do particular words or phrases necessarily determine its character.

Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and

riders, taken and interpreted together, indubitably show the intention of the parties to extend earthquake shock coverage to the

two swimming pools only.

A careful examination of the premium recapitulation will show that it is the clear intent of the parties to extend earthquake

shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code defines a contract of insurance as an

agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an

unknown or contingent event. Thus, an insurance contract exists where the following elements concur:






5. In consideration of the insurer's promise, the insured pays a premium.[26] (Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as the risk attaches. [28] In the subject

policy, no premium payments were made with regard to earthquake shock coverage, except on the two swimming pools. There is

no mention of any premium payable for the other resort properties with regard to earthquake shock. This is consistent with the

history of petitioners previous insurance policies from AHAC-AIU. As borne out by petitioners witnesses:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 12-13

Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two swimming pools only?

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a provision here that it was only for item 5.

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools only?A. Yes, sir.


CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991pp. 23-26

Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the procurement of this policy?

A. Yes, sir.Q. Did you also do this through your insurance agency?A. If you are referring to Forte Insurance Agency, yes.Q. Is Forte Insurance Agency a department or division of your company?A. No, sir. They are our insurance agency.Q. And they are independent of your company insofar as operations are concerned?A. Yes, sir, they are separate entity.Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your instruction, is

that not correct?A. Yes, sir. The final action is still with us although they can recommend what insurance to take.Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give written

instruction to Forte Insurance Agency advising it that the earthquake shock coverage must extend to all properties of Agoo Playa Resort in La Union?

A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of extending the coverage on (sic) the other properties of the company.

Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake tremor in La Union?

A. Yes, sir.Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?A. Yes, sir.Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your instructions

that all properties must be covered again by earthquake shock endorsement?A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit G?Atty. Mejia: Yes.Witness:A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more limitation

referring to the two swimming pools only, I was contented already that the previous limitation pertaining to the two swimming pools was already removed.

Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies[29] to the insurance policy as proof of the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely an enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the policy is subject, as required under Section 50, paragraph 2 of the Insurance Code.

We also hold that no significance can be placed on the deletion of the qualification limiting the coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:DIRECT EXAMINATION OF JUAN BARANDA III[30]

TSN, August 11, 1992pp. 9-12

Atty. Mejia:We respectfully manifest that the same exhibits C to H inclusive have been previously marked by counsel for

defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6) policies issued by your company [in favor] of Agoo Playa Resort?

WITNESS:Yes[,] I remember having gone over these policies at one point of time, sir.

Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock as provided for in each of the six (6) policies?

x x xWITNESS:

The extent of the coverage is only up to the two (2) swimming pools, sir.Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?A. Yes, sir.ATTY. MEJIA:

What is your basis for stating that the coverage against earthquake shock as provided for in each of the six (6) policies extend to the two (2) swimming pools only?

WITNESS:Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.

ATTY. MEJIA:Witness referring to Exhibit C-1, your Honor.

WITNESS:We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we do cover earthquake shock. For building we covered it for full earthquake coverage which includes earthquake shock

COURT:As far as earthquake shock endorsement you do not have a specific coverage for other things other than swimming pool? You are covering building? They are covered by a general insurance?


WITNESS:Earthquake shock coverage could not stand alone. If we are covering building or another we can issue earthquake shock solely but that the moment I see this, the thing that comes to my mind is either insuring a swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.

DIRECT EXAMINATION OF JUAN BARANDA IIITSN, August 11, 1992

pp. 23-25Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive [remained] its

coverage against earthquake shock to two (2) swimming pools only but that Exhibits G and H respectively entend the coverage against earthquake shock to all the properties indicated in the respective schedules attached to said policies, what can you say about that testimony of plaintiffs witness?

WITNESS:As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it, if we are going to look at the premium there has been no change with respect to the rates. Everytime ( sic) there is a renewal if the intention of the insurer was to include the earthquake shock, I think there is a substantial increase in the premium. We are not only going to consider the two (2) swimming pools of the other as stated in the policy. As I see, there is no increase in the amount of the premium. I must say that the coverage was not broaden (sic) to include the other items.

COURT:They are the same, the premium rates?

WITNESS:They are the same in the sence (sic), in the amount of the coverage. If you are going to do some computation based on the rates you will arrive at the same premiums, your Honor.

CROSS-EXAMINATION OF JUAN BARANDA IIITSN, September 7, 1992

pp. 4-6ATTY. ANDRES:

Would you as a matter of practice [insure] swimming pools for fire insurance?WITNESS:

No, we dont, sir.Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?A. Yes, sir.ATTY. ANDRES:

Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming pools was deleted from the policies issued by AIU, is it not?

x x xATTY. ANDRES:

As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for the policies?

WITNESS:My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued with no specific attachments, premium rates and so on. It was inadvertent, sir.

The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the earthquake shock endorsement included all its properties in the resort. Respondent only insured the properties as intended by the petitioner. Petitioners own witness testified to this agreement, viz:CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty. Omlas (sic) to copy from Exhibit H for purposes of procuring the policy from Philippine Charter Insurance Corporation?

A. I told him that the insurance that they will have to get will have the same provisions as this American Home Insurance Policy No. 206-4568061-9.

Q. You are referring to Exhibit H of course?A. Yes, sir, to Exhibit H.Q. So, all the provisions here will be the same except that of the premium rates?A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will be limited to

this one. I (sic) can even be lesser.CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992pp. 12-14

Atty. Mejia:Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of coverage of

Exhibits I and H sometime in the third week of March, 1990 or thereabout?A. Yes, sir, about that time.Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as scope of

coverage of Exhibits I and H respectively?


A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy wordings and rates were copied from the insurance policy I sent them but it was only when this case erupted that we discovered some discrepancies.

Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time between those indicated in Exhibit I and those indicated in Exhibit H respectively?

A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock which I understood before that this provision will have to be placed here because this particular provision under the peril of earthquake shock only is requested because this is an insurance policy and therefore cannot be insured against fire, so this has to be placed.

The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty. Umlas categorically denied having given such assurances.

Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement for earthquake shock covered properties other than the two swimming pools, viz:DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne

Adjusters and Surveyors, Inc.)TSN, January 26, 1993

pp. 22-26Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the policy issued by

Philippine Charter Insurance Corporation?A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance coverage

policy and it was indicated under Item 3 specifically that the coverage is only for earthquake shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in the policy and he confirmed to me indeed only Item 3 which were the two swimming pools have coverage for earthquake shock.

x x xQ. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming pools all

affected items have no coverage for earthquake shock?x x x

A. I based my statement on my findings, because upon my examination of the policy I found out that under Item 3 it

was specific on the wordings that on the two swimming pools only, then enclosed in parenthesis (against the

peril[s] of earthquake shock only), and secondly, when I examined the summary of premium payment only Item 3

which refers to the swimming pools have a computation for premium payment for earthquake shock and all the

other items have no computation for payment of premiums.

In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the general rule that

insurance contracts are contracts of adhesion which should be liberally construed in favor of the insured and strictly against the

insurer company which usually prepares it.[31] A contract of adhesion is one wherein a party, usually a corporation, prepares the

stipulations in the contract, while the other party merely affixes his signature or his "adhesion" thereto. Through the years, the

courts have held that in these type of contracts, the parties do not bargain on equal footing, the weaker party's participation

being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the

courts of justice must protect.[32] Consequently, any ambiguity therein is resolved against the insurer, or construed liberally in

favor of the insured.[33]

The case law will show that this Court will only rule out blind adherence to terms where facts and circumstances will show

that they are basically one-sided.[34] Thus, we have called on lower courts to remain careful in scrutinizing the factual

circumstances behind each case to determine the efficacy of the claims of contending parties. In Development Bank of the

Philippines v. National Merchandising Corporation, et al.,[35] the parties, who were acute businessmen of experience, were

presumed to have assented to the assailed documents with full knowledge.

We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did not know the

provisions of the policy. From the inception of the policy, petitioner had required the respondent to copy verbatim the provisions

and terms of its latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing

the insurance policy of petitioner, is reflective of petitioners knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]

TSN, September 23, 1991

pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo Playa?A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance Corporation as

long as it will follow the same or exact provisions of the previous insurance policy we had with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American Home Insurance policy are to be incorporated in the PCIC policy?

A. Yes, sir.


Q. What steps did you take?A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that the policy

and wordings shall be copied from the AIU Policy No. 206-4568061-9.Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9 in drafting its

Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in the replacement cost endorsement,

but the principal provisions of the policy remained essentially similar to AHAC-AIUs policy. Consequently, we cannot apply the

"fine print" or "contract of adhesion" rule in this case as the parties intent to limit the coverage of the policy to the two

swimming pools only is not ambiguous.[37]

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is dismissed. No costs.

SO ORDERED.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.


ManilaSECOND DIVISIONG.R. No. L-36413 September 26, 1988MALAYAN INSURANCE CO., INC., petitioner, vs.THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.Freqillana Jr. for petitioner.B.F. Estrella & Associates for respondent Martin Vallejos.Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

PADILLA, J.:

Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which

affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First

Instance of Pangasinan.

The antecedent facts of the case are as follows:

On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car

Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor No.

ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not to

exceed P600.00 and "third-party liability" in the amount of P20,000.00.

During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in the afternoon,

the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon Rice Mill, Inc., collided

with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national

highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan P.

Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep.

As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO

before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He prayed therein that the

defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital

expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's

fees.

Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped the

PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it had


observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its

employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.

Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the

fault in the accident was solely imputable to the PANTRANCO.

Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged that he had

actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his cross-

claim against the herein petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive policy

wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as

for any liability to third persons arising out of any accident during the effectivity of such insurance contract, which policy was in

full force and effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance

company for the amount that he may be ordered to pay.

Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc.

for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice

Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon

Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant

to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc.,

making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify

the petitioner for any sum that it may be ordered to pay the plaintiff.

After trial, judgment was rendered as follows:

WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the plaintiff

and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as

follows:

(a) P4,103 as actual damages;

(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3) years;

(c) P5,000.00 as moral damages;

(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.

The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable.

With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00.

As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should

be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved. 1

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc.

and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It

ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company

for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of

insurance between Sio Choy and the insurance company. 2

Hence, the present recourse by petitioner insurance company.

The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice Mill, Inc.

to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may be ordered to

pay jointly and severally with Sio Choy.

The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of

respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of Appeals

shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos against the respondents, without

prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill,

Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3

However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to

determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents Sio

Choy and San Leon Rice Mill, Inc.


Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals, was

correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and

(2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has

been adjudged to pay respondent Vallejos on its insurance policy.

As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio

Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.

We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to

the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.

It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to

Article 2184 of the Civil Code which provides:

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the

vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a

driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice

within the next preceding two months.

If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being

the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which

reads:

Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but

also for those of persons for whom one is responsible.

xxx xxx xxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the

scope of their assigned tasks, even though the former are not engaged ill any business or industry.

xxx xxx xxx

The responsibility treated in this article shall cease when the persons herein mentioned proved that they

observed all the diligence of a good father of a family to prevent damage.

It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to

respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. 4

On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to

pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio

Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and

respondent Sio Choy at the time of the complained vehicular accident.

In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger

jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the

jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial

court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of

the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay

the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner

and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including

the insurance company, who were held solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can

directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does

not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the

insurer is based on contract; that of the insured is based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial

court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For

if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third party


liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying

solidary obligation and insurance contracts.

In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other hand,

insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or

liability arising from an unknown or contingent event." 8

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable

to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00.

In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of

P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire

obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is

only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to

pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a

solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily

liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.

As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be

reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance

existing between petitioner and respondent Sio Choy. We disagree.

The appellate court overlooked the principle of subrogation in insurance contracts. Thus —

... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed.

477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which

the insured may have against the third person whose negligence or wrongful act caused the loss (44 Am. Jur.

2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after

reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing

Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

Although many policies including policies in the standard form, now provide for subrogation, and thus

determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of

payment inures to the insurer without any formal assignment or any express stipulation to that effect in the

policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment

operates as an equitable assignment to the insurer of the property and all remedies which the insured may

have for the recovery thereof. That right is not dependent upon , nor does it grow out of any privity of

contract (emphasis supplied) or upon written assignment of claim, and payment to the insured makes the

insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the

subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent

San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be

reimbursed by his co-debtors for the share which corresponds to each.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary

debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the

interest for the payment already made. If the payment is made before the debt is due, no interest for the

intervening period may be demanded.

xxx xxx xxx

In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary

debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.

To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent

Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary debtors. If

Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is


compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon

Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 )

WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby AFFIRMED,

with the modification above-mentioned. Without pronouncement as to costs.

SO ORDERED.

Melencio-Herrera (Chairperson), Paras, Sarmiento and Regalado, JJ., concur.


ManilaSECOND DIVISIONG.R. No. L-52756 October 12, 1987MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner, vs.COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

PADILLA, J:

Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979, ordering petitioner

Manila Mahogany Manufacturing Corporation to pay private respondent Zenith Insurance Corporation the sum of Five Thousand

Pesos (P5,000.00) with 6% annual interest from 18 January 1973, attorney's fees in the sum of five hundred pesos (P500.00), and

costs of suit, and the resolution of the same Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's

decision.

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with respondent insurance company. On

4 May 1970 the insured vehicle was bumped and damaged by a truck owned by San Miguel Corporation. For the damage caused,

respondent company paid petitioner five thousand pesos (P5,000.00) in amicable settlement. Petitioner's general manager

executed a Release of Claim, subrogating respondent company to all its right to action against San Miguel Corporation.

On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand reimbursement from San Miguel

Corporation of the amount it had paid petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that San Miguel

Corporation had already paid petitioner P4,500.00 for the damages to petitioner's motor vehicle, as evidenced by a cash voucher

and a Release of Claim executed by the General Manager of petitioner discharging San Miguel Corporation from "all actions,

claims, demands the rights of action that now exist or hereafter [sic] develop arising out of or as a consequence of the accident."

Respondent insurance company thus demanded from petitioner reimbursement of the sum of P4,500.00 paid by San Miguel

Corporation. Petitioner refused; hence, respondent company filed suit in the City Court of Manila for the recovery of P4,500.00.

The City Court ordered petitioner to pay respondent P4,500.00. On appeal the Court of First Instance of Manila affirmed the City

Court's decision in toto, which CFI decision was affirmed by the Court of Appeals, with the modification that petitioner was to pay

respondent the total amount of P5,000.00 that it had earlier received from the respondent insurance company.

Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent company as the subrogation

in the Release of Claim it executed in favor of respondent was conditioned on recovery of the total amount of damages petitioner

had sustained. Since total damages were valued by petitioner at P9,486.43 and only P5,000.00 was received by petitioner from

respondent, petitioner argues that it was entitled to go after San Miguel Corporation to claim the additional P4,500.00 eventually


paid to it by the latter, without having to turn over said amount to respondent. Respondent of course disputes this allegation and

states that there was no qualification to its right of subrogation under the Release of Claim executed by petitioner, the contents

of said deed having expressed all the intents and purposes of the parties.

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

Code, which states:

If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the

injury or loss arising out of the wrong or breach of contract complained of the insurance company shall be

subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If

the amount paid by the insurance company does not fully cover the injury or loss the aggrieved party shall be

entitled to recover the deficiency from the person causing the loss or injury.

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

A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be

preferred to the person who has been subrogated in his place in virtue of the partial payment of the same

credit.

We find petitioners arguments to be untenable and without merit. In the absence of any other evidence to support its allegation

that a gentlemen's agreement existed between it and respondent, not embodied in the Release of Claim, such ease of Claim must

be taken as the best evidence of the intent and purpose of the parties. Thus, the Court of Appeals rightly stated:

Petitioner argues that the release claim it executed subrogating Private respondent to any right of action it had

against San Miguel Corporation did not preclude Manila Mahogany from filing a deficiency claim against the

wrongdoer. Citing Article 2207, New Civil Code, to the effect that if the amount paid by an insurance company

does not fully cover the loss, the aggrieved party shall be entitled to recover the deficiency from the person

causing the loss, petitioner claims a preferred right to retain the amount coming from San Miguel Corporation,

despite the subrogation in favor of Private respondent.

Although petitioners right to file a deficiency claim against San Miguel Corporation is with legal basis, without

prejudice to the insurer's right of subrogation, nevertheless when Manila Mahogany executed another release

claim (Exhibit K) discharging San Miguel Corporation from "all actions, claims, demands and rights of action that

now exist or hereafter arising out of or as a consequence of the accident" after the insurer had paid the

proceeds of the policy- the compromise agreement of P5,000.00 being based on the insurance policy-the

insurer is entitled to recover from the insured the amount of insurance money paid (Metropolitan Casualty

Insurance Company of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and Insolvency

Law with comments and annotations, H.B. Perez 1976, p. 151). Since petitioner by its own acts released San

Miguel Corporation, thereby defeating private respondents, the right of subrogation, the right of action of

petitioner against the insurer was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54 O.G. 391)

Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier paid to petitioner. 1

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

If a property is insured and the owner receives the indemnity from the insurer, it is provided in [Article 2207 of

the New Civil Code] that the insurer is deemed subrogated to the rights of the insured against the wrongdoer

and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled

to recover the deficiency. ... Under this legal provision, the real party in interest with regard to the portion of

the indemnity paid is the insurer and not the insured 3(Emphasis supplied)

The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500.00 as originally asked for,

but P5,000.00, the amount respondent company paid petitioner as insurance, is also in accord with law and jurisprudence. In

disposing of this issue, the Court of Appeals held:

... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation under its clear right to file

a deficiency claim for damages incurred, against the wrongdoer, should the insurance company not fully pay for

the injury caused (Article 2207, New Civil Code). However, when petitioner released San Miguel Corporation

from any liability, petitioner's right to retain the sum of P5,000.00 no longer existed, thereby entitling private

respondent to recover the same. (Emphasis supplied)


As has been observed:

... The right of subrogation can only exist after the insurer has paid the otherwise the insured will be deprived of

his right to full indemnity. If the insurance proceeds are not sufficient to cover the damages suffered by the

insured, then he may sue the party responsible for the damage for the the [sic] remainder. To the extent of the

amount he has already received from the insurer enjoy's [sic] the right of subrogation.

Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after

receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights

against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid

to the latter, unless the release was made with the consent of the insurer. 4 (Emphasis supplied.)

And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still, the respondent Court acted

well within its discretion in awarding P5,000.00, the total amount paid by the insurer. The Court of Appeals rightly reasoned as

follows:

It is to be noted that private respondent, in its companies, prays for the recovery, not of P5,000.00 it had paid

under the insurance policy but P4,500.00 San Miguel Corporation had paid to petitioner. On this score, We

believe the City Court and Court of First Instance erred in not awarding the proper relief. Although private

respondent prays for the reimbursement of P4,500.00 paid by San Miguel Corporation, instead of P5,000.00

paid under the insurance policy, the trial court should have awarded the latter, although not prayed for, under

the general prayer in the complaint "for such further or other relief as may be deemed just or equitable, (Rule

6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim, 50 Phil. 844;

Baguiro vs. Barrios Tupas, 77 Phil 120).

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

petitioner.

SO ORDERED.

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



ManilaTHIRD DIVISIONG.R. No. 81026 April 3, 1990PAN MALAYAN INSURANCE CORPORATION, petitioner, vs.COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.Regulus E. Cabote & Associates for petitioner.Benito P. Fabie for private respondents.

CORTES, J.:

Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the Court of Appeals which upheld an

order of the trial court dismissing for no cause of action PANMALAY's complaint for damages against private respondents Erlinda

Fabie and her driver.

The principal issue presented for resolution before this Court is whether or not the insurer PANMALAY may institute an action to

recover the amount it had paid its assured in settlement of an insurance claim against private respondents as the parties

allegedly responsible for the damage caused to the insured vehicle.

On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private respondents Erlinda

Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431 and

registered in the name of Canlubang Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the

"carelessness, recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the insured car was hit

and suffered damages in the amount of P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore,

was subrogated to the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite

repeated demands, defendants, failed and refused to pay the claim of PANMALAY.

Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion thereto. In compliance

therewith, PANMALAY clarified, among others, that the damage caused to the insured car was settled under the "own damage",

coverage of the insurance policy, and that the driver of the insured car was, at the time of the accident, an authorized driver duly

licensed to drive the vehicle. PANMALAY also submitted a copy of the insurance policy and the Release of Claim and Subrogation

Receipt executed by CANLUBANG in favor of PANMALAY.

On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause of action against

them. They argued that payment under the "own damage" clause of the insurance policy precluded subrogation under Article


2207 of the Civil Code, since indemnification thereunder was made on the assumption that there was no wrongdoer or no third

party at fault.

After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an order dated June 16, 1986

dismissing PANMALAY's complaint for no cause of action. On August 19, 1986, the RTC denied PANMALAY's motion for

reconsideration.

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

PANMALAY filed the present petition for review.

After private respondents filed its comment to the petition, and petitioner filed its reply, the Court considered the issues joined

and the case submitted for decision.

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

PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had indemnified CANLUBANG for the

damage to the insured car resulting from a traffic accident allegedly caused by the negligence of the driver of private respondent,

Erlinda Fabie. PANMALAY contended, therefore, that its cause of action against private respondents was anchored upon Article

2207 of the Civil Code, which reads:

If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or

loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the

rights of the insured against the wrongdoer or the person who has violated the contract. . . .

PANMALAY is correct.

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is destroyed or

damaged through the fault or negligence of a party other than the assured, then the insurer, upon payment to the assured, will

be subrogated to the rights of the assured to recover from the wrongdoer to the extent that the insurer has been obligated to

pay. Payment by the insurer to the assured operates as an equitable assignment to the former of all remedies which the latter

may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent

upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the

insurance claim by the insurer [Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964,

12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323].

There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or third

party liable for the loss or damage, from liability, the insurer's right of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie

& Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern

Railway Co., 229 F 2d 705 (1956)]. Similarly, where the insurer pays the assured the value of the lost goods without notifying the

carrier who has in good faith settled the assured's claim for loss, the settlement is binding on both the assured and the insurer,

and the latter cannot bring an action against the carrier on his right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45

Phil. 488 (1923)]. And where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby effecting

"voluntary payment", the former has no right of subrogation against the third party liable for the loss [Sveriges Angfartygs

Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September 5, 1967, 21 SCRA 12].

None of the exceptions are availing in the present case.

The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally subrogated under Article

2207 of the Civil Code to the rights of CANLUBANG, and therefore did not have any cause of action against private respondents.

On the one hand, the trial court held that payment by PANMALAY of CANLUBANG's claim under the "own damage" clause of the

insurance policy was an admission by the insurer that the damage was caused by the assured and/or its representatives. On the

other hand, the Court of Appeals in applying theejusdem generis rule held that Section III-1 of the policy, which was the basis for

settlement of CANLUBANG's claim, did not cover damage arising from collision or overturning due to the negligence of third

parties as one of the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article 2207 and claim

reimbursement from private respondents as alleged wrongdoers or parties responsible for the damage.

The above conclusion is without merit.

It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy impliesdamage to the

insured car caused by the assured itself, instead of third parties, proceeds from an incorrect comprehension of the phrase "own

damage" as used by the insurer. When PANMALAY utilized the phrase "own damage" — a phrase which, incidentally, is not found


in the insurance policy — to define the basis for its settlement of CANLUBANG's claim under the policy, it simply meant that it

had assumed to reimburse the costs for repairing the damage to the insured vehicle [See PANMALAY's Compliance with

Supplementary Motion for Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage" coverage

under Section III of the insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability" coverage

(liabilities arising from the death of, or bodily injuries suffered by, third parties) and from Section IV-2 which refer to "Property

Damage" coverage (liabilities arising from damage caused by the insured vehicle to the properties of third parties).

Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section III-1 of the policy does not

include to the insured vehicle arising from collision or overturning due to the negligent acts of the third party. Not only does it

stem from an erroneous interpretation of the provisions of the section, but it also violates a fundamental rule on the

interpretation of property insurance contracts.

It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed according to the sense and

meaning of the terms which the parties thereto have used. In the case of property insurance policies, the evident intention of the

contracting parties, i.e., the insurer and the assured, determine the import of the various terms and provisions embodied in the

policy. It is only when the terms of the policy are ambiguous, equivocal or uncertain, such that the parties themselves disagree

about the meaning of particular provisions, that the courts will intervene. In such an event, the policy will be construed by the

courts liberally in favor of the assured and strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co.,

Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No. L-43706,

November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-41014, November 28, 1988, 168

SCRA 1. Also Articles 1370-1378 of the Civil Code].

Section III-1 of the insurance policy which refers to the conditions under which the insurer PANMALAY is liable to indemnify the

assured CANLUBANG against damage to or loss of the insured vehicle, reads as follows:

SECTION III — LOSS OR DAMAGE

1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to the Scheduled

Vehicle and its accessories and spare parts whilst thereon: —

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

consequent upon wear and tear;

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

(c) by malicious act;

(d) whilst in transit (including the processes of loading and unloading) incidental to such transit by road, rail,

inland, waterway, lift or elevator.

x x x x x x x x x

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

supplied].

PANMALAY contends that the coverage of insured risks under the above section, specifically Section III-1(a), is comprehensive

enough to include damage to the insured vehicle arising from collision or overturning due to the fault or negligence of a third

party. CANLUBANG is apparently of the same understanding. Based on a police report wherein the driver of the insured car

reported that after the vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20], CANLUBANG filed

its claim with PANMALAY for indemnification of the damage caused to its car. It then accepted payment from PANMALAY, and

executed a Release of Claim and Subrogation Receipt in favor of latter.

Considering that the very parties to the policy were not shown to be in disagreement regarding the meaning and coverage of

Section III-1, specifically sub-paragraph (a) thereof, it was improper for the appellate court to indulge in contract construction, to

apply the ejusdem generis rule, and to ascribe meaning contrary to the clear intention and understanding of these parties.

It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental collision or overturning"

found in the first paint of sub-paragraph (a) is untenable. Although the terms "accident" or "accidental" as used in insurance

contracts have not acquired a technical meaning, the Court has on several occasions defined these terms to mean that which

takes place "without one's foresight or expectation, an event that proceeds from an unknown cause, or is an unusual effect of a

known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30,

1966, 17 SCRA 559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it


cannot be inferred from jurisprudence that these terms, without qualification, exclude events resulting in damage or loss due to

the fault, recklessness or negligence of third parties. The concept "accident" is not necessarily synonymous with the concept of

"no fault". It may be utilized simply to distinguish intentional or malicious acts from negligent or careless acts of man.

Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured vehicle due to

negligent or careless acts of third parties is not listed under the general and specific exceptions to the coverage of insured risks

which are enumerated in detail in the insurance policy itself [See Annex "A-1" of PANMALAY's Compliance with Supplementary

Motion for Bill of Particulars, supra.]

The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the coverage of Section III-1(a)

of the policy is undeniably more beneficial to CANLUBANG than that insisted upon by respondents herein. By arguing that this

section covers losses or damages due not only to malicious, but also to negligent acts of third parties, PANMALAY in effect

advocates for a more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping with the

rationale behind the various rules on the interpretation of insurance contracts favoring the assured or beneficiary so as to effect

the dominant purpose of indemnity or payment [SeeCalanoc v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable

Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July

16, 1984, 130 SCRA 327].

Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy does not cover damage to

the insured vehicle caused by negligent acts of third parties, and that PANMALAY's settlement of CANLUBANG's claim for

damages allegedly arising from a collision due to private respondents' negligence would amount to unwarranted or "voluntary

payment", dismissal of PANMALAY's complaint against private respondents for no cause of action would still be a grave error of

law.

For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its assured under Article

2207 of the Civil Code, PANMALAY would still have a cause of action against private respondents. In the pertinent case of Sveriges

Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of subrogation

due to "voluntary" payment may nevertheless recover from the third party responsible for the damage to the insured property

under Article 1236 of the Civil Code.

In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee merely prays that it be allowed

to institute an action to recover from third parties who allegedly caused damage to the insured vehicle, the amount which it had

paid its assured under the insurance policy. Having thus shown from the above discussion that PANMALAY has a cause of action

against third parties whose negligence may have caused damage to CANLUBANG's car, the Court holds that there is no legal

obstacle to the filing by PANMALAY of a complaint for damages against private respondents as the third parties allegedly

responsible for the damage. Respondent Court of Appeals therefore committed reversible error in sustaining the lower court's

order which dismissed PANMALAY's complaint against private respondents for no cause of action. Hence, it is now for the trial

court to determine if in fact the damage caused to the insured vehicle was due to the "carelessness, recklessness and

imprudence" of the driver of private respondent Erlinda Fabie.

WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages against private

respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on the merits.

SO ORDERED.

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


THIRD DIVISION[G.R. No. 132607. May 5, 1999]CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner, vs. WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and

ASSURANCE COMPANY, INC., respondents.D E C I S I O N

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a reversal of the decision of

the Court of Appeals[1] which affirmed the decision of the trial court of origin finding the petitioner herein, Cebu Shipyard and

Engineering Works, Inc. (CSEW) negligent and liable for damages to the private respondent, William Lines, Inc., and to the

insurer, Prudential Guarantee Assurance Company, Inc.

The antecedent facts that matter are as follows:

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the business of dry-docking and

repairing of marine vessels while the private respondent, Prudential Guarantee and Assurance, Inc. (Prudential), also a domestic

corporation is in the non-life insurance business.

William Lines, Inc. (plaintiff below) is in the shipping business. It was the owner of M/V Manila City, a luxury passenger-cargo

vessel, which caught fire and sank on February 16, 1991. At the time of the unfortunate occurrence sued upon, subject vessel was

insured with Prudential for P45,000,000.00 pesos for hull and machinery. The Hull Policy included an Additional Perils

(INCHMAREE) Clausecovering loss of or damage to the vessel through the negligence of, among others, ship repairmen. The

Policy provided as follows:

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

xxx

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

xxx

provided such loss or damage has not resulted from want of due diligence by the Assured, the Owners or Managers of the Vessel,

of any of them. Masters, Officers, Crew or Pilots are not to be considered Owners within the meaning of this Clause should they

hold shares in the Vessel.[2]

Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairers Legal Liability Insurance Policy.

The policy was for P10 million only, under the limited liability clause, to wit:

7. Limit of Liability

The limit of liability under this insurance, in respect of any one accident or series of accidents, arising out of one occurrence, shall

be [P10 million], including liability for costs and expense which are either:

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


(b) awarded against the Assured.[3]

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

annual dry-docking and repair.

On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and CSEW to discuss the

work to be undertaken on the M/V Manila City.

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

10. The Contractor shall replace at its own work and at its own cost any work or material which can be shown to be defective and

which is communicated in writing within one (1) month of redelivery of the vessel or if the vessel was not in the Contractors

Possession, the withdrawal of the Contractors workmen, or at its option to pay a sum equal to the cost of such replacement at its

own works. These conditions shall apply to any such replacements.

11. Save as provided in Clause 10, the Contractor shall not be under any liability to the Customer either in contract or for delict or

quasi-delict or otherwise except for negligence and such liability shall itself be subject to the following overriding limitations and

exceptions, namely:

(a) The total liability of the Contractor to the Customer (over and above the liability to replace under Clause 10) or of any sub-

contractor shall be limited in respect of any defect or event (and a series of accidents arising out of the same defect or event shall

constitute one defect or event) to the sum of Pesos Philippine Currency One Million only.

(b) In no circumstance whatsoever shall the liability of the Contractor or any Sub-Contractor include any sum in respect of loss of

profit or loss of use of the vessel or damages consequential on such loss of use.

x x x

20. The insurance on the vessel should be maintained by the customer and/or owner of the vessel during the period the contract

is in effect.[4]

While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW, the master, officers and

crew of M/V Manila City stayed in the vessel, using their cabins as living quarters. Other employees hired by William Lines to do

repairs and maintenance work on the vessel were also present during the dry-docking.

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

eventual total loss.

On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that the fire which broke out

in M/V Manila City was caused by CSEWs negligence and lack of care.

On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the latter had paid William

Lines, Inc. the value of the hull and machinery insurance on the M/V Manila City. As a result of such payment Prudential was

subrogated to the claim of P45 million, representing the value of the said insurance it paid.

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

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

1. To pay unto plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the amount of Forty-five Million (P45 million)

Pesos, with interest at the legal rate until full payment is made;

2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven Hundred Fifteen Thousand (P56,715,000.00)

Pesos representing loss of income of M/V MANILA CITY, with interest at the legal rate until full payment is made;

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million) as payment, in addition to what it received

from the insurance company to fully cover the injury or loss, in order to replace the M/V MANILA CITY, with interest at the legal

rate until full payment is made;

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven Thousand Thirty-nine (P927,039.00) Pesos for

the loss of fuel and lub (sic) oil on board the vessel when she was completely gutted by fire at defendant, Cebu Shipyards quay,

with interest at the legal rate until full payment is made;

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four Thousand Six Hundred Seventy-seven Pesos and

Ninety-five centavos (P3,054,677.95) as payment for the spare parts and materials used in the M/V MANILA CITY during dry-

docking with interest at the legal rate until full payment is made;

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


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

costs of this suit.

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the pendency of the appeal, CSEW

and William Lines presented a Joint Motion for Partial Dismissal with prejudice, on the basis of the amicable settlement inked

between Cebu Shipyard and William Lines only.

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

concerned.

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

WHEREFORE, the judgment of the lower court ordering the defendant, Cebu Shipyard and Engineering Works, Inc. to pay the

plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the sum of P45 Million, with interest at the legal rate until full

payment is made, as contained in the decision of Civil Case No. CEB-9935 is hereby AFFIRMED.

With the denial of its motion for reconsideration by the Court of Appeals Resolution dated February 13, 1998, CSEW found

its way to this court via the present petition, contending that:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT CSEW HAD MANAGEMENT AND

SUPERVISORY CONTROL OF THE M/V MANILA CITY AT THE TIME THE FIRE BROKE OUT.

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

III. THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS

BASED ON FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.

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

PROBATIVE VALUE.

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

AGAINST ITS OWN INSURED.

VI. ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AND THAT CSEW WAS NEGLIGENT IN THE

PERFORMANCE OF ITS OBLIGATIONS UNDER THESHIPREPAIR CONTRACTS, THE COURT OF APPEALS COMMITTED A REVERSIBLE

ERROR IN HOLDING THAT THE CONTRACTUAL PROVISIONS LIMITING CSEWS LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P1

MILLION IS NOT VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE COURT.

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

On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its grave dock. It was then transferred to the

docking quay of CSEW where the remaining repair to be done was the replating of the top of Water Ballast Tank No. 12 (Tank Top

No. 12) which was subcontracted by CSEW to JNB General Services. Tank Top No. 12 was at the rear section of the vessel, on level

with the flooring of the crew cabins located on the vessels second deck.

At around seven o clock in the morning of February 16, 1991, the JNB workers trimmed and cleaned the tank top framing which

involved minor hotworks (welding/cutting works). The said work was completed at about 10:00 a. m. The JNB workers then

proceeded to rig the steel plates, after which they had their lunch break. The rigging was resumed at 1:00 p.m.

While in the process of rigging the second steel plate, the JNB workers noticed smoke coming from the passageway along the

crew cabins. When one of the workers, Mr. Casas, proceeded to the passageway to ascertain the origin of the smoke, he noticed

that smoke was gathering on the ceiling of the passageway but did not see any fire as the crew cabins on either side of the

passageway were locked. He immediately sought out the proprietor of JNB, Mr. Buenavista, and the Safety Officer of CSEW, Mr.

Aves, who sounded the fire alarm. CSEWs fire brigade immediately responded as well as the other fire fighting units in Metro

Cebu. However, there were no WLI representative, officer or crew to guide the firemen inside the vessel.

Despite the combined efforts of the firemen of the Lapulapu City Fire Department, Mandaue Fire Department, Cordova Fire

Department, Emergency Rescue Unit Foundation, and fire brigade of CSEW, the fire was not controlled until 2:00 a.m. of the

following day, February 17, 1991.

On the early morning of February 17, 1991, gusty winds rekindled the flames on the vessel and fire again broke out. Then the

huge amounts of water pumped into the vessel, coupled with the strong current, caused the vessel to tilt until it capsized and

sank


When M/V Manila City capsized, steel and angle bars were noticed to have been newly welded along the port side of the hull of

the vessel, at the level of the crew cabins. William Lines did not previously apply for a permit to do hotworks on the said portion

of the ship as it should have done pursuant to its work order with CSEW.[5]

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

At around eleven o clock in the morning of February 16, 1991, the Chief Mate of M/V Manila City was inspecting the various

works being done by CSEW on the vessel, when he saw that some workers of CSEW were cropping out steel plates on Tank Top

No. 12 using acetylene, oxygen and welding torch. He also observed that the rubber insulation wire coming out of the air-

conditioning unit was already burning, prompting him to scold the workers.

At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank No. 12. The vessels reeferman reported such

occurence to the Chief Mate who immediately assembled the crew members to put out the fire. When it was too hot for them to

stay on board and seeing that the fire cannot be controlled, the vessels crew were forced to withdraw from CSEWs docking quay.

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with Prudential Guarantee, William Lines

filed a claim for constructive total loss, and after a thorough investigation of the surrounding circumstances of the tragedy,

Prudential Guarantee found the said insurance claim to be meritorious and issued a check in favor of William Lines in the amount

of P45 million pesos representing the total value of M/V Manila Citys hull and machinery insurance.[6]

The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages to the respondents, William

Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioners submission that the finding of negligence by the Court

of Appeals is not supported by the evidence on record, and contrary to what the Court of Appeals found, petitioner did not have

management and control over M/V Manila City. Although it was brought to the premises of CSEW for annual repair, William

Lines, Inc. retained control over the vessel as the ship captain remained in command and the ships crew were still present. While

it imposed certain rules and regulations on William Lines, it was in the exercise of due diligence and not an indication of CSEWs

exclusive control over subject vessel. Thus, CSEW maintains that it did not have exclusive control over the M/V Manila City and

the trial court and the Court of Appeals erred in applying the doctrine of res ipsa loquitur.

Time and again, this Court had occasion to reiterate the well-established rule that factual findings by the Court of Appeals

are conclusive on the parties and are not reviewable by this Court. They are entitled to great weight and respect, even finality,

especially when, as in this case, the Court of Appeals affirmed the factual findings arrived at by the trial court. [7] When supported

by sufficient evidence, findings of fact by the Court of Appeals affirming those of the trial court, are not to be disturbed on

appeal. The rationale behind this doctrine is that review of the findings of fact of the Court of Appeals is not a function that the

Supreme Court normally undertakes.[8]

Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which caused the total loss of

subject M/V Manila City was due to the negligence of the employees and workers of CSEW. Both courts found that the M/V

Manila City was under the custody and control of petitioner CSEW, when the ill-fated vessel caught fire. The decisions of both the

lower court and the Court of Appeals set forth clearly the evidence sustaining their finding of actionable negligence on the part of

CSEW. This factual finding is accorded great weight and is conclusive on the parties. The court discerns no basis for disturbing

such finding firmly anchored on enough evidence. As held in the case of Roblett Industrial Construction Corporation vs. Court of

Appeals, in the absence of any showing that the trial court failed to appreciate facts and circumstances of weight and substance

that would have altered its conclusion, no compelling reason exists for the Court to impinge upon matters more appropriately

within its province.[9]

Furthermore, in petitions for review on certiorari, only questions of law may be put into issue. Questions of fact cannot be

entertained. The finding of negligence by the Court of Appeals is a question which this Court cannot look into as it would entail

going into factual matters on which the finding of negligence was based. Such an approach cannot be allowed by this Court in the

absence of clear showing that the case falls under any of the exceptions[10] to the well-established principle.

The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by reason of the negligence

of the workers of CSEW, when the said vessel was under the exclusive custody and control of CSEW is accordingly upheld. Under

the circumstances of the case, the doctrine of res ipsa loquitur applies. For the doctrine of res ipsa loquitur to apply to a given

situation, the following conditions must concur: (1) the accident was of a kind which does not ordinarily occur unless someone is


negligent; and (2) that the instrumentality or agency which caused the injury was under the exclusive control of the person

charged with negligence.

The facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny. First, the fire that

occurred and consumed M/V Manila City would not have happened in the ordinary course of things if reasonable care and

diligence had been exercised. In other words, some negligence must have occurred. Second, the agency charged with negligence,

as found by the trial court and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu Shipyard and

Engineering Works, Inc., which had control over subject vessel when it was docked for annual repairs. So also, as found by the

regional trial court, other responsible causes, including the conduct of the plaintiff, and third persons, are sufficiently eliminated

by the evidence.[11]

What is more, in the present case the trial court found direct evidence to prove that the workers and/or employees of CSEW

were remiss in their duty of exercising due diligence in the care of subject vessel. The direct evidence substantiates the

conclusion that CSEW was really negligent. Thus, even without applying the doctrine of res ipsa loquitur, in light of the direct

evidence on record, the ineluctable conclusion is that the petitioner, Cebu Shipyard and Engineering Works, Inc., was negligent

and consequently liable for damages to the respondent, William Lines, Inc.

Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled on the inadmissibility

of the expert testimonies it (petitioner) introduced on the probable cause and origin of the fire. Petitioner maintains that the

Court of Appeals erred in disregarding the testimonies of the fire experts, Messrs. David Grey and Gregory Michael Southeard,

who testified on the probable origin of the fire in M/V Manila City. Petitioner avers that since the said fire experts were one in

their opinion that the fire did not originate in the area of Tank Top No. 12 where the JNB workers were doing hotworks but on

the crew accommodation cabins on the portside No. 2 deck, the trial court and the Court of Appeals should have given weight to

such finding based on the testimonies of fire experts; petitioner argues.

But courts are not bound by the testimonies of expert witnesses. Although they may have probative value, reception in

evidence of expert testimonies is within the discretion of the court. Section 49, Rule 130 of the Revised Rules of Court, provides:

SEC. 49. Opinion of expert witness. - The opinion of a witness on a matter requiring special knowledge, skill, experience or

training which he is shown to possess, may be received in evidence.

The word may signifies that the use of opinion of an expert witness as evidence is a prerogative of the courts. It is never

mandatory for judges to give substantial weight to expert testimonies. If from the facts and evidence on record, a conclusion is

readily ascertainable, there is no need for the judge to resort to expert opinion evidence. In the case under consideration, the

testimonies of the fire experts were not the only available evidence on the probable cause and origin of the fire. There were

witnesses who were actually on board the vessel when the fire occurred. Between the testimonies of the fire experts who merely

based their findings and opinions on interviews and the testimonies of those present during the fire, the latter are of more

probative value. Verily, the trial court and the Court of Appeals did not err in giving more weight to said testimonies.

On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the rights of William

Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded risk and (2) it is a co-assured under the

Marine Hull Insurance Policy.

It is petitioners submission that the loss of M/V Manila City or damage thereto is expressly excluded from the coverage of

the insurance because the same resulted from want of due diligence by the Assured, Owners or Managers which is not included

in the risks insured against. Again, this theory of petitioner is bereft of any factual or legal basis. It proceeds from a wrong

premise that the fire which gutted subject vessel was caused by the negligence of the employees of William Lines, Inc. To repeat,

the issue of who between the parties was negligent has already been resolved against Cebu Shipyard and Engineering Works, Inc.

Upon proof of payment by Prudential to William Lines, Inc., the former was subrogated to the right of the latter to

indemnification from CSEW. As aptly ruled by the Court of Appeals, the law on the matter is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or

loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the

insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does

not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss

or injury.[12]


Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William Lines, Inc., paid the

latter the total amount covered by its insurance policy, it was subrogated to the right of the latter to recover the insured loss

from the liable party, CSEW.

Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured under the subject

insurance policy. To buttress its stance that it is a co-assured, petitioner placed reliance on Clause 20 of of the Work Order which

states:

20. The insurance on the vessel should be maintained by the customer and/or owner of the vessel during the period the contract

is in effect.[13]

According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume the risk of loss of the vessel while

under drydock or repair and to such extent, it is benefited and effectively constituted as a co-assured under the policy.

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is clear in the sense that it

requires William Lines to maintain insurance on the vessel during the period of dry-docking or repair. Concededly, such a

stipulation works to the benefit of CSEW as the shiprepairer. However, the fact that CSEW benefits from the said stipulation does

not automatically make it as a co-assured of William Lines. The intention of the parties to make each other a co-assured under an

insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any other contract or

agreement because the insurance policy denominates the assured and the beneficiaries of the insurance. The hull and machinery

insurance procured by William Lines, Inc. from Prudential named only William Lines, Inc. as the assured. There was no

manifestation of any intention of William Lines, Inc. to constitute CSEW as a co-assured under subject policy. It is axiomatic that

when the terms of a contract are clear its stipulations control. [14] Thus, when the insurance policy involved named only William

Lines, Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is unfounded.

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

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

xxx

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

As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the policy, it would nullify any

claim of William Lines, Inc. from Prudential for any loss or damage caused by the negligence of CSEW. Certainly, no shipowner

would agree to make a shiprepairer a co-assured under such insurance policy; otherwise, any claim for loss or damage under the

policy would be invalidated. Such result could not have been intended by William Lines, Inc.

Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines, Inc., by stipulation in the

Contract or Work Order its liability is limited to One Million (P1,000,000.00) Pesos only, and Prudential a mere subrogee of

William Lines, Inc., should only be entitled to collect the sum stipulated in the said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as binding as an ordinary

contract, the Court recognizes instances when reliance on such contracts cannot be favored especially where the facts and

circumstances warrant that subject stipulations be disregarded.[16] Thus, in ruling on the validity and applicability of the

stipulation limiting the liability of CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-

a-vis the nature of the provision sought to be enforced should be considered, bearing in mind the principles of equity and fair

play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00) Pesos. To

determine the validity and sustainability of the claim of William Lines, Inc., for a total loss, Prudential conducted its own inquiry.

Upon thorough investigation by its hull surveyor, M/V Manila City was found to be beyond economical salvage and repair. [17] The

evaluation of the average adjuster also reported a constructive total loss. [18] The said claim of William Lines, Inc., was then found

to be valid and compensable such that Prudential paid the latter the total value of its insurance claim. Furthermore, it was

ascertained that the replacement cost of the vessel (the price of a vessel similar to M/V Manila City), amounts to Fifty-five Million

(P55,000,000.00) Pesos.[19]

Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has been sufficiently

proven, it would indeed be unfair and inequitable to limit the liability of petitioner to One Million Pesos only. As aptly held by the

trial court, it is rather unconscionable if not overstrained. To allow CSEW to limit its liability to One Million Pesos notwithstanding


the fact that the total loss suffered by the assured and paid for by Prudential amounted to Forty Five Million (P45,000,000.00)

Pesos would sanction the exercise of a degree of diligence short of what is ordinarily required because, then, it would not be

difficult for petitioner to escape liability by the simple expedient of paying an amount very much lower than the actual damage or

loss suffered by William Lines, Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3, 1997, and Resolution,

dated February 13, 1998, of the Court of Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Romero (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

SECOND DIVISION[G.R. No. 127897. November 15, 2001]DELSAN TRANSPORT LINES, INC., petitioner, vs. THE HON. COURT OF APPEALS and AMERICAN HOME ASSURANCE

CORPORATION, respondents.D E C I S I O N

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] of the Court of Appeals in CA-G.R. CV No. 39836

promulgated on June 17, 1996, reversing the decision of the Regional Trial Court of Makati City, Branch 137, ordering petitioner

to pay private respondent the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos

(P5,096,635.57) and costs and the Resolution[2] dated January 21, 1997 which denied the subsequent motion for reconsideration.

The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with the petitioner,

Delsan Transport Lines, Inc., for a period of one year whereby the said common carrier agreed to transport Caltexs industrial fuel

oil from the Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner took on board its vessel,

MT Maysun, 2,277.314 kiloliters of industrial fuel oil of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City. The

shipment was insured with the private respondent, American Home Assurance Corporation.

On August 14, 1986, MT Maysun set sail from Batangas for Zamboanga City. Unfortunately, the vessel sank in the early

morning of August 16, 1986 near Panay Gulf in the Visayas taking with it the entire cargo of fuel oil.

Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and

Fifty-Seven Centavos (P5,096,635.57) representing the insured value of the lost cargo. Exercising its right of subrogation under

Article 2207 of the New Civil Code, the private respondent demanded of the petitioner the same amount it paid to Caltex.

Due to its failure to collect from the petitioner despite prior demand, private respondent filed a complaint with the Regional

Trial Court of Makati City, Branch 137, for collection of a sum of money.After the trial and upon analyzing the evidence adduced,

the trial court rendered a decision on November 29, 1990 dismissing the complaint against herein petitioner without

pronouncement as to cost. The trial court found that the vessel, MT Maysun, was seaworthy to undertake the voyage as

determined by the Philippine Coast Guard per Survey Certificate Report No. M5-016-MH upon inspection during its annual dry-

docking and that the incident was caused by unexpected inclement weather condition or force majeure, thus exempting the

common carrier (herein petitioner) from liability for the loss of its cargo.[3]


The decision of the trial court, however, was reversed, on appeal, by the Court of Appeals. The appellate court gave

credence to the weather report issued by the Philippine Atmospheric, Geophysical and Astronomical Services Administration

(PAGASA for brevity) which showed that from 2:00 oclock to 8:00 oclock in the morning on August 16, 1986, the wind speed

remained at 10 to 20 knots per hour while the waves measured from .7 to two (2) meters in height only in the vicinity of the

Panay Gulf where the subject vessel sank, in contrast to herein petitioners allegation that the waves were twenty (20) feet

high. In the absence of any explanation as to what may have caused the sinking of the vessel coupled with the finding that the

same was improperly manned, the appellate court ruled that the petitioner is liable on its obligation as common carrier [4] to

herein private respondent insurance company as subrogee of Caltex. The subsequent motion for reconsideration of herein

petitioner was denied by the appellate court.

Petitioner raised the following assignments of error in support of the instant petition,[5] to wit:

I

THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT.

II

THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE LEGAL PRESUMPTION THAT THE VESSEL MT

MAYSUN WAS SEAWORTHY.

III

THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE SUPREME COURT IN THE CASE OF HOME INSURANCE

CORPORATION V. COURT OF APPEALS.

Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance Code of the Philippines, which

states that in every marine insurance upon a ship or freight, or freightage, or upon any thing which is the subject of marine

insurance there is an implied warranty by the shipper that the ship is seaworthy. Consequently, the insurer will not be liable to

the assured for any loss under the policy in case the vessel would later on be found as not seaworthy at the inception of the

insurance. It theorized that when private respondent paid Caltex the value of its lost cargo, the act of the private respondent is

equivalent to a tacit recognition that the ill-fated vessel was seaworthy; otherwise, private respondent was not legally liable to

Caltex due to the latters breach of implied warranty under the marine insurance policy that the vessel was seaworthy.

The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not seaworthy on the ground that

the marine officer who served as the chief mate of the vessel, Francisco Berina, was allegedly not qualified. Under Section 116 of

the Insurance Code of the Philippines, the implied warranty of seaworthiness of the vessel, which the private respondent

admitted as having been fulfilled by its payment of the insurance proceeds to Caltex of its lost cargo, extends to the vessels

complement. Besides, petitioner avers that although Berina had merely a 2nd officers license, he was qualified to act as the vessels

chief officer under Chapter IV(403), Category III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules and Regulations. In fact, all

the crew and officers of MT Maysun were exonerated in the administrative investigation conducted by the Board of Marine

Inquiry after the subject accident.[6]

In any event, petitioner further avers that private respondent failed, for unknown reason, to present in evidence during the

trial of the instant case the subject marine cargo insurance policy it entered into with Caltex. By virtue of the doctrine laid down

in the case of Home Insurance Corporation vs. CA,[7] the failure of the private respondent to present the insurance policy in

evidence is allegedly fatal to its claim inasmuch as there is no way to determine the rights of the parties thereto.

Hence, the legal issues posed before the Court are:

I

Whether or not the payment made by the private respondent to Caltex for the insured value of the lost cargo amounted to an

admission that the vessel was seaworthy, thus precluding any action for recovery against the petitioner.

II

Whether or not the non-presentation of the marine insurance policy bars the complaint for recovery of sum of money for lack of

cause of action.

We rule in the negative on both issues.

The payment made by the private respondent for the insured value of the lost cargo operates as waiver of its (private

respondent) right to enforce the term of the implied warranty against Caltex under the marine insurance policy. However, the

same cannot be validly interpreted as an automatic admission of the vessels seaworthiness by the private respondent as to


foreclose recourse against the petitioner for any liability under its contractual obligation as a common carrier. The fact of

payment grants the private respondent subrogatory right which enables it to exercise legal remedies that would otherwise be

available to Caltex as owner of the lost cargo against the petitioner common carrier. [8] Article 2207 of the New Civil Code provides

that:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or

loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the

insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does

not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss

or injury.

The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which

equity adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay. [9] It is not

dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon

payment by the insurance company of the insurance claim. [10] Consequently, the payment made by the private respondent

(insurer) to Caltex (assured) operates as an equitable assignment to the former of all the remedies which the latter may have

against the petitioner.

From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary

diligence in the vigilance over the goods and for the safety of passengers transported by them, according to all the circumstances

of each case.[11] In the event of loss, destruction or deterioration of the insured goods, common carriers shall be responsible

unless the same is brought about, among others, by flood, storm, earthquake, lightning or other natural disaster or calamity. [12] In

all other cases, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have

acted negligently, unless they prove that they observed extraordinary diligence.[13]

In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex, petitioner attributes the sinking

of MT Maysun to fortuitous event or force majeure. From the testimonies of Jaime Jarabe and Francisco Berina, captain and chief

mate, respectively of the ill-fated vessel, it appears that a sudden and unexpected change of weather condition occurred in the

early morning of August 16, 1986; that at around 3:15 oclock in the morning a squall (unos) carrying strong winds with an

approximate velocity of 30 knots per hour and big waves averaging eighteen (18) to twenty (20) feet high, repeatedly buffeted

MT Maysun causing it to tilt, take in water and eventually sink with its cargo. [14] This tale of strong winds and big waves by the

said officers of the petitioner however, was effectively rebutted and belied by the weather report [15] from the Philippine

Atmospheric, Geophysical and Astronomical Services Administration (PAGASA), the independent government agency charged

with monitoring weather and sea conditions, showing that from 2:00 oclock to 8:00 oclock in the morning on August 16, 1986,

the wind speed remained at ten (10) to twenty (20) knots per hour while the height of the waves ranged from .7 to two

(2) meters in the vicinity of Cuyo East Pass and Panay Gulf where the subject vessel sank. Thus, as the appellate court correctly

ruled, petitioners vessel, MT Maysun, sank with its entire cargo for the reason that it was not seaworthy. There was no squall or

bad weather or extremely poor sea condition in the vicinity when the said vessel sank.

The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe and Francisco Berina, ship captain and

chief mate, respectively, of the said vessel, could not be expected to testify against the interest of their employer, the herein

petitioner common carrier.

Neither may petitioner escape liability by presenting in evidence certificates [16] that tend to show that at the time of dry-

docking and inspection by the Philippine Coast Guard, the vessel MT Maysun, was fit for voyage. These pieces of evidence do not

necessarily take into account the actual condition of the vessel at the time of the commencement of the voyage. As correctly

observed by the Court of appeals:

At the time of dry-docking and inspection, the ship may have appeared fit. The certificates issued, however, do not negate the

presumption of unseaworthiness triggered by an unexplained sinking. Of certificates issued in this regard, authorities are likewise

clear as to their probative value, (thus):

Seaworthiness relates to a vessels actual condition. Neither the granting of classification or the issuance of certificates establishes

seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec. 62)

And also:


Authorities are clear that diligence in securing certificates of seaworthiness does not satisfy the vessel owners obligation. Also

securing the approval of the shipper of the cargo, or his surveyor, of the condition of the vessel or her stowage does not establish

due diligence if the vessel was in fact unseaworthy, for the cargo owner has no obligation in relation to seaworthiness. (Ibid.)[17]

Additionally, the exoneration of MT Maysuns officers and crew by the Board of Marine Inquiry merely concerns their

respective administrative liabilities. It does not in any way operate to absolve the petitioner common carrier from its civil liability

arising from its failure to observe extraordinary diligence in the vigilance over the goods it was transporting and for the negligent

acts or omissions of its employees, the determination of which properly belongs to the courts. [18] In the case at bar, petitioner is

liable for the insured value of the lost cargo of industrial fuel oil belonging to Caltex for its failure to rebut the presumption of

fault or negligence as common carrier[19] occasioned by the unexplained sinking of its vessel, MT Maysun, while in transit.

Anent the second issue, it is our view and so hold that the presentation in evidence of the marine insurance policy is not

indispensable in this case before the insurer may recover from the common carrier the insured value of the lost cargo in the

exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the relationship of herein

private respondent as insurer and Caltex, as the assured shipper of the lost cargo of industrial fuel oil, 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.[20]

The presentation of the insurance policy was necessary in the case of Home Insurance Corporation v. CA[21] (a case cited by

petitioner) because the shipment therein (hydraulic engines) passed through several stages with different parties involved in each

stage. First, from the shipper to the port of departure; second, from the port of departure to the M/S Oriental Statesman; third,

from the M/S Oriental Statesman to the M/S Pacific Conveyor; fourth, from the M/S Pacific Conveyor to the port of arrival; fifth,

from the port of arrival to the arrastre operator; sixth, from the arrastre operator to the hauler, Mabuhay Brokerage Co., Inc.

(private respondent therein); and lastly, from the hauler to the consignee. We emphasized in that case that in the absence of

proof of stipulations to the contrary, the hauler can be liable only for any damage that occurred from the time it received the

cargo until it finally delivered it to the consignee. Ordinarily, it cannot be held responsible for the handling of the cargo before it

actually received it. The insurance contract, which was not presented in evidence in that case would have indicated the scope of

the insurers liability, if any, since no evidence was adduced indicating at what stage in the handling process the damage to the

cargo was sustained.

Hence, our ruling on the presentation of the insurance policy in the said case of Home Insurance Corporation is not

applicable to the case at bar. In contrast, there is no doubt that the cargo of industrial fuel oil belonging to Caltex, in the case at

bar, was lost while on board petitioners vessel, MT Maysun, which sank while in transit in the vicinity of Panay Gulf and Cuyo East

Pass in the early morning of August 16, 1986.

WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the Court of Appeals in CA-G.R. CV No.

39836 is AFFIRMED. Costs against the petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.


THIRD DIVISION

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

FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,

INC.,respondents.

D E C I S I O N

PANGANIBAN, J.:

Basic is the requirement that before suing to recover loss of or damage to transported goods, the plaintiff must give the

carrier notice of the loss or damage, within the period prescribed by the Warsaw Convention and/or the airway bill.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision [2] and the

September 21, 2001 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as follows:

WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The appealed Decision of Branch

149 of the Regional Trial Court of Makati City in Civil Case No. 95-1219,entitled American Home Assurance Co. and PHILAM

Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.), is

hereby AFFIRMEDand REITERATED.

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

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

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

On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA delivered to Burlington Air Express

(BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a shipment of 109 cartons of veterinary biologicals for

delivery to consignee SMITHKLINE and French Overseas Company in Makati City, Metro Manila. The shipment was covered by

Burlington Airway Bill No. 11263825 with the words, REFRIGERATE WHEN NOT IN TRANSIT and PERISHABLE stamp marked on its

face. That same day, Burlington insured the cargoes in the amount of $39,339.00 with American Home Assurance Company


(AHAC). The following day, Burlington turned over the custody of said cargoes to Federal Express which transported the same to

Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT and was

immediately stored at [Cargohaus Inc.s] warehouse. While the second, consisting of 17 cartons, came in two (2) days later, or on

January 31, 1994, in Flight No. 0071-30NRT which was likewise immediately stored at Cargohaus warehouse. Prior to the arrival

of the cargoes, Federal Express informed GETC Cargo International Corporation, the customs broker hired by the consignee to

facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its clients cargoes.

On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the cargoes arrived in Manila, a non-licensed

customs broker who was assigned by GETC to facilitate the release of the subject cargoes, found out, while he was about to cause

the release of the said cargoes, that the same [were] stored only in a room with two (2) air conditioners running, to cool the place

instead of a refrigerator. When he asked an employee of Cargohaus why the cargoes were stored in the cool room only, the latter

told him that the cartons where the vaccines were contained specifically indicated therein that it should not be subjected to hot

or cold temperature. Thereafter, DIONEDA, upon instructions from GETC, did not proceed with the withdrawal of the vaccines

and instead, samples of the same were taken and brought to the Bureau of Animal Industry of the Department of Agriculture in

the Philippines by SMITHKLINE for examination wherein it was discovered that the ELISA reading of vaccinates sera are below the

positive reference serum.

As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the shipment and, declaring

total loss for the unusable shipment, filed a claim with AHAC through its representative in the Philippines, the Philam Insurance

Co., Inc. (PHILAM) which recompensed SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED

THIRTY NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against the [petitioner] imputing

negligence on either or both of them in the handling of the cargo.

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

WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its Co-Defendant Cargohaus] are

directed to pay [respondents], jointly and severally, the following:

1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest from the time of the filing of the

complaint to the time the same is fully paid.

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

3. Costs of suit.

SO ORDERED.

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

Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture (Animal and Plant Health Inspection Service) was

found by the CA to be inadmissible in evidence. Despite this ruling, the appellate court held that the shipping Receipts were a

prima facie proof that the goods had indeed been delivered to the carrier in good condition. We quote from the ruling as follows:

Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to the carrier in good condition

[i.e., the shipping receipts], and that the carrier delivered the goods in a damaged condition, a presumption is raised that the

damage occurred through the fault or negligence of the carrier, and this casts upon the carrier the burden of showing that the

goods were not in good condition when delivered to the carrier, or that the damage was occasioned by some cause excepting the

carrier from absolute liability. This the [petitioner] failed to discharge. x x x.[6]

Found devoid of merit was petitioners claim that respondents had no personality to sue. This argument was supposedly not

raised in the Answer or during trial.

Hence, this Petition.[7]

The Issues

In its Memorandum, petitioner raises the following issues for our consideration:

I.

Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the Honorable Court under Rule

45 of the 1997 Rules of Civil Procedure?

II.


Is the conclusion of the Honorable Court of Appeals petitioners claim that respondents have no personality to sue because the

payment was made by the respondents to Smithkline when the insured under the policy is Burlington Air Express is devoid of

merit correct or not?

III.

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

IV.

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

V.

Is the Honorable Court of Appeals correct in ignoring and disregarding respondents own admission that petitioner is not liable?

and

VI.

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

Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court? (2) Is Federal Express

liable for damage to or loss of the insured goods?

This Courts Ruling

The Petition has merit.

Preliminary Issue:

Propriety of Review

The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question of law cognizable by

the Supreme Court.[9]

In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the conclusions drawn from

such facts. Hence, this case is a proper subject for review by this Court.

Main Issue:

Liability for Damages

Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it -- because the

payment made to Smithkline was erroneous.

Pertinent to this issue is the Certificate of Insurance[10] (Certificate) that both opposing parties cite in support of their

respective positions. They differ only in their interpretation of what their rights are under its terms. The determination of those

rights involves a question of law, not a question of fact. As distinguished from a question of law which exists when the doubt or

difference arises as to what the law is on a certain state of facts -- there is a question of fact when the doubt or difference arises

as to the truth or the falsehood of alleged facts; or when the query necessarily invites calibration of the whole evidence

considering mainly the credibility of witnesses, existence and relevancy of specific surrounding circumstance, their relation to

each other and to the whole and the probabilities of the situation.[11]

Proper Payee

The Certificate specifies that loss of or damage to the insured cargo is payable to order x x x upon surrender of this

Certificate. Such wording conveys the right of collecting on any such damage or loss, as fully as if the property were covered by a

special policy in the name of the holder itself. At the back of the Certificate appears the signature of the representative of

Burlington. This document has thus been duly indorsed in blank and is deemed a bearer instrument.

Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being indemnified for loss

of or damage to the insured shipment, as fully as if the property were covered by a special policy in the name of the holder.

Hence, being the holder of the Certificate and having an insurable interest in the goods, Smithkline was the proper payee of the

insurance proceeds.

Subrogation

Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt [12] in favor of

respondents. The latter were thus authorized to file claims and begin suit against any such carrier, vessel, person, corporation or

government. Undeniably, the consignee had a legal right to receive the goods in the same condition it was delivered for transport

to petitioner. If that right was violated, the consignee would have a cause of action against the person responsible therefor.


Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the insurers entitlement to

subrogation pro tanto -- being of the highest equity -- equips it with a cause of action in case of a contractual breach or

negligence.[13] Further, the insurers subrogatory right to sue for recovery under the bill of lading in case of loss of or damage to

the cargo is jurisprudentially upheld.[14]

In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and purposes, it

stands in the place and in substitution of the consignee. A fortiori,both the insurer and the consignee are bound by the

contractual stipulations under the bill of lading.[15]

Prescription of Claim

From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that respondents claim

and right of action are already barred. The latter, and even the consignee, never filed with the carrier any written notice or

complaint regarding its claim for damage of or loss to the subject cargo within the period required by the Warsaw Convention

and/or in the airway bill. Indeed, this fact has never been denied by respondents and is plainly evident from the records.

Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:

6. No action shall be maintained in the case of damage to or partial loss of the shipment unless a written notice, sufficiently

describing the goods concerned, the approximate date of the damage or loss, and the details of the claim, is presented by shipper

or consignee to an office of Burlington within (14) days from the date the goods are placed at the disposal of the person entitled

to delivery, or in the case of total loss (including non-delivery) unless presented within (120) days from the date of issue of the

[Airway Bill].[16]

Relevantly, petitioners airway bill states:

12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the case:

12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest within fourteen (14)

days from receipt of the goods;

12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the goods;

12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and

12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the issue of the air

waybill.

12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was used, or to the first carrier or

to the last carrier or to the carrier who performed the transportation during which the loss, damage or delay took place.[17]

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

ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without complaint shall be prima facie evidence

that the same have been delivered in good condition and in accordance with the document of transportation.

(2) In case of damage, the person entitled to delivery must complain to the carrier forthwith after the discovery of the damage,

and, at the latest, within 3 days from the date of receipt in the case of baggage and 7 days from the date of receipt in the case of

goods. In case of delay the complaint must be made at the latest within 14 days from the date on which the baggage or goods

have been placed at his disposal.

(3) Every complaint must be made in writing upon the document of transportation or by separate notice in writing dispatched

within the times aforesaid.

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

Condition Precedent

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually constitutes a condition

precedent to the accrual of a right of action against a carrier for loss of or damage to the goods. [19] The shipper or consignee must

allege and prove the fulfillment of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of the

former. The aforementioned requirement is a reasonable condition precedent; it does not constitute a limitation of action.[20]

The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental reasons for

such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that it is being charged with liability

therefor; and (2) to give it an opportunity to examine the nature and extent of the injury. This protects the carrier by affording it

an opportunity to make an investigation of a claim while the matter is fresh and easily investigated so as to safeguard itself from

false and fraudulent claims.[21]


When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a notice of claim for loss of

or damage to goods shipped and the stipulation is not complied with, its enforcement can be prevented and the liability cannot

be imposed on the carrier. To stress, notice is a condition precedent, and the carrier is not liable if notice is not given in accordance

with the stipulation.[22] Failure to comply with such a stipulation bars recovery for the loss or damage suffered.[23]

Being a condition precedent, the notice must precede a suit for enforcement. [24] In the present case, there is neither an

allegation nor a showing of respondents compliance with this requirement within the prescribed period. While respondents may

have had a cause of action then, they cannot now enforce it for their failure to comply with the aforesaid condition precedent.

In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner.

We note that respondents are not without recourse. Cargohaus, Inc. -- petitioners co-defendant in respondents Complaint

below -- has been adjudged by the trial court as liable for,inter alia, actual damages in the amount of the peso equivalent of US

$39,339.[25] This judgment was affirmed by the Court of Appeals and is already final and executory.[26]

WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains to Petitioner Federal

Express Corporation. No pronouncement as to costs.

SO ORDERED.

Corona, and Carpio-Morales, JJ., concur.

Sandoval-Gutierrez, J., on leave.


insurance law 8312015

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