SECOND DIVISION

[G.R. No. 119599. March 20, 1997]

MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON.

COURT
OF
APPEALS
and
TKC
MARKETING
CORPORATION, respondents.
DECISION
ROMERO, J.:

Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in CA-G.R. No. 43023 which affirmed, with slight modification, the decision of
the Regional Trial Court of Cebu, Branch 15.
[1]

Private respondent TKC Marketing Corp. was the owner/consignee of some

3,189.171 metric tons of soya bean meal which was loaded on board the ship MV Al
Kaziemah on or about September 8, 1989 for carriage from the port of Rio del Grande,
Brazil, to the port of Manila. Said cargo was insured against the risk of loss by petitioner
Malayan Insurance Corporation for which it issued two (2) Marine Cargo Policy Nos.
M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting
to P1,195,005.45, both dated September 1989.
While the vessel was docked in Durban, South Africa on September 11, 1989
enroute to Manila, the civil authorities arrested and detained it because of a lawsuit on a
question of ownership and possession. As a result, private respondent notified petitioner
on October 4, 1989 of the arrest of the vessel and made a formal claim for the amount
of US$916,886.66, representing the dollar equivalent on the policies, for non-delivery of
the cargo. Private respondent likewise sought the assistance of petitioner on what to do
with the cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a peril
covered by the policies. Private respondent, accordingly, advised petitioner that it might
tranship the cargo and requested an extension of the insurance coverage until actual
transhipment, which extension was approved upon payment of additional premium. The
insurance coverage was extended under the same terms and conditions embodied in
the original policies while in the process of making arrangements for the transhipment of
the cargo from Durban to Manila, covering the period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for
US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature

which could no longer stand a voyage of twenty days to Manila and another twenty days
for the discharge thereof. On January 5, 1990, private respondent forthwith reduced its
claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate
of P22.0138 per $1.00) representing private respondent's loss after the proceeds of the
sale were deducted from the original claim of $916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by civil authorities on a
question of ownership was an excepted risk under the marine insurance policies. This
prompted private respondent to file a complaint for damages praying that aside from its
claim, it be reimbursed the amount of P128,770.88 as legal expenses and the interest it
paid for the loan it obtained to finance the shipment totalling P942,269.30. In addition,
private respondent asked for moral damages amounting toP200,000.00, exemplary
damages amounting to P200,000.00 and attorney's fees equivalent to 30% of what will
be awarded by the court.
The lower court decided in favor of private respondent and required petitioner to
pay, aside from the insurance claim, consequential and liquidated damages amounting
to P1,024,233.88, exemplary damages amounting to P100,000.00, reimbursement in
the amount equivalent to 10% of whatever is recovered as attorney's fees as well as the
costs of the suit. On private respondent's motion for reconsideration, petitioner was also
required to further pay interest at the rate of 12% per annum on all amounts due and
owing to the private respondent by virtue of the lower court decision counted from the
inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that
with the deletion of Clause 12 of the policies issued to private respondent, the same
became automatically covered under subsection 1.1 of Section 1 of the Institute War
Clauses. The arrests, restraints or detainments contemplated in the former clause were
those effected by political or executive acts. Losses occasioned by riot or ordinary
judicial processes were not covered therein. In other words, arrest, restraint or
detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by
ordinary legal processes. Hence, arrests by civil authorities, such as what happened in
the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or
the F.C. & S. Clause. However, with the deletion of Clause 12 of the Institute Cargo
Clause and the consequent adoption or institution of the Institute War Clauses (Cargo),
the arrest and seizure by judicial processes which were excluded under the former
policy became one of the covered risks.
The appellate court added that the failure to deliver the consigned goods in the port
of destination is a loss compensable, not only under the Institute War Clause but also
under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies,
as read in relation to Section 130 of the Insurance Code and as held in Williams v. Cole.
[2]

Furthermore, the appellate court contended that since the vessel was prevented at
an intermediate port from completing the voyage due to its seizure by civil authorities, a
peril insured against, the liability of petitioner continued until the goods could have been
transhipped. But due to the perishable nature of the goods, it had to be promptly sold to
minimize loss. Accordingly, the sale of the goods being reasonable and justified, it
should not operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance
policies.
2. In ruling that there was constructive total loss over the cargo.
3. In ruling that petitioner was in bad faith in declining private respondent's claim.
4. In giving undue reliance to the doctrine that insurance policies are strictly
construed against the insurer.
In assigning the first error, petitioner submits the following: (a) an arrest by civil
authority is not compensable since the term "arrest" refers to "political or executive acts"
and does not include a loss caused by riot or by ordinary judicial process as in this
case; (b) the deletion of the Free from Capture or Seizure Clause would leave the
assured covered solely for the perils specified by the wording of the policy itself; (c) the
rationale for the exclusion of an arrest pursuant to judicial authorities is to eliminate
collusion between unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any loss which private
respondent may have incurred was in the nature and form of unrecovered acquisition
value brought about by a voluntary sacrifice sale and not by arrest, detention or seizure
of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result
of its honest belief that the arrest of the vessel was not a compensable risk under the
policies issued. In fact, petitioner supported private respondent by accommodating the
latter's request for an extension of the insurance coverage, notwithstanding that it was
then under no legal obligation to do so.
Private respondent, on the other hand, argued that when it appealed its case to the
Court of Appeals, petitioner did not raise as an issue the award of exemplary damages.
It cannot now, for the first time, raise the same before this Court. Likewise, petitioner
cannot submit for the first time on appeal its argument that it was wrong for the Court of
Appeals to have ruled the way it did based on facts that would need inquiry into the

evidence. Even if inquiry into the facts were possible, such was not necessary because
the coverage as ruled upon by the Court of Appeals is evident from the very terms of the
policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should
be strictly interpreted against it because the rule is that any ambiguity is to be
taken contra proferentum. Risk policies should be construed reasonably and in a
manner as to make effective the intentions and expectations of the parties. It added that
the policies clearly stipulate that they cover the risks of non-delivery of an entire
package and that it was petitioner itself that invited and granted the extensions and
collected premiums thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause
of the subject policies in relation to the excluded risks or warranty specifically stated
therein.
By way of a historical background, marine insurance developed as an all-risk
coverage, using the phrase "perils of the sea" to encompass the wide and varied range
of risks that were covered. The subject policies contain the "Perils" clause which is a
standard form in any marine insurance policy. Said clause reads:
[3]

"Touching the adventures which the said MALAYAN INSURANCE CO., are content
to bear, and to take upon them in this voyage; they are of the Seas; Men-of-War, Fire,
Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart,
Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings,
Princess and Peoples, of what Nation, condition, or quality soever, Barratry of the
Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come
to hurt, detriment, or damage of the said goods and merchandise or any part thereof .
AND in case of any loss or misfortune it shall be lawful to the ASSURED, their
factors, servants and assigns, to sue, labour, and travel for, in and about the defence,
safeguards, and recovery of the said goods and merchandises, and ship, & c., or any
part thereof, without prejudice to this INSURANCE; to the charges whereof the said
COMPANY, will contribute according to the rate and quantity of the sum herein
INSURED. AND it is expressly declared and agreed that no acts of the Insurer or
Insured in recovering, saving, or preserving the Property insured shall be considered
as a Waiver, or Acceptance of Abandonment. And it is agreed by the said COMPANY,
that this writing or Policy of INSURANCE shall be of as much Force and Effect as
the surest Writing or Policy of INSURANCE made in LONDON. And so the said
MALAYAN INSURANCE COMPANY, INC., are contented, and do hereby promise
and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his
or their Executors, Administrators, or Assigns, for the true Performance of the

Premises; confessing themselves paid the Consideration due unto them for this
INSURANCE at and after the rate arranged." (Underscoring supplied)
The exception or limitation to the "Perils" clause and the "All other perils" clause in
the subject policies is specifically referred to as Clause 12 called the "Free from Capture
& Seizure Clause" or the F.C. & S. Clause which reads, thus:

"Warranted free of capture, seizure, arrest, restraint or detainment, and the

consequences thereof or of any attempt thereat; also from the consequences of
hostilities and warlike operations, whether there be a declaration of war or not; but
this warranty shall not exclude collision, contact with any fixed or floating object
(other than a mine or torpedo), stranding, heavy weather or fire unless caused directly
(and independently of the nature of the voyage or service which the vessel concerned
or, in the case of a collision, any other vessel involved therein is performing) by a
hostile act by or against a belligerent power and for the purpose of this warranty
'power' includes any authorities maintaining naval, military or air forces in association
with power.
Further warranted free from the consequences of civil war, revolution, insurrection, or
civil strike arising therefrom or piracy.
Should Clause 12 be deleted, the relevant current institute war clauses shall be
deemed to form part of this insurance." (Underscoring supplied)
However, the F. C. & S. Clause was deleted from the policies. Consequently, the
Institute War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of
Section 1, provides:

"1. This insurance covers:

1.1 The risks excluded from the standard form of English Marine Policy by the clause
warranted free of capture, seizure, arrest, restraint or detainment, and the
consequences thereof of hostilities or warlike operations, whether there be a
declaration of war or not; but this warranty shall not exclude collision, contact with
any fixed or floating object (other than a mine or torpedo), stranding, heavy weather
or fire unless caused directly (and independently of the nature on voyage or service
which the vessel concerned or, in the case of a collision any other vessel involved
therein is performing) by a hostile act by or against a belligerent power; and for the
purpose of this warranty 'power' includes any authority maintaining naval, military or
air forces in association with a power. Further warranted free from the consequences

of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or

piracy."
According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of
the Institute War Clauses (Cargo), among others, means that any "capture, arrest,
detention, etc." pertained exclusively to warlike operations if this Court strictly construes
the heading of the said Clauses. However, it also claims that the parties intended to
include arrests, etc. even if it were not the result of hostilities or warlike operations. It
further claims that on the strength of jurisprudence on the matter, the term "arrests"
would only cover those arising from political or executive acts, concluding that whether
private respondent's claim is anchored on subsection 1.1 of Section 1 of the Institute
War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by judicial
authorities is an excluded risk.
[4]

This Court cannot agree with petitioner's assertions, particularly when it alleges that
in the "Perils" Clause, it assumed the risk of arrest caused solely by executive or
political acts of the government of the seizing state and thereby excludes "arrests"
caused by ordinary legal processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses,
however, this Court agrees with the Court of Appeals and the private respondent that
"arrest" caused by ordinary judicial process is deemed included among the covered
risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the
Institute War Clauses provided that "this insurance covers the risks excluded from the
Standard Form of English Marine Policy by the clause 'Warranted free of capture,
seizure, arrest, etc. x x x'" or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by
ordinary judicial process is also a risk excluded from the Standard Form of English
Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial
process is not included in the covered risk simply because the F.C. & S. Clause under
the Institute War Clauses can only be operative in case of hostilities or warlike
operations on account of its heading "Institute War Clauses." This Court agrees with the
Court of Appeals when it held that ". . . Although the F.C. & S. Clause may have
originally been inserted in marine policies to protect against risks of war, (see generally
G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its
interpretation in recent years to include seizure or detention by civil authorities seems
consistent with the general purposes of the clause, x x x" In fact, petitioner itself
averred that subsection 1.1 of Section 1 of the Institute War Clauses included "arrest"
even if it were not a result of hostilities or warlike operations. In this regard, since what
was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary
judicial process, logically, such "arrest" would now become a covered risk under
[5]

[6]

subsection 1.1 of Section 1 of the Institute War Clauses, regardless of whether or not
said "arrest" by civil authorities occurred in a state of war.
Petitioner itself seems to be confused about the application of the F.C. & S. Clause
as well as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It
stated that "the F.C. & S. Clause was "originally incorporated in insurance policies
to eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause
applies even if there be no war or warlike operations x x x" In the same vein, it
contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo)
"pertained exclusively to warlike operations" and yet it also stated that "the deletion of
the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result
of hostilities or warlike operations."
[7]

[8]

This Court cannot help the impression that petitioner is overly straining its
interpretation of the provisions of the policy in order to avoid being liable for private
respondent's claim.
This Court finds it pointless for petitioner to maintain its position that it only insures
risks of "arrest" occasioned by executive or political acts of government which is
interpreted as not referring to those caused by ordinary legal processes as contained in
the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest
occasioned by executive or political acts of the government and naturally, also those
caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of
Section 1 of the Institute War Clauses which now includes in the coverage risks of arrest
due to executive or political acts of a government but then still excludes "arrests"
occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said
Clauses should also have included "arrests" previously excluded from the coverage of
the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and forced, as to
lead to an absurd conclusion or to render the policy nonsensical, should, by all means,
be avoided. Likewise, it must be borne in mind that such contracts are invariably
prepared by the companies and must be accepted by the insured in the form in which
they are written. Any construction of a marine policy rendering it void should be
avoided. Such policies will, therefore, be construed strictly against the company in
order to avoid a forfeiture, unless no other result is possible from the language used.
[9]

[10]

[11]

[12]

If a marine insurance company desires to limit or restrict the operation of the

general provisions of its contract by special proviso, exception, or exemption, it should
express such limitation in clear and unmistakable language. Obviously, the deletion of
the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned
[13]

by ordinary judicial process was expressly indicated as an exception in the subject

policies, there would have been no controversy with respect to the interpretation of the
subject clauses.
Be that as it may, exceptions to the general coverage are construed most strongly
against the company. Even an express exception in a policy is to be construed against
the underwriters by whom the policy is framed, and for whose benefit the exception is
introduced.
[14]

[15]

An insurance contract should be so interpreted as to carry out the purpose for which
the parties entered into the contract which is, to insure against risks of loss or damage
to the goods. Such interpretation should result from the natural and reasonable meaning
of language in the policy. Where restrictive provisions are open to two interpretations,
that which is most favorable to the insured is adopted.
[16]

[17]

Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a contract
of adhesion, par excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor of the insured and strictly
against the insurer. Limitations of liability should be regarded with extreme jealousy and
must be construed in such a way as to preclude the insurer from noncompliance with its
obligations.
[18]

[19]

In view of the foregoing, this Court sees no need to discuss the other issues
presented.
WHEREFORE, the petition for review is DENIED and the decision of the Court of
Appeals is AFFIRMED.
SO ORDERED.
Regalado, (Chairman), Puno, Mendoza, and Torres, Jr., JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 13983

September 1, 1919

LA RAZON SOCIAL "GO TIAOCO Y HERMANOS," plaintiff-appellant,

vs.
UNION INSURANCE SOCIETY OF CANTON, LTD., defendant-appellee.

P. E. del Rosario and W. F. Mueller for appellant.

Crossfield and O'Brien for appellee.
STREET, J.:
This is an action on a policy of marine insurance issued by the Union Insurance Society of Canton,
Ltd., upon a cargo of rice belonging to the plaintiffs, Go Tiaoco Brothers, which was transported in
the early days of May, 1915, on the steamship Hondagua from the port of Saigon to Cebu. On
discharging the rice from one of the compartments in the after hold, upon arrival at Cebu, it was
discovered that one thousand four hundred seventy-three sacks and been damages by sea water.
The loss so resulting to the owners of rice, after proper deduction had been made for the portion
saved, was three thousand eight hundred seventy five pesos and twenty-five centavos (P3,875.25).
The trial court found that the inflow of the sea water during the voyage was due to a defect in one of
the drain pipes of the ship and concluded that the loss was not covered by the policy of insurance.
Judgment was accordingly entered in favor of the defendant and the plaintiffs appealed.
The facts with reference to the manner in which the sea water effected entrance into the hold may
be summarized as follows, substantially in accordance with the findings of the trial court:
The drain pipe which served as a discharge from the water closet passed down through the
compartment where the rice in question was stowed and thence out to sea through the wall of the
compartment, which was a part of the wall of the ship. The joint or elbow where the pipe changed its
direction was of cast iron; and in course of time it had become corroded and abraded until a
longitudinal opening had appeared in the pipe about one inch in length. This hole had been in
existence before the voyage was begun, and an attempt had been made to repair it by filling with
cement and bolting over it a strip of iron. The effect of loading the boat was to submerge the vent, or
orifice, of the pipe until it was about 18 inches or 2 feet below the level of the sea. As a consequence
the sea water rose in the pipe. Navigation under these conditions resulted in the washing out of the
cement-filling from the action of the sea water, thus permitting the continued flow of the salt water
into the compartment of rice.
The court found in effect that the opening above described had resulted in course of time from
ordinary wear and tear and not from the straining of the ship in rough weather on that voyage. The
court also found that the repairs that had been made on the pipe were slovenly and defective and
that, by reason of the condition of this pipe, the ship was not properly equipped to receive the rice at
the time the voyage was begun. For this reason the court held that the ship was unseaworthy.
The policy of insurance was signed upon a form long in use among companies engaged in maritime
insurance. It purports to insure the cargo from the following among other risks: "Perils . . . of the
seas, men of war, fire, enemies, pirates, rovers, thieves, jettisons, . . . barratry of the master and
mariners, and of all other perils, losses, and misfortunes that have or shall come to the hurt,
detriment, or damage of the said goods and merchandise or any part thereof."
The question whether the insurer is liable on this policy for the loss caused in the manner above
stated presents two phases which are in a manner involved with each other. One has reference to
the meaning of the expression "perils of the seas and all other perils, losses, and misfortunes," as
used in the policy; the other has reference to the implied warranty, on the part of the insured, as to
the seaworthiness of the ship.

The meaning of the expression "perils . . . of the seas . . . and all other perils, losses, and
misfortunes," used in describing the risks covered by policies of marine insurance, has been the
subject of frequent discussion; and certain propositions relative thereto are now so generally
accepted as to be considered definitely settled.
In the first place it is determined that the words "all other perils, losses, and misfortunes" are to be
interpreted as covering risks which are of like kind (ejusdem generis) with the particular risks which
are enumerated in the preceding part of the same clause of the contract. "According to the ordinary
rules of construction," said Lord Macnaghten in Thames and Mersey Marine Insurance
Co. vs. Hamilton, Fraser & Co. ([1887]), 12 A. C., 484, 501), "these words must be interpreted with
reference to the words which immediately precede them. They were no doubt inserted in order to
prevent disputes founded on nice distinctions. Their office is to cover in terms whatever may be
within the spirit of the cases previously enumerated, and so they have a greater or less effect as a
narrower or broader view is taken of those cases. For example, if the expression 'perils of the seas'
is given its widest sense the general words have little or no effect as applied to that case. If no the
other hand that expression is to receive a limited construction, as apparently it did in
Cullen vs. Butler (5 M. & S., 461), and loss by perils of the seas is to be confined to loss ex marinae
tempestatis discrimine, the general words become most important. But still, ever since the case of
Cullen vs. Butler, when they first became the subject of judicial construction, they have always been
held or assumed to be restricted to cases 'akin to' or resembling' or 'of the same kind as' those
specially mentioned. I see no reason for departing from this settled rule. In marine insurance it is
above all things necessary to abide by settled rules and to avoid anything like novel refinements or a
new departure."
It must be considered to be settled, furthermore, that a loss which, in the ordinary course of events,
results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship,
or from the negligent failure of the ship's owner to provide the vessel with proper equipment to
convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to
what has been aptly called the "peril of the ship." The insurer undertakes to insure against perils of
the sea and similar perils, not against perils of the ship. As was well said by Lord Herschell in
Wilson, Sons & Co. vs. Owners of Cargo per the Xantho ([1887], 12 A. C., 503,509), there must, in
order to make the insurer liable, be "some casualty, something which could not be foreseen as one
of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity
against accidents which may happen, not against events which must happen."
In the present case the entrance of the sea water into the ship's hold through the defective pipe
already described was not due to any accident which happened during the voyage, but to the failure
of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss
was therefore more analogous to that which directly results from simple unseaworthiness than to
that which results from perils of the sea.
The first of the two decisions of the House of Lords from which we have quoted (Thames and
Mersey Marine Insurance Co. vs. Hamilton, Fraser & Co. [1887], 12 A. C., 484) arose upon the
following state of facts: In March, 1884, the Inchmaree was lying at anchor off Diamond Island and
was about to start upon her voyage. To this end it became necessary to fill up her boilers. There was
a donkey-engine with a donkey-pump on board, and the donkey-engine was set to pump up water
from the sea into the boilers. Those in charge of the operation did not take the precaution of making
sure that the valve of the aperture leading into one of the boilers was open. This valve happened to
be closed. The result was that the water being unable to make its way into the boiler was forced

back and split the air-chamber and so disabled the pump. It was held that whether the injury
occurred through negligence or accidentally without negligence, it was not covered by the policy,
since the loss did not fall either under the words "perils of the seas" or under the more general words
"all other perils, losses, and misfortunes." Lord Bramwell, in the course of his opinion quoted with
approbation as definition given by Lopes L.J. in Pandorf vs. Hamilton (16 Q. B. D., 629), which is as
follows: In a sea-worthy ship damage to goods caused by the action of the sea during transit not
attributable to the fault of anybody, is a damage from a peril of the sea.
The second of the decision from the House of Lords from which we have quoted (Wilson, Son &
Co. vs. owners of Cargo per the Xantho [1887], 12 A. C., 503) arose upon the following facts: The
owners of certain cargo embarked the same upon the steamship Xantho. A collision took place in a
fog between this vessel and another ship, Valuta. An action was thereupon instituted by the owners
of the cargo against the owners of the Xantho. It was held that if the collision occurred without fault
on the part of the carrying ship, the owners were not liable for the value of the cargo lost by such
collision.
Still another case was decided in the House of Lords upon the same date as the preceding two,
which is equally instructive as the others upon the question now under consideration. We refer to
Hamilton, Fraser & Co. vs.Pandorf & Co. ([1887], 12 A. C., 518), where it appeared that rice was
shipped under a charter party and bills of lading which expected "dangers and accident of the sea."
During the voyage rats gnawed a hole in a pipe on board the ship, whereby sea water effected an
entrance into the ship's hold and damaged the rice. It appeared that there was no neglect or default
on the part of the shipowners or their servants in the matter of attending to the cargo. It was held that
this loss resulted from an accident or peril of the sea and that the shipowners were not responsible.
Said Bramwell: "No question of negligence exists in this case. The damage was caused by the sea
in the course of navigation with no default in any one. I am, therefore, of opinion that the damage
was caused by peril of the sea within the meaning of the bill of lading." The point which discriminates
this decision from that now before us is that in the present case the negligence of the shipowners
must be accepted as established. Undoubtedly, if in Hamilton, Fraser & Co. vs. Pandorf & Co.
[1887], 12 A. C., 518), it had appeared that this hold had been gnawed by the rats prior to this
voyage and the owners, after having their attention directed to it, had failed to make adequate
repairs, the ship would have been liable.
The three decisions in the House of Lords above referred to contain elaborate discussions
concerning the liability of shipowners and insurers, respectively, for damage happening to cargo in
the course of a sea voyage; and it would be presumptuous for us to undertake to add to what has
been there said by the learned judges of that high court. Suffice it to say that upon the authority of
those cases there is no room to doubt the liability of the shipowner for such a loss as occurred in this
case. By parity of reasoning the insurer is not liable; for, generally speaking, the shipowner excepts
the perils of the sea from his engagement under the bill of lading, while this is the very peril against
which the insurer intends to give protection. As applied to the present case it results that the owners
of the damages rice must look to the shipowner for redress and not to the insurer.
The same conclusion must be reached if the question be discussed with reference to the
seaworthiness of the ship. It is universally accepted that in every contract of insurance upon
anything which is the subject of marine insurance, a warranty is implied that the ship shall be
seaworthy at the time of the inception of the voyage. This rule is accepted in our own Insurance Law
(Act No. 2427, sec. 106). It is also well settled that a ship which is seaworthy for the purpose of
insurance upon the ship may yet be unseaworthy for the purpose of insurance upon the cargo (Act

No. 2427, sec. 106). In Steel vs. State Line Steamship Co. ([1877], L. R. 3 A. C., 72), a cargo of
wheat was laden upon a ship which had a port-hole insecurely fastened at the time of the lading.
This port-hole was about one foot above the water line; and in the course of the voyage sea water
entered the compartment where the wheat was stores and damaged the cargo. It was held that the
ship was unseaworthy with reference to the cargo in question. In Gilroy, Sons & Co. vs. Price & Co.
([1893], 18 A. C., 56), a cargo of jute was shipped. During the voyage the vessel encountered stormy
weather, as a consequence of which the cargo shifted its position and broke a pipe leading down
through the hold from the water closet, with result that water entered the vessel and the jute was
damaged. It was found that the cargo was improperly stowed and that the owners of the ship were
chargeable with negligence for failure to protect the pipe by putting a case over it. It was accordingly
held that the ship was unseaworthy.
From what has been said it follows that the trial court committed no error in absolving the defendant
from the complaint. The judgment must therefore be affirmed, and it is so ordered, with costs.
Arellano, C.J., Johnson, Araullo, Malcolm, Avacena and Moir, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 76145 June 30, 1987
CATHAY INSURANCE CO., petitioner,
vs.
HON. COURT OF APPEALS, and REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.

PARAS, J.:
This petition seeks the review of the decision of the Court of Appeals 1 in CA-G.R. CV No. 06559 affirming the
decision of the Regional Trial Court (RTC), 2 National Capital Region (NCR) Manila, Branch 38 and the Resolution of
the said appellate court denying petitioner's motion for reconsideration.
Originally, this was a complaint filed by private respondent corporation against petitioner (then
defendant) company seeking collection of the sum of P868,339.15 representing private respondent's
losses and damages incurred in a shipment of seamless steel pipes under an insurance contract in
favor of the said private respondent as the insured, consignee or importer of aforesaid merchandise
while in transit from Japan to the Philippines on board vessel SS "Eastern Mariner." The total value
of the shipment was P2,894,463.83 at the prevailing rate of P7.95 to a dollar in June and July 1984,
when the shipment was made.
The trial court decided in favor of private respondent corporation by ordering petitioner to pay it the
sum of P866,339.15 as its recoverable insured loss equivalent to 30% of the value of the seamless
steel pipes; ordering petitioner to pay private respondent interest on the aforecited amount at the

rate of 34% or double the ceiling prescribed by the Monetary Board per annum from February 3,
1982 or 90 days from private respondent's submission of proof of loss to petitioner until paid as
provided in the settlement of claim provision of the policy; and ordering petitioner to pay private
respondent certain amounts for marine surveyor's fee, attorney's fees and costs of the suit.
Respondent in its comment on the petition, contends that:
1. Coverage of private respondent's loss under the insurance policy issued by petitioner is
unmistakable.
2. Alleged contractual limitations contained in insurance policies are regarded with extreme caution
by courts and are to be strictly construed against the insurer; obscure phrases and exceptions
should not be allowed to defeat the very purpose for which the policy was procured.
3. Rust is not an inherent vice of the seamless steel pipes without interference of external factors.
4. No matter how petitioner might want it otherwise, the 15-day clause of the policy had been
foreclosed in the pre-trial order and it was not even raised in petitioner's answer to private
respondent's complaint.
5. The decision was correct in not holding that the heavy rusting of the seamless steel pipes did not
occur during the voyage of 7 days from July 1 to July 7, 1981.
6. The alleged lack of supposed bad order survey from the arrastre capitalized on by petitioner was
more than clarified by no less than 2 witnesses.
7. The placing of notation "rusty" in the way bills is not only private respondent's right but a natural
and spontaneous reaction of whoever received the seamless steel pipes in a rusty condition at
private respondent's bodega.
8. The Court of Appeals did not engage in any guesswork or speculation in concluding a loss
allowance of 30% in the amount of P868,339.15.
9. The rate of 34% per annum double the ceiling prescribed by the Monetary Board is the rate of
interest fixed by the Insurance Policy itself and the Insurance Code.
The petitioner however maintains that:
(1) Private respondent does not dispute the fact that, contrary to the finding of the respondent Court
(the petitioner has failed "to present any evidence of any viable exeption to the application of the
policy") there is in fact an express exeption to the application of the policy.
(2) As adverted to in the Petition for Review, private respondent has admitted that the question
shipment in not covered bya " square provision of the contract," but private respondent claims
implied coverage from the phrase " perils of the sea" mentioned in the opening sentenced of the
policy.
(3) The insistence of private respondent that rusting is a peril of the sea is erroneous.

(4) Private respondent inaccurately invokes the rule of strict construction against insurer under the
guise of construction in order to impart a non-existing ambiguity or doubt into the policy so as to
resolve it against the insurer.
(5) Private respondent while impliedly admitting that a loss occasioned by an inherent defect or vice
in the insured article is not within the terms of the policy, erroneously insists that rusting is not an
inherent vice or in the nature of steel pipes.
(6) Rusting is not a risk insured against, since a risk to be insured against should be a casualty or
some casualty, something which could not be foreseen as one of the necessary incidents of
adventure.
(7) A fact capable of unquestionable demonstration or of public knowledge needs no evidence. This
fact of unquestionable demonstration or of public knowledge is that heavy rusting of steel or iron
pipes cannot occur within a period of a seven (7) day voyage. Besides, petitioner had introduced the
clear cargo receipts or tally sheets indicating that there was no damage on the steel pipes during the
voyage.
(8) The evidence of private respondent betrays the fact that the account of P868,339.15 awarded by
the respondent Court is founded on speculation, surmises or conjectures and the amount of less has
not been proven by competent, satisfactory and clear evidence.
We find no merit in this petition.
There is no question that the rusting of steel pipes in the course of a voyage is a "peril of the sea" in
view of the toll on the cargo of wind, water, and salt conditions. At any rate if the insurer cannot be
held accountable therefor, We would fail to observe a cardinal rule in the interpretation of contracts,
namely, that any ambiguity therein should be construed against the maker/issuer/drafter thereof,
namely, the insurer. Besides the precise purpose of insuring cargo during a voyage would be
rendered fruitless. Be it noted that any attack of the 15-day clause in the policy was foreclosed right
in the pre-trial conference.
Finally, it is a cardinal rule that save for certain exceptions, findings of facts of the appellate tribunal
are binding on Us. Not one of said exceptions can apply to this case.
WHEREFORE, this petition is hereby DENIED, and the assailed decision of the Court of Appeals is
hereby AFFIRMED.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., and Cortes, JJ., concur.
Padilla and Bidin, JJ., took no part

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.
DECISION
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 2 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]
nd

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 illfated 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.

[G.R. No. 116940. June 11, 1997]

THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,

INC., petitioner, vs. COURT OF APPEALS and FELMAN
SHIPPING LINES, respondents.
DECISION

BELLOSILLO, J.:

This case deals with the liability, if any, of a shipowner for loss of cargo
due to its failure to observe the extraordinary diligence required by Art. 1733
of the Civil Code as well as the right of the insurer to be subrogated to the
rights of the insured upon payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board MV
Asilda, a vessel owned and operated by respondent Felman Shipping Lines
(FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles to be
transported from Zamboanga City to
Cebu City for consignee CocaCola Bottlers Philippines, Inc., Cebu. The shipment was insured with
petitioner Philippine American General Insurance Co., Inc. (PHILAMGEN for
brevity), under Marine Open Policy No. 100367-PAG.
[1]

MV Asilda left the port of Zamboanga in fine weather at eight oclock in

the evening of the same day. At around eight forty-five the following morning,
7 July 1983, the vessel sank in the waters of Zamboanga del Norte bringing
down her entire cargo with her including the subject 7,500 cases of 1-liter
Coca-Cola softdrink bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu
plant, filed a claim with respondent FELMAN for recovery of damages it
sustained as a result of the loss of its softdrink bottles that sank with MV
Asilda. Respondent denied the claim thus prompting the consignee to file an
insurance claim with PHILAMGEN which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse against
respondent
FELMAN
which
disclaimed
any
liability
for
the
loss. Consequently, on 29 November 1983 PHILAMGEN sued the shipowner
for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total loss of MV
Asilda and its cargo were due to the vessels unseaworthiness as she was
put
to
sea
in
an
unstable
condition. It
further
alleged
that the vessel was improperly manned and that its officers were grossly
negligent in failing to take appropriate measures to proceed to a nearby port
or beach after the vessel started to list.

On 15 February 1985 FELMAN filed a motion to dismiss based on the

affirmative defense that no right of subrogation in favor of PHILAMGEN was
transmitted by the shipper, and that, in any event, FELMAN had abandoned
all its rights, interests and ownership over MV Asilda together with her
freight and appurtenances for the purpose of limiting and extinguishing its
liability under Art. 587 of the Code of Commerce.
[2]

On 17 February 1986 the trial court dismissed the complaint of

PHILAMGEN. On appeal the Court of Appeals set aside the dismissal and
remanded the case to the lower court for trial on the merits. FELMAN filed a
petition for certiorari with this Court but it was subsequently denied on 13
February 1989.
On 28 February 1992 the trial court rendered judgment in favor of
FELMAN. It ruled that MV Asilda was seaworthy when it left the port of
Zamboanga as confirmed by certificates issued by the Philippine Coast Guard
and the shipowners surveyor attesting to its seaworthiness. Thus the loss of
the vessel and its entire shipment could only be attributed to either a fortuitous
event, in which case, no liability should attach unless there was a stipulation
to the contrary, or to the negligence of the captain and his crew, in which case,
Art. 587 of the Code of Commerce should apply.
[3]

The lower court further ruled that assuming MV Asilda was unseaworthy,
still PHILAMGEN could not recover from FELMAN since the assured (CocaCola Bottlers Philippines, Inc.) had breached its implied warranty on the
vessels seaworthiness. Resultantly, the payment made by PHILAMGEN to
the assured was an undue, wrong and mistaken payment. Since it was not
legally owing, it did not give PHILAMGEN the right of subrogation so as to
permit it to bring an action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of
Appeals. On 29 August 1994 respondent appellate court rendered judgment
finding MV Asilda unseaworthy for being top- heavy as 2,500 cases of
Coca-Cola softdrink bottles were improperly stowed on deck. In other words,
while the vessel possessed the necessary Coast Guard certification indicating
its seaworthiness with respect to the structure of the ship itself, it was not
seaworthy with respect to the cargo. Nonetheless, the appellate court denied
the claim of PHILAMGEN on the ground that the assureds implied warranty of
seaworthiness was not complied with. Perfunctorily, PHILAMGEN was not

properly subrogated to the rights and interests of the shipper. Furthermore,

respondent court held that the filing of notice of abandonment had absolved
the shipowner/agent from liability under the limited liability rule.
The issues for resolution in this petition are: (a) whether MV Asilda was
seaworthy when it left the port of Zamboanga; (b) whether the limited liability
under Art. 587 of the Code of Commerce should apply; and, (c) whether
PHILAMGEN was properly subrogated to the rights and legal actions which
the shipper had against FELMAN, the shipowner.
MV Asilda was unseaworthy when it left the port of Zamboanga. In a
joint statement, the captain as well as the chief mate of the vessel confirmed
that the weather was fine when they left the port of Zamboanga. According to
them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink
bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an
undetermined quantity of empty boxes for fresh eggs. They loaded the empty
boxes for eggs and about 500 cases of Coca-Cola bottles on deck. The ship
captain stated that around four oclock in the morning of 7 July 1983 he was
awakened by the officer on duty to inform him that the vessel had hit a floating
log. At that time he noticed that the weather had deteriorated with strong
southeast winds inducing big waves. After thirty minutes he observed that the
vessel was listing slightly to starboard and would not correct itself despite the
heavy rolling and pitching. He then ordered his crew to shift the cargo from
starboard to portside until the vessel was balanced. At about seven oclock in
the morning, the master of the vessel stopped the engine because the vessel
was listing dangerously to portside. He ordered his crew to shift the cargo
back to starboard. The shifting of cargo took about an hour afterwhich he
rang the engine room to resume full speed.
[4]

At around eight forty-five, the vessel suddenly listed to portside and before
the captain could decide on his next move, some of the
cargo on deck were thrown overboard and seawater entered the
engine room and cargo holds of the vessel. At that instance, the master of the
vessel ordered his crew to abandon ship. Shortly thereafter, MV
Asilda capsized and sank. He ascribed the sinking to the entry of
seawater through a hole in the hull caused by the vessels collision with a
partially submerged log.
[5]

The Elite Adjusters, Inc., submitted a report regarding the sinking of MV

Asilda. The report, which was adopted by the Court of Appeals, reads We found in the course of our investigation that a reasonable explanation for the series
of lists experienced by the vessel that eventually led to her capsizing and sinking, was
that the vessel was top-heavy which is to say that while the vessel may not have been
overloaded, yet the distribution or stowage of the cargo on board was done in such a
manner that the vessel was in top-heavy condition at the time of her departure and
which condition rendered her unstable and unseaworthy for that particular voyage.
In this connection, we wish to call attention to the fact that this vessel was designed as
a fishing vessel x x x x and it was not designed to carry a substantial amount or
quantity of cargo on deck. Therefore, we believe strongly that had her cargo been
confined to those that could have been accommodated under deck, her stability would
not have been affected and the vessel would not have been in any danger of capsizing,
even given the prevailing weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy cargo on its deck, the
vessel was rendered unseaworthy for the purpose of carrying the type of cargo
because the weight of the deck cargo so decreased the vessels metacentric height as
to cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered big waves, it must be
pointed out that ships are precisely designed to be able to navigate safely even during
heavy weather and frequently we hear of ships safely and successfully weathering
encounters with typhoons and although they may sustain some amount of damage, the
sinking of ship during heavy weather is not a frequent occurrence and is not likely to
occur unless they are inherently unstable and unseaworthy x x x x
We believe, therefore, and so hold that the proximate cause of the sinking of
the M/V Asilda was her condition of unseaworthiness arising from her having
been top-heavy when she departed from the Port of Zamboanga. Her having
capsized and eventually sunk was bound to happen and was therefore in the category
of an inevitable occurrence (underscoring supplied).
[6]

We subscribe to the findings of the Elite Adjusters, Inc., and the Court of
Appeals that the proximate cause of the sinking of MV Asilda was its being
top-heavy. Contrary to the ship captains allegations, evidence shows that
approximately 2,500 cases of softdrink bottles were stowed on deck. Several

days after MV Asilda sank, an estimated 2,500 empty Coca-Cola plastic

cases were recovered near the vicinity of the sinking. Considering that the
ships hatches were properly secured, the empty Coca-Cola cases recovered
could have come only from the vessels deck cargo. It is settled that carrying
a deck cargo raises the presumption of unseaworthiness unless it can be
shown that the deck cargo will not interfere with the proper management of
the ship. However, in this case it was established that MV Asilda was not
designed to carry substantial amount of cargo on deck. The inordinate
loading of cargo deck resulted in the decrease of the vessels metacentric
height thus making it unstable. The strong winds and waves encountered by
the vessel are but the ordinary vicissitudes of a sea voyage and as such
merely contributed to its already unstable and unseaworthy condition.
[7]

On the second issue, Art. 587 of the Code of Commerce is not applicable
to the case at bar. Simply put, the ship agent is liable for the negligent acts of
the captain in the care of goods loaded on the vessel. This liability however
can be limited through abandonment of the vessel, its equipment and
freightage as provided in Art. 587. Nonetheless, there are exceptional
circumstances wherein the ship agent could still be held answerable despite
the abandonment, as where the loss or injury was due to the fault of the
shipowner and the captain. The international rule is to the effect that the right
of abandonment of vessels, as a legal limitation of a shipowners liability, does
not apply to cases where the injury or average was occasioned by the
shipowners own fault. It must be stressed at this point that Art. 587 speaks
only of situations where the fault or negligence is committed solely by the
captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply,
and such situation will be covered by the provisions of the Civil Code on
common carrier.
[8]

[9]

[10]

[11]

It was already established at the outset that the sinking of MV

Asilda was due to its unseaworthiness even at the time of its departure from
the port of Zamboanga. It was top-heavy as an excessive amount of cargo
was loaded on deck. Closer supervision on the part of the shipowner could
have prevented this fatal miscalculation. As such, FELMAN was equally
negligent. It cannot therefore escape liability through the expedient of filing a
notice of abandonment of the vessel by virtue of Art. 587 of the Code of
Commerce.

Under Art 1733 of the Civil Code, (c)ommon carriers, from the nature of
their business and for reasons of public policy, are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of
the passengers transported by them, according to all the circumstances of
each case x x x x" In the event of loss of goods, common carriers are
presumed to have acted negligently. FELMAN, the shipowner, was not able to
rebut this presumption.
In relation to the question of subrogation, respondent appellate court
found MV Asilda unseaworthy with reference to the cargo and therefore
ruled that there was breach of warranty of seaworthiness that rendered the
assured not entitled to the payment of is claim under the policy. Hence, when
PHILAMGEN paid the claim of the bottling firm there was in effect a voluntary
payment and no right of subrogation accrued in its favor. In other words,
when PHILAMGEN paid it did so at its own risk.
It is generally held that in every marine insurance policy the assured
impliedly warrants to the assurer that the vessel is seaworthy and such
warranty is as much a term of the contract as if expressly written on the face
of the policy. Thus Sec. 113 of the Insurance Code provides that (i)n every
marine insurance upon a ship or freight, or freightage, or upon anything which
is the subject of marine insurance, a warranty is implied that the ship is
seaworthy. Under Sec. 114, a ship is seaworthy when reasonably fit to
perform
the
service,
and
to
encounter the ordinary perils of the voyage, contemplated by the
parties to the policy. Thus it becomes the obligation of the cargo owner to
look for a reliable common carrier which keeps its vessels in seaworthy
condition. He may have no control over the vessel but he has full control in
the selection of the common carrier that will transport his goods. He also has
full discretion in the choice of assurer that will underwrite a particular venture.
[12]

We need not belabor the alleged breach of warranty of seaworthiness by

the assured as painstakingly pointed out by FELMAN to stress that
subrogation will not work in this case. In policies where the law will generally
imply a warranty of seaworthiness, it can only be excluded by terms in writing
in the policy in the clearest language. And where the policy stipulates that
the seaworthiness of the vessel as between the assured and the assurer is
admitted, the question of seaworthiness cannot be raised by the assurer
without showing concealment or misrepresentation by the assured.
[13]

[14]

The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in

at least two (2) instances has dispensed with the usual warranty of
worthiness. Paragraph 15 of the Marine Open Policy No. 100367-PAG reads
(t)he liberties as per Contract of Affreightment the presence of the Negligence
Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party
and/or Contract of Affreightment as between the Assured and
the Company shall not prejudice the insurance. The seaworthiness of the
vessel as between the Assured and the Assurers is hereby admitted.
[15]

The same clause is present in par. 8 of the Institute Cargo

Clauses (F.P.A.) of the policy which states (t)he seaworthiness of the vessel
as between the Assured and Underwriters in hereby admitted x x x x"
[16]

The result of the admission of seaworthiness by the assurer PHILAMGEN

may mean one or two things: (a) that the warranty of the seaworthiness is to
be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed by the
insurance company. The insertion of such waiver clauses in cargo policies is
in recognition of the realistic fact that cargo owners cannot control the state of
the vessel. Thus it can be said that with such categorical
waiver, PHILAMGEN has accepted the risk of unseaworthiness so that if the
ship should sink by unseaworthiness, as what occurred in this case,
PHILAMGEN is liable.
[17]

Having disposed of this matter, we move on to the legal basis for

subrogation. PHILAMGENs action against FELMAN is squarely sanctioned
by Art. 2207 of the Civil Code which provides:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company 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.
In Pan Malayan Insurance Corporation v. Court of Appeals, we said that
payment by the assurer to the assured operates as an equitable assignment
to the assurer of all the remedies which the assured may have against the
third party whose negligence or wrongful act caused the loss. The right of
[18]

subrogation is not dependent upon, nor does it grow out of any privity of
contract or upon payment by the insurance company of the insurance
claim. It accrues simply upon payment by the insurance company of the
insurance claim.
The doctrine 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, equity and good
conscience ought to pay. Therefore, the payment made by PHILAMGEN to
Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an
action as subrogee against FELMAN. Having failed to rebut the presumption
of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter CocaCola softdrink bottles is inevitable.
[19]

WHEREFORE, the petition is GRANTED. Respondent FELMAN

SHIPPING
LINES
is
ordered
to
pay
petitioner
PHILIPPINE
AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five
Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest
thereon counted from 29 November 1983, the date of judicial demand,
pursuant to Arts. 2212 and 2213 of the Civil Code.
[20]

SO ORDERED.
Vitug, Kapunan, and Hermosisima, Jr., JJ., concur.
Padilla, (Chairman), J., on leave.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. 95070 September 5, 1991
PAN MALAYAN INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS and THE FOOD AND AGRICULTURAL ORGANIZATION OF THE
UNITED NATIONS,respondents.

Alejandro P. Ruiz, Jr. for petitioner.

Conrado R. Ayuyao for private respondent.

REGALADO, J.:p
This case had its origin in a shipment of 1,500 metric petitions of IR-36 certified rice seeds
which private respondent, The Food and Agricultural Organization of the United Nations
(hereinafter referred to as FAO), an autonomous intergovernmental organization created by
treaty, intended and made arrangements to send to Kampuchea to be distributed to the people
for seedling purposes. Respondent court affirms the factual findings therein of the court a
quo as chronologized hereunder.
On May 22, 1980, FAO received a formal offer from the Luzon Stevedoring Corporation
(LUZTEVECO, for brevity) whereby the latter offered to ship the former's aforesaid cargo,
consisting of 3,000 metric petitions in two lots of rice seeds, to Vietnam Ocean Shipping
Industry in Vaung Tau, Vietnam for freight fees of $55.50/MT, subject to the terms and conditions
indicated in the corresponding communication. 1
On May 28, 1980, FAO wrote LUZTEVECO formally confirming its acceptance of the foregoing
offer amounting to US$83,325.92 in respect of one lot of 1,500 metric petitions winch is the
subject of the present action. 2 The cargo was loaded on board LUZTEVECO Barge No. LC3000 and consisted of 34,122 bags of IR-36 certified rice seeds purchased by FAO from the
Bureau of Plant Industry for P4,602,270.00. 3
On June 12, 1980, the loading was completed and LUZTEVECO issued its Bill of Lading No. 01
in favor of FAO. 4The latter then secured insurance coverage in the amount of P5,250,000.00
from petitioner, Pan Malayan Insurance Corporation, as evidenced by the latter's Marine Cargo
Policy No. B-11474A and Premium Invoice No. 78615, dated June 16, 1980. 5
On June 16, 1980, FAO gave instructions to LUZTEVECO to leave for Vaung Tau, Vietnam to
deliver the cargo which, by its nature, could not withstand delay because of the inherent risks of
termination and/or spoilage. On the same date, the insurance premiums on the shipment was
paid by FAO petitioner.
On June 23, 1980, FAO was informed by LUZTEVECO that the tugboat and barge carrying
FAO's shipment returned to Manila after leaving on June 16, 1980 and that the shipment again
left Manila for Vaung Tau Vietnam on June 21, 1980 with the barge being towed by a different
tugboat. Since this was an unauthorized deviation, FAO demanded an explanation on June 25,
1980. 6
On June 26, 1980, FAO was advised of the sinking of the barge in the China Sea, hence it
informed petitioner thereof and, later, formally filed its claim under the marine insurance
policy. 7 On July 29, 1980, FAO was informed by LUSTEVECO of the recovery of the lost
shipment, for which reason FAO formally filed its claim with LUZTEVECO for compensation of
damage to its cargo. 8

Thereafter, despite repeated demands to replace the same or to pay for the total insured value
in the sum of P5,250,000.00, LUSTEVECO failed and refused to do so. Petitioner likewise failed
to pay for the losses and damages sustained by FAO by reason of its inability to recover the
value of the shipment from LUZTEVECO. 9
Petitioner claims that on July 31, 1980 it supposedly engaged the services of Pan Asiatic
Adjustment and Marine Surveying Corporation to investigate and examine the shipment. On
August 4, 1980, J.A. Barroso, Jr. of said corporation reportedly conducted a survey on the
shipment and found that 9,629 bags of rice seeds were in good order, 23,510 bags sustained
wattage of 10% to 15%, and 983 bags were shorthanded or missing. After the alleged survey,
Barroso, Jr. made a report recommending to petitioner the denial of FAO's claim because the
partial damage suffered by the shipment is not compensable under the policy. On the basis of
said recommendation, petitioner denied FAO's claim. 10
Petitioner further avers that upon the request of counsel of FAO, a survey of the shipment was
conducted on September 26, 27 and 29, 1980 by Conrado Catalan, Jr. of Manila Adjusters &
Surveyors Company and he found 6,200 bags in good order condition. At the time of his survey,
23,510 bags of the shipment had allegedly already been sold by LUZTEVECO. Petitioner further
asserts that on September 29, 1980, FAO wrote a letter to petitioner signifying its willingness to
abandon the proceeds of the sale of the 23,510 bags and the remaining good order bags, but
that on October 6, 1980 petitioner rejected FAO's proposed abandonment.
FAO then instituted Civil Case No. 41716 against LUZTEVECO and/or herein petitioner, as
defendants, with the Regional Trial Court of Pasig, Metro Manila which, on December 14, 1987,
rendered judgment in favor of FAO with the following decretal portion:
WHEREFORE, by virtue of preponderance of evidence and in consideration of
justice and equity, this Court hereby renders judgment in favor of the plaintiff
against the defendant Luzon Stevedoring Corporation and defendant Pan
Malayan Insurance Corporation, ordering both the defendants, to pay jointly and
severally, the plaintiff, to wit:
1. The sum of P5,250,000.00 with interest thereon, at legal rate from September
29, 1980 until fully paid;
2. The sum of P250,000.00 by way of attorney's fees and expenses of litigation;
and
3. The cost of this suit. 11
Petitioner alone appealed the said decision to respondent Court of Appeals, docketed therein as
CA-G.R. CV No. 22114, and on July 20, 1990 respondent court affirmed the decision of the trial
court except for the award of attorney's fees which was reduced to P25,000.00. 12 Petitioner's
motion for reconsideration was denied in respondent court's resolution of September 3, 1990. 13
The petition now before us raises the following issues: (1) Whether or not respondent court
committed a reversible error in holding that the trial court is correct in holding that there is a total
loss of the shipment; and (2) Whether or not respondent court committed a reversible error in
affirming the decision of the trial court ordering petitioner to pay private respondent the amount
of P5,250,000.00 representing the full insured value of the rice seeds. 14

The law classifies loss into either total or partial. Total loss may be actual or absolute, 15 or it
may otherwise be constructive or technical. 16 Petitioner submits that respondent court erred in
ruling that there was total loss of the shipment despite the fact that only 27,922 bags of rice
seeds out of 34,122 bags were rendered valueless to FAO and the shipment sustained only a
loss of 78%. FAO, however, claims that, for all intents and purposes, it has practically lost
its total orentire shipment in this case, inclusive of expenses, premium fees, and so forth,
despite the alleged recovery by defendant LUZTEVECO.
As found by the court below and reproduced with approval by respondent court, FAO "has never
been compensated for this total loss or damage, a fact which is not denied nor controverted. If
there were some cargoes saved, by LUZTEVECO, private respondent abandoned it and the
same was sold or used for the benefit of LUZTEVECO or Pan Malayan Corporation. Under
Sections 129 and 130 of the New Insurance Code, a total loss may either be actual or
constructive. In case of total loss in Marine Insurance, the assured is entitled to recover from
the underwriter the whole amount of his subscription (Vol. 2, Arnould Mar. Ins. 9th Ed. P. 1304;
Alsop vs. Commercial Insurance Co. cc Mass IF Case No. 262, summ 451."(Emphasis in the
original text.) 17
It is a fact that on July 9, 1980, FAO formally filed its claim under the marine insurance policy
issued by petitioner.18 FAO thus claims actual loss under paragraphs (c) and (d) of Section 130
of the Insurance Code which provides:
SEC. 130. An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by being broken up;
(c) Any damage to the thing which renders it valueless to the owner for the
purpose for which he held it; or
(d) Any other event which effectively deprives the owner of the possession, at the
port of destination of the thing insured.
Respondent court affirmed the ruling of the trial court to the effect that there was indeed actual
total loss, painstakingly explaining therein the following grounds for holding petitioner liable for
the entire amount of the insurance coverage:
... The lower court was not incorrect in holding that there is a total or entire loss
of shipment in the case at bar.
First, the fact of the sinking of Barge LC-3000 as the occurrence of the risk
insured against under the marine insurance was proved and borne out by the
following findings of the court a quo, thus;
Here, we should not lose sight of the fact of sinking of the barge
according to the defendant LUZTEVECO, in a phone call by Mr.
Emata, defendant's representative, on June 26, 1980 and (of)
which fact, the defendant Pan Malayan Insurance Corporation
was notified. Subsequently, there was marine protest, based on

said information released by the defendant LUZTEVECO. In fine,

the barge LC-3000 carrying the load in question sank. If the barge
was made to refloat, it cannot be denied that it sank, otherwise,
what is the use of refloating the barge? What is mentioned in the
law as the risk or peril insured against is sinking. This is the risk or
peril covered by the Marine Insurance. (Decision, p. 4)
xxx xxx xxx
..., it is worth mentioning the following unrebutted documents, testimonies and
pleadings cited by the plaintiff-appellant, viz:
(1) Testimony of Mr. Keiner that he was informed by Mr. Emata, a
representative of LUZTEVECO, that the barge and its cargo sank
in the South China Sea on June 25, 1980 (Deposition, Q43 p. 11)
(2) Letter of Capt. Ilano of Luzon Stevedoring Corporation dated
June 26, 1980 confirming the sinking of Barge LC-3000 and its
cargo on June 25, 1980 (Exhibit "D-9").
(3) Marine protest executed on July 2, 1980 by Capt. Rudy
Vencer, master of tugboat towing Barge LC-3000, attesting to said
barge's sinking on June 25, 1980, 385 miles off South Vietnam,
due to very strong winds and rough seas. (Exhibit "E- 4").
(4) The answer of defendant LUZTEVECO itself which admits in
no uncertain terms the sinking of Barge LC-3000 on June 25,
1980. ...
xxx xxx xxx
Basing on the evidence on record, the factual finding of the lower court re sinking
of Barge LC-3000 is not without basis but rather sufficiently supported by
evidence adduced by plaintiff-appellee.
Second, there is the direct testimony of Mr. Fritz Keiner (the UNFAO officer-incharge in the Philippines at the time of the loss) which states as follows:
52. CONGEN:
What eventually happened to your Organization's entire shipment
of rice seedlings intended for the refugees of Vietnam?
FK:
First, I would like to point out that the rice seeds were intended for
the people of Kampuchea, but for logistical reasons, the shipment
had to go through Vungtan, (sic) Vietnam.

In spite of the alleged salvaging of our shipment, there was

absolutely no replacement or payment made by either defendant
LUZTEVECO or defendant Pan Malayan Insurance Co. on our
losses and eventually FAO did not recover anything from either of
the said defendants.
53. CONGEN:
Up to the present, has any replacement or payment of the value of
your lost cargo been made to your organization by either of the
defendants?
FPKEINER:
Up to the present, no replacement or payment of the value of our
lost cargo was ever made to our Organization by either of the
defendants in this case. (Deposition of Fritz Keiner, pp. 13-14)
As emphasized by said witness, the insured cargo was intended for distribution
by Vietnam Ocean Shipping Agency to the people of Kampuchea for the purpose
of alleviating the acute rice shortage then prevailing in that country and to
improve the rice production therein. (Deposition, Q17 p. 5). The bags containing
said cargo were marked "TREATED, UNFIT FOR FOOD" (Exh. "E-3-b"; TSN,
January 15, 1985, pp. 3-5) and the seeds themselves were of such a fragile
nature that they have the tendency to germinate upon mere contact with water.
As shown, of the 34,122 bags of rice seeds shipped on board Barge LC-3000
(Exh. "E-l"), 23,510 were determined by defendant-appellant's surveyor, the Pan
Asiatic Adjustment and Marine Surveying Corporation to be bad order bags (Exh.
"3"). Add to these bad order bags the shortlanded/missing bags numbering 983
per report of the same surveying corporation, the damaged/lost bags would total
24,493 thereby leaving a balance of 9,269 (sic) presumed to be good order/dry
bags. Of these 9,629 good order/dry bags, an additional 2,682 bags were found
damaged/wetted after sorting (Exh. "E"). All in all, therefore, 27,175 bags were
determined to be lost/damaged. Although 6,947 bags in apparent external good
order and condition were presumed to be inside the LUZTEVECO warehouse,
only 6,200 were actually determined to be there by Conrado Catalan on
September 26, 27 and 29, 1980 (Exh. "E", p. 2). This increases the number of
lost/damaged bags to 27,922.
Thus considered, We agree with the plaintiff-appellee that the 27,922
damaged/lost bags were rendered valueless to plaintiff-appellee for planting or
seeding purposes in Kampuchea since the wetting or contact with water had
definitely activated their tendency to terminate. Moreover, all of said
damaged/lost bags were no longer available for reshipment to Vietnam because
the same were disposed of by defendant LUZTEVECO without authorization
from plaintiff-appellee, to answer for alleged salvage charges, while the others
were lost/shortlanded.

Third the testimony of Mr. Conrado Catalan, Jr. that the shipment sustained a
loss of 78% is not speculative. Uncontroverted is his testimony which is based on
data corroborated by the report of defendant-appellant's adjuster/surveyor and on
actual inspection of the remaining bags stored in LUZTEVECO's warehouse.
Exhibit '3' of defendant-appellant states in part, thus:

Condition

No.
of
Bag
s

Good order(dry)

9,62
9

Partly wet but

damage limited

only to
approximately
10% to

15% of the
contents. Wet

portion
terminated/sprou
ted.

Remaining 85%
to 90% of the

contents
apparently dry

23,5

10

Shortlanded/miss
ing

983

Total

34,1
22
Bag
s

It is understandable that plaintiff-appellee's surveyor (Mr. Conrado Catalan, Jr.)

no longer saw the 23,510 bad order/damaged bags as these were already sold at
public auction by defendant LUZTEVECO, while 983 more were
shortlanded/missing. When Mr. Catalan sought to verify on September 26, 27
and 29, 1980 the existence and condition of the 9,629 presumed to be good
order bags, he discovered that "an additional 2,629 bags were found
damaged/wetted, with the estimated 6,947 bags in apparently external good
order condition" (Exh. "E"). However, out of these presumed 6,947 bags only
approximately 6,200 bags were computed and counted by Mr. Catalan to the
best of his ability. (Exh. "E", p. 2). It is even more than 78% per testimony of Mr.
Catalan but at least 82% if we divide 6,200 (the actual number of bags in the
warehouse) by 34,122 (the actual number of bags loaded on Barge LC-3000). 19
Petitioner, on the other hand, claims that respondent court gravely erred in sustaining the ruling
of the trial court that there was total loss of the shipment since from the evidence on record and
the findings of respondent court itself, only 27,922 bags of rice seeds out of 34,122 bags were
rendered valueless to FAO and the shipment sustained only a loss of 78%. 20 Thus, petitioner
concludes that the findings of the court a quo, as affirmed by the Court of Appeals, are contrary
to the evidence. Upon an examination, however, of the records presented before this Court, it is
quite clear that there was indeed actual total loss.
While this Court is not a trier of facts, yet, when the findings of the Court of Appeals are alleged
to be without citation of specific evidence on which they are based, there is sufficient reason for
us to review the appellate court's decision. 21 Under the factual milieu of this case, we find that
there is abundant evidence to support the conclusion of respondent court.
In his testimony on cross-examination at the trial, Conrado Catalan, Jr., declared:
Q You said that you did not make an actual count but you
estimated, how many bags all in all did you estimate?
A It is 6,200 bags if I may recall.

Q Out of these 6,200 bags you only opened two (2) bags?
A Yes, sir.
Q And the others, the balance you did not examine anymore?
A It is shown in the picture that it is stained.
Q You must answer the question.
A Yes, sir.
Q What was the damage of the two (2) bags that you examined?
A They are stained. (Emphasis supplied.) 22
It will be recalled that said rice seeds were treated and would germinate upon mere contact with
water. The rule is that where the cargo by the process of decomposition or other chemical
agency no longer remains the same kind of thing as before, an actual total loss has been
suffered.
... However, the complete physical destruction of the subject matter is not
essential to constitute an actual total loss. Such a loss may exist where the form
and specie of the thing is destroyed, although the materials of which it consisted
still exist (Great Western Ins. Co. vs. Fogarty, N.Y., 19 Wall 640, 22 L. Ed. 216),
as where the cargo by the process of decomposition or other chemical agency no
longer remains the same kind of thing as before (Williams vs. Cole, 16 Me.
207). 23
Moreover, it is undisputed that no replacement whatsoever or any payment, for that matter, of
the value of said lost cargo was made to FAO by petitioner or LUZTEVECO. It is thus clear that
FAO suffered actual total loss under Section 130 of the Insurance Code, specifically under
paragraphs (c) and (d) thereof, recompense for which it has been denied up to the present.
In view of our aforestated holding that there was actual total loss of the goods insured in this
case, it is no longer necessary to pass upon the issue of the validity of the abandonment made
by FAO. Section 135 of the Insurance Code explicitly provides that "(u)pon an actual total loss, a
person insured is entitled to payment without notice of abandonment." This is a statutory
adoption of a long standing doctrine in maritime insurance law that in case of actual total loss,
the right of the insured to claim the whole insurance is absolute, without need of a notice of
abandonment. 24
WHEREFORE, the assailed judgment and resolution of respondent Court of Appeals are hereby
AFFIRMED in toto.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras and Padilla, JJ., concur.

Sarmiento, J., is on leave.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 94052 August 9, 1991

ORIENTAL ASSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.
Alejandro P. Ruiz, Jr. for petitioner.
Federico R. Reyes for private respondent.

MELENCIO-HERRERA, J:p
An action to recover on a marine insurance policy, issued by petitioner in favor of private respondent,
arising from the loss of a shipment of apitong logs from Palawan to Manila.
The facts relevant to the present review disclose that sometime in January 1986, private respondent
Panama Sawmill Co., Inc. (Panama) bought, in Palawan, 1,208 pieces of apitong logs, with a total
volume of 2,000 cubic meters. It hired Transpacific Towage, Inc., to transport the logs by sea to
Manila and insured it against loss for P1-M with petitioner Oriental Assurance Corporation (Oriental
Assurance). There is a claim by Panama, however, that the insurance coverage should have been
for P3-M were it not for the fraudulent act of one Benito Sy Yee Long to whom it had entrusted the
amount of P6,000.00 for the payment of the premium for a P3-M policy.
Oriental Assurance issued Marine Insurance Policy No. OACM 86/002, which stipulated, among
others:
Name of Insured:
Panama Sawmill, Inc.
Karuhatan, Valenzuela
Metro Manila
Vessel:
MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter apitong Logs
Barge Transpac 1,000-1,000 cubic meter apitong Logs
Voyage or Period of Insurance:

From Palawan-ETD January 16, 1986

To: Manila
Subject matter Insured:
2,000 cubic meters apitong Logs
Agreed Value
Amount Insured Hereunder:
Pesos: One Million Only (P1,000,000.00)
Philippine Currency
Premium P2,500.00 rate 0.250%
Doc. stamps 187.60 Invoice No. 157862
l % P/tax 25.00
TOTAL P2,712.50
CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES
Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following
clauses:
Civil Code Article 1250 Waiver clause
Typhoon warranty clause
Omnibus clause.
The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a volume of
1,000 cubicmeters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000
cubic meters.
On 28 January 1986, the two barges were towed by one tug-boat, the MT 'Seminole' But, as fate
would have it, during the voyage, rough seas and strong winds caused damage to Barge TPAC-1000
resulting in the loss of 497 pieces of logs out of the 598 pieces loaded thereon.
Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its
contracted liability was for "TOTAL LOSS ONLY." The rejection was upon the recommendation of the
Tan Gatue Adjustment Company.
Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for Damages
against Ever Insurance Agency (allegedly, also liable), Benito Sy Lee Yong and Oriental Assurance,
before the Regional Trial Court, Kalookan, Branch 123, docketed as Civil Case No. C-12601.

After trial on the merit, the RTC 1 rendered its Decision, with the following dispositive portion:
WHEREFORE, upon all the foregoing premises, judgment is hereby rendered:
1. Ordering the defendant Oriental Assurance Corporation to pay plaintiff Panama
Saw Mill Inc. the amount of P415,000.00 as insurance indemnity with interest at the
rate of 12% per annum computed from the date of the filing of the complaint;
2. Ordering Panama Saw Mill to pay defendant Ever Insurance Agency or Antonio Sy
Lee Yong, owner thereof, (Ever being a single proprietorship) for the amount of
P20,000.00 as attorney's fee and another amount of P20,000.00 as moral damages.
3. Dismissing the complaint against defendant Benito Sy Lee Yong.
SO ORDERED.
On appeal by both parties, respondent Appellate Court 2 affirmed the lower Court judgment in all
respects except for the rate of interest, which was reduce from twelve (12%) to six (6%) per annum.
Both Courts shared the view that the insurance contract should be liberally construed in order to
avoid a denial of substantial justice; and that the logs loaded in the two barges should be treated
separately such that the loss sustained by the shipment in one of them may be considered as
"constructive total loss" and correspondingly compensable.
In this Petition for Review on Certiorari, Oriental Assurance challenges the aforesaid dispositions. In
its Comment, Panama, in turn, maintains that the constructive total loss should be based on a policy
value of P3-M and not P1-M, and prays that the award to Ever Insurance Agency or Antonio Sy Lee
Yong of damages and attorney's fees be set aside.
The question for determination is whether or not Oriental Assurance can be held liable under its
marine insurance policy based on the theory of a divisible contract of insurance and, consequently, a
constructive total loss.
Our considered opinion is that no liability attaches.
The terms of the contract constitute the measure of the insurer liability and compliance therewith is a
condition precedent to the insured's right to recovery from the insurer (Perla Compania de Seguros,
Inc. v. Court of Appeals, G.R. No. 78860, May 28, 1990, 185 SCRA 741). Whether a contract is
entire or severable is a question of intention to be determined by the language employed by the
parties. The policy in question shows that the subject matter insured was the entire shipment of
2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different barges did not
make the contract several and divisible as to the items insured. The logs on the two barges were not
separately valued or separately insured. Only one premium was paid for the entire shipment, making
for only one cause or consideration. The insurance contract must, therefore, be considered
indivisible.
More importantly, the insurer's liability was for "total loss only." A total loss may be either actual or
constructive (Sec. 129, Insurance Code). An actual total loss is caused by:

(a) A total destruction of the thing insured;

(b) The irretrievable loss of the thing by sinking, or by being broken up;
(c) Any damage to the thing which renders it valueless to the owner for the purpose
for which he held it; or
(d) Any other event which effectively deprives the owner of the possession, at the
port of destination, of the thing insured. (Section 130, Insurance Code).
A constructive total loss is one which gives to a person insured a right to abandon, under Section
139 of the Insurance Code. This provision reads:
SECTION 139. A person insured by a contract of marine insurance may abandon the
thing insured, or any particular portion thereof separately valued by the policy, or
otherwise separately insured, and recover for a total loss thereof, when the cause of
the loss is a peril injured against,
(a) If more than three-fourths thereof in value is actually lost, or would have to be
expended to recover it from the peril;
(b) If it is injured to such an extent as to reduce its value more than three-fourths;
xxx xxx xxx
(Emphasis supplied)
Respondent Appellate Court treated the loss as a constructive total loss, and for the purpose of
computing the more than three-fourths value of the logs actually lost, considered the cargo in one
barge as separate from the logs in the other. Thus, it concluded that the loss of 497 pieces of logs
from barge TPAC-1000, mathematically speaking, is more than three-fourths () of the 598 pieces of
logs loaded in that barge and may, therefore, be considered as constructive total loss.
The basis thus used is, in our opinion, reversible error. The requirements for the application of
Section 139 of the Insurance Code, quoted above, have not been met. The logs involved, although
placed in two barges, were not separately valued by the policy, nor separately insured. Resultantly,
the logs lost in barge TPAC-1000 in relation to the total number of logs loaded on the same barge
can not be made the basis for determining constructive total loss. The logs having been insured as
one inseparable unit, the correct basis for determining the existence of constructive total loss is the
totality of the shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces thereof were
lost or 41.45% of the entire shipment. Since the cost of those 497 pieces does not exceed 75% of
the value of all 1,208 pieces of logs, the shipment can not be said to have sustained a constructive
total loss under Section 139(a) of the Insurance Code.
In the absence of either actual or constructive total loss, there can be no recovery by the
insured Panama against the insurer, Oriental Assurance.

By reason of the conclusions arrived at, Panama's asseverations in its Comment need no longer be
passed upon, besides the fact that no review, in proper form, has been sought by it.
WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental Assurance
Corporation, is hereby ABSOLVED from liability under its marine insurance policy No. OAC-M86/002. No costs.
SO ORDERED.
Paras, Padilla, Sarmiento and Regalado, JJ., concur.
# Footnotes
1 Presided over by Judge Mauro T. Allarde
2 Special Eighth Division, composed of Justice Felipe B. Kalalo Acting Chairman and
ponente; and Justices Luis D. Victor and Abelardo M. Dayrit, Members.