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COMM2 (INSURANCE)

G.R. No. 185964

GASI sought recompense from COSCO, thru its Philippine agent Smith
Bell Shipping Lines, Inc. (SMITH BELL),6ATI7 and PROVEN8 but was
denied. Hence, it pursued indemnification from the shipments insurer. 9

June 16, 2014

ASIAN TERMINALS, INC., Petitioner,


vs.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION, Respondent.

After the requisite investigation and adjustment, FIRST LEPANTO paid


GASI the amount of P165,772.40 as insurance indemnity. 10
Thereafter, GASI executed a Release of Claim11 discharging FIRST
LEPANTO from any and all liabilities pertaining to the lost/damaged
shipment and subrogating it to all the rights of recovery and claims the
former may have against any person or corporation in relation to the
lost/damaged shipment.

DECISION
REYES, J.:
This is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of
Court seeking to annul and set aside the Decision2 dated October 10,
2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99021 which
adjudged petitioner Asian Terminals, Inc. (ATI) liable to pay the money
claims of respondent First Lepanto-Taisho Insurance Corporation (FIRST
LEPANTO).

As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping


agency in the Philippines, SMITH BELL, PROVEN and ATI,
reimbursement of the amount it paid to GASI. When FIRST LEPANTOs
demands were not heeded, it filed on May 29, 1997 a Complaint12 for
sum of money before the Metropolitan Trial Court (MeTC) of Manila,
Branch 3. FIRST LEPANTO sought that it be reimbursed the amount of
166,772.41, twenty-five percent (25%) thereof as attorneys fees, and
costs of suit.

The Undisputed Facts


On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in
100 plain jumbo bags complete and in good condition were loaded and
received on board M/V "Da Feng" owned by China Ocean Shipping Co.
(COSCO) in favor of consignee, Grand Asian Sales, Inc. (GASI). Based
on a Certificate of Insurance4 dated August 24, 1995, it appears that
the shipment was insured against all risks by GASI with FIRST LEPANTO
forP7,959,550.50 under Marine Open Policy No. 0123.

ATI denied liability for the lost/damaged shipment and claimed that it
exercised due diligence and care in handling the same. 13 ATI averred
that upon arrival of the shipment, SMITH BELL requested for its
inspection14 and it was discovered that one jumbo bag thereof
sustained loss/damage while in the custody of COSCO as evidenced by
Turn Over Survey of Bad Order Cargo No. 47890 dated August 6,
199615 jointly executed by the respective representatives of ATI and
COSCO. During the withdrawal of the shipment by PROVEN from ATIs
warehouse, the entire shipment was re-examined and it was found to
be exactly in the same condition as when it was turned over to ATI
such that one jumbo bag was damaged. To bolster this claim, ATI
submitted Request for Bad Order Survey No. 40622 dated August 9,
199616 jointly executed by the respective representatives of ATI and
PROVEN. ATI also submitted various Cargo Gate Passes17 showing that
PROVEN was able to completely withdraw all the shipment from ATIs
warehouse in good order condition except for that one damaged jumbo
bag.

The shipment arrived in Manila on July 18, 1996 and was discharged
into the possession and custody of ATI, a domestic corporation
engaged in arrastre business. The shipment remained for quite some
time at ATIs storage area until it was withdrawn by broker, Proven
Customs Brokerage Corporation (PROVEN), on August 8 and 9, 1996 for
delivery to the consignee. Upon receipt of the shipment, 5 GASI
subjected the same to inspection and found that the delivered goods
incurred shortages of 8,600 kilograms and spillage of 3,315 kg for a
total of11,915 kg of loss/damage valued at P166,772.41.

In the alternative, ATI asserted that even if it is found liable for the
lost/damaged portion of the shipment, its contract for cargo handling
services limits its liability to not more than P5,000.00 per package. ATI
interposed a counterclaim of P20,000.00 against FIRST LEPANTO as
and for attorneys fees. It also filed a cross-claim against its codefendants COSCO and SMITH BELL in the event that it is made liable
to FIRST LEPANTO.18

WHEREFORE, in light of the foregoing, judgment is hereby rendered


DISMISSING the instant case for failure of [FIRST LEPANTO] to
sufficiently establish its cause o faction against [ATI, COSCO, SMITH
BELL, and PROVEN].

PROVEN denied any liability for the lost/damaged shipment and


averred that the complaint alleged no specific acts or omissions that
makes it liable for damages. PROVEN claimed that the damages in the
shipment were sustained before they were withdrawn from ATIs
custody under which the shipment was left in an open area exposed to
the elements, thieves and vandals. PROVEN contended that it
exercised due diligence and prudence in handling the shipment.
PROVEN also filed a counterclaim for attorneys fees and damages. 19

No pronouncement as to cost.

The counterclaims of [ATI and PROVEN] are likewise dismissed for lack
of legal basis.

SO ORDERED.24
Ruling of the Regional Trial Court
On appeal, the Regional Trial Court (RTC) reversed the MeTCs findings.
In its Decision25 dated January 26, 2007, the RTC of Manila, Branch 21,
in Civil Case No. 06-116237, rejected the contentions of ATI upon its
observation that the same is belied by its very own documentary
evidence. The RTC remarked that, if, as alleged by ATI, one jumbo bag
was already in bad order condition upon its receipt of the shipment
from COSCO on July 18, 1996, then how come that the Request for Bad
Order Survey and the Turn Over Survey of Bad Order Cargo were
prepared only weeks thereafter or on August 9, 1996 and August 6,
1996, respectively. ATI was adjudged unable to prove that it exercised
due diligence while in custody of the shipment and hence, negligent
and should be held liable for the damages caused to GASI which, in
turn, is subrogated by FIRST LEPANTO.

Despite receipt of summons on December 4, 1996, 20 COSCO and SMITH


BELL failed to file an answer to the complaint. FIRST LEPANTO thus
moved that they be declared in default21 but the motion was denied by
the MeTC on the ground that under Rule 9, Section 3 of the Rules of
Civil Procedure, "when a pleading asserting a claim states a common
cause of action against several defending parties, some of whom
answer and the other fail to do so, the Court shall try the case against
all upon the answers thus filed, and render judgment upon the
evidence presented."22
Ruling of the MeTC

The RTC rejected ATIs contention that its liability is limited only
to P5,000.00 per package because its Management Contract with the
Philippine Ports Authority (PPA) purportedly containing the same was
not presented as evidence. More importantly, FIRST LEPANTO or GASI
cannot be deemed bound thereby because they were not parties
thereto. Lastly, the RTC did not give merit to ATIs defense that any
claim against it has already prescribed because GASI failed to file any
claim within the 15-day period stated in the gate pass issued by ATI to
GASIs broker, PROVEN. Accordingly, the RTC disposed thus:

In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and
PROVEN from any liability and instead found COSCO to be the party at
fault and hence liable for the loss/damage sustained by the subject
shipment. However, the MeTC ruled it has no jurisdiction over COSCO
because it is a foreign corporation. Also, it cannot enforce judgment
upon SMITH BELL because no evidence was presented establishing that
it is indeed the Philippine agent of COSCO. There is also no evidence
attributing any fault to SMITH BELL. Consequently, the complaint was
dismissed in this wise:

WHEREFORE, in light of the foregoing, the judgment on appeal is


hereby REVERSED.

SO ORDERED.28
ATI moved for reconsideration but the motion was denied in the CA
Resolution29 dated January 12, 2009. Hence, this petition arguing that:

[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of


[P]165,772.40 with legal interest until fully paid, to pay [FIRST
LEPANTO] 10% of the amount due the latter as and for attorneys fees
plus the costs of suit.

(a) The presentation of the insurance policy is indispensable in proving


the right of FIRST LEPANTO to be subrogated to the right of the
consignee pursuant to the ruling in Wallem Philippines Shipping, Inc. v.
Prudential Guarantee and Assurance Inc.;30

The complaint against [COSCO/SMITH BELL and PROVEN] are


DISMISSED for lack of evidence against them. The counterclaim and
cross[-]claim of [ATI] are likewise DISMISSED for lack of merit.

(b) ATI cannot be barred from invoking the defense of prescription as


provided for in the gate passes in consonance with the ruling in
International Container Terminal Services, Inc. v. Prudential Guarantee
and Assurance Co, Inc.31

SO ORDERED.26
Ruling of the CA

Ruling of the Court


ATI sought recourse with the CA challenging the RTCs finding that
FIRST LEPANTO was validly subrogated to the rights of GASI with
respect to the lost/damaged shipment. ATI argued that there was no
valid subrogation because FIRSTLEPANTO failed to present a valid,
existing and enforceable Marine Open Policy or insurance contract. ATI
reasoned that the Certificate of Insurance or Marine Cover Note
submitted by FIRST LEPANTO as evidence is not the same as an actual
insurance contract.

The Court denies the petition.


ATI failed to prove that it exercised
due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.

In its Decision27 dated October 10, 2008, the CA dismissed the appeal
and held that the Release of Claim and the Certificate of Insurance
presented by FIRST LEPANTO sufficiently established its relationship
with the consignee and that upon proof of payment of the latters claim
for damages, FIRST LEPANTO was subrogated to its rights against
those liable for the lost/damaged shipment.

It must be emphasized that factual questions pertaining to ATIs


liability for the loss/damage sustained by GASI has already been
settled in the uniform factual findings of the RTC and the CA that: ATI
failed to prove by preponderance of evidence that it exercised due
diligence in handling the shipment.
Such findings are binding and conclusive upon this Court since a
review thereof is proscribed by the nature of the present petition. Only
questions of law are allowed in petitions for review on certiorari under
Rule 45 of the Rules of Court. It is not the Courts duty to review,
examine, and evaluate or weigh all over again the probative value of
the evidence presented, especially where the findings of the RTC are
affirmed by the CA, as in this case.32

The CA also affirmed the ruling of the RTC that the subject shipment
was damaged while in the custody of ATI. Thus, the CA disposed as
follows:
WHEREFORE, premises considered, the assailed Decision is hereby
AFFIRMED and the instant petition is DENIED for lack of merit.

There are only specific instances when the Court deviates from the rule
and conducts a review of the courts a quos factual findings, such as
when: (1) the inference made is manifestly mistaken, absurd or
impossible; (2) there is grave abuse of discretion;(3) the findings are
grounded entirely on speculations, surmises or conjectures; (4) the
judgment of the CA is based on misapprehension of facts; (5) the CA, in
making its findings, went beyond the issues of the case and the same
is contrary to the admissions of both appellant and appellee; (6) the
findings of fact are conclusions without citation of specific evidence on
which they are based; (7) the CA manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion; and (8) the findings of
fact of the CA are premised on the absence of evidence and are
contradicted by the evidence on record.33

losses were not due to its negligence or to that of its employees. To


avoid liability, the arrastre operator must prove that it exercised
diligence and due care in handling the shipment. 35
ATI failed to discharge its burden of proof. Instead, it insisted on
shifting the blame to COSCO on the basis of the Request for Bad Order
Survey dated August 9, 1996 purportedly showing that when ATI
received the shipment, one jumbo bag thereof was already in damaged
condition.
The RTC and CA were both correct in concluding that ATIs contention
was improbable and illogical. As judiciously discerned by the courts a
quo, the date of the document was too distant from the date when the
shipment was actually received by ATI from COSCO on July 18, 1996. In
fact, what the document established is that when the loss/damage was
discovered, the shipment has been in ATIs custody for at least two
weeks. This circumstance, coupled with the undisputed declaration of
PROVENs witnesses that while the shipment was in ATIs custody, it
was left in an open area exposed to the elements, thieves and
vandals,36 all generate the conclusion that ATI failed to exercise due
care and diligence while the subject shipment was under its custody,
control and possession as arrastre operator.

None of these instances, however, are present in this case. Moreover, it


is unmistakable that ATI has already conceded to the factual findings of
RTC and CA adjudging it liable for the shipments loss/damage
considering the absence of arguments pertaining to such issue in the
petition at bar.
These notwithstanding, the Court scrutinized the records of the case
and found that indeed, ATI is liable as the arrastre operator for the
lost/damaged portion of the shipment.

To prove the exercise of diligence in handling the subject cargoes, an


arrastre operator must do more than merely show the possibility that
some other party could be responsible for the loss or the damage. 37 It
must prove that it used all reasonable means to handle and store the
shipment with due care and diligence including safeguarding it from
weather elements, thieves or vandals.

The relationship between the consignee and the arrastre operator is


akin to that existing between the consignee and/or the owner of the
shipped goods and the common carrier, or that between a depositor
and a warehouseman. Hence, in the performance of its obligations, an
arrastre operator should observe the same degree of diligence as that
required of a common carrier and a warehouseman. Being the
custodian of the goods discharged from a vessel, an arrastre operators
duty is to take good care of the goods and to turn them over to the
party entitled to their possession.34

Non-presentation of the insurance


contract is not fatal to FIRST
LEPANTOs cause of action for
reimbursement as subrogee.

In a claim for loss filed by the consignee (or the insurer), the burden of
proof to show compliance with the obligation to deliver the goods to
the appropriate party devolves upon the arrastre operator. Since the
safekeeping of the goods is its responsibility, it must prove that the

It is conspicuous from the records that ATI put in issue the submission
of the insurance contract for the first time before the CA. Despite
opportunity to study FIRST LEPANTOs complaint before the MeTC, ATI
failed to allege in its answer the necessity of the insurance contract.

Neither was the same considered during pre-trial as one of the decisive
matters in the case. Further, ATI never challenged the relevancy or
materiality of the Certificate of Insurance presented by FIRST LEPANTO
as evidence during trial as proof of its right to be subrogated in the
consignees stead. Since it was not agreed during the pre-trial
proceedings that FIRST LEPANTO will have to prove its subrogation
rights by presenting a copy of the insurance contract, ATI is barred
from pleading the absence of such contract in its appeal. It is
imperative for the parties to disclose during pre-trial all issues they
intend to raise during the trial because, they are bound by the
delimitation of such issues. The determination of issues during the pretrial conference bars the consideration of other questions, whether
during trial or on appeal.38

the CAs judgment discussing the necessity of presenting an insurance


contract was erroneous.
At any rate, the non-presentation of the insurance contract is not fatal
to FIRST LEPANTOs right to collect reimbursement as the subrogee of
GASI.
"Subrogation is the substitution of one person in the place of another
with reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities."42 The right of subrogation springs
from Article 2207 of the Civil Code which states:
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 wrong-doer 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.

A faithful adherence to the rule by litigants is ensured by the equally


settled principle that a party cannot change his theory on appeal as
such act violates the basic rudiments of fair play and due process. As
stressed in Jose v. Alfuerto:39
[A] party cannot change his theory ofthe case or his cause of action on
appeal. Points of law, theories, issues and arguments not brought to
the attention of the lower court will not be considered by the reviewing
court. The defenses not pleaded in the answer cannot, on appeal,
change fundamentally the nature of the issue in the case. To do so
would be unfair to the adverse party, who had no opportunity to
present evidence in connection with the new theory; this would offend
the basic rules of due process and fair play. 40 (Citation omitted)

As a general rule, the marine insurance policy needs to be presented in


evidence before the insurer may recover the insured value of the
lost/damaged cargo in the exercise of its subrogatory right. In Malayan
Insurance Co., Inc. v.Regis Brokerage Corp.,43 the Court stated that the
presentation of the contract constitutive of the insurance relationship
between the consignee and insurer is critical because it is the legal
basis of the latters right to subrogation.44

While the Court may adopt a liberal stance and relax the rule, no
reasonable explanation, however, was introduced to justify ATIs failure
to timely question the basis of FIRST LEPANTOs rights as a subrogee.

In Home Insurance Corporation v. CA,45 the Court also held that the
insurance contract was necessary to prove that it covered the hauling
portion of the shipment and was not limited to the transport of the
cargo while at sea. The shipment in that case passed through six
stages with different parties involved in each stage until it reached the
consignee. The insurance contract, which was not presented in
evidence, was necessary to determine the scope of the insurers
liability, if any, since no evidence was adduced indicating at what

The fact that the CA took cognizance of and resolved the said issue did
not cure or ratify ATIs faux pas. "[A] judgment that goes beyond the
issues and purports to adjudicate something on which the court did not
hear the parties, is not only irregular but also extrajudicial and
invalid."41 Thus, for resolving an issue not framed during the pre-trial
and on which the parties were not heard during the trial, that portion of

stage in the handling process the damage to the cargo was


sustained.46

Verily, the Certificate of Insurance53 and the Release of


Claim54 presented as evidence sufficiently established FIRST LEPANTOs
right to collect reimbursement as the subrogee of the consignee, GASI.

An analogous disposition was arrived at in the Wallem 47 case cited by


ATI wherein the Court held that the insurance contract must be
presented in evidence in order to determine the extent of its coverage.
It was further ruled therein that the liability of the carrier from whom
reimbursement was demanded was not established with certainty
because the alleged shortage incurred by the cargoes was not
definitively determined.48

With ATIs liability having been positively established, to strictly require


the presentation of the insurance contract will run counter to the
principle of equity upon which the doctrine of subrogation is premised.
Subrogation 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. 55

Nevertheless, the rule is not inflexible. In certain instances, the Court


has admitted exceptions by declaring that a marine insurance policy is
dispensable evidence in reimbursement claims instituted by the
insurer.

The payment by the insurer to the insured operates as an equitable


assignment to the insurer of all the remedies which the insured may
have against the third party whose negligence or wrongful act caused
the loss. The right of subrogation is not dependent upon, nor does it
grow out of any privity of contract or upon payment by the insurance
company of the insurance claim. It accrues simply upon payment by
the insurance company of the insurance claim.56

In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of
subrogation accrues simply upon payment by the insurance company
of the insurance claim. Hence, presentation in evidence of the marine
insurance policy is not indispensable 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, was
held sufficient to establish not only the relationship between the
insurer and consignee, but also the amount paid to settle the insurance
claim. The presentation of the insurance contract was deemed not fatal
to the insurers cause of action because the loss of the cargo
undoubtedly occurred while on board the petitioners vessel. 50

ATI cannot invoke prescription


ATI argued that the consignee, thru its insurer, FIRST LEPANTO is
barred from seeking payment for the lost/damaged shipment because
the claim letter of GASI to ATI was served only on September 27, 1996
or more than one month from the date the shipment was delivered to
the consignees warehouse on August 9, 1996. The claim of GASI was
thus filed beyond the 15-day period stated in ATIs Management
Contract with PPA which in turn was reproduced in the gate passes
issued to the consignees broker, PROVEN, as follows:

The same rationale was the basis of the judgment in International


Container Terminal Services, Inc. v. FGU Insurance
Corporation,51 wherein the arrastre operator was found liable for the
lost shipment despite the failure of the insurance company to offer in
evidence the insurance contract or policy. As in Delsan, it was certain
that the loss of the cargo occurred while in the petitioners custody. 52

Issuance of this Gate Pass Constitutes delivery to and receipt by


consignee of the goods as described above in good order and condition
unless an accompanying x x x certificates duly issued and noted on the
face of this Gate Pass appeals. [sic]

Based on the attendant facts of the instant case, the application of the
exception is warranted.1wphi1 As discussed above, it is already
settled that the loss/damage to the GASIs shipment occurred while
they were in ATIs custody, possession and control as arrastre operator.

This Gate pass is subject to all terms and conditions defined in the
Management Contract between the Philippine Port[s] Authority and
Asian Terminals, Inc. and amendment thereto and alterations thereof
particularly but not limited to the [A]rticle VI thereof, limiting the

contractors liability to [P]5,000.00 per package unless the importation


is otherwise specified or manifested or communicated in writing
together with the invoice value and supported by a certified packing
list to the contractor by the interested party or parties before the
discharge of the goods and corresponding arrastre charges have been
paid providing exception or restrictions from liability releasing the
contractor from liability among others unless a formal claim with the
required annexes shall have been filed with the contractor within
fifteen (15) days from date of issuance by the contractors or certificate
of loss, damages, injury, or Certificate of non-delivery. 57

ATI cannot rely on the ruling in Prudentiat61 because the consignee


therein made no provisional claim thru request for bad order survey
and instead filed a claim for the first time after four months from
receipt of the shipment.
Attorney's fees and interests
All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65,
772.40 representing the insurance indemnity paid by the latter to
GASI. Pursuant to Nacar v. Gallery Frames,62 the said amount shall earn
a legal interest at the rate of six percent (6%) per annum from the date
of finality of this judgment until its full satisfaction.

The contention is bereft of merit. As clarified in Insurance Company of


North America v. Asian Terminals, Inc.,58substantial compliance with the
15-day time limitation is allowed provided that the consignee has
made a provisional claim thru a request for bad order survey or
examination report, viz:

As correctly imposed by the RTC and the CA, ten percent (10%) of the
judgment award is reasonable as and for attorney's fees considering
the length of time that has passed in prosecuting the claim. 63

Although the formal claim was filed beyond the 15-day period from the
issuance of the examination report on the request for bad order
survey, the purpose of the time limitations for the filing of claims had
already been fully satisfied by the request of the consignees broker for
a bad order survey and by the examination report of the arrastre
operator on the result thereof, as the arrastre operator had become
aware of and had verified the facts giving rise to its liability. Hence, the
arrastre operator suffered no prejudice by the lack of strict compliance
with the 15-day limitation to file the formal complaint. 59 (Citations
omitted)

WHEREFORE, premises considered, the petition is hereby DENIED. The


Decision dated October 10, 2008 of the Court of Appeals in CA-G.R. SP
No. 99021 is hereby AFFIRMED insofar as it adjudged liable and
ordered Asian Terminals, Inc., to pay First Lepanto-Taisho Insurance
Corp., the amount of P165,772.40, ten percent (10%) thereof as and
for attorney's fees, plus costs of suit. The said amount shall earn legal
interest at the rate of six percent ( 6%) per annum from the date of
finality of this judgment until its full satisfaction.
SO ORDERED.

In the present case, ATI was notified of the loss/damage to the subject
shipment as early as August 9, 1996 thru a Request for Bad Order
Survey60 jointly prepared by the consignees broker, PROVEN, and the
representatives of ATI. For having submitted a provisional claim, GASI
is thus deemed to have substantially complied with the notice
requirement to the arrastre operator notwithstanding that a formal
claim was sent to the latter only on September 27, 1996. ATI was not
deprived the best opportunity to probe immediately the veracity of
such claims. Verily then, GASI, thru its subrogee FIRST LEPANTO, is not
barred by filing the herein action in court.

G.R. No. 152334

September 24, 2014

H.H. HOLLERO CONSTRUCTION, INC., Petitioner,


vs.

GOVERNMENT SERVICE INSURANCE SYSTEM and POOL OF


MACHINERY INSURERS, Respondents.

Under both policies, it was provided that: (a) there must be prior notice
of claim for loss, damage or liability within fourteen (14) days from the
occurrence of the loss or damage;14 (b) all benefits thereunder shall be
forfeited if no action is instituted within twelve(12) months after the
rejection of the claim for loss, damage or liability;15 and (c) if the sum
insured is found to be less than the amount required to be insured, the
amount recoverable shall be reduced tosuch proportion before taking
into account the deductibles stated in the schedule (average clause
provision).16

DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 are the Decision2 dated
March 13, 2001 and the Resolution3 dated February 21, 2002 of the
Court of Appeals (CA) in CA-G.R. CV No. 63175, which set aside and
reversed the Judgment4 dated February 3, 1999 of the Regional Trial
Court of Quezon City, Branch 220 (RTC) in Civil Case No. 91-10144, and
dismissed petitioner H.H. Hollero Construction, Inc.' s (petitioner)
Complaint for Sum of Money and Damages under the insurance
policies issued by public respondent, the Government Service
Insurance System (GSIS), on the ground of prescription.

During the construction, three (3) typhoons hit the country, namely,
Typhoon Biring from June 1 to June 4, 1988, Typhoon Huaning on July
29, 1988, and Typhoon Saling on October 11, 1989, which caused
considerable damage to the Project.17 Accordingly, petitioner filed
several claims for indemnity with the GSIS on June 30, 1988, 18 August
25, 1988,19 and October 18, 1989,20 respectively.
In a letter21 dated April 26, 1990, the GSIS rejected petitioners
indemnity claims for the damages wrought by Typhoons Biring and
Huaning, finding that no amount is recoverable pursuant to the
average clause provision under the policies.22 In a letter23 dated June
21, 1990, the GSIS similarly rejected petitioners indemnity claim for
damages wrought by Typhoon Saling on a "no loss" basis, itappearing
from its records that the policies were not renewed before the onset of
the said typhoon.24

The Facts
On April 26, 1988, the GSIS and petitioner entered into a Project
Agreement (Agreement) whereby the latter undertook the
development of a GSIS housing project known as Modesta Village
Section B (Project).5 Petitioner obligated itself to insurethe Project,
including all the improvements, upon the execution of the Agreement
under a Contractors All Risks (CAR) Insurance with the GSIS General
Insurance Department for an amount equal to its cost or sound value,
which shall not be subject to any automatic annual reduction. 6

In a letter25 dated April 18, 1991, petitioner impugned the rejection of


its claims for damages/loss on accountof Typhoon Saling, and
reiterated its demand for the settlement of its claims.

Pursuant to its undertaking, petitioner secured CAR Policy No.


88/0857 in the amount of P1,000,000.00 for land development, which
was later increased to P10,000,000.00,8 effective from May 2, 1988 to
May 2, 1989.9Petitioner likewise secured CAR Policy No. 88/086 10 in the
amount of P1,000,000.00 for the construction of twenty (20) housing
units, which amount was later increased to P17,750,000.0011 to cover
the construction of another 355 new units, effective from May 2, 1988
toJune 1, 1989.12 In turn, the GSIS reinsured CAR Policy No. 88/085 with
respondent Pool of Machinery Insurers (Pool).13

On September 27, 1991, petitioner filed a Complaint 26 for Sum of


Money and Damages before the RTC, docketed as Civil Case No. 9110144,27 which was opposed by the GSIS through a Motion to
Dismiss28 dated October 25, 1991 on the ground that the causes of
action stated therein are barred by the twelve-month limitation
provided under the policies, i.e., the complaint was filed more than
one(1) year from the rejection of the indemnity claims. The RTC, in an
Order29 dated May 13, 1993, denied the said motion; hence, the GSIS
filed its answer30 with counterclaims for litigation expenses, attorneys

fees, and exemplary damages. Subsequently, the GSIS filed a Third


Party Complaint31 for indemnification against Pool, the reinsurer.

must be taken and understood in their plain, ordinary, and popular


sense.39

The RTC Ruling

Section 1040 of the General Conditions of the subject CAR Policies


commonly read:

In a Judgment32 dated February 3, 1999, the RTC granted petitioners


indemnity claims. It held that: (a) the average clauseprovision in the
policies which did not contain the assentor signature of the petitioner
cannot limit the GSIS liability, for being inefficacious and contrary to
public policy;33 (b) petitioner has established that the damages it
sustained were due to the peril insured against;34 and (c) CAR Policy
No. 88/086 was deemed renewed when the GSIS withheld the amount
of 35,855.00 corresponding to the premium payable,35 from the
retentions it released to petitioner. 36 The RTC thereby declared the GSIS
liable for petitioners indemnity claims for the damages brought about
by the said typhoons, less the stipulated deductions under the
policies,plus 6% legal interest from the dates of extrajudicial demand,
as well as for attorneys fees and costs of suit. It further dismissed for
lack of merit GSISs counterclaim and third party complaint. 37

10. If a claim is in any respect fraudulent, or if any false declaration is


made or used in support thereof, or if any fraudulent means or devices
are used by the Insured or anyone acting on his behalf to obtain any
benefit under this Policy, or if a claim is made and rejected and no
action or suit is commenced within twelve months after such
rejectionor, in case of arbitration taking place as provided herein,
within twelve months after the Arbitrator or Arbitrators or Umpire have
made their award, all benefit under this Policy shall be forfeited.
(Emphases supplied)
In this relation, case law illumines that the prescriptive period for the
insureds action for indemnity should bereckoned from the "final
rejection" of the claim.41

Dissatisfied, the GSIS elevated the matter to the CA. The CA Ruling In a
Decision38 dated March 13, 2001, the CAset aside and reversed the RTC
Judgment, thereby dismissing the complaint. It ruled that the complaint
filed on September 27, 1991 was barred by prescription, having been
commenced beyond the twelve-month limitation provided under the
policies, reckoned from the final rejection of the indemnity claims on
April 26, 1990 and June 21, 1990. The Issue Before the Court

Here, petitioner insists that the GSISs letters dated April 26, 1990 and
June 21, 1990 did not amount to a "final rejection" ofits claims, arguing
that they were mere tentative resolutions pending further action on
petitioners part or submission of proof in refutation of the reasons for
rejection.42 Hence, its causes of action for indemnity did not accrue on
those dates.
The Court does not agree.

The essential issue for the Courts resolution is whether or not the CA
committed reversible error in dismissing the complaint onthe ground of
prescription.

A perusal of the letter43 dated April 26, 1990 shows that the GSIS
denied petitioners indemnity claims wrought by Typhoons Biring and
Huaning, it appearing that no amount was recoverable under the
policies. While the GSIS gave petitioner the opportunity to dispute its
findings, neither of the parties pursued any further action on the
matter; this logically shows that they deemed the said letter as a
rejection of the claims. Lest it cause any confusion, the statement in
that letter pertaining to any queries petitioner may have on the denial
should be construed, at best, as a form of notice to the former that it
had the opportunity to seek reconsideration of the GSISs rejection.

The Courts Ruling


The petition lacks merit.
Contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous, they

Surely, petitioner cannot construe the said letter to be a mere


"tentative resolution." In fact, despite its disavowals, petitioner
admitted in its pleadings44 that the GSIS indeed denied its claim
through the aforementioned letter, buttarried in commencing the
necessary action in court.

In support of private respondents view, two rulings of this Court have


been cited, namely, the case of Eagle Star Insurance Co.vs.Chia Yu
([supra note 41]), where the Court held:
The right of the insured to the payment of his loss accrues from the
happening of the loss. However, the cause of action in an insurance
contract does not accrue until the insureds claim is finally rejected by
the insurer. This is because before such final rejection there is no real
necessity for bringing suit.

The same conclusion obtains for the letter 45 dated June 21, 1990
denying petitioners indemnity claim caused by Typhoon Saling on a
"no loss" basis due to the non-renewal of the policies therefor before
the onset of the said typhoon. The fact that petitioner filed a letter 46 of
reconsideration therefrom dated April 18, 1991, considering too the
inaction of the GSIS on the same similarly shows that the June 21, 1990
letter was also a final rejection of petitioners indemnity claim.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA
151 [1968], holding that:
Since "cause of action" requires as essential elements not only a legal
right of the plaintiff and a correlated obligation of the defendant in
violation of the said legal right, the cause of action does not accrue
until the party obligated (surety) refuses, expressly or impliedly, to
comply with its duty (in this case to pay the amount of the bond)."

As correctly observed by the CA, "final rejection" simply means denial


by the insurer of the claims of the insured and not the rejection or
denial by the insurer of the insureds motion or request for
reconsideration.47 The rejection referred to should be construed as the
rejection in the first instance,48 as in the two instances abovediscussed.

Indisputably, the above-cited pronouncements of this Court may be


taken to mean that the insured' s cause of action or his right to file a
claim either in the Insurance Commission or in a court of competent
jurisdiction [as in this case] commences from the time of the denial of
his claim by the Insurer, either expressly or impliedly.1wphi1

Comparable to the foregoing is the Courts action in the case of Sun


Insurance Office, Ltd. v. CA49 wherein it debunked "[t]he contention of
the respondents [therein] that the one-year prescriptive period does
not start to run until the petition for reconsideration had been resolved
by the insurer," holding that such view "runs counter to the declared
purpose for requiring that an action or suit be filed in the Insurance
Commission or in a court of competent jurisdiction from the denial of
the claim."50 In this regard, the Court rationalized that
"uphold[ing]respondents' contention would contradict and defeat the
very principle which this Court had laid down. Moreover, it can easily
be used by insured persons as a scheme or device to waste time until
any evidence which may be considered against them is
destroyed."51 Expounding on the matter, the Court had this to say:

But as pointed out by the petitioner insurance company, the rejection


referred to should be construed as the rejection, in the first instance,
for if what is being referred to is a reiterated rejection conveyed in a
resolution of a yetition for reconsideration, such should have been
expressly stipulated.52
In light of the foregoing, it is thus clear that petitioner's causes of
action for indemnity respectively accrued from its receipt of the letters
dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected
its claims in the first instance. Consequently, given that it allowed
more than twelve (12) months to lapse before filing the necessary
complaint before the R TC on September 27, 1991, its causes of action
had already prescribed.

The crucial issue in this case is: When does the cause of action accrue?

10

WHEREFORE, the petition is DENIED. The Decision dated March 13,


2001 and the Resolution dated February 21, 2002 of the Court of
Appeals (CA) in CA-G.R. CV No. 63175 are hereby AFFIRMED.

carcinoma.6 Consequently, respondent Tan Kit filed a claim under the


subject policy.
In a Letter7 dated September 3, 2001, petitioner denied respondent Tan
Kits claim on account of Norbertos failure to fully and faithfully
disclose in his insurance application certain material and relevant
information about his health and smoking history. Specifically, Norberto
answered "No" to the question inquiring whether he had smoked
cigarettes or cigars within the last 12 months prior to filling out said
application.8 However, the medical report of Dr. Anna Chua (Dr. Chua),
one of the several physicians that Norberto consulted for his illness,
reveals that he was a smoker and had only stopped smoking in August
1999. According to petitioner, its underwriters would not have
approved Norbertos application for life insurance had they been given
the correct information. Believing that the policy is null and void,
petitioner opined that its liability is limited to the refund of all the
premiums paid. Accordingly, it enclosed in the said letter a check
for P13,080.93 representing the premium refund.

SO ORDERED.
G.R. No. 183272

October 15, 2014

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,


vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO
TAN KIT, respondents.
DECISION
DEL CASTILLO, J.:
The Court of Appeals' (CA) imposition of 12o/o interest on
the P13,080.93 premium refund is the only matter in question in this
case.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to


accept the check and insisted on the payment of the insurance
proceeds.

This Petition for Review on Certiorari1 assails the October 17, 2007
Decision2 of CA in CA-GR. CV No. 86923, which, among others, imposed
a 12% per annum rate of interest reckoned from the time of death of
the insured until fully paid, on the premium to be reimbursed by
petitioner Sun Life of Canada (Philippines), Inc. (petitioner) to
respondents Sandra Tan Kit (respondent Tan Kit) and the Estate of the
Deceased Norberto Tan Kit (respondent estate). Likewise assailed in
this Petition is the CA's June 12, 2008 Resolution3 denying petitioner's
Motion for Reconsideration of the said Decision.

On October 4, 2002, petitioner filed a Complaint10 for Rescission of


Insurance Contract before the Regional Trial Court (RTC) of Makati City.
Ruling of the Regional Trial Court
In its November 30, 2005 Decision,11 the RTC noted that petitioners
physician, Dr. Charity Salvador (Dr. Salvador), conducted medical
examination on Norberto. Moreover, petitioners agent, Irma Joy E.
Javelosa (Javelosa), answered "NO" to the question "Are you aware of
anything about the life to be insureds lifestyle, hazardous sports,
habits, medical history, or any risk factor that would have an adverse
effect on insurability?" in her Agents Report. Javelosa also already
knew Norberto two years prior to the approval of the latters
application for insurance. The RTC concluded that petitioner, through
the above-mentioned circumstances, had already cleared Norberto of
any misrepresentation that he may have committed. The RTC also

Factual Antecedents
Respondent Tan Kit is the widow and designated beneficiary of
Norberto Tan Kit (Norberto), whose application for a life insurance
policy,4 with face value of P300,000.00, was granted by petitioner on
October 28, 1999. On February 19, 2001, or within the two-year
contestability period,5 Norberto died of disseminated gastric

11

opined that the affidavit of Dr. Chua, presented as part of petitioners


evidence and which confirmed the fact that the insured was a smoker
and only stopped smoking a year ago [1999], is hearsay since Dr. Chua
did not testify in court. Further, since Norberto had a subsisting
insurance policy with petitioner during his application for insurance
subject of this case, it was incumbent upon petitioner to ascertain the
health condition of Norberto considering the additional burden that it
was assuming. Lastly, petitioner did not comply with the requirements
for rescission of insurance contract as held in Philamcare Health
Systems, Inc. v. Court of Appeals.12 Thus, the dispositive portion of the
RTC Decision:

to his claim that he did not smoke cigarettes within 12 months prior to
the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the
risks of the insurance policy. This gave petitioner the right to rescind
the insurance contract which it properly exercised in this case.
In addition, the CA held that the content of Norbertos medical records
are deemed admitted by respondents since they failed to deny the
same despite having received from petitioner a Request for Admission
pursuant to Rule 26 of the Rules of Court.17 And since an admission is
in the nature of evidence the legal effects of which form part of the
records, the CA discredited the RTCs ruling that the subject medical
records and the affidavits executed by Norbertos physicians attesting
to the truth of the same were hearsay.

WHEREFORE, in view of the foregoing considerations, this court hereby


finds in favor of the [respondents and] against the [petitioner], hence it
hereby orders the [petitioner] to pay the [respondent], Sandra Tan Kit,
the sum of Philippine Pesos: THREE HUNDRED THOUSAND
(P300,000.00), representing the face value of the insurance policy with
interest at six percent (6%) per annum from October 4, 2002 until fully
paid.

The dispositive portion of the CA Decision reads:


WHEREFORE, the foregoing considered, the instant appeal is hereby
GRANTED and the appealed Decision REVERSED and SET ASIDE, and in
lieu thereof, a judgment is hereby rendered GRANTING the complaint a
quo.

Cost de oficio.
SO ORDERED.13
Petitioner moved for reconsideration,14 but was denied in an Order15
dated February 15, 2006.

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum


of P13,080.93 representing the [premium] paid by the insured with
interest at the rate of 12% per annum from the time of the death of the
insured until fully paid.

Hence, petitioner appealed to the CA.

SO ORDERED.18

Ruling of the Court of Appeals

The parties filed their separate motions for reconsideration. 19 While


respondents questioned the factual and legal bases of the CA Decision,
petitioner, on the other hand, assailed the imposition of interest on the
premium ordered refunded to respondents.

On appeal, the CA reversed and set aside the RTCs ruling in its
Decision16 dated October 17, 2007.

However, the appellate court denied the motions in its June 12, 2008
Resolution,20 viz:

From the records, the CA found that prior to his death, Norberto had
consulted two physicians, Dr. Chua on August 19, 2000, and Dr. John
Ledesma (Dr. Ledesma) on December 28, 2000, to whom he confided
that he had stopped smoking only in 1999. At the time therefore that
he applied for insurance policy on October 28, 1999, there is no truth

12

WHEREFORE, the foregoing considered, the separate motions for


reconsideration filed by the [petitioner] and the [respondents] are
hereby DENIED.

Tio Khe Chio is not applicable in this case.


Petitioner avers that Tio Khe Chio, albeit pertaining to marine
insurance, is instructive on the issue of payment of
interest.1wphi1 There, the Court pointed to Sections 243 and 244 of
the Insurance Code which explicitly provide for payment of interest
when there is unjustified refusal or withholding of payment of the claim
by the insurer, 23 and to Article 220924 of the New Civil Code which
likewise provides for payment of interest when the debtor is in delay.

SO ORDERED.21
Only petitioner appealed to this Court through the present Petition for
Review on Certiorari.
Issue

The Court finds, however, that Tio Khe Chio is not applicable here as it
deals with payment of interest on the insurance proceeds in which the
claim therefor was either unreasonably denied or withheld or the
insurer incurred delay in the payment thereof. In this case, what is
involved is an order for petitioner to refund to respondents the
insurance premium paid by Norberto as a consequence of the
rescission of the insurance contract on account of the latters
concealment of material information in his insurance application.
Moreover, petitioner did not unreasonably deny or withhold the
insurance proceeds as it was satisfactorily established that Norberto
was guilty of concealment.

The sole issue in this case is whether petitioner is liable to pay interest
on the premium to be refunded to respondents.
The Parties Arguments
Petitioner argues that no interest should have been imposed on the
premium to be refunded because the CA Decision does not provide any
legal or factual basis therefor; that petitioner directly and timely
tendered to respondents an amount representing the premium refund
but they rejected it since they opted to pursue their claim for the
proceeds of the insurance policy; that respondents should bear the
consequence of their unsound decision of rejecting the refund tendered
to them; and, that petitioner is not guilty of delay or of invalid or unjust
rescission as to make it liable for interest. Hence, following the ruling in
Tio Khe Chio v. Court of Appeals,22 no interest can be assessed against
petitioner.

Nature of interest imposed by the CA


There are two kinds of interest monetary and compensatory.
"Monetary interest refers to the compensation set by the parties for
the use or forbearance of money."25 No such interest shall be due
unless it has been expressly stipulated in writing. 26 "On the other hand,
compensatory interest refers to the penalty or indemnity for damages
imposed by law or by the courts."27 The interest mentioned in Articles
2209 and 221228of the Civil Code applies to compensatory interest.29

Respondents, on the other hand, contend that the reimbursement of


premium is clearly a money obligation or one that arises from
forbearance of money, hence, the imposition of 12% interest per
annum is just, proper and supported by jurisprudence. While they
admit that they refused the tender of payment of the premium refund,
they aver that they only did so because they did not want to abandon
their claim for the proceeds of the insurance policy. In any case, what
petitioner should have done under the circumstances was to consign
the amount of payment in court during the pendency of the case.

Clearly and contrary to respondents assertion, the interest imposed by


the CA is not monetary interest because aside from the fact that there
is no use or forbearance of money involved in this case, the subject
interest was not one which was agreed upon by the parties in writing.
This being the case and judging from the tenor of the CA, to wit:

Our Ruling

13

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum


of P13,080.93 representing the [premium] paid by the insured with
interest at the rate of 12% per annum from time of death of the
insured until fully paid.30

WHEREFORE, the assailed October 17, 2007 Decision of the Court of


Appeals in CA-G.R. CV No. 86923 is MODIFIED in that petitioner Sun
Life of Canada (Philippines), Inc. is ordered to reimburse to
respondents Sandra Tan Kit and the Estate of the Deceased Norberto
Tan Kit the sum of ~13,080.93 representing the premium paid by the
insured within fifteen (15) days from date of finality of this Decision. If
the amount is not reimbursed within said period, the same shall earn
interest of 6% per annum until fully paid.

there can be no other conclusion than that the interest imposed by the
appellate court is in the nature of compensatory interest.
The CA incorrectly imposed compensatory interest on the premium
refund reckoned from the time of death of the insured until fully paid

SO ORDERED.

As a form of damages, compensatory interest is due only if the obligor


is proven to have failed to comply with his obligation. 31

ALPHA INSURANCE AND SURETY CO. vs. ARSENIA SONIA


CASTOR

In this case, it is undisputed that simultaneous to its giving of notice to


respondents that it was rescinding the policy due to concealment,
petitioner tendered the refund of premium by attaching to the said
notice a check representing the amount of refund. However,
respondents refused to accept the same since they were seeking for
the release of the proceeds of the policy. Because of this discord,
petitioner filed for judicial rescission of the contract. Petitioner, after
receiving an adverse judgment from the RTC, appealed to the CA. And
as may be recalled, the appellate court found Norberto guilty of
concealment and thus upheld the rescission of the insurance contract
and consequently decreed the obligation of petitioner to return to
respondents the premium paid by Norberto. Moreover, we find that
petitioner did not incur delay or unjustifiably deny the claim.

G.R. No. 198174, September 2, 2013 (PERALTA, J.)


FACTS:
Arsenia Sonia Castor (Castor) obtained a Motor Car Policy for her
Toyota Revo DLX DSL with Alpha Insurance and Surety Co (Alpha). The
contract of insurance obligates the petitioner to pay the respondent
the amount of P630,000 in case of loss or damage to said vehicle
during the period covered.

Based on the foregoing, we find that petitioner properly complied with


its obligation under the law and contract. Hence, it should not be made
liable to pay compensatory interest.

On April 16, 2007, respondent instructed her driver, Jose Joel Salazar

Considering the prevailing circumstances of the case, we hereby direct


petitioner to reimburse the premium paid within 15 days from date of
finality of this Decision. If petitioner fails to pay within the said period,
then the amount shall be deemed equivalent to a forbearance of
credit.32 In such a case, the rate of interest shall be 6% per annum. 33

diligent efforts to locate the same, said efforts proved futile.

Lanuza to bring the vehicle to nearby auto-shop for a tune up.


However, Lanuza no longer returned the motor vehicle and despite

Resultantly, respondent promptly reported the incident to the police


and concomitantly notified petitioner of the said loss and demanded
payment of the insurance proceeds.

14

Alpha, however, denied the demand of Castor claiming that they are

A contract of insurance is a contract of adhesion. So, when the terms of

not liable since the culprit who stole the vehicle is employed with

the insurance contract contain limitations on liability, courts should

Castor. Under the Exceptions to Section III of the Policy, the Company

construe them in such a way as to preclude the insurer from non-

shall not be liable for (4) any malicious damage caused by the insured,

compliance with his obligation. Thus, in Eternal Gardens Memorial Park

any member of his family or by A PERSON IN THE INSUREDS

Corporation vs. Philippine American Life Insurance Company, this Court

SERVICE.

ruled that it must be remembered that an insurance contract is a


contract of adhesion which must be construed liberally in favor of the

Castor filed a Complaint for Sum of Money with Damages against Alpha

insured and strictly against the insurer in order to safeguard the

before the Regional Trial Court of Quezon City. The trial court rendered

latters interest.

its decision in favor of Castor which decision is affirmed in toto by the


Court of Appeals. Hence, this Petition for Review on Certiorari.
ISSUE:

G.R. No. L-47593 December 29, 1943

Whether or not the loss of respondents vehicle is excluded under the

THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,


vs.
SERAFIN D. FELICIANO ET AL., respondents.

insurance policy
HELD:

Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for


petitioner.
Deflfin Joven and Pablo Lorenzo for respondents.
Ramirez and Ortigas as amici curiae.

NO. The words loss and damage mean different things in common
ordinary usage. The word loss refers to the act or fact of losing, or
failure to keep possession, while the word damage means
deterioration or injury to property. Therefore, petitioner cannot exclude

OZAETA, J.:

the loss of Castors vehicle under the insurance policy under paragraph
4 of Exceptions to Section III, since the same refers only to

In a four-to-three decision promulgated on September 13, 1941, 1 this


Court affirmed the judgment of the Court of Appeals in favor of the
respondents and against the petitioner for the sum of P25,000,
representing the value of two insurance policies issued by the
petitioner on the life of Evaristo Feliciano. A motion to reconsider and
set aside said decision has been filed by the petitioner, and both

malicious damage, or more specifically, injury to the motor vehicle


caused by a person under the insureds service. Paragraph 4 clearly
does not contemplate loss of property.

15

parties have submitted exhaustive and luminous written arguments in


support of their respective contentions.

three times to the Santol Sanatorium and had X-ray pictures of his
lungs taken; but that in spite of such information the agent and the
medical examiner told them that the applicant was a fit subject for
insurance.

The facts of the case are set forth in the majority and dissenting
opinions heretofore handed down by this Court, the salient points of
which may be briefly restated as follows:

Each of the policies sued upon contains the following stipulations:

Evaristo Feliciano, who died on September 29, 1935, was suffering with
advanced pulmonary tuberculosis when he signed his applications for
insurance with the petitioner on October 12, 1934. On that same date
Doctor Trepp, who had taken X-ray pictures of his lungs, informed the
respondent Dr. Serafin D. Feliciano, brother of Evaristo, that the latter
"was already in a very serious ad practically hopeless condition."
Nevertheless the question contained in the application "Have you
ever suffered from any ailment or disease of the lungs, pleurisy,
pneumonia or asthma?" appears to have been answered , "No" And
above the signature of the applicant, following the answers to the
various questions propounded to him, is the following printed
statement:1awphil.net

This policy and the application herefor constitute the entire


contract between the parties hereto. . . . Only the President, or
the Manager, acting jointly with the Secretary or Assistant
Secretary (and then only in writing signed by them) have
power in behalf of the Company to issue permits, or to modify
this or any contract, or to extend the same time for making
any premium payment, and the Company shall not be bound
by any promise or representation heretofore or hereafter given
by any person other than the above-named officials, and by
them only in writing and signed conjointly as stated.
The application contains, among others, the following statements:

I declare on behalf of myself and of any person who shall have


or claim any interest in any policy issued hereunder, that each
of the above answers is full, complete and true, and that to the
best of my knowledge and belief I am a proper subject for life
insurance. (Exhibit K.)

18. I [the applicant] hereby declare that all the above


statements and answers as well as all those that I may make to
the Company's Medical Examiner in continuation of this
application, to be complete, true and correct to the best of my
knowledge and belief, and I hereby agree as follows:

The false answer above referred to, as well as the others, was written
by the Company's soliciting agent Romulo M. David, in collusion with
the medical examiner Dr. Gregorio Valdez, for the purpose of securing
the Company's approval of the application so that the policy to be
issued thereon might be credited to said agent in connection with the
inter-provincial contest which the Company was then holding among its
soliciting agents to boost the sales of its policies. Agent David bribed
Medical Examiner Valdez with money which the former borrowed from
the applicant's mother by way of advanced payment on the premium,
according to the finding of the Court of Appeals. Said court also found
that before the insured signed the application he, as well as the
members of his family, told the agent and the medical examiner that
he had been sick and coughing for some time and that he had gone

1. That his declaration, with the answers to be given by me to


the Medical Examiner, shall be the basis of the policy and form
part of same.
xxx

xxx

xxx

3. That the said policy shall not take effect until the first
premium has been paid and the policy has been delivered to
and accepted by me, while I am in good health.
4. That the agent taking this application has no authority to
make, modify or discharge contracts, or to waive any of the
Company's rights or requirements.

16

5. My acceptance of any policy issued on this application will


constitute a ratification by me of any corrections in or additions
to this application made by the Company in the space provided
"For Home Office Corrections or Additions Only." I agree that
photographic copy of this applications as corrected or added to
shall constitute sufficient notice to me of the changes made.
(Emphasis added.)

therefore knew that he was not "a proper subject for life insurance."
When he accepted the policy, he knew that he was not in good health.
Nevertheless, he not only accepted the first policy of P20,000 but then
and there applied for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the
trouble to read the answers contained in the photostatic copy of the
application attached to and made a part of the policy before he
accepted it and paid the premium thereon. He must have notice that
the answers to the questions therein asked concerning his clinical
history were false, and yet he accepted the first policy and applied for
another. In any event, he obligated himself to read the policy when he
subscribed to this statement: "My acceptance of any policy issued on
this application will constitute a ratification by me of any corrections in
or additions to this application made by the Company . . ." By
accepting the policy he became charged with knowledge of its
contents, whether he actually read it or not. He could not ostrich-like
hide his head from it in order to avoid his part of the bargain and at the
same time claim the benefit thereof. He knew, or was chargeable with
knowledge, from the very terms of the two policies sued upon (one of
which is printed in English and the other in Spanish) that the soliciting
agent and the medical examiner had no power to bind the Company by
any verbal promise or oral representation. The insured, therefore, had
no right to rely and we cannot believe he relied in good faith upon
the oral representation. The insured, therefore, had no right to rely
and we cannot believe he relied in good faith upon the oral
representation of said agent and medical examiner that he (the
applicant) was a fit subject for insurance notwithstanding that he had
been and was still suffering with advanced pulmonary tuberculosis.

The petitioner insists that upon the facts of the case the policies in
question are null and void ab initio and that all that the respondents
are entitled to is the refund of the premiums paid thereon. After a
careful re-examination of the facts and the law, we are persuaded that
petitioner's contention is correct. To the reasons adduced in the
dissenting opinion heretofore published, we only desire to add the
following considerations:
When Evaristo Feliciano, the applicant for insurance, signed the
application in blank and authorized the soliciting agent and/or medical
examiner of the Company to write the answers for him, he made them
his own agents for that purpose, and he was responsible for their acts
in that connection. If they falsified the answers for him, he could not
evade the responsibility for he falsification. He was not supposed to
sign the application in blank. He knew that the answers to the
questions therein contained would be "the basis of the policy," and for
that every reason he was required with his signature to vouch for truth
thereof.
Moreover, from the facts of the case we cannot escape the conclusion
that the insured acted in connivance with the soliciting agent and the
medical examiner of the Company in accepting the policies in question.
Above the signature of the applicant is the printed statement or
representation: " . . . I am a proper subject for life insurance." In
another sheet of the same application and above another signature of
the applicant was also printed this statement: "That the said policy
shall not take effect until he first premium has been paid and the policy
as been delivered to and accepted by me, while I am in good health."
When the applicant signed the application he was "having difficulty in
breathing, . . . with a very high fever." He had gone three times to the
Santol Sanatorium and had X-ray pictures taken of his lungs. He

From all the facts and circumstances of this case, we are constrained to
conclude that the insured was a coparticipant, and coresponsible with
Agent David and Medical Examiner Valdez, in the fraudulent
procurement of the policies in question and that by reason thereof said
policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the
judgment of the Court of Appeals is hereby reversed. Let another
judgment be entered in favor of the respondents and against the

17

petitioner for the refund of the premiums amounting to P1,389, with


legal interest thereon from the date of the complaint, and without any
finding as to costs.
G.R. No. L-1669

covered the period up to September 26, 1942. The plaintiff Paz Lopez
de Constantino was regularly appointed beneficiary. The policy
contained these stipulations, among others:

August 31, 1950

This POLICY OF INSURANCE is issued in consideration of the


written and printed application here for a copy of which is
attached hereto and is hereby made a part hereof made a part
hereof, and of the payment in advance during the lifetime and
good health of the Insured of the annual premium of One
Hundred fifty-eight and 4/100 pesos Philippine currency 1 and of
the payment of a like amount upon each twenty-seventh day
of September hereafter during the term of Twenty years or
until the prior death of the Insured. (Emphasis supplied.)

PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,


vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670

August 31, 1950

xxx

AGUSTINA PERALTA, plaintiff-appellant,


vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.

xxx

xxx

All premium payments are due in advance and any


unpunctuality in making any such payment shall cause this
policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of 31 days.)

Mariano Lozada for appellant Constantino.


Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.

After that first payment, no further premiums were paid. The insured
died on September 22, 1944.

BENGZON, J.:

It is admitted that the defendant, being an American corporation , had


to close its branch office in Manila by reason of the Japanese
occupation, i.e. from January 2, 1942, until the year 1945.

These two cases, appealed from the Court of First Instance of Manila,
call for decision of the question whether the beneficiary in a life
insurance policy may recover the amount thereof although the insured
died after repeatedly failing to pay the stipulated premiums, such
failure having been caused by the last war in the Pacific.

Second case. On August 1, 1938, the defendant Asia Life Insurance


Company issued its Policy No. 78145 (Joint Life 20-Year Endowment
Participating with Accident Indemnity), covering the lives of the
spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The
annual premium stipulated in the policy was regularly paid from August
1, 1938, up to and including September 30, 1941. Effective August 1,
1941, the mode of payment of premiums was changed from annual to
quarterly, so that quarterly premiums were paid, the last having been
delivered on November 18, 1941, said payment covering the period up
to January 31, 1942. No further payments were handed to the insurer.
Upon the Japanese occupation, the insured and the insurer became

The facts are these:


First case. In consideration of the sum of P176.04 as annual premium
duly paid to it, the Asia Life Insurance Company (a foreign corporation
incorporated under the laws of Delaware, U.S.A.), issued on September
27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of
Arcadio Constantino for a term of twenty years. The first premium

18

separated by the lines of war, and it was impossible and illegal for
them to deal with each other. Because the insured had borrowed on
the policy an mount of P234.00 in January, 1941, the cash surrender
value of the policy was sufficient to maintain the policy in force only up
to September 7, 1942. Tomas Ruiz died on February 16, 1945. The
plaintiff Agustina Peralta is his beneficiary. Her demand for payment
met with defendant's refusal, grounded on non-payment of the
premiums.

The controversial point has never been decided in this jurisdiction.


Fortunately, this court has had the benefit of extensive and exhaustive
memoranda including those of amici curiae. The matter has received
careful consideration, inasmuch as it affects the interest of thousands
of policy-holders and the obligations of many insurance companies
operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act
No. 2427, as amended, and the Civil Code.2 Act No. 2427 was largely
copied from the Civil Code of California.3 And this court has heretofore
announced its intention to supplement the statutory laws with general
principles prevailing on the subject in the United State. 4

The policy provides in part:


This POLICY OF INSURANCE is issued in consideration of the
written and printed application herefor, a copy of which is
attached hereto and is hereby made apart hereof, and of the
payment in advance during the life time and good health of the
Insured of the annual premium of Two hundred and 43/100
pesos Philippine currency and of the payment of a like amount
upon each first day of August hereafter during the term of
Twenty years or until the prior death of either of the Insured.
(Emphasis supplied.)
xxx

xxx

In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that
"contracts of insurance are contracts of indemnity upon the terms and
conditions specified in the policy. The parties have a right to impose
such reasonable conditions at the time of the making of the contract as
they may deem wise and necessary. The rate of premium is measured
by the character of the risk assumed. The insurance company, for a
comparatively small consideration, undertakes to guarantee the
insured against loss or damage, upon the terms and conditions agreed
upon, and upon no other, and when called upon to pay, in case of loss,
the insurer, therefore, may justly insists upon a fulfillment of these
terms. If the insured cannot bring himself within the conditions of the
policy, he is not entitled for the loss. The terms of the policy constitute
the measure of the insurer's liability, and in order to recover the
insured must show himself within those terms; and if it appears that
the contract has been terminated by a violation, on the part of the
insured, of its conditions, then there can be no right of recovery. The
compliance of the insured with the terms of the contract is a condition
precedent to the right of recovery."

xxx

All premium payments are due in advance and any


unpunctuality in making any such payment shall cause this
policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive
the proceeds of the policies minus all sums due for premiums in
arrears. They allege that non-payment of the premiums was caused by
the closing of defendant's offices in Manila during the Japanese
occupation and the impossible circumstances created by war.

Recall of the above pronouncements is appropriate because the


policies in question stipulate that "all premium payments are due in
advance and any unpunctuality in making any such payment shall
cause this policy to lapse." Wherefore, it would seem that pursuant to
the express terms of the policy, non-payment of premium produces its
avoidance.

Defendant on the other hand asserts that the policies had lapsed for
non-payment of premiums, in accordance with the contract of the
parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.

19

The conditions of contracts of Insurance, when plainly


expressed in a policy, are binding upon the parties and should
be enforced by the courts, if the evidence brings the case
clearly within their meaning and intent. It tends to bring the
law itself into disrepute when, by astute and subtle
distinctions, a plain case is attempted to be taken without the
operation of a clear, reasonable and material obligation of the
contract. Mack vs. Rochester German Ins. Co., 106 N.Y., 560,
564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)

payment of premiums is a condition precedent, the non-performance


would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of
decisions, hold that "war between states in which the parties reside
merely suspends the contracts of the life insurance, and that, upon
tender of all premiums due by the insured or his representatives after
the war has terminated, the contract revives and becomes fully
operative."

In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life
policy was avoided because the premium had not been paid within the
time fixed, since by its express terms, non-payment of any premium
when due or within the thirty-day period of grace, ipso facto caused
the policy to lapse. This goes to show that although we take the view
that insurance policies should be conserved 5 and should not lightly be
thrown out, still we do not hesitate to enforce the agreement of the
parties.

The United States rule declares that the contract is not merely
suspended, but is abrogated by reason of non-payments is peculiarly of
the essence of the contract. It additionally holds that it would be unjust
to allow the insurer to retain the reserve value of the policy, which is
the excess of the premiums paid over the actual risk carried during the
years when the policy had been in force. This rule was announced in
the well-known Statham6case which, in the opinion of Professor
Vance, is the correct rule.7

Forfeitures of insurance policies are not favored, but courts


cannot for that reason alone refuse to enforce an insurance
contract according to its meaning. (45 C.J.S., p. 150.)

The appellants and some amici curiae contend that the New York rule
should be applied here. The appellee and other amici curiae contend
that the United States doctrine is the orthodox view.

Nevertheless, it is contended for plaintiff that inasmuch as the nonpayment of premium was the consequence of war, it should be
excused and should not cause the forfeiture of the policy.

We have read and re-read the principal cases upholding the different
theories. Besides the respect and high regard we have always
entertained for decisions of the Supreme Court of the United States,
we cannot resist the conviction that the reasons expounded in its
decision of the Statham case are logically and judicially sound. Like the
instant case, the policy involved in the Statham decision specifies that
non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the court said:

Professor Vance of Yale, in his standard treatise on Insurance, says that


in determining the effect of non-payment of premiums occasioned by
war, the American cases may be divided into three groups, according
as they support the so-called Connecticut Rule, the New York Rule, or
the United States Rule.

. . . it must be conceded that promptness of payment is


essential in the business of life insurance. All the calculations
of the insurance company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the
premiums when due, but on compounding interest upon them.
It is on this basis that they are enabled to offer assurance at
the favorable rates they do. Forfeiture for non-payment is an

The first holds the view that "there are two elements in the
consideration for which the annual premium is paid First, the mere
protection for the year, and second, the privilege of renewing the
contract for each succeeding year by paying the premium for that year
at the time agreed upon. According to this view of the contract, the

20

necessary means of protecting themselves from


embarrassment. Unless it were enforceable, the business
would be thrown into confusion. It is like the forfeiture of
shares in mining enterprises, and all other hazardous
undertakings. There must be power to cut-off unprofitable
members, or the success of the whole scheme is endangered.
The insured parties are associates in a great scheme. This
associated relation exists whether the company be a mutual
one or not. Each is interested in the engagements of all; for out
of the co-existence of many risks arises the law of average,
which underlies the whole business. An essential feature of this
scheme is the mathematical calculations referred to, on which
the premiums and amounts assured are based. And these
calculations, again, are based on the assumption of average
mortality, and of prompt payments and compound interest
thereon. Delinquency cannot be tolerated nor redeemed,
except at the option of the company. This has always been the
understanding and the practice in this department of business.
Some companies, it is true, accord a grace of thirty days, or
other fixed period, within which the premium in arrear may be
paid, on certain conditions of continued good health, etc. But
this is a matter of stipulation, or of discretion, on the part of
the particular company. When no stipulation exists, it is the
general understanding that time is material, and that the
forfeiture is absolute if the premium be not paid. The
extraordinary and even desperate efforts sometimes made,
when an insured person is in extremes to meet a premium
coming due, demonstrates the common view of this matter.

The truth is, that the doctrine of the revival of contracts


suspended during the war is one based on considerations of
equity and justice, and cannot be invoked to revive a contract
which it would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in
the performance of the contract, another strong reason exists
why the policy should not be revived. The parties do not stand
on equal ground in reference to such a revival. It would operate
most unjustly against the company. The business of insurance
is founded on the law of average; that of life insurance
eminently so. The average rate of mortality is the basis on
which it rests. By spreading their risks over a large number of
cases, the companies calculate on this average with
reasonable certainty and safety. Anything that interferes with it
deranges the security of the business. If every policy lapsed by
reason of the war should be revived, and all the back
premiums should be paid, the companies would have the
benefit of this average amount of risk. But the good risks are
never heard from; only the bar are sought to be revived, where
the person insured is either dead or dying. Those in health can
get the new policies cheaper than to pay arrearages on the old.
To enforce a revival of the bad cases, whilst the company
necessarily lose the cases which are desirable, would be
manifestly unjust. An insured person, as before stated, does
not stand isolated and alone. His case is connected with and
co-related to the cases of all others insured by the same
company. The nature of the business, as a whole, must be
looked at to understand the general equities of the parties.

The case, therefore, is one in which time is material and of the


essence and of the essence of the contract. Non-payment at
the day involves absolute forfeiture if such be the terms of the
contract, as is the case here. Courts cannot with safety vary
the stipulation of the parties by introducing equities for the
relief of the insured against their own negligence.

The above consideration certainly lend themselves to the approval of


fair-minded men. Moreover, if, as alleged, the consequences of war
should not prejudice the insured, neither should they bear down on the
insurer.
Urging adoption of the New York theory, counsel for plaintiff point out
that the obligation of the insured to pay premiums was excused during
the war owing to impossibility of performance, and that consequently
no unfavorable consequences should follow from such failure.

In another part of the decision, the United States Supreme Court


considers and rejects what is, in effect, the New York theory in the
following words and phrases:

21

The appellee answers, quite plausibly, that the periodic payment of


premiums, at least those after the first, is not an obligation of the
insured, so much so that it is not a debt enforceable by action of the
insurer.

For the plaintiffs, it is again argued that in view of the enormous


growth of insurance business since the Statham decision, it could now
be relaxed and even disregarded. It is stated "that the relaxation of
rules relating to insurance is in direct proportion to the growth of the
business. If there were only 100 men, for example, insured by a
Company or a mutual Association, the death of one will distribute the
insurance proceeds among the remaining 99 policy-holders. Because
the loss which each survivor will bear will be relatively great, death
from certain agreed or specified causes may be deemed not a
compensable loss. But if the policy-holders of the Company or
Association should be 1,000,000 individuals, it is clear that the death of
one of them will not seriously prejudice each one of the 999,999
surviving insured. The loss to be borne by each individual will be
relatively small."

Under an Oklahoma decision, the annual premium due is not a


debt. It is not an obligation upon which the insurer can
maintain an action against insured; nor is its settlement
governed by the strict rule controlling payments of debts. So,
the court in a Kentucky case declares, in the opinion, that it is
not a debt. . . . The fact that it is payable annually or semiannually, or at any other stipulated time, does not of itself
constitute a promise to pay, either express or implied. In case
of non-payment the policy is forfeited, except so far as the
forfeiture may be saved by agreement, by waiver, estoppel, or
by statute. The payment of the premium is entirely optional,
while a debt may be enforced at law, and the fact that the
premium is agreed to be paid is without force, in the absence
of an unqualified and absolute agreement to pay a specified
sum at some certain time. In the ordinary policy there is no
promise to pay, but it is optional with the insured whether he
will continue the policy or forfeit it. (3 Couch, Cyc. on
Insurance, Sec. 623, p. 1996.)

The answer to this is that as there are (in the example) one million
policy-holders, the "losses" to be considered will not be the death of
one but the death of ten thousand, since the proportion of 1 to 100
should be maintained. And certainly such losses for 10,000 deaths will
not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the nonpayment of premiums is such a vital defense of insurance companies
that since the very beginning, said Act no. 2427 expressly preserved it,
by providing that after the policy shall have been in force for two years,
it shall become incontestable (i.e. the insurer shall have no defense)
except for fraud, non-payment of premiums, and military or naval
service in time of war (sec. 184 [b], Insurance Act). And when Congress
recently amended this section (Rep. Act No. 171), the defense of fraud
was eliminated, while the defense of nonpayment of premiums was
preserved. Thus the fundamental character of the undertaking to pay
premiums and the high importance of the defense of non-payment
thereof, was specifically recognized.

It is well settled that a contract of insurance is sui generis.


While the insured by an observance of the conditions may hold
the insurer to his contract, the latter has not the power or right
to compel the insured to maintain the contract relation with it
longer than he chooses. Whether the insured will continue it or
not is optional with him. There being no obligation to pay for
the premium, they did not constitute a
debt. (Noblevs. Southern States M.D. Ins. Co., 157 Ky., 46; 162
S.W., 528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime
conditions but also for times of war, because the policies contained
provisions applicable expressly to wartime days. The logical inference,
therefore, is that the parties contemplated uninterrupted operation of
the contract even if armed conflict should ensue.

In keeping with such legislative policy, we feel no hesitation to adopt


the United States Rule, which is in effect a variation of the Connecticut
rule for the sake of equity. In this connection, it appears that the first
policy had no reserve value, and that the equitable values of the

22

second had been practically returned to the insured in the form of loan
and advance for premium.

being a company under American jurisdiction when said policy was


issued on October 1, 1941. The petitioner, however, in pursuance of
the order of the Director of Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the respondent the sum of
P92,650 on April 19, 1943.

For all the foregoing, the lower court's decision absolving the
defendant from all liability on the policies in question, is hereby
affirmed, without costs.

G.R. No. L-2294

The present action was filed on August 6, 1946, in the Court of First
Instance of Manila for the purpose of recovering from the respondent
the sum of P92,650 above mentioned. The theory of the petitioner is
that the insured merchandise were burned up after the policy issued in
1941 in favor of the respondent corporation has ceased to be effective
because of the outbreak of the war between the United States and
Germany on December 10, 1941, and that the payment made by the
petitioner to the respondent corporation during the Japanese military
occupation was under pressure. After trial, the Court of First Instance of
Manila dismissed the action without pronouncement as to costs. Upon
appeal to the Court of Appeals, the judgment of the Court of First
Instance of Manila was affirmed, with costs. The case is now before us
on appeal by certiorari from the decision of the Court of Appeals.

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,


vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.

The Court of Appeals overruled the contention of the petitioner that the
respondent corporation became an enemy when the United States
declared war against Germany, relying on English and American cases
which held that a corporation is a citizen of the country or state by and
under the laws of which it was created or organized. It rejected the
theory that nationality of private corporation is determine by the
character or citizenship of its controlling stockholders.

PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld,
& Co., Inc., after payment of corresponding premium, obtained from
the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in a building
located at No. 711 Roman Street, Binondo Manila. On February 27,
1942, or during the Japanese military occupation, the building and
insured merchandise were burned. In due time the respondent
submitted to the petitioner its claim under the policy. The salvage
goods were sold at public auction and, after deducting their value, the
total loss suffered by the respondent was fixed at P92,650. The
petitioner refused to pay the claim on the ground that the policy in
favor of the respondent had ceased to be in force on the date the
United States declared war against Germany, the respondent
Corporation (though organized under and by virtue of the laws of the
Philippines) being controlled by the German subjects and the petitioner

There is no question that majority of the stockholders of the


respondent corporation were German subjects. This being so, we have
to rule that said respondent became an enemy corporation upon the
outbreak of the war between the United States and Germany. The
English and American cases relied upon by the Court of Appeals have
lost their force in view of the latest decision of the Supreme Court of
the United States in Clark vs. Uebersee Finanz Korporation, decided on
December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-153,
in which the controls test has been adopted. In "Enemy Corporation"
by Martin Domke, a paper presented to the Second International

23

Conference of the Legal Profession held at the Hague (Netherlands) in


August. 1948 the following enlightening passages appear:

corporation is determined by the enemy nationality of the


controlling stockholders.

Since World War I, the determination of enemy nationality of


corporations has been discussion in many countries,
belligerent and neutral. A corporation was subject to enemy
legislation when it was controlled by enemies, namely
managed under the influence of individuals or corporations,
themselves considered as enemies. It was the English courts
which first the Daimler case applied this new concept of
"piercing the corporate veil," which was adopted by the peace
of Treaties of 1919 and the Mixed Arbitral established after the
First World War.

Measures of blocking foreign funds, the so called freezing


regulations, and other administrative practice in the treatment
of foreign-owned property in the United States allowed to large
degree the determination of enemy interest in domestic
corporations and thus the application of the control test. Court
decisions sanctioned such administrative practice enacted
under the First War Powers Act of 1941, and more recently, on
December 8, 1947, the Supreme Court of the United States
definitely approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss corporation
allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach of
the vesting power (of the Alien Property Custodian) not to
appropriate friendly or neutral assets but to reach enemy
interest which masqueraded under those innocent fronts. . . .
The power of seizure and vesting was extended to all property
of any foreign country or national so that no innocent
appearing device could become a Trojan horse."

The United States of America did not adopt the control test
during the First World War. Courts refused to recognized the
concept whereby American-registered corporations could be
considered as enemies and thus subject to domestic legislation
and administrative measures regarding enemy property.
World War II revived the problem again. It was known that
German and other enemy interests were cloaked by domestic
corporation structure. It was not only by legal ownership of
shares that a material influence could be exercised on the
management of the corporation but also by long term loans
and other factual situations. For that reason, legislation on
enemy property enacted in various countries during World War
II adopted by statutory provisions to the control test and
determined, to various degrees, the incidents of control. Court
decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of
domestic corporation.

It becomes unnecessary, therefore, to dwell at length on the


authorities cited in support of the appealed decision. However, we may
add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz.,
(Supp. 9) 299, we already held that China Banking Corporation came
within the meaning of the word "enemy" as used in the Trading with
the Enemy Acts of civilized countries not only because it was
incorporated under the laws of an enemy country but because it was
controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8,
provides that "anyone except a public enemy may be insured." It
stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.

The United States did not, in the amendments of the Trading


with the Enemy Act during the last war, include as did other
legislations the applications of the control test and again, as in
World War I, courts refused to apply this concept whereby the
enemy character of an American or neutral-registered

Effect of war, generally. All intercourse between citizens of


belligerent powers which is inconsistent with a state of war is
prohibited by the law of nations. Such prohibition includes all

24

negotiations, commerce, or trading with the enemy; all acts


which will increase, or tend to increase, its income or
resources; all acts of voluntary submission to it; or receiving its
protection; also all acts concerning the transmission of money
or goods; and all contracts relating thereto are thereby
nullified. It further prohibits insurance upon trade with or by
the enemy, upon the life or lives of aliens engaged in service
with the enemy; this for the reason that the subjects of one
country cannot be permitted to lend their assistance to protect
by insurance the commerce or property of belligerent, alien
subjects, or to do anything detrimental too their country's
interest. The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent that
one country should destroy its enemy's property and repay in
insurance the value of what has been so destroyed, or that it
should in such manner increase the resources of the enemy, or
render it aid, and the commencement of war determines, for
like reasons, all trading intercourse with the enemy, which prior
thereto may have been lawful. All individuals therefore, who
compose the belligerent powers, exist, as to each other, in a
state of utter exclusion, and are public enemies. (6 Couch, Cyc.
of Ins. Law, pp. 5352-5353.)

The Court of Appeals, in deciding the case, stated that the main issue
hinges on the question of whether the policy in question became null
and void upon the declaration of war between the United States and
Germany on December 10, 1941, and its judgment in favor of the
respondent corporation was predicated on its conclusion that the policy
did not cease to be in force. The Court of Appeals necessarily assumed
that, even if the payment by the petitioner to the respondent was
involuntary, its action is not tenable in view of the ruling on the validity
of the policy. As a matter of fact, the Court of Appeals held that "any
intimidation resorted to by the appellee was not unjust but the exercise
of its lawful right to claim for and received the payment of the
insurance policy," and that the ruling of the Bureau of Financing to the
effect that "the appellee was entitled to payment from the appellant
was, well founded." Factually, there can be no doubt that the Director
of the Bureau of Financing, in ordering the petitioner to pay the claim
of the respondent, merely obeyed the instruction of the Japanese
Military Administration, as may be seen from the following: "In view of
the findings and conclusion of this office contained in its decision on
Administrative Case dated February 9, 1943 copy of which was sent to
your office and the concurrence therein of the Financial Department of
the Japanese Military Administration, and following the instruction of
said authority, you are hereby ordered to pay the claim of Messrs.
Christern, Huenefeld & Co., Inc. The payment of said claim, however,
should be made by means of crossed check." (Emphasis supplied.)

In the case of an ordinary fire policy, which grants insurance


only from year, or for some other specified term it is plain that
when the parties become alien enemies, the contractual tie is
broken and the contractual rights of the parties, so far as not
vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)

It results that the petitioner is entitled to recover what paid to the


respondent under the circumstances on this case. However, the
petitioner will be entitled to recover only the equivalent, in actual
Philippines currency of P92,650 paid on April 19, 1943, in accordance
with the rate fixed in the Ballantyne scale.

The respondent having become an enemy corporation on December


10, 1941, the insurance policy issued in its favor on October 1, 1941,
by the petitioner (a Philippine corporation) had ceased to be valid and
enforcible, and since the insured goods were burned after December
10, 1941, and during the war, the respondent was not entitled to any
indemnity under said policy from the petitioner. However, elementary
rules of justice (in the absence of specific provision in the Insurance
Law) require that the premium paid by the respondent for the period
covered by its policy from December 11, 1941, should be returned by
the petitioner.

Wherefore, the appealed decision is hereby reversed and the


respondent corporation is ordered to pay to the petitioner the sum of
P77,208.33, Philippine currency, less the amount of the premium, in
Philippine currency, that should be returned by the petitioner for the
unexpired term of the policy in question, beginning December 11,
1941. Without costs. So ordered.

25

husband and minor child, respectively, demanded payment of the face


value of the policy. The claim was rejected and this suit was
subsequently instituted.
G.R. No. L-16163

February 28, 1963

It appears that two months prior to the issuance of the policy or on


September 9, 1957, Saturnino was operated on for cancer, involving
complete removal of the right breast, including the pectoral muscles
and the glands found in the right armpit. She stayed in the hospital for
a period of eight days, after which she was discharged, although
according to the surgeon who operated on her she could not be
considered definitely cured, her ailment being of the malignant type.

IGNACIO SATURNINO, in his own behalf and as the JUDICIAL


GUARDIAN OF CARLOS SATURNINO, minor, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY, defendant-appellee.
Eleazaro A. Samson for plaintiffs-appellants.
Abello & Macias for defendant-appellee.

Notwithstanding the fact of her operation Estefania A. Saturnino did


not make a disclosure thereof in her application for insurance. On the
contrary, she stated therein that she did not have, nor had she ever
had, among other ailments listed in the application, cancer or other
tumors; that she had not consulted any physician, undergone any
operation or suffered any injury within the preceding five years; and
that she had never been treated for nor did she ever have any illness
or disease peculiar to her sex, particularly of the breast, ovaries,
uterus, and menstrual disorders. The application also recites that the
foregoing declarations constituted "a further basis for the issuance of
the policy."

MAKALINTAL, J.:
Plaintiffs, now appellants, filed this action in the Court of First Instance
of Manila to recover the sum of P5,000.00, corresponding to the face
value of an insurance policy issued by defendant on the life of
Estefania A. Saturnino, and the sum of P1,500.00 as attorney's fees.
Defendant, now appellee, set up special defenses in its answer, with a
counterclaim for damages allegedly sustained as a result of the
unwarranted presentation of this case. Both the complaint and the
counterclaim were dismissed by the trial court; but appellants were
declared entitled to the return of the premium already paid; plus
interest at 6% up to January 8, 1959, when a check for the
corresponding amount P359.65 was sent to them by appellee.

The question at issue is whether or not the insured made such false
representations of material facts as to avoid the policy. There can be
no dispute that the information given by her in her application for
insurance was false, namely, that she had never had cancer or tumors,
or consulted any physician or undergone any operation within the
preceding period of five years. Are the facts then falsely represented
material? The Insurance Law (Section 30) provides that "materiality is
to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the proposed
contract, or in making his inquiries." It seems to be the contention of
appellants that the facts subject of the representation were not
material in view of the "non-medical" nature of the insurance applied
for, which does away with the usual requirement of medical
examination before the policy is issued. The contention is without

The policy sued upon is one for 20-year endowment non-medical


insurance. This kind of policy dispenses with the medical examination
of the applicant usually required in ordinary life policies. However,
detailed information is called for in the application concerning the
applicant's health and medical history. The written application in this
case was submitted by Saturnino to appellee on November 16, 1957,
witnessed by appellee's agent Edward A. Santos. The policy was issued
on the same day, upon payment of the first year's premium of
P339.25. On September 19, 1958 Saturnino died of pneumonia,
secondary to influenza. Appellants here, who are her surviving

26

merit. If anything, the waiver of medical examination renders even


more material the information required of the applicant concerning
previous condition of health and diseases suffered, for such information
necessarily constitutes an important factor which the insurer takes into
consideration in deciding whether to issue the policy or not. It is logical
to assume that if appellee had been properly apprised of the insured's
medical history she would at least have been made to undergo medical
examination in order to determine her insurability.

avoid a policy it is not necessary to show actual fraud on the part of


the insured. In the case of Kasprzyk v. Metropolitan Insurance Co., 140
N.Y.S. 211, 214, it was held:
Moreover, if it were the law that an insurance company could
not depend a policy on the ground of misrepresentation, unless
it could show actual knowledge on the part of the applicant
that the statements were false, then it is plain that it would be
impossible for it to protect itself and its honest policyholders
against fraudulent and improper claims. It would be wholly at
the mercy of any one who wished to apply for insurance, as it
would be impossible to show actual fraud except in the
extremest cases. It could not rely on an application as
containing information on which it could act. There would be no
incentive to an applicant to tell the truth.

Appellants argue that due information concerning the insured's


previous illness and operation had been given to appellees agent
Edward A. Santos, who filled the application form after it was signed in
blank by Estefania A. Saturnino. This was denied by Santos in his
testimony, and the trial court found such testimony to be true. This is a
finding of fact which is binding upon us, this appeal having been taken
upon questions of law alone. We do not deem it necessary, therefore,
to consider appellee's additional argument, which was upheld by the
trial court, that in signing the application form in blank and leaving it to
Edward A. Santos to fill (assuming that to be the truth) the insured in
effect made Santos her agent for that purpose and consequently was
responsible for the errors in the entries made by him in that capacity.

Wherefore, the parties respectfully pray that the foregoing


stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t

In the application for insurance signed by the insured in this case, she
agreed to submit to a medical examination by a duly appointed
examiner of appellee if in the latter's opinion such examination was
necessary as further evidence of insurability. In not asking her to
submit to a medical examination, appellants maintain, appellee was
guilty of negligence, which precluded it from finding about her actual
state of health. No such negligence can be imputed to appellee. It was
precisely because the insured had given herself a clean bill of health
that appellee no longer considered an actual medical checkup
necessary.

In this jurisdiction a concealment, whether intentional or unintentional,


entitles the insurer to rescind the contract of insurance, concealment
being defined as "negligence to communicate that which a party
knows and ought to communicate" (Sections 24 & 26, Act No. 2427). In
the case of Argente v. West Coast Life Insurance Co., 51 Phil. 725, 732,
this Court said, quoting from Joyce, The Law of Insurance, 2nd ed., Vol.
3:
"The basis of the rule vitiating the contract in cases of
concealment is that it misleads or deceives the insurer into
accepting the risk, or accepting it at the rate of premium
agreed upon. The insurer, relying upon the belief that the
assured will disclose every material fact within his actual or
presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby
induced to estimate the risk upon a false basis that it does not
exist."

Appellants also contend there was no fraudulent concealment of the


truth inasmuch as the insured herself did not know, since her doctor
never told her, that the disease for which she had been operated on
was cancer. In the first place the concealment of the fact of the
operation itself was fraudulent, as there could not have been any
mistake about it, no matter what the ailment. Secondly, in order to

27

The judgment appealed from, dismissing the complaint and awarding


the return to appellants of the premium already paid, with interest at
6% up to January 29, 1959, affirmed, with costs against appellants.

premiums and interest thereon due for January and February, 1969, in
the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the
Policy as the designated beneficiary therein, although she admits that
she and the insured Buenaventura C. Ebrado were merely living as
husband and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the
deceased insured. She asserts that she is the one entitled to the
insurance proceeds, not the common-law wife, Carponia T. Ebrado.

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


THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE
EBRADO, defendants-appellants.

In doubt as to whom the insurance proceeds shall be paid, the insurer,


The Insular Life Assurance Co., Ltd. commenced an action for
Interpleader before the Court of First Instance of Rizal on April 29,
1970.
After the issues have been joined, a pre-trial conference was held on
July 8, 1972, after which, a pre-trial order was entered reading as
follows: +.wph!1

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

During the pre-trial conference, the parties manifested


to the court. that there is no possibility of amicable
settlement. Hence, the Court proceeded to have the
parties submit their evidence for the purpose of the
pre-trial and make admissions for the purpose of
pretrial. During this conference, parties Carponia T.
Ebrado and Pascuala Ebrado agreed and stipulated:
1) that the deceased Buenaventura Ebrado was
married to Pascuala Ebrado with whom she has six
(legitimate) namely; Hernando, Cresencio, Elsa,
Erlinda, Felizardo and Helen, all surnamed Ebrado; 2)
that during the lifetime of the deceased, he was
insured with Insular Life Assurance Co. Under Policy No.
009929 whole life plan, dated September 1, 1968 for
the sum of P5,882.00 with the rider for accidental
death benefit as evidenced by Exhibits A for plaintiffs
and Exhibit 1 for the defendant Pascuala and Exhibit 7
for Carponia Ebrado; 3) that during the lifetime of

On September 1, 1968, Buenaventura Cristor Ebrado was issued by


The Life Assurance Co., Ltd., Policy No. 009929 on a whole-life for
P5,882.00 with a, rider for Accidental Death for the same amount
Buenaventura C. Ebrado designated T. Ebrado as the revocable
beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t
when he was hit by a failing branch of a tree. As the policy was in
force, The Insular Life Assurance Co., Ltd. liable to pay the coverage in
the total amount of P11,745.73, representing the face value of the
policy in the amount of P5,882.00 plus the additional benefits for
accidental death also in the amount of P5,882.00 and the refund of
P18.00 paid for the premium due November, 1969, minus the unpaid

28

Buenaventura Ebrado, he was living with his commonwife, Carponia Ebrado, with whom she had 2 children
although he was not legally separated from his legal
wife; 4) that Buenaventura in accident on October 21,
1969 as evidenced by the death Exhibit 3 and affidavit
of the police report of his death Exhibit 5; 5) that
complainant Carponia Ebrado filed claim with the
Insular Life Assurance Co. which was contested by
Pascuala Ebrado who also filed claim for the proceeds
of said policy 6) that in view ofthe adverse claims the
insurance company filed this action against the two
herein claimants Carponia and Pascuala Ebrado; 7) that
there is now due from the Insular Life Assurance Co. as
proceeds of the policy P11,745.73; 8) that the
beneficiary designated by the insured in the policy is
Carponia Ebrado and the insured made reservation to
change the beneficiary but although the insured made
the option to change the beneficiary, same was never
changed up to the time of his death and the wife did
not have any opportunity to write the company that
there was reservation to change the designation of the
parties agreed that a decision be rendered based on
and stipulation of facts as to who among the two
claimants is entitled to the policy.

concubinage is not essential in order to establish the


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

Upon motion of the parties, they are given ten (10)


days to file their simultaneous memoranda from the
receipt of this order.

From this judgment, Carponia T. Ebrado appealed to the Court of


Appeals, but on July 11, 1976, the Appellate Court certified the case to
Us as involving only questions of law.

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

We affirm the judgment of the lower court.


1. It is quite unfortunate that the Insurance Act (RA 2327, as amended)
or even the new Insurance Code (PD No. 612, as amended) does not
contain any specific provision grossly resolutory of the prime question
at hand. Section 50 of the Insurance Act which provides that "(t)he
insurance shag be applied exclusively to the proper interest of the
person in whose name it is made" 1 cannot be validly seized upon to

It is patent from the last paragraph of Art. 739 of the


Civil Code that a criminal conviction for adultery or

29

hold that the mm includes the beneficiary. The word "interest" highly
suggests that the provision refers only to the "insured" and not to the
beneficiary, since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws against illicit relationships
especially on property and descent will be rendered nugatory, as the
same could easily be circumvented by modes of insurance. Rather, the
general rules of civil law should be applied to resolve this void in the
Insurance Law. Article 2011 of the New Civil Code states: "The contract
of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code."
When not otherwise specifically provided for by the Insurance Law, the
contract of life insurance is governed by the general rules of the civil
law regulating contracts. 3 And under Article 2012 of the same Code,
"any person who is forbidden from receiving any donation under Article
739 cannot be named beneficiary of a fife insurance policy by the
person who cannot make a donation to him. 4 Common-law spouses
are, definitely, barred from receiving donations from each other. Article
739 of the new Civil Code provides: +.wph!1

from the premiums of the policy which the insured pays out of
liberality, the beneficiary will receive the proceeds or profits of said
insurance. As a consequence, the proscription in Article 739 of the new
Civil Code should equally operate in life insurance contracts. The
mandate of Article 2012 cannot be laid aside: any person who cannot
receive a donation cannot be named as beneficiary in the life insurance
policy of the person who cannot make the donation.5 Under American
law, a policy of life insurance is considered as a testament and in
construing it, the courts will, so far as possible treat it as a will and
determine the effect of a clause designating the beneficiary by rules
under which wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the
institution of a barrier between common law spouses in record to
Property relations since such hip ultimately encroaches upon the
nuptial and filial rights of the legitimate family There is every reason to
hold that the bar in donations between legitimate spouses and those
between illegitimate ones should be enforced in life insurance policies
since the same are based on similar consideration As above pointed
out, a beneficiary in a fife insurance policy is no different from a donee.
Both are recipients of pure beneficence. So long as manage remains
the threshold of family laws, reason and morality dictate that the
impediments imposed upon married couple should likewise be imposed
upon extra-marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more reason should an
illicit relationship be restricted by these disabilities. Thus,
in Matabuena v. Cervantes, 7 this Court, through Justice Fernando,
said: +.wph!1

The following donations shall be void:


1. Those made between persons who were guilty of
adultery or concubinage at the time of donation;
Those made between persons found guilty of the same
criminal offense, in consideration thereof;
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his office.

If the policy of the law is, in the language of the opinion


of the then Justice J.B.L. Reyes of that court (Court of
Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue
and improper pressure and influence upon the donor, a
prejudice deeply rooted in our ancient law;" por-que no
se enganen desponjandose el uno al otro por amor que
han de consuno' (According to) the Partidas (Part IV,
Tit. XI, LAW IV), reiterating the rationale 'No Mutuato
amore invicem spoliarentur' the Pandects (Bk, 24, Titl.
1, De donat, inter virum et uxorem); then there is very

In the case referred to in No. 1, the action for


declaration of nullity may be brought by the spouse of
the donor or donee; and the guilt of the donee may be
proved by preponderance of evidence in the same
action.
2. In essence, a life insurance policy is no different from a civil donation
insofar as the beneficiary is concerned. Both are founded upon the
same consideration: liberality. A beneficiary is like a donee, because

30

reason to apply the same prohibitive policy to persons


living together as husband and wife without the benefit
of nuptials. For it is not to be doubted that assent to
such irregular connection for thirty years bespeaks
greater influence of one party over the other, so that
the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already
pointed out by Ulpian (in his lib. 32 ad Sabinum, fr. 1),
'it would not be just that such donations should subsist,
lest the condition 6f those who incurred guilt should
turn out to be better.' So long as marriage remains the
cornerstone of our family law, reason and morality
alike demand that the disabilities attached to marriage
should likewise attach to concubinage.

who were guilty of adultery or concubinage at the time of the


donation," Article 739 itself provides: +.wph!1
In the case referred to in No. 1, the action for
declaration of nullity may be brought by the spouse of
the donor or donee; and the guilty of the donee may
be proved by preponderance of evidence in the same
action.
The underscored clause neatly conveys that no criminal conviction for
the offense is a condition precedent. In fact, it cannot even be from the
aforequoted provision that a prosecution is needed. On the contrary,
the law plainly states that the guilt of the party may be proved "in the
same acting for declaration of nullity of donation. And, it would be
sufficient if evidence preponderates upon the guilt of the consort for
the offense indicated. The quantum of proof in criminal cases is not
demanded.

It is hardly necessary to add that even in the absence


of the above pronouncement, any other conclusion
cannot stand the test of scrutiny. It would be to indict
the frame of the Civil Code for a failure to apply a
laudable rule to a situation which in its essentials
cannot be distinguished. Moreover, if it is at all to be
differentiated the policy of the law which embodies a
deeply rooted notion of what is just and what is right
would be nullified if such irregular relationship instead
of being visited with disabilities would be attended with
benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any
occasion where the principle of statutory construction
that what is within the spirit of the law is as much a
part of it as what is written, this is it. Otherwise the
basic purpose discernible in such codal provision would
not be attained. Whatever omission may be apparent
in an interpretation purely literal of the language used
must be remedied by an adherence to its avowed
objective.

In the caw before Us, the requisite proof of common-law relationship


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

4. We do not think that a conviction for adultery or concubinage is


exacted before the disabilities mentioned in Article 739 may
effectuate. More specifically, with record to the disability on "persons

31

payable to the estate of the deceased insured. Costs against Carponia


T. Ebrado.

April 15, 1969, she gave the date of her birth as July 11, 1904. On the
same date, she paid the sum of P20.00 representing the premium for
which she was issued the corresponding receipt signed by an
authorized agent of the respondent insurance corporation. (Rollo, p.
27.) Upon the filing of said application and the payment of the
premium on the policy applied for, the respondent insurance
corporation issued to Carmen O. Lapuz its Certificate of Insurance No.
128866. (Rollo, p. 28.) The policy was to be effective for a period of 90
days.

SO ORDERED.

G.R. No. L-34200 September 30, 1982


On May 31, 1969 or during the effectivity of Certificate of Insurance
No. 12886, Carmen O. Lapuz died in a vehicular accident in the North
Diversion Road.

REGINA L. EDILLON, as assisted by her husband, MARCIAL


EDILLON, petitioners-appellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the
COURT OF FIRST INSTANCE OF RIZAL, BRANCH V, QUEZON
CITY, respondents-appellees.

On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and


who was the named beneficiary in the policy, filed her claim for the
proceeds of the insurance, submitting all the necessary papers and
other requisites with the private respondent. Her claim having been
denied, Regina L. Edillon instituted this action in the Court of First
Instance of Rizal on August 27, 1969.

K.V. Faylona for petitioners-appellants.


L. L. Reyes for respondents-appellees.

In resisting the claim of the petitioner, the respondent insurance


corporation relies on a provision contained in the Certificate of
Insurance, excluding its liability to pay claims under the policy in behalf
of "persons who are under the age of sixteen (16) years of age or over
the age of sixty (60) years ..." It is pointed out that the insured being
over sixty (60) years of age when she applied for the insurance
coverage, the policy was null and void, and no risk on the part of the
respondent insurance corporation had arisen therefrom.

VASQUEZ, J.:
The question of law raised in this case that justified a direct appeal
from a decision of the Court of First Instance Rizal, Branch V, Quezon
City, to be taken directly to the Supreme Court is whether or not the
acceptance by the private respondent insurance corporation of the
premium and the issuance of the corresponding certificate of insurance
should be deemed a waiver of the exclusionary condition of overage
stated in the said certificate of insurance.

The trial court sustained the contention of the private respondent and
dismissed the complaint; ordered the petitioner to pay attorney's fees
in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the
private respondent; and ordered the private respondent to return the
sum of TWENTY (P20.00) PESOS received by way of premium on the
insurancy policy. It was reasoned out that a policy of insurance being a
contract of adhesion, it was the duty of the insured to know the terms
of the contract he or she is entering into; the insured in this case, upon
learning from its terms that she could not have been qualified under

The material facts are not in dispute. Sometime in April 1969, Carmen
O, Lapuz applied with respondent insurance corporation for insurance
coverage against accident and injuries. She filled up the blank
application form given to her and filed the same with the respondent
insurance corporation. In the said application form which was dated

32

the conditions stated in said contract, what she should have done is
simply to ask for a refund of the premium that she paid. It was further
argued by the trial court that the ruling calling for a liberal
interpretation of an insurance contract in favor of the insured and
strictly against the insurer may not be applied in the present case in
view of the peculiar facts and circumstances obtaining therein.

We are in agreement with the trial Court that the


appellant is barred by waiver (or rather estoppel) to
claim violation of the so-called fire hydrants warranty,
for the reason that knowing fully an that the number of
hydrants demanded therein never existed from the
very beginning, the appellant nevertheless issued the
policies in question subject to such warranty, and
received the corresponding premiums. It would be
perilously close to conniving at fraud upon the insured
to allow appellant to claim now as void ab initio the
policies that it had issued to the plaintiff without
warning of their fatal defect, of which it was informed,
and after it had misled the defendant into believing
that the policies were effective.

We REVERSE the judgment of the trial court. The age of the insured
Carmen 0. Lapuz was not concealed to the insurance company. Her
application for insurance coverage which was on a printed form
furnished by private respondent and which contained very few items of
information clearly indicated her age of the time of filing the same to
be almost 65 years of age. Despite such information which could
hardly be overlooked in the application form, considering its
prominence thereon and its materiality to the coverage applied for, the
respondent insurance corporation received her payment of premium
and issued the corresponding certificate of insurance without question.
The accident which resulted in the death of the insured, a risk covered
by the policy, occurred on May 31, 1969 or FORTY-FIVE (45) DAYS after
the insurance coverage was applied for. There was sufficient time for
the private respondent to process the application and to notice that the
applicant was over 60 years of age and thereby cancel the policy on
that ground if it was minded to do so. If the private respondent failed
to act, it is either because it was willing to waive such disqualification;
or, through the negligence or incompetence of its employees for which
it has only itself to blame, it simply overlooked such fact. Under the
circumstances, the insurance corporation is already deemed in
estoppel. It inaction to revoke the policy despite a departure from the
exclusionary condition contained in the said policy constituted a waiver
of such condition, as was held in the case of "Que Chee Gan vs. Law
Union Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on
an insurance policy which contained a provision as to the installation of
fire hydrants the number of which depended on the height of the
external wan perimeter of the bodega that was insured. When it was
determined that the bodega should have eleven (11) fire hydrants in
the compound as required by the terms of the policy, instead of only
two (2) that it had, the claim under the policy was resisted on that
ground. In ruling that the said deviation from the terms of the policy
did not prevent the claim under the same, this Court stated the
following:

The insurance company was aware, even before the


policies were issued, that in the premises insured there
were only two fire hydrants installed by Que Chee Gan
and two others nearby, owned by the municipality of
Tabaco, contrary to the requirements of the warranty in
question. Such fact appears from positive testimony for
the insured that appellant's agents inspected the
premises; and the simple denials of appellant's
representative (Jamiczon) can not overcome that proof.
That such inspection was made it moreover rendered
probable by its being a prerequisite for the fixing of the
discount on the premium to which the insured was
entitled, since the discount depended on the number of
hydrants, and the fire fighting equipment available
(See"'Scale of Allowances" to which the policies were
expressly made subject). The law, supported by a long
line of cases, is expressed by American Jurisprudence
(Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer,
at the time of the issuance of a policy
of insurance, has knowledge of existing
facts which, if insisted on, would
invalidate the contract from its very
inception, such knowledge constitutes

33

a waiver of conditions in the contract


inconsistent with the known facts, and
the insurer is stopped thereafter from
asserting the breach of such
conditions. The law is charitable
enough to assume, in the absence of
any showing to the contrary, that an
insurance company intends to execute
a valid contract in return for the
premium received; and when the policy
contains a condition which renders it
voidable at its inception, and this result
is known to the insurer, it will be
presumed to have intended to waive
the conditions and to execute a binding
contract, rather than to have deceived
the insured into thinking he is insured
when in fact he is not, and to have
taken is money without consideration.'
(29 Am. Jur., Insurance, section 807, at
pp. 611-612.)

deemed to be the real intention of the


parties. To hold that a literal
construction of the policy expressed
the true intention of the company
would be to indict it, for fraudulent
purposes and designs which we cannot
believe it to be guilty of (Wilson vs.
Commercial Union Assurance Co., 96
Atl. 540, 543544).
A similar view was upheld in the case of Capital Insurance & Surety
Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134, which involved a
violation of the provision of the policy requiring the payment of
premiums before the insurance shall become effective. The company
issued the policy upon the execution of a promissory note for the
payment of the premium. A check given subsequent by the insured as
partial payment of the premium was dishonored for lack of funds.
Despite such deviation from the terms of the policy, the insurer was
held liable.
Significantly, in the case before Us the Capital
Insurance accepted the promise of Plastic Era to pay
the insurance premium within thirty (30) days from the
effective date of policy. By so doing, it has impliedly
agreed to modify the tenor of the insurance policy and
in effect, waived the provision therein that it would
only pay for the loss or damage in case the same
occurs after the payment of the premium. Considering
that the insurance policy is silent as to the mode of
payment, Capital Insurance is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered. The view taken
in most cases in the United States:

The reason for the rule is not difficult to


find.
The plain, human justice of this
doctrine is perfectly apparent. To allow
a company to accept one's money for a
policy of insurance which it then knows
to be void and of no effect, though it
knows as it must, that the assured
believes it to be valid and binding, is so
contrary to the dictates of honesty and
fair dealing, and so closely related to
positive fraud, as to be abhorent to
fairminded men. It would be to allow
the company to treat the policy as valid
long enough to get the premium on it,
and leave it at liberty to repudiate it
the next moment. This cannot be

... is that although one of conditions of


an insurance policy is that "it shall not
be valid or binding until the first
premium is paid", if it is silent as to the

34

mode of payment, promissory notes


received by the company must be
deemed to have been accepted in
payment of the premium. In other
words, a requirement for the payment
of the first or initial premium in
advance or actual cash may be waived
by acceptance of a promissory note...

This is an appeal from the judgment of the Court of First Instance of


Manila, ordering the appellant Asian-Crusader Life Assurance
Corporation to pay the face value of an insurance policy issued on the
life of Kwong Nam the deceased husband of appellee Ng Gan Zee.
Misrepresentation and concealment of material facts in obtaining the
policy were pleaded to avoid the policy. The lower court rejected the
appellant's theory and ordered the latter to pay appellee "the amount
of P 20,000.00, with interest at the legal rate from July 24, 1964, the
date of the filing of the complaint, until paid, and the costs. "

WHEREFORE, the judgment appealed from is hereby REVERSED and


SET ASIDE. In lieu thereof, the private respondent insurance
corporation is hereby ordered to pay to the petitioner the sum of TEN
THOUSAND (P10,000.00) PESOS as proceeds of Insurance Certificate
No. 128866 with interest at the legal rate from May 31, 1969 until fully
paid, the further sum of TWO THOUSAND (P2,000.00) PESOS as and for
attorney's fees, and the costs of suit.

The Court of Appeals certified this appeal to Us, as the same involves
solely a question of law.
On May 12, 1962, Kwong Nam applied for a 20-year endowment
insurance on his life for the sum of P20,000.00, with his wife, appellee
Ng Gan Zee as beneficiary. On the same date, appellant, upon receipt
of the required premium from the insured, approved the application
and issued the corresponding policy. On December 6, 1963, Kwong
Nam died of cancer of the liver with metastasis. All premiums had been
religiously paid at the time of his death.

SO ORDERED.

On January 10, 1964, his widow Ng Gan Zee presented a claim in due
form to appellant for payment of the face value of the policy. On the
same date, she submitted the required proof of death of the insured.
Appellant denied the claim on the ground that the answers given by
the insured to the questions appealing in his application for life
insurance were untrue.

G.R. No. L-30685 May 30, 1983


NG GAN ZEE, plaintiff-appellee,
vs.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendantappellant.

Appellee brought the matter to the attention of the Insurance


Commissioner, the Hon. Francisco Y. Mandamus, and the latter, after
conducting an investigation, wrote the appellant that he had found no
material concealment on the part of the insured and that, therefore,
appellee should be paid the full face value of the policy. This opinion of
the Insurance Commissioner notwithstanding, appellant refused to
settle its obligation.

Alberto Q. Ubay for plaintiff-appellee.


Santiago F. A lidio for defendant-appellant.

Appellant alleged that the insured was guilty of misrepresentation


when he answered "No" to the following question appearing in the
application for life insurance-

ESCOLIN, J.:

35

Has any life insurance company ever refused your


application for insurance or for reinstatement of a
lapsed policy or offered you a policy different from that
applied for? If, so, name company and date.

whether any life insurance company ever refused his


application for reinstatement of a lapsed policy he did
not misrepresent any fact.
... the evidence shows that the application of Kwong
Nam with the Insular Life Assurance Co., Ltd. was for
the reinstatement and amendment of his lapsed
insurance policy-Policy No. 369531 -not an application
for a 'new insurance policy. The Insular Life Assurance
Co., Ltd. approved the said application on April 24,
1962. Policy No. 369531 was reinstated for the amount
of P20,000.00 as applied for by Kwong Nam [Exhs. 'L',
'L-l' and 'L-2']. No new policy was issued by the Insular
Life Assurance Co., Ltd. to Kwong Nam in connection
with said application for reinstatement and
amendment. Such being the case, the Court finds that
there is no misrepresentation on this matter. 2

In its brief, appellant rationalized its thesis thus:


... As pointed out in the foregoing summary of the
essential facts in this case, the insured had in January,
1962, applied for reinstatement of his lapsed life
insurance policy with the Insular Life Insurance Co.,
Ltd, but this was declined by the insurance company,
although later on approved for reinstatement with a
very high premium as a result of his medical
examination. Thus notwithstanding the said insured
answered 'No' to the [above] question propounded to
him. ... 1

Appellant further maintains that when the insured was examined in


connection with his application for life insurance, he gave the
appellant's medical examiner false and misleading information as to
his ailment and previous operation. The alleged false statements given
by Kwong Nam are as follows:

The lower court found the argument bereft of factual basis; and We
quote with approval its disquisition on the matterOn the first question there is no evidence that the
Insular Life Assurance Co., Ltd. ever refused any
application of Kwong Nam for insurance. Neither is
there any evidence that any other insurance company
has refused any application of Kwong Nam for
insurance.

Operated on for a Tumor [mayoma] of the stomach.


Claims that Tumor has been associated with ulcer of
stomach. Tumor taken out was hard and of a hen's egg
size. Operation was two [2] years ago in Chinese
General Hospital by Dr. Yap. Now, claims he is
completely recovered.

... The evidence shows that the Insular Life Assurance


Co., Ltd. approved Kwong Nam's request for
reinstatement and amendment of his lapsed insurance
policy on April 24, 1962 [Exh. L-2 Stipulation of Facts,
Sept. 22, 1965). The Court notes from said application
for reinstatement and amendment, Exh. 'L', that the
amount applied for was P20,000.00 only and not for
P50,000.00 as it was in the lapsed policy. The amount
of the reinstated and amended policy was also for
P20,000.00. It results, therefore, that when on May 12,
1962 Kwong Nam answered 'No' to the question

To demonstrate the insured's misrepresentation, appellant directs Our


attention to:
[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong
Nam at the Chinese General Hospital on May 22, 1960, i.e., about 2
years before he applied for an insurance policy on May 12, 1962.
According to said report, Dr. Fu Sun Yuan had diagnosed the patient's

36

ailment as 'peptic ulcer' for which, an operation, known as a 'sub-total


gastric resection was performed on the patient by Dr. Pacifico Yap; and

Assuming that the aforesaid answer given by the insured is false, as


claimed by the appellant. Sec. 27 of the Insurance Law, above-quoted,
nevertheless requires that fraudulent intent on the part of the insured
be established to entitle the insurer to rescind the contract. And as
correctly observed by the lower court, "misrepresentation as a defense
of the insurer to avoid liability is an 'affirmative' defense. The duty to
establish such a defense by satisfactory and convincing evidence rests
upon the defendant. The evidence before the Court does not clearly
and satisfactorily establish that defense."

[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that
the specimen removed from the patient's body was 'a portion of the
stomach measuring 12 cm. and 19 cm. along the lesser curvature with
a diameter of 15 cm. along the greatest dimension.
On the bases of the above undisputed medical data showing that the
insured was operated on for peptic ulcer", involving the excision of a
portion of the stomach, appellant argues that the insured's statement
in his application that a tumor, "hard and of a hen's egg size," was
removed during said operation, constituted material concealment.

It bears emphasis that Kwong Nam had informed the appellant's


medical examiner that the tumor for which he was operated on was
"associated with ulcer of the stomach." In the absence of evidence that
the insured had sufficient medical knowledge as to enable him to
distinguish between "peptic ulcer" and "a tumor", his statement that
said tumor was "associated with ulcer of the stomach, " should be
construed as an expression made in good faith of his belief as to the
nature of his ailment and operation. Indeed, such statement must be
presumed to have been made by him without knowledge of its
incorrectness and without any deliberate intent on his part to mislead
the appellant.

The question to be resolved may be propounded thus: Was appellant,


because of insured's aforesaid representation, misled or deceived into
entering the contract or in accepting the risk at the rate of premium
agreed upon?
The lower court answered this question in the negative, and We agree.
Section 27 of the Insurance Law [Act 2427] provides:

While it may be conceded that, from the viewpoint of a medical expert,


the information communicated was imperfect, the same was
nevertheless sufficient to have induced appellant to make further
inquiries about the ailment and operation of the insured.

Sec. 27. Such party a contract of insurance must


communicate to the other, in good faith, all facts within
his knowledge which are material to the contract, and
which the other has not the means of ascertaining, and
as to which he makes no warranty. 3

Section 32 of Insurance Law [Act No. 24271 provides as follows:


Section 32. The right to information of material facts
maybe waived either by the terms of insurance or by
neglect to make inquiries as to such facts where they
are distinctly implied in other facts of which
information is communicated.

Thus, "concealment exists where the assured had knowledge of a fact


material to the risk, and honesty, good faith, and fair dealing requires
that he should communicate it to the assurer, but he designedly and
intentionally withholds the same." 4
It has also been held "that the concealment must, in the absence of
inquiries, be not only material, but fraudulent, or the fact must have
been intentionally withheld." 5

It has been held that where, upon the face of the application, a
question appears to be not answered at all or to be imperfectly
answered, and the insurers issue a policy without any further inquiry,

37

they waive the imperfection of the answer and render the omission to
answer more fully immaterial. 6

prescribed the following fro him: Trazepam, a tranquilizer; and Aptin, a


beta-blocker drug. Mr. Canilang consulted the same doctor again on 3
August 1982 and this time was found to have "acute bronchitis."

As aptly noted by the lower court, "if the ailment and operation of
Kwong Nam had such an important bearing on the question of whether
the defendant would undertake the insurance or not, the court cannot
understand why the defendant or its medical examiner did not make
any further inquiries on such matters from the Chinese General
Hospital or require copies of the hospital records from the appellant
before acting on the application for insurance. The fact of the matter is
that the defendant was too eager to accept the application and receive
the insured's premium. It would be inequitable now to allow the
defendant to avoid liability under the circumstances."

On next day, 4 August 1982, Jaime Canilang applied for a "nonmedical" insurance policy with respondent Great Pacific Life Assurance
Company ("Great Pacific") naming his wife, Thelma Canilang, as his
beneficiary. 1 Jaime Canilang was issued ordinary life insurance Policy
No. 345163, with the face value of P19,700, effective as of 9 August
1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure,"
"anemia," and "chronic anemia." 2 Petitioner, widow and beneficiary of
the insured, filed a claim with Great Pacific which the insurer denied on
5 December 1983 upon the ground that the insured had concealed
material information from it.

Finding no reversible error committed by the trial court, the judgment


appealed from is hereby affirmed, with costs against appellant AsianCrusader life Assurance Corporation.

Petitioner then filed a complaint against Great Pacific with the


Insurance Commission for recovery of the insurance proceeds. During
the hearing called by the Insurance Commissioner, petitioner testified
that she was not aware of any serious illness suffered by her late
husband 3 and that, as far as she knew, her husband had died because
of a kidney disorder. 4 A deposition given by Dr. Wilfredo Claudio was
presented by petitioner. There Dr. Claudio stated that he was the
family physician of the deceased Jaime Canilang 5 and that he had
previously treated him for "sinus tachycardia" and "acute
bronchitis." 6 Great Pacific for its part presented Dr. Esperanza
Quismorio, a physician
and a medical underwriter working for Great Pacific. 7 She testified that
the deceased's insurance application had been approved on the basis
of his medical declaration. 8 She explained that as a rule, medical
examinations are required only in cases where the applicant has
indicated in his application for insurance coverage that he has
previously undergone medical consultation and hospitalization. 9

SO ORDERED.

G.R. No. 92492 June 17, 1993


THELMA VDA. DE CANILANG, petitioner,
vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, respondents.
Simeon C. Sato for petitioner.
FELICIANO, J.:

In a decision dated 5 November 1985, Insurance Commissioner


Armando Ansaldo ordered Great Pacific to pay P19,700 plus legal
interest and P2,000.00 as attorney's fees after holding that:

On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and


was diagnosed as suffering from "sinus tachycardia." The doctor

38

1. the ailment of Jaime Canilang was not so serious


that, even if it had been disclosed, it would not have
affected Great Pacific's decision to insure him;

1. . . . the Honorable Court of Appeals, speaking with


due respect, erred in not holding that the issue in the
case agreed upon between the parties before the
Insurance Commission is whether or not Jaime
Canilang "intentionally" made material concealment in
stating his state of health;

2. Great Pacific had waived its right to inquire into the


health condition of the applicant by the issuance of the
policy despite the lack of answers to "some of the
pertinent questions" in the insurance application;

2. . . . at any rate, the non-disclosure of certain facts


about his previous health conditions does not amount
to fraud and private respondent is deemed to have
waived inquiry thereto. 11

3. there was no intentional concealment on the part of


the insured Jaime Canilang as he had thought that he
was merely suffering from a minor ailment and simple
cold; 10 and

The medical declaration which was set out in the application for
insurance executed by Jaime Canilang read as follows:

4. Batas Pambansa Blg. 847 which voids an insurance


contract, whether or not concealment was intentionally
made, was not applicable to Canilang's case as that
law became effective only on 1 June 1985.

MEDICAL DECLARATION
I hereby declare that:

On appeal by Great Pacific, the Court of Appeals reversed and set


aside the decision of the Insurance Commissioner and dismissed
Thelma Canilang's complaint and Great Pacific's counterclaim. The
Court of Appealed found that the use of the word "intentionally" by the
Insurance Commissioner in defining and resolving the issue agreed
upon by the parties at pre-trial before the Insurance Commissioner was
not supported by the evidence; that the issue agreed upon by the
parties had been whether the deceased insured, Jaime Canilang, made
a material concealment as the state of his health at the time of the
filing of insurance application, justifying respondent's denial of the
claim. The Court of Appeals also found that the failure of Jaime
Canilang to disclose previous medical consultation and treatment
constituted material information which should have been
communicated to Great Pacific to enable the latter to make proper
inquiries. The Court of Appeals finally held that the Ng Gan Zee case
which had involved misrepresentation was not applicable in respect of
the case at bar which involves concealment.

(1) I have not been confined in any hospital, sanitarium


or infirmary, nor receive any medical or surgical
advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a
physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney, stomach disorder, or
any other physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
_______________________________________________________
_________________________
GENERAL DECLARATION

Petitioner Thelma Canilang is now before this Court on a Petition for


Review on Certiorari alleging that:

39

I hereby declare that all the foregoing answers and


statements are complete, true and correct. I
herebyagree that if there be any fraud or
misrepresentation in the above statements material to
the risk, the INSURANCE COMPANY upon discovery
within two (2) years from the effective date of
insurance shall have the right to declare such
insurance null and void. That the liabilities of the
Company under the said Policy/TA/Certificate shall
accrue and begin only from the date of
commencement of risk stated in the
Policy/TA/Certificate, provided that the first premium is
paid and the Policy/TA/Certificate is delivered to, and
accepted by me in person, when I am in actual good
health.

in assessing the risk involved in making or omitting to make further


inquiries and in accepting the application for insurance; that "probable
and reasonable influence of the facts" concealed must, of course, be
determined objectively, by the judge ultimately.
The insurance Great Pacific applied for was a "non-medical" insurance
policy. In Saturnino v. Philippine-American Life Insurance
Company, 16 this Court held that:
. . . if anything, the waiver of medical examination [in a
non-medical insurance contract] renders even more
material the information required of the applicant
concerning previous condition of health and diseases
suffered, for such information necessarily constitutes
an important factor which the insurer takes into
consideration in deciding whether to issue the policy or
not . . . . 17 (Emphasis supplied)

Signed at Manila his 4th day of August, 1992

Illegible The Insurance Commissioner had also ruled that the failure of Great

Pacific to convey certain information to the insurer was not


Signature
of Applicant.
"intentional"
in nature, for the reason that Jaime Canilang believed that
he was suffering from minor ailment like a common cold. Section 27 of
the Insurance Code of 1978 as it existed from 1974 up to 1985, that is,
throughout the time range material for present purposes, provided
that:

We agree with the Court of Appeals that the information which Jaime
Canilang failed to disclose was material to the ability of Great Pacific to
estimate the probable risk he presented as a subject of life insurance.
Had Canilang disclosed his visits to his doctor, the diagnosis made and
medicines prescribed by such doctor, in the insurance application, it
may be reasonably assumed that Great Pacific would have made
further inquiries and would have probably refused to issue a nonmedical insurance policy or, at the very least, required a higher
premium for the same coverage. 15 The materiality of the information
withheld by Great Pacific did not depend upon the state of mind of
Jaime Canilang. A man's state of mind or subjective belief is not
capable of proof in our judicial process, except through proof of
external acts or failure to act from which inferences as to his
subjective belief may be reasonably drawn. Neither does materiality
depend upon the actual or physical events which ensue. Materiality
relates rather to the "probable and reasonable influence of the facts"
upon the party to whom the communication should have been made,

Sec. 27. A concealment entitles the injured party to


rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up
to 1974, had provided:
Sec. 26. A concealment, whether intentional or
unintentional, entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)
Upon the other hand, in 1985, the Insurance Code of 1978 was
amended by

40

B.P. Blg. 874. This subsequent statute modified Section 27 of the


Insurance Code of 1978 so as to read as follows:

We find it difficult to take seriously the argument that Great Pacific


had waived inquiry into the concealment by issuing the insurance
policy notwithstanding Canilang's failure to set out answers to some of
the questions in the insurance application. Such failure precisely
constituted concealment on the part of Canilang. Petitioner's
argument, if accepted, would obviously erase Section 27 from the
Insurance Code of 1978.

Sec. 27. A concealment whether intentional or


unintentional entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)
The unspoken theory of the Insurance Commissioner appears to have
been that by deleting the phrase "intentional or unintentional," the
Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874)
intended to limit the kinds of concealment which generate a right to
rescind on the part of the injured party to "intentional concealments."
This argument is not persuasive. As a simple matter of grammar, it
may be noted that "intentional" and "unintentional" cancel each other
out. The net result therefore of the phrase "whether intentional or
unitentional" is precisely to leave unqualified the term "concealment."
Thus, Section 27 of the Insurance Code of 1978 is properly read as
referring to "any concealment" without regard to whether such
concealment is intentional or unintentional. The phrase "whether
intentional or unintentional" was in fact superfluous. The deletion of
the phrase "whether intentional or unintentional" could not have had
the effect of imposing an affirmative requirement that a concealment
must be intentional if it is to entitle the injured party to rescind a
contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the
phrase "whether intentional or unintentional" merely underscored the
fact that all throughout (from 1914 to 1985), the statute
did not require proof that concealment must be "intentional" in order
to authorize rescission by the injured party.

It remains only to note that the Court of Appeals finding that the
parties had not agreed in the pretrial before the Insurance Commission
that the relevant issue was whether or not Jaime Canilang
had intentionally concealed material information from the insurer, was
supported by the evidence of record, i.e., the Pre-trial Order itself
dated 17 October 1984 and the Minutes of the Pre-trial Conference
dated 15 October 1984, which "readily shows that the word
"intentional" does not appear in the statement or definition of the
issue in the said Order and Minutes." 18
WHEREFORE, the Petition for Review is DENIED for lack of merit and
the Decision of the Court of Appeals dated 16 October 1989 in C.A.G.R. SP No. 08696 is hereby AFFIRMED. No pronouncement as to the
costs.
SO ORDERED.

In any case, in the case at bar, the nature of the facts not conveyed to
the insurer was such that the failure to communicate must have
been intentional rather than merely inadvertent. For Jaime Canilang
could not have been unaware that his heart beat would at times rise to
high and alarming levels and that he had consulted a doctor twice in
the two (2) months before applying for non-medical insurance. Indeed,
the last medical consultation took place just the day before the
insurance application was filed. In all probability, Jaime Canilang went
to visit his doctor precisely because of the discomfort and concern
brought about by his experiencing "sinus tachycardia."

G.R. No. 105135 June 22, 1995


SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and
BERNARDA BACANI, respondents.

41

QUIASON, J.:

EGG?
X-rays?
blood tests?
other tests?

This is a petition for review for certiorari under Rule 45 of the Revised
Rules of Court to reverse and set aside the Decision dated February 21,
1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its
Resolution dated April 22, 1992, denying reconsideration thereof.

c) attended or been admitted to any


hospital or other medical facility?

We grant the petition.


6. Have you ever had or sought advice for:
I
xxx xxx xxx
On April 15, 1986, Robert John B. Bacani procured a life insurance
contract for himself from petitioner. He was issued Policy No. 3-903766-X valued at P100,000.00, with double indemnity in case of
accidental death. The designated beneficiary was his mother,
respondent Bernarda Bacani.

b) urine, kidney or bladder disorder? (Rollo, p. 53)


The deceased answered question No. 5(a) in the affirmative but limited
his answer to a consultation with a certain Dr. Reinaldo D. Raymundo of
the Chinese General Hospital on February 1986, for cough and flu
complications. The other questions were answered in the negative
(Rollo, p. 53).

On June 26, 1987, the insured died in a plane crash. Respondent


Bernarda Bacani filed a claim with petitioner, seeking the benefits of
the insurance policy taken by her son. Petitioner conducted an
investigation and its findings prompted it to reject the claim.

Petitioner discovered that two weeks prior to his application for


insurance, the insured was examined and confined at the Lung Center
of the Philippines, where he was diagnosed for renal failure. During his
confinement, the deceased was subjected to urinalysis, ultrasonography and hematology tests.

In its letter, petitioner informed respondent Bernarda Bacani, that the


insured did not disclose material facts relevant to the issuance of the
policy, thus rendering the contract of insurance voidable. A check
representing the total premiums paid in the amount of P10,172.00 was
attached to said letter.

On November 17, 1988, respondent Bernarda Bacani and her husband,


respondent Rolando Bacani, filed an action for specific performance
against petitioner with the Regional Trial Court, Branch 191,
Valenzuela, Metro Manila. Petitioner filed its answer with counterclaim
and a list of exhibits consisting of medical records furnished by the
Lung Center of the Philippines.

Petitioner claimed that the insured gave false statements in his


application when he answered the following questions:
5. Within the past 5 years have you:

On January 14, 1990, private respondents filed a "Proposed Stipulation


with Prayer for Summary Judgment" where they manifested that they
"have no evidence to refute the documentary evidence of
concealment/misrepresentation by the decedent of his health condition
(Rollo, p. 62).

a) consulted any doctor or other health


practitioner?
b) submitted to:

42

Petitioner filed its Request for Admissions relative to the authenticity


and due execution of several documents as well as allegations
regarding the health of the insured. Private respondents failed to
oppose said request or reply thereto, thereby rendering an admission
of the matters alleged.

Petitioner's motion for reconsideration was denied; hence, this petition.

Petitioner then moved for a summary judgment and the trial court
decided in favor of private respondents. The dispositive portion of the
decision is reproduced as follows:

The rule that factual findings of the lower court and the appellate court
are binding on this Court is not absolute and admits of exceptions,
such as when the judgment is based on a misappreciation of the facts
(Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).

II
We reverse the decision of the Court of Appeals.

WHEREFORE, judgment is hereby rendered in favor of


the plaintiffs and against the defendant, condemning
the latter to pay the former the amount of One
Hundred Thousand Pesos (P100,000.00) the face value
of insured's Insurance Policy No. 3903766, and the
Accidental Death Benefit in the amount of One
Hundred Thousand Pesos (P100,000.00) and further
sum of P5,000.00 in the concept of reasonable
attorney's fees and costs of suit.

In weighing the evidence presented, the trial court concluded that


indeed there was concealment and misrepresentation, however, the
same was made in "good faith" and the facts concealed or
misrepresented were irrelevant since the policy was "non-medical". We
disagree.
Section 26 of The Insurance Code is explicit in requiring a party to a
contract of insurance to communicate to the other, in good faith, all
facts within his knowledge which are material to the contract and as to
which he makes no warranty, and which the other has no means of
ascertaining. Said Section provides:

Defendant's counterclaim is hereby Dismissed (Rollo,


pp. 43-44).
In ruling for private respondents, the trial court concluded that the
facts concealed by the insured were made in good faith and under a
belief that they need not be disclosed. Moreover, it held that the health
history of the insured was immaterial since the insurance policy was
"non-medical".

A neglect to communicate that which a party knows


and ought to communicate, is called concealment.
Materiality is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the party to whom
communication is due, in forming his estimate of the disadvantages of
the proposed contract or in making his inquiries (The Insurance Code,
Sec. 31).

Petitioner appealed to the Court of Appeals, which affirmed the


decision of the trial court. The appellate court ruled that petitioner
cannot avoid its obligation by claiming concealment because the cause
of death was unrelated to the facts concealed by the insured. It also
sustained the finding of the trial court that matters relating to the
health history of the insured were irrelevant since petitioner waived the
medical examination prior to the approval and issuance of the
insurance policy. Moreover, the appellate court agreed with the trial
court that the policy was "non-medical" (Rollo, pp. 4-5).

The terms of the contract are clear. The insured is specifically required
to disclose to the insurer matters relating to his health.
The information which the insured failed to disclose were material and
relevant to the approval and issuance of the insurance policy. The
matters concealed would have definitely affected petitioner's action on

43

his application, either by approving it with the corresponding


adjustment for a higher premium or rejecting the same. Moreover, a
disclosure may have warranted a medical examination of the insured
by petitioner in order for it to reasonably assess the risk involved in
accepting the application.

(Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48


[1960]).
We, therefore, rule that petitioner properly exercised its right to rescind
the contract of insurance by reason of the concealment employed by
the insured. It must be emphasized that rescission was exercised
within the two-year contestability period as recognized in Section 48 of
The Insurance Code.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held


that materiality of the information withheld does not depend on the
state of mind of the insured. Neither does it depend on the actual or
physical events which ensue.

WHEREFORE, the petition is GRANTED and the Decision of the Court of


Appeals is REVERSED and SET ASIDE.

Thus, "goad faith" is no defense in concealment. The insured's failure


to disclose the fact that he was hospitalized for two weeks prior to
filing his application for insurance, raises grave doubts about
his bonafides. It appears that such concealment was deliberate on his
part.

SO ORDERED.

The argument, that petitioner's waiver of the medical examination of


the insured debunks the materiality of the facts concealed, is
untenable. We reiterate our ruling in Saturnino v. Philippine American
Life Insurance Company, 7 SCRA 316 (1963), that " . . . the waiver of a
medical examination [in a non-medical insurance contract] renders
even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether to issue the policy
or not . . . "

[G.R. No. 82036. May 22, 1997]


TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner,
vs.
HON.
COURT
OF
APPEALS
and
VICENTE
MENDOZA, respondents.
DECISION
HERMOSISIMA, JR., J.:

Moreover, such argument of private respondents would make Section


27 of the Insurance Code, which allows the injured party to rescind a
contract of insurance where there is concealment, ineffective (See Vda.
de Canilang v. Court of Appeals, supra).

The petition herein seeks the review and reversal of the


decision[1] of respondent Court of Appeals [2] affirming in toto the
judgment[3] of the Regional Trial Court[4] in an action for damages[5] filed
by private respondent Vicente Mendoza, Jr. as heir of his mother who
was killed in a vehicular accident.

Anent the finding that the facts concealed had no bearing to the cause
of death of the insured, it is well settled that the insured need not die
of the disease he had failed to disclose to the insurer. It is sufficient
that his non-disclosure misled the insurer in forming his estimates of
the risks of the proposed insurance policy or in making inquiries

Before the trial court, the complainant lumped the erring taxicab
driver, the owner of the taxicab, and the alleged insurer of the vehicle
which featured in the vehicular accident into one complaint. The erring

44

taxicab was allegedly covered by a third-party liability insurance policy


issued by petitioner Travellers Insurance & Surety Corporation.

driving the subject taxicab in a careless, reckless and imprudent


manner and at a speed greater than what was reasonable and proper
without taking the necessary precaution to avoid accident to persons x
x x considering the condition of the traffic at the place at the time
aforementioned x x x. Moreover, the driver fled from the scene of the
accident and without rendering assistance to the victim. x x x

The evidence presented before the trial court established the


following facts:
At about 5:30 oclock in the morning of July 20, 1980, a 78-year old
woman by the name of Feliza Vineza de Mendoza was on her way to
hear mass at the Tayuman Cathedral. While walking along Tayuman
corner Gregorio Perfecto Streets, she was bumped by a taxi that was
running fast. Several persons witnessed the accident, among whom
were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno. After the
bumping, the old woman was seen sprawled on the pavement. Right
away, the good Samaritan that he was, Marvilla ran towards the old
woman and held her on his lap to inquire from her what had happened,
but obviously she was already in shock and could not talk. At this
moment, a private jeep stopped. With the driver of that vehicle, the two
helped board the old woman on the jeep and brought her to the Mary
Johnston Hospital in Tondo.

x x x Three (3) witnesses who were at the scene at the time identified
the taxi involved, though not necessarily the driver thereof. Marvilla saw
a lone taxi speeding away just after the bumping which, when it passed
by him, said witness noticed to be a Lady Love Taxi with Plate No. 438,
painted maroon, with baggage bar attached on the baggage
compartment and with an antenae[sic] attached at the right rear
side.The same descriptions were revealed by Ernesto Lopez, who further
described the taxi to have x x x reflectorized decorations on the edges
of the glass at the back. x x x A third witness in the person of Eulogio
Tabalno x x x made similar descriptions although, because of the fast
speed of the taxi, he was only able to detect the last digit of the plate
number which is 8. x x x [T]he police proceeded to the garage of Lady
Love Taxi and then and there they took possession of such a taxi and
later impounded it in the impounding area of the agency concerned. x x
x [T]he eyewitnesses x x x were unanimous in pointing to that Lady
Love Taxi with Plate No. 438, obviously the vehicle involved herein.

x x x Ernesto Lopez, a driver of a passenger jeepney plying along


Tayuman Street from Pritil, Tondo, to Rizal Avenue and vice-versa, also
witnessed the incident. It was on his return trip from Rizal Avenue when
Lopez saw the plaintiff and his brother who were crying near the scene
of the accident. Upon learning that the two were the sons of the old
woman, Lopez told them what had happened. The Mendoza brothers
were then able to trace their mother at the Mary Johnston Hospital
where they were advised by the attending physician that they should
bring the patient to the National Orthopedic Hospital because of her
fractured bones. Instead, the victim was brought to the U.S.T. Hospital
where she expired at 9:00 oclock that same morning. Death was caused
by traumatic shock as a result of the severe injuries she sustained x x x
x.

x x x During the investigation, defendant Armando Abellon, the


registered owner of Lady Love Taxi bearing No. 438-HA Pilipinas Taxi
1980, certified to the fact that the vehicle was driven last July 20, 1980
by one Rodrigo Dumlao x x x x x x It was on the basis of this affidavit of
the registered owner that caused the police to apprehend Rodrigo
Dumlao, and consequently to have him prosecuted and eventually
convicted of the offense x x x. x x x [S]aid Dumlao absconded in that
criminal case, specially at the time of the promulgation of the judgment
therein so much so that he is now a fugitive from justice. [6]
Private respondent filed a complaint for damages against
Armando Abellon as the owner of the Lady Love Taxi and Rodrigo
Dumlao as the driver of the Lady Love taxicab that bumped private
respondents mother. Subsequently, private respondent amended his

x x x The evidence shows that at the moment the victim was bumped
by the vehicle, the latter was running fast, so much so that because of
the strong impact the old woman was thrown away and she fell on the
pavement. x x x In truth, in that related criminal case against defendant
Dumlao x x x the trial court found as a fact that therein accused was

45

complaint to include petitioner as the compulsory insurer of the said


taxicab under Certificate of Cover No. 1447785-3.

Petitioner mainly contends that it did not issue an insurance policy


as compulsory insurer of the Lady Love Taxi and that,
assuming arguendo that it had indeed covered said taxicab for thirdparty liability insurance, private respondent failed to file a written
notice of claim with petitioner as required by Section 384 of P.D. No.
612, otherwise known as the Insurance Code.

After trial, the trial court rendered judgment in favor of private


respondent, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or
more particularly the Heirs of the late Feliza Vineza de Mendoza, and
against defendants Rodrigo Dumlao, Armando Abellon and Travellers
Insurance and Surety Corporation, by ordering the latter to pay, jointly
and severally, the former the following amounts:

We find the petition to be meritorious.


I
When private respondent filed his amended complaint to implead
petitioner as party defendant and therein alleged that petitioner was
the third-party liability insurer of the Lady Love taxicab that fatally hit
private respondents mother, private respondent did not attach a copy
of the insurance contract to the amended complaint. Private
respondent does not deny this omission.

(a) The sum of P2,924.70, as actual and compensatory damages, with


interest thereon at the rate of 12% per annum from October 17, 1980,
when the complaint was filed, until the said amount is fully paid;
(b) P30,000.00 as death indemnity;

It is significant to point out at this juncture that the right of a third


person to sue the insurer depends on whether the contract of
insurance is intended to benefit third persons also or only the insured.

(c) P25,000.00 as moral damages;


(d) P10,000.00 as by way of corrective or exemplary damages; and

[A] policy x x x whereby the insurer agreed to indemnify the insured


against all sums x x x which the Insured shall become legally liable to
pay in respect of: a. death of or bodily injury to any person x x x is one
for indemnity against liability; from the fact then that the insured is
liable to the third person, such third person is entitled to sue the
insurer.

(e) Another P10,000.00 by way of attorneys fees and other litigation


expenses.
Defendants are further ordered to pay, jointly and severally, the costs
of this suit.
SO ORDERED.[7]

The right of the person injured to sue the insurer of the party at fault
(insured), depends on whether the contract of insurance is intended to
benefit third persons also or on the insured. And the test applied has
been this: Where the contract provides for indemnity against liability to
third persons, then third persons to whom the insured is liable can sue
the insurer. Where the contract is for indemnity against actual loss or
payment, then third persons cannot proceed against the insurer, the
contract being solely to reimburse the insured for liability actually
discharged by him thru payment to third persons, said third persons
recourse being thus limited to the insured alone.[10]

Petitioner appealed from the aforecited decision to the respondent


Court of Appeals. The decision of the trial court was affirmed by
respondent appellate court. Petitioners Motion for Reconsideration[8] of
September 22, 1987 was denied in a Resolution [9] dated February 9,
1988.
Hence this petition.

46

Since private respondent failed to attach a copy of the insurance


contract to his complaint, the trial court could not have been able to
apprise itself of the real nature and pecuniary limits of petitioners
liability. More importantly, the trial court could not have possibly
ascertained the right of private respondent as third person to sue
petitioner as insurer of the Lady Love taxicab because the trial court
never saw nor read the insurance contract and learned of its terms and
conditions.

directly sue the insurer, however, the direct liability of the insurer
under indemnity contracts against third-party liability does not mean
that the insurer can be held solidarily liable with the insured and/or the
other parties found at fault. The liability of the insurer is based on
contract; that of the insured is based on tort.[11]

Petitioner, understandably, did not volunteer to present any


insurance contract covering the Lady Love taxicab that fatally hit
private respondents mother, considering that petitioner precisely
presented the defense of lack of insurance coverage before the trial
court. Neither did the trial court issue a subpoena duces tecum to have
the insurance contract produced before it under pain of contempt.

In solidary obligation, the creditor may enforce the entire obligation


against one of the solidary debtors. On the other hand, insurance is
defined as a contract whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an
unknown or contingent event.

Applying this principle underlying solidary obligation and insurance


contracts, we ruled in one case that:

In the case at bar, the trial court held petitioner together with
respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to
respondent Vallejos for a total amount of P29,103.00, with the
qualification that petitioners liability is only up to P20,000.00. In the
context of a solidary obligation, petitioner may be compelled by
respondent Vallejos to pay the entire obligation of P29,103.00,
notwithstanding the qualification made by the trial court. But, how can
petitioner be obliged to pay the entire obligation when the amount
stated in its insurance policy with respondent Sio Choy for indemnity
against third-party liability is only P20,000.00? Moreover, the
qualification made in the decision of the trial court to the effect that
petitioner is sentenced to pay up to P20,000.00 only when the
obligation to pay P29,103.00 is made solidary is an evident breach of
the concept of a solidary obligation.[12]

We thus find hardly a basis in the records for the trial court to
have validly found petitioner liable jointly and severally with the owner
and the driver of the Lady Love taxicab, for damages accruing to
private respondent.
Apparently, the trial court did not distinguish between the private
respondents cause of action against the owner and the driver of the
Lady Love taxicab and his cause of action against petitioner. The
former is based on torts and quasi-delicts while the latter is based on
contract. Confusing these two sources of obligations as they arise from
the same act of the taxicab fatally hitting private respondents mother,
and in the face of overwhelming evidence of the reckless imprudence
of the driver of the Lady Love taxicab, the trial court brushed aside its
ignorance of the terms and conditions of the insurance contract and
forthwith found all three - the driver of the taxicab, the owner of the
taxicab, and the alleged insurer of the taxicab - jointly and severally
liable for actual, moral and exemplary damages as well as attorneys
fees and litigation expenses. This is clearly a misapplication of the law
by the trial court, and respondent appellate court grievously erred in
not having reversed the trial court on this ground.

The above principles take on more significance in the light of the


counter-allegation of petitioner that, assuming arguendo that it is the
insurer of the Lady Love taxicab in question, its liability is limited to
only P50,000.00, this being its standard amount of coverage in vehicle
insurance policies. It bears repeating that no copy of the insurance
contract was ever proffered before the trial court by the private
respondent, notwithstanding knowledge of the fact that the latters
complaint against petitioner is one under a written contract. Thus, the
trial court proceeded to hold petitioner liable for an award of damages

While it is true that where the insurance contract provides for


indemnity against liability to third persons, such third persons can

47

exceeding its limited liability of P50,000.00. This only shows beyond


doubt that the trial court was under the erroneous presumption that
petitioner could be found liable absent proof of the contract and based
merely on the proof of reckless imprudence on the part of the driver of
the Lady Love taxicab that fatally hit private respondents mother.

Petitioner did not tire in arguing before the trial court and the
respondent appellate court that, assuming arguendo that it had issued
the insurance contract over the Lady Love taxicab, private respondents
cause of action against petitioner did not successfully accrue because
he failed to file with petitioner a written notice of claim within six (6)
months from the date of the accident as required by Section 384 of the
Insurance Code.

It is very obvious that petitioner company is trying to use Section 384


of the Insurance Code as a cloak to hide itself from its liabilities. The
facts of these cases evidently reflect the deliberate efforts of petitioner
company to prevent the filing of a formal action against it. Bearing in
mind that if it succeeds in doing so until one year lapses from the date
of the accident it could set up the defense of prescription, petitioner
company made private respondents believe that their claims would be
settled in order that the latter will not find it necessary to immediately
bring suit. In violation of its duties to adopt and implement reasonable
standards for the prompt investigation of claims and to effectuate
prompt, fair and equitable settlement of claims, and with manifest bad
faith, petitioner company devised means and ways of stalling the
settlement proceedings. x x x [N]o steps were taken to process the
claim and no rejection of said claim was ever made even if private
respondent had already complied with all the requirements. x x x

At the time of the vehicular incident which resulted in the death of


private respondents mother, during which time the Insurance Code had
not yet been amended by Batas Pambansa (B.P.) Blg. 874, Section 384
provided as follows:

This Court has made the observation that some insurance companies
have been inventing excuses to avoid their just obligations and it is
only the State that can give the protection which the insuring public
needs from possible abuses of the insurers. [14]

Any person having any claim upon the policy issued pursuant to this
chapter shall, without any unnecessary delay, present to the insurance
company concerned a written notice of claim setting forth the amount
of his loss, and/or the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician. Notice of claim
must be filed within six months from date of the accident, otherwise,
the claim shall be deemed waived. Action or suit for recovery of
damage due to loss or injury must be brought in proper cases, with the
Commission or the Courts within one year from date of accident,
otherwise the claimants right of action shall prescribe [emphasis and
underscoring supplied].

It is significant to note that the aforecited Section 384 was


amended by B.P. Blg. 874 to categorically provide that action or suit for
recovery of damage due to loss or injury must be brought in proper
cases, with the Commissioner or the Courts within one
year from denial of the claim, otherwise the claimants right of
action shall prescribe [emphasis ours].[15]

II

We have certainly ruled with consistency that the prescriptive


period to bring suit in court under an insurance policy, begins to run
from the date of the insurers rejection of the claim filed by the insured,
the beneficiary or any person claiming under an insurance
contract. This ruling is premised upon the compliance by the persons
suing under an insurance contract, with the indispensable requirement
of having filed the written claim mandated by Section 384 of the
Insurance Code before and after its amendment. Absent such written
claim filed by the person suing under an insurance contract, no cause
of action accrues under such insurance contract, considering that it is
the rejection of that claim that triggers the running of the one-year

In the landmark case of Summit Guaranty and Insurance Co., Inc.


v. De Guzman,[13] we ruled that the one year prescription period to
bring suit in court against the insurer should be counted from the time
that the insurer rejects the written claim filed therewith by the insured,
the beneficiary or the third person interested under the insurance
policy. We explained:

48

prescriptive period to bring suit in court, and there can be no


opportunity for the insurer to even reject a claim if none has been filed
in the first place, as in the instant case.

Corporation was found jointly and severally liable to pay actual, moral
and exemplary damages, death indemnity, attorneys fees and litigation
expenses in Civil Case No. 135486. The complaint against Travellers
Insurance & Surety Corporation in said case is hereby ordered
dismissed.

The one-year period should instead be counted from the date of


rejection by the insurer as this is the time when the cause of action
accrues. x x x

No pronouncement as to costs.

In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:

SO ORDERED.

The plaintiffs cause of action did not accrue until his claim was finally
rejected by the insurance company. This is because, before such final
rejection, there was no real necessity for bringing suit.
The philosophy of the above pronouncement was pointed out in the
case of ACCFA vs. Alpha Insurance and Surety Co., viz.:

G.R. No. 113899 October 13, 1999

Since a cause of action requires, as essential elements, not only a legal


right of the plaintiff and a correlative obligation of the defendant but
also an act or omission of the defendant in violation of said legal right,
the cause of action does not accrue until the party obligated refuses,
expressly or impliedly, to comply with its duty. [16]

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,


vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.
QUISUMBING, J.:

When petitioner asseverates, thus, that no written claim was filed


by private respondent and rejected by petitioner, and private
respondent does not dispute such asseveration through a denial in his
pleadings, we are constrained to rule that respondent appellate court
committed reversible error in finding petitioner liable under an
insurance contract the existence of which had not at all been proven in
court. Even if there were such a contract, private respondents cause of
action can not prevail because he failed to file the written claim
mandated by Section 384 of the Insurance Code. He is deemed, under
this legal provision, to have waived his rights as against petitionerinsurer.

This petition for review, under Rule 45 of the Rules of Court, assails the
Decision 1 dated May 17, 1993, of the Court of Appeals and its
Resolution 2 dated January 4, 1994 in CA-G.R. CV No. 18341. The
appellate court affirmed in toto the judgment of the Misamis Oriental
Regional Trial Court, Branch 18, in an insurance claim filed by private
respondent against Great Pacific Life Assurance Co. The dispositive
portion of the trial court's decision reads:
WHEREFORE, judgment is rendered adjudging the
defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy No. G1907, in relation to Certification B-18558 liable and
ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo
Leuterio, the amount of EIGHTY SIX THOUSAND TWO

WHEREFORE, the instant petition is HEREBY GRANTED. The


decision of the Court of Appeals in CA-G.R. CV No. 09416 and the
decision of the Regional Trial Court in Civil Case No. 135486 are
REVERSED and SET ASIDE insofar as Travellers Insurance & Surety

49

HUNDRED PESOS (P86,200.00); dismissing the claims


for damages, attorney's fees and litigation expenses in
the complaint and counterclaim, with costs against the
defendant and dismissing the complaint in respect to
the plaintiffs, other than the widow-beneficiary, for lack
of cause of action. 3

On August 6, 1984, Dr. Leuterio died due to "massive cerebral


hemorrhage." Consequently, DBP submitted a death claim to Grepalife.
Grepalife denied the claim alleging that Dr. Leuterio was not physically
healthy when he applied for an insurance coverage on November 15,
1983. Grepalife insisted that Dr. Leuterio did not disclose he had been
suffering from hypertension, which caused his death. Allegedly, such
non-disclosure constituted concealment that justified the denial of the
claim.

The facts, as found by the Court of Appeals, are as follows:

On October 20, 1986, the widow of the late Dr. Leuterio, respondent
Medarda V. Leuterio, filed a complaint with the Regional Trial Court of
Misamis Oriental, Branch 18, against Grepalife for "Specific
Performance with Damages." 5 During the trial, Dr. Hernando Mejia,
who issued the death certificate, was called to testify. Dr. Mejia's
findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably
due to high blood pressure. The inference was not conclusive because
Dr. Leuterio was not autopsied, hence, other causes were not ruled out.

A contract of group life insurance was executed between petitioner


Great Pacific Life Assurance Corporation (hereinafter Grepalife) and
Development Bank of the Philippines (hereinafter DBP). Grepalife
agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a
housing debtor of DBP applied for membership in the group life
insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:

On February 22, 1988, the trial court rendered a decision in favor of


respondent widow and against Grepalife. On May 17, 1993, the Court
of Appeals sustained the trial court's decision. Hence, the present
petition. Petitioners interposed the following assigned errors:

7. Have you ever had, or consulted, a


physician for a heart condition, high
blood pressure, cancer, diabetes, lung;
kidney or stomach disorder or any
other physical impairment?

1. THE LOWER COURT ERRED IN


HOLDING DEFENDANT-APPELLANT
LIABLE TO THE DEVELOPMENT BANK
OF THE PHILIPPINES (DBP) WHICH IS
NOT A PARTY TO THE CASE FOR
PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE
ON THE LIFE OF PLAINTIFF'S HUSBAND
WILFREDO LEUTERIO ONE OF ITS LOAN
BORROWERS, INSTEAD OF DISMISSING
THE CASE AGAINST DEFENDANTAPPELLANT [Petitioner Grepalife] FOR
LACK OF CAUSE OF ACTION.

Answer: No. If so give details


_____________.
8. Are you now, to the best of your
knowledge, in good health?
Answer: [x] Yes [ ] NO.

On November 15, 1983, Grepalife issued Certificate No. B-18558, as


insurance coverage of Dr. Leuterio, to the extent of his DBP mortgage
indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.1wphi1.nt

50

2. THE LOWER COURT ERRED IN NOT


DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR
NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.

which would vitiate the insurance


contract?
3. Whether the Court of Appeals erred
in holding Grepalife liable in the
amount of eighty six thousand, two
hundred (P86,200.00) pesos without
proof of the actual outstanding
mortgage payable by the mortgagor to
DBP.

3. THE LOWER COURT ERRED IN


ORDERING DEFENDANT-APPELLANT TO
PAY TO DBP THE AMOUNT OF
P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS
THE ACTUAL AMOUNT PAYABLE TO DBP
IN ACCORDANCE WITH ITS GROUP
INSURANCE CONTRACT WITH
DEFENDANT-APPELLANT.

Petitioner alleges that the complaint was instituted by the widow of Dr.
Leuterio, not the real party in interest, hence the trial court acquired no
jurisdiction over the case. It argues that when the Court of Appeals
affirmed the trial court's judgment, Grepalife was held liable to pay the
proceeds of insurance contract in favor of DBP, the indispensable party
who was not joined in the suit.

4. THE LOWER COURT ERRED IN


HOLDING THAT THERE WAS NO
CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF
WILFREDO LEUTERIO IN HIS
APPLICATION FOR MEMBERSHIP IN THE
GROUP LIFE INSURANCE PLAN
BETWEEN DEFENDANT-APPELLANT OF
THE INSURANCE CLAIM ARISING FROM
THE DEATH OF WILFREDO LEUTERIO. 6

To resolve the issue, we must consider the insurable interest in


mortgaged properties and the parties to this type of contract. The
rationale of a group insurance policy of mortgagors, otherwise known
as the "mortgage redemption insurance," is a device for the protection
of both the mortgagee and the mortgagor. On the part of the
mortgagee, it has to enter into such form of contract so that in the
event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such
insurance will be applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from paying the
obligation. 7 In a similar vein, ample protection is given to the
mortgagor under such a concept so that in the event of death; the
mortgage obligation will be extinguished by the application of the
insurance proceeds to the mortgage indebtedness. 8 Consequently,
where the mortgagor pays the insurance premium under the group
insurance policy, making the loss payable to the mortgagee, the
insurance is on the mortgagor's interest, and the mortgagor continues
to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such losspayable clause does not make the mortgagee a party to the contract. 9

Synthesized below are the assigned errors for our resolution:


1. Whether the Court of Appeals erred
in holding petitioner liable to DBP as
beneficiary in a group life insurance
contract from a complaint filed by the
widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred
in not finding that Dr. Leuterio
concealed that he had hypertension,

51

Sec. 8 of the Insurance Code provides:

benefit of the mortgagee and is made payable to him,


yet the mortgagor may sue thereon in his own name,
especially where the mortgagee's interest is less than
the full amount recoverable under the policy, * * *.

Unless the policy provides, where a mortgagor of


property effects insurance in his own name providing
that the loss shall be payable to the mortgagee, or
assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the
original contract, and any act of his, prior to the loss,
which would otherwise avoid the insurance, will have
the same effect, although the property is in the hands
of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee
therein named, with the same effect as if it had been
performed by the mortgagor.

And in volume 33, page 82, of the same work, we read


the following:
Insured may be regarded as the real party in interest,
although he has assigned the policy for the purpose of
collection, or has assigned as collateral security any
judgment he may obtain. 13
And since a policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has an insurable
interest or not, and such person may recover it whatever the insured
might have recovered,14 the widow of the decedent Dr. Leuterio may
file the suit against the insurer, Grepalife.

The insured private respondent did not cede to the mortgagee all his
rights or interests in the insurance, the policy stating that: "In the
event of the debtor's death before his indebtedness with the Creditor
[DBP] shall have been fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor." 10 When DBP submitted the insurance claim
against petitioner, the latter denied payment thereof, interposing the
defense of concealment committed by the insured. Thereafter, DBP
collected the debt from the mortgagor and took the necessary action
of foreclosure on the residential lot of private
respondent. 11 In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins.
Co. 12 we held:

The second assigned error refers to an alleged concealment that the


petitioner interposed as its defense to annul the insurance contract.
Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists
where the assured had knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally
withholds the same. 15
Petitioner merely relied on the testimony of the attending physician,
Dr. Hernando Mejia, as supported by the information given by the
widow of the decedent. Grepalife asserts that Dr. Mejia's technical
diagnosis of the cause of death of Dr. Leuterio was a duly documented
hospital record, and that the widow's declaration that her husband had
"possible hypertension several years ago" should not be considered as
hearsay, but as part of res gestae.

Insured, being the person with whom the contract was


made, is primarily the proper person to bring suit
thereon. * * * Subject to some exceptions, insured may
thus sue, although the policy is taken wholly or in part
for the benefit of another person named or unnamed,
and although it is expressly made payable to another
as his interest may appear or otherwise. * * * Although
a policy issued to a mortgagor is taken out for the

On the contrary the medical findings were not conclusive because Dr.
Mejia did not conduct an autopsy on the body of the decedent. As the
attending physician, Dr. Mejia stated that he had no knowledge of Dr.

52

Leuterio's any previous hospital confinement. 16 Dr. Leuterio's death


certificate stated that hypertension was only "the possible cause of
death." The private respondent's statement, as to the medical history
of her husband, was due to her unreliable recollection of events.
Hence, the statement of the physician was properly considered by the
trial court as hearsay.

evidence rests upon the insurer. 19 In the case at bar, the petitioner
failed to clearly and satisfactorily establish its defense, and is therefore
liable to pay the proceeds of the insurance.1wphi1.nt
And that brings us to the last point in the review of the case at bar.
Petitioner claims that there was no evidence as to the amount of Dr.
Leuterio's outstanding indebtedness to DBP at the time of the
mortgagor's death. Hence, for private respondent's failure to establish
the same, the action for specific performance should be dismissed.
Petitioner's claim is without merit. A life insurance policy is a valued
policy. 20 Unless the interest of a person insured is susceptible of exact
pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the coverage of his
insurance, which states that:

The question of whether there was concealment was aptly answered


by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his
insurance application that he was in good health and
that he had not consulted a doctor or any of the
enumerated ailments, including hypertension; when he
died the attending physician had certified in the death
certificate that the former died of cerebral hemorrhage,
probably secondary to hypertension. From this report,
the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had
concealed the fact that he had hypertension.

The policy states that upon receipt of due proof of the


Debtor's death during the terms of this insurance, a
death benefit in the amount of P86,200.00 shall be
paid.

Contrary to appellant's allegations, there was no


sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the
insured's widow who was not even sure if the
medicines taken by Dr. Leuterio were for hypertension,
the appellant had not proven nor produced any witness
who could attest to Dr. Leuterio's medical history . . .

In the event of the debtor's death before his


indebtedness with the creditor shall have been fully
paid, an amount to pay the outstanding indebtedness
shall first be paid to the Creditor and the balance of the
Sum Assured, if there is any shall then be paid to the
beneficiary/ies designated by the debtor."22 (Emphasis
omitted)

xxx xxx xxx

However, we noted that the Court of Appeals' decision was


promulgated on May 17, 1993. In private respondent's memorandum,
she states that DBP foreclosed in 1995 their residential lot, in
satisfaction of mortgagor's outstanding loan. Considering this
supervening event, the insurance proceeds shall inure to the benefit of
the heirs of the deceased person or his beneficiaries. Equity dictates
that DBP should not unjustly enrich itself at the expense of another
(Nemo cum alterius detrimenio protest). Hence, it cannot collect the
insurance proceeds, after it already foreclosed on the mortgage. The

Appellant insurance company had failed to establish


that there was concealment made by the insured,
hence, it cannot refuse payment of the claim. 17
The fraudulent intent on the part of the insured must be established to
entitle the insurer to rescind the contract. 18 Misrepresentation as a
defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing

53

proceeds now rightly belong to Dr. Leuterio's heirs represented by his


widow, herein private respondent Medarda Leuterio.

On April 15, 1991, petitioner issued five (5) insurance policies covering
respondent's various property described therein against fire, for the
period from May 22, 1991 to May 22, 1992.

WHEREFORE, the petition is hereby DENIED. The Decision and


Resolution of the Court of Appeals in CA-G.R. CV 18341 is AFFIRMED
with MODIFICATION that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six thousand, two hundred
(P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio
(deceased), upon presentation of proof of prior settlement of
mortgagor's indebtedness to Development Bank of the Philippines.
Costs against petitioner.1wphi1.nt

In March 1992, petitioner evaluated the policies and decided not to


renew them upon expiration of their terms on May 22, 1992. Petitioner
advised respondent's broker, Zuellig Insurance Brokers, Inc. of its
intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the
non-renewal of the policies at the address stated in the policies.

SO ORDERED.

On June 13, 1992, fire razed respondent's property covered by three of


the insurance policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its
head office five (5) manager's checks in the total amount of
P225,753.95, representing premium for the renewal of the policies
from May 22, 1992 to May 22, 1993. No notice of loss was filed by
respondent under the policies prior to July 14, 1992.

G.R. No. 137172 June 15, 1999

On July 14, 1992, respondent filed with petitioner its formal claim for
indemnification of the insured property razed by fire.

UCPB GENERAL INSURANCE CO., INC., petitioner,


vs.
MASAGANA TELAMART, INC., respondent.

On the same day, July 14, 1992, petitioner returned to respondent the
five (5) manager's checks that it tendered, and at the same time
rejected respondent's claim for the reasons (a) that the policies had
expired and were not renewed, and (b) that the fire occurred on June
13, 1992, before respondent's tender of premium payment.

PARDO, J.:
The case is an appeal via certiorari seeking to set aside the decision of
the Court of Appeals, 1 affirming with modification that of the Regional
Trial Court, Branch 58, Makati, ordering petitioner to pay respondent
the sum of P18,645,000.00, as the proceeds of the insurance coverage
of respondent's property razed by fire; 25% of the total amount due as
attorney's fees and P25,000.00 as litigation expenses, and costs.

On July 21, 1992, respondent filed with the Regional Trial Court, Branch
58, Makati City, a civil complaint against petitioner for recovery of
P18,645,000.00, representing the face value of the policies covering
respondent's insured property razed by fire, and for attorney's fees. 2
On October 23, 1992, after its motion to dismiss had been denied,
petitioner filed an answer to the complaint. It alleged that the
complaint "fails to state a cause of action"; that petitioner was not
liable to respondent for insurance proceeds under the policies because

The facts are undisputed and may be related as follows:

54

at the time of the loss of respondent's property due to fire, the policies
had long expired and were not renewed. 3

SO ORDERED.
Makati, Metro-Manila, March 10, 1993.

After due trial, on March 10, 1993, the Regional Trial Court, Branch 58,
Makati, rendered decision, the dispositive portion of which reads:

ZOSIMO Z. ANGELES.

WHEREFORE, premises considered, judgment is hereby


rendered in favor of the plaintiff and against the
defendant, as follows:

In due time, petitioner appealed to the Court of Appeals.

(1) Authorizing and allowing the plaintiff to


consign/deposit with this Court the sum of P225,753.95
(refused by the defendant) as full payment of the
corresponding premiums for the replacement-renewal
policies for Exhibits A, B, C, D and E;

On September 7, 1998, the Court of Appeals promulgated its


decision 6 affirming that of the Regional Trial Court with the
modification that item No. 3 of the dispositive portion was deleted, and
the award of attorney's fees was reduced to 10% of the total amount
due. 7

(2) Declaring plaintiff to have fully complied with its


obligation to pay the premium thereby rendering the
replacement-renewal policy of Exhibits A, B, C, D and E
effective and binding for the duration May 22, 1992
until May 22, 1993; and, ordering defendant to deliver
forthwith to plaintiff the said replacement-renewal
policies;

The Court of Appeals held that following previous practise, respondent


was allowed a sixty (60) to ninety (90) day credit term for the renewal
of its policies, and that the acceptance of the late premium payment
suggested an understanding that payment could be made later.

Judge. 4
5

Hence, this appeal.


By resolution adopted on March 24, 1999, we required respondent to
comment on the petition, not to file a motion to dismiss within ten (10)
days from notice. 8 On April 22, 1999, respondent filed its comment. 9

(3) Declaring Exhibits A & B, in force from August 22,


1991 up to August 23, 1992 and August 9, 1991 to
August 9, 1992, respectively; and

Respondent submits that the Court of Appeals correctly ruled that no


timely notice of non-renewal was sent. The notice of non-renewal sent
to broker Zuellig which claimed that it verbally notified the insurance
agency but not respondent itself did not suffice. Respondent submits
further that the Court of Appeals did not err in finding that there
existed a sixty (60) to ninety (90) days credit agreement between
UCPB and Masagana, and that, finally, the Supreme Court could not
review factual findings of the lower court affirmed by the Court of
Appeals. 10

(4) Ordering the defendant to pay plaintiff the sums of:


(a) P18,645,000.00 representing the latter's claim for
indemnity under Exhibits A, B & C and/or its
replacement-renewal policies; (b) 25% of the total
amount due as and for attorney's fees; (c) P25,000.00
as necessary litigation expenses; and, (d) the costs of
suit.
All other claims and counterclaims asserted by the
parties are denied and/or dismissed, including
plaintiff's claim for interests.

We give due course to the appeal.

55

The basic issue raised is whether the fire insurance policies issued by
petitioner to the respondent covering the period May 22, 1991 to May
22, 1992, had expired on the latter date or had been extended or
renewed by an implied credit arrangement though actual payment of
premium was tendered on a later date after the occurrence of the risk
(fire) insured against.

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,


vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for
a health care coverage with petitioner Philamcare Health Systems, Inc.
In the standard application form, he answered no to the following
question:

The answer is easily found in the Insurance Code. No, an insurance


policy, other than life, issued originally or on renewal, is not valid and
binding until actual payment of the premium. Any agreement to the
contrary is void. 11The parties may not agree expressly or impliedly on
the extension of creditor time to pay the premium and consider the
policy binding before actual payment.

Have you or any of your family members ever consulted or


been treated for high blood pressure, heart trouble, diabetes,
cancer, liver disease, asthma or peptic ulcer? (If Yes, give
details).1

The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by


the Court of Appeals, is not applicable. In that case, payment of the
premium was in fact actually made on December 24, 1981, and the fire
occurred on January 18, 1982. Here, the payment of the premium for
renewal of the policies was tendered on July 13, 1992, a month after
the fire occurred on June 13, 1992. The assured did not even give the
insurer a notice of loss within a reasonable time after occurrence of the
fire.

The application was approved for a period of one year from March 1,
1988 to March 1, 1989. Accordingly, he was issued Health Care
Agreement No. P010194. Under the agreement, respondents husband
was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of "out-patient
benefits" such as annual physical examinations, preventive health care
and other out-patient services.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision
of the Court of Appeals in CA-G.R. CV No. 42321. In lieu thereof the
Court renders judgment dismissing respondent's complaint and
petitioner's counterclaims thereto filed with the Regional Trial Court,
Branch 58, Makati City, in Civil Case No. 92-2023. Without
costs.1wphi1.nt

Upon the termination of the agreement, the same was extended for
another year from March 1, 1989 to March 1, 1990, then from March 1,
1990 to June 1, 1990. The amount of coverage was increased to a
maximum sum of P75,000.00 per disability.2
During the period of his coverage, Ernani suffered a heart attack and
was confined at the Manila Medical Center (MMC) for one month
beginning March 9, 1990. While her husband was in the hospital,
respondent tried to claim the benefits under the health care
agreement. However, petitioner denied her claim saying that the
Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC
allegedly discovered at the time of Ernanis confinement that he was
hypertensive, diabetic and asthmatic, contrary to his answer in the

SO ORDERED.

G.R. No. 125678

March 18, 2002

56

application form. Thus, respondent paid the hospitalization expenses


herself, amounting to about P76,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court
but deleted all awards for damages and absolved petitioner
Reverente.4 Petitioners motion for reconsideration was denied.5 Hence,
petitioner brought the instant petition for review, raising the primary
argument that a health care agreement is not an insurance contract;
hence the "incontestability clause" under the Insurance Code6 does not
apply.1wphi1.nt

After her husband was discharged from the MMC, he was attended by a
physical therapist at home. Later, he was admitted at the Chinese
General Hospital. Due to financial difficulties, however, respondent
brought her husband home again. In the morning of April 13, 1990,
Ernani had fever and was feeling very weak. Respondent was
constrained to bring him back to the Chinese General Hospital where
he died on the same day.

Petitioner argues that the agreement grants "living benefits," such as


medical check-ups and hospitalization which a member may
immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also
points out that only medical and hospitalization benefits are given
under the agreement without any indemnification, unlike in an
insurance contract where the insured is indemnified for his loss.
Moreover, since Health Care Agreements are only for a period of one
year, as compared to insurance contracts which last longer, 7 petitioner
argues that the incontestability clause does not apply, as the same
requires an effectivity period of at least two years. Petitioner further
argues that it is not an insurance company, which is governed by the
Insurance Commission, but a Health Maintenance Organization under
the authority of the Department of Health.

On July 24, 1990, respondent instituted with the Regional Trial Court of
Manila, Branch 44, an action for damages against petitioner and its
president, Dr. Benito Reverente, which was docketed as Civil Case No.
90-53795. She asked for reimbursement of her expenses plus moral
damages and attorneys fees. After trial, the lower court ruled against
petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders
judgment in favor of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital
coverage of the late Ernani Trinos in the amount of P76,000.00
plus interest, until the amount is fully paid to plaintiff who paid
the same;

Section 2 (1) of the Insurance Code defines a contract of insurance as


an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the
following elements concur:

2. Defendants to pay the reduced amount of moral damages of


P10,000.00 to plaintiff;

1. The insured has an insurable interest;

3. Defendants to pay the reduced amount of P10,000.00 as


exemplary damages to plaintiff;

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


the designated peril;

4. Defendants to pay attorneys fees of P20,000.00, plus costs


of suit.

3. The insurer assumes the risk;

SO ORDERED.3

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


distribute actual losses among a large group of persons
bearing a similar risk; and

57

5. In consideration of the insurers promise, the insured pays a


premium.8

We hereby declare and agree that all statement and answers


contained herein and in any addendum annexed to this
application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there
shall be no contract of health care coverage unless and until an
Agreement is issued on this application and the full
Membership Fee according to the mode of payment applied for
is actually paid during the lifetime and good health of proposed
Members; that no information acquired by any Representative
of PhilamCare shall be binding upon PhilamCare unless set out
in writing in the application;that any physician is, by these
presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility
for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall
be a ratification of any correction in or addition to this
application as stated in the space for Home Office
Endorsement.11 (Underscoring ours)

Section 3 of the Insurance Code states that any contingent or unknown


event, whether past or future, which may damnify a person having an
insurable interest against him, may be insured against. Every person
has an insurable interest in the life and health of himself. Section 10
provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for
education or support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the
payment of money, respecting property or service, of which
death or illness might delay or prevent the performance; and

In addition to the above condition, petitioner additionally required the


applicant for authorization to inquire about the applicants medical
history, thus:

(4) of any person upon whose life any estate or interest vested
in him depends.
In the case at bar, the insurable interest of respondents husband in
obtaining the health care agreement was his own health. The health
care agreement was in the nature of non-life insurance, which is
primarily a contract of indemnity.9 Once the member incurs hospital,
medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same
to the extent agreed upon under the contract.

I hereby authorize any person, organization, or entity that has


any record or knowledge of my health and/or that of __________
to give to the PhilamCare Health Systems, Inc. any and all
information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. This
authorization is in connection with the application for health
care coverage only. A photographic copy of this authorization
shall be as valid as the original.12 (Underscoring ours)

Petitioner argues that respondents husband concealed a material fact


in his application. It appears that in the application for health
coverage, petitioners required respondents husband to sign an
express authorization for any person, organization or entity that has
any record or knowledge of his health to furnish any and all information
relative to any hospitalization, consultation, treatment or any other
medical advice or examination.10 Specifically, the Health Care
Agreement signed by respondents husband states:

Petitioner cannot rely on the stipulation regarding "Invalidation of


agreement" which reads:
Failure to disclose or misrepresentation of any material
information by the member in the application or medical
examination, whether intentional or unintentional, shall

58

automatically invalidate the Agreement from the very


beginning and liability of Philamcare shall be limited to return
of all Membership Fees paid. An undisclosed or misrepresented
information is deemed material if its revelation would have
resulted in the declination of the applicant by Philamcare or the
assessment of a higher Membership Fee for the benefit or
benefits applied for.13

answer the same to the extent agreed upon. In the end, the liability of
the health care provider attaches once the member is hospitalized for
the disease or injury covered by the agreement or whenever he avails
of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the
injured party to rescind a contract of insurance." The right to rescind
should be exercised previous to the commencement of an action on
the contract.17 In this case, no rescission was made. Besides, the
cancellation of health care agreements as in insurance policies require
the concurrence of the following conditions:

The answer assailed by petitioner was in response to the question


relating to the medical history of the applicant. This largely depends on
opinion rather than fact, especially coming from respondents husband
who was not a medical doctor. Where matters of opinion or judgment
are called for, answers made in good faith and without intent to
deceive will not avoid a policy even though they are untrue. 14 Thus,

1. Prior notice of cancellation to insured;


2. Notice must be based on the occurrence after effective date of the
policy of one or more of the grounds mentioned;

(A)lthough false, a representation of the expectation, intention,


belief, opinion, or judgment of the insured will not avoid the
policy if there is no actual fraud in inducing the acceptance of
the risk, or its acceptance at a lower rate of premium, and this
is likewise the rule although the statement is material to the
risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon
such statement, but is obligated to make further inquiry. There
is a clear distinction between such a case and one in which the
insured is fraudulently and intentionally states to be true, as a
matter of expectation or belief, that which he then knows, to
be actually untrue, or the impossibility of which is shown by
the facts within his knowledge, since in such case the intent to
deceive the insurer is obvious and amounts to actual
fraud.15 (Underscoring ours)

3. Must be in writing, mailed or delivered to the insured at the address


shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the
Insurance Code and upon request of insured, to furnish facts on which
cancellation is based.18
None of the above pre-conditions was fulfilled in this case. When the
terms of insurance contract contain limitations on liability, courts
should construe them in such a way as to preclude the insurer from
non-compliance with his obligation.19 Being a contract of adhesion, the
terms of an insurance contract are to be construed strictly against the
party which prepared the contract the insurer. 20 By reason of the
exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture.21 This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital service
contracts, such as the one at bar, must be liberally construed in favor
of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted,

The fraudulent intent on the part of the insured must be established to


warrant rescission of the insurance contract.16 Concealment as a
defense for the health care provider or insurer to avoid liability is an
affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having
assumed a responsibility under the agreement, petitioner is bound to

59

and exclusionary clauses of doubtful import should be strictly


construed against the provider.22

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER


INSURANCE AND SURETY CORPORATION AND THE
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., respondents.

Anent the incontestability of the membership of respondents husband,


we quote with approval the following findings of the trial court:

DECISION
(U)nder the title Claim procedures of expenses, the defendant
Philamcare Health Systems Inc. had twelve months from the
date of issuance of the Agreement within which to contest the
membership of the patient if he had previous ailment of
asthma, and six months from the issuance of the agreement if
the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or
misrepresentation no longer lie.23

QUISUMBING, J.:
This petition for review assails the Decision[1] dated July 30, 2002
of the Court of Appeals in CA-G.R. SP No. 60144, affirming
the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C.
Adm. Case No. RD-277. Both decisions held that there was no violation
of the Insurance Code and the respondents do not need license as
insurer and insurance agent/broker.

Finally, petitioner alleges that respondent was not the legal wife of the
deceased member considering that at the time of their marriage, the
deceased was previously married to another woman who was still
alive. The health care agreement is in the nature of a contract of
indemnity. Hence, payment should be made to the party who incurred
the expenses. It is not controverted that respondent paid all the
hospital and medical expenses. She is therefore entitled to
reimbursement. The records adequately prove the expenses incurred
by respondent for the deceaseds hospitalization, medication and the
professional fees of the attending physicians.24

The facts are undisputed.


White Gold Marine Services, Inc. (White Gold) procured a
protection and indemnity coverage for its vessels from The Steamship
Mutual Underwriting Association (Bermuda) Limited (Steamship
Mutual) through Pioneer Insurance and Surety Corporation (Pioneer).
Subsequently, White Gold was issued a Certificate of Entry and
Acceptance.[3] Pioneer also issued receipts evidencing payments for the
coverage. When White Gold failed to fully pay its accounts, Steamship
Mutual refused to renew the coverage.

WHEREFORE, in view of the foregoing, the petition is DENIED. The


assailed decision of the Court of Appeals dated December 14, 1995
is AFFIRMED.
SO ORDERED.

Steamship Mutual thereafter filed a case against White Gold for


collection of sum of money to recover the latters unpaid balance.
White Gold on the other hand, filed a complaint before the Insurance
Commission claiming that Steamship Mutual violated Sections
186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections
299,[6] 300[7] and 301[8] in relation to Sections 302 and 303, thereof.

[G.R. No. 154514. July 28, 2005]

The Insurance Commission dismissed the complaint. It said that


there was no need for Steamship Mutual to secure a license because it
was not engaged in the insurance business. It explained that
Steamship Mutual was a Protection and Indemnity Club (P & I Club).
Likewise, Pioneer need not obtain another license as insurance agent

60

and/or a broker for Steamship Mutual because Steamship Mutual was


not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship
Mutual was already superfluous.

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF


RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P
& I Club, engaged in the insurance business in the Philippines? (2)
Does Pioneer need a license as an insurance agent/broker for
Steamship Mutual?

The Court of Appeals affirmed the decision of the Insurance


Commissioner. In its decision, the appellate court distinguished
between P & I Clubs vis--vis conventional insurance. The appellate
court also held that Pioneer merely acted as a collection agent of
Steamship Mutual.

The parties admit that Steamship Mutual is a P & I Club.


Steamship Mutual admits it does not have a license to do business in
the Philippines although Pioneer is its resident agent. This relationship
is reflected in the certifications issued by the Insurance Commission.

In this petition, petitioner assigns the following errors allegedly


committed by the appellate court,
FIRST ASSIGNMENT OF ERROR

Petitioner insists that Steamship Mutual as a P & I Club is engaged


in the insurance business. To buttress its assertion, it cites the
definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of
Appeals[10] as an association composed of shipowners in general who
band together for the specific purpose of providing insurance cover on
a mutual basis against liabilities incidental to shipowning that the
members incur in favor of third parties. It stresses that as a P & I Club,
Steamship Mutuals primary purpose is to solicit and provide protection
and indemnity coverage and for this purpose, it has engaged the
services of Pioneer to act as its agent.

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT


STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE
GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS
AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE
A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS
BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED
IN INSURANCE BUSINESS.

Respondents contend that although Steamship Mutual is a P & I


Club, it is not engaged in the insurance business in the Philippines. It is
merely an association of vessel owners who have come together to
provide mutual protection against liabilities incidental to shipowning.
[11]
Respondents aver Hyopsung is inapplicable in this case because the
issue in Hyopsung was the jurisdiction of the court over Hyopsung.

THIRD ASSIGNMENT OF ERROR


THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT
PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS
AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

Is Steamship Mutual engaged in the insurance business?


Section 2(2) of the Insurance Code enumerates what constitutes
doing an insurance business or transacting an insurance business.
These are:

FOURTH ASSIGNMENT OF ERROR

61

(a) making or proposing to make, as insurer, any insurance


contract;

Relatedly, a mutual insurance company is a cooperative


enterprise where the members are both the insurer and insured. In it,
the members all contribute, by a system of premiums or assessments,
to the creation of a fund from which all losses and liabilities are paid,
and where the profits are divided among themselves, in proportion to
their interest.[17] Additionally, mutual insurance associations, or clubs,
provide three types of coverage, namely, protection and indemnity,
war risks, and defense costs.[18]

(b) making, or proposing to make, as surety, any contract of


suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an
insurance business within the meaning of this Code;

A P & I Club is a form of insurance against third party liability,


where the third party is anyone other than the P & I Club and the
members.[19] By definition then, Steamship Mutual as a P & I Club is a
mutual insurance association engaged in the marine insurance
business.

(d) doing or proposing to do any business in substance equivalent


to any of the foregoing in a manner designed to evade the
provisions of this Code.

The records reveal Steamship Mutual is doing business in the


country albeit without the requisite certificate of authority mandated
by Section 187[20] of the Insurance Code. It maintains a resident agent
in the Philippines to solicit insurance and to collect payments in its
behalf. We note that Steamship Mutual even renewed its P & I Club
cover until it was cancelled due to non-payment of the calls. Thus, to
continue doing business here, Steamship Mutual or through its agent
Pioneer, must secure a license from the Insurance Commission.

...
The same provision also provides, the fact that no profit is derived
from the making of insurance contracts, agreements or transactions, or
that no separate or direct consideration is received therefor, shall not
preclude the existence of an insurance business. [12]
The test to determine if a contract is an insurance contract or not,
depends on the nature of the promise, the act required to be
performed, and the exact nature of the agreement in the light of the
occurrence, contingency, or circumstances under which the
performance becomes requisite. It is not by what it is called. [13]

Since a contract of insurance involves public interest, regulation


by the State is necessary. Thus, no insurer or insurance company is
allowed to engage in the insurance business without a license or a
certificate of authority from the Insurance Commission. [21]

Basically, an insurance contract is a contract of indemnity. In it,


one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. [14]

Does Pioneer, as agent/broker of Steamship Mutual, need a special


license?
Pioneer is the resident agent of Steamship Mutual as evidenced by
the certificate of registration[22] issued by the Insurance Commission. It
has been licensed to do or transact insurance business by virtue of the
certificate of authority[23] issued by the same agency. However, a
Certification from the Commission states that Pioneer does not have a
separate license to be an agent/broker of Steamship Mutual. [24]

In particular, a marine insurance undertakes to indemnify the


assured against marine losses, such as the losses incident to a marine
adventure.[15] Section 99[16] of the Insurance Code enumerates the
coverage of marine insurance.

62

Although Pioneer is already licensed as an insurance company, it


needs a separate license to act as insurance agent for Steamship
Mutual. Section 299 of the Insurance Code clearly states:

GULF RESORTS, INC., petitioner,


vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
DECISION

SEC. 299 . . .
PUNO, J.:

No person shall act as an insurance agent or as an insurance broker in


the solicitation or procurement of applications for insurance, or receive
for services in obtaining insurance, any commission or other
compensation from any insurance company doing business in the
Philippines or any agent thereof, without first procuring a license so to
act from the Commissioner, which must be renewed annually on the
first day of January, or within six months thereafter. . .

Before the Court is the petition for certiorari under Rule 45 of the
Revised Rules of Court by petitioner GULF RESORTS, INC., against
respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner
assails the appellate court decision 1 which dismissed its two appeals
and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent
on the scope of the insurance companys liability for earthquake
damage to petitioners properties. Petitioner avers that, pursuant to its
earthquake shock endorsement rider, Insurance Policy No. 31944
covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for
loss to the two swimming pools of petitioner.

Finally, White Gold seeks revocation of Pioneers certificate of


authority and removal of its directors and officers. Regrettably, we are
not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision
dated July 30, 2002 of the Court of Appeals affirming the Decision
dated May 3, 2000 of the Insurance Commission is hereby REVERSED
AND SET ASIDE. The Steamship Mutual Underwriting Association
(Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are
ORDERED to obtain licenses and to secure proper authorizations to do
business as insurer and insurance agent, respectively. The petitioners
prayer for the revocation of Pioneers Certificate of Authority and
removal of its directors and officers, is DENIED. Costs against
respondents.

The facts as established by the court a quo, and affirmed by the


appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La
Union and had its properties in said resort insured originally
with the American Home Assurance Company (AHAC-AIU). In
the first four insurance policies issued by AHAC-AIU from 198485; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and
"F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of
loss from earthquake shock was extended only to plaintiffs two
swimming pools, thus, "earthquake shock endt." (Item 5 only)
(Exhs. "C-1"; "D-1," and "E" and two (2) swimming pools only
(Exhs. "C-1"; D-1", "E" and "F-1"). "Item 5" in those policies
referred to the two (2) swimming pools only (Exhs. "1-B", "2-B",
"3-B" and "F-2"); that subsequently AHAC(AIU) issued in
plaintiffs favor Policy No. 206-4182383-0 covering the period
March 14, 1988 to March 14, 1989 (Exhs. "G" also "G-1") and in
said policy the earthquake endorsement clause as indicated in
Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was deleted and
the entry under Endorsements/Warranties at the time of issue
read that plaintiff renewed its policy with AHAC (AIU) for the
period of March 14, 1989 to March 14, 1990 under Policy No.

SO ORDERED.

G.R. No. 156167

May 16, 2005

63

206-4568061-9 (Exh. "H") which carried the entry under


"Endorsement/Warranties at Time of Issue", which read
"Endorsement to Include Earthquake Shock (Exh. "6-B-1") in
the amount of P10,700.00 and paid P42,658.14 (Exhs. "6-A"
and "6-B") as premium thereof, computed as follows:

Item

P7,691,000.00 -

on the Clubhouse only

that plaintiff agreed to insure with defendant the properties


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

@ .392%;
Rate-Various
-

1,500,000.00 -

on the furniture, etc. contained in the building


above-mentioned@ .490%;
Premium

393,000.00 -

116,600.00

on the two swimming pools, only (against the peril of


earthquake shock only) @ 0.100%

other buildings include as follows:

a) Tilter House

P19,800.00 -

0.551%

b) Power House

P41,000.00 -

0.551%

c) House Shed

P55,000.00 -

0.540%

P100,000.00 -

P37,420.60 F/L

2,061.52

Typhoon

1,030.76

EC

393.00

ES

Doc. Stamps

3,068.10

F.S.T.

776.89

for furniture, fixtures, lines air-con and operating


Prem. Tax
equipment

64

409.05

TOTAL

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


the insured properties, with interest thereon, as computed
under par. 29 of the policy (Annex "B") until fully paid;

45,159.92;

2.) The sum of P428,842.00 per month, representing


continuing losses sustained by plaintiff on account of
defendants refusal to pay the claims;

In consideration of the payment by the insured to the


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

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


4.) The sum of P500,000.00 by way of attorneys fees and
expenses of litigation;
5.) Costs.11

that in Exhibit "7-C" the word "included" above the underlined


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

Respondent filed its Answer with Special and Affirmative Defenses with
Compulsory Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:

After the earthquake, petitioner advised respondent that it would be


making a claim under its Insurance Policy No. 31944 for damages on its
properties. Respondent instructed petitioner to file a formal claim, then
assigned the investigation of the claim to an independent claims
adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30, 1990,
respondent, through its adjuster, requested petitioner to submit
various documents in support of its claim. On August 7, 1990, Bayne
Adjusters and Surveyors, Inc., through its Vice-President A.R. de
Leon,4 rendered a preliminary report5 finding extensive damage caused
by the earthquake to the clubhouse and to the two swimming pools.
Mr. de Leon stated that "except for the swimming pools, all affected
items have no coverage for earthquake shocks." 6 On August 11, 1990,
petitioner filed its formal demand7 for settlement of the damage to all
its properties in the Agoo Playa Resort. On August 23, 1990,
respondent denied petitioners claim on the ground that its insurance
policy only afforded earthquake shock coverage to the two swimming
pools of the resort.8Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a
complaint10 with the regional trial court of Pasig praying for the
payment of the following:

The above schedule clearly shows that plaintiff paid only a


premium of P393.00 against the peril of earthquake shock, the
same premium it paid against earthquake shock only on the
two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits "C", "D", "E", "F" and "G"). From this fact the Court
must consequently agree with the position of defendant that
the endorsement rider (Exhibit "7-C") means that only the two
swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a
contract of adhesion hence, where the language used in an
insurance contract or application is such as to create ambiguity
the same should be resolved against the party responsible
therefor, i.e., the insurance company which prepared the
contract. To the mind of [the] Court, the language used in the
policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of
the provisions therein.
From the above observations the Court finds that only the two
(2) swimming pools had earthquake shock coverage and were
heavily damaged by the earthquake which struck on July 16,

65

1990. Defendant having admitted that the damage to the


swimming pools was appraised by defendants adjuster
at P386,000.00, defendant must, by virtue of the contract of
insurance, pay plaintiff said amount.

ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY


16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFFAPPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH
INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON
PROCEEDS OF POLICY.

Because it is the finding of the Court as stated in the


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

On the other hand, respondent filed a partial appeal, assailing the


lower courts failure to award it attorneys fees and damages on its
compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court
and ruled, thus:
However, after carefully perusing the documentary evidence of
both parties, We are not convinced that the last two (2)
insurance contracts (Exhs. "G" and "H"), which the plaintiffappellant had with AHAC (AIU) and upon which the subject
insurance contract with Philippine Charter Insurance
Corporation is said to have been based and copied (Exh. "I"),
covered an extended earthquake shock insurance on all the
insured properties.

WHEREFORE, premises considered, defendant is ordered to pay


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

xxx

No pronouncement as to costs.13

We also find that the Court a quo was correct in not granting
the plaintiff-appellants prayer for the imposition of interest
24% on the insurance claim and 6% on loss of income allegedly
amounting toP4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two
(2) swimming pools, as the Court a quo and this Court correctly
found it to be liable only, it then cannot be said that it was in
default and therefore liable for interest.

Petitioners Motion for Reconsideration was denied. Thus, petitioner


filed an appeal with the Court of Appeals based on the following
assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFFAPPELLANT CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO
SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944,
CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE
EARTHQUAKE OF JULY 16, 1990.

Coming to the defendant-appellants prayer for an attorneys


fees, long-standing is the rule that the award thereof is subject
to the sound discretion of the court. Thus, if such discretion is
well-exercised, it will not be disturbed on appeal (Castro et al.
v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being
the award thereof an exception rather than a rule, it is
necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFFAPPELLANTS RIGHT TO RECOVER UNDER DEFENDANTAPPELLEES POLICY (NO. 31944; EXH "I") BY LIMITING ITSELF
TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM
THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE

66

of such award (Country Bankers Insurance Corp. v. Lianga Bay


and Community Multi-Purpose Coop., Inc., G.R. No. 136914,
January 25, 2002). Therefore, holding that the plaintiffappellants action is not baseless and highly speculative, We
find that the Court a quo did not err in granting the same.

Fifth, that the earthquake shock endorsement rider should be given


precedence over the wording of the insurance policy, because the rider
is the more deliberate expression of the agreement of the contracting
parties.
Sixth, that in their previous insurance policies, limits were placed on
the endorsements/warranties enumerated at the time of issue.

WHEREFORE, in view of all the foregoing, both appeals are


hereby DISMISSED and judgment of the Trial Court hereby
AFFIRMED in toto. No costs.15

Seventh, any ambiguity in the earthquake shock endorsement should


be resolved in favor of petitioner and against respondent. It was
respondent which caused the ambiguity when it made the policy in
issue.

Petitioner filed the present petition raising the following issues: 16


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

Eighth, the qualification of the endorsement limiting the earthquake


shock endorsement should be interpreted as a caveat on the standard
fire insurance policy, such as to remove the two swimming pools from
the coverage for the risk of fire. It should not be used to limit the
respondents liability for earthquake shock to the two swimming pools
only.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED


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

Ninth, there is no basis for the appellate court to hold that the
additional premium was not paid under the extended coverage. The
premium for the earthquake shock coverage was already included in
the premium paid for the policy.

Petitioner contends:

Tenth, the parties contemporaneous and subsequent acts show that


they intended to extend earthquake shock coverage to all insured
properties. When it secured an insurance policy from respondent,
petitioner told respondent that it wanted an exact replica of its latest
insurance policy from American Home Assurance Company (AHAC-AIU),
which covered all the resorts properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent
assured petitioner that it was covered for earthquake shock.
Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary documents for its
building claims and other repair costs. Thus, under the doctrine of
equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.

First, that the policys earthquake shock endorsement clearly covers


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

Eleventh, that it is proper for it to avail of a petition for review


by certiorari under Rule 45 of the Revised Rules of Court as its remedy,
and there is no need for calibration of the evidence in order to
establish the facts upon which this petition is based.

Fourth, it is unbelievable for respondent to claim that it only made an


inadvertent omission when it deleted the said qualification.

67

On the other hand, respondent made the following counter


arguments:18

Fifth, in order for the earthquake shock endorsement to be effective,


premiums must be paid for all the properties covered. In all of its seven
insurance policies, petitioner only paid P393.00 as premium for
coverage of the swimming pools against earthquake shock. No other
premium was paid for earthquake shock coverage on the other
properties. In addition, the use of the qualifier "ANY" instead of "ALL"
to describe the property covered was done deliberately to enable the
parties to specify the properties included for earthquake coverage.

First, none of the previous policies issued by AHAC-AIU from 1983 to


1990 explicitly extended coverage against earthquake shock to
petitioners insured properties other than on the two swimming pools.
Petitioner admitted that from 1984 to 1988, only the two swimming
pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier
policies, and there was no increase in the premium paid. AHAC-AIU, in
a letter19 by its representative Manuel C. Quijano, categorically stated
that its previous policy, from which respondents policy was copied,
covered only earthquake shock for the two swimming pools.

Sixth, petitioner did not inform respondent of its requirement that all
of its properties must be included in the earthquake shock coverage.
Petitioners own evidence shows that it only required respondent to
follow the exact provisions of its previous policy from AHAC-AIU.
Respondent complied with this requirement. Respondents only
deviation from the agreement was when it modified the provisions
regarding the replacement cost endorsement. With regard to the issue
under litigation, the riders of the old policy and the policy in issue are
identical.

Second, petitioners payment of additional premium in the amount


of P393.00 shows that the policy only covered earthquake shock
damage on the two swimming pools. The amount was the same
amount paid by petitioner for earthquake shock coverage on the two
swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.

Seventh, respondent did not do any act or give any assurance to


petitioner as would estop it from maintaining that only the two
swimming pools were covered for earthquake shock. The adjusters
letter notifying petitioner to present certain documents for its building
claims and repair costs was given to petitioner before the adjuster
knew the full coverage of its policy.

Third, the deletion of the phrase pertaining to the limitation of the


earthquake shock endorsement to the two swimming pools in the
policy schedule did not expand the earthquake shock coverage to all of
petitioners properties. As per its agreement with petitioner,
respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said
qualification in their riders title, in the last two policies, this
qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda
III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden
the scope of the endorsement whose descriptive title was merely
enumerated. Any ambiguity in the policy can be easily resolved by
looking at the other provisions, specially the enumeration of the items
insured, where only the two swimming pools were noted as covered for
earthquake shock damage.

Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the


phrase "Item 5 Only" after the descriptive name or title of the
Earthquake Shock Endorsement. However, the words of the policy
reflect the parties clear intention to limit earthquake shock coverage
to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its
conditions. It did not object to any deficiency nor did it institute any
action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys
fees and litigation expenses. Since respondent was willing and able to
pay for the damage caused on the two swimming pools, it cannot be
considered to be in default, and therefore, it is not liable for interest.

Fourth, in its Complaint, petitioner alleged that in its policies from


1984 through 1988, the phrase "Item 5 P393,000.00 on the two
swimming pools only (against the peril of earthquake shock only)"
meant that only the swimming pools were insured for earthquake
damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming
pools as "Item 3."

We hold that the petition is devoid of merit.

68

In Insurance Policy No. 31944, four key items are important in the
resolution of the case at bar.

ANNUAL PAYMENT AGREEMENT ON


LONG TERM POLICIES

First, in the designation of location of risk, only the two swimming


pools were specified as included, viz:

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED


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

ITEM 3 393,000.00 On the two (2) swimming pools only


(against the peril of earthquake shock only)20
Second, under the breakdown for premium payments,21 it was stated
that:

Earthquake Endorsement

PREMIUM RECAPITULATION

ITEM NOS.

AMOUNT

RATES

PREMIUM

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

xxx

In consideration of the payment by the Insured to the Company


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

393,000.00

0.100%-E/S

393.0022]

Third, Policy Condition No. 6 stated:

Petitioner contends that pursuant to this rider, no qualifications were


placed on the scope of the earthquake shock coverage. Thus, the
policy extended earthquake shock coverage to all of the insured
properties.
It is basic that all the provisions of the insurance policy should be
examined and interpreted in consonance with each other.25 All its parts
are reflective of the true intent of the parties. The policy cannot be
construed piecemeal. Certain stipulations cannot be segregated and
then made to control; neither do particular words or phrases
necessarily determine its character. Petitioner cannot focus on the
earthquake shock endorsement to the exclusion of the other
provisions. All the provisions and riders, taken and interpreted
together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.

6. This insurance does not cover any loss or damage


occasioned by or through or in consequence, directly or
indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of
nature. 23
Fourth, the rider attached to the policy, titled "Extended Coverage
Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and
Smoke)," stated, viz:

69

A careful examination of the premium recapitulation will show that it is


the clear intent of the parties to extend earthquake shock coverage
only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. Thus,
an insurance contract exists where the following elements concur:

A. Yes, sir. It is limited to the two swimming pools, specifically


shown in the warranty, there is a provision here that it was only
for item 5.
Q. More specifically Item 5 states the amount of P393,000.00
corresponding to the two swimming pools only?
A. Yes, sir.

1. The insured has an insurable interest;

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,


November 25, 1991

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


the designated peril;

pp. 23-26

3. The insurer assumes the risk;

Q. For the period from March 14, 1988 up to March 14, 1989,
did you personally arrange for the procurement of this policy?

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


distribute actual losses among a large group of persons
bearing a similar risk; and

A. Yes, sir.

5. In consideration of the insurer's promise, the insured


pays a premium.26 (Emphasis ours)

Q. Did you also do this through your insurance agency?


A. If you are referring to Forte Insurance Agency, yes.

An insurance premium is the consideration paid an insurer for


undertaking to indemnify the insured against a specified peril. 27 In fire,
casualty, and marine insurance, the premium payable becomes a debt
as soon as the risk attaches.28 In the subject policy, no premium
payments were made with regard to earthquake shock coverage,
except on the two swimming pools. There is no mention of any
premium payable for the other resort properties with regard to
earthquake shock. This is consistent with the history of petitioners
previous insurance policies from AHAC-AIU. As borne out by petitioners
witnesses:

Q. Is Forte Insurance Agency a department or division of your


company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as
operations are concerned?
A. Yes, sir, they are separate entity.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,


November 25, 1991
pp. 12-13

Q. But insofar as the procurement of the insurance policy is


concerned they are of course subject to your instruction, is that
not correct?

Q. Now Mr. Mantohac, will it be correct to state also that insofar


as your insurance policy during the period from March 4, 1984
to March 4, 1985 the coverage on earthquake shock was
limited to the two swimming pools only?

A. Yes, sir. The final action is still with us although they can
recommend what insurance to take.

70

Q. In the procurement of the insurance police (sic) from March


14, 1988 to March 14, 1989, did you give written instruction to
Forte Insurance Agency advising it that the earthquake shock
coverage must extend to all properties of Agoo Playa Resort in
La Union?

Endorsement, FEA Warranty & Annual Payment Agreement on


Long Term Policies"29 to the insurance policy as proof of the intent of
the parties to extend the coverage for earthquake shock. However, this
phrase is merely an enumeration of the descriptive titles of the riders,
clauses, warranties or endorsements to which the policy is subject, as
required under Section 50, paragraph 2 of the Insurance Code.

A. No, sir. We did not make any written instruction, although we


made an oral instruction to that effect of extending the
coverage on (sic) the other properties of the company.

We also hold that no significance can be placed on the deletion of the


qualification limiting the coverage to the two swimming pools. The
earthquake shock endorsement cannot stand alone. As explained by
the testimony of Juan Baranda III, underwriter for AHAC-AIU:

Q. And that instruction, according to you, was very important


because in April 1987 there was an earthquake tremor in La
Union?

DIRECT EXAMINATION OF JUAN BARANDA III30


TSN, August 11, 1992
pp. 9-12

A. Yes, sir.

Atty. Mejia:

Q. And you wanted to protect all your properties against similar


tremors in the [future], is that correct?

We respectfully manifest that the same exhibits C to H


inclusive have been previously marked by counsel for
defendant as Exhibit[s] 1-6 inclusive. Did you have
occasion to review of (sic) these six (6) policies issued
by your company [in favor] of Agoo Playa Resort?

A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to
check the provisions with respect to your instructions that all
properties must be covered again by earthquake shock
endorsement?

WITNESS:
Yes[,] I remember having gone over these policies at
one point of time, sir.

A. Are you referring to the insurance policy issued by American


Home Assurance Company marked Exhibit "G"?

Q. Now, wach (sic) of these six (6) policies marked in evidence


as Exhibits C to H respectively carries an earthquake shock
endorsement[?] My question to you is, on the basis on (sic) the
wordings indicated in Exhibits C to H respectively what was the
extent of the coverage [against] the peril of earthquake shock
as provided for in each of the six (6) policies?

Atty. Mejia: Yes.


Witness:
A. I examined the policy and seeing that the warranty on the
earthquake shock endorsement has no more limitation
referring to the two swimming pools only, I was contented
already that the previous limitation pertaining to the two
swimming pools was already removed.

xxx
WITNESS:

Petitioner also cited and relies on the attachment of the phrase


"Subject to: Other Insurance Clause, Typhoon Endorsement,
Earthquake Shock Endorsement, Extended Coverage

The extent of the coverage is only up to the two (2)


swimming pools, sir.

71

Q. Is that for each of the six (6) policies namely: Exhibits C, D,


E, F, G and H?

earthquake shock solely but that the moment I see


this, the thing that comes to my mind is either insuring
a swimming pool, foundations, they are normally
affected by earthquake but not by fire, sir.

A. Yes, sir.

DIRECT EXAMINATION OF JUAN BARANDA III


TSN, August 11, 1992
pp. 23-25

ATTY. MEJIA:
What is your basis for stating that the coverage against
earthquake shock as provided for in each of the six (6)
policies extend to the two (2) swimming pools only?

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that


only Exhibits C, D, E and F inclusive [remained] its coverage
against earthquake shock to two (2) swimming pools only but
that Exhibits G and H respectively entend the coverage against
earthquake shock to all the properties indicated in the
respective schedules attached to said policies, what can you
say about that testimony of plaintiffs witness?

WITNESS:
Because it says here in the policies, in the enumeration
"Earthquake Shock Endorsement, in the Clauses and
Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.

WITNESS:

ATTY. MEJIA:

As I have mentioned earlier, earthquake shock cannot


stand alone without the other half of it. I assure you
that this one covers the two swimming pools with
respect to earthquake shock endorsement. Based on it,
if we are going to look at the premium there has been
no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to
include the earthquake shock, I think there is a
substantial increase in the premium. We are not only
going to consider the two (2) swimming pools of the
other as stated in the policy. As I see, there is no
increase in the amount of the premium. I must say that
the coverage was not broaden (sic) to include the other
items.

Witness referring to Exhibit C-1, your Honor.


WITNESS:
We do not normally cover earthquake shock
endorsement on stand alone basis. For swimming pools
we do cover earthquake shock. For building we covered
it for full earthquake coverage which includes
earthquake shock
COURT:
As far as earthquake shock endorsement you do not
have a specific coverage for other things other than
swimming pool? You are covering building? They are
covered by a general insurance?

COURT:
They are the same, the premium rates?
WITNESS:

WITNESS:

They are the same in the sence (sic), in the amount of


the coverage. If you are going to do some computation

Earthquake shock coverage could not stand alone. If


we are covering building or another we can issue

72

based on the rates you will arrive at the same


premiums, your Honor.

underwriter, we do not cover. . it was inadvertent


because of the previous policies that we have issued
with no specific attachments, premium rates and so on.
It was inadvertent, sir.

CROSS-EXAMINATION OF JUAN BARANDA III


TSN, September 7, 1992
pp. 4-6

The Court also rejects petitioners contention that respondents


contemporaneous and subsequent acts to the issuance of the
insurance policy falsely gave the petitioner assurance that the
coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as
intended by the petitioner. Petitioners own witness testified to this
agreement, viz:

ATTY. ANDRES:
Would you as a matter of practice [insure] swimming
pools for fire insurance?
WITNESS:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC


TSN, January 14, 1992
pp. 4-5

No, we dont, sir.


Q. That is why the phrase "earthquake shock to the two (2)
swimming pools only" was placed, is it not?

Q. Just to be clear about this particular answer of yours Mr.


Witness, what exactly did you tell Atty. Omlas (sic) to copy from
Exhibit "H" for purposes of procuring the policy from Philippine
Charter Insurance Corporation?

A. Yes, sir.

A. I told him that the insurance that they will have to get will
have the same provisions as this American Home Insurance
Policy No. 206-4568061-9.

ATTY. ANDRES:
Will you not also agree with me that these exhibits,
Exhibits G and H which you have pointed to during
your direct-examination, the phrase "Item no. 5 only"
meaning to (sic) the two (2) swimming pools was
deleted from the policies issued by AIU, is it not?

Q. You are referring to Exhibit "H" of course?


A. Yes, sir, to Exhibit "H".

xxx

Q. So, all the provisions here will be the same except that of
the premium rates?

ATTY. ANDRES:
A. Yes, sir. He assured me that with regards to the insurance
premium rates that they will be charging will be limited to this
one. I (sic) can even be lesser.

As an insurance executive will you not attach any


significance to the deletion of the qualifying phrase for
the policies?

CROSS EXAMINATION OF LEOPOLDO MANTOHAC


TSN, January 14, 1992
pp. 12-14

WITNESS:
My answer to that would be, the deletion of that
particular phrase is inadvertent. Being a company

Atty. Mejia:

73

Q. Will it be correct to state[,] Mr. Witness, that you made a


comparison of the provisions and scope of coverage of Exhibits
"I" and "H" sometime in the third week of March, 1990 or
thereabout?

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters


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

A. Yes, sir, about that time.

Q. Do you recall the circumstances that led to your discussion


regarding the extent of coverage of the policy issued by
Philippine Charter Insurance Corporation?

Q. And at that time did you notice any discrepancy or


difference between the policy wordings as well as scope of
coverage of Exhibits "I" and "H" respectively?

A. I remember that when I returned to the office after the


inspection, I got a photocopy of the insurance coverage policy
and it was indicated under Item 3 specifically that the
coverage is only for earthquake shock. Then, I remember I had
a talk with Atty. Umlas (sic), and I relayed to him what I had
found out in the policy and he confirmed to me indeed only
Item 3 which were the two swimming pools have coverage for
earthquake shock.

A. No, sir, I did not discover any difference inasmuch (sic) as I


was assured already that the policy wordings and rates were
copied from the insurance policy I sent them but it was only
when this case erupted that we discovered some
discrepancies.
Q. With respect to the items declared for insurance coverage
did you notice any discrepancy at any time between those
indicated in Exhibit "I" and those indicated in Exhibit "H"
respectively?

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

A. With regard to the wordings I did not notice any difference


because it was exactly the same P393,000.00 on the two (2)
swimming pools only against the peril of earthquake shock
which I understood before that this provision will have to be
placed here because this particular provision under the peril of
earthquake shock only is requested because this is an
insurance policy and therefore cannot be insured against fire,
so this has to be placed.

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

The verbal assurances allegedly given by respondents representative


Atty. Umlas were not proved. Atty. Umlas categorically denied having
given such assurances.
Finally, petitioner puts much stress on the letter of respondents
independent claims adjuster, Bayne Adjusters and Surveyors, Inc. But
as testified to by the representative of Bayne Adjusters and Surveyors,
Inc., respondent never meant to lead petitioner to believe that the
endorsement for earthquake shock covered properties other than the
two swimming pools, viz:

In sum, there is no ambiguity in the terms of the contract and its


riders. Petitioner cannot rely on the general rule that insurance
contracts are contracts of adhesion which should be liberally construed
in favor of the insured and strictly against the insurer company which
usually prepares it.31 A contract of adhesion is one wherein a party,
usually a corporation, prepares the stipulations in the contract, while
the other party merely affixes his signature or his "adhesion" thereto.

74

Through the years, the courts have held that in these type of contracts,
the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it.
Thus, these contracts are viewed as traps for the weaker party whom
the courts of justice must protect.32Consequently, any ambiguity
therein is resolved against the insurer, or construed liberally in favor of
the insured.33

A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter
Insurance Corporation I specifically told him that the policy and
wordings shall be copied from the AIU Policy No. 206-45680619.

The case law will show that this Court will only rule out blind adherence
to terms where facts and circumstances will show that they are
basically one-sided.34 Thus, we have called on lower courts to remain
careful in scrutinizing the factual circumstances behind each case to
determine the efficacy of the claims of contending parties.
In Development Bank of the Philippines v. National
Merchandising Corporation, et al.,35 the parties, who were acute
businessmen of experience, were presumed to have assented to the
assailed documents with full knowledge.

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


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

We cannot apply the general rule on contracts of adhesion to the case


at bar. Petitioner cannot claim it did not know the provisions of the
policy. From the inception of the policy, petitioner had required the
respondent to copyverbatim the provisions and terms of its latest
insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo
Mantohac, a direct participant in securing the insurance policy of
petitioner, is reflective of petitioners knowledge,viz:

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


The petition for certiorari is dismissed. No costs.
SO ORDERED.

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36


TSN, September 23, 1991
pp. 20-21

REPUBLIC OF THE G.R. No. 156956


PHILIPPINES, Represented

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you
would want for those facilities in Agoo Playa?

by EDUARDO T. MALINIS, Present:


A. Yes, sir. I told him that I will agree to that renewal of this
policy under Philippine Charter Insurance Corporation as long
as it will follow the same or exact provisions of the previous
insurance policy we had with American Home Assurance
Corporation.

in His Capacity as Insurance


Commissioner, PANGANIBAN, CJ, Chairperson,
Petitioner, YNARES-SANTIAGO,

Q. Did you take any step Mr. Witness to ensure that the
provisions which you wanted in the American Home Insurance
policy are to be incorporated in the PCIC policy?

AUSTRIAMARTINEZ,
CALLEJO, SR., and

75

- versus - CHICO-NAZARIO, JJ
The Case

DEL MONTE MOTORS, INC., Promulgated:


Respondent. October 9, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x

Before us is a Petition for Review [1] under Rule 45 of the Rules of Court,

DECISION

seeking to reverse the January 16, 2003 Order [2] of the Regional Court
PANGANIBAN, CJ:

(RTC) ofQuezon City (Branch 221) in Civil Case No. Q-97-30412. The
RTC found Insurance Commissioner Eduardo T. Malinis guilty of indirect
contempt

The securities required by the Insurance Code to be deposited with

for

refusing

to

comply

with

the December

18,

2002 Resolution[3] of the lower court. The January 16, 2003 Order

the Insurance Commissioner are intended to answer for the claims

states in full:

of all policy holders in the event that the depositing insurance


company becomes insolvent or otherwise unable to satisfy their

On January 8, 2003, [respondent] filed a Motion


to Cite Commissioner Eduardo T. Malinis of the Office of
the Insurance Commission in Contempt of Court
because of his failure and refusal to obey the lawful
order of this court embodied in a Resolution dated
December 18, 2002 directing him to allow the
withdrawal of the security deposit of Capital Insurance
and
Surety
Co.
(CISCO)
in
the
amount
of P11,835,375.50
to
be
paid
to
Sheriff
Manuel Paguyo in the satisfaction of the Notice of
Garnishment pursuant to a Decision of this Court which
has become final and executory.

claims. The security deposit must be ratably distributed among all the
insured who are entitled to their respective shares; it cannot be
garnished or levied upon by a single claimant, to the detriment of the
others.

76

On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-

During the hearing of the Motion set last


January 10, 2003, Commissioner Malinis or his counsel
or his duly authorized representative failed to appear
despite notice in utter disregard of the order of this
Court. However, Commissioner Malinis filed on January
15, 2003 a written Comment reiterating the same
grounds already passed upon and rejected by this
Court. This Court finds no lawful justification or excuse
for Commissioner Malinis refusal to implement the
lawful orders of this Court.

97-30412, finding the defendants (Vilfran Liner, Inc., Hilaria Villegas


and Maura Villegas) jointly and severally liable to pay Del Monte
Motors, Inc., P11,835,375.50 representing the balance of Vilfran Liners
service contracts with respondent. The trial court further ordered the
execution

of

the

Decision

against

the counterbond posted

by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and

Wherefore, premises considered and after due


hearing, Commissioner Eduardo T. Malinis is hereby
declared guilty of Indirect Contempt of Court pursuant
to Section 3 [of] Rule 71 of the 1997 Rules of Civil
Procedure for willfully disobeying and refusing to
implement and obey a lawful order of this Court.[4]

Surety Co., Inc. (CISCO).

On April 18, 2002, CISCO opposed the Motion for Execution filed by
respondent, claiming that the latter had no record or document
regarding the alleged issuance of the counterbond; thus, the bond was
The Facts
not valid and enforceable.

77

Furthermore, the Commissioner of the Office of the


Insurance Commission is hereby ordered to comply
with its obligations under the Insurance Code by
upholding the integrity and efficacy of bonds validly
issued by duly accredited Bonding and Insurance
Companies; and to safeguard the public interest by
insuring the faithful performance to enforce contractual
obligations under existing bonds. Accordingly said
office is ordered to withdraw from the security deposit
of Capital Insurance & Surety Company, Inc. the
amount of P11,835.50 to be paid to Sheriff Manuel
S. Paguyo in satisfaction of the Notice of Garnishment
served on August 16, 2002.[5]

On June 13, 2002, the RTC granted the Motion for Execution and issued
the

corresponding

Writ. Armed

with

this

Writ,

Sheriff

Manuel

S. Paguyoproceeded to levy on the properties of CISCO. He also issued


a Notice of Garnishment on several depository banks of the insurance
company. Moreover, he served a similar notice on the Insurance
Commission, so as to enforce the Writ on the security deposit filed by
CISCO with the Commission in accordance with Section 203 of the
Insurance Code.

On January 8, 2003, respondent moved to cite Insurance Commissioner


On December 18, 2002, after a hearing on all the pending Motions, the

Eduardo T. Malinis in contempt of court for his refusal to obey the

RTC ruled that the Notice of Garnishment served by Sheriff Paguyo on

December 18, 2002 Resolution of the trial court.

the insurance commission was valid. The trial court added that the
letter and spirit of the law made the security deposit answerable for
contractual obligations incurred by CISCO under the insurance

Ruling of the Trial Court

contracts the latter had entered into. The RTC resolved thus:

78

The RTC held Insurance Commissioner Malinis in contempt for his

The Petition is meritorious.

refusal to implement its Order. It explained that the commissioner had


no

legal

justification

for

his

refusal

to

allow

the

withdrawal
Preliminary Issue:

of CISCOs security deposit.


Propriety of Review
Hence, this Petition.[6]

Issues
Before discussing the principal issue, the Court will first dispose of the
question of mootness.

Petitioner raises this sole issue for the Courts consideration:

Prior

to

the

filing

of

the

instant

Petition,

Insurance

Commissioner Malinis sent the treasurer of the Philippines a letter


Whether or not the security deposit held by the
Insurance Commissioner pursuant to Section 203 of the
Insurance Code may be levied or garnished in favor of
only one insured.[7]

dated March 26, 2003, stating that the former had no objection to the
release of the security deposit to Del Monte Motors. Portions of the
fund were consequently released to respondent in July, October, and
December 2003. Thus, the issue arises: whether these circumstances

The Courts Ruling

render the case moot.

79

replenished. Moreover, after the questioned Order of the lower court


was issued, similar claims on the security deposits of various insurance
Petitioner, however, contends that the partial releases should
companies have been made before the Insurance Commission. To set
not be construed as an abandonment of its stand that security deposits
aside the resolution of the issue will only postpone a task that is
under Section 203 of the Insurance Code are exempt from levy and
certain to crop up in the future.
garnishment. The Republic claims that the releases were made
pursuant to the commissioners power of control over the fund, not to

Besides, the business of insurance is imbued with public interest. It is

the lower courts Order of garnishment. Petitioner further invokes the

subject to regulation by the State, with respect not only to the relations

jurisdiction of this Court to put to rest the principal issue of whether

between the insurer and the insured, but also to the internal affairs of

security deposits made with the Insurance Commission may be levied

insurance companies.[8] As this case is undeniably endowed with public

and garnished.

interest and involves a matter of public policy, this Court shall not shirk
from its duty to educate the bench and the bar by formulating guiding
and controlling principles, precepts, doctrines and rules. [9]

The issue is not totally moot. To stress, only a portion of respondents


claim was satisfied, and the Insurance Commission has required CISCO
Principal Issue:
to replenish the latters security deposit. Respondent, therefore, may

Exemption of Security Deposit

one day decide to further garnish the security deposit, once

from Levy or Garnishment

80

requirement
supplied)

of

the

Commissioner. (Emphasis

Respondent notes that Section 203 does not provide


for an absolute prohibition on the levy and
garnishment of the security deposit. It contends that
the law requires the deposit, precisely to ensure
faithful performance of all the obligations of the
depositing insurer under the latters various insurance
contracts. Hence, respondent claims that the security
deposit
should
be
answerable
for
the counterbond issued by CISCO.

Section 203 of the Insurance Code provides as follows:

Sec. 203. Every domestic insurance company shall, to


the extent of an amount equal in value to twentyfive per centum of the minimum paid-up capital
required under section one hundred eighty-eight,
invest its funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other evidences
of debt of the Government of the Philippines or its
political subdivisions or instrumentalities, or of
government-owned or controlled corporations and
entities,
including the
Central
Bank of
the
Philippines: Provided, That such investments shall at all
times be maintained free from any lien or
encumbrance;
and Provided,
further, That
such
securities shall be deposited with and held by the
Commissioner for the faithful performance by the
depositing insurer of all its obligations under its
insurance contracts. The provisions of section one
hundred ninety-two shall, so far as practicable, apply to
the securities deposited under this section.

The Court is not convinced. As worded, the law expressly and


clearly states that the security deposit shall be (1) answerable
for all the obligations of the depositing insurer under its insurance
contracts; (2) at all times free from any liens or encumbrance; and (3)
exempt from levy by any claimant.

To be sure, CISCO, though presently under conservatorship,


has valid outstanding policies. Its policy holders have a right under the
law to be equally protected by its security deposit. To allow the

Except as otherwise provided in this Code, no


judgment creditor or other claimant shall have
the right to levy upon any of the securities of the
insurer held on deposit pursuant to the

garnishment of that deposit would impair the fund by decreasing it to


less than the percentage of paid-up capital that the law requires to be

81

maintained. Further, this move would create, in favor of respondent, a

to answer for the claims against the insurance company by all its

preference of credit over the other policy holders and beneficiaries.

policy holders and their beneficiaries.This step is taken in the event


that the company becomes insolvent or otherwise unable to satisfy the

Our Insurance Code is patterned after that of California.


claims against it. Thus, a single claimant may not lay stake on the
[10]

Thus, the ruling of the states Supreme Court on a similar concept as


securities to the exclusion of all others. The other parties may have

that of the security deposit is instructive. Engwicht v. Pacific States Life


their own claims against the insurance company under other insurance
Assurance Co.

[11]

held that the money required to be deposited by a


contracts it has entered into.

mutual assessment insurance company with the state treasurer was a


trust fund to be ratably distributed amongst all the claimants entitled
to share in it. Such a distribution cannot be had except in an action in
Respondents Inchoate Right
the nature of a creditors bill, upon the hearing of which, and with all
the parties interested in the fund before it, the court may make
The right to lay claim on the fund is dependent on the solvency

equitable distribution of the fund, and appoint a receiver to carry that

of the insurer and is subject to all other obligations of the company

distribution into effect.[12]

arising from its insurance contracts. Thus, respondents interest is


Basic is the statutory construction rule that provisions of a
merely inchoate. Being a mere expectancy, it has no attribute of
statute should be construed in accordance with the purpose for which
property. At this time, it is nonexistent and may never exist. [14] Hence,
it was enacted.[13]That is, the securities are held as a contingency fund

82

it would be premature to make the security deposit answerable

The

for CISCOs present obligation to Del Monte Motors.

which claimants are entitled to the security deposit and in what prorated amounts. Only after all other claimants under subsisting policies
issued by CISCO have been heard can respondents share be
determined.

of

the

insurance

The Commissioner may issue such rulings,


instructions, circulars, orders and decisions as he may
deem necessary to secure the enforcement of the
provisions of this Code, subject to the approval of the
Secretary of Finance. Except as otherwise specified,
decisions
made
by
the
Commissioner
shall
be appealable to the Secretary of Finance. (Emphasis
supplied)

Powers of the Commissioner

The Insurance Code has vested the Office of the Insurance


both regulatory and adjudicatory authority

authority

Sec. 414. The Insurance Commissioner shall


have the duty to see that all laws relating to insurance,
insurance companies and other insurance matters,
mutual benefit associations, and trusts for charitable
uses are faithfully executed and to perform the duties
imposed upon him by this Code, and shall,
notwithstanding any existing laws to the contrary, have
sole and exclusive authority to regulate the issuance
and sale of variable contracts as defined in section two
hundred thirty-two and to provide for the licensing of
persons selling such contracts, and to issue such
reasonable rules and regulations governing the same.

yet to be conducted, it would be impossible to establish at this time

with

regulatory

commissioner is described in Section 414 of the Code as follows:

Moreover, since insolvency proceedings against CISCO have

Commission

general

over

insurance matters.[15]

83

same, but shall as long as the company is solvent,


permit the company to collect the interest or dividends
on the securities so deposited, and, from time to
time, with his assent, to withdraw any of such
securities, upon depositing with said Commissioner
other like securities, the market value of which shall be
equal to the market value of such as may be
withdrawn. In the event of any company ceasing to do
business in the Philippines the securities deposited as
aforesaid shall be returned upon the companys making
application therefor and proving to the satisfaction of
the Commissioner that it has no further liability under
any of its policies in thePhilippines. (Emphasis
supplied)

Pursuant to these regulatory powers, the commissioner is authorized


to (1) issue (or to refuse to issue) certificates of authority to persons or
entities desiring to engage in insurance business in the Philippines;
[16]

(2) revoke or suspend these certificates of authority upon finding

grounds for the revocation or suspension; [17] (3) impose upon insurance
companies, their directors and/or officers and/or agents appropriate
penalties -- fines, suspension or removal from office -- for failing to
comply with the Code or with any of the commissioners orders,
instructions, regulations or rulings, or for otherwise conducting

Undeniably, the insurance commissioner has been given a wide

business in an unsafe or unsound manner.[18]

latitude of discretion to regulate the insurance industry so as to protect


Included in the above regulatory responsibilities is the duty to hold the
the insuring public. The law specifically confers custody over the
security deposits under Sections 191

[19]

and 203 of the Code, for the


securities upon the commissioner, with whom these investments are

benefit and security of all policy holders. In relation to these provisions,


required to be deposited. An implied trust[20] is created by the law for
Section 192 of the Insurance Code states:
the benefit of all claimants under subsisting insurance contracts issued
by the insurance company.[21]

Sec. 192. The Commissioner shall hold the securities,


deposited as aforesaid, for the benefit and security of
all the policyholders of the company depositing the

84

As the officer vested with custody of the security deposit, the

applying and implementing particular statutes have accumulated

insurance commissioner is in the best position to determine if and

experience and specialized capabilities.Thus, in a long line of cases,

when it may be released without prejudicing the rights of other policy

this Court has recognized that their construction of a statute is entitled

holders. Before allowing the withdrawal or the release of the deposit,

to great respect and should ordinarily be controlling, unless clearly

the commissioner must be satisfied that the conditions contemplated

shown to be in sharp conflict with the governing statute or the

by the law are met and all policy holders protected.

Constitution and other laws.[23]

Clearly, then, the trial court erred in issuing the Writ of


Commissioners Actions

Garnishment against the security deposit of CISCO. It follows that

Entitled to Great Respect

without the issuance of a valid order, the insurance commissioner


could not have been in contempt of court.[24]

In this case, Commissioner Malinis refused to release the


security deposit of CISCO. Believing that the funds were exempt from
execution as provided by law, he sought to protect other policy
holders. His interpretation of the provisions of the law carries great
weight and consideration,[22] as he is the head of a specialized body
tasked with the regulation of insurance matters and primarily charged
with the implementation of the Insurance Code.

WHEREFORE,

Order SET ASIDE. No costs.

SO ORDERED.

The emergence of the multifarious needs of modern society


necessitates the establishment of diverse administrative agencies. In
addressing these needs, the administrative agencies charged with

the

85

Petition

is GRANTED and

the

assailed

G.R. No. 147839

the covering invoice or actual delivery of the merchandise


whichever shall first occur.

June 8, 2006

2. Warranted that the Insured shall submit to the Company


within twelve (12) days after the close of every calendar month
all amount shown in their books of accounts as unpaid and
thus become receivable item from their customers and dealers.
x x x4

GAISANO CAGAYAN, INC. Petitioner,


vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION

xxxx
AUSTRIA-MARTINEZ, J.:
Petitioner is a customer and dealer of the products of IMC and LSPI. On
February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire. Included in the items
lost or destroyed in the fire were stocks of ready-made clothing
materials sold and delivered by IMC and LSPI.

Before the Court is a petition for review on certiorari of the


Decision1 dated October 11, 2000 of the Court of Appeals (CA) in CAG.R. CV No. 61848 which set aside the Decision dated August 31, 1998
of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No.
92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc.
(petitioner); and the CA Resolution dated April 11, 2001 which denied
petitioner's motion for reconsideration.

On February 4, 1992, respondent filed a complaint for damages against


petitioner. It alleges that IMC and LSPI filed with respondent their
claims under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials
with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that
respondent made several demands for payment upon petitioner but
these went unheeded.5

The factual background of the case is as follows:


Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue
Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products
bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI
separately obtained from respondent fire insurance policies with book
debt endorsements. The insurance policies provide for coverage on
"book debts in connection with ready-made clothing materials which
have been sold or delivered to various customers and dealers of the
Insured anywhere in the Philippines."2 The policies defined book debts
as the "unpaid account still appearing in the Book of Account of the
Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:

In its Answer with Counter Claim dated July 4, 1995, petitioner


contends that it could not be held liable because the property covered
by the insurance policies were destroyed due to fortuities event or
force majeure; that respondent's right of subrogation has no basis
inasmuch as there was no breach of contract committed by it since the
loss was due to fire which it could not prevent or foresee; that IMC and
LSPI never communicated to it that they insured their properties; that
it never consented to paying the claim of the insured. 6

1. Warranted that the Company shall not be liable for any


unpaid account in respect of the merchandise sold and
delivered by the Insured which are outstanding at the date of
loss for a period in excess of six (6) months from the date of

At the pre-trial conference the parties failed to arrive at an amicable


settlement.7 Thus, trial on the merits ensued.

86

On August 31, 1998, the RTC rendered its decision dismissing


respondent's complaint.8 It held that the fire was purely accidental;
that the cause of the fire was not attributable to the negligence of the
petitioner; that it has not been established that petitioner is the debtor
of IMC and LSPI; that since the sales invoices state that "it is further
agreed that merely for purpose of securing the payment of purchase
price, the above-described merchandise remains the property of the
vendor until the purchase price is fully paid", IMC and LSPI retained
ownership of the delivered goods and must bear the loss.

goods but the payment of its unpaid account and as such the
obligation to pay is not extinguished, even if the fire is considered a
fortuitous event; that by subrogation, the insurer has the right to go
against petitioner; that, being a fire insurance with book debt
endorsements, what was insured was the vendor's interest as a
creditor.11

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the


CA rendered its decision setting aside the decision of the RTC. The
dispositive portion of the decision reads:

Hence, the present petition for review on certiorari anchored on the


following Assignment of Errors:

Petitioner filed a motion for reconsideration12 but it was denied by the


CA in its Resolution dated April 11, 2001.13

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN


THE INSTANT CASE WAS ONE OVER CREDIT.

WHEREFORE, in view of the foregoing, the appealed decision is


REVERSED and SET ASIDE and a new one is entered ordering
defendant-appellee Gaisano Cagayan, Inc. to pay:

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO
PETITIONER UPON DELIVERY THEREOF.

1. the amount of P2,119,205.60 representing the amount paid


by the plaintiff-appellant to the insured Inter Capitol Marketing
Corporation, plus legal interest from the time of demand until
fully paid;

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS


AUTOMATIC SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN
FAVOR OF RESPONDENT.14

2. the amount of P535,613.00 representing the amount paid by


the plaintiff-appellant to the insured Levi Strauss Phil., Inc.,
plus legal interest from the time of demand until fully paid.

Anent the first error, petitioner contends that the insurance in the
present case cannot be deemed to be over credit since an insurance
"on credit" belies not only the nature of fire insurance but the express
terms of the policies; that it was not credit that was insured since
respondent paid on the occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner of any obligation;
that, even if the insurance is deemed as one over credit, there was no
loss as the accounts were not yet due since no prior demands were
made by IMC and LSPI against petitioner for payment of the debt and
such demands came from respondent only after it had already paid
IMC and LSPI under the fire insurance policies.15

With costs against the defendant-appellee.


SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed
statements of the nature, quantity and cost of the thing sold; that loss
of the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under
Article 1504 (1) of the Civil Code, to the general rule that if the thing is
lost by a fortuitous event, the risk is borne by the owner of the thing at
the time the loss under the principle of res perit domino; that
petitioner's obligation to IMC and LSPI is not the delivery of the lost

As to the second error, petitioner avers that despite delivery of the


goods, petitioner-buyer IMC and LSPI assumed the risk of loss when
they secured fire insurance policies over the goods.

87

Concerning the third ground, petitioner submits that there is no


subrogation in favor of respondent as no valid insurance could be
maintained thereon by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that petitioner was not privy to
the insurance contract or the payment between respondent and its
insured nor was its consent or approval ever secured; that this lack of
privity forecloses any real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping the insured goods safe
from fire.

the findings of facts are conflicting; (6) when in making its findings the
CA went beyond the issues of the case, or its findings are contrary to
the admissions of both the appellant and the appellee; (7) when the
findings are contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are
based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent;
(10) when the findings of fact are premised on the supposed absence
of evidence and contradicted by the evidence on record; and (11)
when the CA manifestly overlooked certain relevant facts not disputed
by the parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present
petition.

For its part, respondent counters that while ownership over the readymade clothing materials was transferred upon delivery to petitioner,
IMC and LSPI have insurable interest over said goods as creditors who
stand to suffer direct pecuniary loss from its destruction by fire; that
petitioner is liable for loss of the ready-made clothing materials since it
failed to overcome the presumption of liability under Article 1265 16 of
the Civil Code; that the fire was caused through petitioner's negligence
in failing to provide stringent measures of caution, care and
maintenance on its property because electric wires do not usually short
circuit unless there are defects in their installation or when there is lack
of proper maintenance and supervision of the property; that petitioner
is guilty of gross and evident bad faith in refusing to pay respondent's
valid claim and should be liable to respondent for contracted lawyer's
fees, litigation expenses and cost of suit.17

At issue is the proper interpretation of the questioned insurance policy.


Petitioner claims that the CA erred in construing a fire insurance policy
on book debts as one covering the unpaid accounts of IMC and LSPI
since such insurance applies to loss of the ready-made clothing
materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction.22 In this case, the
questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold
or delivered to various customers and dealers of the Insured anywhere
in the Philippines."23 ; and defined book debts as the "unpaid account
still appearing in the Book of Account of the Insured 45 days after the
time of the loss covered under this Policy." 24 Nowhere is it provided in
the questioned insurance policies that the subject of the insurance is
the goods sold and delivered to the customers and dealers of the
insured.

As a general rule, in petitions for review, the jurisdiction of this Court in


cases brought before it from the CA is limited to reviewing questions of
law which involves no examination of the probative value of the
evidence presented by the litigants or any of them.18 The Supreme
Court is not a trier of facts; it is not its function to analyze or weigh
evidence all over again.19 Accordingly, findings of fact of the appellate
court are generally conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in
which factual issues may be resolved by this Court, such as: (1) when
the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken,
absurd or impossible; (3) when there is grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts; (5) when

Indeed, when the terms of the agreement are clear and explicit that
they do not justify an attempt to read into it any alleged intention of
the parties, the terms are to be understood literally just as they appear
on the face of the contract.25 Thus, what were insured against were the
accounts of IMC and LSPI with petitioner which remained unpaid 45

88

days after the loss through fire, and not the loss or destruction of the
goods delivered.

but whether insured has substantial economic interest in the


property.28

Petitioner argues that IMC bears the risk of loss because it expressly
reserved ownership of the goods by stipulating in the sales invoices
that "[i]t is further agreed that merely for purpose of securing the
payment of the purchase price the above described merchandise
remains the property of the vendor until the purchase price thereof is
fully paid."26

Section 13 of our Insurance Code defines insurable interest as "every


interest in property, whether real or personal, or any relation thereto,
or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured." Parenthetically, under Section 14
of the same Code, an insurable interest in property may consist in: (a)
an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises.

The Court is not persuaded.

Therefore, an insurable interest in property does not necessarily imply


a property interest in, or a lien upon, or possession of, the subject
matter of the insurance, and neither the title nor a beneficial interest is
requisite to the existence of such an interest, it is sufficient that the
insured is so situated with reference to the property that he would be
liable to loss should it be injured or destroyed by the peril against
which it is insured.29 Anyone has an insurable interest in property who
derives a benefit from its existence or would suffer loss from its
destruction.30Indeed, a vendor or seller retains an insurable interest in
the property sold so long as he has any interest therein, in other words,
so long as he would suffer by its destruction, as where he has a
vendor's lien.31 In this case, the insurable interest of IMC and LSPI
pertain to the unpaid accounts appearing in their Books of Account 45
days after the time of the loss covered by the policies.

The present case clearly falls under paragraph (1), Article 1504 of the
Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's
risk until the ownership therein is transferred to the buyer, but when
the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a
bailee for the buyer, in pursuance of the contract and the ownership in
the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the
goods are at the buyer's risk from the time of such delivery; (Emphasis
supplied)

The next question is: Is petitioner liable for the unpaid accounts?

xxxx

Petitioner's argument that it is not liable because the fire is a fortuitous


event under Article 117432 of the Civil Code is misplaced. As held
earlier, petitioner bears the loss under Article 1504 (1) of the Civil
Code.

Thus, when the seller retains ownership only to insure that the buyer
will pay its debt, the risk of loss is borne by the buyer. 27 Accordingly,
petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have
an insurable interest until full payment of the value of the delivered
goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in
property insurance, one's interest is not determined by concept of title,

Moreover, it must be stressed that the insurance in this case is not for
loss of goods by fire but for petitioner's accounts with IMC and LSPI
that remained unpaid 45 days after the fire. Accordingly, petitioner's
obligation is for the payment of money. As correctly stated by the CA,
where the obligation consists in the payment of money, the failure of

89

the debtor to make the payment even by reason of a fortuitous event


shall not relieve him of his liability.33 The rationale for this is that the
rule that an obligor should be held exempt from liability when the loss
occurs thru a fortuitous event only holds true when the obligation
consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does
not apply when the obligation is pecuniary in nature. 34

Art. 2207. If the plaintiff's property has been insured, and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. x x
x
Petitioner failed to refute respondent's evidence.

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a


generic thing, the loss or destruction of anything of the same kind does
not extinguish the obligation." If the obligation is generic in the sense
that the object thereof is designated merely by its class or genus
without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the
same kind even without the debtor's fault and before he has incurred
in delay will not have the effect of extinguishing the obligation. 35This
rule is based on the principle that the genus of a thing can never
perish. Genus nunquan perit.36 An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of
the debtor.37

As to LSPI, respondent failed to present sufficient evidence to prove its


cause of action. No evidentiary weight can be given to Exhibit "F Levi
Strauss",42 a letter dated April 23, 1991 from petitioner's General
Manager, Stephen S. Gaisano, Jr., since it is not an admission of
petitioner's unpaid account with LSPI. It only confirms the loss of Levi's
products in the amount of P535,613.00 in the fire that razed
petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of
LSPI; no subrogation receipt was offered in evidence. Thus, there is no
evidence that respondent has been subrogated to any right which LSPI
may have against petitioner. Failure to substantiate the claim of
subrogation is fatal to petitioner's case for recovery of the amount
of P535,613.00.

Thus, whether fire is a fortuitous event or petitioner was negligent are


matters immaterial to this case. What is relevant here is whether it has
been established that petitioner has outstanding accounts with IMC
and LSPI.

WHEREFORE, the petition is partly GRANTED. The assailed Decision


dated October 11, 2000 and Resolution dated April 11, 2001 of the
Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
the MODIFICATIONthat the order to pay the amount of P535,613.00
to respondent is DELETED for lack of factual basis.

With respect to IMC, the respondent has adequately established its


claim. Exhibits "C" to "C-22"38 show that petitioner has an outstanding
account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the
check voucher evidencing payment to IMC. Exhibit "F"40 is the
subrogation receipt executed by IMC in favor of respondent upon
receipt of the insurance proceeds. All these documents have been
properly identified, presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to establish not only the
relationship of respondent as insurer and IMC as the insured, but also
the amount paid to settle the insurance claim. The right of subrogation
accrues simply upon payment by the insurance company of the
insurance claim.41Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:

No pronouncement as to costs.
SO ORDERED.

90

VICENTE ONG LIM SING, JR.,

G.R. No. 168115

Petitioner,
Present:
This

is

petition

for

review

on

certiorari

assailing

the

Decision[1] dated March 15, 2005 and the Resolution[2] dated May 23,

YNARES-SANTIAGO, J.,

2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.


- versus -

Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and

The facts are as follows:

NACHURA, JJ.

FEB LEASING & FINANCE CORPORATION,

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered

Promulgated:

into a lease[3] of equipment and motor vehicles with JVL Food Products

Respondent.

(JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim) executed an
June 8, 2007

Individual Guaranty Agreement[4] with FEB to guarantee the prompt


and faithful performance of the terms and conditions of the aforesaid
lease agreement. Corresponding Lease Schedules with Delivery and

x------------------------------------------------------------------------------------x

Acceptance Certificates[5] over the equipment and motor vehicles


formed part of the agreement.Under the contract, JVL was obliged to
pay FEB an aggregate gross monthly rental of One Hundred Seventy
DECISION

Thousand Four Hundred Ninety-Four Pesos (P170,494.00).

NACHURA, J.:
JVL defaulted in the payment of the monthly rentals. As of July 31,
2000, the amount in arrears, including penalty charges and insurance
premiums, amounted to Three Million Four Hundred Fourteen Thousand

91

Four Hundred Sixty-Eight and 75/100 Pesos (P3,414,468.75). On August

In upholding JVL and Lims stance, the trial court stressed the

23, 2000, FEB sent a letter to JVL demanding payment of the said

contradictory terms it found in the lease agreement. The pertinent

amount. However, JVL failed to pay.[6]

portions of the Decision dated November 22, 2002 read:

A profound scrutiny of the provisions of the contract


which is a contract of adhesion at once exposed the
use of several contradictory terms. To name a few, in
Section 9 of the said contract disclaiming warranty, it is
stated that the lessor is not the manufacturer nor the
latters agent and therefore does not guarantee any
feature or aspect of the object of the contract as to its
merchantability. Merchantability is a term applied in a
contract of sale of goods where conditions and
warranties are made to apply. Article 1547 of the Civil
Code provides that unless a contrary intention appears
an implied warranty on the part of the seller that he
has the right to sell and to pass ownership of the object
is furnished by law together with an implied warranty
that the thing shall be free from hidden faults or
defects or any charge or encumbrance not known to
the buyer.

On December 6, 2000, FEB filed a Complaint [7] with the


Regional Trial Court of Manila, docketed as Civil Case No. 00-99451, for
sum of money, damages, and replevin against JVL, Lim, and John Doe.

In the Amended Answer,[8] JVL and Lim admitted the existence


of the lease agreement but asserted that it is in reality a sale of
equipment on installment basis, with FEB acting as the financier. JVL
and Lim claimed that this intention was apparent from the fact that
they were made to believe that when full payment was effected, a
Deed of Sale will be executed by FEB as vendor in favor of JVL and Lim
as vendees.[9] FEB purportedly assured them that documenting the
transaction as a lease agreement is just an industry practice and that

In an adhesion contract which is drafted and printed in


advance and parties are not given a real arms length
opportunity to transact, the Courts treat this kind of
contract strictly against their architects for the reason
that the party entering into this kind of contract has no
choice but to accept the terms and conditions found
therein even if he is not in accord therewith and for
that matter may not have understood all the terms and
stipulations prescribed thereat. Contracts of
this character are prepared unilaterally by the stronger
party with the best legal talents at itsdisposal. It is
upon that thought that the Courts are called upon to

the proper documentation would be effected as soon as full payment


for every item was made. They also contended that the lease
agreement is a contract of adhesion and should, therefore, be
construed against the party who prepared it, i.e., FEB.

92

analyze closely said contracts so that the weaker party


could be fully protected.

Still another observation is the existence in the records


of a Deed of Absolute Sale by and between the same
parties, plaintiff and defendants which was an exhibit
of the defendant where the plaintiff sold to the same
defendants one unit 1995 Mitsubishi L-200 STRADA DC
PICK UP and in said Deed, The Court noticed that the
same terms as in the alleged lease were used in
respect to warranty, as well as liability in case of loss
and other conditions. This action of the plaintiff
unequivocally exhibited their real intention to execute
the corresponding Deed after the defendants have paid
in full and as heretofore discussed and for the sake of
emphasis the obscurity in the written contract cannot
favor the party who caused the obscurity.

Another instance is when the alleged lessee was


required to insure the thing against loss, damage or
destruction.

In property insurance against loss or other accidental


causes, the assured must have an insurable interest,
32 Corpus Juris 1059.

xxxx

Based on substantive Rules on Interpretation, if the


terms are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its
stipulations shall control. If the words appear to be
contrary to the evident intention of the parties, their
contemporaneous and subsequent acts shall be
principally considered. If the doubts are cast upon the
principal object of the contract in such a way that it
cannot be known what may have been the intention or
will of the parties, the contract shall be null and void. [10]

It has also been held that the test of insurable interest


in property is whether the assured has a right, title or
interest therein that he will be benefited by its
preservation and continued existence or suffer a direct
pecuniary loss from its destruction or injury by the peril
insured against. If the defendants were to be regarded
as only a lessee, logically the lessor who asserts
ownership will be the one directly benefited or injured
and therefore the lessee is not supposed to be the
assured as he has no insurable interest.

Thus, the court concluded with the following disposition:

There is also an observation from the records that the


actual value of each object of the contract would be
the result after computing the monthly rentals by
multiplying the said rentals by the number of months
specified when the rentals ought to be paid.

In this case, which is held by this Court as a sale on


installment there is no chattel mortgage on the thing
sold, but it appears amongst the Complaints prayer,

93

that the plaintiff elected to exact fulfillment of the


obligation.

B. When it ruled that the applicable law on the case is


Article 1484 (of the Civil Code) and not R.A. No. 8556;

For the vehicles returned, the plaintiff can only recover


the unpaid balance of the price because of the
previous payments made by the defendants for the
reasonable use of the units, specially so, as it appears,
these returned vehicles were sold at auction and that
the plaintiff can apply the proceeds to the balance.
However, with respect to the unreturned units and
machineries still in the possession of the defendants, it
is this Courts view and so hold that the defendants are
liable therefore and accordingly are ordered jointly and
severally to pay the price thereof to the plaintiff
together with attorneys fee and the costs of suit in the
sum of Php25,000.00.

C.
When it ruled that the Plaintiff-Appellant can
no longer recover the unpaid balance of the price
because of the previous payments made by the
defendants for the reasonable use of the units;

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

On March 15, 2005, the CA issued its Decision[15] declaring the


SO ORDERED.[11]

transaction between the parties as a financial lease agreement under


Republic Act (R.A.) No. 8556.[16]The fallo of the assailed Decision reads:

On December 27, 2002, FEB filed its Notice of Appeal.


[12]

Accordingly,

on January

17,

2003,

the

court

issued

WHEREFORE, the instant appeal is GRANTED and the


assailed Decision dated 22 November 2002 rendered
by the Regional Trial Court of Manila, Branch 49 in Civil
Case No. 00-99451 isREVERSED and SET ASIDE, and
a
new
judgment
is
hereby ENTERED ordering
appellees JVL Food Products and Vicente Ong Lim, Jr. to
solidarily pay appellant FEB Leasing and Finance
Corporation the amount of Three Million Four
Hundred Fourteen Thousand Four Hundred Sixty
Eight Pesos and 75/100 (Php3,414,468.75), with
interest at the rate of twelve percent (12%) per
annum starting from the date of judicial demand on 06

an

Order[13] elevating the entire records of the case to the CA. FEB averred
that the trial court erred:

A. When it ruled that the agreement between the


Parties-Litigants is one of sale of personal properties on
installment and not of lease;

94

December 2000, until full payment thereof. Costs


against appellees.

THE HONORABLE COURT OF APPEALS ERRED IN NOT


DISMISSING THE APPEAL FOR FAILURE OF THE
RESPONDENT TO FILE ON TIME ITS APPELLANTS BRIEF
AND TO SEPARATELY RULE ON THE PETITIONERS
MOTION TO DISMISS.

SO ORDERED.[17]

IV
Lim filed the instant Petition for Review on Certiorari under Rule 45
THE HONORABLE COURT OF APPEALS ERRED IN
FINDING THAT THE CONTRACT BETWEEN THE PARTIES
IS ONE OF A FINANCIAL LEASE AND NOT OF A
CONTRACT OF SALE.

contending that:

I
V
THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THAT THE UNDATED COMPLAINT
WAS FILED BY SATURNINO J. GALANG, JR., WITHOUT
ANY AUTHORITY FROM RESPONDENTS BOARD OF
DIRECTORS AND/OR SECRETARYS CERTIFICATE.

THE HONORABLE COURT OF APPEALS ERRED IN RULING


THAT THE PAYMENTS PAID BY THE PETITIONER TO THE
RESPONDENT ARE RENTALS AND NOT INSTALLMENTS
PAID FOR THE PURCHASE PRICE OF THE SUBJECT
MOTOR VEHICLES, HEAVY MACHINES AND EQUIPMENT.

II
VI
THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO STRICTLY APPLY SECTION 7, RULE 18 OF THE
1997 RULES OF CIVIL PROCEDURE AND NOW ITEM 1,
A(8) OF A.M. NO. 03-1-09 SC (JUNE 8, 2004).

THE HONORABLE COURT OF APPEALS ERRED IN RULING


THAT THE PREVIOUS CONTRACT OF SALE INVOLVING
THE PICK-UP VEHICLE IS OF NO CONSEQUENCE.

III

95

VII

representative of FEB in the proceedings before the trial court up to the


appellate court. Petitioner never placed in issue the validity of Galangs
representation before the trial and appellate courts. Issues raised for

THE HONORABLE COURT OF APPEALS FAILED TO TAKE


INTO CONSIDERATION THAT THE CONTRACT OF LEASE,
A CONTRACT OF ADHESION, CONCEALED THE TRUE
INTENTION OF THE PARTIES, WHICH IS A CONTRACT
OF SALE.

the first time on appeal are barred by estoppel. Arguments not raised
in the original proceedings cannot be considered on review; otherwise,
it would violate basic principles of fair play.[19]

VIII
Second, there is no legal basis for Lim to question the authority
of the CA to go beyond the matters agreed upon during the pre-trial

THE HONORABLE COURT OF APPEALS ERRED IN RULING


THAT THE PETITIONER IS A LESSEE WITH INSURABLE
INTEREST OVER THE SUBJECT PERSONAL PROPERTIES.

conference, or in not dismissing the appeal for failure of FEB to file its
brief on time, or in not ruling separately on the petitioners motion to
dismiss.

IX
Courts have the prerogative to relax procedural rules of even
THE HONORABLE COURT OF APPEALS ERRED IN
CONSTRUING THE INTENTIONS OF THE COURT A
QUO IN ITS USAGE OF THE TERM MERCHANTABILITY. [18]

the most mandatory character, mindful of the duty to reconcile both


the need to speedily put an end to litigation and the parties right to
due

process. In

numerous

cases,

this

Court

has allowed liberal construction of the rules when to do so would serve


the demands of substantial justice and equity. [20] In Aguam v. Court of
Appeals, the Court explained:

We affirm the ruling of the appellate court.

The court has the discretion to dismiss or not to


dismiss an appellant's appeal. It is a power conferred
on the court, not a duty. The "discretion must be a

First, Lim can no longer question Galangs authority as FEBs


authorized representative in filing the suit against Lim. Galang was the

96

sound one, to be exercised in accordance with the


tenets of justice and fair play, having in mind the
circumstances obtaining in each case." Technicalities,
however, must be avoided.
The law abhors
technicalities that impede the cause of justice. The
court's primary duty is to render or dispense justice.
"A litigation is not a game of technicalities." "Lawsuits
unlike duels are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid
to justice and becomes its great hindrance and chief
enemy,
deserves
scant
consideration
from
courts." Litigations must be decided on their merits
and not on technicality. Every party litigant must be
afforded the amplest opportunity for the proper and
just determination of his cause, free from the
unacceptable plea of technicalities. Thus, dismissal of
appeals purely on technical grounds is frowned upon
where the policy of the court is to encourage hearings
of appeals on their merits and the rules of procedure
ought not to be applied in a very rigid, technical sense;
rules of procedure are used only to help secure, not
override substantial justice. It is a far better and more
prudent course of action for the court to excuse a
technical lapse and afford the parties a review of the
case on appeal to attain the ends of justice rather than
dispose of the case on technicality and cause a grave
injustice to the parties, giving a false impression of
speedy disposal of cases while actually resulting in
more delay, if not a miscarriage of justice.[21]

without objection, then the contract serves as the law between the
parties.

In Section 23 of the lease contract, it was expressly stated


that:

SECTION
CLAUSE

23. ENTIRE

AGREEMENT;

SEVERABILITY

23.1. The LESSOR and the LESSEE agree this


instrument constitute the entire agreement between
them, and that no representations have been made
other than as set forth herein. This Agreement shall not
be amended or altered in any manner, unless such
amendment be made in writing and signed by the
parties hereto.

Petitioners claim that the real intention of the parties was a contract of
sale of personal property on installment basis is more likely a mere
afterthought in order to defeat the rights of the respondent.
Third, while we affirm that the subject lease agreement is a contract of
adhesion, such a contract is not void per se. It is as binding as any
The Lease Contract with corresponding Lease Schedules with Delivery

ordinary contract. A party who enters into an adhesion contract is free

and Acceptance Certificates is, in point of fact, a financial lease within

to reject the stipulations entirely.[22] If the terms thereof are accepted

97

the purview of R.A. No. 8556.Section 3(d) thereof defines financial

leasing transaction is to enable the prospective buyer of equipment,

leasing as:

who is unable to pay for such equipment in cash in one lump sum, to
lease such equipment in the meantime for his use, at a fixed rental
sufficient to amortize at least 70% of the acquisition cost (including the

[A] mode of extending credit through a non-cancelable


lease contract under which the lessor purchases or
acquires, at the instance of the lessee, machinery,
equipment, motor vehicles, appliances, business
and office machines, and other movable or immovable
property in consideration of the periodic payment by
the
lessee
of
a
fixed
amount
of
money sufficient to amortize at least seventy (70%) of
the purchase price or acquisition cost, including any
incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during
which the lessee has the right to hold and use the
leased property with the right to expense the lease
rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but
with no obligation or option on his part to purchase the
leased property from the owner-lessor at the end of the
lease contract.

expenses and a margin of profit for the financial lessor) with the
expectation that at the end of the lease period the buyer/financial
lessee will be able to pay any remaining balance of the purchase price.
[23]

The allegation of petitioner that the rent for the use of each
movable constitutes the value of the vehicle or equipment leased is of
no moment. The law on financial lease does not prohibit such a
circumstance and this alone does not make the transaction between
the parties a sale of personal property on installment. In fact, the value
of the lease, usually constituting the value or amount of the property
involved, is a benefit allowed by law to the lessor for the use of the
property by the lessee for the duration of the lease. It is recognized
that the value of these movables depreciates through wear and tear
upon use by the lessee. In Beltran v. PAIC Finance Corporation, [24] we

FEB leased the subject equipment and motor vehicles to JVL in

stated that:

consideration of a monthly periodic payment of P170,494.00. The


periodic payment by petitioner is sufficient to amortize at least 70% of
Generally speaking, a financing company is not a buyer
or seller of goods; it is not a trading company. Neither
is it an ordinary leasing company; it does not make its
profit by buying equipment and repeatedly leasing
out such equipment to different users thereof. But a

the purchase price or acquisition cost of the said movables in


accordance

with

the

Lease

Schedules

with

Delivery and AcceptanceCertificates. The basic purpose of a financial

98

financial lease must be preceded by a purchase and


sale contract covering the equipment which becomes
the subject matter of the financial lease. The financial
lessor takes the role of the buyer of the equipment
leased. And so the formal or documentary tie between
the seller and the real buyer of the equipment, i.e., the
financial lessee, is apparently severed. In economic
reality, however, that relationship remains. The sale of
the
equipment by the
supplier thereof to
the financial lessor and the latter's legal ownership
thereof are intended to secure the repayment over
time of the purchase price of the equipment, plus
financing charges, through the payment of lease
rentals; that legal title is the upfront security held by
the financial lessor, a security probably superior in
some instances to a chattel mortgagee's lien.[25]

law, morals, good customs, public policy, or public order, they shall
have the force of law between the parties. [26] Contracting parties may
stipulate on terms and conditions as they may see fit and these have
the force of law between them.[27]

The stipulation in Section 14[28] of the lease contract, that the


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

Fourth, the validity of Lease No. 27:95:20 between FEB and JVL

of loss, damage, or destruction of any of the properties leased.

should be upheld. JVL entered into the lease contract with full
knowledge of its terms and conditions.The contract was in force for
more than four years. Since its inception on March 9, 1995, JVL and Lim
never questioned its provisions. They only attacked the validity of the

Likewise, the stipulation in Section 9.1 of the lease contract

contract after they were judicially made to answer for their default in

that the lessor does not warrant the merchantability of the equipment

the payment of the agreed rentals.

is a valid stipulation. Section 9.1 of the lease contract is stated as:

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT


THE LESSOR IS NOT THE MANUFACTURER OR SUPPLIER
OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE
HEREBY ACKNOWLEDGES THAT IT HAS SELECTED THE

It is settled that the parties are free to agree to such


stipulations, clauses, terms, and conditions as they may want to
include in a contract. As long as such agreements are not contrary to

99

EQUIPMENT
AND
THE
SUPPLIER
THEREOF ANDTHAT THERE ARE NO WARRANTIES,
CONDITIONS,
TERMS,
REPRESENTATION
OR
INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY OR
OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR
AS TO ANY FEATURE OR ASPECT OF THE EQUIPMENT
OR ANY PART THEREOF, OR AS TO ITS FITNESS,
SUITABILITY,
CAPACITY,
CONDITION
OR
MERCHANTABILITY, NOR AS TO WHETHER THE
EQUIPMENT
WILL MEET THE REQUIREMENTS OF ANY LAW, RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR
SPECIFIC MACHINERY OR APPARATUS OR SPECIAL
METHODS.[29]

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

We join the CA in rejecting this view because to allow the


transaction involving the pick-up to be read into the terms of the lease
agreement would expand the coverage of the agreement, in violation
of Article 1372 of the New Civil Code.

[31]

The lease contract subject of

the complaint speaks only of a lease. Any agreement between the

In the financial lease agreement, FEB did not assume

parties after the lease contract has ended is a different transaction

responsibility as to the quality, merchantability, or capacity of the

altogether

equipment. This stipulation provides that, in case of defect of any kind

and

should

lease. Furthermore, it

that will be found by the lessee in any of the equipment, recourse

is

not
a

be

included

cardinal

rule

in

as

part

of

the interpretation

the
of

contracts that if the terms of a contract are clear and leave no doubt

should be made to the manufacturer. The financial lessor, being a

as to the intention of the contracting parties, the literal meaning of its

financing company, i.e., an extender of credit rather than an ordinary

stipulations shall control. No amount of extrinsic aid is necessary in

equipment rental company, does not extend a warranty of the fitness

order to determine the parties' intent.[32]

of the equipment for any particular use. Thus, the financial lessee was
precisely in a position to enforce such warranty directly against the
supplier of the equipment and not against the financial lessor. We find

WHEREFORE, in the light of all the foregoing, the petition

nothing contra legem or contrary to public policy in such a contractual

is DENIED. The Decision of the CA in CA-G.R. CV No. 77498

arrangement.[30]

dated March

15,

2005 and

Resolution

2005 are AFFIRMED. Costs against petitioner.

100

datedMay

23,

On December 10, 1980, respondent Philippine American Life Insurance


Company (Philamlife) entered into an agreement denominated as

SO ORDERED.

Creditor Group Life Policy No. P-1920 [2] with petitioner Eternal Gardens

ETERNAL GARDENS MEMORIAL G.R. No. 166245

Memorial Park Corporation (Eternal). Under the policy, the clients of


PARK CORPORATION,
Petitioner,
Present:
CARPIO MORALES,
- versus - Acting Chairperson,
TINGA,
VELASCO, JR.,
CHICO-NAZARIO,* and
BRION, JJ.
THE PHILIPPINE AMERICAN Promulgated:
LIFE INSURANCE COMPANY,
Respondent. April 9, 2008
x-----------------------------------------------------------------------------------------x

Eternal who purchased burial lots from it on installment basis would be


insured by Philamlife. The amount of insurance coverage depended
upon the existing balance of the purchased burial lots. The policy was
to be effective for a period of one year, renewable on a yearly basis.

The relevant provisions of the policy are:


ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but
not more than 65 years of age, is indebted to the
Assured for the unpaid balance of his loan with the
Assured, and is accepted for Life Insurance coverage
by the Company on its effective date is eligible for
insurance under the Policy.

DECISION
VELASCO, JR., J.:

EVIDENCE OF INSURABILITY.

The Case

No medical examination shall be required for amounts


of insurance up to P50,000.00. However, a declaration
of good health shall be required for all Lot Purchasers
as part of the application. The Company reserves the
right to require further evidence of insurability
satisfactory to the Company in respect of the following:
1.
Any amount of insurance in excess of
P50,000.00.
2.
Any lot purchaser who is more than 55
years of age.

Central to this Petition for Review on Certiorari under Rule 45 which


seeks to reverse and set aside the November 26, 2004 Decision [1] of
the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May
the inaction of the insurer on the insurance application be considered
as approval of the application?

LIFE INSURANCE BENEFIT.


The Facts

101

The Life Insurance coverage of any Lot Purchaser at


any time shall be the amount of the unpaid balance of
his loan (including arrears up to but not exceeding 2
months) as reported by the Assured to the Company or

the sum of P100,000.00, whichever is smaller. Such


benefit shall be paid to the Assured if the Lot Purchaser
dies while insured under the Policy.

its insurance claim for Chuangs death: (1) Certificate of Claimant (with

EFFECTIVE DATE OF BENEFIT.

Application for Insurance accomplished and signed by the insured,

The insurance of any eligible Lot Purchaser shall be


effective on the date he contracts a loan with the
Assured. However, there shall be no insurance if the
application of the Lot Purchaser is not approved by the
Company.[3]

Chuang, while still living; and (4) Statement of Account showing the

form attached); (2) Assureds Certificate (with form attached); (3)

unpaid balance of Chuang before his death.

Eternal transmitted the required documents through a letter


Eternal was required under the policy to submit to Philamlife a list of all

dated November

14,

new lot purchasers, together with a copy of the application of each

on November 15, 1984.

1984,[7] which

was

received

by

Philamlife

purchaser, and the amounts of the respective unpaid balances of all


insured lot purchasers. In relation to the instant petition, Eternal

After more than a year, Philamlife had not furnished Eternal

complied by submitting a letter dated December 29, 1982, [4] containing

with any reply to the latters insurance claim. This prompted Eternal to

a list of insurable balances of its lot buyers for October 1982. One of

demand from Philamlife the payment of the claim for PhP 100,000

those included in the list as new business was a certain John Chuang.

on April 25, 1986.[8]

His balance of payments was PhP 100,000. OnAugust 2, 1984, Chuang


died.

In response to Eternals demand, Philamlife denied Eternals


insurance claim in a letter dated May 20, 1986,[9] a portion of which

Eternal sent a letter dated August 20, 1984[5] to Philamlife, which

reads:

served as an insurance claim for Chuangs death. Attached to the claim


The deceased was 59 years old when he entered into
Contract
#9558
and
9529
with Eternal Gardens Memorial Park in October 1982
for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance
was submitted in our office prior to his death on August
2, 1984.

were the following documents: (1) Chuangs Certificate of Death; (2)


Identification Certificate stating that Chuang is a naturalized Filipino
Citizen; (3) Certificate of Claimant; (4) Certificate of Attending
Physician; and (5) Assureds Certificate.

In accordance with our Creditors Group Life Policy No.


P-1920, under Evidence of Insurability provision, a
declaration of good health shall be required for all Lot
Purchasers as party of the application. We cite further
the provision on Effective Date of Coverage under the

In reply, Philamlife wrote Eternal a letter on November 12,


1984,[6] requiring Eternal to submit the following documents relative to

102

policy which states that there shall be no insurance if


the application is not approved by the Company. Since
no application had been submitted by the
Insured/Assured, prior to his death, for our approval but
was submitted instead on November 15, 1984, after his
death, Mr. John Uy Chuang was not covered under the
Policy. We wish to point out that Eternal Gardens being
the Assured was a party to the Contract and was
therefore aware of these pertinent provisions.

the

submission

of

the

requirements

of

the

group

insurance

on December 29, 1982 to Chuangs death on August 2, 1984, as well as


Philamlifes acceptance of the premiums during the same period,
Philamlife was deemed to have approved Chuangs application. The RTC
said that since the contract is a group life insurance, once proof of
death is submitted, payment must follow.

With regard to our acceptance of premiums, these do


not connote our approval per se of the insurance
coverage but are held by us in trust for the payor until
the prerequisites for insurance coverage shall have
been met. We will however, return all the premiums
which have been paid in behalf of John Uy Chuang.

Philamlife appealed to the CA, which ruled, thus:


WHEREFORE, the decision of the Regional
Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint
is DISMISSED. No costs.

Consequently, Eternal filed a case before the Makati City Regional Trial
Court (RTC) for a sum of money against Philamlife, docketed as Civil

SO ORDERED.[11]

Case No. 14736. The trial court decided in favor of Eternal, the
dispositive portion of which reads:

The CA based its Decision on the factual finding that Chuangs


application was not enclosed in Eternals letter dated December 29,

WHEREFORE, premises considered, judgment is hereby


rendered in favor of Plaintiff ETERNAL, against
Defendant PHILAMLIFE, ordering the Defendant
PHILAMLIFE, to pay the sum of P100,000.00,
representing the proceeds of the Policy of John Uy
Chuang, plus legal rate of interest, until fully paid; and,
to pay the sum of P10,000.00 as attorneys fees.

1982. It further ruled that the non-accomplishment of the submitted


application form violated Section 26 of the Insurance Code. Thus, the
CA concluded, there being no application form, Chuang was not
covered by Philamlifes insurance.

SO ORDERED.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a
question of substance, not therefore determined by
this Honorable Court, or has decided it in a way not in
accord with law or with the applicable jurisprudence, in
holding that:

The RTC found that Eternal submitted Chuangs application for


insurance which he accomplished before his death, as testified to by
Eternals witness and evidenced by the letter dated December 29,
1982, stating, among others: Encl: Phil-Am Life Insurance Application
Forms & Cert.[10] It further ruled that due to Philamlifes inaction from

103

I.

II.

The application for insurance was not duly


submitted to respondent PhilamLife before the
death of John Chuang;

In the instant case, the factual findings of the RTC were reversed by the

There was no valid insurance coverage; and

CA; thus, this Court may review them.

III. Reversing and setting aside the Decision of the


Regional Trial Court dated May 29, 1996.

Eternal claims that the evidence that it presented before the trial court
supports its contention that it submitted a copy of the insurance

The Courts Ruling

application

of

Chuang

before

his

death.

In

Eternals

letter

dated December 29, 1982, a list of insurable interests of buyers for


As a general rule, this Court is not a trier of facts and will not

October 1982 was attached, including Chuang in the list of new

re-examine factual issues raised before the CA and first level courts,

businesses. Eternal added it was noted at the bottom of said letter that

considering their findings of facts are conclusive and binding on this

the corresponding Phil-Am Life Insurance Application Forms & Cert.

Court. However, such rule is subject to exceptions, as enunciated

were enclosed in the letter that was apparently received by Philamlife

in Sampayan v. Court of Appeals:

on January 15, 1983. Finally, Eternal alleged that it provided a copy of

(1) when the findings are grounded entirely on


speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion;
(4) when the judgment is based on a misapprehension
of facts; (5) when the findings of facts are conflicting;
(6) when in making its findings the [CA] went beyond
the issues of the case, or its findings are contrary to
the admissions of both the appellant and the
appellee; (7) when the findings [of the CA] are
contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on
which they are based; (9) when the facts set forth in
the petition as well as in the petitioners main and reply
briefs are not disputed by the respondent; (10) when
the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence
on record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered,
would justify a different conclusion. [12] (Emphasis
supplied.)

the insurance application which was signed by Chuang himself and


executed before his death.

On the other hand, Philamlife claims that the evidence presented by


Eternal is insufficient, arguing that Eternal must present evidence
showing that Philamlife received a copy of Chuangs insurance
application.

The evidence on record supports Eternals position.

The fact of the matter is, the letter dated December 29, 1982, which
Philamlife stamped as received, states that the insurance forms for the
attached list of burial lot buyers were attached to the letter. Such

104

stamp of receipt has the effect of acknowledging receipt of the letter

Philamlife primarily claims that Eternal did not even know where the

together with the attachments. Such receipt is an admission by

original insurance application of Chuang was, as shown by the

Philamlife against its own interest.[13] The burden of evidence has

testimony of Edilberto Mendoza:


Atty. Arevalo:

shifted to Philamlife, which must prove that the letter did not contain

Q Where is the original of the application form which is


required in case of new coverage?

Chuangs insurance application. However, Philamlife failed to do so;


thus, Philamlife is deemed to have received Chuangs insurance

[Mendoza:]

application.

A It is [a] standard operating procedure for the new


client to fill up two copies of this form and the original
of this is submitted to Philamlife together with the
monthly remittances and the second copy is remained
or
retained
with
the
marketing
department
of Eternal Gardens.

To reiterate, it was Philamlifes bounden duty to make sure that before a


transmittal letter is stamped as received, the contents of the letter are
correct and accounted for.

Atty. Miranda:

reliability due to inconsistencies is groundless. The trial court is in the

We move to strike out the answer as it is not


responsive as counsel is merely asking for the location
and does not [ask] for the number of copy.

best position to determine the reliability and credibility of the

Atty. Arevalo:

Philamlifes allegation that Eternals witnesses ran out of credibility and

witnesses, because it has the opportunity to observe firsthand the

Q Where is the original?

witnesses demeanor, conduct, and attitude. Findings of the trial court


[Mendoza:]

on such matters are binding and conclusive on the appellate court,

considered, might affect the result of the case.[15]

A As far as I remember I do not know where the


original but when I submitted with that payment
together with the new clients all the originals I see to it
before I sign the transmittal letter the originals are
attached therein.[16]

An examination of the testimonies of the witnesses mentioned by

In other words, the witness admitted not knowing where the

Philamlife, however, reveals no overlooked facts of substance and

original insurance application was, but believed that the application

value.

was transmitted to Philamlife as an attachment to a transmittal letter.

unless some facts or circumstances of weight and substance have


been

overlooked,

misapprehended,

or

misinterpreted, [14] that,

if

105

As to the seeming inconsistencies between the testimony of

As earlier stated, Philamlife and Eternal entered into an

Manuel Cortez on whether one or two insurance application forms were

agreement denominated as Creditor Group Life Policy No. P-1920

accomplished and the testimony of Mendoza on who actually filled out

dated December 10, 1980. In the policy, it is provided that:

the application form, these are minor inconsistencies that do not affect
the

credibility

of

the

witnesses.

Thus,

we

ruled

in People

EFFECTIVE DATE OF BENEFIT.

v.

The insurance of any eligible Lot Purchaser


shall be effective on the date he contracts a loan with
the Assured. However, there shall be no insurance if
the application of the Lot Purchaser is not approved by
the Company.

Paredesthat minor inconsistencies are too trivial to affect the credibility


of witnesses, and these may even serve to strengthen their credibility
as these negate any suspicion that the testimonies have been
rehearsed.[17]

An examination of the above provision would show ambiguity


between its two sentences. The first sentence appears to state that the

We reiterated the above ruling in Merencillo v. People:

insurance coverage of the clients of Eternal already became effective

Minor discrepancies or inconsistencies do not


impair the essential integrity of the prosecutions
evidence as a whole or reflect on the witnesses
honesty. The test is whether the testimonies agree on
essential facts and whether the respective versions
corroborate and substantially coincide with each other
so as to make a consistent and coherent whole.[18]

upon contracting a loan with Eternal while the second sentence


appears to require Philamlife to approve the insurance contract before
the same can become effective.

In the present case, the number of copies of the insurance application

It must be remembered that an insurance contract is a contract

that Chuang executed is not at issue, neither is whether the insurance

of adhesion which must be construed liberally in favor of the insured

application presented by Eternal has been falsified. Thus, the

and strictly against the insurer in order to safeguard the latters

inconsistencies pointed out by Philamlife are minor and do not affect

interest. Thus, in Malayan Insurance Corporation v. Court of Appeals,

the credibility of Eternals witnesses.

this Court held that:

However, the question arises as to whether Philamlife assumed


the risk of loss without approving the application.

This question must be answered in the affirmative.

106

Indemnity and liability insurance policies are


construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured,
where the contract or policy is prepared by the
insurer. A contract of insurance, being a contract
of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in
other words, it should be construed liberally in favor of
the insured and strictly against the insurer. Limitations

of liability should be regarded with extreme jealousy


and must be construed in such a way as to preclude
the insurer from noncompliance with its obligations.
[19]
(Emphasis supplied.)

mere inaction of the insurer on the insurance application must not


work to prejudice the insured; it cannot be interpreted as a termination
of the insurance contract. The termination of the insurance contract by
the insurer must be explicit and unambiguous.

In the more recent case of Philamcare Health Systems, Inc. v.


Court of Appeals, we reiterated the above ruling, stating that:

As a final note, to characterize the insurer and the insured as

When the terms of insurance contract contain


limitations on liability, courts should construe them in
such a way as to preclude the insurer from noncompliance with his obligation. Being a contract of
adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the
contract, the insurer. By reason of the exclusive control
of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally
in favor of the insured, especially to avoid forfeiture. [20]

contracting parties on equal footing is inaccurate at best. Insurance


contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More
often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if
at all understandable to laypersons, that are imposed on those who
wish to avail of insurance. As such, insurance contracts are imbued
with public interest that must be considered whenever the rights and

Clearly, the vague contractual provision, in Creditor Group Life

obligations of the insurer and the insured are to be delineated. Hence,

Policy No. P-1920 dated December 10, 1980, must be construed in

in order to protect the interest of insurance applicants, insurance

favor of the insured and in favor of the effectivity of the insurance

companies must be obligated to act with haste upon insurance

contract.

applications, to either deny or approve the same, or otherwise be


bound to honor the application as a valid, binding, and effective

On the other hand, the seemingly conflicting provisions must

insurance contract.[21]

be harmonized to mean that upon a partys purchase of a memorial lot


on installment from Eternal, an insurance contract covering the lot

WHEREFORE, we GRANT the petition. The November 26, 2004 CA

purchaser is created and the same is effective, valid, and binding until

Decision in CA-G.R. CV No. 57810 is REVERSED and SET ASIDE. The

terminated by Philamlife by disapproving the insurance application.

May 29,

The second sentence of Creditor Group Life Policy No. P-1920 on the

1996

Decision

of

the

Makati City

is MODIFIED. Philamlife is hereby ORDERED:

Effective Date of Benefit is in the nature of a resolutory condition which


would lead to the cessation of the insurance contract. Moreover, the

107

RTC,

Branch

138

(1) To pay Eternal the amount of PhP 100,000 representing the


proceeds of the Life Insurance Policy of Chuang;

CHICO-NAZARIO,**

(2) To pay Eternal legal interest at the rate of six percent (6%) per

THE
INSULAR
LIFE
ASSURANCE
COMPANY LIMITED, AS REPRESENTED
BY THE PRESIDENT VICENTE R. AVILON,

annum of PhP 100,000 from the time of extra-judicial demand by


Eternal until Philamlifes receipt of the May 29, 1996 RTC Decision on

Acting Chairperson,

Respondent.

June 17, 1996;

VELASCO, JR.,

(3) To pay Eternal legal interest at the rate of twelve percent (12%) per
annum of PhP 100,000 from June 17, 1996 until full payment of this

NACHURA, and

award; and

PERALTA, JJ.

(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

No costs.
Promulgated:
SO ORDERED.
August 25, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

VIOLETA R. LALICAN,

G.R. No. 183526

Petitioner,

Present:

DECISION

CARPIO MORALES,*
- versus -

108

CHICO-NAZARIO, J.:

Challenged in this Petition for Review on Certiorari[1] under Rule


45 of the Rules of Court are the Decision
the Orders dated 10 April 2008

[2]

Under the terms of Policy No. 9011992, Eulogio was to pay the

dated 30 August 2007 and

and 3 July 2008

premiums on a quarterly basis in the amount of P8,062.00, payable

of the Regional Trial

every 24 April, 24 July, 24 October and 24 January of each year, until

Court (RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its

the end of the 20-year period of the policy. According to the Policy

assailed Decision, the RTC dismissed the claim for death benefits filed

Contract, there was a grace period of 31 days for the payment of each

by petitioner Violeta R. Lalican (Violeta) against respondent Insular Life

premium subsequent to the first. If any premium was not paid on or

Assurance Company Limited (Insular Life); while in its questioned

before the due date, the policy would be in default, and if the premium

Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC

remained unpaid until the end of the grace period, the policy would

declared the finality of the aforesaid Decision and denied petitioners

automatically lapse and become void.[8]

[3]

[4]

Notice of Appeal.

Eulogio paid the premiums due on 24 July 1997 and 24 October


The factual and procedural antecedents of the case, as culled

1997. However, he failed to pay the premium due on 24 January 1998,

from the records, are as follows:

even

after

the

lapse

of

the

grace

period

of

31

days. Policy

No. 9011992, therefore, lapsed and became void.

Violeta is the widow of the deceased Eulogio C. Lalican


(Eulogio).

Eulogio submitted to the Cabanatuan District Office of Insular


Life,

through

Reinstatement

two

riders

1998,

No. 9011992,together

an

Application

with

the

for

amount

although he already deposited P8,062.00 as payment for the 24

9011992,[5] which contained a 20-Year Endowment Variable Income


worth P500,000.00,[6] with

of

Policy

May

Application for Reinstatement could not be fully processed because,

(Malaluan), its agent in GapanCity, issued in favor of Eulogio Policy No.


Plan

on 26

letter[10] dated 17 July 1998, Insular Life notified Eulogio that his

Insular Life. On 24 April 1997, Insular Life, through Josephine Malaluan

Flexi

Malaluan,

of P8,062.00 to pay for the premium due on 24 January 1998. In a

During his lifetime, Eulogio applied for an insurance policy with

Package

[9]

January 1998 premium, he left unpaid the overdue interest thereon

valued

amounting to P322.48. Thus, Insular Life instructed Eulogio to pay the

at P500,000.00 each.[7] Thus, the value of the policy amounted

amount

to P1,500,000.00. Violeta was named as the primary beneficiary.

of

interest

and

to

file

another

application

for

reinstatement. Eulogio was likewise advised by Malaluan to pay the


premiums that subsequently became due on 24 April 1998 and 24 July
1998, plus interest.

109

Eulogios death, Policy No. 9011992 had already lapsed, and Eulogio
failed

On 17 September 1998, Eulogio went to Malaluans house and


submitted

second

No. 9011992, including

Application
the

for

amount

Reinstatement [11] of
ofP17,500.00,

to

reinstate

the

same. According

to

the

Application

for

Reinstatement, the policy would only be considered reinstated upon

Policy

approval of the application by Insular Life during the applicants lifetime

representing

and good health, and whatever amount the applicant paid in

payments for the overdue interest on the premium for 24 January

connection thereto was considered to be a deposit only until approval

1998, and the premiums which became due on 24 April 1998 and 24

of said application. Enclosed with the 14 January 1999 letter of Insular

July 1998. As Malaluan was away on a business errand, her husband

Life to Violeta was DBP Check No. 0000309734, for the amount

received Eulogios second Application for Reinstatement and issued a

of P25,417.00, drawn in Violetas favor, representing the full refund of

receipt for the amount Eulogio deposited.

the payments made by Eulogio on Policy No. 9011992.

A while later, on the same day, 17 September 1998, Eulogio

On 12 February 1998, Violeta requested a reconsideration of

died of cardio-respiratory arrest secondary to electrocution.

the disallowance of her claim. In a letter[13] dated 10 March 1999,


Insular Life stated that it could not find any reason to reconsider its
decision rejecting Violetas claim. Insular Life again tendered to Violeta

Without knowing of Eulogios death, Malaluan forwarded to the

the above-mentioned check in the amount of P25,417.00.

Insular Life Regional Office in the City of San Fernando, on 18


September 1998, Eulogios second Application for Reinstatement of
Policy No. 9011992 and P17,500.00 deposit. However, Insular Life no

Violeta returned the letter dated 10 March 1999 and the check

longer acted upon Eulogios second Application for Reinstatement, as

enclosed

the former was informed on 21 September 1998 that Eulogio had

therein

to

the

Cabanatuan

District

Office

of

Insular

Life. Violetas counsel subsequently sent a letter [14] dated 8 July 1999 to

already passed away.

Insular Life, demanding payment of the full proceeds of Policy No.


9011992. On 11 August 1999, Insular Life responded to the said
demand letter by agreeing to conduct a re-evaluation of Violetas claim.

On 28 September 1998, Violeta filed with Insular Life a claim


for payment of the full proceeds of Policy No. 9011992.
Without waiting for the result of the re-evaluation by Insular
Life, Violeta filed with the RTC, on 11 October 1999, a Complaint for
In a letter

dated 14 January 1999, Insular Life informed

Death Claim Benefit,[15] which was docketed as Civil Case No.

Violeta that her claim could not be granted since, at the time of

2177. Violeta alleged that Insular Life engaged in unfair claim

[12]

110

[The] arguments [of Insular Life] are not without


basis. When the premiums for April 24 and July 24,
1998 were not paid by [Eulogio] even after the lapse of
the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and
conditions of the contract between [Insular Life] and
[Eulogio] which are written in [the] Policy provisions of
Policy No. 9011992 x x x.[17]

settlement practice and deliberately failed to act with reasonable


promptness on her insurance claim. Violeta prayed that Insular Life be
ordered to pay her death claim benefits on Policy No. 9011992, in the
amount of P1,500,000.00, plus interests, attorneys fees, and cost of
suit.

Insular Life filed with the RTC an Answer with Counterclaim,


[16]

asserting

that

Violetas

Complaint

had

no

legal

or

factual

bases. Insular Life maintained that Policy No. 9011992, on which


The RTC, taking into account the clear provisions of the Policy

Violeta sought to recover, was rendered void by the non-payment of


the

Contract between Eulogio and Insular Life and the Application for

of

Reinstatement Eulogio subsequently signed and submitted to Insular

counterclaim, Insular Life prayed that Violeta be ordered to pay

Life, held that Eulogio was not able to fully comply with the

attorneys fees and expenses of litigation incurred by the former.

requirements for the reinstatement of Policy No. 9011992:

the 24

January

requirements

1998 premium

for

the

and

reinstatement

non-compliance
of

the

same. By

with
way

The well-settled rule is that a contract has the force of


law between the parties. In the instant case, the terms
of the insurance contract between [Eulogio] and
[Insular Life] were spelled out in the policy provisions
of Insurance Policy No. 9011992. There is likewise no
dispute that said insurance contract is by nature a
contract of adhesion[,] which is defined as one in
which one of the contracting parties imposes a readymade form of contract which the other party may
accept or reject but cannot modify. (Polotan, Sr. vs. CA,
296 SCRA 247).

Violeta, in her Reply and Answer to Counterclaim, asserted that


the requirements for the reinstatement of Policy No. 9011992 had been
complied with and the defenses put up by Insular Life were purely
invented and illusory.

After trial, the RTC rendered, on 30 August 2007, a Decision in


favor of Insular Life.

xxxx

The RTC found that Policy No. 9011992 had indeed lapsed and
Eulogio needed to have the same reinstated:

111

The New Lexicon Websters Dictionary defines


ambiguity as the quality of having more than one
meaning and an idea, statement or expression capable
of being understood in more than one sense. In Nacu
vs. Court of Appeals, 231 SCRA 237 (1994), the
Supreme Court stated that[:]

for reinstatement, his lapsed policy was not


automatically reinstated and that its approval was
subject to certain conditions. Nowhere in the policy
or in the application for reinstatement was it
ever mentioned that the payment of premiums
would have the effect of an automatic and
immediate renewal of the lapsed policy. Instead,
what was clearly stated in the application for
reinstatement is that pending approval thereof,
the premiums paid would be treated as a deposit
only and shall not bind the company until this
application is finally approved during my/our
lifetime and good health[.]

Any ambiguity in a contract, whose


terms are susceptible of different
interpretations as a result thereby,
must be read and construed against
the party who drafted it on the
assumption that it could have been
avoided by the exercise of a little care.

Again, the court finds nothing in the aforesaid


provisions that would even suggest an ambiguity either
in the words used or in the manner they were
written. [Violeta] did not present any proof that
[Eulogio] was not conversant with the English
language. Hence, his having personally signed the
application for reinstatement[,] which consisted only of
one page, could only mean that he has read its
contents and that he understood them. x x x

In the instant case, the dispute arises from the


afore-quoted provisions written on the face of
the
second
application
for
reinstatement. Examining the said provisions,
the court finds the same clearly written in terms
that are simple enough to admit of only one
interpretation. They are clearly not ambiguous,
equivocal or uncertain that would need further
construction. The same are written on the very
face of the application just above the space
where
[Eulogio]
signed
his
name. It
is
inconceivable that he signed it without reading
and understanding its import.

Therefore, consistent with the above Supreme Court


ruling and finding no ambiguity both in the policy
provisions of Policy No. 9011992 and in the application
for reinstatement subject of this case, the court finds
no merit in [Violetas] contention that the policy
provision stating that [the lapsed policy of Eulogio]
should be reinstated during his lifetime is ambiguous
and should be construed in his favor. It is true that
[Eulogio] submitted his application for reinstatement,
together with his premium and interest payments, to
[Insular Life] through its agent Josephine Malaluan in
the morning of September 17, 1998. Unfortunately, he
died in the afternoon of that same day. It was only on

Similarly, the provisions of the policy provisions (sic)


earlier mentioned are written in simple and clear
laymans language, rendering it free from any
ambiguity that would require a legal interpretation or
construction. Thus, the court believes that [Eulogio]
was well aware that when he filed the said application

112

the following day, September 18, 1998 that Ms.


Malaluan brought the said document to [the regional
office of Insular Life] in San Fernando, Pampanga for
approval. As correctly pointed out by [Insular Life]
there was no more application to approve
because the applicant was already dead and no
insurance company would issue an insurance
policy to a dead person.[18] (Emphases ours.)

WHEREFORE, all the foregoing premises considered


and finding that [Violeta] has failed to establish by
preponderance of evidence her cause of action against
the defendant, let this case be, as it is
hereby DISMISSED.[20]

On 14 September 2007, Violeta filed a Motion for Reconsideration [21] of


The RTC, in the end, explained that:

the afore-mentioned RTC Decision. Insular Life opposed[22] the said


motion, averring that the arguments raised therein were merely a

While the court truly empathizes with the [Violeta] for


the loss of her husband, it cannot express the same by
interpreting the insurance agreement in her favor
where there is no need for such interpretation. It is
conceded that [Eulogios] payment of overdue
premiums and interest was received by [Insular Life]
through its agent Ms. Malaluan. It is also true that [the]
application for reinstatement was filed by [Eulogio] a
day before his death. However, there is nothing
that would justify a conclusion that such receipt
amounted to an automatic reinstatement of the
policy that has already lapsed. The evidence
suggests clearly that no such automatic renewal
was contemplated in the contract between
[Eulogio] and [Insular Life]. Neither was it shown
that Ms. Malaluan was the officer authorized to
approve the application for reinstatement and
that her receipt of the documents submitted by
[Eulogio] amounted to its approval. [19] (Emphasis
ours.)

rehash of the issues already considered and addressed by the RTC. In


an Order[23] dated 8 November 2007, the RTC denied Violetas Motion
for Reconsideration, finding no cogent and compelling reason to disturb
its earlier findings. Per the Registry Return Receipt on record, the 8
November 2007 Order of the RTC was received by Violeta on 3
December 2007.

In the interim, on 22 November 2007, Violeta filed with the RTC


a Reply[24] to the Motion for Reconsideration, wherein she reiterated the
prayer in her Motion for Reconsideration for the setting aside of the
Decision

dated 30

August

2007. Despite

already

receiving

on 3

December 2007, a copy of the RTC Order dated 8 November 2007,


which denied her Motion for Reconsideration, Violeta still filed with the
RTC, on 26 February 2008, a Reply Extended Discussion elaborating on
the

arguments

she

had

previously

made

in

her

Motion

for

Reconsideration and Reply.


The fallo of the RTC Decision thus reads:
On 10 April 2008, the RTC issued an Order, [25] declaring that the
Decision dated 30 August 2007 in Civil Case No. 2177 had already

113

attained finality in view of Violetas failure to file the appropriate notice

Violeta insists that her former counsel committed an honest mistake in

of appeal within the reglementary period. Thus, any further discussions

filing a Reply, instead of a Notice of Appeal of the RTC Decision

on the issues raised by Violeta in her Reply and Reply Extended

dated 30 August 2007; and in the computation of the reglementary

Discussion would be moot and academic.

period for appealing the said judgment. Violeta claims that her former
counsel suffered from poor health, which rapidly deteriorated from the
first week of July 2008 until the latters death just shortly after the filing
of

Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with
Motion,[26] praying that the Order dated 10 April 2008 be set aside and

Petition

on 8

August

2008. In

light

of

these

Violeta further posits that the Court should address the

In an Order[27] dated 3 July 2008, the RTC denied Violetas Notice of

question of law arising in this case involving the interpretation of the

Appeal with Motion given that the Decision dated 30 August 2007 had

second sentence of Section 19 of the Insurance Code, which provides:

long since attained finality.

Section. 19. x x x [I]nterest in the life or health of a


person insured must exist when the insurance takes
effect, but need not exist thereafter or when the loss
occurs.

Violeta directly elevated her case to this Court via the instant Petition
for Review on Certiorari, raising the following issues for consideration:

On the basis thereof, Violeta argues that Eulogio still had

Whether or not the Decision of the court a


quo dated August 30, 2007, can still be
reviewed despite having allegedly attained
finality and despite the fact that the mode of
appeal that has been availed of by Violeta is
erroneous?

insurable interest in his own life when he reinstated Policy No. 9011992
just before he passed away on 17 September 1998. The RTC should
have construed the provisions of the Policy Contract and Application for
Reinstatement in favor of the insured Eulogio and against the insurer
Insular Life, and considered the special circumstances of the case, to
rule

2.

instant

course to her appeal even if the same was filed out of time.

that she be allowed to file an appeal with the Court of Appeals.

1.

the

circumstances, Violeta entreats this Court to admit and give due

that

Eulogio

had

complied

with

the

requisites

for

the

reinstatement of Policy No. 9011992 prior to his death, and that Violeta

Whether or not the Regional Trial Court in


its original jurisdiction has decided the case on
a question of law not in accord with law and
applicable decisions of the Supreme Court?

is entitled to claim the proceeds of said policy as the primary


beneficiary thereof.

114

The Petition lacks merit.

that Violetas former counsel was already suffering from ill health
during these times; or that the illness of Violetas former counsel would

At the outset, the Court notes that the elevation of the case to

have affected his judgment and competence as a lawyer.

us via the instant Petition for Review on Certiorari is not justified. Rule
41, Section 1 of the Rules of Court, [28] provides that no appeal may be
taken from an order disallowing or dismissing an appeal. In such a

Moreover, the failure of her former counsel to file a Notice of

case, the aggrieved party may file a Petition for Certiorari under Rule

Appeal within the reglementary period binds Violeta, which failure the

65 of the Rules of Court.[29]

latter cannot now disown on the basis of her bare allegation and self-

Furthermore, the RTC Decision dated 30 August 2007, assailed

serving pronouncement that the former was ill. A client is bound by his

in this Petition, had long become final and executory. Violeta filed a

counsels mistakes and negligence.[31]

Motion for Reconsideration thereof, but the RTC denied the same in an
Order dated 8 November 2007. The records of the case reveal that
Violeta

received

copy

of

the 8

November

December 2007. Thus, Violeta had 15 days

[30]

2007 Order

on 3

The Court, therefore, finds no reversible error on the part of the

from said date of

RTC in denying Violetas Notice of Appeal for being filed beyond the

receipt, or until 18 December 2007, to file a Notice of Appeal. Violeta

reglementary period. Without an appeal having been timely filed, the

filed a Notice of Appeal only on 20 May 2008, more than five


months after

receipt

of

the

RTC

Order

dated 8

RTC Decision dated 30 August 2007 in Civil Case No. 2177 already

November

became final and executory.

2007 denying her Motion for Reconsideration.

A judgment becomes "final and executory" by operation of law. Finality

Violetas claim that her former counsels failure to file the proper

becomes a fact when the reglementary period to appeal lapses and no

remedy within the reglementary period was an honest mistake,

appeal is perfected within such period. As a consequence, no court

attributable to the latters deteriorating health, is unpersuasive.

(not even this Court) can exercise appellate jurisdiction to review a


case or modify a decision that has become final. [32] When a final

Violeta merely made a general averment of her former


counsels

poor

health,

lacking

relevant

details

and

judgment is executory, it becomes immutable and unalterable. It may

supporting

no longer be modified in any respect either by the court, which

evidence. By Violetas own admission, her former counsels health

rendered it or even by this Court. The doctrine is founded on

rapidly deteriorated only by the first week of July 2008. The events

considerations of public policy and sound practice that, at the risk of

pertinent to Violetas Notice of Appeal took place months before July

occasional errors, judgments must become final at some definite point

2008, i.e., a copy of the RTC Order dated 8 November 2007, denying

in time.[33]

Violetas Motion for Reconsideration of the Decision dated 30 August


2007, was received on 3 December 2007; and Violetas Notice of

The only recognized exceptions to the doctrine of immutability and

Appeal was filed on 20 May 2008. There is utter lack of proof to show

unalterability are the correction of clerical errors, the so-called nunc

115

pro tunc entries, which cause no prejudice to any party, and void

Upon more extensive study of the Petition, it becomes evident that the

judgments.

matter of insurable interest is entirely irrelevant in the case at bar. It is

[34]

The instant case does not fall under any of these

exceptions.

actually beyond question that while Eulogio was still alive, he had an
insurable interest in his own life, which he did insure under Policy

Even if the Court ignores the procedural lapses committed herein, and

No. 9011992. The real point of contention herein is whether Eulogio

proceeds to resolve the substantive issues raised, the Petition must still

was able to reinstate the lapsed insurance policy on his life before his

fail.

death on 17 September 1998.

Violeta makes it appear that her present Petition involves a question of

The Court rules in the negative.

law, particularly, whether Eulogio had an existing insurable interest in


his own life until the day of his death.

Before proceeding, the Court must correct the erroneous


declaration of the RTC in its 30 August 2007 Decision that Policy

An insurable interest is one of the most basic and essential

No. 9011992 lapsed because of Eulogios non-payment of the premiums

requirements in an insurance contract. In general, an insurable interest

which became due on 24 April 1998 and 24 July 1998. Policy

is that interest which a person is deemed to have in the subject matter

No. 9011992 had lapsed and become void earlier, on 24 February

insured, where he has a relation or connection with or concern in it,

1998, upon the expiration of the 31-day grace period for payment of

such that the person will derive pecuniary benefit or advantage from

the premium, which fell due on 24 January 1998, without any

the preservation of the subject matter insured and will suffer pecuniary

payment having been made.

loss or damage from its destruction, termination, or injury by the


happening of the event insured against.[35] The existence of an

That Policy No. 9011992 had already lapsed is a fact beyond

insurable interest gives a person the legal right to insure the subject

dispute. Eulogios filing of his first Application for Reinstatement with

matter of the policy of insurance. [36] Section 10 of the Insurance Code

Insular Life, through Malaluan, on 26 May 1998, constitutes an

indeed provides that every person has an insurable interest in his own

admission that Policy No. 9011992 had lapsed by then. Insular Life did

life.

Section 19 of the same code also states that an interest in the

not act on Eulogios first Application for Reinstatement, since the

life or health of a person insured must exist when the insurance takes

amount Eulogio simultaneously deposited was sufficient to cover only

effect, but need not exist thereafter or when the loss occurs.

the P8,062.00

[37]

[38]

overdue

the P322.48 overdue

premium

interests

for 24

January

thereon. On 17

1998,

but

September

not

1998,

Eulogio submitted a second Application for Reinstatement to Insular


Life, again through Malaluan, depositing at the same time P17,500.00,
to cover payment for the overdue interest on the premium for 24
January 1998, and the premiums that had also become due on 24 April
1998 and 24 July 1998. On the very same day, Eulogio passed away.

116

I/We agree that said Policy shall not be considered


reinstated until this application is approved by
the Company during my/our lifetime and good
health and until all other Company requirements
for the reinstatement of said Policy are fully
satisfied.

To reinstate a policy means to restore the same to premium-paying


status after it has been permitted to lapse. [39] Both the Policy Contract
and the Application for Reinstatement provide for specific conditions
for the reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified
the following conditions for reinstatement should the policy lapse:

I/We further agree that any payment made or to be


made in connection with this application shall be
considered as deposit only and shall not bind the
Company until this application is finally
approved by the Company during my/our lifetime
and good health. If this application is disapproved,
I/We also agree to accept the refund of all payments
made in connection herewith, without interest, and to
surrender the receipts for such payment. [41] (Emphases
ours.)

10. REINSTATEMENT

You may reinstate this policy at any time within three


years after it lapsed if the following conditions are met:
(1) the policy has not been surrendered for its cash
value or the period of extension as a term insurance
has not expired; (2) evidence of insurability
satisfactory to [Insular Life] is furnished; (3) overdue
premiums are paid with compound interest at a rate
not exceeding that which would have been applicable
to said premium and indebtedness in the policy years
prior to reinstatement; and (4) indebtedness which
existed at the time of lapsation is paid or renewed. [40]

In the instant case, Eulogios death rendered impossible full compliance


with the conditions for reinstatement of Policy No. 9011992. True,
Eulogio, before his death, managed to file his Application for
Reinstatement and deposit the amount for payment of his overdue
premiums and interests thereon with Malaluan; but Policy No. 9011992
could

Additional conditions for reinstatement of a lapsed policy were

only

be

Reinstatement

stated in the Application for Reinstatement which Eulogio signed and

considered

had

been

reinstated after the

processed

and

Application

approved

by

for

Insular

Life during Eulogios lifetime and good health.

submitted, to wit:

Relevant herein is the following pronouncement of the Court in Andres


v. The Crown Life Insurance Company,[42] citing McGuire v. The
Manufacturer's Life Insurance Co.[43]:

117

The stipulation in a life insurance policy giving


the insured the privilege to reinstate it upon written
application does not give the insured absolute
right to such reinstatement by the mere filing of an
application. The insurer has the right to deny the
reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not pay
all overdue premium and all other indebtedness to the
insurer. After the death of the insured the
insurance Company cannot be compelled to
entertain an application for reinstatement of the
policy
because
the
conditions
precedent
to
reinstatement can no longer be determined and
satisfied. (Emphases ours.)

The Court agrees with the RTC that the conditions for
reinstatement

under

the

Policy

Contract

and

Application

for

Reinstatement were written in clear and simple language, which could


not admit of any meaning or interpretation other than those that they
so obviously embody. A construction in favor of the insured is not
called for, as there is no ambiguity in the said provisions in the first
place. The words thereof are clear, unequivocal, and simple enough so
as to preclude any mistake in the appreciation of the same.

Violeta did not adduce any evidence that Eulogio might have
failed to fully understand the import and meaning of the provisions of
his Policy Contract and/or Application for Reinstatement, both of which

It does not matter that when he died, Eulogios Application for

he voluntarily signed. While it is a cardinal principle of insurance law

Reinstatement and deposits for the overdue premiums and interests

that a policy or contract of insurance is to be construed liberally in

were already with Malaluan. Insular Life, through the Policy Contract,

favor of the insured and strictly as against the insurer company, yet,

expressly limits the power or authority of its insurance agents, thus:

contracts of insurance, like other contracts, are to be construed


according to the sense and meaning of the terms, which the parties

Our agents have no authority to make or modify this


contract, to extend the time limit for payment of
premiums, to waive any lapsation, forfeiture or any of
our rights or requirements, such powers being limited
to our president, vice-president or persons authorized
by the Board of Trustees and only in writing.
[44]
(Emphasis ours.)

themselves have used. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular
sense.[45]

Eulogios death, just hours after filing his Application for


Reinstatement and depositing his payment for overdue premiums and
Malaluan did not have the authority to approve Eulogios Application for

interests with Malaluan, does not constitute a special circumstance

Reinstatement. Malaluan still had to turn over to Insular Life Eulogios

that can persuade this Court to already consider Policy No. 9011992

Application

reinstated. Said circumstance cannot override the clear and express

for

Reinstatement

and

accompanying

deposits,

for

provisions of the Policy Contract and Application for Reinstatement,

processing and approval by the latter.

and operate to remove the prerogative of Insular Life thereunder to


approve or disapprove the Application for Reinstatement.Even though

118

Petitioner, Present:

the Court commiserates with Violeta, as the tragic and fateful turn of
events

leaves

her

practically

empty-handed,

the

Court

cannot

arbitrarily burden Insular Life with the payment of proceeds on a

PUNO, C.J., Chairperson,

lapsed insurance policy. Justice and fairness must equally apply to all
parties to a case. Courts are not permitted to make contracts for the

CORONA,

parties. The function and duty of the courts consist simply in enforcing

- v e r s u s - CHICO-NAZARIO,*

and carrying out the contracts actually made.[46]

LEONARDO-DE CASTRO and

Policy No. 9011992 remained lapsed and void, not having been

BERSAMIN, JJ.*

reinstated in accordance with the Policy Contract and Application for


Reinstatement before Eulogios death.Violeta, therefore, cannot claim
any death benefits from Insular Life on the basis of Policy No. 9011992;
but she is entitled to receive the full refund of the payments made by

COMMISSIONER OF

Eulogio thereon.

INTERNAL REVENUE,
Respondent. Promulgated:
September 18,
2009

WHEREFORE, premises considered, the Court DENIES the


instant Petition for Review on Certiorari under Rule 45 of the Rules of
Court. The Court AFFIRMS the Orders dated 10 April 2008 and 3 July
2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177,

x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

denying petitioner Violeta R. Lalicans Notice of Appeal, on the ground


that the Decision dated 30 August 2007 subject thereof, was already
final and executory. No costs.

RESOLUTION

SO ORDERED.
CORONA, J.:

ARTICLE II

PHILIPPINE HEALTH CARE G.R. No. 167330

Declaration of Principles and State Policies

PROVIDERS, INC.,

119

system or a health maintenance organization to take


care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative,
legal, and financial responsibilities of the organization.
Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various
preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and
other professional technical staff participating in the
group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.

Section 15. The State shall protect and


promote the right to health of the people and instill
health consciousness among them.

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated


and comprehensive approach to health development
which shall endeavor to make essential goods, health
and other social services available to all the people at
affordable cost. There shall be priority for the needs of
the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free
medical care to paupers.[1]

For

resolution

are

motion

for

reconsideration

xxx xxx xxx

On January 27, 2000, respondent Commissioner


of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment
notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of P224,702,641.18.
xxxx

and

supplemental motion for reconsideration dated July 10, 2008 and July
14, 2008, respectively, filed by petitioner Philippine Health Care

The deficiency [documentary stamp tax (DST)]


assessment was imposed on petitioners health care
agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx

Providers, Inc.[2]

We recall the facts of this case, as follows:

xxx xxx xxx

Petitioner is a domestic corporation whose primary


purpose is [t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery

Petitioner protested the assessment in a letter


dated February 23, 2000. As respondent did not act on
the protest, petitioner filed a petition for review in the

120

Court of Tax Appeals (CTA) seeking the cancellation of


the deficiency VAT and DST assessments.

Respondent appealed the CTA decision to the


[Court of Appeals (CA)] insofar as it cancelled the DST
assessment. He claimed that petitioners health care
agreement was a contract of insurance subject to DST
under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its


decision. It held that petitioners health care agreement
was in the nature of a non-life insurance contract
subject to DST.

On April 5, 2002, the CTA rendered a decision,


the dispositive portion of which read:

WHEREFORE, in view of the


foregoing, the instant Petition for
Review
is
PARTIALLY
GRANTED. Petitioner
is
hereby
ORDERED to PAY the deficiency VAT
amounting to P22,054,831.75 inclusive
of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid
for
the
1996
VAT
deficiency
and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from
January 20, 1998 until fully paid for the
1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void
and without force and effect. The 1996
and 1997 deficiency DST assessment
against
petitioner
is
hereby
CANCELLED
AND
SET
ASIDE. Respondent is ORDERED to
DESIST from collecting the said DST
deficiency tax.

WHEREFORE, the petition for


review is GRANTED. The Decision of the
Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and
1997 deficiency documentary stamp
tax assessment and ordered petitioner
to desist from collecting the same is
REVERSED and SET ASIDE.

Respondent is ordered to pay


the
amounts
of P55,746,352.19
and P68,450,258.73
as
deficiency
Documentary Stamp Tax for 1996 and
1997, respectively, plus 25% surcharge
for late payment and 20% interest per
annum from January 27, 2000,
pursuant to Sections 248 and 249 of
the Tax Code, until the same shall have
been fully paid.

SO ORDERED.
SO ORDERED.

121

Unable to accept our verdict, petitioner filed the present motion for

Petitioner moved for reconsideration but the


CA denied it. Hence, petitioner filed this case.

reconsideration

and

supplemental

motion

for

reconsideration,

asserting the following arguments:


xxx xxx xxx
(a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a
company engaged in the business of fidelity
bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an
insurance company.

In a decision dated June 12, 2008, the Court denied the petition
and affirmed the CAs decision. We held that petitioners health care
agreement during the pertinent period was in the nature of non-life
insurance

which

is

contract

of

indemnity,

citing Blue

(b) The Court, in dismissing the appeal in CIR v.


Philippine National Bank, affirmed in effect the
CAs disposition that health care services are
not in the nature of an insurance business.

Cross

Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v.


CA.[4] We also ruled that petitioners contention that it is a health

(c) Section 185 should be strictly construed.


maintenance organization (HMO) and not an insurance company is
irrelevant because contracts between companies like petitioner and
the

beneficiaries

under

their

plans

are

treated

(d) Legislative
intent
to
exclude
health
care
agreements from items subject to DST is clear,
especially in the light of the amendments
made in the DST law in 2002.

as insurance

contracts. Moreover, DST is not a tax on the business transacted but


an excise on the privilege, opportunity or facility offered at exchanges

(e) Assuming arguendo that petitioners agreements


are contracts of indemnity, they are not those
contemplated under Section 185.

for the transaction of the business.

122

(f) Assuming arguendo that petitioners agreements are


akin to health insurance, health insurance is
not covered by Section 185.

In its motion for reconsideration, petitioner reveals for the first


time that it availed of a tax amnesty under RA 9480 [7] (also known as
the

(g) The agreements do not fall under the phrase other


branch of insurance mentioned in Section 185.

Tax

Amnesty

Act

of

2007)

by

fully

paying

the

amount

of P5,127,149.08 representing 5% of its net worth as of the year


ending December 31, 2005.[8]

(h) The June 12, 2008 decision should only apply


prospectively.
We find merit in petitioners motion for reconsideration.
(i) Petitioner availed of the tax amnesty benefits under
RA[5] 9480 for the taxable year 2005 and all
prior
years. Therefore,
the
questioned
assessments on the DST are now rendered
moot and academic.[6]

Petitioner was formally registered and incorporated with the


Securities and Exchange Commission on June 30, 1987. [9] It is engaged
in the dispensation of the following medical services to individuals who
enter into health care agreements with it:

Oral arguments were held in Baguio City on April 22, 2009. The
parties submitted their memoranda on June 8, 2009.

Preventive medical services such as periodic


monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise
and other healthy habits, and immunization;

Diagnostic medical services such as routine


physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and

123

Curative medical services which pertain to the


performing of other remedial and therapeutic
processes in the event of an injury or sickness on the
part of the enrolled member.[10]

To avail of petitioners health care programs, the individual


members are required to sign and execute a standard health care
agreement embodying the terms and conditions for the provision of

Individuals enrolled in its health care program pay an annual

the health care services. The same agreement contains the various

membership fee. Membership is on a year-to-year basis. The medical

health care services that can be engaged by the enrolled member, i.e.,

services are dispensed to enrolled members in a hospital or clinic

preventive, diagnostic and curative medical services. Except for the

owned, operated or accredited by petitioner, through physicians,

curative aspect of the medical service offered, the enrolled member

medical and dental practitioners under contract with it. It negotiates

may actually make use of the health care services being offered by

with such health care practitioners regarding payment schemes,


financing

and

other

procedures

for

the

delivery

of

petitioner at any time.

health

services. Except in cases of emergency, the professional services are


to be provided only by petitioner's physicians, i.e. those directly
HEALTH
employed by it[11] or whose services are contracted by it. [12] Petitioner
also

provides

hospital

services

such

as

room

and

MAINTENANCE

board

ORGANIZATIONS ARE

accommodation, laboratory services, operating rooms, x-ray facilities

NOT

and general nursing care.[13] If and when a member avails of the

THE

benefits under the agreement, petitioner pays the participating

BUSINESS

physicians and other health care providers for the services rendered, at
pre-agreed rates.

ENGAGED

IN

INSURANCE

We said in our June 12, 2008 decision that it is irrelevant that

[14]

petitioner is an HMO and not an insurer because its agreements are


treated as insurance contracts and the DST is not a tax on the business

124

steam boiler, burglar, elevator, automatic sprinkler, or


other branch of insurance (except life, marine,
inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the
performance of the duties of any office or position, for
the doing or not doing of anything therein specified,
and on all obligations guaranteeing the validity or
legality of any bond or other obligations issued by any
province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the
title to any real estate, or guaranteeing any mercantile
credits, which may be made or renewed by any such
person, company or corporation, there shall be
collected a documentary stamp tax of fifty centavos
(P0.50) on each four pesos (P4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)

but an excise on the privilege, opportunity or facility used in the


transaction of the business.[15]

Petitioner, however, submits that it is of critical importance to


characterize the business it is engaged in, that is, to determine
whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST
on its health care agreements.[16]

A second hard look at the relevant law and jurisprudence

It is a cardinal rule in statutory construction that no word,

convinces the Court that the arguments of petitioner are meritorious.

clause, sentence, provision or part of a statute shall be considered


surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred

Section 185 of the National Internal Revenue Code of 1997

over that which makes some words idle and nugatory. [17] This principle

(NIRC of 1997) provides:

is expressed in the maxim Ut magis valeat quam pereat, that is, we


Section 185. Stamp tax on fidelity bonds and
other
insurance
policies. On
all
policies
of
insurance or bonds or obligations of the nature of
indemnity for loss, damage, or liability made or
renewed by any person, association or company
or
corporation
transacting
the
business
of accident, fidelity, employers liability, plate, glass,

choose the interpretation which gives effect to the whole of the statute
its every word.[18]

125

From the language of Section 185, it is evident that two

Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance

requisites must concur before the DST can apply, namely: (1) the

Code) enumerates what constitutes doing an insurance business or

document must be a policy of insurance or an obligation in the

transacting an insurance business:

nature of indemnity and (2) the maker should be transacting


the business of accident, fidelity, employers liability, plate, glass,

a)

making or proposing to make, as insurer,


any insurance contract;

b)

making or proposing to make, as surety, any


contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;

c)

doing any kind of business, including a


reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;

d)

doing or proposing to do any business in


substance equivalent to any of the foregoing in
a manner designed to evade the provisions of
this Code.

steam boiler, burglar, elevator, automatic sprinkler, or other branch


of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or The


National Health Insurance Act of 1995), an HMO is an entity that
provides, offers or arranges for coverage of designated health services
needed
[19]

by

plan

members

for

fixed

prepaid

premium.

The payments do not vary with the extent, frequency or type of

services provided.

The question is: was petitioner, as an HMO, engaged in the


In the application of the provisions of this Code,
the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or
that no separate or direct consideration is received
therefore, shall not be deemed conclusive to show that
the making thereof does not constitute the doing or
transacting of an insurance business.

business of insurance during the pertinent taxable years? We rule that


it was not.

126

The

rule

was

enunciated

in Jordan

v.

Group

Health

Association[23] wherein the Court of Appeals of the District of Columbia


Various courts in the United States, whose jurisprudence has a

Circuit held that Group Health Association should not be considered as

persuasive effect on our decisions, [21] have determined that HMOs are

engaged in insurance activities since it was created primarily for the

not in the insurance business. One test that they have applied is

distribution of health care services rather than the assumption of

whether the assumption of risk and indemnification of loss (which are

insurance risk.
xxx Although Group Healths activities may be
considered in one aspect as creating security against
loss from illness or accident more truly they constitute
the quantity purchase of well-rounded, continuous
medical service by its members. xxx The functions of
such an organization are not identical with those
of insurance or indemnity companies. The latter
are concerned primarily, if not exclusively, with risk
and the consequences of its descent, not with service,
or its extension in kind, quantity or distribution; with
the unusual occurrence, not the daily routine of living.
Hazard is predominant. On the other hand, the
cooperative is concerned principally with getting
service rendered to its members and doing so at
lower
prices
made
possible
by
quantity
purchasing and economies in operation. Its
primary purpose is to reduce the cost rather
than the risk of medical care; to broaden the
service to the individual in kind and quantity; to
enlarge the number receiving it; to regularize it
as an everyday incident of living, like purchasing
food and clothing or oil and gas, rather than
merely protecting against the financial loss
caused
by
extraordinary
and
unusual
occurrences, such as death, disaster at sea, fire
and tornado. It is, in this instance, to take care of
colds, ordinary aches and pains, minor ills and all the

elements of an insurance business) are the principal object and


purpose of the organization or whether they are merely incidental to its
business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal
purpose, then the business is not insurance.

Applying the principal object and purpose test, [22] there is


significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for profit),
whose main object is to provide the members of a group with health
services, is not engaged in the insurance business.

127

temporary bodily discomforts as well as the more


serious and unusual illness. To summarize, the
distinctive features of the cooperative are the
rendering of service, its extension, the bringing
of physician and patient together, the preventive
features, the regularization of service as well as
payment, the substantial reduction in cost by
quantity purchasing in short, getting the medical
job done and paid for; not, except incidentally to
these features, the indemnification for cost after
the services is rendered. Except the last, these
are not distinctive or generally characteristic of
the insurance arrangement. There is, therefore, a
substantial difference between contracting in this way
for the rendering of service, even on the contingency
that it be needed, and contracting merely to stand its
cost when or after it is rendered.

In California Physicians Service v. Garrison,[25] the California


court felt that, after scrutinizing the plan of operation as a whole of the
corporation, it was service rather than indemnity which stood as its
principal purpose.

There is another and more compelling reason


for holding that the service is not engaged in the
insurance business. Absence or presence of
assumption of risk or peril is not the sole test to
be applied in determining its status. The
question, more broadly, is whether, looking at
the plan of operation as a whole, service rather
than indemnity is its principal object and
purpose. Certainly the objects and purposes of the
corporation organized and maintained by the California
physicians have a wide scope in the field of social
service. Probably there is no more impelling need
than that of adequate medical care on a
voluntary, low-cost basis for persons of small
income. The medical profession unitedly is
endeavoring to meet that need. Unquestionably
this is service of a high order and not indemnity.
[26]
(Emphasis supplied)

That an incidental element of risk distribution


or assumption may be present should not outweigh all
other factors. If attention is focused only on that
feature, the line between insurance or indemnity and
other types of legal arrangement and economic
function becomes faint, if not extinct. This is especially
true when the contract is for the sale of goods or
services on contingency. But obviously it was not the
purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of
risk. That view would cause them to engulf practically
all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in
looking only at the risk element, to the exclusion
of all others present or their subordination to it.
The question turns, not on whether risk is
involved or assumed, but on whether that or
something else to which it is related in the
particular plan is its principal object purpose.
[24]
(Emphasis supplied)

American courts have pointed out that the main difference


between an HMO and an insurance company is that HMOs undertake to
provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake

128

by health service corporation in return for which the


health service corporation agrees to make
payment directly to the participating provider.
[28]
(Emphasis supplied)

to indemnify the insured for medical expenses incurred up to a preagreed limit.Somerset Orthopedic Associates, P.A. v. Horizon Blue
Cross and Blue Shield of New Jersey[27] is clear on this point:

Consequently, the mere presence of risk would be insufficient


to override the primary purpose of the business to provide medical

The basic distinction between medical service


corporations and ordinary health and accident insurers
is that the former undertake to provide prepaid medical
services through participating physicians, thus
relieving subscribers of any further financial burden,
while the latter only undertake to indemnify an insured
for medical expenses up to, but not beyond, the
schedule of rates contained in the policy.

services as needed, with payment made directly to the provider of


these services.[29] In short, even if petitioner assumes the risk of paying
the cost of these services even if significantly more than what the
member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.

xxx xxx xxx


The primary purpose of a medical service
corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a
prepaid basis. Hence, if there are no physicians
participating in the medical service corporations
plan, not only will the subscribers be deprived of
the protection which they might reasonably have
expected would be provided, but the corporation
will, in effect, be doing business solely as a
health and accident indemnity insurer without
having qualified as such and rendering itself subject to
the more stringent financial requirements of the
General Insurance Laws.

By the same token, any indemnification resulting from the


payment for services rendered in case of emergency by nonparticipating health providers would still be incidental to petitioners
purpose of providing and arranging for health care services and does
not transform it into an insurer. To fulfill its obligations to its members
under the agreements, petitioner is required to set up a system and
the facilities for the delivery of such medical services. This indubitably
shows that indemnification is not its sole object.

A participating provider of health care services


is one who agrees in writing to render health care
services to or for persons covered by a contract issued

129

In fact, a substantial portion of petitioners services covers

It is important to emphasize that, in adopting the principal

preventive and diagnostic medical services intended to keep members

purpose test used in the above-quoted U.S. cases, we are not saying

from developing medical conditions or diseases.[30] As an HMO, it is its

that petitioners operations are identical in every respect to those of the

obligation to maintain the good health of its members. Accordingly,

HMOs or health providers which were parties to those cases. What we

its health care programs are designed to prevent or to

are stating is that, for the purpose of determining what doing an

minimize thepossibility of any assumption of risk on its

insurance business means, we have to scrutinize the operations of the

part. Thus, its undertaking under its agreements is not to indemnify its

business as a whole and not its mere components. This is of course

members against any loss or damage arising from a medical condition

only prudent and appropriate, taking into account the burdensome and

but, on the contrary, to provide the health and medical services

strict laws, rules and regulations applicable to insurers and other

needed to prevent such loss or damage.[31]

entities engaged in the insurance business. Moreover, we are also not


unmindful that there are other American authorities who have found

Overall, petitioner appears to provide insurance-type benefits

particular HMOs to be actually engaged in insurance activities. [32]

to its members (with respect to its curative medical services), but


these are incidental to the principal activity of providing them medical

Lastly, it is significant that petitioner, as an HMO, is not part of

care. The insurance-like aspect of petitioners business is miniscule


it

the insurance industry. This is evident from the fact that it is not

substantially provides health care services rather than insurance

supervised by the Insurance Commission but by the Department of

services, it cannot be considered as being in the insurance business.

Health.[33] In fact, in a letter dated September 3, 2000, the Insurance

compared

to

its

noninsurance

activities. Therefore,

since

Commissioner confirmed that petitioner is not engaged in the


insurance business.This determination of the commissioner must be

130

CONTRACT
accorded great weight. It is well-settled that the interpretation of an

CONTEMPLATED

administrative agency which is tasked to implement a statute is

UNDER SECTION 185

accorded great respect and ordinarily controls the interpretation of

OF

laws by the courts. The reason behind this rule was explained in Nestle

1997

THE

NIRC

OF

Philippines, Inc. v. Court of Appeals:[34]


Section 185 states that DST is imposed on all policies of
The rationale for this rule relates not only to
the emergence of the multifarious needs of a modern
or modernizing society and the establishment of
diverse administrative agencies for addressing and
satisfying those needs; it also relates to the
accumulation of experience and growth of specialized
capabilities by the administrative agency charged with
implementing a particular statute. In Asturias Sugar
Central, Inc. vs. Commissioner of Customs,[35] the Court
stressed that executive officials are presumed to have
familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and
to have formed an independent, conscientious and
competent expert opinion thereon. The courts give
much weight to the government agency officials
charged with the implementation of the law, their
competence, expertness, experience and informed
judgment, and the fact that they frequently are the
drafters of the law they interpret.[36]

HEALTH

insurance or obligations of the nature of indemnity for loss, damage, or


liability. In our decision dated June 12, 2008, we ruled that petitioners
health care agreements are contracts of indemnity and are therefore
insurance contracts:

It is incorrect to say that the health care


agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the
liability and indemnifies its member for hospital,
medical and related expenses (such as professional
fees of physicians). The term "loss or damage" is broad
enough to cover the monetary expense or liability a
member will incur in case of illness or injury.
Under the health care agreement, the rendition
of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his
availment of so-called "out-patient services" (including
physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and
family planning counseling) is the contingent event
which gives rise to liability on the part of the member.

CARE

AGREEMENT IS NOT
AN

INSURANCE

131

In case of exposure of the member to liability, he would


be entitled to indemnification by petitioner.

In construing this provision, we should be guided by the


principle that tax statutes are strictly construed against the taxing

Furthermore, the fact that petitioner must


relieve its member from liability by paying for
expenses arising from the stipulated contingencies
belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be
predicted beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the costs of
the services even if they are significantly and
substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of
persons bearing a similar risk, that is, among all the
other members of the health care program. This is
insurance.[37]

authority.[38] This is because taxation is a destructive power which


interferes with the personal and property rights of the people and takes
from them a portion of their property for the support of the
government.[39]Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged
so as to embrace matters not specifically provided. [40]

We are aware that, in Blue Cross and Philamcare, the Court


pronounced that a health care agreement is in the nature of non-life

We reconsider. We shall quote once again the pertinent portion

insurance, which is primarily a contract of indemnity. However, those

of Section 185:

cases did not involve the interpretation of a tax provision. Instead, they
dealt with the liability of a health service provider to a member under

Section 185. Stamp tax on fidelity bonds and


other
insurance
policies. On
all
policies
of
insurance or bonds or obligations of the nature of
indemnity for loss, damage, or liabilitymade or
renewed by any person, association or company or
corporation transacting the business of accident,
fidelity, employers liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)

the terms of their health care agreement. Such contracts, as contracts


of adhesion, are liberally interpreted in favor of the member and
strictly against the HMO. For this reason, we reconsider our ruling
that Blue Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of


insurance

132

as

an

agreement

whereby

one

undertakes

for

consideration to indemnify another against loss, damage or liability

insurance contract, if its primary purpose is the rendering of service, it

arising from an unknown or contingent event. An insurance contract

is not a contract of insurance:

exists where the following elements concur:

1.

2.

3.

It does not necessarily follow however, that a


contract containing all the four elements mentioned
above would be an insurance contract. The primary
purpose of the parties in making the contract
may negate the existence of an insurance
contract. For example, a law firm which enters into
contracts with clients whereby in consideration of
periodical payments, it promises to represent such
clients in all suits for or against them, is not engaged in
the insurance business. Its contracts are simply for the
purpose of rendering personal services. On the other
hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own
expense to defend a physician against all suits for
damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business
of insurance. Unlike the lawyers retainer contract, the
essential purpose of such a contract is not to render
personal services, but to indemnify against loss and
damage resulting from the defense of actions for
malpractice.[42] (Emphasis supplied)

The insured has an insurable interest;

The insured is subject to a risk of loss by the


happening of the designed peril;

The insurer assumes the risk;

4.

Such assumption of risk is part of a general


scheme to distribute actual losses among a large
group of persons bearing a similar risk and

5.

In consideration of the insurers promise, the


insured pays a premium.[41]

Do the agreements between petitioner and its members


Second. Not all the necessary elements of a contract of

possess all these elements? They do not.

insurance are present in petitioners agreements. To begin with, there is


no loss, damage or liability on the part of the member that should be
First. In our jurisdiction, a commentator of our insurance laws

indemnified by petitioner as an HMO. Under the agreement, the

has pointed out that, even if a contract contains all the elements of an

133

member pays petitioner a predetermined consideration in exchange for

Third. According to the agreement, a member can take

the hospital, medical and professional services rendered by the

advantage of the bulk of the benefits anytime, e.g. laboratory services,

petitioners physician or affiliated physician to him. In case of availment

x-ray, routine annual physical examination and consultations, vaccine

by a member of the benefits under the agreement,petitioner does not

administration as well as family planning counseling, even in the

reimburse or indemnify the member as the latter does not pay any

absence of any peril, loss or damage on his or her part.

third party. Instead, it is the petitioner who pays the participating


physicians and other health care providers for the services rendered at

Fourth. In case of emergency, petitioner is obliged to reimburse

pre-agreed rates. The member does not make any such payment.

the member who receives care from a non-participating physician or


hospital. However, this is only a very minor part of the list of services

In other words, there is nothing in petitioner's agreements that

available. The assumption of the expense by petitioner is not confined

gives rise to a monetary liability on the part of the member to any third

to the happening of a contingency but includes incidents even in the

party-provider of medical services which might in turn necessitate

absence of illness or injury.

indemnification from petitioner. The terms indemnify or indemnity


presuppose that a liability or claim has already been incurred. There is

In Michigan Podiatric Medical Association v. National Foot Care

no indemnity precisely because the member merely avails of medical

Program, Inc.,[43] although the health care contracts called for the

services to be paid or already paid in advance at a pre-agreed price

defendant to partially reimburse a subscriber for treatment received

under the agreements.

from a non-designated doctor, this did not make defendant an insurer.


Citing Jordan, the Court determined that the primary activity of the
defendant (was) the provision of podiatric services to subscribers in

134

consideration of prepayment for such services. [44] Since indemnity of

However, assuming that petitioners commitment to provide

the insured was not the focal point of the agreement but the extension

medical services to its members can be construed as an acceptance of

of medical services to the member at an affordable cost, it did not

the risk that it will shell out more than the prepaid fees, it still will not

partake of the nature of a contract of insurance.

qualify as an insurance contract because petitioners objective is to


provide medical services at reduced cost, not to distribute risk like an
insurer.

Fifth. Although risk is a primary element of an insurance


contract, it is not necessarily true that risk alone is sufficient to
establish it. Almost anyone who undertakes a contractual obligation

In sum, an examination of petitioners agreements with its

always bears a certain degree of financial risk. Consequently, there is a

members leads us to conclude that it is not an insurance contract

need to distinguish prepaid service contracts (like those of petitioner)

within the context of our Insurance Code.

from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when


THERE

it offers to provide health services: the risk that it might fail to earn a

WAS

NO

LEGISLATIVE INTENT

reasonable return on its investment.But it is not the risk of the type

TO IMPOSE DST ON
peculiar only to insurance companies. Insurance risk, also known as

HEALTH

actuarial risk, is the risk that the cost of insurance claims might be

AGREEMENTS

higher than the premiums paid. The amount of premium is calculated

HMOS

on the basis of assumptions made relative to the insured. [45]

135

CARE
OF

xxx xxx xxx


Furthermore, militating in convincing fashion against the imposition of
DST on petitioners health care agreements under Section 185 of the

Third xxx (c) on all policies of insurance or bond


or obligation of the nature of indemnity for loss,
damage, or liability made or renewed by any
person, association, company, or corporation
transacting the business of accident, fidelity,
employers liability, plate glass, steam boiler,
burglar, elevator, automatic sprinkle, or other
branch of insurance (except life, marine, inland,
and fire insurance) xxxx (Emphasis supplied)

NIRC of 1997 is the provisions legislative history. The text of Section


185 came into U.S. law as early as 1904 when HMOs and health care
agreements were not even in existence in this jurisdiction. It was
imposed under Section 116, Article XI of Act No. 1189 (otherwise
known as the Internal Revenue Law of 1904) [46] enacted on July 2, 1904
and became effective on August 1, 1904. Except for the rate of tax,
Section 185 of the NIRC of 1997 is a verbatim reproduction of the

On February 27, 1914, Act No. 2339 (the Internal Revenue Law

pertinent portion of Section 116, to wit:

of 1914) was enacted revising and consolidating the laws relating to

ARTICLE XI

internal revenue. The aforecited pertinent portion of Section 116,

Stamp Taxes on Specified Objects

Article XI of Act No. 1189 was completely reproduced as Section 30 (l),


Article III of Act No. 2339. The very detailed and exclusive enumeration

Section 116. There shall be levied, collected,


and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness,
and other documents, instruments, matters, and things
mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which
such instrument, matters, or things or any of them
shall be written or printed by any person or persons
who shall make, sign, or issue the same, on and after
January first, nineteen hundred and five, the several
taxes following:

of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was
again reproduced as Section 1604 (l), Article IV of Act No. 2657
(Administrative Code). Upon its amendment on March 10, 1917, the

136

pertinent DST provision became Section 1449 (l) of Act No. 2711,

On December 23, 1993, under RA 7660, Section 185 was amended but,

otherwise known as the Administrative Code of 1917.

again, only with respect to the rate of tax.

Section

1449

(1)

eventually

became

Sec.

222

of

Notwithstanding the comprehensive amendment of the NIRC of 1977

Commonwealth Act No. 466 (the NIRC of 1939), which codified all the

by RA 8424 (or the NIRC of 1997), the subject legal provision was

internal revenue laws of the Philippines. In an amendment introduced

retained as the present Section 185. In 2004, amendments to the DST

by RA 40 on October 1, 1946, the DST rate was increased but the

provisions

provision remained substantially the same.

untouched.

were introduced by RA 9243[48] but Section 185 was

On the other hand, the concept of an HMO was introduced in


the Philippines with the formation of Bancom Health Care Corporation

Thereafter, on June 3, 1977, the same provision with the same DST

in 1974. The same pioneer HMO was later reorganized and renamed

rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under

Integrated Health Care Services, Inc. (or Intercare). However, there are

PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984

those who claim that Health Maintenance, Inc. is the HMO industry

respectively, the DST rate was again increased.

pioneer, having set foot in the Philippines as early as 1965 and having
been formally incorporated in 1991. Afterwards, HMOs proliferated
quickly and currently, there are 36 registered HMOs with a total

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section

enrollment of more than 2 million.[49]

234 of the NIRC of 1977 was renumbered as Section 198. And under
Section 23 of EO[47] 273 dated July 25, 1987, it was again renumbered
We can clearly see from these two histories (of the DST on the

and became Section 185.

one hand and HMOs on the other) that when the law imposing the DST
was first passed, HMOs were yet unknown in the Philippines. However,

137

when the various amendments to the DST law were enacted, they were

Taking into account that health care agreements are clearly not

already in existence in the Philippines and the term had in fact already

within the ambit of Section 185 of the NIRC and there was never any

been defined by RA 7875. If it had been the intent of the legislature to

legislative intent to impose the same on HMOs like petitioner, the same

impose DST on health care agreements, it could have done so in clear

should not be arbitrarily and unjustly included in its coverage.

and categorical terms. It had many opportunities to do so. But it did


not. The fact that the NIRC contained no specific provision on the DST

It is a matter of common knowledge that there is a great social

liability of health care agreements of HMOs at a time they were already

need for adequate medical services at a cost which the average wage

known as such, belies any legislative intent to impose it on them. As a

earner can afford. HMOs arrange, organize and manage health care

matter of fact, petitioner was assessed its DST liability only on

treatment in the furtherance of the goal of providing a more efficient

January 27, 2000, after more than a decade in the business as

and inexpensive health care system made possible by quantity

an HMO.[50]

purchasing of services and economies of scale. They offer advantages


over the pay-for-service system (wherein individuals are charged a fee

Considering that Section 185 did not change since 1904

each time they receive medical services), including the ability to

(except for the rate of tax), it would be safe to say that health care

control costs. They protect their members from exposure to the high

agreements were never, at any time, recognized as insurance

cost of hospitalization and other medical expenses brought about by a

contracts or deemed engaged in the business of insurance within the

fluctuating economy. Accordingly, they play an important role in

context of the provision.

society as partners of the State in achieving its constitutional mandate


of providing its citizens with affordable health services.

A FINAL NOTE

138

Petitioner, Present:
VELASCO, JR., J., Chairperson,
- versus - LEONARDO-DE CASTRO,*

The rate of DST under Section 185 is equivalent to 12.5% of


the premium charged.[74] Its imposition will elevate the cost of health

PERALTA,

care services. This will in turn necessitate an increase in the

ABAD, and

membership fees, resulting in either placing health services beyond

MENDOZA, JJ.

the reach of the ordinary wage earner or driving the industry to the

NYK-FILJAPAN SHIPPING CORP.,

ground. At the end of the day, neither side wins, considering the

LEP PROFIT INTERNATIONAL,

indispensability of the services offered by HMOs.

INC. (ORD), LEP INTERNATIONAL


PHILIPPINES, INC., DMT CORP.,

WHEREFORE,

the

motion

for

reconsideration

ADVATECH INDUSTRIES, INC.,

is GRANTED. The August 16, 2004 decision of the Court of Appeals in

MARINA PORT SERVICES, INC.,

CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and
1997

deficiency

DST

assessment

against

petitioner

SERBROS CARRIER CORPORATION,

is

and SEABOARD-EASTERN

hereby CANCELLED and SET ASIDE. Respondent is ordered to desist

INSURANCE CO., INC.,

from collecting the said tax.

Respondents.

No costs.
SO ORDERED.

x ------------------------------------------------- x

NEW WORLD INTERNATIONAL G.R. No. 174241


DEVELOPMENT (PHILS.), INC.,
NEW WORLD INTERNATIONAL G.R. No. 171468

Petitioner,

DEVELOPMENT (PHILS.), INC.,

139

- versus -

DMT

SEABOARD-EASTERN Promulgated:

shipped

the

generator

sets

by

truck

from Wisconsin, United States, to LEP Profit International, Inc. (LEP

INSURANCE CO., INC.,

Profit) in Chicago, Illinois. From there, the shipment went by train

Respondent. August 24, 2011

to Oakland, California, where it was loaded on S/S California Luna V59,


owned and operated by NYK Fil-Japan Shipping Corporation (NYK) for

x --------------------------------------------------------------------------------------- x

delivery to petitioner New World in Manila. NYK issued a bill of lading,


declaring that it received the goods in good condition.

DECISION

ABAD, J.:

NYK unloaded the shipment in Hong Kong and transshipped it to S/S

These consolidated petitions involve a cargo owners right to recover

ACX Ruby V/72 that it also owned and operated. On its journey

damages from the loss of insured goods under the Carriage of Goods

to Manila, however, ACX Ruby encountered typhoon Kadiang whose

by Sea Act and the Insurance Code.

captain filed a sea protest on arrival at the Manila South Harbor on


October 5, 1993 respecting the loss and damage that the goods on
board his vessel suffered.

The Facts and the Case


Petitioner New World International Development (Phils.), Inc. (New

Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or

World) bought from DMT Corporation (DMT) through its agent,

cargo-handling

Advatech Industries, Inc. (Advatech) three emergency generator sets

operator,

received

the

shipment

on

October

7,

1993. Upon inspection of the three container vans separately carrying

worth US$721,500.00.

the generator sets, two vans bore signs of external damage while the

140

third van appeared unscathed. The shipment remained at Pier 3s

petitioner New World to submit to it an itemized list of the damaged

Container Yard under Marinas care pending clearance from the Bureau

units, parts, and accessories, with corresponding values, for the

of Customs. Eventually, on October 20, 1993 customs authorities

processing of the claim.But petitioner New World did not submit what

allowed petitioners customs broker, Serbros Carrier Corporation

was required of it, insisting that the insurance policy did not include

(Serbros), to withdraw the shipment and deliver the same to petitioner

the submission of such a list in connection with an insurance

New Worlds job site in Makati City.

claim. Reacting to this, Seaboard refused to process the claim.

An examination of the three generator sets in the presence of

On October 11, 1994 petitioner New World filed an action for

petitioner New Worlds representatives, Federal Builders (the project

specific performance and damages against all the respondents before

contractor)

the Regional Trial Court (RTC) ofMakati City, Branch 62, in Civil Case 94-

and

surveyors

of

petitioner New

Worlds

insurer,

SeaboardEastern Insurance Company (Seaboard), revealed that all

2770.

three sets suffered extensive damage and could no longer be


repaired. For these reasons, New World demanded recompense for its
LEP

On August 16, 2001 the RTC rendered a decision absolving the various

International Philippines, Inc. (LEP), Marina, and Serbros. While LEP and

respondents from liability with the exception of NYK. The RTC found

NYK acknowledged receipt of the demand, both denied liability for the

that the generator sets were damaged during transit while in the care

loss.

of NYKs vessel, ACX Ruby. The latter failed, according to the RTC, to

loss

from

respondents

NYK,

DMT,

Advatech,

LEP

Profit,

exercise the degree of diligence required of it in the face of a foretold


raging typhoon in its path.
Since Seaboard covered the goods with a marine insurance policy,
petitioner New World sent it a formal claim dated November 16,
1993. Replying

on

February

14,

1994,

Seaboard

required

141

The RTC ruled, however, that petitioner New World filed its claim

that the one-year prescriptive period under the COGSA did not affect

against the vessel owner NYK beyond the one year provided under the

New Worlds right under the insurance policy since it was the Insurance

Carriage of Goods by Sea Act (COGSA). New World filed its complaint

Code that governed the relation between the insurer and the insured.

on October 11, 1994 when the deadline for filing the action (on or
before October 7, 1994) had already lapsed. The RTC held that the oneyear period should be counted from the date the goods were delivered

Although petitioner New World promptly filed a petition for review of

to the arrastre operator and not from the date they were delivered to

the CA decision before the Court in G.R. 171468, Seaboard chose to file

petitioners job site.[1]

a motion for reconsideration of that decision. On August 17, 2006 the


CA rendered an amended decision, reversing itself as regards the claim
against Seaboard. The CA held that the submission of the itemized

As regards petitioner New Worlds claim against Seaboard, its insurer,

listing was a reasonable requirement that Seaboard asked of New

the RTC held that the latter cannot be faulted for denying the claim

World. Further, the CA held that the one-year prescriptive period for

against it since New World refused to submit the itemized list that

maritime claims applied to Seaboard, as insurer and subrogee of New

Seaboard needed for assessing the damage to the shipment. Likewise,

Worlds right against the vessel owner. New Worlds failure to comply

the belated filing of the complaint prejudiced Seaboards right to pursue

promptly with what was required of it prejudiced such right.

a claim against NYK in the event of subrogation.

Instead of filing a motion for reconsideration, petitioner instituted a


On appeal, the Court of Appeals (CA) rendered judgment on January

second petition for review before the Court in G.R. 174241, assailing

31, 2006,[2] affirming the RTCs rulings except with respect to Seaboards

the CAs amended decision.

liability. The CA held that petitioner New World can still recoup its loss
from Seaboards marine insurance policy, considering a) that the
The Issues Presented

submission of the itemized listing is an unreasonable imposition and b)

142

The issues presented in this case are as follows:

In G.R. 171468 --

a) In G.R. 171468, whether or not the CA erred in affirming the

Petitioner New World asserts that the roles of respondents

RTCs release from liability of respondents DMT, Advatech, LEP, LEP

DMT, Advatech, LEP, LEP Profit, Marina and Serbros in handling and

Profit, Marina, and Serbros who were at one time or another involved in

transporting its shipment fromWisconsin to Manila collectively resulted

handling the shipment; and

in the damage to the same, rendering such respondents solidarily


liable with NYK, the vessel owner.

b) In G.R. 174241, 1) whether or not the CA erred in ruling that


Seaboards request from petitioner New World for an itemized list is a

But the issue regarding which of the parties to a dispute

reasonable imposition and did not violate the insurance contract

incurred negligence is factual and is not a proper subject of a petition

between them; and 2) whether or not the CA erred in failing to rule

for review on certiorari. And petitioner New World has been unable to

that the one-year COGSA prescriptive period for marine claims does

make out an exception to this rule.[3] Consequently, the Court will not

not apply to petitioner New Worlds prosecution of its claim against

disturb the finding of the RTC, affirmed by the CA, that the generator

Seaboard, its insurer.

sets were totally damaged during the typhoon which beset the vessels
voyage from Hong Kong to Manila and that it was her negligence in
continuing with that journey despite the adverse condition which
caused petitioner New Worlds loss.
The Courts Rulings

143

That the loss was occasioned by a typhoon, an exempting

conceivable loss or damage except when otherwise excluded or when

cause under Article 1734 of the Civil Code, does not automatically

the loss or damage was due to fraud or intentional misconduct

relieve the common carrier of liability. The latter had the burden of

committed by the insured. The policy covered all losses during the

proving that the typhoon was the proximate and only cause of loss and

voyage whether or not arising from a marine peril.[5]

that it exercised due diligence to prevent or minimize such loss before,


during, and after the disastrous typhoon.[4] As found by the RTC and the
Here, the policy enumerated certain exceptions like unsuitable

CA, NYK failed to discharge this burden.

packaging, inherent vice, delay in voyage, or vessels unseaworthiness,


among

others.[6] But Seaboard

had been unable to

show

that

petitioner New Worlds loss or damage fell within some or one of the
enumerated exceptions.

In G.R. 174241 --

What is more, Seaboard had been unable to explain how it

One. The Court does not regard as substantial the question of

could not verify the damage that New Worlds goods suffered going by

reasonableness of Seaboards additional requirement of an itemized

the documents that it already submitted, namely, (1) copy of the

listing of the damage that the generator sets suffered. The record

Suppliers Invoice KL2504; (2) copy of the Packing List; (3) copy of the

shows that petitioner New World complied with the documentary

Bill of Lading 01130E93004458; (4) the Delivery of Waybill Receipts

requirements evidencing damage to its generator sets.

1135, 1222, and 1224; (5) original copy of Marine Insurance Policy MAHO-000266; (6) copies of Damage Report from Supplier and Insurance
Adjusters; (7) Consumption Report from the Customs Examiner; and (8)

The marine open policy that Seaboard issued to New World was
an

all-risk policy. Such

a policy

insured

against

all causes

Copies

of

of

Received

Formal

Claim

from

the

following:

a)

LEP

International Philippines, Inc.; b) Marina Port Services, Inc.; and c)

144

Serbros Carrier Corporation.[7] Notably, Seaboards own marine surveyor


attended the inspection of the generator sets.

But whose fault was it that the suit against NYK, the common
carrier, was not brought to court on time? The last day for filing such a
suit fell on October 7, 1994. The record shows that petitioner New

Seaboard cannot pretend that the above documents are

World filed its formal claim for its loss with Seaboard, its insurer, a

inadequate since they were precisely the documents listed in its

remedy it had the right to take, as early as November 16, 1993 or

insurance policy.[8] Being a contract of adhesion, an insurance policy is

about 11 months before the suit against NYK would have fallen due.

construed strongly against the insurer who prepared it. The Court
cannot read a requirement in the policy that was not there.

In the ordinary course, if Seaboard had processed that claim


and paid the same, Seaboard would have been subrogated to

Further, it appears from the exchanges of communications

petitioner New Worlds right to recover from NYK. And it could have

between Seaboard and Advatech that submission of the requested

then filed the suit as a subrogee. But, as discussed above, Seaboard

itemized listing was incumbent on the latter as the seller DMTs local
agent. Petitioner New

World should

not

be

made

to

suffer

made an unreasonable demand on February 14, 1994 for an itemized

for

list of the damaged units, parts, and accessories, with corresponding

Advatechs shortcomings.

values when it appeared settled that New Worlds loss was total and
when the insurance policy did not require the production of such a list
in the event of a claim.

Two. Regarding prescription of claims, Section 3(6) of the


COGSA provides that the carrier and the ship shall be discharged from
all liability in case of loss or damage unless the suit is brought within

Besides, when petitioner New World declined to comply with

one year after delivery of the goods or the date when the goods should

the demand for the list, Seaboard against whom a formal claim was

have been delivered.

145

pending should not have remained obstinate in refusing to process that

Notably, Seaboard already incurred delay when it failed to

claim. It should have examined the same, found it unsubstantiated by

settle petitioner New Worlds claim as Section 243 required. Under

documents if that were the case, and formally rejected it. That would

Section 244, a prima facie evidence of unreasonable delay in payment

have at least given petitioner New World a clear signal that it needed

of the claim is created by the failure of the insurer to pay the claim

to promptly file its suit directly against NYK and the others. Ultimately,

within the time fixed in Section 243.

the fault for the delayed court suit could be brought to Seaboards
doorstep.
Consequently, Seaboard should pay interest on the proceeds of
the policy for the duration of the delay until the claim is fully satisfied
Section 241 of the Insurance Code provides that no insurance

at the rate of twice the ceiling prescribed by the Monetary Board. The

company doing business in the Philippines shall refuse without just

term ceiling prescribed by the Monetary Board means the legal rate of

cause to pay or settle claims arising under coverages provided by its

interest of 12% per annum provided in Central Bank Circular 416,

policies. And, under Section 243, the insurer has 30 days after proof of

pursuant to Presidential Decree 116.[9] Section 244 of the Insurance

loss is received and ascertainment of the loss or damage within which

Code also provides for an award of attorneys fees and other expenses

to pay the claim. If such ascertainment is not had within 60 days from

incurred by the assured due to the unreasonable withholding of

receipt of evidence of loss, the insurer has 90 days to pay or settle the

payment of his claim.

claim. And, in case the insurer refuses or fails to pay within the
prescribed time, the insured shall be entitled to interest on the
In Prudential

proceeds of the policy for the duration of delay at the rate of twice the

Guarantee

and

Assurance,

Inc.

v.

Trans-

Asia Shipping Lines, Inc.,[10] the Court regarded as proper an award of

ceiling prescribed by the Monetary Board.

10% of the insurance proceeds as attorneys fees. Such amount is fair


considering the length of time that has passed in prosecuting the
claim.[11] Pursuant to the Courts ruling in Eastern Shipping Lines, Inc. v.

146

Court of Appeals,[12] a 12% interest per annum from the finality of

Insurance Company, Inc. to pay petitioner New World International

judgment until full satisfaction of the claim should likewise be imposed,

Development (Phils.), Inc. US$721,500.00 under Policy MA-HO-000266,

the interim period equivalent to a forbearance of credit.

with 24% interest per annum for the duration of delay in accordance
with Sections 243 and 244 of the Insurance Code and attorneys fees
equivalent to 10% of the insurance proceeds. Seaboard shall also pay,

Petitioner New World is entitled to the value stated in the

from finality of judgment, a 12% interest per annum on the total

policy which is commensurate to the value of the three emergency

amount due to petitioner until its full satisfaction.

generator sets or US$721,500.00 with double interest plus attorneys


fees as discussed above.
SO ORDERED.

WHEREFORE, the Court DENIES the petition in G.R. 171468


and AFFIRMS the Court of Appeals decision of January 31, 2006
insofar as petitioner New World International Development (Phils.), Inc.

MA. LOURDES S. FLORENDO, G.R. No. 186983

is not allowed to recover against respondents DMT Corporation,

Petitioner,
Present:
VELASCO, JR., J., Chairperson,
- versus - PERALTA,

Advatech Industries, Inc., LEP International Philippines, Inc., LEP Profit


International, Inc., Marina Port Services, Inc. and Serbros Carrier
Corporation.

ABAD,
MENDOZA, and
PERLASBERNABE, JJ.

With respect to G.R. 174241, the Court GRANTS the petition


and REVERSES and SETS ASIDE the Court of Appeals Amended

PHILAM PLANS, INC.,

Decision of August 17, 2006. The Court DIRECTS Seaboard-Eastern

PERLA ABCEDE and Promulgated:

147

MA. CELESTE ABCEDE,

needed in the application.[2] Respondent Ma. Celeste Abcede, Perlas

Respondents. February 22, 2012

daughter, signed the application as sales counselor. [3]

x --------------------------------------------------------------------------------------- x
Aside from pension benefits, the comprehensive pension plan
also provided life insurance coverage to Florendo. [4] This was covered
DECISION

by a Group Master Policy that Philippine American Life Insurance


Company (Philam Life) issued to Philam Plans. [5] Under the master
policy, Philam Life was to automatically provide life insurance

ABAD, J.:

coverage, including accidental death, to all who signed up for Philam


Plans comprehensive pension plan. [6] If the plan holder died before the
maturity of the plan, his beneficiary was to instead receive the
proceeds

This case is about an insureds alleged concealment in his

of

the

life

insurance,

equivalent

to

the

pre-need

pension plan application of his true state of health and its effect on the

price. Further, the life insurance was to take care of any unpaid

life insurance portion of that plan in case of death.

premium until the pension plan matured, entitling the beneficiary to


the maturity value of the pension plan.[7]

The Facts and the Case


On October 30, 1997 Philam Plans issued Pension Plan
Agreement PP43005584[8] to Manuel, with petitioner Ma. Lourdes S.
Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly

On October 23, 1997 Manuel Florendo filed an application for

premiums.[9]

comprehensive pension plan with respondent Philam Plans, Inc.


(Philam Plans) after some convincing by respondent Perla Abcede. The

Eleven months later or on September 15, 1998, Manuel died of

plan had a pre-need price of P997,050.00, payable in 10 years, and

blood poisoning. Subsequently, Lourdes filed a claim with Philam Plans

had a maturity value of P2,890,000.00 after 20 years.[1] Manuel signed

for the payment of the benefits under her husbands plan. [10] Because

the application and left to Perla the task of supplying the information

Manuel died before his pension plan matured and his wife was to get

148

only the benefits of his life insurance, Philam Plans forwarded her claim

required Manuel to disclose to Philam Plans conditions affecting the

to Philam Life.[11]

risk of which he was aware or material facts that he knew or ought to


know.[18]

On
[12]

declining

maintenance

May

3,

1999

Philam

her claim. Philam


medicine

for

Life

his

Plans

wrote Lourdes a

found that

heart

and

letter,

Manuel was

had

an

on

Issues Presented

implanted

pacemaker. Further, he suffered from diabetes mellitus and was taking


insulin. Lourdes renewed
plan

[13]

her

demand

but Philam Plans rejected it,

[14]

for

payment

under

the

The issues presented in this case are:

prompting her to file the present

action against the pension plan company before the Regional Trial
1. Whether or not the CA erred in finding Manuel guilty of
concealing his illness when he kept blank and did not answer questions
in his pension plan application regarding the ailments he suffered from;

Court (RTC) of Quezon City.[15]

On March 30, 2006 the RTC rendered judgment, [16] ordering

2. Whether or not the CA erred in holding that Manuel was


bound by the failure of respondents Perla and Ma. Celeste to declare
the condition of Manuels health in the pension plan application; and

Philam Plans, Perla and Ma. Celeste, solidarily, to pay Lourdes all the
benefits from her husbands pension plan, namely: P997,050.00, the
proceeds of his term insurance, and P2,890,000.00 lump sum pension
benefit upon maturity of his plan; P100,000.00 as moral damages; and

3. Whether or not the CA erred in finding that Philam Plans


approval of Manuels pension plan application and acceptance of his
premium payments precluded it from denying Lourdes claim.

to pay the costs of the suit. The RTC ruled that Manuel was not guilty of
concealing the state of his health from his pension plan application.

Rulings of the Court

On December 18, 2007 the Court of Appeals (CA) reversed the


RTC

decision,[17] holding

that

insurance

policies

are

traditionally

contracts uberrimae fidae or contracts of utmost good faith. As such, it

149

One. Lourdes points out that, seeing the unfilled spaces in Manuels
xxxx

pension plan application relating to his medical history, Philam Plans


should have returned it to him for completion. Since Philam Plans
chose to approve the application just as it was, it cannot cry

(c) I have never been treated for heart condition,


high blood pressure, cancer, diabetes, lung,
kidney or stomach disorder or any other
physical impairment in the last five years.

concealment on Manuels part. Further, Lourdes adds that Philam Plans


never

queried

Manuel

directly

regarding

the

state

of

his

health. Consequently, it could not blame him for not mentioning it. [19]
(d) I am in good health and physical condition.
But Lourdes is shifting to Philam Plans the burden of putting on the
pension plan application the true state of Manuels health. She forgets

If your answer to any of the statements above


reveal otherwise, please give details in the space
provided for:

that since Philam Plans waived medical examination for Manuel, it had
to rely largely on his stating the truth regarding his health in his
application. For, after all, he knew more than anyone that he had been

Date
of
____________________________

under treatment for heart condition and diabetes for more than five
years preceding his submission of that application. But he kept those

Name
of
Hospital
____________________________

crucial facts from Philam Plans.

Name
of
Attending
____________________________
Besides, when Manuel signed the pension plan application, he adopted

confinement :

or

Clinic :

Physician :

Findings : ____________________________

as his own the written representations and declarations embodied in


Others:
(Please
____________________________

it. It is clear from these representations that he concealed his chronic


heart ailment and diabetes from Philam Plans. The pertinent portion of

specify) :

x x x x.[20] (Emphasis supplied)

his representations and declarations read as follows:


I hereby represent and declare to the best of my
knowledge that:

Since Manuel signed the application without filling in the


details regarding his continuing treatments for heart condition and

150

diabetes, the assumption is that he has never been treated for the said

implanted into the body and connected to the wall of the heart,

illnesses in the last five years preceding his application. This is implicit

designed to provide regular, mild, electric shock that stimulates the

from the phrase If your answer to any of the statements above

contraction of the heart muscles and restores normalcy to the

(specifically, the statement: I have never been treated for heart

heartbeat.[25] That Manuel still had his pacemaker when he applied for

condition or diabetes) reveal otherwise, please give details in the

a pension plan in October 1997 is an admission that he remained

space provided for. But this is untrue since he had been on Coumadin,

under treatment for irregular heartbeat within five years preceding that

a treatment for venous thrombosis, [21] and insulin, a drug used in the

application.

treatment of diabetes mellitus, at that time.[22]

Besides, as already stated, Manuel had been taking medicine


Lourdes insists that Manuel had concealed nothing since Perla,

for his heart condition and diabetes when he submitted his pension

the soliciting agent, knew that Manuel had a pacemaker implanted on

plan application. These clearly fell within the five-year period. More,

his chest in the 70s or about 20 years before he signed up for the

even if Perlas knowledge of Manuels pacemaker may be applied to

pension plan.[23] But by its tenor, the responsibility for preparing the

Philam Plans under the theory of imputed knowledge, [26] it is not

application belonged to Manuel. Nothing in it implies that someone

claimed that Perla was aware of his two other afflictions that needed

else may provide the information that Philam Plans needed. Manuel

medical treatments. Pursuant to Section 27 [27] of the Insurance Code,

cannot sign the application and disown the responsibility for having it

Manuels concealment entitles Philam Plans to rescind its contract of

filled up. If he furnished Perla the needed information and delegated to

insurance with him.

her the filling up of the application, then she acted on his instruction,

Two. Lourdes contends that the mere fact that Manuel signed the

not on Philam Plans instruction.

application in blank and let Perla fill in the required details did not
make her his agent and bind him to her concealment of his true state
of health. Since there is no evidence of collusion between them, Perlas

Lourdes next points out that it made no difference if Manuel

fault must be considered solely her own and cannot prejudice Manuel.

failed to reveal the fact that he had a pacemaker implant in the early

[28]

70s since this did not fall within the five-year timeframe that the
disclosure contemplated.[24] But a pacemaker is an electronic device

151

But Manuel forgot that in signing the pension plan application, he

granting the same, Philam Plans and Philam Life were acting on the

certified that he wrote all the information stated in it or had someone

truth of the representations contained in that application. Thus:

do it under his direction. Thus:


DECLARATIONS AND REPRESENTATIONS
APPLICATION FOR PENSION PLAN
(Comprehensive)

xxxx

I hereby apply to purchase from PHILAM PLANS,


INC. a Pension Plan Program described herein in
accordance with the General Provisions set forth in this
application and hereby certify that the date and
other information stated herein are written by
me or under my direction. x x x.[29] (Emphasis
supplied)

I agree that the insurance coverage of this


application is based on the truth of the foregoing
representations and is subject to the provisions of
the Group Life Insurance Policy issued by THE
PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM
PLANS, INC.[30] (Emphasis supplied)

As the Court said in New Life Enterprises v. Court of Appeals:[31]

Assuming that it was Perla who filled up the application form,


Manuel is still bound by what it contains since he certified that he
authorized her action. Philam Plans had every right to act on the faith

It may be true that x x x insured persons may accept


policies without reading them, and that this is not
negligence per se. But, this is not without any
exception. It is and was incumbent upon petitioner Sy
to read the insurance contracts, and this can be
reasonably expected of him considering that he has
been a businessman since 1965 and the contract
concerns indemnity in case of loss in his moneymaking trade of which important consideration he
could not have been unaware as it was precisely the
reason for his procuring the same.[32]

of that certification.

Lourdes could not seek comfort from her claim that Perla had
assured Manuel that the state of his health would not hinder the
approval of his application and that what is written on his application
made no difference to the insurance company. But, indubitably, Manuel
was made aware when he signed the pension plan application that, in

152

reasons any claim for insurance under this Agreement,


except for the reason that installment has not been
paid (lapsed), or that you are not insurable at the time
you bought this pension program by reason of age. If
this Agreement lapses but is reinstated afterwards, the
one (1) year contestability period shall start again on
the date of approval of your request for reinstatement.

The same may be said of Manuel, a civil engineer and manager


of a construction company.[33] He could be expected to know that one
must read every document, especially if it creates rights and

[35]

obligations affecting him, before signing the same. Manuel is not


unschooled that the Court must come to his succor. It could reasonably
be expected that he would not trifle with something that would provide

The above incontestability clause precludes the insurer from

additional financial security to him and to his wife in his twilight years.

disowning liability under the policy it issued on the ground of


concealment or misrepresentation regarding the health of the insured
after a year of its issuance.

Three. In a final attempt to defend her claim for benefits under


Manuels

pension

insufficiency

in

plan, Lourdes points

the

information

out

provided

that
by

any

his

defect

pension

or

plan

application should be deemed waived after the same has been

Since Manuel died on the eleventh month following the

approved, the policy has been issued, and the premiums have been

issuance of his plan,[36] the one year incontestability period has not yet

collected. [34]

set

in. Consequently,

Philam

Plans

was

not

barred

from

questioning Lourdes entitlement to the benefits of her husbands


pension plan.
The Court cannot agree. The comprehensive pension plan that Philam
Plans issued contains a one-year incontestability period. It states:
WHEREFORE, the Court AFFIRMS in its entirety the decision of the
Court of Appeals in CA-G.R. CV 87085 dated December 18, 2007.
VIII. INCONTESTABILITY
SO ORDERED.
UNITED MERCHANTS

After this Agreement has remained in force for


one (1) year, we can no longer contest for health

153

G.R. No. 198588

CORPORATION,
Petitioner,

Present:
This Petition for Review on Certiorari [1] seeks to reverse the Court of
Appeals Decision[2] dated 16 June 2011 and its Resolution [3] dated 8
September 2011 in CA-G.R. CV No. 85777. The Court of Appeals
CARPIO, J., Chairperson,
reversed the Decision[4] of the Regional Trial Court (RTC) of Manila,

BRION,

Branch 3, and ruled that the claim on the Insurance Policy is void.

PEREZ,
- versus -

The Facts

SERENO, and
REYES, JJ.

The facts, as culled from the records, are as follows:

Promulgated:
Petitioner United Merchants Corporation (UMC) is engaged in the
COUNTRY BANKERS INSURANCE CORPORATION,

July 11, 2012

business of buying, selling, and manufacturing Christmas lights. UMC


leased a warehouse at 19-B Dagot Street, San Jose Subdivision, Barrio

Respondent.

Manresa, Quezon City, where UMC assembled and stored its products.

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -----x

On 6 September 1995, UMCs General Manager Alfredo Tan insured


UMCs stocks in trade of Christmas lights against fire with defendant

DECISION

Country Bankers Insurance Corporation (CBIC) for P15,000,000.00. The


Fire Insurance Policy No. F-HO/95-576 (Insurance Policy) and Fire
Invoice No. 12959A, valid until 6 September 1996, states:

CARPIO, J.:

AMOUNT OF INSURANCE: FIFTEEN


The Case
MILLION PESOS

154

PHILIPPINE

conduct a parallel investigation. On 6 July 1996, UMC, through CRM,

CURRENCY

submitted to CBIC its Sworn Statement of Formal Claim, with proofs of


its loss.

xxx
On 20 November 1996, UMC demanded for at least fifty percent (50%)
payment of its claim from CBIC. On 25 February 1997, UMC received

PROPERTY INSURED: On stocks in trade only, consisting


of Christmas Lights, the properties of the Assured or
held by them in trust, on commissions, or on joint
account with others and/or for which they are
responsible in the event of loss and/or damage during
the currency of this policy, whilst contained in the
building of one lofty storey in height, constructed of
concrete and/or hollow blocks with portion of
galvanized iron sheets, under galvanized iron rood,
occupied as Christmas lights storage.[5]

CBICs letter, dated 10 January 1997, rejecting UMCs claim due to


breach of Condition No. 15 of the Insurance Policy. Condition No. 15
states:

If the claim be in any respect fraudulent, or if any false


declaration be made or used in support thereof, or if
any fraudulent means or devices are used by the
Insured or anyone acting in his behalf to obtain any
benefit under this Policy; or if the loss or damage be
occasioned by the willful act, or with the connivance of
the Insured, all the benefits under this Policy shall be
forfeited.[6]

On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and


Fire Invoice No. 16583A to form part of the Insurance Policy.
Endorsement F/96-154 provides that UMCs stocks in trade were
insured against additional perils, to wit: typhoon, flood, ext. cover, and
full earthquake. The sum insured was also increased to P50,000,000.00
effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC issued
Endorsement F/96-157 where the name of the assured was changed

On 19 February 1998, UMC filed a Complaint [7] against CBIC with the

from Alfredo Tan to UMC.

RTC of Manila. UMC anchored its insurance claim on the Insurance


Policy, the Sworn Statement of Formal Claim earlier submitted, and the
Certification dated 24 July 1996 made by Deputy Fire Chief/Senior

On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC

Superintendent Bonifacio J. Garcia of the Bureau of Fire Protection. The

designated CRM Adjustment Corporation (CRM) to investigate and

Certification dated 24 July 1996 provides that:

evaluate UMCs loss by reason of the fire. CBICs reinsurer, Central


Surety, likewise requested the National Bureau of Investigation (NBI) to

155

This is to certify that according to available records of


this office, on or about 6:10 P.M. of July 3, 1996, a fire
broke out at United Merchants Corporation located at
19-B Dag[o]t Street, Brgy. Manresa, Quezon City
incurring an estimated damage of Fifty-Five Million
Pesos (P55,000,000.00) to the building and contents,
while the reported insurance coverage amounted to
Fifty Million Pesos (P50,000,000.00) with Country
Bankers Insurance Corporation.

false

declaration

because

the

invoices

were

genuine

and

the

Statement of Inventory was for internal revenue purposes only, not for
its insurance claim.
During trial, UMC presented five witnesses. The first witness was Josie
Ebora (Ebora), UMCs disbursing officer. Ebora testified that UMCs
stocks in trade, at the time of the fire, consisted of: (1) raw materials
for its Christmas lights; (2) Christmas lights already assembled; and (3)

The Bureau further certifies that no evidence was


gathered to prove that the establishment was willfully,
feloniously and intentionally set on fire.

Christmas lights purchased from local suppliers. These stocks in trade


were delivered from August 1995 to May 1996. She stated that Straight
Cargo Commercial Forwarders delivered the imported materials to the
warehouse, evidenced by delivery receipts. However, for the year

That the investigation of the fire incident is already


closed being ACCIDENTAL in nature.[8]

1996, UMC had no importations and only bought from its local
suppliers.

In

its

Answer

with

Compulsory

Counterclaim [9] dated

Ebora

identified

the

suppliers

as

Fiber

Technology

March

Corporation from which UMC bought stocks worth P1,800,000.00 on 20

1998, CBIC admitted the issuance of the Insurance Policy to UMC but

May 1996; Fuze Industries Manufacturer Philippines from which UMC

raised the following defenses: (1) that the Complaint states no cause of

bought stocks worth P19,500,000.00 from 20 January 1996 to 23

action; (2) that UMCs claim has already prescribed; and (3) that UMCs

February 1996; and Tomco Commercial Press from which UMC bought

fire claim is tainted with fraud. CBIC alleged that UMCs claim was

several Christmas boxes. Ebora testified that all these deliveries were

fraudulent because UMCs Statement of Inventory showed that it had

not yet paid. Ebora also presented UMCs Balance Sheet, Income

no stocks in trade as of 31 December 1995, and that UMCs suspicious

Statement and Statement of Cash Flow. Per her testimony, UMCs

purchases for the year 1996 did not even amount to P25,000,000.00.

purchases amounted to P608,986.00 in 1994; P827,670.00 in 1995;

UMCs GIS and Financial Reports further revealed that it had insufficient

and P20,000,000.00 in 1996. Ebora also claimed that UMC had sales

capital, which meant UMC could not afford the alleged P50,000,000.00

only from its fruits business but no sales from its Christmas lights for

worth of stocks in trade.

the year 1995.

In its Reply[10] dated 20 March 1998, UMC denied violation of Condition

The next witness, Annie Pabustan (Pabustan), testified that her

No. 15 of the Insurance Policy. UMC claimed that it did not make any

company provided about 25 workers to assemble and pack Christmas

156

lights for UMC from 28 March 1996 to 3 July 1996. The third witness,

arson

was

committed

based

from

their

interview

Metropolitan Bank and Trust Company (MBTC) Officer Cesar Martinez,

with barangay officials and the pictures showing that blackened

stated that UMC opened letters of credit with MBTC for the year 1995

surfaces were present at different parts of the warehouse. On cross-

only. The fourth witness presented was Ernesto Luna (Luna), the

examination, Lazaro admitted that they did not conduct a forensic

delivery checker of Straight Commercial Cargo Forwarders. Luna

investigation of the warehouse, nor did they file a case for arson.

affirmed the delivery of UMCs goods to its warehouse on 13 August


1995, 6 September 1995, 8 September 1995, 24 October 1995, 27
October 1995, 9 November 1995, and 19 December 1995. Lastly, CRMs

For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper

adjuster

of the documents of UCPB General Insurance, the insurer of Perfect

Dominador

Victorio

testified

that

he

inspected

UMCs

warehouse and prepared preliminary reports in this connection.

Investment Company, Inc., the warehouse owner. When asked to bring


documents related to the insurance of Perfect Investment Company,
Inc., Batallones brought the papers of Perpetual Investment, Inc.

On the other hand, CBIC presented the claims manager Edgar


Caguindagan (Caguindagan), a Securities and Exchange Commission
(SEC) representative, Atty.

Ernesto Cabrera (Cabrera), and NBI

The Ruling of the Regional Trial Court

Investigator Arnold Lazaro (Lazaro). Caguindagan testified that he


inspected the burned warehouse on 5 July 1996, took pictures of it and
referred the claim to an independent adjuster. The SEC representatives

On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in

testimony was dispensed with, since the parties stipulated on the

favor of UMC, the dispositive portion of which reads:

existence of certain documents, to wit: (1) UMCs GIS for 1994-1997; (2)
UMCs Financial Report as of 31 December 1996; (3) SEC Certificate
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and ordering defendant to pay plaintiff:

that UMC did not file GIS or Financial Reports for certain years; and (4)
UMCs Statement of Inventory as of 31 December 1995 filed with the
BIR.

a) the sum of P43,930,230.00 as indemnity with


interest thereon at 6% per annum from November
2003 until fully paid;
Cabrera and Lazaro testified that they were hired by Central Surety to
b) the sum of P100,000.00 for exemplary damages;

investigate UMCs claim. On 19 November 1996, they concluded that

157

c) the sum of P100,000.00 for attorneys fees; and

fire while that of the latter was done 4 months later.


Certainly it would be a different situation as the site
was no longer the same after the clearing up operation
which is normal after a fire incident. The Christmas
lights and parts could have been swept away. Hence
the finding of the latter appears to be speculative to
benefit the reinsurer and which defendant wants to
adopt to avoid liability.

d) the costs of suit.

Defendants counterclaim is denied for lack of


merit.

SO ORDERED.[11]

The CRM Adjustment report found no arson and


confirmed
substantial
stocks
in
the
burned
warehouse (Exhs. QQQ) [underscoring supplied]. This is
bolstered by the BFP certification that there was no
proof of arson and the fire was accidental (Exhs. PPP).
The certification by a government agency like BFP is
presumed to be a regular performance of official duty.
Absent convincing evidence to the contrary, the
presumption of regularity in the performance of official
functions has to be upheld. (People vs. Lapira, 255
SCRA 85) The report of UCPB General Insurances
adjuster also found no arson so that the burned
warehouse owner PIC was indemnified.[12]

The RTC found no dispute as to UMCs fire insurance contract with CBIC.
Thus, the RTC ruled for UMCs entitlement to the insurance proceeds, as
follows:

Fraud is never presumed but must be proved by clear


and convincing evidence. (see Alonso v. Cebu Country
Club, 417 SCRA 115 [2003]) Defendant failed to
establish by clear and convincing evidence that the
documents submitted to the SEC and BIR were true. It
is common business practice for corporations to have
2 sets of reports/statements for tax purposes. The
stipulated documents of plaintiff (Exhs. 2 8) may not
have been accurate.

Hence, CBIC filed an appeal with the Court of Appeals (CA).

The Ruling of the Court of Appeals


The conflicting findings of defendants adjuster, CRM
Adjustment [with stress] and that made by Atty.
Cabrera & Mr. Lazaro for Central Surety shall be
resolved in favor of the former. Definitely the formers
finding is more credible as it was made soon after the

On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The


dispositive portion of the Decision reads:

158

WHEREFORE, in view of the foregoing premises, the


instant appeal is GRANTED and the Decision of the
Regional Trial Court, of the National Judicial Capital
Region, Branch 3 of the City of Manila dated June 16,
2005 in Civil Case No. 98-87370 is REVERSED and SET
ASIDE. The plaintiff-appellees claim upon its insurance
policy is deemed avoided.

Second, We consider the reported purchases of the


plaintiff-appellee as shown in its financial report dated
December 31, 1996 vis--vis the testimony of Ms. Ebora
thus:

1994- P608,986.00
1995- P827,670.00

SO ORDERED.[13]

1996- P20,000,000.00 (more or less) which


were purchased for a period of one month.

The CA ruled that UMCs claim under the Insurance Policy is void. The
CA found that the fire was intentional in origin, considering the array of
evidence submitted by CBIC, particularly the pictures taken and the

Third, We shall also direct our attention to the alleged


true and complete purchases of the plaintiff-appellee
as well as the value of all stock-in-trade it had at the
time that the fire occurred. Thus:

reports of Cabrera and Lazaro, as opposed to UMCs failure to explain


the details of the alleged fire accident. In addition, it found that UMCs
claim was overvalued through fraudulent transactions. The CA ruled:

Exhibit
We have meticulously gone over the entirety of the
evidence submitted by the parties and have come up
with a conclusion that the claim of the plaintiffappellee was indeed overvalued by transactions which
were fraudulently concocted so that the full coverage
of the insurance policy will have to be fully awarded to
the plaintiff-appellee.

Source

Exhs. P-DD,

Fuze Industries

inclusive

Manufacturer Phils.

Amount (pesos)
19,550,400.00

Dates Covere
January 20, 1996
January 31, 1996

February 12, 1996

February 20, 1996

February 23, 1996


Exhs. EE-HH,

First, We turn to the backdrop of the plaintiff-appellees


case, thus, [o]n September 6, 1995 its stocks-in-trade
were insured for Fifteen Million Pesos and on May 7,
1996 the same was increased to 50 Million Pesos. Two
months thereafter, a fire gutted the plaintiff-appellees
warehouse.

inclusive

Tomco
Press

Commercial1,712,000.00

December 19, 19
January 24, 1996

February 21, 1996

November 24, 19
Exhs. II-QQ,

159

Precious Belen

2,720,400.00

January 13, 1996

inclusive

Exhs. RREEE, inclusive

Trading

Wisdom
Services

January 19, 1996

Manpower361,966.00

materials

September 4, 199

January 26, 1996

October 2, 1995

February 3, 1996

October 27, 1995

February 13, 1996

January 8, 1996

February 20, 1996

March 19, 1996

February 27, 1996

Exhs. GGG-11

April 3, 1996

- GGG-24,

April 12, 1996

HHH-12, HHH-22,
III-11, III-14,

April 19, 1996


April 26, 1996

JJJ-13,
LLL-5

SCCFI statements of384,794.38


account

June 28, 1995


August 1, 1995

September 4, 199

KKK-11,

September 8, 199

May 3, 1996

September 11, 19

May 10, 1996

October 30, 199[5

May 17, 1996

November 10, 19

May 24, 1996

December 21, 19

June 7, 1996

TOTAL

44,315,024.31

June 14, 1996


June 21, 1996
June 28, 1996
July 5, 1996
15,159,144.71

June 15, 1995

Exhs. GGG-

Costs of Letters of

May 29, 1995

NNN, inclusive

Credit for

June 15, 1995

imported raw

July 5, 1995

160

Fourth, We turn to the allegation of fraud by the


defendant-appellant by thoroughly looking through the
pieces of evidence that it adduced during the trial. The
latter alleged that fraud is present in the case at bar as
shown by the discrepancy of the alleged purchases
from that of the reported purchases made by plaintiffappellee. It had also averred that fraud is present when
upon verification of the address of Fuze Industries, its
office is nowhere to be found. Also, the defendantappellant expressed grave doubts as to the purchases
of the plaintiff-appellee sometime in 1996 when such

purchases escalated to a high 19.5 Million Pesos


without any contract to back it up.[14]

At the outset, CBIC assails this petition as defective since what UMC
ultimately wants this Court to review are questions of fact. However,
UMC argues that where the findings of the CA are in conflict with those
of the trial court, a review of the facts may be made. On this

On 7 July 2011, UMC filed a Motion for Reconsideration,


[15]

procedural issue, we find UMCs claim meritorious.

which the CA denied in its Resolution dated 8 September 2011.

Hence, this petition.

A petition for review under Rule 45 of the Rules of Court specifically


provides that only questions of law may be raised. The findings of fact
of the CA are final and conclusive and this Court will not review them

The Issues

on appeal,[17] subject to exceptions as when the findings of the


appellate court conflict with the findings of the trial court. [18] Clearly,
UMC seeks a reversal and raises the following issues for resolution:

the present case falls under the exception. Since UMC properly raised
the conflicting findings of the lower courts, it is proper for this Court to
resolve such contradiction.

I.
WHETHER THE COURT OF APPEALS MADE A RULING
INCO[N]SISTENT
WITH
LAW,
APPLICABLE
JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE
OF ARSON AND FRAUD IN THE ABSENCE OF
MATERIALLY CONVINCING EVIDENCE.

Having settled the procedural issue, we proceed to the primordial issue


which boils down to whether UMC is entitled to claim from CBIC the full
coverage of its fire insurance policy.

II.
UMC contends that because it had already established a prima

WHETHER THE COURT OF APPEALS MADE A RULING


INCONSISTENT WITH LAW, APPLICABLE JURISPRUDENCE
AND EVIDENCE WHEN IT FOUND THAT PETITIONER
BREACHED ITS WARRANTY.[16]

facie case against CBIC which failed to prove its defense, UMC is
entitled to claim the full coverage under the Insurance Policy. On the
other hand, CBIC contends that because arson and fraud attended the
claim, UMC is not entitled to recover under Condition No. 15 of the
Insurance Policy.

The Ruling of the Court


Burden of proof is the duty of any party to present evidence to
establish his claim or defense by the amount of evidence required by

161

law,[19] which is preponderance of evidence in civil cases. [20] The party,

a criminal act; and (2) the identity of the defendants as the one

whether plaintiff or defendant, who asserts the affirmative of the issue

responsible for the crime.[25] Corpus delicti means the substance of the

has the burden of proof to obtain a favorable judgment. [21] Particularly,

crime, the fact that a crime has actually been committed. [26] This is

ininsurance cases, once an insured makes out a prima facie case in its

satisfied by proof of the bare occurrence of the fire and of its having

favor, the burden of evidence shifts to the insurer to controvert the

been intentionally caused.[27]

insureds prima facie case.[22] In the present case, UMC established


a prima facie case against CBIC. CBIC does not dispute that UMCs
stocks in trade were insured against fire under the Insurance Policy and
In the present case, CBICs evidence did not prove that the fire was

that the warehouse, where UMCs stocks in trade were stored, was

intentionally caused by the insured. First, the findings of CBICs

gutted by fire on 3 July 1996, within the duration of the fire insurance.

witnesses, Cabrera and Lazaro, were based on an investigation

However, since CBIC alleged an excepted risk, then the burden of

conducted more than four months after the fire. The testimonies of

evidence shifted to CBIC to prove such exception.

Cabrera and Lazaro, as to the boxes doused with kerosene as told to


them by barangayofficials, are hearsay because the barangay officials
were not presented in court. Cabrera and Lazaro even admitted that
An insurer who seeks to defeat a claim because of an exception or

they did not conduct a forensic investigation of the warehouse nor did

limitation in the policy has the burden of establishing that the loss

they file a case for arson.[28] Second, the Sworn Statement of Formal

comes within the purview of the exception or limitation. [23] If loss is

Claim submitted by UMC, through CRM, states that the cause of the fire

proved apparently within a contract of insurance, the burden is upon

was faulty electrical wiring/accidental in nature. CBIC is bound by this

the insurer to establish that the loss arose from a cause of loss which is

evidence because in its Answer, it admitted that it designated CRM to

excepted or for which it is not liable, or from a cause which limits its

evaluate UMCs loss. Third, the Certification by the Bureau of Fire

liability.

Protection states that the fire was accidental in origin. This Certification

[24]

In the present case, CBIC failed to discharge its primordial

burden of establishing that the damage or loss was caused by arson, a

enjoys the presumption of regularity, which CBIC failed to rebut.

limitation in the policy.

Contrary to UMCs allegation, CBICs failure to prove arson does not


In prosecutions for arson, proof of the crime charged is complete where

mean that it also failed to prove fraud. Qua Chee Gan v. Law

the evidence establishes: (1) the corpus delicti, that is, a fire caused by

Union[29] does not apply in the present case. InQua Chee Gan,[30] the

162

Court dismissed the allegation of fraud based on the dismissal of the

fraudulent, or if any false declaration be made or used in support

arson case against the insured, because the evidence was identical in

thereof, to wit:

both cases, thus:

15. If the claim be in any respect fraudulent, or if any


false declaration be made or used in support thereof,
or if any fraudulent means or devices are used by the
Insured or anyone acting in his behalf to obtain any
benefit under this Policy; or if the loss or damage be
occasioned by the willful act, or with the connivance of
the Insured, all the benefits under this Policy shall be
forfeited.

While the acquittal of the insured in the arson case is


not res judicata on the present civil action, the insurers
evidence, to judge from the decision in the criminal
case, is practically identical in both cases and must
lead to the same result, since the proof to establish the
defense of connivance at the fire in order to defraud
the insurer cannot be materially less convincing than
that required in order to convict the insured of the
crime of arson (Bachrach vs. British American
Assurance Co., 17 Phil. 536). [31]

In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,[32] the Court held
that where a fire insurance policy provides that if the claim be in any
In the present case, arson and fraud are two separate grounds based

respect fraudulent, or if any false declaration be made or used in

on two different sets of evidence, either of which can void the

support thereof, or if any fraudulent means or devices are used by the

insurance claim of UMC. The absence of one does not necessarily result

Insured or anyone acting on his behalf to obtain any benefit under this

in the absence of the

Policy, and the evidence is conclusive that the proof of claim which the
insured submitted was false and fraudulent both as to the kind, quality
and amount of the goods and their value destroyed by the fire, such a
proof of claim is a bar against the insured from recovering on the policy

other. Thus, on the allegation of fraud, we affirm the findings of the

even for the amount of his actual loss.

Court of Appeals.

In the present case, as proof of its loss of stocks in trade


Condition No. 15 of the Insurance Policy provides that all the benefits

amounting to P50,000,000.00, UMC submitted its Sworn Statement of

under the policy shall be forfeited, if the claim be in any respect

Formal Claim together with the following documents: (1) letters of

163

credit and invoices for raw materials, Christmas lights and cartons

23 February 1996. The uncontroverted testimony of Cabrera revealed

purchased; (2) charges for assembling the Christmas lights; and (3)

that there was no Fuze Industries Manufacturer Phils. located at 55

delivery receipts of the raw materials. However, the charges for

Mahinhin St., Teachers Village, Quezon City, the business address

assembling the Christmas lights and delivery receipts could not

appearing in the invoices and the records of the Department of Trade &

support its insurance claim. The Insurance Policy provides that CBIC

Industry. Cabrera testified that:

agreed to insure UMCs stocks in trade. UMC defined stock in trade


as tangible personal property kept for sale or traffic. [33] Applying UMCs
definition, only the letters of credit and invoices for raw materials,

A: Then we went personally to the address as I stated a


while ago appearing in the record furnished by the
United Merchants Corporation to the adjuster, and the
adjuster in turn now, gave us our basis in conducting
investigation, so we went to this place which according
to the records, the address of this company but there
was no office of this company.

Christmas lights and cartons may be considered.

The invoices, however, cannot be taken as genuine. The


invoices reveal that the stocks in trade purchased for 1996 amounts
to P20,000,000.00 which were purchased in one month. Thus, UMC

Q: You mentioned Atty. Cabrera that you went to


Diliman, Quezon City and discover the address
indicated by the United Merchants as the place of
business of Fuze Industries Manufacturer, Phils. was a
residential place, what then did you do after
determining that it was a residential place?

needs to prove purchases amounting to P30,000,000.00 worth of


stocks in trade for 1995 and prior years. However, in the Statement of
Inventory it submitted to the BIR, which is considered an entry in
official records,[34] UMC stated that it had no stocks in trade as of 31
December 1995. In its defense, UMC alleged that it did not include as
stocks in trade the raw materials to be assembled as Christmas lights,
which it had on 31 December 1995. However, as proof of its loss, UMC

A: We went to the owner of the alleged company as


appearing in the Department of Trade & Industry
record, and as appearing a certain Chinese name Mr.
Huang, and the address as appearing there is
somewhere in Binondo. We went personally there
together with the NBI Agent and I am with them when
the subpoena was served to them, but a male person
approached us and according to him, there was no
Fuze Industries Manufacturer, Phils., company in that
building sir.[35]

submitted invoices for raw materials, knowing that the insurance


covers only stocks in trade.
Equally important, the invoices (Exhibits P-DD) from Fuze Industries
Manufacturer Phils. were suspicious. The purchases, based on the
invoices

and

without

any

supporting

contract,

amounted

to P19,550,400.00 worth of Christmas lights from 20 January 1996 to

164

Q: These purchases were made for the entire year


of 1995 and 1994 respectively, am I correct?
In Yu Ban Chuan v. Fieldmens Insurance, Co., Inc.,[36] the Court ruled

A:
[40]

that the submission of false invoices to the adjusters establishes a

Yes sir, for the


(Emphasis supplied)

year

1994

and

1995.

clear case of fraud and misrepresentation which voids the insurers


liability as per condition of the policy. Their falsity is the best evidence
of the fraudulent character of plaintiffs claim. [37] In Verendia v. Court of

In its 1996 Financial Report, which UMC admitted as existing, authentic

Appeals,[38] where the insured presented a fraudulent lease contract to

and

support his claim for insurance benefits, the Court held that by its false

duly

executed

during

the

December

2002

hearing,

it

had P1,050,862.71 as total assets andP167,058.47 as total liabilities.[41]

declaration, the insured forfeited all benefits under the policy provision
similar to Condition No. 15 of the Insurance Policy in this case.

Thus, either amount in UMCs Income Statement or Financial Reports


is twenty-five times the claim UMC seeks to enforce. The RTC itself

Furthermore, UMCs Income Statement indicated that the purchases or

recognized

costs of sales are P827,670.00 for 1995 and P1,109,190.00 for 1996 or

that

UMC

padded

its

claim

when

it

only

allowed P43,930,230.00 as insurance claim. UMC supported its claim

a total of P1,936,860.00.[39] To corroborate this fact, Ebora testified

of P50,000,000.00 with the Certification from the Bureau of Fire

that:

Protection stating that x x x a fire broke out at United Merchants


Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City
incurring

Q: Based on your 1995 purchases, how much were the


purchases made in 1995?

an

estimated

damage

of

Fifty-

Five

Million

Pesos

(P55,000,000.00) to the building and contents x x x. However, this


Certification only proved that the estimated damage of P55,000,000.00

A: The purchases made by United Merchants


Corporation for the last year 1995 is P827,670.
[00] sir

is shared by both the building and the stocks in trade.


It has long been settled that a false and material statement made with

Q: And how about in 1994?

an intent to deceive or defraud voids an insurance policy. [42] In Yu Cua


v. South British Insurance Co.,[43]the claim was fourteen times bigger

A: In 1994, its P608,986.00 sir.

than the real loss; in Go Lu v. Yorkshire Insurance Co,[44] eight times;

165

and in Tuason v. North China Insurance Co.,[45] six times. In the present

insurance policy. Mere filing of such a claim will exonerate the insurer.

case, the claim is twenty five times the actual claim proved.

[50]

Considering that all the circumstances point to the inevitable


conclusion that UMC padded its claim and was guilty of fraud, UMC
The most liberal human judgment cannot attribute such difference to

violated Condition No. 15 of the Insurance Policy. Thus, UMC forfeited

mere innocent error in estimating or counting but to a deliberate intent

whatever benefits it may be entitled under the Insurance Policy,

to demand from insurance companies payment for indemnity of goods

including its insurance claim.

not existing at the time of the fire.[46] This constitutes the socalled fraudulent claim which, by express agreement between the
insurers and the insured, is a ground for the exemption of insurers from
While it is a cardinal principle of insurance law that a contract of

civil liability.[47]

insurance is to be construed liberally in favor of the insured and strictly


against the insurer company,[51]contracts of insurance, like other
contracts, are to be construed according to the sense and meaning of
In its Reply,

UMC

admitted the discrepancies

when it stated

the terms which the parties themselves have used. [52] If such terms are

that discrepancies in its statements were not covered by the warranty

clear and unambiguous, they must be taken and understood in their

such that any discrepancy in the declaration in other instruments or

plain, ordinary and popular sense. Courts are not permitted to make

documents as to matters that may have some relation to the insurance

contracts for the parties; the function and duty of the courts is simply

coverage voids the policy.[48]

to enforce and carry out the contracts actually made.[53]

WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011

On UMCs allegation that it did not breach any warranty, it may be

Decision and the 8 September 2011 Resolution of the Court of Appeals

argued that the discrepancies do not, by themselves, amount to a

in CA-G.R. CV No. 85777.

breach of warranty. However, the Insurance Code provides that a policy


may declare that a violation of specified provisions thereof shall avoid
it.[49] Thus, in fire insurance policies, which contain provisions such as

SO ORDERED.

Condition No. 15 of the Insurance Policy, a fraudulent discrepancy


between the actual loss and that claimed in the proof of loss voids the

166

The Courts ruling:

We do not agree.
GR NO. 173773
PARAMOUNT INSURANCE V. SPS. YVES AND MARIA REMONDEULAZ

Adverse to petitioners claim, respondents policy clearly undertook to

The Facts: On May 26, 1994, spouses Yves and Maria Teresa
(Remondeulaz) insured their 1994 Toyota Corolla sedan under a
comprehensive car insurance policy with . While the contract was in
effect, the spouses car was taken by one Ricardo Sales, to whom they
entrusted the car to add accessories and improvement, but did not
return the same within the agreed three-day period. Thus they filed a
complaint sheet and immediately reported the theft to the Traffic
Management Command of the PNP. They they notified the insurance
company, Paramount Insurance Corporation (Paramount), to claim for
reimbursement, but the latter refused to pay, hence they filed a case
for sum of money against the company before the RTC. Upon
termination of plaintiff evidence, the company filed a Demurrer to
Evidence, which the trial court granted in an Order, ruling that the
spouses cannot recover more than its interest in any property subject
of an insurance, since they already recovered from another company
(Standard Insurance Company, Inc.) in Civil Case No. 95-1524, the
amount for the loss of the same car, albeit under a different insurance
policy and insurance company. On appeal to the Court of Appeals, the
latter reversed and set aside the RTC decision. Holding that the car
subject of the case was a different car from that of Civil Case No.
9501524, the CA said the company is liable to the spouses under the
theft clause of their insurance contract. The company elevated their
case to the Supreme Court via petition for review on certiorari.

indemnify the insured against loss of or damage to the scheduled


vehicle when caused by theft, to wit:

SECTION III LOSS OR DAMAGE

1.

The Company will, subject to the Limits of Liability, indemnify


the insured against loss of or damage to the Scheduled
Vehicle and its accessories and spare parts whilst thereon:

a)

by accidental collision or overturning, or collision or overturning consequent


tear;

The Issue/s: Whether or not the loss of the car of the spouses falls
within the theft clause of the insurance contract, making it
compensable. They argue that it was not stolen but was entrusted to
another person.

167

(b)

by fire, external explosion, self-ignition or lightning or burglary, housebreakin

(c)

by malicious act;

(d)

Apropos, we now resolve the issue of whether the loss of respondents


whilst in transit (including the [process] of loading and unloading) incidental to such transit by road, rail, inland waterway, lift or elevator.
vehicle falls within the concept of the theft clause under the
insurance policy.

In People v. Bustinera2, this Court had the occasion to interpret the


theft clause of an insurance policy. In this case, the Court explained
that when one takes the motor vehicle of another without the latters
consent even if the motor vehicle is later returned, there is theft
there being intent to gain as the use of the thing unlawfully taken
constitutes gain.
Also, in Malayan Insurance Co., Inc. v. Court of Appeals,3 this Court
held that the taking of a vehicle by another person without the
permission or authority from the owner thereof is sufficient to place it
within the ambit of the word theft as contemplated in the policy, and is
therefore, compensable.

168

Moreover, the case of Santos v. People4 is worthy of note. Similarly in

In the instant case, Sales did not have juridical possession over the

Santos, the owner of a car entrusted his vehicle to therein petitioner

vehicle. Here, it is apparent that the taking of respondents vehicle by

Lauro Santos who owns a repair shop for carburetor repair and

Sales is without any consent or authority from the former.

repainting. However, when the owner tried to retrieve her car, she was
Records would show that respondents entrusted possession of their

not able to do so since Santos had abandoned his shop. In the said

vehicle only to the extent that Sales will introduce repairs and

case, the crime that was actually committed was Qualified Theft.

improvements thereon, and not to permanently deprive them of

However, the Court held that because of the fact that it was not

possession thereof. Since, Theft can also be committed through

alleged in the information that the object of the crime was a car, which

misappropriation, the fact that Sales failed to return the subject vehicle

is a qualifying circumstance, the Court found that Santos was only

to respondents constitutes Qualified Theft. Hence, since respondents

guilty of the crime of Theft and merely considered the qualifying

car is undeniably covered by a Comprehensive Motor Vehicle Insurance

circumstance as an aggravating circumstance in the imposition of the

Policy that allows for recovery in cases of theft, petitioner is liable

appropriate penalty. The Court therein clarified the distinction between

under the policy for the loss of respondents vehicle under the theft

the crime of Estafa and Theft, to wit:

clause.
x x x The principal distinction between the two crimes is that in theft
the thing is taken while in estafa the accused receives the property and

All told, Sales act of depriving respondents of their motor vehicle at, or

converts it to his own use or benefit. However, there may be theft even

soon after the transfer of physical possession of the movable property,

if the accused has possession of the property. If he was entrusted only

constitutes theft under the insurance policy, which is compensable. 6

with the material or physical (natural) or de facto possession of the

WHEREFORE, the instant petition is DENIED. The Decision dated April

thing, his misappropriation of the same constitutes theft, but if he has

12, 2005 and Resolution dated July 20, 2006 of the Court of Appeals

the juridical possession of the thing, his conversion of the same

are hereby AFFIRMED in toto.

constitutes embezzlement or estafa.5


SO ORDERED.

169