Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-36232 December 19, 1974

PIONEER INSURANCE AND SURETY CORPORATION, petitioner-appellant,
vs.
OLIVA YAP, represented by her attorney-in-fact, CHUA SOON POON respondentappellee.
Eriberto D. Ignacio for petitioner-appellant.
Paculdo, Miranda, Marquez, Sibal & Associates for respondent-appellee.

FERNANDEZ, J.:p
This is an appeal by certiorari from the decision of the Court of Appeals dated December 16,
1972, in CA-G.R. No. 36669-R, affirming the judgment of the Court of First Instance of Manila
(Branch VI) in Civil Case No. 54508, which latter court declared plaintiff Oliva Yap, herein
respondent, entitled to recover from defendant Pioneer Insurance & Surety Corporation,
herein petitioner, the full amount of the damage inquired in Policy No. 4219, which is
P25,000.00, plus 12% of said sum from the date of filing of the complaint until full payment,
in addition to the sum of P6,000.00 for attorney's fees, and costs.
Respondent Oliva Yap was the owner of a store in a two-storey building located at No. 856
Juan Luna Street, Manila, where in 1962 she sold shopping bags and footwear, such as
shoes, sandals and step-ins. Chua Soon Poon Oliva Yap's son-in-law, was in charge of the
store.
On April 19, 1962, respondent Yap took out Fire Insurance Policy No. 4216 from petitioner
Pioneer Insurance & Surety Corporation with a face value of P25,000.00 covering her stocks,
office furniture, fixtures and fittings of every kind and description. Among the conditions in
the policy executed by the parties are the following:
The Insured shall give notice to the Company of any insurance or insurances already
effected, or which may subsequently be effected, covering any of the property hereby
insured, and unless such notice be given and the particulars of such insurance or insurances
be stated in, or endorsed on this Policy by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this Policy shall be forfeited. (emphasis
supplied)
It is understood that, except as may be stated on the face of this policy there is no other
insurance on the property hereby covered and no other insurance is allowed except by the

consent of the Company endorsed hereon. Any false declaration or breach or this condition
will render this policy null and void.
At the time of the insurance on April 19, 1962 of Policy No. 4219 in favor of respondent Yap,
an insurance policy for P20,000.00 issued by the Great American Insurance Company
covering the same properties was noted on said policy as co-insurance (Annex "1-E"). Later,
on August 29, 1962, the parties executed Exhibit "1-K", as an endorsement on Policy No.
4219, stating:
It is hereby declared and agreed that the co-insurance existing at present under this policy is
as follows: P20,000.00 Northwest Ins., and not as originally stated. (emphasis supplied)
Except as varied by this endorsement, all other terms and conditions remain unchanged.
Still later, or on September 26, 1962, respondent Oliva Yap took out another fire insurance
policy for P20,000.00 covering the same properties, this time from the Federal Insurance
Company, Inc., which new policy was, however, procured without notice to and the written
consent of petitioner Pioneer Insurance & Surety Corporation and, therefore, was not noted
as a co-insurance in Policy No. 4219.
At dawn on December 19, 1962, a fire broke out in the building housing respondent Yap's
above-mentioned store, and the said store was burned. Respondent Yap filed an insurance
claim, but the same was denied in petitioner's letter of May 17, 1963 (Exhibit "G"), on the
ground of "breach and/or violation of any and/or all terms and conditions" of Policy No. 4219.
On July 17, 1963, Oliva Yap filed with the Court of First Instance of Manila the present
complaint, asking, among others, for payment of the face value of her fire insurance policy.
In its answer, petitioner alleged that no property belonging to plaintiff Yap and covered by
the insurance policy was destroyed by the fire; that Yap's claim was filed out of time; and
that Yap took out an insurance policy from another insurance company without petitioner's
knowledge and/or endorsement, in violation of the express stipulations in Policy No. 4219,
hence, all benefits accruing from the policy were deemed forfeited.
As already stated at the beginning of this opinion, the trial court decided for plaintiff Oliva
Yap; and its judgment was affirmed in full by the Court of Appeals.
The vital issue in this appeal is whether or not petitioner should be absolved from liability on
Fire Insurance Policy No. 4219 on account of any violation by respondent Yap of the coinsurance clause therein. In resolving this problem, the Court of Appeals stated in its
decision:
5. The plaintiff-appellee has not violated the other insurance clause (Exhibit 1-F) of the
insurance Policy No. 4219 that would justify the defendant-appellant, as insurer, to avoid its
liability thereunder. It appears on the face of said policy that a co-insurance in the amount of
P20,000.00 was secured from the Great American Insurance and was declared by the
plaintiff-appellee and recognized by the defendant-appellant. This was later on substituted
for the same amount and secured by the Federal Insurance Company. Chua Soon Poon on
being cross-examined by counsel for the defendant-appellant, declared that the Great

American Insurance policy was cancelled because of the difference in the premium and the
same was changed for that of the Federal (t.s.n., hearing of December 1, 1964, pp. 35-36).
Contrary to the assertion of the defendant-appellant, the Great American Insurance policy
was not substituted by the Northwest Insurance policy. As admitted by the defendantappellant in its brief (p. 48), the fire insurance policy issued by the Great American Insurance
Company for P20,000.00 (Exhibit 1-E) was cancelled on August 29, 1962. On the other hand,
the fire insurance policy issued by the Northwest Insurance & Surety Company for
P20,000.00 (Exhibit 1-K) was taken out on July 23, 1962. How then can the Northwest
Insurance policy issued on July 23, 1962, be considered as having substituted the Great
American policy which was cancelled only on August 29, 1962? The defendant-appellant can
be considered to have waived the formal requirement of indorsing the policy of co-insurance
since there was absolutely no showing that it was not aware of said substitution and
preferred to continue the policy (Gonzales La O vs. Yek Tong Lin Fire and Marine Insurance
Co., 55 Phil. 386). Even assuming that the defendant-appellant did not indorse the Federal
Insurance policy, there is no question that the same was only a substitution and did not in
any way increase the amount of the declared co-insurance. In other words, there was no
increase in the risk assumed by the defendant-appellant.
We do not agree with the conclusion of the Court of Appeals.
There was a violation by respondent Oliva Yap of the co-insurance clause contained in Policy
No. 4219 that resulted in the avoidance of petitioner's liability. The insurance policy for
P20,000.00 issued by the Great American Insurance Company covering the same properties
of respondent Yap and duly noted on Policy No. 4219 as c-insurance, ceased, by agreement
of the parties (Exhibit "1-L"), to be recognized by them as a co-insurance policy. The Court of
Appeals says that the Great American Insurance policy was substituted by the Federal
Insurance policy for the same amount, and because it was a mere case of substitution, there
was no necessity for its endorsement on Policy No. 4219. This finding, as well as reasoning,
suffers from several flaws. There is no evidence to establish and prove such a substitution. If
anything was substituted for the Great American Insurance policy, it could only be the
Northwest Insurance policy for the same amount of P20,000.00. The endorsement (Exhibit
"1-K") quoted above shows the clear intention of the parties to recognize on the date the
endorsement was made (August 29, 1962), the existence of only one co-insurance, and that
is the Northwest Insurance policy, which according to the stipulation of the parties during the
hearing, was issued on August 20, 1962 (t.s.n., January 12, 1965, pp. 3-4) and endorsed only
on August 20, 1962. The finding of the Court of Appeals that the Great American Insurance
policy was substituted by the Federal Insurance policy is unsubstantiated by the evidence of
record and indeed contrary to said stipulation and admission of respondent, and is grounded
entirely on speculation, surmises or conjectures, hence, not binding on the Supreme Court. 1
The Court of Appeals would consider petitioner to have waived the formal requirement of
endorsing the policy of co-insurance "since there was absolutely no showing that it was not
aware of said substitution and preferred to continue the policy." The fallacy of this argument
is that, contrary to Section 1, Rule 131 of the Revised Rules of Court, which requires each
party to prove his own allegations, it would shift to petitioner, respondent's burden of
proving her proposition that petitioner was aware of the alleged substitution, and with such
knowledge preferred to continue the policy. Respondent Yap cites Gonzales La O vs. Yek Tong

Lin Fire and Marine Insurance Co., Ltd.2 to justify the assumption but in that case, unlike
here, there was knowledge by the insurer of violations of the contract, to wit: "If, with the
knowledge of the existence of other insurances which the defendant deemed violations of
the contract, it has preferred to continue the policy, its action amounts to a waiver of the
annulment of the contract ..." A waiver must be express. If it is to be implied from conduct
mainly, said conduct must be clearly indicative of a clear intent to waive such right.
Especially in the case at bar where petitioner is assumed to have waived a valuable right,
nothing less than a clear, positive waiver, made with full knowledge of the circumstances,
must be required.
By the plain terms of the policy, other insurance without the consent of petitioner would ipso
facto avoid the contract. It required no affirmative act of election on the part of the company
to make operative the clause avoiding the contract, wherever the specified conditions should
occur. Its obligations ceased, unless, being informed of the fact, it consented to the
additional insurance.
The validity of a clause in a fire insurance policy to the effect that the procurement of
additional insurance without the consent of the insurer renders ipso facto the policy void is
well-settled:
In Milwaukee Mechanids' Lumber Co., vs. Gibson, 199 Ark. 542, 134 S. W. 2d 521, 522, a
substantially identical clause was sustained and enforced, the court saying: "The rule in this
state and practically all of the states is to the effect that a clause in a policy to the effect
that the procurement of additional insurance without the consent of the insurer renders the
policy void is a valid provision. The earlier cases of Planters Mutual Insurance Co., vs. Green,
72 Ark. 305, 80 S.W. 92, are to the same effect." And see Vance, Insurance, 2nd Ed., 725.
(Reach vs. Arkansas Farmers Mut. Fire Ins. Co., [Ark. Nov. 14, 1949] 224 S. W. 2d 48, 49.)
2. Where a policy contains a clause providing that the policy shall be void if insured has or
shall procure any other insurance on the property, the procurement of additional insurance
without the consent of the insurer avoids the policy." (Planters' Mut. Ins. Ass'n vs. Green
[Supreme Court of Arkansas, March 19, 1904] 80 S.W. 151.)
3. The policy provided that it should be void in case of other insurance "without notice and
consent of this company. ..." It also authorized the company to terminate the contract at any
time, at its option, by giving notice and refunding a ratable proportion of the premium. Held,
that additional insurance, unless consented to, or unless a waiver was shown, ipso
facto avoided the contract, and the fact that the company had not, after notice of such
insurance, cancelled the policy, did not justify the legal conclusion that it had elected to
allow it to continue in force." (Johnson vs. American Fire Ins., Co., [Supreme Court of
Minnesota, Aug. 12, 1889] 43 N.W., 59)
The aforecited principles have been applied in this jurisdiction in General Insurance & Surety
Corporation vs. Ng Hua 3. There, the policy issued by the General Insurance & Surety
Corporation in favor of respondent Ng Hua contained a provision identical with the provisions
in Policy No. 4219 quoted above. 4 This Court, speaking thru Justice Cesar P. Bengson, in
reversing the judgment of the Court of Appeals and absolving the insurer from liability under
the policy, held:

... And considering the terms of the policy which required the insured to declare other
insurances, the statement in question must be deemed to be a statement (warranty) binding
on both insurer and insured, that there were no other insurance on the property. ...
The annotation then, must be deemed to be a warranty that the property was not insured by
any other policy. Violation thereof entitled the insurer to rescind. (Sec. 69, Insurance Act.)
Such misrepresentation is fatal in the light of our views in Santa Ana vs. Commercial Union
Assurance Company, Ltd., 55 Phil. 329. The materiality of non-disclosure of other insurance
policies is not open to doubt.
Furthermore, even if the annotations were overlooked the defendant insurer would still be
free from liability because there is no question that the policy issued by General Indemnity
has not been stated in nor endorsed on Policy No. 471 of defendant. And as stipulated in the
above-quoted provisions of such policy "all benefit under this policy shall be forfeited.
(Emphasis supplied)
The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance
and thus avert the perpetration of fraud. The public, as well as the insurer, is interested in
preventing the situation in which a fire would be profitable to the insured. According to
Justice Story: "The insured has no right to complain, for he assents to comply with all the
stipulation on his side, in order to entitle himself to the benefit of the contract, which, upon
reason or principle, he has no right to ask the court to dispense with the performance of his
own part of the agreement, and yet to bind the other party to obligations, which, but for
those stipulation would not have been entered into." 5
In view of the above conclusion, We deem it unnecessary to consider the other defenses
interposed by petitioner.
WHEREFORE, the appealed judgment of the Court of Appeals is reversed and set aside, and
the petitioner absolved from all liability under the policy. Costs against private respondent.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-27932 October 30, 1972

UNION MANUFACTURING CO., INC. and the REPUBLIC BANK, plaintiffs, REPUBLIC
BANK, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY CO., INC., defendant-appellee.
Armando L. Abad, Sr. for plaintiff-appellant.
Gamelo, Francisco and Aquino for defendant-appellee.

FERNANDO, J.:p
In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co., Inc.,
defendant in the lower court and now appellee, was able to avoid liability upon proof that
there was a violation of a warranty. There was no denial thereof from the insured, Union
Manufacturing Co., Inc. With such a legally crippling blow, the effort of the Republic Bank,
the main plaintiff and now the sole appellant, to recover on such policy as mortgagee, by
virtue of the cover note in the insurance policy providing that it is entitled to the payment of
loss or damages as its interest may appear, was in vain. The defect being legally incurable,
its appeal is likewise futile. We affirm.
As noted in the decision, the following facts are not disputed: "(1) That on January 12, 1962,
the Union Manufacturing Co., Inc. obtained certain loans, overdrafts and other credit
accommodations from the Republic Bank in the total sum of P415,000.00 with interest at 9%
per annum from said date and to secure the payment thereof, said Union Manufacturing Co.,
Inc. executed a real and chattel mortgages on certain properties, which are more particularly
described and listed at the back of the mortgage contract ...; (2) That as additional condition
of the mortgage contract, the Union Manufacturing Co., Inc. undertook to secure insurance
coverage over the mortgaged properties for the same amount of P415,000.00 distributed as
follows: (a) Buildings, P30,000.00; (b) Machineries, P300,000.00; and (c) Merchandise
Inventory, P85,000.00, giving a total of P415,000.00; (3) That as Union Manufacturing Co.,
Inc. failed to secure insurance coverage on the mortgaged properties since January 12,
1962, despite the fact that Cua Tok, its general manager, was reminded of said requirement,
the Republic Bank procured from the defendant, Philippine Guaranty Co., Inc. an insurance
coverage on loss against fire for P500,000.00 over the properties of the Union Manufacturing
Co., Inc., as described in defendant's 'Cover Note' dated September 25, 1962, with the
annotation that loss or damage, if any, under said Cover Note is payable to Republic Bank as
its interest may appear, subject however to the printed conditions of said defendant's Fire

Insurance Policy Form; (4) That on September 27, 1962, Fire Insurance Policy No. 43170 ...
was issued for the sum of P500,000.00 in favor of the assured, Union Manufacturing Co., Inc.,
for which the corresponding premium in the sum of P8,328.12, which was reduced to
P6,688.12, was paid by the Republic Bank to the defendant, Philippine Guaranty Co., Inc. ...;
(5) That upon the expiration of said fire policy on September 25, 1963, the same was
renewed by the Republic Bank upon payment of the corresponding premium in the same
amount of P6,663.52 on September 26, 1963; (6) That in the corresponding voucher ..., it
appears that although said renewal premium was paid by the Republic Bank, such payment
was for the account of Union Manufacturing Co., Inc. and that the cash voucher for the
payment of the first premium was paid also by the Republic Bank but for the account Union
Manufacturing Co., Inc.; (7) That sometime on September 6, 1964, a fire occurred in the
premises of the Union Manufacturing Co., Inc.; (8) That on October 6, 1964, the Union
Manufacturing Co., Inc. filed its fire claim with the defendant Philippine Guaranty Co., Inc.,
thru its adjuster, H. H. Bayne Adjustment Co., which was denied by said defendant in its
letter dated November 27, 1964 ..., on the following grounds: 'a. Policy Condition No. 3
and/or the 'Other Insurance Clause' of the policy violated because you did not give notice to
us the other insurance which you had taken from New India for P80,000.00, Sincere
Insurance for P25,000.00 and Manila Insurance for P200,000.00 with the result that these
insurances, of which we became aware of only after the fire, were not endorsed on our
policy; and (b) Policy Condition No. 11 was not complied with because you have failed to
give to our representatives the required documents and other proofs with respect to your
claim and matters touching on our liability, if any, and the amount of such liability'; (9) That
as of September, 1962, when the defendant Philippine Guaranty Co., issued Fire Insurance
Policy No. 43170 ... in the sum of P500,000.00 to cover the properties of the Union
Manufacturing Co., Inc., the same properties were already covered by Fire Policy No. 1533 of
the Sincere Insurance Company for P25,000.00 for the period from October 7, 1961 to
October 7, 1962 ...; and by insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic
Insurance Agency for the total sum of P300,000.00 and for periods respectively, from
January 27, 1962 to January 27, 1963, and from June 1, 1962 to June 1, 1963; and (10) That
when said defendant's Fire Insurance Policy No. 43170 was already in full force and effect,
the Union Manufacturing Co., Inc. without the consent of the defendant, Philippine Guaranty
Co., Inc., obtained other insurance policies totalling P305,000.00 over the same properties
prior to the fire, to wit: (1) Fire Policy No. 250 of New India Assurance Co., Ltd., for
P80,000.00 for the period from May 27, 1964 to May 27, 1965 ...; (2) Fire Policy No. 3702 of
the Sincere Insurance Company for P25,000.00 for the period from October 7, 1963 to
October 7, 1964 ...; and (3) Fire Policy No. 6161 of Manila Insurance Co. for P200,000.00 for
the period from May 15, 1964 to May 15, 1965 ... ." 1 There is in the cover note 2 and in the
fire insurance policy 3 the following warranty: "[Co- Insurance Declared]: Nil." 4
Why the appellant Republic Bank could not recover, as payee, in case of loss as its "interest
may appear subject to the terms and conditions, clauses and warranties" of the policy was
expressed in the appealed decision thus: "However, inasmuch as the Union Manufacturing
Co., Inc. has violated the condition of the policy to the effect that it did not reveal the
existence of other insurance policies over the same properties, as required by the warranty
appearing on the face of the policy issued by the defendant and that on the other hand said
Union Manufacturing Co., Inc. represented that there were no other insurance policies at the

time of the issuance of said defendant's policy, and it appearing furthermore that while the
policy of the defendant was in full force and effect the Union Manufacturing Co., Inc. secured
other fire insurance policies without the written consent of the defendant endorsed on the
policy, the conclusion is inevitable that both the Republic Bank and Union Manufacturing Co.,
Inc. cannot recover from the same policy of the defendant because the same is null and
void." 5 The tone of confidence apparent in the above excerpts from the lower court decision
is understandable. The conclusion reached by the lower court finds support in authoritative
precedents. It is far from easy, therefore, for appellant Republic Bank to impute to such a
decision a failure to abide by the law. Hence, as noted at the outset, the appeal cannot
prosper. An affirmance is indicated.

language used: "The insurance contract may be rather onerous ('one sided', as the lower
court put it), but that in itself does not justify the abrogation of its express terms, terms
which the insured accepted or adhered to and which is the law between the contracting
parties." 15
There is no escaping the conclusion then that the lower court could not have disposed of this
case in a way other than it did. Had it acted otherwise, it clearly would have disregarded
pronouncements of this Court, the compelling force of which cannot be denied. There is, to
repeat, no justification for a reversal.
WHEREFORE, the decision of the lower court of March 31, 1967 is affirmed. No costs.

It is to Santa Ana v. Commercial Union Assurance Co., a 1930 decision, that one turns to for
the first explicit formulation as to the controlling principle. As was made clear in the opinion
of this Court, penned by Justice Villa-Real: "Without deciding whether notice of other
insurance upon the same property must be given in writing, or whether a verbal notice is
sufficient to render an insurance valid which requires such notice, whether oral or written,
we hold that in the absolute absence of such notice when it is one of the conditions specified
in the fire insurance policy, the policy is null and void." 7 The next year, in Ang Giok Chip v.
Springfield Fire & Marine Ins. Co., 8 the conformity of the insured to the terms of the policy,
implied from the failure to express any disagreement with what is provided for, was stressed
in these words of the ponente, Justice Malcolm: "It is admitted that the policy before us was
accepted by the plaintiff. The receipt of this policy by the insured without objection binds
both the acceptor and the insured to the terms thereof. The insured may not thereafter be
heard to say that he did not read the policy or know its terms, since it is his duty to read his
policy and it will be assumed that he did so." 9 As far back as 1915, in Young v. Midland
Textile Insurance Company, 10 it was categorically set forth that as a condition precedent to
the right of recovery, there must be compliance on the part of the insured with the terms of
the policy. As stated in the opinion of the Court through Justice Johnson: "If the insured has
violated or failed to perform the conditions of the contract, and such a violation or want of
performance has not been waived by the insurer, then the insured cannot recover. Courts
are not permitted to make contracts for the parties. The function and duty of the courts
consist simply in enforcing and carrying out the contracts actually made. While it is true, as
a general rule, that contracts of insurance are construed most favorably to the insured, yet
contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous they must be taken and understood in their plain, ordinary and popular
sense." 11 More specifically, there was a reiteration of this Santa Ana ruling in a decision by
the then Justice, later Chief Justice, Bengzon, in General Insurance & Surety Corp. v. Ng
Hua. 12 Thus: "The annotation then, must be deemed to be a warranty that the property was
not insured by any other policy. Violation thereof entitles the insurer to rescind. (Sec. 69,
Insurance Act) Such misrepresentation is fatal in the light of our views in Santa Ana v.
Commercial Union Assurance Company, Ltd. ... . The materiality of non-disclosure of other
insurance policies is not open to doubt." 13 As a matter of fact, in a 1966 decision, Misamis
Lumber Corp. v. Capital Ins. & Surety Co., Inc., 14 Justice J.B.L. Reyes, for this Court, made
manifest anew its adherence to such a principle in the face of an assertion that thereby a
highly unfavorable provision for the insured would be accorded recognition. This is the
6

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 94052 August 9, 1991

Subject matter Insured:

2,000 cubic meters apitong Logs
Agreed Value
Amount Insured Hereunder:
Pesos: One Million Only (P1,000,000.00)
Philippine Currency

ORIENTAL ASSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.

Premium P2,500.00 rate 0.250%

Alejandro P. Ruiz, Jr. for petitioner.

l % P/tax 25.00

Federico R. Reyes for private respondent.

TOTAL P2,712.50

Doc. stamps 187.60 Invoice No. 157862

CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES

MELENCIO-HERRERA, J:p

Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following clauses:

An action to recover on a marine insurance policy, issued by petitioner in favor of private

respondent, arising from the loss of a shipment of apitong logs from Palawan to Manila.

Civil Code Article 1250 Waiver clause

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

Typhoon warranty clause

Omnibus clause.
The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a
volume of 1,000 cubicmeters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a
volume of 1,000 cubic meters.
On 28 January 1986, the two barges were towed by one tug-boat, the MT 'Seminole' But, as
fate would have it, during the voyage, rough seas and strong winds caused damage to Barge
TPAC-1000 resulting in the loss of 497 pieces of logs out of the 598 pieces loaded thereon.
Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its
contracted liability was for "TOTAL LOSS ONLY." The rejection was upon the recommendation
of the Tan Gatue Adjustment Company.
Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for
Damages against Ever Insurance Agency (allegedly, also liable), Benito Sy Lee Yong and
Oriental Assurance, before the Regional Trial Court, Kalookan, Branch 123, docketed as Civil
Case No. C-12601.
After trial on the merit, the RTC

rendered its Decision, with the following dispositive portion:

WHEREFORE, upon all the foregoing premises, judgment is hereby rendered:

From Palawan-ETD January 16, 1986

To: Manila

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

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

WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental
Assurance Corporation, is hereby ABSOLVED from liability under its marine insurance policy
No. OAC-M-86/002. No costs.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-66935 November 11, 1985

After hearing, the trial court found in favor of the petitioners. The dispositive portion of the
decision reads:
FOR ALL THE FOREGOING, the Court hereby rendered judgment as follows:
(a) Condemning defendants Manila Bay Lighterage Corporation and Pioneer Insurance and
Surety Corporation to pay plaintiffs, jointly and severally, the sum of P100,000.00;
(b) Sentencing defendant Manila Bay Lighterage Corporation to pay plaintiff, in addition, the
sum of P50,000.00, plus P12,500.00, that the latter advanced to the former as down
payment for transporting the logs in question;

ISABELA ROQUE, doing busines under the name and style of Isabela Roque Timber
Enterprises and ONG CHIONG, petitioners,
vs.
HON. INTERMEDIATE APPELATE COURT and PIONEER INSURANCE AND SURETY
CORPORATION,respondent.

(c) Ordering the counterclaim of defendant Insurance against plaintiffs, dismissed, for lack of
merit, but as to its cross-claim against its co-defendant Manila Bay Lighterage Corporation,
the latter is ordered to reimburse the former for whatever amount it may pay the plaintiffs
as such surety;

GUTIERREZ, JR., J.:

(e) Plaintiffs' claim of not less than P100,000.00 and P75,000.00 as exemplary damages are
ordered dismissed, for lack of merits; plaintiffs' claim for attorney's fees in the sum of
P10,000.00 is hereby granted, against both defendants, who are, moreover ordered to pay
the costs; and

This petition for certiorari asks for the review of the decision of the Intermediate Appellate
Court which absolved the respondent insurance company from liability on the grounds that
the vessel carrying the insured cargo was unseaworthy and the loss of said cargo was
caused not by the perils of the sea but by the perils of the ship.
On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay), a common
carrier, entered into a contract with the petitioners whereby the former would load and carry
on board its barge Mable 10 about 422.18 cubic meters of logs from Malampaya Sound,
Palawan to North Harbor, Manila. The petitioners insured the logs against loss for
P100,000.00 with respondent Pioneer Insurance and Surety Corporation (Pioneer).
On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at Malampaya
Sound, Palawan for carriage and delivery to North Harbor, Port of Manila, but the shipment
never reached its destination because Mable 10 sank with the 811 pieces of logs somewhere
off Cabuli Point in Palawan on its way to Manila. As alleged by the petitioners in their
complaint and as found by both the trial and appellate courts, the barge where the logs were
loaded was not seaworthy such that it developed a leak. The appellate court further found
that one of the hatches was left open causing water to enter the barge and because the
barge was not provided with the necessary cover or tarpaulin, the ordinary splash of sea
waves brought more water inside the barge.
On March 8, 1972, the petitioners wrote a letter to Manila Bay demanding payment of
P150,000.00 for the loss of the shipment plus P100,000.00 as unrealized profits but the
latter ignored the demand. Another letter was sent to respondent Pioneer claiming the full
amount of P100,000.00 under the insurance policy but respondent refused to pay on the
ground that its hability depended upon the "Total loss by Total Loss of Vessel only". Hence,
petitioners commenced Civil Case No. 86599 against Manila Bay and respondent Pioneer.

(d) Ordering the counterclaim of defendant Lighterage against plaintiffs, dismissed for lack
of merit;

(f) The sum of P150,000.00 award to plaintiffs, shall bear interest of six per cent (6%) from
March 25, 1975, until amount is fully paid.
Respondent Pioneer appealed to the Intermediate Appellate Court. Manila Bay did not
appeal. According to the petitioners, the transportation company is no longer doing business
and is without funds.
During the initial stages of the hearing, Manila Bay informed the trial court that it had
salvaged part of the logs. The court ordered them to be sold to the highest bidder with the
funds to be deposited in a bank in the name of Civil Case No. 86599.
On January 30, 1984, the appellate court modified the trial court's decision and absolved
Pioneer from liability after finding that there was a breach of implied warranty of
seaworthiness on the part of the petitioners and that the loss of the insured cargo was
caused by the "perils of the ship" and not by the "perils of the sea". It ruled that the loss is
not covered by the marine insurance policy.
After the appellate court denied their motion for reconsideration, the petitioners filed this
petition with the following assignments of errors:
I
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT IN CASES OF MARINE
CARGO INSURANCE, THERE IS A WARRANTY OF SEAWORTHINESS BY THE CARGO OWNER.

II
THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT THE LOSS OF THE CARGO IN
THIS CASE WAS CAUSED BY "PERILS OF THE SHIP" AND NOT BY "PERILS OF THE SEA."
III
THE INTERMEDIATE APPELLATE COURT ERRED IN NOT ORDERING THE RETURN TO
PETITIONER OF THE AMOUNT OF P8,000.00 WHICH WAS DEPOSITED IN THE TRIAL COURT AS
SALVAGE VALUE OF THE LOGS THAT WERE RECOVERED.
In their first assignment of error, the petitioners contend that the implied warranty of
seaworthiness provided for in the Insurance Code refers only to the responsibility of the
shipowner who must see to it that his ship is reasonably fit to make in safety the
contemplated voyage.
The petitioners state that a mere shipper of cargo, having no control over the ship, has
nothing to do with its seaworthiness. They argue that a cargo owner has no control over the
structure of the ship, its cables, anchors, fuel and provisions, the manner of loading his cargo
and the cargo of other shippers, and the hiring of a sufficient number of competent officers
and seamen. The petitioners' arguments have no merit.
There is no dispute over the liability of the common carrier Manila Bay. In fact, it did not
bother to appeal the questioned decision. However, the petitioners state that Manila Bay has
ceased operating as a firm and nothing may be recovered from it. They are, therefore, trying
to recover their losses from the insurer.
The liability of the insurance company is governed by law. Section 113 of the Insurance Code
provides:
In every marine insurance upon a ship or freight, or freightage, or upon any thing which is
the subject of marine insurance, a warranty is implied that the ship is seaworthy.
Section 99 of the same Code also provides in part.
Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, ...
From the above-quoted provisions, there can be no mistaking the fact that the term "cargo"
can be the subject of marine insurance and that once it is so made, the implied warranty of
seaworthiness immediately attaches to whoever is insuring the cargo whether he be the
shipowner or not.
As we have ruled in the case of Go Tiaoco y Hermanos v. Union Insurance Society of
Canton (40 Phil. 40):

The same conclusion must be reached if the question be discussed with reference to the
seaworthiness of the ship. It is universally accepted that in every contract of insurance upon
anything which is the subject of marine insurance, a warranty is implied that the ship shall
be seaworthy at the time of the inception of the voyage. This rule is accepted in our own
Insurance Law (Act No. 2427, sec. 106). ...
Moreover, the fact that the unseaworthiness of the ship was unknown to the insured is
immaterial in ordinary marine insurance and may not be used by him as a defense in order
to recover on the marine insurance policy.
As was held in Richelieu and Ontario Nav. Co. v. Boston Marine, Inc., Co. (136 U.S. 406):
There was no look-out, and both that and the rate of speed were contrary to the Canadian
Statute. The exception of losses occasioned by unseaworthiness was in effect a warranty
that a loss should not be so occasioned, and whether the fact of unseaworthiness were
known or unknown would be immaterial.
Since the law provides for an implied warranty of seaworthiness in every contract of ordinary
marine insurance, it becomes the obligation of a cargo owner to look for a reliable common
carrier which keeps its vessels in seaworthy condition. The shipper of cargo may have no
control over the vessel but he has full control in the choice of the common carrier that will
transport his goods. Or the cargo owner may enter into a contract of insurance which
specifically provides that the insurer answers not only for the perils of the sea but also
provides for coverage of perils of the ship.
We are constrained to apply Section 113 of the Insurance Code to the facts of this case. As
stated by the private respondents:
In marine cases, the risks insured against are "perils of the sea" (Chute v. North River Ins.
Co., Minn214 NW 472, 55 ALR 933). The purpose of such insurance is protection against
contingencies and against possible damages and such a policy does not cover a loss or
injury which must inevitably take place in the ordinary course of things. There is no doubt
that the term 'perils of the sea' extends only to losses caused by sea damage, or by the
violence of the elements, and does not embrace all losses happening at sea. They insure
against losses from extraordinary occurrences only, such as stress of weather, winds and
waves, lightning, tempests, rocks and the like. These are understood to be the "perils of the
sea" referred in the policy, and not those ordinary perils which every vessel must encounter.
"Perils of the sea" has been said to include only such losses as are of extraordinarynature,
or arise from some overwhelming power, which cannot be guarded against by the ordinary
exertion of human skill and prudence. Damage done to a vessel by perils of the sea includes
every species of damages done to a vessel at sea, as distinguished from the ordinary wear
and tear of the voyage, and distinct from injuries suffered by the vessel in consequence of
her not being seaworthy at the outset of her voyage (as in this case). It is also the general
rule that everything which happens thru the inherent vice of the thing, or by the act of the
owners, master or shipper, shall not be reputed a peril, if not otherwise borne in the policy.
(14 RCL on Insurance, Sec. 384, pp. 1203- 1204; Cia. de Navegacion v. Firemen's Fund Ins.
Co., 277 US 66, 72 L. ed. 787, 48 S. Ct. 459).

With regard to the second assignment of error, petitioners maintain, that the loss of the
cargo was caused by the perils of the sea, not by the perils of the ship because as found by
the trial court, the barge was turned loose from the tugboat east of Cabuli Point "where it
was buffeted by storm and waves." Moreover, petitioners also maintain that barratry, against
which the cargo was also insured, existed when the personnel of the tugboat and the barge
committed a mistake by turning loose the barge from the tugboat east of Cabuli Point. The
trial court also found that the stranding and foundering of Mable 10 was due to improper
loading of the logs as well as to a leak in the barge which constituted negligence.

adventure. The purpose of the policy is to secure an indemnity against accidents which may
happen, not against events which must happen.

On the contention of the petitioners that the trial court found that the loss was occasioned
by the perils of the sea characterized by the "storm and waves" which buffeted the vessel,
the records show that the court ruled otherwise. It stated:

xxx xxx xxx

xxx xxx xxx

... The other affirmative defense of defendant Lighterage, 'That the supposed loss of the logs
was occasioned by force majeure... "was not supported by the evidence. At the time Mable
10 sank, there was no typhoon but ordinary strong wind and waves, a condition which is
natural and normal in the open sea. The evidence shows that the sinking of Mable 10 was
due to improper loading of the logs on one side so that the barge was tilting on one side and
for that it did not navigate on even keel; that it was no longer seaworthy that was why it
developed leak; that the personnel of the tugboat and the barge committed a mistake when
it turned loose the barge from the tugboat east of Cabuli point where it was buffeted by
storm and waves, while the tugboat proceeded to west of Cabuli point where it was
protected by the mountain side from the storm and waves coming from the east
direction. ..."
In fact, in the petitioners' complaint, it is alleged that "the barge Mable 10 of defendant
carrier developed a leak which allowed water to come in and that one of the hatches of said
barge was negligently left open by the person in charge thereof causing more water to come
in and that "the loss of said plaintiffs' cargo was due to the fault, negligence, and/or lack of
skill of defendant carrier and/or defendant carrier's representatives on barge Mable 10."

In the present case the entrance of the sea water into the ship's hold through the defective
pipe already described was not due to any accident which happened during the voyage, but
to the failure of the ship's owner properly to repair a defect of the existence of which he was
apprised. The loss was therefore more analogous to that which directly results from simple
unseaworthiness than to that which result from the perils of the sea.

Suffice it to say that upon the authority of those cases there is no room to doubt the liability
of the shipowner for such a loss as occurred in this case. By parity of reasoning the insurer is
not liable; for generally speaking, the shipowner excepts the perils of the sea from his
engagement under the bill of lading, while this is the very perils against which the insurer
intends to give protection. As applied to the present case it results that the owners of the
damaged rice must look to the shipowner for redress and not to the insurer.
Neither can petitioners allege barratry on the basis of the findings showing negligence on
the part of the vessel's crew.
Barratry as defined in American Insurance Law is "any willful misconduct on the part of
master or crew in pursuance of some unlawful or fraudulent purpose without the consent of
the owners, and to the prejudice of the owner's interest." (Sec. 171, U.S. Insurance Law,
quoted in Vance, Handbook on Law of Insurance, 1951, p. 929.)
Barratry necessarily requires a willful and intentional act in its commission. No honest error
of judgment or mere negligence, unless criminally gross, can be barratry. (See Vance on Law
of Insurance, p. 929 and cases cited therein.)
In the case at bar, there is no finding that the loss was occasioned by the willful or
fraudulent acts of the vessel's crew. There was only simple negligence or lack of skill. Hence,
the second assignment of error must likewise be dismissed.

It is quite unmistakable that the loss of the cargo was due to the perils of the ship rather
than the perils of the sea. The facts clearly negate the petitioners' claim under the insurance
policy. In the case of Go Tiaoco y Hermanos v. Union Ins. Society of Canton, supra, we had
occasion to elaborate on the term "perils of the ship." We ruled:

Anent the third assignment of error, we agree with the petitioners that the amount of
P8,000.00 representing the amount of the salvaged logs should have been awarded to them.
However, this should be deducted from the amounts which have been adjudicated against
Manila Bay Lighterage Corporation by the trial court.

It must be considered to be settled, furthermore, that a loss which, in the ordinary course of
events, results from the natural and inevitable action of the sea, from the ordinary wear and
tear of the ship, or from the negligent failure of the ship's owner to provide the vessel with
proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea.
Such a loss is rather due to what has been aptly called the "peril of the ship." The insurer
undertakes to insure against perils of the sea and similar perils, not against perils of the
ship. As was well said by Lord Herschell in Wilson, Sons & Co. v. Owners of Cargo per the
Xantho ([1887], 12 A. C., 503, 509), there must, in order to make the insurer liable, be some
casualty, something which could not be foreseen as one of the necessary incidents of the

WHEREFORE, the decision appealed from is AFFIRMED with the modification that the amount
of P8,000.00 representing the value of the salvaged logs which was ordered to be deposited
in the Manila Banking Corporation in the name of Civil Case No. 86599 is hereby awarded
and ordered paid to the petitioners. The liability adjudged against Manila Bay Lighterage
Corporation in the decision of the trial court is accordingly reduced by the same amount.
SO ORDERED.

10

11

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 85141 November 28, 1989
FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.
Balgos & Perez Law Offices for petitioner.
Lapuz Law office for private respondent.

REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July 19,1988, the
dispositive part of which reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino
Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with interest at
legal rate from the date of filing of the complaint, and is modified with respect to the third
party complaint in that (1) third party defendant E. Razon, Inc. is ordered to reimburse third
party plaintiff the sum of P25,471.80 with legal interest from the date of payment until the
date of reimbursement, and (2) the third-party complaint against third party defendant
Compagnie Maritime Des Chargeurs Reunis is dismissed. 1
The facts as found by the trial court and adopted by the Court of Appeals are as follows:
This is an action brought by the consignee of the shipment of fishmeal loaded on board the
vessel SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976
and seeks to recover from the defendant insurance company the amount of P51,568.62
representing damages to said shipment which has been insured by the defendant insurance
company under Policy No. M-2678. The defendant brought a third party complaint against
third party defendants Compagnie Maritime Des Chargeurs Reunis and/or E. Razon, Inc.
seeking judgment against the third (sic) defendants in case Judgment is rendered against
the third party plaintiff. It appears from the evidence presented that in December 1976,
plaintiff insured said shipment with defendant insurance company under said cargo Policy
No. M-2678 for the sum of P267,653.59 for the goods described as 600 metric tons of
fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand to Manila against all
risks under warehouse to warehouse terms. Actually, what was imported was 59.940 metric
tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were
unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E.
Razon, Inc. and defendant's surveyor ascertained and certified that in such discharge 105
bags were in bad order condition as jointly surveyed by the ship's agent and the arrastre

contractor. The condition of the bad order was reflected in the turn over survey report of Bad
Order cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three (3) pages which are
also Exhibits 4, 5 and 6- Razon. The cargo was also surveyed by the arrastre contractor
before delivery of the cargo to the consignee and the condition of the cargo on such delivery
was reflected in E. Razon's Bad Order Certificate No. 14859, 14863 and 14869 covering a
total of 227 bags in bad order condition. Defendant's surveyor has conducted a final and
detailed survey of the cargo in the warehouse for which he prepared a survey report Exhibit
F with the findings on the extent of shortage or loss on the bad order bags totalling 227 bags
amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff made a
formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A formal claim statement
was also presented by the plaintiff against the vessel dated December 21, 1976, Exhibit B,
but the defendant Filipino Merchants Insurance Company refused to pay the claim.
Consequently, the plaintiff brought an action against said defendant as adverted to above
and defendant presented a third party complaint against the vessel and the arrastre
contractor. 2
The court below, after trial on the merits, rendered judgment in favor of private respondent,
the decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff
and against the defendant Filipino Merchant's (sic) Insurance Co., ordering the defendants to
pay the plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint;
On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs
Reunis and third party defendant E. Razon, Inc. are ordered to pay to the third party plaintiff
jointly and severally reimbursement of the amounts paid by the third party plaintiff with
legal interest from the date of such payment until the date of such reimbursement.
Without pronouncement as to costs. 3
On appeal, the respondent court affirmed the decision of the lower court insofar as the
award on the complaint is concerned and modified the same with regard to the adjudication
of the third-party complaint. A motion for reconsideration of the aforesaid decision was
denied, hence this petition with the following assignment of errors:
1. The Court of Appeals erred in its interpretation and application of the "all risks" clause of
the marine insurance policy when it held the petitioner liable to the private respondent for
the partial loss of the cargo, notwithstanding the clear absence of proof of some fortuitous
event, casualty, or accidental cause to which the loss is attributable, thereby contradicting
the very precedents cited by it in its decision as well as a prior decision of the same Division
of the said court (then composed of Justices Cacdac, Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that the private respondent had no insurable
interest in the subject cargo, hence, the marine insurance policy taken out by private
respondent is null and void;

12

3. The Court of Appeals erred in not holding that the private respondent was guilty of fraud
in not disclosing the fact, it being bound out of utmost good faith to do so, that it had no
insurable interest in the subject cargo, which bars its recovery on the policy. 4
On the first assignment of error, petitioner contends that an "all risks" marine policy has a
technical meaning in insurance in that before a claim can be compensable it is essential that
there must be "some fortuity, " "casualty" or "accidental cause" to which the alleged loss is
attributable and the failure of herein private respondent, upon whom lay the burden, to
adduce evidence showing that the alleged loss to the cargo in question was due to a
fortuitous event precludes his right to recover from the insurance policy. We find said
contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the subject-matter insured but shall
in no case be deemed to extend to cover loss, damage, or expense proximately caused by
delay or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder
shall be payable irrespective of percentage. 5
An "all risks policy" should be read literally as meaning all risks whatsoever and covering all
losses by an accidental cause of any kind. The terms "accident" and "accidental", as used in
insurance contracts, have not acquired any technical meaning. They are construed by the
courts in their ordinary and common acceptance. Thus, the terms have been taken to mean
that which happens by chance or fortuitously, without intention and design, and which is
unexpected, unusual and unforeseen. An accident is an event that takes place without one's
foresight or expectation; an event that proceeds from an unknown cause, or is an unusual
effect of a known cause and, therefore, not expected. 6

thereafter, the burden then shifts to the insurer to show the exception to the coverage. 10 As
we held in Paris-Manila Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that
the insurance company has the burden of proving that the loss is caused by the risk
excepted and for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a special type of
insurance which extends coverage to risks not usually contemplated and avoids putting
upon the insured the burden of establishing that the loss was due to the peril falling within
the policy's coverage; the insurer can avoid coverage upon demonstrating that a specific
provision expressly excludes the loss from coverage. 12 A marine insurance policy providing
that the insurance was to be "against all risks" must be construed as creating a special
insurance and extending to other risks than are usually contemplated, and covers all losses
except such as arise from the fraud of the insured. 13 The burden of the insured, therefore, is
to prove merely that the goods he transported have been lost, destroyed or deteriorated.
Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted
perils. To impose on the insured the burden of proving the precise cause of the loss or
damage would be inconsistent with the broad protective purpose of "all risks" insurance.
In the present case, there being no showing that the loss was caused by any of the excepted
perils, the insurer is liable under the policy. As aptly stated by the respondent Court of
Appeals, upon due consideration of the authorities and jurisprudence it discussed
... it is believed that in the absence of any showing that the losses/damages were caused by
an excepted peril, i.e. delay or the inherent vice or nature of the subject matter insured, and
there is no such showing, the lower court did not err in holding that the loss was covered by
the policy.

The very nature of the term "all risks" must be given a broad and comprehensive meaning
as covering any loss other than a willful and fraudulent act of the insured. 7 This is pursuant
to the very purpose of an "all risks" insurance to give protection to the insured in those
cases where difficulties of logical explanation or some mystery surround the loss or damage
to property. 8 An "all asks" policy has been evolved to grant greater protection than that
afforded by the "perils clause," in order to assure that no loss can happen through the
incidence of a cause neither insured against nor creating liability in the ship; it is written
against all losses, that is, attributable to external causes. 9

There is no evidence presented to show that the condition of the gunny bags in which the
fishmeal was packed was such that they could not hold their contents in the course of the
necessary transit, much less any evidence that the bags of cargo had burst as the result of
the weakness of the bags themselves. Had there been such a showing that spillage would
have been a certainty, there may have been good reason to plead that there was no risk
covered by the policy (See Berk vs. Style [1956] cited in Marine Insurance Claims, Ibid, p.
125). Under an 'all risks' policy, it was sufficient to show that there was damage occasioned
by some accidental cause of any kind, and there is no necessity to point to any particular
cause. 14

The term "all risks" cannot be given a strained technical meaning, the language of the
clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it
extends to all damages/losses suffered by the insured cargo except (a) loss or damage or
expense proximately caused by delay, and (b) loss or damage or expense proximately
caused by the inherent vice or nature of the subject matter insured.

Contracts of insurance are contracts of indemnity upon the terms and conditions specified in
the policy. The agreement has the force of law between the parties. The terms of the policy
constitute the measure of the insurer's liability. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and popular sense. 15

Generally, the burden of proof is upon the insured to show that a loss arose from a covered
peril, but under an "all risks" policy the burden is not on the insured to prove the precise
cause of loss or damage for which it seeks compensation. The insured under an "all risks
insurance policy" has the initial burden of proving that the cargo was in good condition when
the policy attached and that the cargo was damaged when unloaded from the vessel;

Anent the issue of insurable interest, we uphold the ruling of the respondent court that
private respondent, as consignee of the goods in transit under an invoice containing the
terms under "C & F Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every interest in
property, whether real or personal, or any relation thereto, or liability in respect thereof, of

13

such nature that a contemplated peril might directly damnify the insured. In principle,
anyone has an insurable interest in property who derives a benefit from its existence or
would suffer loss from its destruction whether he has or has not any title in, or lien upon or
possession of the property y. 16 Insurable interest in property may consist in (a) an existing
interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy,
coupled with an existing interest in that out of which the expectancy arises. 17

WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent
Court of Appeals is AFFIRMED in toto.
SO ORDERED.

Herein private respondent, as vendee/consignee of the goods in transit has such existing
interest therein as may be the subject of a valid contract of insurance. His interest over the
goods is based on the perfected contract of sale. 18 The perfected contract of sale between
him and the shipper of the goods operates to vest in him an equitable title even before
delivery or before be performed the conditions of the sale. 19 The contract of shipment,
whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of
whether the vendee has an insurable interest or not in the goods in transit. The perfected
contract of sale even without delivery vests in the vendee an equitable title, an existing
interest over the goods sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of
sale, the seller is authorized or required to send the goods to the buyer, delivery of the
goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to
the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule
not obtaining in the present case. The Court has heretofore ruled that the delivery of the
goods on board the carrying vessels partake of the nature of actual delivery since, from that
time, the foreign buyers assumed the risks of loss of the goods and paid the insurance
premium covering them. 20
C & F contracts are shipment contracts. The term means that the price fixed includes in a
lump sum the cost of the goods and freight to the named destination. 21 It simply means that
the seller must pay the costs and freight necessary to bring the goods to the named
destination but the risk of loss or damage to the goods is transferred from the seller to the
buyer when the goods pass the ship's rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest was not among the defenses averred in
petitioners answer. It was neither an issue agreed upon by the parties at the pre-trial
conference nor was it raised during the trial in the court below. It is a settled rule that an
issue which has not been raised in the court a quo cannot be raised for the first time on
appeal as it would be offensive to the basic rules of fair play, justice and due process. 23 This
is but a permuted restatement of the long settled rule that when a party deliberately adopts
a certain theory, and the case is tried and decided upon that theory in the court below, he
will not be permitted to change his theory on appeal because, to permit him to do so, would
be unfair to the adverse party. 24
If despite the fundamental doctrines just stated, we nevertheless decided to indite a
disquisition on the issue of insurable interest raised by petitioner, it was to put at rest all
doubts on the matter under the facts in this case and also to dispose of petitioner's third
assignment of error which consequently needs no further discussion.

14

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 84507 March 15, 1990
CHOA TIEK SENG, doing business under the name and style of SENG'S
COMMERCIAL ENTERPRISES,petitioner,
vs.
HON. COURT OF APPEALS, FILIPINO MERCHANTS' INSURANCE COMPANY, INC., BEN
LINES CONTAINER, LTD. AND E. RAZON, INC., respondents.
Lapuz Law Office for petitioner.
De Santos, Balgoz & Perez for respondent Filipino Merchants' Insurance Company, Inc.
Marilyn Cacho-Noe for respondent Ben Lines Container, Ltd.

GANCAYCO, J.:
This is an appeal from a decision of the Court of Appeals dated February 18, 1988 in CA-G.R.
CV No. 09627 which affirmed the decision of the Regional Trial Court (RTC) of Manila which in
turn dismissed the complaint. 1
On November 4, 1976 petitioner imported some lactose crystals from Holland. The
importation involved fifteen (15) metric tons packed in 600 6-ply paper bags with
polythelene inner bags, each bag at 25 kilos net. The goods were loaded at the port at
Rotterdam in sea vans on board the vessel "MS Benalder' as the mother vessel, and
thereafter aboard the feeder vessel "Wesser Broker V-25" of respondent Ben Lines Container,
Ltd. (Ben Lines for short). The goods were insured by the respondent Filipino Merchants'
Insurance Co., Inc. (insurance company for short) for the sum of P98,882.35, the equivalent
of US$8,765.00 plus 50% mark-up or US$13,147.50, against all risks under the terms of the
insurance cargo policy. Upon arrival at the port of Manila, the cargo was discharged into the
custody of the arrastre operator respondent E. Razon, Inc. (broker for short), prior to the
delivery to petitioner through his broker. Of the 600 bags delivered to petitioner, 403 were in
bad order. The surveys showed that the bad order bags suffered spillage and loss later
valued at P33,117.63.
Petitioner filed a claim for said loss dated February 16, 1977 against respondent insurance
company in the amount of P33,117.63 as the insured value of the loss.
Respondent insurance company rejected the claim alleging that assuming that spillage took
place while the goods were in transit, petitioner and his agent failed to avert or minimize the
loss by failing to recover spillage from the sea van, thus violating the terms of the insurance
policy sued upon; and that assuming that the spillage did not occur while the cargo was in

transit, the said 400 bags were loaded in bad order, and that in any case, the van did not
carry any evidence of spillage.
Hence, petitioner filed the complaint dated August 2, 1977 in the Regional Trial Court of
Manila against respondent insurance company seeking payment of the sum of P33,117.63 as
damages plus attorney's fees and expenses of litigation. In its answer, respondent insurance
company denied all the material allegations of the complaint and raised several special
defenses as well as a compulsory counterclaim. On February 24, 1978, respondent insurance
company filed a third-party complaint against respondents Ben Lines and broker. Respondent
broker filed its answer to the third-party complaint denying liability and arguing, among
others, that the petitioner has no valid cause of action against it. Similarly, Ben Lines filed its
answer denying any liability and a special defense arguing that respondent insurance
company was not the proper party in interest and has no connection whatsoever with Ben
Lines Containers, Ltd. and that the third-party complaint has prescribed under the applicable
provisions of the Carriage of Goods by Sea Act.
On November 6, 1979, respondent Ben Lines filed a motion for preliminary hearing on the
affirmative defense of prescription. In an order dated February 28, 1980, the trial court
deferred resolution of the aforesaid motion after trial on the ground that the defense of
prescription did not appear to be indubitable.
After the pre-trial conference and trial on the merits, on March 31, 1986, the court a
quo rendered a judgment dismissing the complaint, the counterclaim and the third-party
complaint with costs against the petitioner.
Hence, the appeal to the Court of Appeals by petitioner which, in due course, as aforestated,
affirmed the judgment of the trial court.
A motion for reconsideration of said judgment was denied by the appellate court in a
resolution dated August 1, 1988.
Petitioner now filed this petition for review on certiorari in this Court predicated on the
following grounds:
I
RESPONDENT COURT ERRED IN HOLDING THAT THE INSURED SHIPMENT DID NOT SUSTAIN
ANY DAMAGE/LOSS DESPITE ADMISSION THEREOF ON THE PART OF RESPONDENT
INSURANCE COMPANY AND THE FINDING OF THE LATTER'S SURVEYORS.
II
RESPONDENT COURT ERRED IN HOLDING THAT AN "ALL RISKS" COVERAGE COVERS ONLY
LOSSES OCCASIONED BY OR RESULTING FROM "EXTRA AND FORTUITOUS EVENTS" DESPITE
THE CLEAR AND UNEQUIVOCAL DEFINITION OF THE TERM MADE AND CONTAINED IN THE
POLICY SUED UPON.
III

15

THE HOLDING OF RESPONDENT COURT THAT AN "ALL RISKS" COVERAGE COVERS LOSSES
OCCASIONED BY AND RESULTING FROM "EXTRA AND FORTUITOUS EVENTS" CONTRADICTS
THE RULING OF THE SAME COURT IN ANOTHER CASE WHERE THE DEFINITION OF THE TERM
"ALL RISKS"/ STATED IN THE POLICY WAS MADE TO CONTROL HENCE THE NEED FOR
REVIEW. 2
The petition is impressed with merit.
The appellate court, in arriving at the conclusion that there was no damage suffered by the
cargo at the time of the devanning thereof, held as follows:
Appellant argued that the cargo in question sustained damages while still in the possession
of the carrying vessel, because as his appointed surveyor reported, Worldwide Marine
Survey Corporation, at the time of devanning at the pier, 403 bags were already in bad order
and condition. Appellant found support to this contention on the basis of the survey report of
Worldwide Marine Survey Corporation of the Philippines and of the Adjustment Corporation
of the Philippines which were identified by his sole witness, Jose See. It must be pointed out,
however, that witness Jose See was incompetent to identify the two survey reports because
he was not actually present during the actual devanning of the cargo, which fact was
admitted by him, hence, he failed to prove the authenticity of the aforesaid survey reports.
On the other hand, the evidence submitted by the appellee would conclusively establish the
fact that there was no damage suffered by the subject cargo at the time of the devanning
thereof. The cargo, upon discharge from the vessel, was delivered to the custody of the
arrastre operator (E. Razon) under clean tally sheet (Exh. 6-FMIC). Moreover, the container
van containing the cargo was found with both its seal and lock intact. Article IV, paragraph 4
of the Management Contract (Exh. 5) signed between the Bureau of Customs and the
Arrastre Operator provides:
4. Tally Sheets for Cargo Vans or Containers The contractor shall give a clean tally sheet
for cargo vans received by it in good order and condition with locks, and seals intact.
The same cargo was in turn delivered into the possession of the appellant by the arrastre
operator at the pier in good order and condition as shown by the clean gate passes (Exhs. 2
and 3) and the delivery permit (Exh. 4). The clean gate passes were issued by appellee
arrastre operator covering the shipment in question, with the conformity of the appellant's
representative. The clean gate passes provide in part:
. . . 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 B.O. (Bad Order)
Certificate duly issued and noted on the face of this Gate Pass appears.
These clean gate passes are undoubtedly important and vital pieces of evidence. They are
noted in the dorsal side of another important piece of document which is the permit to
deliver (Exh. 4) issued by the Bureau of Customs to effect delivery of the cargo to the
consignee. The significance and value of these documents is that they bind the shipping
company and the arrastre operator whenever a cargo sustains damage while in their
respective custody. It is worthy of note that there was no turn over survey executed between

the vessel and the arrastre operator, indicating any damage to the cargo upon discharge
from the custody of the vessel. There was no bad order certificate issued by the appellee
arrastre operator, indicating likewise that there was no damage to the cargo while in its
custody.
It is surprising to the point that one could not believe that if indeed there was really damage
affecting the 403 bags out of the 600, with an alleged estimated spillage of 240%, this
purportedly big quantity of spillage was never recovered which could have been easily done
considering that the shipment was in a container van which was found to be sealed and
intact. 3
However, in the same decision of the appellate court, the following evidence of the
petitioner on this aspect was summarized as follows:
The 600 bags which the original carrier received in apparent good order condition and
certified to by the vessel's agent to be weighing 15,300 kg. gross, were unloaded from the
transhipment vessel "Wesser Broker" stuffed in one container and turned over to the arrastre
operator, third party defendant-appellee E. Razon, Inc. A shipboard surveyor, the Worldwide
Marine Cargo Surveyor, as well as a representative of the vessel "Wesser Broker" and a
representative of the arrastre operator attended the devanning of the shipment and the said
shipboard surveyor certified that 403 bags were in bad order condition with estimated
spillage as follows:
65 P/bags
78 P/bags
79 P/bags
87 P/bags
94 P/bags
(Exh. F-1)

each
each
each
each
each

of
of
of
of
of

20%
35%
45%
65%
75%

Defendant and third-party plaintiff-appellee's protective surveyor determined the exact

spillage from the bad order bags as found by the shipboard surveyor at the consignee's
warehouse by weighing the bad order bags. Said protective surveyor found after weighing
the 403 bags in bad order condition that an aggregate of 5,173 kilos were missing therefrom
(Exh. F). 4
The assertion of the appellate court that the authenticity of the survey reports of the
Worldwide Marine Cargo Survey Corporation and the Adjustment Corporation of the
Philippines were not established as Jose See who identified the same was incompetent as he
was not actually present during the actual devanning of the cargo is not well taken.
In the first place it was respondent insurance company which undertook the protective
survey aforestated relating to the goods from the time of discharge up to the time of
delivery thereof to the consignee's warehouse, so that it is bound by the report of its
surveyor which is the Adjustment Corporation of the Philippines. 5 The Worldwide Marine
Cargo Survey Corporation of the Philippines was the vessel's surveyor. The survey report of
the said Adjustment Corporation of the Philippines reads as follows:

16

During the turn-over of the contents delivery from the cargo sea van by the representative
of the shipping agent to consignee's representative/ Broker (Saint Rose Forwarders), 403
bags were bursted and/or torn, opened on one end contents partly spilled. The same were
inspected by thevessel's surveyor (Worldwide Marine & Cargo Survey Corporation), findings
as follows:

possession of the petitioner by the broker in good order and condition as shown by the clean
gate passes and delivery permit.

FOUND:

The clean tally sheet referred to by the appellate court covers the van container and not the
cargo stuffed therein.9 The appellate court clearly stated that the clean tally sheet issued by
the broker covers the cargo vans received by it in good order and condition with lock and
seal intact. Said tally sheet is no evidence of the condition of the cargo therein contained.
Even the witness of the respondent insurance company, Sergio Icasiano, stated that the
clean gate passes do not reflect the actual condition of the cargo when released by the
broker as it was not physically examined by the broker. 10

197-Paper Bags (6-Ply each with One inner Plastic Lining Machine Stitched with cotton Twine
on Both ends. Containing Lactose Crystal 25 mesh Sep 061-09-03 in good order.

There is no question, therefore, that there were 403 bags in damaged condition delivered
and received by petitioner.

403-Bags, 6-ply torn and/or opened on one end, contents partly spilled, estimated spillages
as follows:

Nevertheless, on the assumption that the cargo suffered damages, the appellate court ruled:

One (1) Container No. 2987789

Property locked and secured with Seal No. 18880.

65 P/bags each of 20%

78 P/bags each of 35%
79 P/bags each of 45%
87 P/bags each of 65%
94 P/bags each of 75%
(emphasis supplied) 6
The authenticity of the said survey report need not be established in evidence as it is
binding on respondent insurance company who caused said protective survey.
Secondly, contrary to the findings of the appellate court that petitioner's witness Jose See
was not present at the time of the actual devanning of the cargo, what the record shows is
that he was present when the cargo was unloaded and received in the warehouse of the
consignee. He saw 403 bags to be in bad order. Present then was the surveyor, Adjustment
Corporation of the Philippines, who surveyed the cargo by segregating the bad order cargo
from the good order and determined the amount of loss. 7 Thus, said witness was indeed
competent to identify the survey report aforestated.
Thirdly, in its letter dated May 26, 1977 to petitioner, respondent insurance company
admitted in no uncertain terms, the damages as indicated in the survey report in this
manner:
We do not question the fact that out of the 600 bags shipment 403 bags appeared to be in
bad order or in damaged condition as indicated in the survey report of the vessel
surveyor. . . . 8
This admission even standing alone is sufficient proof of loss or damage to the cargo.
The appellate court observed that the cargo was discharged from the vessel and delivered to
the custody of the broker under the clean tally sheet, that the container van containing the
cargo was found with both its seal and lock intact; and that the cargo was delivered to the

Even assuming that the cargo indeed sustained damage, still the appellant cannot hold the
appellee insurance company liable on the insurance policy. In the case at bar, appellant
failed to prove that the alleged damage was due to risks connected with navigation. A
distinction should be made between "perils of the sea" which render the insurer liable on
account of the loss and/or damage brought about thereof and "perils of the ship" which do
not render the insurer liable for any loss or damage. Perils of the sea or perils of navigation
embrace all kinds of marine casualties, such as shipwreck, foundering, stranding, collision
and every specie of damage done to the ship or goods at sea by the violent action of the
winds or waves. They do not embrace all loses happening on the sea. A peril whose only
connection with the sea is that it arises aboard ship is not necessarily a peril of the sea; the
peril must be of the sea and not merely one accruing on the sea (The Phil. Insurance Law, by
Guevarra, 4th ed., 1961, p. 143). In Wilson, Sons and Co. vs. Owners of Cargo per the
Xantho(1887) A.C. 503, 508, it was held:
There must, in order to make the insurer liable be "some casualty," something which could
not be foreseen as one of the necessary incidents of the adventure. The purpose of the
policy is to secure an indemnity against accidents which may happen, not against events
which must happen.
Moreover, the cargo in question was insured in an "against all risk policy." Insurance "against
all risk" has a technical meaning in marine insurance. Under an "all risk" marine policy, there
must be a general rule be a fortuitous event in order to impose liability on the insurer; losses
occasioned by ordinary circumstances or wear and tear are not covered, thus, while an "all
risk" marine policy purports to cover losses from casualties at sea, it does not cover losses
occasioned by the ordinary circumstances of a voyage, but only those resulting from extra
and fortuitous events.
It has been held that damage to a cargo by high seas and other weather is not covered by
an "all risk" marine policy, since it is not fortuitous, particularly where the bad weather
occurs at a place where it could be expected at the time in question. (44 Am. Jur. 2d. 216)
In Go Tiaoco y Hermanas vs. Union Insurance Society of Canto, 40 Phil. 40, it was held:

17

In the present case, the entrance of the sea water into the ship's hold through the defective
pipe already described was not due to any accident which happened during the voyage, but
to the failure of the ship's owner properly to repair a defect of the existence of which he was
apprised. The loss was therefore more analogous to that which directly results from simple
unseaworthiness than to that whose results, from perils of the sea. 11
The Court disagrees.
In Gloren Inc. vs. Filipinas Cia. de Seguros, 12 it was held that an all risk insurance policy
insures against all causes of conceivable loss or damage, except as otherwise excluded in
the policy or due to fraud or intentional misconduct on the part of the insured. It covers all
losses during the voyage whether arising from a marine peril or not, including pilferage
losses during the war.
In the present case, the "all risks" clause of the policy sued upon reads as follows:
5. This insurance is against all risks of loss or damage to the subject matter insured but shall
in no case be deemed to extend to cover loss, damage, or expense proximately caused by
delay or inherent vice or nature of the subject matter insured. Claims recoverable hereunder
shall be payable irrespective of percentage. 13
The terms of the policy are so clear and require no interpretation. The insurance policy
covers all loss or damage to the cargo except those caused by delay or inherent vice or
nature of the cargo insured. It is the duty of the respondent insurance company to establish
that said loss or damage falls within the exceptions provided for by law, otherwise it is liable
therefor.
An "all risks" provision of a marine policy creates a special type of insurance which extends
coverage to risks not usually contemplated and avoids putting upon the insured the burden
of establishing that the loss was due to peril falling within the policy's coverage. The insurer
can avoid coverage upon demonstrating that a specific provision expressly excludes the loss
from coverage. 14
In this case, the damage caused to the cargo has not been attributed to any of the
exceptions provided for nor is there any pretension to this effect. Thus, the liability of
respondent insurance company is clear.
WHEREFORE, the decision appealed from is hereby REVERSED AND SET ASIDE and another
judgment is hereby rendered ordering the respondent Filipinas Merchants Insurance
Company, Inc. to pay the sum of P33,117.63 as damages to petitioner with legal interest
from the filing of the complaint, plus attorney's fees and expenses of litigation in the amount
of P10,000.00 as well as the costs of the suit.
SO ORDERED.

18

SECOND DIVISION
[G.R. No. 127897. November 15, 2001]
DELSAN TRANSPORT LINES, INC., petitioner, vs. THE HON. COURT OF APPEALS and
AMERICAN HOME ASSURANCE CORPORATION, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court of Appeals in CAG.R. CV No. 39836 promulgated on June 17, 1996, reversing the decision of the Regional Trial
Court of Makati City, Branch 137, ordering petitioner to pay private respondent the sum of
Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos
(P5,096,635.57) and costs and the Resolution [2] dated January 21, 1997 which denied the
subsequent motion for reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of
affreightment with the petitioner, Delsan Transport Lines, Inc., for a period of one year
whereby the said common carrier agreed to transport Caltexs industrial fuel oil from the
Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner
took on board its vessel, MT Maysun, 2,277.314 kiloliters of industrial fuel oil of Caltex to be
delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was insured with the
private respondent, American Home Assurance Corporation.
On August 14, 1986, MT Maysun set sail from Batangas for Zamboanga City. Unfortunately,
the vessel sank in the early morning of August 16, 1986 near Panay Gulf in the Visayas
taking with it the entire cargo of fuel oil.
Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand
Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.57) representing the
insured value of the lost cargo. Exercising its right of subrogation under Article 2207 of the
New Civil Code, the private respondent demanded of the petitioner the same amount it paid
to Caltex.
Due to its failure to collect from the petitioner despite prior demand, private respondent filed
a complaint with the Regional Trial Court of Makati City, Branch 137, for collection of a sum
of money. After the trial and upon analyzing the evidence adduced, the trial court rendered a
decision on November 29, 1990 dismissing the complaint against herein petitioner without
pronouncement as to cost. The trial court found that the vessel, MT Maysun, was seaworthy
to undertake the voyage as determined by the Philippine Coast Guard per Survey Certificate
Report No. M5-016-MH upon inspection during its annual dry-docking and that the incident
was caused by unexpected inclement weather condition or force majeure, thus exempting
the common carrier (herein petitioner) from liability for the loss of its cargo. [3]
The decision of the trial court, however, was reversed, on appeal, by the Court of
Appeals. The appellate court gave credence to the weather report issued by the Philippine
Atmospheric, Geophysical and Astronomical Services Administration (PAGASA for brevity)

which showed that from 2:00 oclock to 8:00 oclock in the morning on August 16, 1986, the
wind speed remained at 10 to 20 knots per hour while the waves measured from .7 to two
(2) meters in height only in the vicinity of the Panay Gulf where the subject vessel sank, in
contrast to herein petitioners allegation that the waves were twenty (20) feet high. In the
absence of any explanation as to what may have caused the sinking of the vessel coupled
with the finding that the same was improperly manned, the appellate court ruled that the
petitioner is liable on its obligation as common carrier [4] to herein private respondent
insurance company as subrogee of Caltex. The subsequent motion for reconsideration of
herein petitioner was denied by the appellate court.
Petitioner raised the following assignments of error in support of the instant petition, [5] to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL
COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE LEGAL
PRESUMPTION THAT THE VESSEL MT MAYSUN WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE SUPREME COURT IN
THE CASE OF HOME INSURANCE CORPORATION V. COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance
Code of the Philippines, which states that in every marine insurance upon a ship or freight,
or freightage, or upon any thing which is the subject of marine insurance there is an implied
warranty by the shipper that the ship is seaworthy. Consequently, the insurer will not be
liable to the assured for any loss under the policy in case the vessel would later on be found
as not seaworthy at the inception of the insurance. It theorized that when private respondent
paid Caltex the value of its lost cargo, the act of the private respondent is equivalent to a
tacit recognition that the ill-fated vessel was seaworthy; otherwise, private respondent was
not legally liable to Caltex due to the latters breach of implied warranty under the marine
insurance policy that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not
seaworthy on the ground that the marine officer who served as the chief mate of the vessel,
Francisco Berina, was allegedly not qualified. Under Section 116 of the Insurance Code of the
Philippines, the implied warranty of seaworthiness of the vessel, which the private
respondent admitted as having been fulfilled by its payment of the insurance proceeds to
Caltex of its lost cargo, extends to the vessels complement. Besides, petitioner avers that
although Berina had merely a 2nd officers license, he was qualified to act as the vessels chief
officer under Chapter IV(403), Category III(a)(3)(ii)(aa) of the Philippine Merchant Marine
Rules and Regulations. In fact, all the crew and officers of MT Maysun were exonerated in the

19

administrative investigation conducted by the Board of Marine Inquiry after the subject
accident.[6]

equitable assignment to the former of all the remedies which the latter may have against
the petitioner.

In any event, petitioner further avers that private respondent failed, for unknown reason, to
present in evidence during the trial of the instant case the subject marine cargo insurance
policy it entered into with Caltex. By virtue of the doctrine laid down in the case of Home
Insurance Corporation vs. CA,[7] the failure of the private respondent to present the insurance
policy in evidence is allegedly fatal to its claim inasmuch as there is no way to determine the
rights of the parties thereto.

From the nature of their business and for reasons of public policy, common carriers are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety
of passengers transported by them, according to all the circumstances of each case. [11] In the
event of loss, destruction or deterioration of the insured goods, common carriers shall be
responsible unless the same is brought about, among others, by flood, storm, earthquake,
lightning or other natural disaster or calamity.[12] In all other cases, if the goods are lost,
destroyed or deteriorated, common carriers are presumed to have been at fault or to have
acted negligently, unless they prove that they observed extraordinary diligence. [13]

Hence, the legal issues posed before the Court are:

I
Whether or not the payment made by the private respondent to Caltex for the insured value
of the lost cargo amounted to an admission that the vessel was seaworthy, thus precluding
any action for recovery against the petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars the complaint for
recovery of sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost cargo
operates as waiver of its (private respondent) right to enforce the term of the implied
warranty against Caltex under the marine insurance policy. However, the same cannot be
validly interpreted as an automatic admission of the vessels seaworthiness by the private
respondent as to foreclose recourse against the petitioner for any liability under its
contractual obligation as a common carrier. The fact of payment grants the private
respondent subrogatory right which enables it to exercise legal remedies that would
otherwise be available to Caltex as owner of the lost cargo against the petitioner common
carrier.[8] Article 2207 of the New Civil Code provides that:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.
The right of subrogation has its roots in equity. It is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by
one who in justice and good conscience ought to pay. [9] It is not dependent upon, nor does it
grow out of, any privity of contract or upon written assignment of claim. It accrues simply
upon payment by the insurance company of the insurance claim. [10] Consequently, the
payment made by the private respondent (insurer) to Caltex (assured) operates as an

In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex,
petitioner attributes the sinking of MT Maysun to fortuitous event or force majeure. From the
testimonies of Jaime Jarabe and Francisco Berina, captain and chief mate, respectively of the
ill-fated vessel, it appears that a sudden and unexpected change of weather condition
occurred in the early morning of August 16, 1986; that at around 3:15 oclock in the morning
a squall (unos) carrying strong winds with an approximate velocity of 30 knots per hour and
big waves averaging eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun
causing it to tilt, take in water and eventually sink with its cargo. [14] This tale of strong winds
and big waves by the said officers of the petitioner however, was effectively rebutted and
belied by the weather report[15] from the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA), the independent government agency
charged with monitoring weather and sea conditions, showing that from 2:00 oclock to 8:00
oclock in the morning on August 16, 1986, the wind speed remained at ten (10) to twenty
(20) knots per hour while the height of the waves ranged from .7 to two (2) meters in the
vicinity of Cuyo East Pass and Panay Gulf where the subject vessel sank. Thus, as the
appellate court correctly ruled, petitioners vessel, MT Maysun, sank with its entire cargo for
the reason that it was not seaworthy. There was no squall or bad weather or extremely poor
sea condition in the vicinity when the said vessel sank.
The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe and
Francisco Berina, ship captain and chief mate, respectively, of the said vessel, could not be
expected to testify against the interest of their employer, the herein petitioner common
carrier.
Neither may petitioner escape liability by presenting in evidence certificates [16] that tend to
show that at the time of dry-docking and inspection by the Philippine Coast Guard, the
vessel MT Maysun, was fit for voyage. These pieces of evidence do not necessarily take into
account the actual condition of the vessel at the time of the commencement of the
voyage. As correctly observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit. The certificates
issued, however, do not negate the presumption of unseaworthiness triggered by an
unexplained sinking. Of certificates issued in this regard, authorities are likewise clear as to
their probative value, (thus):

20

Seaworthiness relates to a vessels actual condition. Neither the granting of classification or

the issuance of certificates establishes seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec.
62)
And also:
Authorities are clear that diligence in securing certificates of seaworthiness does not satisfy
the vessel owners obligation. Also securing the approval of the shipper of the cargo, or his
surveyor, of the condition of the vessel or her stowage does not establish due diligence if the
vessel was in fact unseaworthy, for the cargo owner has no obligation in relation to
seaworthiness. (Ibid.)[17]

Hence, our ruling on the presentation of the insurance policy in the said case of Home
Insurance Corporation is not applicable to the case at bar. In contrast, there is no doubt that
the cargo of industrial fuel oil belonging to Caltex, in the case at bar, was lost while on board
petitioners vessel, MT Maysun, which sank while in transit in the vicinity of Panay Gulf and
Cuyo East Pass in the early morning of August 16, 1986.
WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the Court
of Appeals in CA-G.R. CV No. 39836 is AFFIRMED. Costs against the petitioner.
SO ORDERED.

Additionally, the exoneration of MT Maysuns officers and crew by the Board of Marine Inquiry
merely concerns their respective administrative liabilities. It does not in any way operate to
absolve the petitioner common carrier from its civil liability arising from its failure to observe
extraordinary diligence in the vigilance over the goods it was transporting and for the
negligent acts or omissions of its employees, the determination of which properly belongs to
the courts.[18] In the case at bar, petitioner is liable for the insured value of the lost cargo of
industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault or
negligence as common carrier[19] occasioned by the unexplained sinking of its vessel, MT
Maysun, while in transit.
Anent the second issue, it is our view and so hold that the presentation in evidence of the
marine insurance policy is not indispensable in this case before the insurer may recover from
the common carrier the insured value of the lost cargo in the exercise of its subrogatory
right. The subrogation receipt, by itself, is sufficient to establish not only the relationship of
herein private respondent as insurer and Caltex, as the assured shipper of the lost cargo of
industrial fuel oil, but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the insurance claim.
[20]

The presentation of the insurance policy was necessary in the case of Home Insurance
Corporation v. CA[21] (a case cited by petitioner) because the shipment therein (hydraulic
engines) passed through several stages with different parties involved in each stage. First,
from the shipper to the port of departure; second, from the port of departure to the M/S
Oriental Statesman; third, from the M/S Oriental Statesman to the M/S Pacific Conveyor;
fourth, from the M/S Pacific Conveyor to the port of arrival; fifth, from the port of arrival to
the arrastre operator; sixth, from the arrastre operator to the hauler, Mabuhay Brokerage
Co., Inc. (private respondent therein); and lastly, from the hauler to the consignee. We
emphasized in that case that in the absence of proof of stipulations to the contrary, the
hauler can be liable only for any damage that occurred from the time it received the cargo
until it finally delivered it to the consignee. Ordinarily, it cannot be held responsible for the
handling of the cargo before it actually received it. The insurance contract, which was not
presented in evidence in that case would have indicated the scope of the insurers liability, if
any, since no evidence was adduced indicating at what stage in the handling process the
damage to the cargo was sustained.

21

Republic of the Philippines

SUPREME COURT
Manila

the benefit of any person but himself, he alleging that he was and is the sole owner thereof
and that it is his individual property. He, therefore, asks that he be declared the owner of the
real estate redeemed by the payment of the P18,365.20, the owner of the remaining
P21,634.80, the balance of the insurance policy, and that the plaintiff's account for the use
and occupation of the premises so redeemed since the date of the redemption.

EN BANC
G.R. No. L-9374

February 16, 1915

FRANCISCO DEL VAL, ET AL., plaintiffs-appellants,

vs.
ANDRES DEL VAL, defendant-appellee.
Ledesma, Lim and Irureta Goyena for appellants.
O'Brien and DeWitt for appellee.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the city of Manila
dismissing the complaint with costs.
The pleadings set forth that the plaintiffs and defendant are brother and sisters; that they
are the only heirs at law and next of kin of Gregorio Nacianceno del Val, who died in Manila
on August 4, 1910, intestate; that an administrator was appointed for the estate of the
deceased, and, after a partial administration, it was closed and the administrator discharged
by order of the Court of First Instance dated December 9, 1911; that during the lifetime of
the deceased he took out insurance on his life for the sum of P40,000 and made it payable
to the defendant as sole beneficiary; that after his death the defendant collected the face of
the policy; that of said policy he paid the sum of P18,365.20 to redeem certain real estate
which the decedent had sold to third persons with a right to repurchase; that the redemption
of said premises was made by the attorney of the defendant in the name of the plaintiff and
the defendant as heirs of the deceased vendor; that the redemption of said premises they
have had the use and benefit thereof; that during that time the plaintiffs paid no taxes and
made no repairs.
It further appears from the pleadings that the defendant, on the death of the deceased, took
possession of most of his personal property, which he still has in his possession, and that he
has also the balance on said insurance policy amounting to P21,634.80.
Plaintiffs contend that the amount of the insurance policy belonged to the estate of the
deceased and not to the defendant personally; that, therefore, they are entitled to a
partition not only of the real and personal property, but also of the P40,000 life insurance.
The complaint prays a partition of all the property, both real and personal, left by the
deceased; that the defendant account for P21,634.80, and that that sum be divided equally
among the plaintiffs and defendant along with the other property of deceased.
The defendant denies the material allegations of the complaint and sets up as special
defense and counterclaim that the redemption of the real estate sold by his father was made
in the name of the plaintiffs and himself instead of in his name alone without his knowledge
or consent; and that it was not his intention to use the proceeds of the insurance policy for

The learned trial court refused to give relief to either party and dismissed the action.
It says in its opinion: "This purports to be an action for partition, brought against an heir by
his coheirs. The complaint, however, fails to comply with Code Civ., Pro. sec. 183, in that it
does not 'contain an adequate description of the real property of which partition is
demanded.' Because of this defect (which has not been called to our attention and was
discovered only after the cause was submitted) it is more than doubtful whether any relief
can be awarded under the complaint, except by agreement of all the parties."
This alleged defect of the complaint was made one of the two bases for the dismissal of the
action.
We do not regard this as sufficient reason for dismissing the action. It is the doctrine of this
court, set down in several decisions, Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504,
that, even though the complaint is defective to the extent of failing in allegations necessary
to constitute a cause of action, if, on the trial of the cause, evidence is offered which
establishes the cause of action which the complaint intended to allege, and such evidence is
received without objection, the defect is thereby cured and cannot be made the ground of a
subsequent objection. If, therefore, evidence was introduced on the trial in this case
definitely and clearly describing the real estate sought to be partitioned, the defect in the
complaint was cured in that regard and should not have been used to dismiss the action. We
do not stop to inquire whether such evidence was or was not introduced on the trial,
inasmuch as this case must be turned for a new trial with opportunity to both parties to
present such evidence as is necessary to establish their respective claims.
The court in its decision further says: "It will be noticed that the provision above quoted
refers exclusively to real estate. . . . It is, in other words, an exclusive real property action,
and the institution thereof gives the court no jurisdiction over chattels. . . . But no relief
could possibly be granted in this action as to any property except the last (real estate), for
the law contemplated that all the personal property of an estate be distributed before the
administration is closed. Indeed, it is only in exceptional cases that the partition of the real
estate is provided for, and this too is evidently intended to be effected as a part of the
administration, but here the complaint alleges that the estate was finally closed on
December 9, 1911, and we find upon referring to the record in that case that subsequent
motion to reopen the same were denied; so that the matter of the personal property at least
must be considered res judicata (for the final judgment in the administration proceedings
must be treated as concluding not merely what was adjudicated, but what might have been).
So far, therefore, as the personal property at least is concerned, plaintiffs' only remedy was
an appeal from said order."
We do not believe that the law is correctly laid down in this quotation. The courts of the
Islands have jurisdiction to divide personal property between the common owners thereof

22

and that power is as full and complete as is the power to partition real property. If an actual
partition of personal property cannot be made it will be sold under the direction of the court
and the proceeds divided among the owners after the necessary expenses have been
deducted.
The administration of the estate of the decedent consisted simply, so far as the record
shows, in the payment of the debts. No division of the property, either real or personal,
seems to have been made. On the contrary, the property appears, from the record, to have
been turned over to the heirs in bulk. The failure to partition the real property may have
been due either to the lack of request to the court by one or more of the heirs to do so, as
the court has no authority to make a partition of the real estate without such request; or it
may have been due to the fact that all the real property of decedent had been sold
under pacto de retro and that, therefore, he was not the owner of any real estate at the time
of his death. As to the personal property, it does not appear that it was disposed of in the
manner provided by law. (Sec. 753, Code of Civil Procedure.) So far as this action is
concerned, however, it is sufficient for us to know that none of the property was actually
divided among the heirs in the administration proceeding and that they remain coowners
and tenants-in- common thereof at the present time. To maintain an action to partition real
or personal property it is necessary to show only that it is owned in common.
The order finally closing the administration and discharging the administrator, referred to in
the opinion of the trial court, has nothing to do with the division of either the real or the
personal property. The heirs have the right to ask the probate court to turn over to them
both the real and personal property without division; and where that request is unanimous it
is the duty of the court to comply with it, and there is nothing in section 753 of the Code of
Civil Procedure which prohibits it. In such case an order finally settling the estate and
discharging the administrator would not bar a subsequent action to require a division of
either the real or personal property. If, on the other hand, an order had been made in the
administration proceedings dividing the personal or the real property, or both, among the
heirs, then it is quite possible that, to a subsequent action brought by one of the heirs for a
partition of the real or personal property, or both, there could have been interposed a plea
of res judicata based on such order. As the matter now stands, however, there is no ground
on which to base such a plea. Moreover, no such plea has been made and no evidence
offered to support it.
With the finding of the trial court that the proceeds of the life-insurance policy belong
exclusively to the defendant as his individual and separate property, we agree. That the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of
the person whose life was insured, and that such proceeds are the separate and individual
property of the beneficiary, and not of the heirs of the person whose life was insured, is the
doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of
section 428 of the Code of Commerce, which reads:
The amount which the underwriter must deliver to the person insured, in fulfillment of the
contract, shall be the property of the latter, even against the claims of the legitimate heirs or
creditors of any kind whatsoever of the person who effected the insurance in favor of the
former.

It is claimed by the attorney for the plaintiffs that the section just quoted is subordinate to
the provisions of the Civil Code as found in article 1035. This article reads:
An heir by force of law surviving with others of the same character to a succession must
bring into the hereditary estate the property or securities he may have received from the
deceased during the life of the same, by way of dowry, gift, or for any good consideration, in
order to compute it in fixing the legal portions and in the account of the division.
Counsel also claim that the proceeds of the insurance policy were a donation or gift made by
the father during his lifetime to the defendant and that, as such, its ultimate destination is
determined by those provisions of the Civil Code which relate to donations, especially article
819. This article provides that "gifts made to children which are not betterments shall be
considered as part of their legal portion."
We cannot agree with these contentions. The contract of life insurance is a special contract
and the destination of the proceeds thereof is determined by special laws which deal
exclusively with that subject. The Civil Code has no provisions which relate directly and
specifically to life- insurance contracts or to the destination of life insurance proceeds. That
subject is regulated exclusively by the Code of Commerce which provides for the terms of
the contract, the relations of the parties and the destination of the proceeds of the policy.
The proceeds of the life-insurance policy being the exclusive property of the defendant and
he having used a portion thereof in the repurchase of the real estate sold by the decedent
prior to his death with right to repurchase, and such repurchase having been made and the
conveyance taken in the names of all of the heirs instead of the defendant alone, plaintiffs
claim that the property belongs to the heirs in common and not to the defendant alone.
We are not inclined to agree with this contention unless the fact appear or be shown that the
defendant acted as he did with the intention that the other heirs should enjoy with him the
ownership of the estate in other words, that he proposed, in effect, to make a gift of the
real estate to the other heirs. If it is established by the evidence that that was his intention
and that the real estate was delivered to the plaintiffs with that understanding, then it is
probable that their contention is correct and that they are entitled to share equally with the
defendant therein. If, however, it appears from the evidence in the case that the
conveyances were taken in the name of the plaintiffs without his knowledge or consent, or
that it was not his intention to make a gift to them of the real estate, then it belongs to him.
If that facts are as stated, he has two remedies. The one is to compel the plaintiffs to
reconvey to him and the other is to let the title stand with them and to recover from them
the sum he paid on their behalf.
For the complete and proper determination of the questions at issue in this case, we are of
the opinion that the cause should be returned to the trial court with instructions to permit
the parties to frame such issues as will permit the settlement of all the questions involved
and to introduce such evidence as may be necessary for the full determination of the issues
framed. Upon such issues and evidence taken thereunder the court will decide the questions
involved according to the evidence, subordinating his conclusions of law to the rules laid
down in this opinion.

23

We do not wish to be understood as having decided in this opinion any question of fact which
will arise on the trial and be there in controversy. The trial court is left free to find the facts
as the evidence requires. To the facts as so found he will apply the law as herein laid down.
The judgment appealed from is set aside and the cause returned to the Court of First
Instance whence it came for the purpose hereinabove stated. So ordered.

24

Republic of the Philippines

SUPREME COURT
Manila

It is hereby stipulated and agreed by and between the parties in the above-entitled action
through their respective undersigned attorneys:

EN BANC
G.R. No. L-34583

October 22, 1931

1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late Adolphe Oscar
Schuetze, is of legal age, a native of Manila, Philippine Islands, and is and was at all times
hereinafter mentioned a resident of Germany, and at the time of the death of her husband,
the late Adolphe Oscar Schuetze, she was actually residing and living in Germany;

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late
Adolphe Oscar Schuetze,plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

2. That the Bank of the Philippine Islands, is and was at all times hereinafter mentioned a
banking institution duly organized and existing under and by virtue of the laws of the
Philippine Islands;

Araneta, De Joya, Zaragoza and Araneta for appellant.

Attorney-General Jaranilla for appellee.

3. That on or about August 23, 1928, the herein plaintiff before notary public Salvador
Zaragoza, drew a general power appointing the above-mentioned Bank of the Philippine
Islands as her attorney-in-fact, and among the powers conferred to said attorney-in-fact was
the power to represent her in all legal actions instituted by or against her;

VILLA-REAL, J.:

4. That the defendant, of legal age, is and at all times hereinafter mentioned the duly
appointed Collector of Internal Revenue with offices at Manila, Philippine Islands;

The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe
Oscar Schuetze, has appealed to this court from the judgment of the Court of First Instance
of Manila absolving the defendant Juan Posadas, Jr., Collector of Internal Revenue, from the
complaint filed against him by said plaintiff bank, and dismissing the complaint with costs.
The appellant has assigned the following alleged errors as committed by the trial court in its
judgment, to wit:
1. The lower court erred in holding that the testimony of Mrs. Schuetze was inefficient to
established the domicile of her husband.
2. The lower court erred in holding that under section 1536 of the Administrative Code the
tax imposed by the defendant is lawful and valid.
3. The lower court erred in not holding that one-half () of the proceeds of the policy in
question is community property and that therefore no inheritance tax can be levied, at least
on one-half () of the said proceeds.
4. The lower court erred in not declaring that it would be unconstitutional to impose an
inheritance tax upon the insurance policy here in question as it would be a taking of property
without due process of law.
The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of
Internal Revenue, the amount of P1,209 paid by the plaintiff under protest, in its capacity of
administrator of the estate of the late Adolphe Oscar Schuetze, as inheritance tax upon the
sum of P20,150, which is the amount of an insurance policy on the deceased's life, wherein
his own estate was named the beneficiary.

5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for the first
time of March 31, 1890, and worked in the several German firms as a mere employee and
that from the year 1903 until the year 1918 he was partner in the business of Alfredo
Roensch;
6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of making
various trips to Europe;
7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java, and with
the intention of going to Bremen, landed in the Philippine Islands where he met his death on
February 2, 1928;
8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany, executed a
will, in accordance with its law, wherein plaintiff was named his universal heir;
9. That the Bank of the Philippine Islands by order of the Court of First Instance of Manila
under date of May 24, 1928, was appointed administrator of the estate of the deceased
Adolphe Oscar Schuetze;
10. That, according to the testamentary proceedings instituted in the Court of First Instance
of Manila, civil case No. 33089, the deceased at the time of his death was possessed of not
only real property situated in the Philippine Islands, but also personal property consisting of
shares of stock in nineteen (19) domestic corporations;
11. That the fair market value of all the property in the Philippine Islands left by the
deceased at the time of his death in accordance with the inventory submitted to the Court of
First Instance of Manila, civil case No. 33089, was P217,560.38;

At the hearing, in addition to documentary and parol evidence, both parties submitted the
following agreed statement of facts of the court for consideration:

25

12. That the Bank of the Philippine Islands, as administrator of the estate of the deceased
rendered its final account on June 19, 1929, and that said estate was closed on July 16,
1929;
13. That among the personal property of the deceased was found life-insurance policy No.
194538 issued at Manila, Philippine Islands, on January 14, 1913, for the sum of $10,000 by
the Sun Life Assurance Company of Canada, Manila branch, a foreign corporation duly
organized and existing under and by virtue of the laws of Canada, and duly authorized to
transact business in the Philippine Islands;
14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was named
the beneficiary without any qualification whatsoever;
15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the
premiums of said policy to the Sun Life Assurance Company of Canada, Manila branch;
16. That on or about the year 1918, the Sun Life Assurance Company of Canada, Manila
branch, transferred said policy to the Sun Life Assurance Company of Canada, London
branch;
17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the time of his
death paid the premiums of said policy to the Sun Life Assurance Company of Canada,
London Branch;
18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his widow, the
plaintiff herein;
19. That at the time of the death of the deceased and at all times thereafter including the
date when the said insurance policy was paid, the insurance policy was not in the hands or
possession of the Manila office of the Sun Life Assurance Company of Canada, nor in the
possession of the herein plaintiff, nor in the possession of her attorney-in-fact the Bank of
the Philippine Islands, but the same was in the hands of the Head Office of the Sun Life
Assurance Company of Canada, at Montreal, Canada;

23. That the Bank of the Philippine Islands as administrator of the decedent's estate and as
attorney-in-fact of the herein plaintiff, having been demanded by the herein defendant to
pay inheritance tax amounting to the sum of P1,209, paid to the defendant under protest the
above-mentioned sum;
24. That notwithstanding the various demands made by plaintiff to the defendant, said
defendant has refused and refuses to refund to plaintiff the above mentioned sum of P1,209;
25. That plaintiff reserves the right to adduce evidence as regards the domicile of the
deceased, and so the defendant, the right to present rebuttal evidence;
26. That both plaintiff and defendant submit this stipulation of facts without prejudice to
their right to introduce such evidence, on points not covered by the agreement, which they
may deem proper and necessary to support their respective contentions.
In as much as one of the question raised in the appeal is whether an insurance policy on said
Adolphe Oscar Schuetze's life was, by reason of its ownership, subject to the inheritance tax,
it would be well to decide first whether the amount thereof is paraphernal or community
property.
According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze
is the sole beneficiary named in the life-insurance policy for $10,000, issued by the Sun Life
Assurance Company of Canada on January 14, 1913. During the following five years the
insured paid the premiums at the Manila branch of the company, and in 1918 the policy was
transferred to the London branch.
The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant
Rosario Gelano on January 16, 1914.

20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of the
decedent's estate received from the Sun Life Assurance Company of Canada, Manila branch,
the sum of P20,150 representing the proceeds of the insurance policy, as shown in the
statement of income and expenses of the estate of the deceased submitted on June 18,
1929, by the administrator to the Court of First Instance of Manila, civil case No. 33089;

With the exception of the premium for the first year covering the period from January 14,
1913 to January 14, 1914, all the money used for paying the premiums, i. e., from the
second year, or January 16, 1914, or when the deceased Adolphe Oscar Schuetze married
the plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is conjugal
property inasmuch as it does not appear to have exclusively belonged to him or to his wife
(art. 1407, Civil Code). As the sum of P20,150 here in controversy is a product of such
premium it must also be deemed community property, because it was acquired for a
valuable consideration, during said Adolphe Oscar Schuetze's marriage with Rosario Gelano
at the expense of the common fund (art. 1401, No. 1, Civil Code), except for the small part
corresponding to the first premium paid with the deceased's own money.

21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said sum of
P20,150;

In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats
of life insurance in the following terms, to wit:

22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax upon the
transmission of the proceeds of the policy in question in the sum of P20,150 from the estate
of the late Adolphe Oscar Schuetze to the sole heir of the deceased, or the plaintiff herein,
which inheritance tax amounted to the sum of P1,209;

The amount of the policy represents the premiums to be paid, and the right to it arises the
moment the contract is perfected, for at the moment the power of disposing of it may be
exercised, and if death occurs payment may be demanded. It is therefore something
acquired for a valuable consideration during the marriage, though the period of its
fulfillment, depend upon the death of one of the spouses, which terminates the partnership.

26

So considered, the question may be said to be decided by articles 1396 and 1401: if the
premiums are paid with the exclusive property of husband or wife, the policy belongs to the
owner; if with conjugal property, or if the money cannot be proved as coming from one or
the other of the spouses, the policy is community property.
The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ. A.,
509) laid down the following doctrine:
COMMUNITY PROPERTY LIFE INSURANCE POLICY. A husband took out an endowment life
insurance policy on his life, payable "as directed by will." He paid the premiums thereon out
of community funds, and by his will made the proceeds of the policy payable to his own
estate. Held, that the proceeds were community estate, one-half of which belonged to the
wife.
In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the
following doctrine:
A testator, after marriage, took out an insurance policy, on which he paid the premiums from
his salary. Held that the insurance money was community property, to one-half of which, the
wife was entitled as survivor.
In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following doctrine:
A decedent paid the first third of the amount of the premiums on his life-insurance policy out
of his earnings before marriage, and the remainder from his earnings received after
marriage. Held, that one-third of the policy belonged to his separate estate, and the
remainder to the community property.
Thus both according to our Civil Code and to the ruling of those North American States
where the Spanish Civil Code once governed, the proceeds of a life-insurance policy whereon
the premiums were paid with conjugal money, belong to the conjugal partnership.
The appellee alleges that it is a fundamental principle that a life-insurance policy belongs
exclusively to the beneficiary upon the death of the person insured, and that in the present
case, as the late Adolphe Oscar Schuetze named his own estate as the sole beneficiary of
the insurance on his life, upon his death the latter became the sole owner of the proceeds,
which therefore became subject to the inheritance tax, citing Del Val vs. Del Val (29 Phil.,
534), where the doctrine was laid down that an heir appointed beneficiary to a life-insurance
policy taken out by the deceased, becomes the absolute owner of the proceeds of such
policy upon the death of the insured.
The estate of a deceased person cannot be placed on the same footing as an individual heir.
The proceeds of a life-insurance policy payable to the estate of the insured passed to the
executor or administrator of such estate, and forms part of its assets (37 Corpus Juris, 565,
sec. 322); whereas the proceeds of a life-insurance policy payable to an heir of the insured
as beneficiary belongs exclusively to said heir and does not form part of the deceased's
estate subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323,
and articles 419 and 428 of the Code of Commerce.)

Just as an individual beneficiary of a life-insurance policy taken out by a married person

becomes the exclusive owner of the proceeds upon the death of the insured even if the
premiums were paid by the conjugal partnership, so, it is argued, where the beneficiary
named is the estate of the deceased whose life is insured, the proceeds of the policy become
a part of said estate upon the death of the insured even if the premiums have been paid with
conjugal funds.
In a conjugal partnership the husband is the manager, empowered to alienate the
partnership property without the wife's consent (art. 1413, Civil Code), a third person,
therefore, named beneficiary in a life-insurance policy becomes the absolute owner of its
proceeds upon the death of the insured even if the premiums should have been paid with
money belonging to the community property. When a married man has his life insured and
names his own estate after death, beneficiary, he makes no alienation of the proceeds of
conjugal funds to a third person, but appropriates them himself, adding them to the assets
of his estate, in contravention of the provisions of article 1401, paragraph 1, of the Civil
Code cited above, which provides that "To the conjugal partnership belongs" (1) Property
acquired for a valuable consideration during the marriage at the expense of the common
fund, whether the acquisition is made for the partnership or for one of the spouses only."
Furthermore, such appropriation is a fraud practised upon the wife, which cannot be allowed
to prejudice her, according to article 1413, paragraph 2, of said Code. Although the husband
is the manager of the conjugal partnership, he cannot of his own free will convert the
partnership property into his own exclusive property.
As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar
Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the proceeds
of the policy, excluding the proportional part corresponding to the first premium, constitute
community property, notwithstanding the fact that the policy was made payable to the
deceased's estate, so that one-half of said proceeds belongs to the estate, and the other half
to the deceased's widow, the plaintiff-appellant Rosario Gelano Vda. de Schuetze.
The second point to decide in this appeal is whether the Collector of Internal Revenue has
authority, under the law, to collect the inheritance tax upon one-half of the life-insurance
policy taken out by the late Adolphe Oscar Schuetze, which belongs to him and is made
payable to his estate.
According to the agreed statement of facts mentioned above, the plaintiff-appellant, the
Bank of the Philippine Islands, was appointed administrator of the late Adolphe Oscar
Schuetze's testamentary estate by an order dated March 24, 1928, entered by the Court of
First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of Canada,
whose main office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her
arrival at Manila, the sum of P20,150, which was the amount of the insurance policy on the
life of said deceased, payable to the latter's estate. On the same date Rosario Gelano Vda.
de Schuetze delivered the money to said Bank of the Philippine Islands, as administrator of
the deceased's estate, which entered it in the inventory of the testamentary estate, and
then returned the money to said widow.

27

Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and
section 1 of Act No. 3031, contains the following relevant provision:

state is in another state merely in transitu or for a short time, it is taxable in the former
state, and is not taxable in the state where it is for the time being. . . . .

SEC. 1536. Conditions and rate of taxation. Every transmission by virtue of inheritance,
devise, bequest, gift mortis causa or advance in anticipation of inheritance, devise, or
bequest of real property located in the Philippine Islands and real rights in such property; of
any franchise which must be exercised in the Philippine Islands; of any shares, obligations, or
bonds issued by any corporation or sociedad anonimaorganized or constituted in the
Philippine Islands in accordance with its laws; of any shares or rights in any partnership,
business or industry established in the Philippine Islands or of any personal property located
in the Philippine Islands shall be subject to the following tax:

Property merely in transit through a state ordinarily is not taxable there. Transit begins when
an article is committed to a carrier for transportation to the state of its destination, or
started on its ultimate passage. Transit ends when the goods arrive at their destination. But
intermediate these points questions may arise as to when a temporary stop in transit is such
as to make the property taxable at the place of stoppage. Whether the property is taxable in
such a case usually depends on the length of time and the purpose of the interruption of
transit. . . . .

xxx

xxx

xxx

In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar
Schuetze were paid to the Bank of the Philippine Islands, as administrator of the deceased's
estate, for management and partition, and as such proceeds were turned over to the sole
and universal testamentary heiress Rosario Gelano Vda. de Schuetze, the plaintiff-appellant,
here in Manila, the situs of said proceeds is the Philippine Islands.
In his work "The Law of Taxation," Cooley enunciates the general rule governing the levying
of taxes upon tangible personal property, in the following words:
GENERAL RULE. The suits of tangible personal property, for purposes of taxation may be
where the owner is domiciled but is not necessarily so. Unlike intangible personal property, it
may acquire a taxation situs in a state other than the one where the owner is domiciled,
merely because it is located there. Its taxable situs is where it is more or less permanently
located, regardless of the domicile of the owner. It is well settled that the state where it is
more or less permanently located has the power to tax it although the owner resides out of
the state, regardless of whether it has been taxed for the same period at the domicile of the
owner, provided there is statutory authority for taxing such property. It is equally well settled
that the state where the owner is domiciled has no power to tax it where the property has
acquired an actual situs in another state by reason of its more or less permanent location in
that state. ... (2 Cooley, The Law of Taxation, 4th ed., p. 975, par. 451.)
With reference to the meaning of the words "permanent" and "in transit," he has the
following to say:
PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. In order to acquire a situs in a state or
taxing district so as to be taxable in the state or district regardless of the domicile of the
owner and not taxable in another state or district at the domicile of the owner, tangible
personal property must be more or less permanently located in the state or district. In other
words, the situs of tangible personal property is where it is more or less permanently located
rather than where it is merely in transit or temporarily and for no considerable length of
time. If tangible personal property is more or less permanently located in a state other than
the one where the owner is domiciled, it is not taxable in the latter state but is taxable in the
state where it is located. If tangible personal property belonging to one domiciled in one

. . . It has been held that property of a construction company, used in construction of a

railroad, acquires a situs at the place where used for an indefinite period. So tangible
personal property in the state for the purpose of undergoing a partial finishing process is not
to be regarded as in the course of transit nor as in the state for a mere temporary purpose.
(2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988, par. 452.)
If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze and
made payable to his estate, were delivered to the Bank of the Philippine Islands for
administration and distribution, they were not in transit but were more or less permanently
located in the Philippine Islands, according to the foregoing rules. If this be so, half of the
proceeds which is community property, belongs to the estate of the deceased and is subject
to the inheritance tax, in accordance with the legal provision quoted above, irrespective of
whether or not the late Adolphe Oscar Schuetze was domiciled in the Philippine Islands at
the time of his death.
By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a lifeinsurance policy payable to the insured's estate, on which the premiums were paid by the
conjugal partnership, constitute community property, and belong one-half to the husband
and the other half to the wife, exclusively; (2) that if the premiums were paid partly with
paraphernal and partly conjugal funds, the proceeds are likewise in like proportion
paraphernal in part and conjugal in part; and (3) that the proceeds of a life-insurance policy
payable to the insured's estate as the beneficiary, if delivered to the testamentary
administrator of the former as part of the assets of said estate under probate administration,
are subject to the inheritance tax according to the law on the matter, if they belong to the
assured exclusively, and it is immaterial that the insured was domiciled in these Islands or
outside.1awphil.net
Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return
to the plaintiff the one-half of the tax collected upon the amount of P20,150, being the
proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze, after
deducting the proportional part corresponding to the first premium, without special
pronouncement of costs. So ordered.
Avancea, C.J., Johnson, Street, Malcolm, Villamor, and Ostrand, JJ., concur.

28

29

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-44059 October 28, 1977
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary in
the life insurance policy of a legally married man claim the proceeds thereof in case of death
of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co.,
Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the
same amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in
his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a
failing branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable
to pay the coverage in the total amount of P11,745.73, representing the face value of the
policy in the amount of P5,882.00 plus the additional benefits for accidental death also in the
amount of P5,882.00 and the refund of P18.00 paid for the premium due November, 1969,
minus the unpaid premiums and interest thereon due for January and February, 1969, in the
sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured Buenaventura
C. Ebrado were merely living as husband and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She
asserts that she is the one entitled to the insurance proceeds, not the common-law wife,
Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First Instance
of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after
which, a pre-trial order was entered reading as follows: +.wph!1
During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties submit

their evidence for the purpose of the pre-trial and make admissions for the purpose of
pretrial. During this conference, parties Carponia T. Ebrado and Pascuala Ebrado agreed and
stipulated: 1) that the deceased Buenaventura Ebrado was married to Pascuala Ebrado with
whom she has six (legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and
Helen, all surnamed Ebrado; 2) that during the lifetime of the deceased, he was insured with
Insular Life Assurance Co. Under Policy No. 009929 whole life plan, dated September 1, 1968
for the sum of P5,882.00 with the rider for accidental death benefit as evidenced by Exhibits
A for plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado;
3) that during the lifetime of Buenaventura Ebrado, he was living with his common-wife,
Carponia Ebrado, with whom she had 2 children although he was not legally separated from
his legal wife; 4) that Buenaventura in accident on October 21, 1969 as evidenced by the
death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that complainant
Carponia Ebrado filed claim with the Insular Life Assurance Co. which was contested by
Pascuala Ebrado who also filed claim for the proceeds of said policy 6) that in view ofthe
adverse claims the insurance company filed this action against the two herein claimants
Carponia and Pascuala Ebrado; 7) that there is now due from the Insular Life Assurance Co.
as proceeds of the policy P11,745.73; 8) that the beneficiary designated by the insured in
the policy is Carponia Ebrado and the insured made reservation to change the beneficiary
but although the insured made the option to change the beneficiary, same was never
changed up to the time of his death and the wife did not have any opportunity to write the
company that there was reservation to change the designation of the parties agreed that a
decision be rendered based on and stipulation of facts as to who among the two claimants is
entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others, Carponia
T. Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado
and directing the payment of the insurance proceeds to the estate of the deceased insured.
The trial court held: +.wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for
adultery or concubinage is not essential in order to establish the disqualification mentioned
therein. Neither is it also necessary that a finding of such guilt or commission of those acts
be made in a separate independent action brought for the purpose. The guilt of the donee
(beneficiary) may be proved by preponderance of evidence in the same proceeding (the
action brought to declare the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in the policy in question for the disqualification and
incapacity to exist and that it is only necessary that such fact be established by
preponderance of evidence in the trial. Since it is agreed in their stipulation above-quoted
that the deceased insured and defendant Carponia T. Ebrado were living together as
husband and wife without being legally married and that the marriage of the insured with

30

the other defendant Pascuala Vda. de Ebrado was valid and still existing at the time the
insurance in question was purchased there is no question that defendant Carponia T. Ebrado
is disqualified from becoming the beneficiary of the policy in question and as such she is not
entitled to the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11,
1976, the Appellate Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended) does not contain any specific provision grossly
resolutory of the prime question at hand. Section 50 of the Insurance Act which provides that
"(t)he insurance shag be applied exclusively to the proper interest of the person in whose
name it is made" 1 cannot be validly seized upon to hold that the mm includes the
beneficiary. The word "interest" highly suggests that the provision refers only to the
"insured" and not to the beneficiary, since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws against illicit relationships especially on property
and descent will be rendered nugatory, as the same could easily be circumvented by modes
of insurance. Rather, the general rules of civil law should be applied to resolve this void in
the Insurance Law. Article 2011 of the New Civil Code states: "The contract of insurance is
governed by special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code." When not otherwise specifically provided for by the Insurance Law,
the contract of life insurance is governed by the general rules of the civil law regulating
contracts. 3 And under Article 2012 of the same Code, "any person who is forbidden from
receiving any donation under Article 739 cannot be named beneficiary of a fife insurance
policy by the person who cannot make a donation to him. 4 Common-law spouses are,
definitely, barred from receiving donations from each other. Article 739 of the new Civil Code
provides: +.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.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by preponderance
of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured pays

out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the new Civil Code should equally operate in
life insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who
cannot receive a donation cannot be named as beneficiary in the life insurance policy of the
person who cannot make the donation.5 Under American law, a policy of life insurance is
considered as a testament and in construing it, the courts will, so far as possible treat it as a
will and determine the effect of a clause designating the beneficiary by rules under which
wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a barrier
between common law spouses in record to Property relations since such hip ultimately
encroaches upon the nuptial and filial rights of the legitimate family There is every reason to
hold that the bar in donations between legitimate spouses and those between illegitimate
ones should be enforced in life insurance policies since the same are based on similar
consideration As above pointed out, a beneficiary in a fife insurance policy is no different
from a donee. Both are recipients of pure beneficence. So long as manage remains the
threshold of family laws, reason and morality dictate that the impediments imposed upon
married couple should likewise be imposed upon extra-marital relationship. If legitimate
relationship is circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 7 this Court,
through Justice Fernando, said: +.wph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of
that court (Court of Appeals), 'to prohibit donations in favor of the other consort and his
descendants because of and undue and improper pressure and influence upon the donor, a
prejudice deeply rooted in our ancient law;" por-que no se enganen desponjandose el uno al
otro por amor que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV),
reiterating the rationale 'No Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl.
1, De donat, inter virum et uxorem); then there is very reason to apply the same prohibitive
policy to persons living together as husband and wife without the benefit of nuptials. For it is
not to be doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad
Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the condition 6f
those who incurred guilt should turn out to be better.' So long as marriage remains the
cornerstone of our family law, reason and morality alike demand that the disabilities
attached to marriage should likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement, any
other conclusion cannot stand the test of scrutiny. It would be to indict the frame of the Civil
Code for a failure to apply a laudable rule to a situation which in its essentials cannot be
distinguished. Moreover, if it is at all to be differentiated the policy of the law which
embodies a deeply rooted notion of what is just and what is right would be nullified if such
irregular relationship instead of being visited with disabilities would be attended with
benefits. Certainly a legal norm should not be susceptible to such a reproach. If there is
every any occasion where the principle of statutory construction that what is within the spirit
of the law is as much a part of it as what is written, this is it. Otherwise the basic purpose

31

discernible in such codal provision would not be attained. Whatever omission may be
apparent in an interpretation purely literal of the language used must be remedied by an
adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the
disabilities mentioned in Article 739 may effectuate. More specifically, with record to the
disability on "persons who were guilty of adultery or concubinage at the time of the
donation," Article 739 itself provides: +.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.
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 payable to the estate of the deceased insured. Costs against Carponia T. Ebrado.
SO ORDERED.

32

Republic of the Philippines

SUPREME COURT
Manila

deducting any accumulated indebtedness) be less than the premium then due, the Company
will, without further requests, continue this insurance in force for a period .. . .

EN BANC
G.R. No. L-2910

June 29, 1951

THE MANUFACTURERS LIFE INSURANCE CO., plaintiff-appellant,

vs.
BIBIANO L. MEER, in the capacity as Collector of Internal Revenue, defendantappellee.
Camus, Zavalla, Bautista and Nueves for appellant.
First Assistant Solicitor General Roberto A. Gianzon, Office of the Solicitor Felix V. Makasiar
and Solicitor Jose P. Alejandro for appellee.
BENGZON, J.:
Appeal from a decision of the Honorable Buenaventura Ocampo, then judge of the Manila
court of first instance, dismissing plaintiff's complaint to recover money paid under protest
for taxes. The case was submitted upon a stipulation of facts, supplemented by
documentary evidence.
The plaintiff, the Manufacturer Life Insurance Company in a corporation duly organized in
Canada with head office at Toronto. It is duly registered and licensed to engage in life
insurance business in the Philippines, and maintains a branch office in Manila. It was
engaged in such business in the Philippines for more than five years before and including the
year 1941. But due to the exigencies of the war it closed the branch office at Manila during
1942 up to September 1945.
In the course of its operations before the war, plaintiff issued a number of life insurance
policies in the Philippines containing stipulations referred to as non-forfeiture clauses, as
follows:
'8. Automatic Premium Loan. This Policy shall not lapse for non-payment of any premium
after it has been three full years in force, if, at the due date of such premium, the Cash Value
of this Policy and of any bonus additions and dividends left on accumulation (after deducting
any indebtedness to the Company and the interest accrued thereon) shall exceed the
amount of said premium. In which event the company will, without further request, treat the
premium then due as paid, and the amount of such premium, with interest from its actual
due date at six per cent per annum, compounded yearly, and one per cent, compounded
yearly, for expenses, shall be a first lien on this Policy in the Company's favour in priority to
the claim of any assignee or any other person. The accumulated lien may at any time, while
the Policy is in force, be paid in whole or in part.
"When the premium falls due and is not paid in cash within the month's grace, if the Cash
Value of this policy and of any bonus addition and dividends left on accumulation (after

"10. Cash and Paid-Up Insurance Values. At the end of the third policy year or thereafter,
upon the legal surrender of this Policy to the Company while there is no default in premium
payments or within two months after the due date of the premium in default, the Company
will (1) grant a cash value as specified in Column (A) increased by the cash value of any
bonus additions and dividends left on accumulation, which have been alloted to this
Policy, less all indebtedness to the Company on this Policy on the date of such surrender, or
(2) endorse this Policy as a Non-Participating Paid-up Policy for the amount as specified in
Column (B) of the Table of Guaranteed Values . . ..
"11. Extended Insurance. After the premiums for three or more full years have been paid
hereunder in cash, if any subsequent premium is not paid when due, and there is no
indebtness to the Company, on the written request of the Insured . . ..
From January 1, 1942 to December 31, 1946 for failure of the insured under the above
policies to pay the corresponding premiums for one or more years, the plaintiff's head office
of Toronto, applied the provision of the automatic premium loan clauses; and the net amount
of premiums so advanced or loaned totalled P1,069,254.98. On this sum the defendant
Collector of Internal Revenue assessed P17,917.12 which plaintiff paid supraprotest .
The assessment was made pursuant to section 255 of the National Internal Revenue Code as
amended. which partly provides:
SEC. 255. Taxes on insurance premiums. There shall be collected from every person,
company, or corporation (except purely cooperative companies or associations) doing
business of any sort in the Philippines a tax of one per centum of the total premiums
collected .. whether such premiums are paid in money, notes credits, or any substitute for
money but premiums refunded within six months after payment on account of rejection of
risk or returned for other reason to person insured shall not be included in the taxable
receipts . . ..
It is the plaintiff's contention that when it made premium loans or premium advances, as
above stated, by virtue of the non-forfeiture clauses, it did not collect premiums within the
meaning of the above sections of the law, and therefore it is not amendable to the tax
therein provided.
The plaintiff conveniently divides that issue into five minor issues, to wit:
(a) Whether or not premium advances made by plaintiff-appellant under the automatic
premium loan clause of its policies are "premium collected" by the Company subject to tax;
(b) Whether or not, in the application of the automatic premium loan clause of plaintiffappellant's policies, there is "payment in money, notes, credit, or any substitutes for
money";
(c) Whether or not the collection of the alleged deficiency premium taxes constitutes double
taxation;

33

(d) Whether the making of premium advances, granting for the sake of argument that it
amounted to collection of premiums, were done in Toronto, Canada, or in the Philippines; and
(e) Whether or not the fact that plaintiff-appellant was not doing business in the Philippines
during the period from January 1, 1942 to September 30, 1945, inclusive, exempts it from
payment of premium taxes corresponding to said period.
These points will be considered in their order. The first two may best taken up together in
the light of a practical illustration offered by appellant:
"Suppose that "A" years of age, secures a 20-years endowment policy for P5,000 from
plaintiff-appellant Company and pays an annual premium of P250. 'A' pays the first ten
yearly premiums amounting to P2,500 and on this amount plaintiff-appellant pays the
corresponding taxes under section 255 of the National Internal Revenue Code. Suppose also
that the cash value of said policy after the payment of the 10th annual premium amounts to
P1,000." When on the eleventh year the annual premium fell due and the insured remitted
no money within the months grace, the insurer treated the premium then over due as paid
from the cash value, the amount being loan to the policyholder 1 who could discharged it at
anytime with interest at 6 per cent. The insurance contract, therefore, continued in force for
the eleventh year.
Under the circumstances described, did the insurer collect the amount of P250 as the annual
premium for the eleventh year on the said policy? The plaintiff says no; but the defendant
and the lower court say yes. The latter have, in our opinion, the correct view. In effect the
Manufacturers Life Insurance Co. loaned to "A" on the eleventh year, the sum of P250 and
the latter in turn paid with that sum the annual premium on his policy. The Company
therefore collected the premium for the eleventh year.
"How could there be such a collection "plaintiff argues "when as a result thereof, insurer
becomes a creditor, acquires a lien on the policy and is entitled to collect interest on the
amount of the unpaid premiums?".
Wittingly, the "premium" and the "loan" have been interchanged in the argument. The
insurer "became a creditor"of the loan, but not of the premium that had already been paid.
And it is entitled to collect interest on the loan, not on the premium.
In other words, "A" paid the premium for the eleventh; but in turn he became a debtor of the
company for the sum of P250. This debt he could repay either by later remitting the money
to the insurer or by letting the cash value compensate for it. The debt may also be deducted
form the amount of the policy should "A" die thereafter during the continuance of the policy.
Proceeding along the same line of argument counsel for plaintiff observes "that there is no
change, much less an increase, in the amount of the assets of plaintiff-appellant after the
application of the automatic premium loan clause. Its assets remain exactly the same after
making the advances in question. It being so, there could have been no collection of
premium . . .. "We cannot assent to this view, because there was an increase. There was
thenew credit for the advances made. True, the plaintiff could not sue the insured to enforce
that credit. But it has means of satisfaction out of the cash surrender value.

Here again it may be urged that if the credit is paid out of the cash surrender value, there
were no new funds added to the company's assets. Cash surrender value "as applied to life
insurance policy, is the amount of money the company agrees to pay to the holder of the
policy if he surrenders it and releases his claims upon it. The more premiums the insured has
paid the greater will be the surrender value; but the surrender value is always a lesser sum
than the total amount of premiums paid." (Cyclopedia Law Dictionary 3d. ed. 1077.)
The cash value or cash surrender value is therefore an amount which the insurance company
holds in trust2 for the insured to be delivered to him upon demand. It is therefore a liability of
the company to the insured. Now then, when the company's credit for advances is paid out
of the cash value or cash surrender value, that value and the company's liability is thereby
dismissed pro tanto. Consequently, the net assets of the insurance
companyincreased corresponding; for it is plain mathematics that the decrease of a person's
liabilities means a corresponding increase in his net assets.
Nevertheless let us grant for the nonce that the operation of the automatic loan provision
contributed no additional cash to the funds of the insurer. Yet it must be admitted that the
insurer agreed to consider the premium paid on the strength of the automatic loan. The
premium was therefore paid by means of a "note" or "credit" or "other substitute for money"
and the taxis due because section 255 above quoted levies taxes according to the total
premiums collected by the insurer "whether such premiums are paid in money, notes,
credits or any substitutes for money.
In connection with the third issue, appellant refers to its example about "A" who failed to pay
the premium on the eleventh year and the insurer advanced P250 from the cash value. Then
it reasons out that "if the amount P250 is deducted from the cash value of P1,000 of the
policy, then taxing this P250 anew as premium collected, as was done in the present case,
will amount to double taxation since taxes had already been collected on the cash value of
P1,000 as part of the P2,500 collected as premiums for the first ten years." The trouble with
the argument is that it assumes all advances are necessarily repaid from the cash value.
That is true in some cases. In others the insured subsequently remits the money to repay the
advance and to keep unimpaired the cash reserve of his policy.
As to a matter of fact of the total amount advanced (P1,069,254.998) P158,666.63 had
actually been repaid at the time of assessment notice. Besides, the premiums paid and on
which taxes had already been collected, were those for the ten years. The tax demanded is
on the premium for the eleventh year.
In any event there is no constitutional prohibition against double taxation.
On the fourth issue the appellant takes the position that as advances of premiums were
made in Toronto, such premiums are deemed to have been paid there not in the
Philippines and therefore those payments are not subject to local taxation. The thesis
overlooks the actual fact that the loans are made to policyholders in the Philippines, who in
turn pay therewith the premium to the insurer thru the Manila branch. Approval of appellants
position will enable foreign insurers to evade the tax by contriving to require that premium
payments shall be made at their head offices. What is important, the law does not
contemplate premiums collected in the Philippines.It is enough that the insurer is doing

34

insurance business in the Philippines, irrespective of the place of its organization or

establishment.
This brings forth the appellant's last contention that it was "engaged in business" in the
Philippines during the years 1942 to September 1945, and that as section 255 applies only
to companies "doing insurance business in the Philippines" this tax was improperly
demanded.
It is our opinion that although during those years the appellant was not open for new
business because its branch office was closed, still it was practically and legally, operating in
this country by collecting premiums on its outstanding policies, incurring the risks and/or
enjoying the benefits consequent thereto, without having previously taken any steps
indicating withdrawal in good faith field of economic activity 3.
As a matter of fact, in objecting to the payment of the tax, plaintiff-appellant never insisted,
before the Bureau of Internal Revenue, that it was not engaged in business in this country
during those years.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-109937 March 21, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by
CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION INSURANCE
POOL, respondents.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to
reverse and set aside the decision of the Court of Appeals in CA-G.R CV No. 26434 and its
resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I

In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law,
applied for a loan of P500,000.00 with the Development Bank of the Philippines (DBP),
Basilan Branch. As the principal mortgagor, Dans, then 76 years of age, was advised by DBP
to obtain a mortgage redemption insurance (MRI) with the DBP Mortgage Redemption
Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and
released on August 11, 1987. From the proceeds of the loan, DBP deducted the amount of
P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans accomplished and
submitted the "MRI Application for Insurance" and the "Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was
credited by DBP to the savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool
was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this
information to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP that
Dans was not eligible for MRI coverage, being over the acceptance age limit of 60 years at
the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's
MRI application. The DBP offered to refund the premium of P1,476.00 which the deceased
had paid, but Candida Dans refused to accept the same, demanding payment of the face
value of the MRI or an amount equivalent to the loan. She, likewise, refused to accept an ex
gratia settlement of P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a
complaint with the Regional Trial Court, Branch I, Basilan, against DBP and the insurance
pool for "Collection of Sum of Money with Damages." Respondent Estate alleged that Dans
became insured by the DBP MRI Pool when DBP, with full knowledge of Dans' age at the time
of application, required him to apply for MRI, and later collected the insurance premium
thereon. Respondent Estate therefore prayed: (1) that the sum of P139,500.00, which it paid
under protest for the loan, be reimbursed; (2) that the mortgage debt of the deceased be
declared fully paid; and (3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a
cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits
submitted by respondent Estate. As a result of these admissions, the trial court narrowed
down the issues and, without opposition from the parties, found the case ripe for summary
judgment. Consequently, the trial court ordered the parties to submit their respective
position papers and documentary evidence, which may serve as basis for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and
against DBP. The DBP MRI Pool, however, was absolved from liability, after the trial court
found no privity of contract between it and the deceased. The trial court declared DBP in
estoppel for having led Dans into applying for MRI and actually collecting the premium and

35

the service fee, despite knowledge of his age ineligibility. The dispositive portion of the
decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance of justice and
equity, the Court finds judgment for the plaintiff and against Defendant DBP, ordering the
latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of interest as
amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest accumulated or
otherwise to have been settled, satisfied or set-off by virtue of the insurance coverage of the
late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other expenses, and
other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The Crossclaim of Defendant DBP is likewise dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the
appellate court affirmedin toto the decision of the trial court. The DBP's motion for
reconsideration was denied in a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement for DBP
MRI Pool" (Exh. "5-Bank") with the following declaration:
I hereby declare and agree that all the statements and answers contained herein are true,
complete and correct to the best of my knowledge and belief and form part of my application
for insurance. It is understood and agreed that no insurance coverage shall be effected
unless and until this application is approved and the full premium is paid during my
continued good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the
application shall be approved by the insurance pool; and (2) when the full premium is paid
during the continued good health of the applicant. These two conditions, being joined
conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The
pool, however, did not approve the application of Dans. There is also no showing that it
accepted the sum of P1,476.00, which DBP credited to its account with full knowledge that it
was payment for Dan's premium. There was, as a result, no perfected contract of insurance;
hence, the DBP MRI Pool cannot be held liable on a contract that does not exist.

The liability of DBP is another matter.

It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure
MRI coverage. Instead of allowing Dans to look for his own insurance carrier or some other
form of insurance policy, DBP compelled him to apply with the DBP MRI Pool for MRI
coverage. When Dan's loan was released on August 11, 1987, DBP already deducted from
the proceeds thereof the MRI premium. Four days latter, DBP made Dans fill up and sign his
application for MRI, as well as his health statement. The DBP later submitted both the
application form and health statement to the DBP MRI Pool at the DBP Main Building, Makati
Metro Manila. As service fee, DBP deducted 10 percent of the premium collected by it from
Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the second
as an insurance agent.
As an insurance agent, DBP made Dans go through the motion of applying for said
insurance, thereby leading him and his family to believe that they had already fulfilled all the
requirements for the MRI and that the issuance of their policy was forthcoming. Apparently,
DBP had full knowledge that Dan's application was never going to be approved. The
maximum age for MRI acceptance is 60 years as clearly and specifically provided in Article 1
of the Group Mortgage Redemption Insurance Policy signed in 1984 by all the insurance
companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not
personally liable to the party with whom he contracts, unless he expressly binds himself or
exceeds the limits of his authority without giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more than 60
years of age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible for MRI coverage
because of his advanced age, DBP exceeded the scope of its authority when it accepted
Dan's application for MRI by collecting the insurance premium, and deducting its agent's
commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon whether the
third person is aware of the limits of the agent's powers. There is no showing that Dans knew
of the limitation on DBP's authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of the authority conferred
by the principal on the agent and he (third person) has been deceived by the non-disclosure
thereof by the agent, then the latter is liable for damages to him (V Tolentino, Commentaries
and Jurisprudence on the Civil Code of the Philippines, p. 422 [1992], citing Sentencia [Cuba]
of September 25, 1907). The rule that the agent is liable when he acts without authority is
founded upon the supposition that there has been some wrong or omission on his part either
in misrepresenting, or in affirming, or concealing the authority under which he assumes to
act (Francisco, V., Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as
the non-disclosure of the limits of the agency carries with it the implication that a deception
was perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21 of the
Civil Code of the Philippines come into play.

36

Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his duties, act with
justice give everyone his due and observe honesty and good faith.
Article 20 provides:

(P50,000.00) as moral damages and the amount of Ten Thousand Pesos (P10,000.00) as
attorney's fees. With costs against petitioner.
SO ORDERED.
Cruz, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy. To
assume that were it not for DBP's concealment of the limits of its authority, Dans would have
secured an MRI from another insurance company, and therefore would have been fully
insured by the time he died, is highly speculative. Considering his advanced age, there is no
absolute certainty that Dans could obtain an insurance coverage from another company. It
must also be noted that Dans died almost immediately, i.e., on the nineteenth day after
applying for the MRI, and on the twenty-third day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered by him as
he has duly proved (Civil Code of the Philippines, Art. 2199). Damages, to be recoverable,
must not only be capable of proof, but must be actually proved with a reasonable degree of
certainty (Refractories Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989];
Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative damages are too
remote to be included in an accurate estimate of damages (Sun Life Assurance v. Rueda
Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral damages. No
proof of pecuniary loss is required in the assessment of said kind of damages (Civil Code of
Philippines, Art. 2216). The same may be recovered in acts referred to in Article 2219 of the
Civil Code.
The assessment of moral damages is left to the discretion of the court according to the
circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering that DBP
had offered to pay P30,000.00 to respondent Estate in ex gratia settlement of its claim and
that DBP's non-disclosure of the limits of its authority amounted to a deception to its client,
an award of moral damages in the amount of P50,000.00 would be reasonable.
The award of attorney's fees is also just and equitable under the circumstances (Civil Code of
the Philippines, Article 2208 [11]).
WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent Estate
of Juan B. Dans the amount of P1,476.00 with legal interest from the date of the filing of the
complaint until fully paid; and (2) to PAY said Estate the amount of Fifty Thousand Pesos

37

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

should be six (6%) per cent per annum in accordance with Article 2209 of the Civil Code and
not twelve (12%) per cent as insisted upon by petitioner's counsel. In its order of July 30,
1986, the trial court denied EASCO's motion. EASCO then filed a petition for certiorari and
prohibition before the Court of Appeals.

G.R. No. 76101-02 September 30, 1991

On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive part of
which states:

TIO KHE CHIO, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND SURETY
CORPORATION,respondents.

WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes the
interest at 12% on the principal amount of P87,598.82 from the date of filing of the
complaint until the full payment of the amount, and the interest that the private respondent
is entitled to collect from the petitioner is hereby reduced to 6% per annum.

Rodolfo M. Morelos for petitioner.

No pronouncement as to costs.

Ferrer, Mariano, Sangalang & Gatdula for private respondent.

In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not only
is it unjust and unfair but it is also contrary to the correct interpretation of the fixing of
interest rates under Sections 243 and 244 of the Insurance Code. And since petitioner's
claims is based on an insurance contract, then it is the Insurance Code which must govern
and not the Civil Code.

FERNAN, C.J.:p
The issue in this petition for certiorari and prohibition is the legal rate of interest to be
imposed in actions for damages arising from unpaid insurance claims. Petitioner Tio Khe Chio
claims that it should be twelve (12%) per cent pursuant to Articles 243 and 244 of the
Insurance Code while private respondent Eastern Assurance and Surety Corporation (EASCO)
claims that it should be six (6%) per cent under Article 2209 of the Civil Code.
The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one
thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A. Dallas,
Texas, U.S.A. The goods were insured with respondent EASCO and shipped on board the M/V
Peskov, a vessel owned by Far Eastern Shipping Company. When the goods reached Manila
on January 28, 1979, they were found to have been damaged by sea water which rendered
the fishmeal useless. Petitioner filed a claim with EASCO and Far Eastern Shipping. Both
refused to pay. Whereupon, petitioner sued them before the then Court of First Instance of
Cebu, Branch II for damages. EASCO, as the insurer, filed a counterclaim against the
petitioner for the recovery of P18,387.86 representing the unpaid insurance premiums.
On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern
Shipping to pay petitioner solidarily the sum of P105,986.68 less the amount of P18,387.86
for unpaid premiums with interest at the legal rate from the filing of the complaint, the sum
of P15,000.00 as attorney's fees and the costs. 1
The judgment became final as to EASCO but the shipping company appealed to the Court of
Appeals and was absolved from liability by the said court in AC-G.R. No. 00161, entitled "Tio
Khe Chio vs. Eastern Assurance and Surety Corporation."
The trial court, upon motion by petitioner, issued a writ of execution against EASCO. The
sheriff enforcing the writ reportedly fixed the legal rate of interest at twelve (12%).
Respondent EASCO moved to quash the writ alleging that the legal interest to be computed

We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%) per
annum as correctly held by the Appellate Court.
Section 243 of the Insurance Code provides:
The amount of any loss or damage for which an insurer may be liable, under any policy other
than life insurance policy, shall be paid within thirty days after proof of loss is received by
the insurer and ascertainment of the loss or damage is made either by agreement between
the insured and the insurer or by arbitration; but if such ascertainment is not had or made
within sixty days after such receipt by the insurer of the proof of loss, then the loss or
damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss
or damage within the time prescribed herein will entitle the assured to collect interest on the
proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed
by the Monetary Board, unless such failure or refusal to pay is based on the ground that the
claim is fraudulent.
Section 244 of the aforementioned Code also provides:
In case of any litigation for the enforcement of any policy or contract of insurance, it shall be
the duty of the Commissioner or the Court, as the case may be, to make a finding as to
whether the payment of the claim of the insured has been unreasonably denied or withheld;
and in the affirmative case, the insurance company shall be adjudged to pay damages which
shall consist of attorney's fees and other expenses incurred by the insured person by reason
of such undeniable denial or withholding of payment plus interest of twice the ceiling
prescribed by the Monetary Board of the amount of the claim due the insured, from the date
following the time prescribed in section two hundred forty-two or in section two hundred
forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to

38

pay any such claim within the time prescribed in said sections shall be considered prima
facie evidence of unreasonable delay in payment.

SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.

In the case at bar, the Court of Appeals made no finding that there was an unjustified refusal
or withholding of payment on petitioner's claim. In fact, respondent court had this to say on
EASCO's refusal to settle the claim of petitioner:
... EASCO's refusal to settle the claim to Tio Khe Chio was based on some ground which,
while not sufficient to free it from liability under its policy, nevertheless is sufficient to
negate any assertion that in refusing to pay, it acted unjustifiably.
xxx xxx xxx
The case posed some genuine issues of interpretation of the terms of the policy as to which
persons may honestly differ. This is the reason the trial court did not say EASCO's refusal
was unjustified. 3
Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant
case. They apply only when the court finds an unreasonable delay or refusal in the payment
of the claims.
Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of interest
from six (6%) to twelve (12%) per cent apply to the case at bar as by the petitioner. The
adjusted rate mentioned in the circular refers only to loans or forbearances of money, goods
or credits and court judgments thereon but not to court judgments for damages arising from
injury to persons and loss of property which does not involve a loan. 4
In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143
SCRA 158, the Court declared that the legal rate of interest is six (6%) per cent per annum,
and not twelve (12%) per cent, where a judgment award is based on an action for damages
for personal injury, not use or forbearance of money, goods or credit. In the same vein, the
Court held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30, 1986, 145 SCRA 311,
that the rates under the Usury Law (amended by P.D. 116) are applicable only to interest by
way of compensation for the use or forbearance of money, interest by way of damages is
governed by Article 2209 of the Civil Code.
Clearly, the applicable law is Article 2209 of the Civil Code which reads:
If the obligation consists in the payment of a sum of money and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment
of interest agreed upon, and in the absence of stipulation, the legal interest which is six per
cent per annum.
And in the light of the fact that the contending parties did not allege the rate of interest
stipulated in the insurance contract, the legal interest was properly pegged by the Appellate
Court at six (6%) per cent.
WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.

39

FIRST DIVISION
[G.R. No. 138737. July 12, 2001]
FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS
and USIPHIL INCORPORATED, respondents.
DECISION
KAPUNAN, J.:
Through this petition for review on certiorari Finman General Assurance Corporation
(petitioner) seeks to reverse and set aside the Decision, dated January 14, 1999, of the Court
of Appeals (CA) in CA-G.R. CV No. 46721 directing petitioner to pay the insurance claim of
Usiphil Incorporated (private respondent). The appellate courts Resolution, dated May 13,
1999, which denied petitioners motion for reconsideration, is likewise sought to be reversed
and set aside.

WHEREFORE, in view of the above observations and findings, judgment is hereby rendered in
favor of the plaintiff and against the defendant, ordering the latter:
1. To pay the plaintiff the sum of P842,683.40 and to pay 24% interest per annum from
February 28, 1985 until fully paid (par. 29 of Exh. K);
2. To pay the plaintiff the sum equivalent to 10% of the principal obligation as and for
attorneys fees, plus P1,500.00 per court appearance of counsel;
3. To pay the plaintiff the amount of P30,000.00 as exemplary damages in addition to the
actual and compensatory damages awarded;
4. Dismissing the claim of P30,000.00 for actual damages under par. 4 of the prayer, since
the actual damages has been awarded under par. 1 of the decisions dispositive portion;
5. Dismissing the claim of interest under par. 2 of the prayer, there being no agreement to
such effect;

The antecedent facts, as culled from the decision of the trial court and the CA, are as follows:

6. Dismissing the counter-claim for lack of merit;

On September 15, 1981, private respondent obtained a fire insurance policy from petitioner
(then doing business under the name Summa Insurance Corporation) covering certain
properties, e.g., office, furniture, fixtures, shop machinery and other trade equipment. Under
Policy No. F3100 issued to private respondent, petitioner undertook to indemnify private
respondent for any damage to or loss of said properties arising from fire.

7. Ordering the defendant to pay the cost of suit.

Sometime in 1982, private respondent filed with petitioner an insurance claim amounting to
P987,126.11 for the loss of the insured properties due to fire. Acting thereon, petitioner
appointed Adjuster H.H. Bayne to undertake the valuation and adjustment of the loss. H.H.
Bayne then required private respondent to file a formal claim and submit proof of loss. In
compliance therewith, private respondent submitted its Sworn Statement of Loss and Formal
Claim, dated July 22, 1982, signed by Reynaldo Cayetano, private respondents
Manager. Respondent likewise submitted Proof of Loss signed by its Accounting Manager
Pedro Palallos and countersigned by H.H. Baynes Adjuster F.C. Medina.
Palallos personally followed-up private respondents claim with petitioners President Joaquin
Ortega. During their meeting, Ortega instructed their Finance Manager, Rosauro Maghirang,
to reconcile the records. Thereafter, Maghirang and Palallos signed a Statement/Agreement,
dated February 28, 1985, which indicated that the amount due respondent was P842,683.40.
Despite repeated demands by private respondent, petitioner refused to pay the insurance
claim. Thus, private respondent was constrained to file a complaint against petitioner for the
unpaid insurance claim. In its Answer, petitioner maintained that the claim of private
respondent could not be allowed because it failed to comply with Policy Condition No. 13
regarding the submission of certain documents to prove the loss.
Trial ensued. On July 6, 1994, the trial court rendered judgment in favor of private
respondent. The dispositive portion of the decision reads:

SO ORDERED.[1]
On appeal, the CA substantially affirmed the decision of the trial court. The dispositive
portion of the CA decision reads:
WHEREFORE, the appealed decision is hereby AFFIRMED with the modification that
defendant-appellant is ordered to pay plaintiff-appellee the sum of P842,683.40 and to pay
24% interest per annum from 03 May 1985 until fully paid. In all other respects, the
appealed decision is AFFIRMED IN TOTO.
SO ORDERED.[2]
Petitioner now comes to this Court assailing the decision of the appellate court. Petitioner
alleges that:
Respondent Court of Appeals erred in finding that there is evidence sufficient to justify the
Decision of the lower court;
Respondent Court of Appeals erred in failing to consider the fact that Private Respondent
committed a violation of the Insurance Policy which justifies the denial of the claim by
Petitioner;
Respondent Court of Appeals further erred in finding that Petitioner is liable to pay the
respondent, Usiphil, Inc., an interest of 24% per annum in addition to the principal amount of
P842,683.40.[3]
Essentially, petitioner argues that the disallowance of private respondents claim is justified
by its failure to submit the required documents in accordance with Policy Condition No.

40

13. Said requirements were allegedly communicated to private respondent in the two letters
of H.H. Bayne to private respondent. The first letter stated:
To be able to expedite adjustment of this case, please submit to us without delay the
following documents and/or particulars:
For FFF, Machineries/Equipment Claims
1. Your formal claim (which may be accomplished in the enclosed form) accompanied by a
detailed inventory of the documents submitted.

For Stock Claim

1. Your formal claim (which may be accomplished in the enclosed), accompanied by a
detailed inventory of the documents submitted.
2. Certification from the appropriate government office showing that the Insureds property
was involved in the fire as a consequence of which the claim is being filed.
3. Proof of premium payment.

2. Certification from the appropriate government office indicating the date of the occurrence
of the fire, the property involved, its location and possible point of origin.

4. Three colored photographs of the debris, property captioned/identified/dated and initiated

by the claimant at the back; in a floor plan, indicate the point from where the picture was
taken and by an arrow where the camera was facing.

3. Proof of premium payment.

4.1. Close-up (not more than 2 meters away) of the most severely damaged.

4. Three color photographs of the debris properly captioned/identified/dated and initiated by

the claimant at the back.

4.2. Close-up (not more than 2 meters away) of the least damaged.

4.1 Close-up (not more than 2 meters away) of the most severely damaged.

4.3. Overall view of the debris (may be from farther than 2 meters away); splice two or more
frames if necessary.

4.2 Close-up (not more than 2 meters away) of the least damaged.

Our adjuster will also take photographs.

4.3. Original view of the debris (may be from farther than 2 meters away); splice two or
more frames if necessary.

5. Books of accounts bill, invoices and other vouchers, or certified copies thereof if originals
be lost. This requirement includes, but is not limited to, purchase and sales invoices, delivery

Though our adjusters will also take photographs in the manner prescribed above, please do
not rely on his photographs in the preservations of your evidence of loss thru pictures.

6. Certified copies of income tax returns for the last three years and the accompanying
financial statements.

5. Copies of purchase invoices.

7. Latest inventory of merchandise filed with a financial institution, the Bureau of Internal
Revenue or any government entity prior to the loss.

6. In the absence of No. 5, suppliers certificates of sales and delivery.

7. Appraisal report, if any.

8. A detailed inventory of the articles damaged or destroyed, showing the cost price of each,
extent of loss, if any, if the risk sustained partial or water damaged.

8. Where initial estimated loss is exceeding P20,000.00, submit estimate by at least 2

contractors/suppliers.

9. Certificates of registration.

9. Others (to be specified)

1. Repairs cost of the affected items including quotation or invoices in support thereof;
2. Complete lists of furniture, fixtures & fittings including date and cost of acquisition, and;
3. Statement of salvage on burned items.
Your preferential attention to this request will be fully appreciated. [4]
While the other letter stated:

10. Bank Statements.

11. For losses where the estimated value of stocks claimed which are burned out of sight
and/or which may no longer be subject to actual physical count exceeds P50,000.00, a CPAs
detailed computations in support of such estimated value.
12. In the absence of purchase invoices/delivery receipts (state reason for absence), submit
suppliers certificate of sales and delivery.
13. Others (to be specified).
Statement of salvage of the affected stocks in trade.

Please submit to us without delay the following documents and/or particulars.

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Your compliance with this request will enable us to expedite adjustment of the loss in
caption.[5]
According to petitioner, in complete disregard of the foregoing requirements, private
respondent never submitted any of the documents mentioned therein. Further, petitioner
assails the award in favor of private respondent of an interest rate of 24% per annum. Since
there was allegedly no express finding that petitioner unreasonably denied or withheld the
payment of the subject insurance claim, then the award of 24% per annum is not
proper. Petitioner opines that the judgment should only bear the legal interest rate of 12%
per annum for the delay in the payment of the claim.
The petition is bereft of merit.
Well-settled is the rule that factual findings and conclusions of the trial court and the CA are
entitled to great weight and respect, and will not be disturbed on appeal in the absence of
any clear showing that the trial court overlooked certain facts or circumstances which would
substantially affect the disposition of the case.[6] There is no cogent reason to deviate from
this salutary rule in the present case.
Both the trial court and the CA concur in holding that private respondent had substantially
complied with Policy Condition No. 13 which reads:
13. The insured shall give immediate written notice to the Company of any loss, protect the
property from further damage, forthwith separate the damaged and undamaged personal
property, put it in the best possible order, furnish a complete inventory of the destroyed,
damaged, and undamaged property, showing in detail quantities, costs, actual cash value
and the amount of loss claimed; AND WITHIN SIXTY DAYS AFTER THE LOSS, UNLESS SUCH
TIME IS EXTENDED IN WRITING BY THE COMPANY, THE INSURED SHALL RENDER TO THE
COMPANY A PROOF OF LOSS, signed and sworn to by the insured, stating the knowledge and
belief of the insured as to the following: the time and origin of the loss, the interest of the
insured and of all others in the property, the actual cash value of each item thereof and the
amount of loss thereto, all encumbrances thereon, all other contracts of insurance, whether
valid or not, covering any of said property, any changes in the title, use, occupation,
location, possession or exposures of said property since the issuing of this policy by whom
and for what purpose any buildings herein described and the several parts thereof were
occupied at the time of loss and whether or not it then stood on leased ground, and shall
furnish a copy of all the descriptions and schedules in all policies, and if required verified
plans and specifications of any building, fixtures, or machinery destroyed or damaged. The
insured, as often as may be reasonably required, shall exhibit to any person designated by
the company all that remains of any property herein described, and submit to examination
under oath by any person named by the Company, and subscribe the same; and, as often as
may be reasonably required, shall produce for examination all books of account, bills,
invoices, and other vouchers or certified copies thereof if originals be lost, at such
reasonable time and place as may be designated by the Company or its representative and
shall permit extracts and copies thereof to be made.
No claim under this policy shall be payable unless the terms of this condition have been
complied with.[7]

A perusal of the records shows that private respondent, after the occurrence of the fire,
immediately notified petitioner thereof. Thereafter, private respondent submitted the
following documents: (1) Sworn Statement of Loss and Formal Claim (Exhibit C) and; (2)
Proof of Loss (Exhibit D). The submission of these documents, to the Courts mind, constitutes
substantial compliance with the above provision. Indeed, as regards the submission of
documents to prove loss, substantial, not strict as urged by petitioner, compliance with the
requirements will always be deemed sufficient.[8]
In any case, petitioner itself acknowledged its liability when through its Finance Manager,
Rosauro Maghirang, it signed the document indicating that the amount due private
respondent is P842,683.40 (Exhibit E). As correctly held by the appellate court:
Under the aforequoted provision of the insurance policy, the insured was required to submit
to the insurer written notice of the loss; and a complete inventory of the properties damaged
within 60 days after the fire, as well as a signed and sworn statement of Proof of Loss. It is
admitted by all parties that plaintiff-appellee notified the insurer Summa Corporation of the
fire which occurred on 27 May 1982. It is likewise admitted by all parties that plaintiffappellee submitted the following documents in support of its claim: (1) Sworn Statement of
Loss (Exhibit C); (2) formal claim dated 22 July 1982; (3) unnotarized sworn statement of
proof of loss (Exhibit D). There was, therefore, sufficient compliance with the requirements in
Section 13 of the policy. But, even assuming that plaintiff-appellee indeed failed to submit
certain required documents as proof of loss per Section 13, such violation was waived by the
insurer Summa when it signed the document marked Exhibit E, a breakdown of the amount
due to plaintiff-appellee as of February 1985 on the insurance claim. By such act, defendantappellant acknowledged its liability under the insurance policy.
Antecedent to the execution of Exhibit E, there was a conference between Pallalos,
representing plaintiff-appellee and Ortega representing Summa Insurance. There is no
evidence that in that meeting, Summa Insurance questioned plaintiff-appellees submission
of the required documents. What happened was that Ortega summoned Maghirang so that
he could settle with Pallalos regarding the amount due to plaintiff-appellee from insurance
claim. The result is a reconciliation of claim in Exhibit E which shows that as of February
1985, the net due sum is P842,683.49.
Defendant-appellant alleges that Maghirang was without authority to sign Exhibit E, and
therefore without authority to bind defendant-appellant corporation. We do not agree. The
evidence indicate that at a meeting between plaintiff-appellees corporate president Pedro
Pallalos and his counterpart in defendant-appellant corporation, Joaquin Ortega, the latter
summoned Rosauro Maghirang to reconcile the claims of plaintiff-appellee. One who clothes
another with apparent authority as his agent and holds him to the public as such, cannot
later be allowed to deny the authority of such person to act as his agent when such third
person entered into the contract in good faith and in an honest belief that he is such
agent. Witness for defendant-appellant Luis Manapats testimony that Maghirang was without
authority to bind the defendant-appellant cannot be given credence because, as he himself
testified, he was not yet part of the Summa Corporation at the time the negotiations in
question were going on.[9]

42

Anent the payment of 24% interest per annum computed from May 3, 1985 until fully paid,
suffice it to say that the same is authorized by Sections 243 and 244 of the Insurance Code:

Sections 243 and 244.[10] Further, Section 29 of the policy itself provides for the payment of
such interest:

Sec. 243. The amount of any loss or damage for which an insurer may be liable, under any
policy other than life insurance policy, shall be paid within thirty days after proof of loss is
received by the insurer and ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by arbitration; but if such ascertainment
is not had or made within sixty days after such receipt by the insurer of the proof of loss,
then the loss or damage shall be paid within ninety days after such receipt. Refusal or failure
to pay the loss or damage within the time prescribed herein will entitle the assured to collect
interest on the proceeds of the policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on
the ground that the claim is fraudulent.

29. Settlement of claim clause. The amount of any loss or damage for which the company
may be liable, under this policy shall be paid within thirty days after proof of loss is received
by the company and ascertainment of the loss or damage is made either in an agreement
between the insured and the company or by arbitration; but if such ascertainment is not had
or made within sixty days after such receipt by the company of the proof of loss, then the
loss or damage shall be paid within ninety days after such receipt. Refusal or failure to pay
the loss or damage within the time prescribed herein will entitle the assured to collect
interest on the proceeds of the policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on
the grounds (sic) that the claim is fraudulent.[11]

Sec. 244. In case of any litigation for the enforcement of any policy or contract of insurance,
it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding
as to whether the payment of the claim of the insured has been unreasonably denied or
withheld; and in the affirmative case, the insurance company shall be adjudged to pay
damages which shall consist of attorneys fees and other expenses incurred by the insured
person by reason of such unreasonable denial or withholding of payment plus interest of
twice the ceiling prescribed by the Monetary Board of the amount of the claim due the
insured, from the date following the time prescribed in section two hundred forty-two or in
section two hundred forty-three, as the case may be, until the claim is fully
satisfied: Provided, That the failure to pay any such claim within the time prescribed in said
sections shall be considered prima facie evidence of reasonable delay in payment.

The policy itself obliges petitioner to pay the insurance claim within thirty days after proof of
loss and ascertainment of the loss made in an agreement between private respondent and
petitioner. In this case, as found by the CA, petitioner and private respondent signed the
agreement (Exhibit E) indicating that the amount due private respondent was P842,683.40
on April 2, 1985. Petitioner thus had until May 2, 1985 to pay private respondents insurance.
[12]
For its failure to do so, the CA and the trial court rightfully directed petitioner to pay, inter
alia, 24% interest per annum in accordance with the above quoted provisions.

Notably, under Section 244, a prima facie evidence of unreasonable delay in payment of the
claim is created by the failure of the insurer to pay the claim within the time fixed in both

SO ORDERED.

WHEREFORE, the instant petition is hereby DENIED for lack of merit. The Decision, dated
January 14, 1999, of the Court of Appeals in CA-G.R. CV No. 46721 and its Resolution, dated
May 13, 1999, are AFFIRMED IN TOTO.

43