G.R. No.
198174 September 2, 2013 In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and argued
ALPHA INSURANCE AND SURETY CO., PETITIONER,
vs.
ARSENIA SONIA CASTOR, RESPONDENT.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision1 dated May 31, 2011 and Resolution2 dated August 10, 2011 of the Court of Appeals
(CA) in CA-G.R. CV No. 93027.
The facts follow.
On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The
contract of insurance obligates the petitioner to pay the respondent the amount of Six Hundred
Thirty Thousand Pesos (P630,000.00) in case of loss or damage to said vehicle during the
period covered, which is from February 26, 2007 to February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar
Lanuza (Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tune-up.
However, Lanuza no longer returned the motor vehicle to respondent and despite diligent efforts
to locate the same, said efforts proved futile. Resultantly, respondent promptly reported the
incident to the police and concomitantly notified petitioner of the said loss and demanded
payment of the insurance proceeds in the total sum of P630,000.00.
In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating among
others, thus:
Upon verification of the documents submitted, particularly the Police Report and your Affidavit,
which states that the culprit, who stole the Insure[d] unit, is employed with you. We would like to
invite you on the provision of the Policy under Exceptions to Section-III, which we quote:
1.) The Company shall not be liable for:
xxxx
(4) Any malicious damage caused by the Insured, any member of his family or by "A PERSON
IN THE INSUREDS SERVICE."
In view [of] the foregoing, we regret that we cannot act favorably on your claim.
that the exception refers to damage of the motor vehicle and not to its loss. However, petitioners
denial of respondents insured claim remains firm.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner
before the Regional Trial Court (RTC) of Quezon City on September 10, 2007.
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of respondent in
this wise:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant ordering the latter as follows:
To pay plaintiff the amount of P466,000.00 plus legal interest of 6% per annum from the time of
demand up to the time the amount is fully settled;
To pay attorneys fees in the sum of P65,000.00; and
To pay the costs of suit.
All other claims not granted are hereby denied for lack of legal and factual basis. 3
Aggrieved, petitioner filed an appeal with the CA.
On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon Citys
decision. The fallo reads:
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision,
dated December 19, 2008, of Branch 215 of the Regional Trial Court of Quezon City, in Civil
Case No. Q-07-61099, is hereby AFFIRMED in toto.
SO ORDERED.4
Petitioner filed a Motion for Reconsideration against said decision, but the same was denied in a
Resolution dated August 10, 2011.
Hence, the present petition wherein petitioner raises the following grounds for the allowance of
its petition:
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
GROSSLY OR GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF
THE PRIVATE RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT
EXCEPTION DOES NOT COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF
THE INSURANCE POLICY ARE [AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT
THE PARTIES THEMSELVES DISAGREE ABOUT THE MEANING OF PARTICULAR
PROVISIONS, THE POLICY WILL BE CONSTRUED BY THE COURTS LIBERALLY IN FAVOR
OF THE ASSURED AND STRICTLY AGAINST THE INSURER.
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE
JUDGMENT OF THE TRIAL COURT.5
Simply, the core issue boils down to whether or not the loss of respondents vehicle is excluded
under the insurance policy.
We rule in the negative.
Significant portions of Section III of the Insurance Policy states:
Damage to tires, unless the Schedule Vehicle is damaged at the same time;
Any malicious damage caused by the Insured, any member of his family or by a person in the
Insureds service.6
In denying respondents claim, petitioner takes exception by arguing that the word "damage,"
under paragraph 4 of "Exceptions to Section III," means loss due to injury or harm to person,
property or reputation, and should be construed to cover malicious "loss" as in "theft." Thus, it
asserts that the loss of respondents vehicle as a result of it being stolen by the latters driver is
excluded from the policy.

We do not agree.
SECTION III LOSS OR DAMAGE

Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft
The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or
perpetrated by the driver of the insured is not an exception to the coverage from the insurance
damage to the Schedule Vehicle and its accessories and spare parts whilst thereon:
policy, since Section III thereof did not qualify as to who would commit the theft. Thus:

(a)
Theft perpetrated by a driver of the insured is not an exception to the coverage from the
insurance policy subject of this case. This is evident from the very provision of Section III "Loss
by accidental collision or overturning, or collision or overturning consequent upon mechanical or Damage." The insurance company, subject to the limits of liability, is obligated to indemnify
breakdown or consequent upon wear and tear; the insured against theft. Said provision does not qualify as to who would commit the theft. Thus,
even if the same is committed by the driver of the insured, there being no categorical declaration
(b) of exception, the same must be covered. As correctly pointed out by the plaintiff, "(A)n insurance
contract should be interpreted as to carry out the purpose for which the parties entered into the
contract which is to insure against risks of loss or damage to the goods. Such interpretation
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft; should result from the natural and reasonable meaning of language in the policy. Where
restrictive provisions are open to two interpretations, that which is most favorable to the insured
(c) is adopted." The defendant would argue that if the person employed by the insured would
commit the theft and the insurer would be held liable, then this would result to an absurd
situation where the insurer would also be held liable if the insured would commit the theft. This
by malicious act;
argument is certainly flawed. Of course, if the theft would be committed by the insured himself,
the same would be an exception to the coverage since in that case there would be fraud on the
(d) part of the insured or breach of material warranty under Section 69 of the Insurance Code.7

whilst in transit (including the processes of loading and unloading) incidental to such transit by
road, rail, inland waterway, lift or elevator.
xxxx
EXCEPTIONS TO SECTION III
The Company shall not be liable to pay for:
Loss or Damage in respect of any claim or series of claims arising out of one event, the first
amount of each and every loss for each and every vehicle insured by this Policy, such amount
being equal to one percent (1.00%) of the Insureds estimate of Fair Market Value as shown in
the Policy Schedule with a minimum deductible amount of Php3,000.00;
Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures or
breakages;
Moreover, 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.8 Accordingly, in interpreting the exclusions in an insurance contract, the terms used
specifying the excluded classes therein are to be given their meaning as understood in common
speech.9
Adverse to petitioners claim, the words "loss" and "damage" mean different things in common
ordinary usage. The word "loss" refers to the act or fact of losing, or failure to keep possession,
while the word "damage" means deterioration or injury to property.1wphi1
Therefore, petitioner cannot exclude the loss of respondents vehicle under the insurance policy
under paragraph 4 of "Exceptions to Section III," since the same refers only to "malicious
damage," or more specifically, "injury" to the motor vehicle caused by a person under the
insureds service. Paragraph 4 clearly does not contemplate "loss of property," as what
happened in the instant case.
Further, the CA aptly ruled that "malicious damage," as provided for in the subject policy as one In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated
of the exceptions from coverage, is the damage that is the direct result from the deliberate or the above ruling, stating that:
willful act of the insured, members of his family, and any person in the insureds service, whose
clear plan or purpose was to cause damage to the insured vehicle for purposes of defrauding
When the terms of insurance contract contain limitations on liability, courts should construe them
the insurer, viz.:
in such a way as to preclude the insurer from non-compliance with his obligation. Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly against the
This interpretation by the Court is bolstered by the observation that the subject policy appears to party which prepared the contract, the insurer. By reason of the exclusive control of the
clearly delineate between the terms "loss" and "damage" by using both terms throughout the insurance company over the terms and phraseology of the insurance contract, ambiguity must
said policy. x x x be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture.12
xxxx
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED.
Accordingly, the Decision dated May 31, 2011 and Resolution dated August 10, 2011 of the
If the intention of the defendant-appellant was to include the term "loss" within the term
Court of Appeals are hereby AFFIRMED.
"damage" then logic dictates that it should have used the term "damage" alone in the entire
policy or otherwise included a clear definition of the said term as part of the provisions of the
said insurance contract. Which is why the Court finds it puzzling that in the said policys SO ORDERED.
provision detailing the exceptions to the policys coverage in Section III thereof, which is one of
the crucial parts in the insurance contract, the insurer, after liberally using the words "loss" and
"damage" in the entire policy, suddenly went specific by using the word "damage" only in the
policys exception regarding "malicious damage." Now, the defendant-appellant would like this
Court to believe that it really intended the word "damage" in the term "malicious damage" to
include the theft of the insured vehicle.

The Court does not find the particular contention to be well taken.

True, it is a basic rule in the interpretation of contracts that the terms of a contract are to be
construed according to the sense and meaning of the terms which the parties thereto have used.
In the case of property insurance policies, the evident intention of the contracting parties, i.e.,
the insurer and the assured, determine the import of the various terms and provisions embodied
in the policy. However, when the terms of the insurance policy are ambiguous, equivocal or
uncertain, such that the parties themselves disagree about the meaning of particular provisions,
the policy will be construed by the courts liberally in favor of the assured and strictly against the
insurer.10

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the insurance
contract contain limitations on liability, courts should construe them in such a way as to preclude
the insurer from non-compliance with his obligation. Thus, in Eternal Gardens Memorial Park
Corporation v. Philippine American Life Insurance Company,11 this Court ruled

It must be remembered that an insurance contract is a contract of adhesion which must be

construed liberally in favor of the insured and strictly against the insurer in order to safeguard the
latters interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared
by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to preclude the insurer
from non-compliance with its obligations.

G.R. No. 200784 August 7, 2013
MALAYAN INSURANCE COMPANY, INC., PETITIONER,
vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.
DECISION
MENDOZA, J.:
Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court is the
October 27, 2011 Decision1 of the Court of Appeals (CA), which affirmed with modification the
September 17, 2009 Decision2 of the Regional Trial Court, Branch 15, Manila (RTC), and its
February 24, 2012 Resolution3 denying the motion for reconsideration filed by petitioner Malayan
Insurance Company., Inc. (Malayan).
The Facts
The undisputed factual antecedents were succinctly summarized by the CA as follows:
On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance Policy No. F-
00227-000073 to PAP Co., Ltd. (PAP Co.) for the latters machineries and equipment located at
Sanyo Precision Phils. Bldg., Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite (Sanyo Building).
The insurance, which was for Fifteen Million Pesos (?15,000,000.00) and effective for a period of
one (1) year, was procured by PAP Co. for Rizal Commercial Banking Corporation (RCBC), the
mortgagee of the insured machineries and equipment.
After the passage of almost a year but prior to the expiration of the insurance coverage, PAP Co.
renewed the policy on an "as is" basis. Pursuant thereto, a renewal policy, Fire Insurance Policy
No. F-00227-000079, was issued by Malayan to PAP Co. for the period May 13, 1997 to May 13,
1998.
On October 12, 1997 and during the subsistence of the renewal policy, the insured machineries
and equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim with Malayan
in the amount insured.
In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at the
time of the loss, the insured machineries and equipment were transferred by PAP Co. to a
location different from that indicated in the policy. Specifically, that the insured machineries were
transferred in September 1996 from the Sanyo Building to the Pace Pacific Bldg., Lot 14, Block
14, Phase III, PEZA, Rosario, Cavite (Pace Pacific). Contesting the denial, PAP Co. argued that
Malayan cannot avoid liability as it was informed of the transfer by RCBC, the party duty-bound
to relay such information. However, Malayan reiterated its denial of PAP Co.s claim. Distraught,
PAP Co. filed the complaint below against Malayan.4
Ruling of the RTC
On September 17, 2009, the RTC handed down its decision, ordering Malayan to pay PAP
Company Ltd (PAP) an indemnity for the loss under the fire insurance policy as well as for
attorneys fees. The dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff.
Defendant is hereby ordered:
a)
To pay plaintiff the sum of FIFTEEN MILLION PESOS (P15,000,000.00) as and for indemnity for
the loss under the fire insurance policy, plus interest thereon at the rate of 12% per annum from
the time of loss on October 12, 1997 until fully paid;
b)
To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (PhP500,000.00) as and by
way of attorneys fees; [and,]
c)
To pay the costs of suit.
SO ORDERED.5
The RTC explained that Malayan is liable to indemnify PAP for the loss under the subject fire
insurance policy because, although there was a change in the condition of the thing insured as a
result of the transfer of the subject machineries to another location, said insurance company
failed to show proof that such transfer resulted in the increase of the risk insured against. In the
absence of proof that the alteration of the thing insured increased the risk, the contract of fire
insurance is not affected per Article 169 of the Insurance Code.
The RTC further stated that PAPs notice to Rizal Commercial Banking Corporation (RCBC)
sufficiently complied with the notice requirement under the policy considering that it was RCBC
which procured the insurance. PAP acted in good faith in notifying RCBC about the transfer and
the latter even conducted an inspection of the machinery in its new location.
Not contented, Malayan appealed the RTC decision to the CA basically arguing that the trial
court erred in ordering it to indemnify PAP for the loss of the subject machineries since the latter,
without notice and/or consent, transferred the same to a location different from that indicated in
the fire insurance policy.
Ruling of the CA
On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC decision
but deleted the attorneys fees. The decretal portion of the CA decision reads:
WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan Insurance
Company must indemnify PAP Co. Ltd the amount of Fifteen Million Pesos (PhP15,000,000.00)
for the loss under the fire insurance policy, plus interest thereon at the rate of 12% per annum
from the time of loss on October 12, 1997 until fully paid. However, the Five Hundred Thousand
Pesos (PhP500,000.00) awarded to PAP Co., Ltd. as attorneys fees is DELETED. With costs.
SO ORDERED.6
The CA wrote that Malayan failed to show proof that there was a prohibition on the transfer of
the insured properties during the efficacy of the insurance policy. Malayan also failed to show
that its contractual consent was needed before carrying out a transfer of the insured properties.
Despite its bare claim that the original and the renewed insurance policies contained provisions
on transfer limitations of the insured properties, Malayan never cited the specific provisions.
The CA further stated that even if there was such a provision on transfer restrictions of the
insured properties, still Malayan could not escape liability because the transfer was made during
the subsistence of the original policy, not the renewal policy. PAP transferred the insured
properties from the Sanyo Factory to the Pace Pacific Building (Pace Factory) sometime in
September 1996. Therefore, Malayan was aware or should have been aware of such transfer
when it issued the renewal policy on May 14, 1997. The CA opined that since an insurance
policy was a contract of adhesion, any ambiguity must be resolved against the party that
prepared the contract, which, in this case, was Malayan.
Finally, the CA added that Malayan failed to show that the transfer of the insured properties
increased the risk of the loss. It, thus, could not use such transfer as an excuse for not paying
the indemnity to PAP. Although the insurance proceeds were payable to RCBC, PAP could still
sue Malayan to enforce its rights on the policy because it remained a party to the insurance
contract.
Not in conformity with the CA decision, Malayan filed this petition for review anchored on the
following
GROUNDS
I
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE
WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT AND THUS RULING IN THE
QUESTIONED DECISION AND RESOLUTION THAT PETITIONER MALAYAN IS LIABLE
UNDER THE INSURANCE CONTRACT BECAUSE:
CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER MALAYAN
WAS ABLE TO PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF THE RENEWAL
POLICY ISSUED TO RESPONDENT PAP CO., THERE IS AN AFFIRMATIVE WARRANTY OR
A REPRESENTATION MADE BY THE INSURED THAT THE "LOCATION OF THE RISK" WAS
AT THE SANYO BUILDING. IT IS LIKEWISE UNDISPUTED THAT WHEN THE RENEWAL
POLICY WAS ISSUED TO RESPONDENT PAP CO., THE INSURED PROPERTIES WERE
NOT AT THE SANYO BUILDING BUT WERE AT A DIFFERENT LOCATION, THAT IS, AT THE
PACE FACTORY AND IT WAS IN THIS DIFFERENT LOCATION WHEN THE LOSS INSURED
AGAINST OCCURRED. THESE SET OF UNDISPUTED FACTS, BY ITSELF ALREADY
ENTITLES PETITIONER MALAYAN TO CONSIDER THE RENEWAL POLICY AS AVOIDED OR
RESCINDED BY LAW, BECAUSE OF CONCEALMENT, MISREPRESENTATION AND
BREACH OF AN AFFIRMATIVE WARRANTY UNDER SECTIONS 27, 45 AND 74 IN RELATION
TO SECTION 31 OF THE INSURANCE CODE, RESPECTIVELY.
RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT COMMIT
CONCEALMENT, MISREPRESENTATION OR BREACH OF AN AFFIRMATIVE WARRANTY
WHEN IT FAILED TO PROVE THAT IT INFORMED PETITIONER MALAYAN THAT THE
INSURED PROPERTIES HAD BEEN TRANSFERRED TO A LOCATION DIFFERENT FROM
WHAT WAS INDICATED IN THE INSURANCE POLICY.
IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE
CONDITIONS AND LIMITATIONS TO THE RENEWAL POLICY WHICH ARE THE REASONS
WHY ITS CLAIM WAS DENIED IN THE FIRST PLACE. IN FACT, THE BEST PROOF THAT
RESPONDENT PAP CO. RECOGNIZES THESE CONDITIONS AND LIMITATIONS IS THE
FACT THAT ITS ENTIRE EVIDENCE FOCUSED ON ITS FACTUAL ASSERTION THAT IT
SUPPOSEDLY NOTIFIED PETITIONER MALAYAN OF THE TRANSFER AS REQUIRED BY
THE INSURANCE POLICY.
MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE WAS AN
INCREASE IN RISK BECAUSE OF THE UNILATERAL TRANSFER OF THE INSURED
PROPERTIES. IN FACT, THIS PIECE OF EVIDENCE WAS UNREBUTTED BY RESPONDENT
PAP CO.
II
THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND
ESTABLISHED DECISIONS OF THE HONORABLE COURT WHEN IT IMPOSED INTEREST
AT THE RATE OF TWELVE PERCENT (12%) INTEREST FROM THE TIME OF THE LOSS
UNTIL FULLY PAID.
JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY IS NOT A
LOAN OR FORBEARANCE OF MONEY FROM WHICH A BREACH ENTITLES A PLAINTIFF
TO AN AWARD OF INTEREST AT THE RATE OF TWELVE PERCENT (12%) PER ANNUM.
MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE SHOULD NOT
HAVE BEEN APPLIED BY THE COURT OF APPEALS BECAUSE THERE WAS NEVER ANY
FINDING THAT PETITIONER MALAYAN UNJUSTIFIABLY REFUSED OR WITHHELD THE
PROCEEDS OF THE INSURANCE POLICY BECAUSE IN THE FIRST PLACE, THERE WAS A
LEGITIMATE DISPUTE OR DIFFERENCE IN OPINION ON WHETHER RESPONDENT PAP
CO. COMMITTED CONCEALMENT, MISREPRESENTATION AND BREACH OF AN
AFFIRMATIVE WARRANTY WHICH ENTITLES PETITIONER MALAYAN TO RESCIND THE
INSURANCE POLICY AND/OR TO CONSIDER THE CLAIM AS VOIDED.
 III
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE
WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
AGREED WITH THE TRIAL COURT AND HELD IN THE QUESTIONED DECISION THAT THE
PROCEEDS OF THE INSURANCE CONTRACT IS PAYABLE TO RESPONDENT PAP CO.
DESPITE THE EXISTENCE OF A MORTGAGEE CLAUSE IN THE INSURANCE POLICY.
IV
THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND
JURISPRUDENCE WHEN IT HELD IN THE QUESTIONED DECISION AND RESOLUTION
THAT THE INTERPRETATION MOST FAVORABLE TO THE INSURED SHALL BE ADOPTED.7
Malayan basically argues that it cannot be held liable under the insurance contract because PAP
committed concealment, misrepresentation and breach of an affirmative warranty under the
renewal policy when it transferred the location of the insured properties without informing it.
Such transfer affected the correct estimation of the risk which should have enabled Malayan to
decide whether it was willing to assume such risk and, if so, at what rate of premium. The
transfer also affected Malayans ability to control the risk by guarding against the increase of the
risk brought about by the change in conditions, specifically the change in the location of the risk.
Malayan claims that PAP concealed a material fact in violation of Section 27 of the Insurance
Code8 when it did not inform Malayan of the actual and new location of the insured properties. In
fact, before the issuance of the renewal policy on May 14, 1997, PAP even informed it that there
would be no changes in the renewal policy. Malayan also argues that PAP is guilty of breach of
warranty under the renewal policy in violation of Section 74 of the Insurance Code 9 when,
contrary to its affirmation in the renewal policy that the insured properties were located at the
Sanyo Factory, these were already transferred to the Pace Factory. Malayan adds that PAP is
guilty of misrepresentation upon a material fact in violation of Section 45 of the Insurance
Code10 when it informed Malayan that there would be no changes in the original policy, and that
the original policy would be renewed on an "as is" basis.
Malayan further argues that PAP failed to discharge the burden of proving that the transfer of the
insured properties under the insurance policy was with its knowledge and consent. Granting that
PAP informed RCBC of the transfer or change of location of the insured properties, the same is
irrelevant and does not bind Malayan considering that RCBC is a corporation vested with
separate and distinct juridical personality. Malayan did not consent to be the principal of RCBC.
RCBC did not also act as Malayans representative.
With regard to the alleged increase of risk, Malayan insists that there is evidence of an increase
in risk as a result of the unilateral transfer of the insured properties. According to Malayan, the
Sanyo Factory was occupied as a factory of automotive/computer parts by the assured and
factory of zinc & aluminum die cast and plastic gear for copy machine by Sanyo Precision Phils.,
Inc. with a rate of 0.449% under 6.1.2 A, while Pace Factory was occupied as factory that
repacked silicone sealant to plastic cylinders with a rate of 0.657% under 6.1.2 A.
PAPs position
On the other hand, PAP counters that there is no evidence of any misrepresentation,
concealment or deception on its part and that its claim is not fraudulent. It insists that it can still
sue to protect its rights and interest on the policy notwithstanding the fact that the proceeds of
the same was payable to RCBC, and that it can collect interest at the rate of 12% per annum on
the proceeds of the policy because its claim for indemnity was unduly delayed without legal
justification.
The Courts Ruling
The Court agrees with the position of Malayan that it cannot be held liable for the loss of the
insured properties under the fire insurance policy.
As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP obtained a ?
15,000,000.00 fire insurance policy from Malayan covering its machineries and equipment
effective for one (1) year or until May 13, 1997; that the policy expressly stated that the insured
properties were located at "Sanyo Precision Phils. Building, Phase III, Lots 4 & 6, Block 15,
EPZA, Rosario, Cavite"; that before its expiration, the policy was renewed 11 on an "as is" basis
for another year or until May 13, 1998; that the subject properties were later transferred to the
Pace Factory also in PEZA; and that on October 12, 1997, during the effectivity of the renewal
policy, a fire broke out at the Pace Factory which totally burned the insured properties.
The policy forbade the removal of the insured properties unless sanctioned by Malayan
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as regards the
property affected unless the insured, before the occurrence of any loss or damage, obtains the
sanction of the company signified by endorsement upon the policy, by or on behalf of the
Company:
xxx xxx xxx
(c) If property insured be removed to any building or place other than in that which is herein
stated to be insured.12
Evidently, by the clear and express condition in the renewal policy, the removal of the insured
property to any building or place required the consent of Malayan. Any transfer effected by the
insured, without the insurers consent, would free the latter from any liability.
The respondent failed to notify, and to obtain the consent of, Malayan regarding the removal
The records are bereft of any convincing and concrete evidence that Malayan was notified of the
transfer of the insured properties from the Sanyo factory to the Pace factory. The Court has
combed the records and found nothing that would show that Malayan was duly notified of the
transfer of the insured properties.
What PAP did to prove that Malayan was notified was to show that it relayed the fact of transfer
to RCBC, the entity which made the referral and the named beneficiary in the policy. Malayan
and RCBC might have been sister companies, but such fact did not make one an agent of the
other. The fact that RCBC referred PAP to Malayan did not clothe it with authority to represent
and bind the said insurance company. After the referral, PAP dealt directly with Malayan.
The respondent overlooked the fact that during the November 9, 2006 hearing,13 its counsel After the RCBC was informed in the manner you stated, what did you do regarding the new
stipulated in open court that it was Malayans authorized insurance agent, Rodolfo Talusan, who location of these properties at Pace Pacific Bldg. insofar as Malayan Insurance Company is
procured the original policy from Malayan, not RCBC. This was the reason why Talusans concerned?
testimony was dispensed with.
A
Moreover, in the previous hearing held on November 17, 2005,14 PAPs hostile witness,
Alexander Barrera, Administrative Assistant of Malayan, testified that he was the one who
After that transfer, we informed the RCBC about the transfer of the equipment and also Malayan
procured Malayans renewal policy, not RCBC, and that RCBC merely referred fire insurance
Insurance but we were not able to contact Malayan Insurance so I instructed again my secretary
clients to Malayan. He stressed, however, that no written referral agreement exists between
to inform Malayan about the transfer.
RCBC and Malayan. He also denied that PAP notified Malayan about the transfer before the
renewal policy was issued. He added that PAP, through Maricar Jardiniano (Jardiniano),
informed him that the fire insurance would be renewed on an "as is basis."15 Q

Granting that any notice to RCBC was binding on Malayan, PAPs claim that it notified RCBC Who was the secretary you instructed to contact Malayan Insurance, the defendant in this case?
and Malayan was not indubitably established. At best, PAP could only come up with the hearsay
testimony of its principal witness, Branch Manager Katsumi Yoneda (Mr. Yoneda), who testified A
as follows:

Dory Ramos.
Q

Q
What did you do as Branch Manager of Pap Co. Ltd.?

How many secretaries do you have at that time in your office?

A

A
What I did I instructed my Secretary, because these equipment was bank loan and because of
the insurance I told my secretary to notify.
Only one, sir.

Q
Q

To notify whom?
Do you know a certain Maricar Jardiniano?

A
A

I told my Secretary to inform the bank.

Yes, sir.

Q
Q

You are referring to RCBC?

Why do you know her?

A
A

Yes, sir.
Because she is my secretary.

xxxx
Q

Q
So how many secretaries did you have at that time?
A It is according to the report given to me.

Two, sir. Q

Q Who gave that report to you?

What happened with the instruction that you gave to your secretary Dory Ramos about the A
matter of informing the defendant Malayan Insurance Co of the new location of the insured
properties?
Dory Ramos.

A
Q

She informed me that the notification was already given to Malayan Insurance.
Was that report in writing or verbally done?

Q
A

Aside from what she told you how did you know that the information was properly relayed by the
Verbal.16 [Emphases supplied]
said secretary, Dory Ramos, to Malayan Insurance?

The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no personal
A
knowledge of the notice to either Malayan or RCBC. PAP should have presented his secretaries,
Dory Ramos and Maricar Jardiniano, at the witness stand. His testimony alone was unreliable.
I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.
Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the insured properties
Q were transferred to a different location only after the renewal of the fire insurance policy.

Now after you were told by your secretary, Dory Ramos, that she was able to inform Malayan COURT
Insurance Company about the transfer of the properties insured to the new location, do you
know what happened insofar this information was given to the defendant Malayan Insurance?
Q

A
When did you transfer the machineries and equipments before the renewal or after the renewal
of the insurance?
I heard that someone from Malayan Insurance came over to our company.
A
Q
After the renewal.
Did you come to know who was that person who came to your place at Pace Pacific?
COURT
A
Q
I do not know, sir.
You understand my question?
Q
A
How did you know that this person from Malayan Insurance came to your place?
Yes, Your Honor.17 [Emphasis supplied]
A
This enfeebles PAPs position that the subject properties were already transferred to the Pace Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
factory before the policy was renewed. contract of insurance."

The transfer from the Sanyo Factory to the PACE Factory increased the risk. Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or condition of the thing insured. Section
168 of the Insurance Code provides, as follows:
The courts below held that even if Malayan was not notified thereof, the transfer of the insured
properties to the Pace Factory was insignificant as it did not increase the risk.
Section 68. An alteration in the use or condition of a thing insured from that to which it is limited
by the policy made without the consent of the insurer, by means within the control of the insured,
Malayan argues that the change of location of the subject properties from the Sanyo Factory to
and increasing the risks, entitles an insurer to rescind a contract of fire insurance.
the Pace Factory increased the hazard to which the insured properties were exposed. Malayan
wrote:
Accordingly, an insurer can exercise its right to rescind an insurance contract when the following
conditions are present, to wit:
With regards to the exposure of the risk under the old location, this was occupied as factory of
automotive/computer parts by the assured, and factory of zinc & aluminum die cast, plastic gear
for copy machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A. But under 1) the policy limits the use or condition of the thing insured;
Pace Pacific Mfg. Corporation this was occupied as factory that repacks silicone sealant to
plastic cylinders with a rate of 0.657% under 6.1.2 A. Hence, there was an increase in the
2) there is an alteration in said use or condition;
hazard as indicated by the increase in rate.18

3) the alteration is without the consent of the insurer;

The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to a
hazardous environment and negatively affected the fire rating stated in the renewal policy. The
increase in tariff rate from 0.449% to 0.657% put the subject properties at a greater risk of loss. 4) the alteration is made by means within the insureds control; and
Such increase in risk would necessarily entail an increase in the premium payment on the fire
policy. 5) the alteration increases the risk of loss.20

Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the In the case at bench, all these circumstances are present. It was clearly established that the
importance of the issue, PAP failed to refute Malayans argument on the increased risk. renewal policy stipulated that the insured properties were located at the Sanyo factory; that PAP
removed the properties without the consent of Malayan; and that the alteration of the location
Malayan is entitled to rescind the insurance contract increased the risk of loss.

Considering that the original policy was renewed on an "as is basis," it follows that the renewal WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby REVERSED
policy carried with it the same stipulations and limitations. The terms and conditions in the and SET ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby declared NOT liable for
renewal policy provided, among others, that the location of the risk insured against is at the the loss of the insured machineries and equipment suffered by PAP Co., Ltd.
Sanyo factory in PEZA. The subject insured properties, however, were totally burned at the Pace
Factory. Although it was also located in PEZA, Pace Factory was not the location stipulated in SO ORDERED.
the renewal policy. There being an unconsented removal, the transfer was at PAPs own risk.
Consequently, it must suffer the consequences of the fire. Thus, the Court agrees with the report
of Cunningham Toplis Philippines, Inc., an international loss adjuster which investigated the fire
incident at the Pace Factory, which opined that "[g]iven that the location of risk covered under
the policy is not the location affected, the policy will, therefore, not respond to this loss/claim."19

It can also be said that with the transfer of the location of the subject properties, without notice
and without Malayans consent, after the renewal of the policy, PAP clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides:

Section 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.

G.R. No. 175666 July 29, 2013
MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.
vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business
from or provide insurance coverage only to legitimate and bona fide clients, by requiring them to
thoroughly investigate those they insure within two years from effectivity of the policy and while
the insured is still alive. If they do not, they will be obligated to honor claims on the policies they
issue, regardless of fraud, concealment or misrepresentation. The law assumes that they will do
just that and not sit on their laurels, indiscriminately soliciting and accepting insurance business
from any Tom, Dick and Harry.
Assailed in this Petition for Review on Certiorari1 are the September 28, 2005 Decision2 of the
Court of Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 Resolution 3 denying
the petitioners Motion for Reconsideration.4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her
niece,5 as her beneficiary.
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of P100,000.00, in
Soteros favor on August 30, 1993, after the requisite medical examination and payment of the
insurance premium.6
On April 10, 1996,7 when the insurance policy had been in force for more than two years and
seven months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9,
1996. Petitioner conducted an investigation into the claim,8 and came out with the following
findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to pay the insurance premiums on
Insurance Policy No. 747411;
4. Sotero did not sign the July 3, 1993 application for insurance; 9 and
5. Respondent was the one who filed the insurance application, and x x x designated
herself as the beneficiary.10
For the above reasons, petitioner denied respondents claim on April 16, 1997 and refunded the
premiums paid on the policy.11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy, which
was docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial
Court. The main thesis of the Complaint was that the policy was obtained by fraud, concealment
and/or misrepresentation under the Insurance Code,12 which thus renders it voidable under
Article 139013 of the Civil Code.
Respondent filed a Motion to Dismiss14 claiming that petitioners cause of action was barred by
prescription pursuant to Section 48 of the Insurance Code, which provides as follows:
Whenever a right to rescind a contract of insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to the commencement of an action on the
contract.
After a policy of life insurance made payable on the death of the insured shall have been in force
during the lifetime of the insured for a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason
of the fraudulent concealment or misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioners investigator testified in court,
stating among others that the insurance underwriter who solicited the insurance is a cousin of
respondents husband, Dindo Aban,15and that it was the respondent who paid the annual
premiums on the policy.16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an Order17 granting respondents Motion to Dismiss,
thus:
WHEREFORE, defendant CRESENCIA P. ABANs Motion to Dismiss is hereby granted. Civil
Case No. 97-867 is hereby dismissed.
SO ORDERED.18
In dismissing the case, the trial court found that Sotero, and not respondent, was the one who
procured the insurance; thus, Sotero could legally take out insurance on her own life and validly
designate as she did respondent as the beneficiary. It held further that under Section 48,
petitioner had only two years from the effectivity of the policy to question the same; since the
policy had been in force for more than two years, petitioner is now barred from contesting the
same or seeking a rescission or annulment thereof.
Petitioner moved for reconsideration, but in another Order19 dated October 20, 1998, the trial
court stood its ground.
Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner
questioned the dismissal of Civil Case No. 97-867, arguing that the trial court erred in applying
Section 48 and declaring that prescription has set in. It contended that since it was respondent
and not Sotero who obtained the insurance, the policy issued was rendered void ab initio for
want of insurable interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed Decision, which contained the following
decretal portion:
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying Section 48 to petitioners case, the CA held that
petitioner may no longer prove that the subject policy was void ab initio or rescindible by reason
of fraudulent concealment or misrepresentation after the lapse of more than two years from its
issuance. It ratiocinated that petitioner was equipped with ample means to determine, within the
first two years of the policy, whether fraud, concealment or misrepresentation was present when
the insurance coverage was obtained. If it failed to do so within the statutory two-year period,
then the insured must be protected and allowed to claim upon the policy.
Petitioner moved for reconsideration,21 but the CA denied the same in its November 9, 2006
Resolution.22Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL
COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE
INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR
RECONSIDERATION.23
Petitioners Arguments
In praying that the CA Decision be reversed and that the case be remanded to the trial court for
the conduct of further proceedings, petitioner argues in its Petition and Reply24 that Section 48
cannot apply to a case where the beneficiary under the insurance contract posed as the insured
and obtained the policy under fraudulent circumstances. It adds that respondent, who was
merely Soteros niece, had no insurable interest in the life of her aunt.
Relying on the results of the investigation that it conducted after the claim for the insurance
proceeds was filed, petitioner insists that respondents claim was spurious, as it appeared that
Sotero did not actually apply for insurance coverage, was unlettered, sickly, and had no visible
source of income to pay for the insurance premiums; and that respondent was an impostor,
posing as Sotero and fraudulently obtaining insurance in the latters name without her
knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given
rise to rights and obligations; as such, the action for the declaration of its nullity or inexistence
does not prescribe.25
Respondents Arguments
Respondent, on the other hand, essentially argues in her Comment26 that the CA is correct in
applying Section 48. She adds that petitioners new allegation in its Petition that the policy is
void ab initio merits no attention, having failed to raise the same below, as it had claimed
originally that the policy was merely voidable.
On the issue of insurable interest, respondent echoes the CAs pronouncement that since it was
Sotero who obtained the insurance, insurable interest was present. Under Section 10 of the
Insurance Code, Sotero had insurable interest in her own life, and could validly designate
anyone as her beneficiary. Respondent submits that the CAs findings of fact leading to such
conclusion should be respected.
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and appellate courts finding that it was Sotero who
obtained the insurance for herself, designating respondent as her beneficiary. Both courts are in
accord in this respect, and the Court is loath to disturb this. While petitioner insists that its
independent investigation on the claim reveals that it was respondent, posing as Sotero, who
obtained the insurance, this claim is no longer feasible in the wake of the courts finding that it
was Sotero who obtained the insurance for herself. This finding of fact binds the Court.
With the above crucial finding of fact that it was Sotero who obtained the insurance for herself
petitioners case is severely weakened, if not totally disproved. Allegations of fraud, which are
predicated on respondents alleged posing as Sotero and forgery of her signature in the
insurance application, are at once belied by the trial and appellate courts finding that Sotero
herself took out the insurance for herself. "Fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the contract."27 In the absence of proof of such
fraudulent intent, no right to rescind arises.
Moreover, the results and conclusions arrived at during the investigation conducted unilaterally
by petitioner after the claim was filed may simply be dismissed as self-serving and may not form
the basis of a cause of action given the existence and application of Section 48, as will be
discussed at length below.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the
insured. Under the provision, an insurer is given two years from the effectivity of a life
insurance contract and while the insured is alive to discover or prove that the policy is void ab
initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the
insured or his agent. After the two-year period lapses, or when the insured dies within the period,
the insurer must make good on the policy, even though the policy was obtained by fraud,
concealment, or misrepresentation. This is not to say that insurance fraud must be rewarded, but
that insurers who recklessly and indiscriminately solicit and obtain business must be penalized,
for such recklessness and lack of discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It
gives insurers enough time to inquire whether the policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at
insurance fraud would be timely uncovered thus deterring them from venturing into such
nefarious enterprise. At the same time, legitimate policy holders are absolutely protected from
unwarranted denial of their claims or delay in the collection of insurance proceeds occasioned
by allegations of fraud, concealment, or misrepresentation by insurers, claims which may no
longer be set up after the two-year period expires as ordained under the law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the
insured are given the assurance that any dishonest scheme to obtain life insurance would be
exposed, and attempts at unduly denying a claim would be struck down. Life insurance policies
that pass the statutory two-year period are essentially treated as legitimate and beyond
question, and the individuals who wield them are made secure by the thought that they will be
paid promptly upon claim. In this manner, Section 48 contributes to the stability of the insurance
industry.
Section 48 prevents a situation where the insurer knowingly continues to accept annual premium
payments on life insurance, only to later on deny a claim on the policy on specious claims of
fraudulent concealment and misrepresentation, such as what obtains in the instant case. Thus,
instead of conducting at the first instance an investigation into the circumstances surrounding
the issuance of Insurance Policy No. 747411 which would have timely exposed the supposed
flaws and irregularities attending it as it now professes, petitioner appears to have turned a blind
eye and opted instead to continue collecting the premiums on the policy. For nearly three years,
petitioner collected the premiums and devoted the same to its own profit. It cannot now deny the
claim when it is called to account. Section 48 must be applied to it with full force and effect.
The Court therefore agrees fully with the appellate courts pronouncement that
the "incontestability clause" is a provision in law that after a policy of life insurance made
payable on the death of the insured shall have been in force during the lifetime of the insured for
a period of two (2) years from the date of its issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is rescindible by reason of fraudulent concealment or
misrepresentation of the insured or his agent.
The purpose of the law is to give protection to the insured or his beneficiary by limiting the
rescinding of the contract of insurance on the ground of fraudulent concealment or
misrepresentation to a period of only two (2) years from the issuance of the policy or its last
reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent concealment
or misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the
premiums as long as the insured is still alive, only to raise the issue of fraudulent concealment or
misrepresentation when the insured dies in order to defeat the right of the beneficiary to recover
under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is
given the stability to recover under the policy when the insured dies. The provision also makes
clear when the two-year period should commence in case the policy should lapse and is
reinstated, that is, from the date of the last reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how patent or
well-founded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance
companies to avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are
concerned if the insurance has been in force for at least two years during the insureds lifetime.
The phrase "during the lifetime" found in Section 48 simply means that the policy is no longer
considered in force after the insured has died. The key phrase in the second paragraph of
Section 48 is "for a period of two years."

As borne by the records, the policy was issued on August 30, 1993, the insured died on April 10,
1996, and the claim was denied on April 16, 1997. The insurance policy was thus in force for a
period of 3 years, 7 months, and 24 days. Considering that the insured died after the two-year
period, the plaintiff-appellant is, therefore, barred from proving that the policy is void ab initio by
reason of the insureds fraudulent concealment or misrepresentation or want of insurable interest
on the part of the beneficiary, herein defendant-appellee.

Well-settled is the rule that it is the plaintiff-appellants burden to show that the factual findings of
the trial court are not based on substantial evidence or that its conclusions are contrary to
applicable law and jurisprudence. The plaintiff-appellant failed to discharge that burden.28

Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the
cousin of respondents husband, and thus insinuates that both connived to commit insurance
fraud. If this were truly the case, then petitioner would have discovered the scheme earlier if it
had in earnest conducted an investigation into the circumstances surrounding the Sotero policy.
But because it did not and it investigated the Sotero account only after a claim was filed thereon
more than two years later, naturally it was unable to detect the scheme. For its negligence and
inaction, the Court cannot sympathize with its plight. Instead, its case precisely provides the
strong argument for requiring insurers to diligently conduct investigations on each policy they
issue within the two-year period mandated under Section 48, and not after claims for insurance
proceeds are filed with them.

Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease doing business.
If they could not properly screen their agents or salesmen before taking them in to market their
products, or if they do not thoroughly investigate the insurance contracts they enter into with
their clients, then they have only themselves to blame. Otherwise said, insurers cannot be
allowed to collect premiums on insurance policies, use these amounts collected and invest the
same through the years, generating profits and returns therefrom for their own benefit, and
thereafter conveniently deny insurance claims by questioning the authority or integrity of their
own agents or the insurance policies they issued to their premium-paying clients. This is exactly
one of the schemes which Section 48 aims to prevent.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court,
hoping that the inevitable may be put off for years or even decades by the pendency of these
unnecessary court cases. In the meantime, they benefit from collecting the interest and/or
returns on both the premiums previously paid by the insured and the insurance proceeds which
should otherwise go to their beneficiaries. The business of insurance is a highly regulated
commercial activity in the country,29 and is imbued with public interest.30 "An insurance contract
is a contract of adhesion which must be construed liberally in favor of the insured and strictly
against the insurer in order to safeguard the formers interest."31

WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the
November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286 are AFFIRMED.

SO ORDERED.
 THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,
INC., petitioner, vs. COURT OF APPEALS and FELMAN SHIPPING
LINES,respondents.

DECISION

BELLOSILLO, J p:

This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to
observe the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of
the insurer to be subrogated to the rights of the insured upon payment of the insurance claim.

On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board "MV Asilda," a vessel
owned and operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases
of 1-liter Coca-Cola softdrink bottles to be transported from Zamboanga City to Cebu City for
consignee Coca-Cola Bottlers Philippines, Inc., Cebu. 1 The shipment was insured with
petitioner Philippine American General Insurance Co., Inc. (PHILAMGEN for brevity), under
Marine Open Policy No. 100367-PAG.

"MV Asilda" left the port of Zamboanga in fine weather at eight o'clock in the evening of the
same day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the
waters of Zamboanga del Norte bringing down her entire cargo with her including the subject
7,500 cases of 1-liter Coca-Cola softdrink bottles.

On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim
with respondent FELMAN for recovery of damages it sustained as a result of the loss of its
softdrink bottles that sank with "MV Asilda." Respondent denied the claim thus prompting the
consignee to file an insurance claim with PHILAMGEN which paid its claim of P755,250.00.

Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN
which disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN
sued the shipowner for sum of money and damages.

In its complaint PHILAMGEN alleged that the sinking and total loss of "MV Asilda" and its cargo
were due to the vessel's unseaworthiness as she was put to sea in an unstable condition. It
further alleged that the vessel was improperly manned and that its officers were grossly
negligent in failing to take appropriate measures to proceed to a nearby port or beach after the
vessel started to list.

On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that
[G.R. No. 116940. June 11, 1997.]
no right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any
event, FELMAN had abandoned all its rights, interests and ownership over "MV Asilda" together
with her freight and appurtenances for the purpose of limiting and extinguishing its liability
under Art. 587 of the Code of Commerce. 2
On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the
Court of Appeals set aside the dismissal and remanded the case to the lower court for trial on
the merits. FELMAN filed a petition for certiorari with this Court but it was subsequently denied
on 13 February 1989.
On 28 February 1992 the trial court rendered judgment in favor of FELMAN. 3 It ruled that "MV
Asilda" was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by
the Philippine Coast Guard and the shipowner's surveyor attesting to its seaworthiness. Thus the
loss of the vessel and its entire shipment could only be attributed to either a fortuitous event, in
which case, no liability should attach unless there was a stipulation to the contrary, or to the
negligence of the captain and his crew, in which case, Art. 587 of the Code of Commerce should
apply.
The lower court further ruled that assuming "MV Asilda" was unseaworthy, still PHILAMGEN
could not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had
breached its implied warranty on the vessel's seaworthiness. Resultantly, the payment made by
PHILAMGEN to the assured was an undue, wrong and mistaken payment. Since it was not
legally owing, it did not give PHILAMGEN the right of subrogation so as to permit it to bring an
action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August
1994 respondent appellate court rendered judgment finding "MV Asilda" unseaworthy for being
top-heavy as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In
other words, while the vessel possessed the necessary Coast Guard certification indicating its
seaworthiness with respect to the structure of the ship itself, it was not seaworthy with respect to
the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that
the assured's implied warranty of seaworthiness was not complied with. Perfunctorily,
PHILAMGEN was not properly subrogated to the rights and interests of the shipper.
Furthermore, respondent court held that the filing of notice of abandonment had absolved the
shipowner/agent from liability under the limited liability rule.
The issues for resolution in this petition are: (a) whether "MV Asilda" was seaworthy when it left
the port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce
should apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal
actions which the shipper had against FELMAN, the shipowner.
"MV Asilda" was unseaworthy when it left the port of Zamboanga. In a joint statement, the
captain as well as the chief mate of the vessel confirmed that the weather was fine when they
left the port of Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter
Coca-Cola softdrink bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an
undetermined quantity of empty boxes for fresh eggs. They loaded the empty boxes for eggs and
about 500 cases of Coca-Cola bottles on deck. 4 The ship captain stated that around four
o'clock in the morning of 7 July 1983 he was awakened by the officer on duty to inform him that
the vessel had hit a floating log. At that time he noticed that the weather had deteriorated with
strong southeast winds inducing big waves. After thirty minutes he observed that the vessel was
listing slightly to starboard and would not correct itself despite the heavy rolling and pitching. He
then ordered his crew to shift the cargo from starboard to portside until the vessel was balanced.
At about seven o'clock in the morning, the master of the vessel stopped the engine because the
vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to
starboard. The shifting of cargo took about an hour afterwhich he rang the engine room to
resume full speed.
At around eight forty-five, the vessel suddenly listed to portside and before the captain could
decide on his next move, some of the cargo on deck were thrown overboard and seawater
entered the engine room and cargo holds of the vessel. At that instance, the master of the vessel
ordered his crew to abandon ship. Shortly thereafter, "MV Asilda" capsized and sank. He
ascribed the sinking to the entry of seawater through a hole in the hull caused by the vessel's
collision with a partially submerged log. 5
The Elite Adjusters, Inc., submitted a report regarding the sinking of "MV Asilda." The report,
which was adopted by the Court of Appeals, reads
We found in the course of our investigation that a reasonable explanation
for the series of lists experienced by the vessel that eventually led to her
capsizing and sinking, was that the vessel was top-heavy which is to say
that while the vessel may not have been overloaded, yet the distribution
or stowage of the cargo on board was done in such a manner that the
vessel was in top-heavy condition at the time of her departure and which
condition rendered her unstable and unseaworthy for that particular
voyage.
In this connection, we wish to call attention to the fact that this vessel was
designed as a fishing vessel . . . and it was not designed to carry a
substantial amount or quantity of cargo on deck. Therefore, we believe
strongly that had her cargo been confined to those that could have been
accommodated under deck, her stability would not have been affected
and the vessel would not have been in any danger of capsizing, even
given the prevailing weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy cargo on
its deck, the vessel was rendered unseaworthy for the purpose of
 carrying the type of cargo because the weight of the deck cargo so
decreased the vessel's metacentric height as to cause it to become
unstable.
Finally, with regard to the allegation that the vessel encountered big
waves, it must be pointed out that ships are precisely designed to be able
to navigate safely even during heavy weather and frequently we hear of
ships safely and successfully weathering encounters with typhoons and
although they may sustain some amount of damage, the sinking of ship
during heavy weather is not a frequent occurrence and is not likely to
occur unless they are inherently unstable and unseaworthy . . .
We believe, therefore, and so hold that the proximate cause of the sinking
of the M/V "Asilda" was her condition of unseaworthiness arising from her
having been top-heavy when she departed from the Port of Zamboanga.
Her having capsized and eventually sunk was bound to happen and was
therefore in the category of an inevitable occurrence (emphasis
supplied). 6
We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the
proximate cause of the sinking of "MV Asilda" was its being top-heavy. Contrary to the ship
captain's allegations, evidence shows that approximately 2,500 cases of softdrink bottles were
stowed on deck. Several days after "MV Asilda" sank, an estimated 2,500 empty Coca-Cola
plastic cases were recovered near the vicinity of the sinking. Considering that the ship's hatches
were properly secured, the empty Coca-Cola cases recovered could have come only from the
vessel's deck cargo. It is settled that carrying a deck cargo raises the presumption of
unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper
management of the ship. However, in this case it was established that "MV Asilda" was not
designed to carry substantial amount of cargo on deck. The inordinate loading of cargo deck
resulted in the decrease of the vessel's metacentric height 7 thus making it unstable. The strong
winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage
and as such merely contributed to its already unstable and unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at
bar. 8 Simply put, the ship agent is liable for the negligent acts of the captain in the care of
goods loaded on the vessel. This liability however can be limited through abandonment of the
vessel, its equipment and freightage as provided in Art. 587. Nonetheless, there are exceptional
circumstances wherein the ship agent could still be held answerable despite the abandonment,
as where the loss or injury was due to the fault of the shipowner and the captain. 9 The
international rule is to the effect that the right of abandonment of vessels, as a legal limitation of
a shipowner's liability, does not apply to cases where the injury or average was occasioned by
the shipowner's own fault. 10 It must be stressed at this point that Art. 587 speaks only of
situations where the fault or negligence is committed solely by the captain. Where the shipowner
is likewise to be blamed, Art. 587 will not apply, and such situation will be covered by the
provisions of the Civil Code on common carrier. 11
It was already established at the outset that the sinking of "MV Asilda" was due to its
unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy
as an excessive amount of cargo was loaded on deck. Closer supervision on the part of the
shipowner could have prevented this fatal miscalculation. As such, FELMAN was equally
negligent. It cannot therefore escape liability through the expedient of filing a notice of
abandonment of the vessel by virtue of Art. 587 of the Code of Commerce.
Under Art. 1733 of the Civil Code, "(c)ommon carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by them, according to all the
circumstances of each case . . ." In the event of loss of goods, common carriers are presumed to
have acted negligently. FELMAN, the shipowner, was not able to rebut this presumption.
In relation to the question of subrogation, respondent appellate court found "MV Asilda"
unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of
seaworthiness that rendered the assured not entitled to the payment of his claim under the
policy. Hence, when PHILAMGEN paid the claim of the bottling firm there was in effect a
"voluntary payment" and no right of subrogation accrued in its favor. In other words, when
PHILAMGEN paid it did so at its own risk.
It is generally held that in every marine insurance policy the assured impliedly warrants to the
assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if
expressly written on the face of the policy. 12 Thus Sec. 113 of the Insurance Code provides that
"(i)n every marine insurance upon a ship or freight, or freightage, or upon anything which is the
subject of marine insurance, a warranty is implied that the ship is seaworthy." Under Sec. 114, a
ship is "seaworthy when reasonably fit to perform the service, and to encounter the ordinary
perils of the voyage, contemplated by the parties to the policy." Thus it becomes the obligation of
the cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy
condition. He may have no control over the vessel but he has full control in the selection of the
common carrier that will transport his goods. He also has full discretion in the choice of assurer
that will underwrite a particular venture.
We need not belabor the alleged breach of warranty of seaworthiness by the assured as
painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In
policies where the law will generally imply a warranty of seaworthiness, it can only be excluded
by terms in writing in the policy in the clearest language. 13 And where the policy stipulates that
the seaworthiness of the vessel as between the assured and the assurer is admitted, the
question of seaworthiness cannot be raised by the assurer without showing concealment or
misrepresentation by the assured. 14
The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2)
instances has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine
Open Policy No. 100367-PAG reads "(t)he liberties as per Contract of Affreightment the
presence of the Negligence Clause and/or Latent Defect Clause in the Bill of Lading and/or
Charter Party and/or Contract of Affreightment as between the Assured and the Company shall
not prejudice the insurance. The seaworthiness of the vessel as between the Assured and the
Assurers is hereby admitted." 15
The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which
states "(t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby
admitted . . ." 16
The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one
who in justice, equity and good conscience ought to pay. 19 Therefore, the payment made by
PHILAMGEN to Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action
as subrogee against FELMAN. Having failed to rebut the presumption of fault, the liability of
FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.
WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to
pay petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred
Fifty-five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon
counted from 29 November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213
of the Civil Code. 20
SO ORDERED.

The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two ||| (Phil-Am General Insurance Co., Inc. v. Court of Appeals, G.R. No. 116940, [June 11, 1997],
things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of 339 PHIL 455-467)
unseaworthiness is assumed by the insurance company. 17 The insertion of such waiver clauses
in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of
the vessel. Thus it can be said that with such categorical waiver, PHILAMGEN has accepted the
risk of unseaworthiness so that if the ship should sink by unseaworthiness, as what occurred in
this case, PHILAMGEN is liable.

Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN's
action against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing
the loss or injury.

In Pan Malayan Insurance Corporation v. Court of Appeals, 18 we said that payment by the
assurer to the assured operates as an equitable assignment to the assurer of all the remedies
which the assured may have against the third party whose negligence or wrongful act caused
the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of
contract or upon payment by the insurance company of the insurance claim. It accrues simply
upon payment by the insurance company of the insurance claim. LexLib
G.R. No. 92383 July 17, 1992

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:

The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of
P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his
wife Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed
that there was no suicide. It argued, however that there was no accident either.

Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6,
1982, at about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon,
Lim was in a happy mood (but not drunk) and was playing with his handgun, from which he had
previously removed the magazine. As she watched television, he stood in front of her and
pointed the gun at her. She pushed it aside and said it might he loaded. He assured her it was
not and then pointed it to his temple. The next moment there was an explosion and Lim slumped
to the floor. He was dead before he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was
sustained. 2 The petitioner was sentenced to pay her P200,000.00, representing the face value
of the policy, with interest at the legal rate; P10,000.00 as moral damages; P5,000.00 as
exemplary damages; P5,000.00 as actual and compensatory damages; and P5,000.00 as
attorney's fees, plus the costs of the suit. This decision was affirmed on appeal, and the motion
for reconsideration was denied. 3 The petitioner then came to this Court to fault the Court of
Appeals for approving the payment of the claim and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical signification in law,
and when used in an insurance contract are to be construed and considered according to the
ordinary understanding and common usage and speech of people generally. In-substance, the
courts are practically agreed that the words "accident" and "accidental" mean that which
happens by chance or fortuitously, without intention or design, and which is unexpected,
unusual, and unforeseen. The definition that has usually been adopted by the courts is that an
accident is an event that takes place without one's foresight or expectation an event that
proceeds from an unknown cause, or is an unusual effect of a known case, and therefore not
expected. 4
An accident is an event which happens without any human agency or, if happening through
human agency, an event which, under the circumstances, is unusual to and not expected by the
person to whom it happens. It has also been defined as an injury which happens by reason of
some violence or casualty to the injured without his design, consent, or voluntary co-operation. 5
In light of these definitions, the Court is convinced that the incident that resulted in Lim's death
was indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital
Insurance, 6 says that "there is no accident when a deliberate act is performed unless some
additional, unexpected, independent and unforeseen happening occurs which produces or
brings about their injury or death." There was such a happening. This was the firing of the gun,
which was the additional unexpected and independent and unforeseen occurrence that led to
the insured person's death.
The petitioner also cites one of the four exceptions provided for in the insurance contract and
contends that the private petitioner's claim is barred by such provision. It is there stated:
Exceptions
The company shall not be liable in respect of
1. Bodily injury
xxx xxx xxx
b. consequent upon
i) The insured person attempting to commit suicide or willfully exposing
himself to needless peril except in an attempt to save human life.
To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner
contends that the insured willfully exposed himself to needless peril and thus removed himself
from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril are in pari
materia because they both signify a disregard for one's life. The only difference is in degree, as
suicide imports a positive act of ending such life whereas the second act indicates a reckless
risking of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one
thousand meters above the ground and without any safety device may not actually be intending
to commit suicide, but his act is nonetheless suicidal. He would thus be considered as "willfully
exposing himself to needless peril" within the meaning of the exception in question.
The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully
exposed himself to needless peril and so came under the exception. The theory is that a gun
is per se dangerous and should therefore be handled cautiously in every case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the
magazine from the gun and believed it was no longer dangerous. He expressly assured her that
the gun was not loaded. It is submitted that Lim did not willfully expose himself to needless peril
when he pointed the gun to his temple because the fact is that he thought it was not unsafe to
do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless.
The contrary view is expressed by the petitioner thus:
Accident insurance policies were never intended to reward the insured for
his tendency to show off or for his miscalculations. They were intended to
provide for contingencies. Hence, when I miscalculate and jump from the
Quezon Bridge into the Pasig River in the belief that I can overcome the
current, I have wilfully exposed myself to peril and must accept the
consequences of my act. If I drown I cannot go to the insurance company to
ask them to compensate me for my failure to swim as well as I thought I
could. The insured in the case at bar deliberately put the gun to his head
and pulled the trigger. He wilfully exposed himself to peril.
The Court certainly agrees that a drowned man cannot go to the insurance company to ask for
compensation. That might frighten the insurance people to death. We also agree that under the
circumstances narrated, his beneficiary would not be able to collect on the insurance policy for it
is clear that when he braved the currents below, he deliberately exposed himself to
a known peril.
The private respondent maintains that Lim did not. That is where she says the analogy fails. The
petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge that the currents
below were dangerous. By contrast, Lim did not know that the gun he put to his head was
loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it should not
prevent his widow from recovering from the insurance policy he obtained precisely against
accident. There is nothing in the policy that relieves the insurer of the responsibility to pay the
indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed,
most accidents are caused by negligence. There are only four exceptions expressly made in the
contract to relieve the insurer from liability, and none of these exceptions is applicable in the
case at bar. **
It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor
of the assured. There is no reason to deviate from this rule, especially in view of the
circumstances of this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the petitioner. The basic
issue raised in this case is, as the petitioner correctly observed, one of first impression. It is
evident that the petitioner was acting in good faith then it resisted the private respondent's claim
on the ground that the death of the insured was covered by the exception. The issue was indeed
debatable and was clearly not raised only for the purpose of evading a legitimate obligation. We
hold therefore that the award of moral and exemplary damages and of attorney's fees is unjust
and so must be disapproved.

In order that a person may be made liable to the payment of moral

damages, the law requires that his act be wrongful. The adverse result of an
action does not per se make the act wrongful and subject the act or to the
payment of moral damages. The law could not have meant to impose a
penalty on the right to litigate; such right is so precious that moral damages
may not be charged on those who may exercise it erroneously. For these
the law taxes costs. 7

The fact that the results of the trial were adverse to Barreto did not alone
make his act in bringing the action wrongful because in most cases one
party will lose; we would be imposing an unjust condition or limitation on the
right to litigate. We hold that the award of moral damages in the case at bar
is not justified by the facts had circumstances as well as the law.

If a party wins, he cannot, as a rule, recover attorney's fees and litigation

expenses, since it is not the fact of winning alone that entitles him to recover
such damages of the exceptional circumstances enumerated in Art. 2208.
Otherwise, every time a defendant wins, automatically the plaintiff must pay
attorney's fees thereby putting a premium on the right to litigate which
should not be so. For those expenses, the law deems the award of costs as
sufficient. 8
[G.R. No. 198588. July 11, 2012.]

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it

holds the petitioner liable to the private respondent in the sum of P200,000.00 representing the UNITED MERCHANTS CORPORATION, petitioner, vs. COUNTRY
face value of the insurance contract, with interest at the legal rate from the date of the filing of
BANKERS INSURANCE CORPORATION, respondent.
the complaint until the full amount is paid, but MODIFIED with the deletion of all awards for
damages, including attorney's fees, except the costs of the suit.

SO ORDERED.
DECISION

CARPIO, J p:

The Case

This Petition for Review on Certiorari 1 seeks to reverse the Court of Appeals' Decision 2 dated
16 June 2011 and its Resolution 3 dated 8 September 2011 in CA-G.R. CV No. 85777. The
Court of Appeals reversed the Decision 4 of the Regional Trial Court (RTC) of Manila, Branch 3,
and ruled that the claim on the Insurance Policy is void.

The Facts

The facts, as culled from the records, are as follows:

Petitioner United Merchants Corporation (UMC) is engaged in the business of buying, selling,
and manufacturing Christmas lights. UMC leased a warehouse at 19-B Dagot Street, San Jose
Subdivision, Barrio Manresa, Quezon City, where UMC assembled and stored its products.
On 6 September 1995, UMC's General Manager Alfredo Tan insured UMC's stocks in trade of
Christmas lights against fire with defendant Country Bankers Insurance Corporation (CBIC) for
P15,000,000.00. The Fire Insurance Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice
No. 12959A, valid until 6 September 1996, states:
AMOUNT OF INSURANCE: FIFTEEN
MILLION PESOS
PHILIPPINE
CURRENCY
xxx xxx xxx
PROPERTY INSURED: On stocks in trade only, consisting of Christmas
Lights, the properties of the Assured or held by them in trust, on
commissions, or on joint account with others and/or for which they are
responsible in the event of loss and/or damage during the currency of this
policy, whilst contained in the building of one lofty storey in height,
constructed of concrete and/or hollow blocks with portion of galvanized
iron sheets, under galvanized iron rood, occupied as Christmas lights
storage. 5 IDEHCa
On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A
to form part of the Insurance Policy. Endorsement F/96-154 provides that UMC's stocks in trade
were insured against additional perils, to wit: "typhoon, flood, ext. cover, and full earthquake."
The sum insured was also increased to P50,000,000.00 effective 7 May 1996 to 10 January
1997. On 9 May 1996, CBIC issued Endorsement F/96-157 where the name of the assured was
changed from Alfredo Tan to UMC.
On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment
Corporation (CRM) to investigate and evaluate UMC's loss by reason of the fire. CBIC's
reinsurer, Central Surety, likewise requested the National Bureau of Investigation (NBI) to
conduct a parallel investigation. On 6 July 1996, UMC, through CRM, submitted to CBIC its
Sworn Statement of Formal Claim, with proofs of its loss.
On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from
CBIC. On 25 February 1997, UMC received CBIC's letter, dated 10 January 1997, rejecting
UMC's claim due to breach of Condition No. 15 of the Insurance Policy. Condition No. 15 states:
If the claim be in any respect fraudulent, or if any false declaration be
made or used in support thereof, or if any fraudulent means or devices
are used by the Insured or anyone acting in his behalf to obtain any
benefit under this Policy; or if the loss or damage be occasioned by the
willful act, or with the connivance of the Insured, all the benefits under this
Policy shall be forfeited. 6
On 19 February 1998, UMC filed a Complaint 7 against CBIC with the RTC of Manila. UMC
anchored its insurance claim on the Insurance Policy, the Sworn Statement of Formal Claim
earlier submitted, and the Certification dated 24 July 1996 made by Deputy Fire Chief/Senior
Superintendent Bonifacio J. Garcia of the Bureau of Fire Protection. The Certification dated 24
July 1996 provides that:
This is to certify that according to available records of this office, on or
about 6:10 P.M. of July 3, 1996, a fire broke out at United Merchants
Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City
incurring an estimated damage of Fifty-Five Million Pesos
(P55,000,000.00) to the building and contents, while the reported
insurance coverage amounted to Fifty Million Pesos (P50,000,000.00)
with Country Bankers Insurance Corporation.
The Bureau further certifies that no evidence was gathered to prove that
the establishment was willfully, feloniously and intentionally set on fire.
That the investigation of the fire incident is already closed being
ACCIDENTAL in nature. 8 aCTHDA
In its Answer with Compulsory Counterclaim 9 dated 4 March 1998, CBIC admitted the issuance
of the Insurance Policy to UMC but raised the following defenses: (1) that the Complaint states
no cause of action; (2) that UMC's claim has already prescribed; and (3) that UMC's fire claim is
tainted with fraud. CBIC alleged that UMC's claim was fraudulent because UMC's Statement of
Inventory showed that it had no stocks in trade as of 31 December 1995, and that UMC's
suspicious purchases for the year 1996 did not even amount to P25,000,000.00. UMC's GIS and
Financial Reports further revealed that it had insufficient capital, which meant UMC could not
afford the alleged P50,000,000.00 worth of stocks in trade.
In its Reply 10 dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance
Policy. UMC claimed that it did not make any false declaration because the invoices were
genuine and the Statement of Inventory was for internal revenue purposes only, not for its
insurance claim.
During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMC's
disbursing officer. Ebora testified that UMC's stocks in trade, at the time of the fire, consisted of:
(1) raw materials for its Christmas lights; (2) Christmas lights already assembled; and (3)
Christmas lights purchased from local suppliers. These stocks in trade were delivered from
August 1995 to May 1996. She stated that Straight Cargo Commercial Forwarders delivered the
imported materials to the warehouse, evidenced by delivery receipts. However, for the year
1996, UMC had no importations and only bought from its local suppliers. Ebora identified the
suppliers as Fiber Technology Corporation from which UMC bought stocks worth P1,800,000.00
on 20 May 1996; Fuze Industries Manufacturer Philippines from which UMC bought stocks worth
P19,500,000.00 from 20 January 1996 to 23 February 1996; and Tomco Commercial Press from
which UMC bought several Christmas boxes. Ebora testified that all these deliveries were not yet
paid. Ebora also presented UMC's Balance Sheet, Income Statement and Statement of Cash
Flow. Per her testimony, UMC's purchases amounted to P608,986.00 in 1994; P827,670.00 in
1995; and P20,000,000.00 in 1996. Ebora also claimed that UMC had sales only from its fruits
business but no sales from its Christmas lights for the year 1995.
The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25
workers to assemble and pack Christmas lights for UMC from 28 March 1996 to 3 July 1996.
The third witness, Metropolitan Bank and Trust Company (MBTC) Officer Cesar Martinez, stated
that UMC opened letters of credit with MBTC for the year 1995 only. The fourth witness
presented was Ernesto Luna (Luna), the delivery checker of Straight Commercial Cargo
Forwarders. Luna affirmed the delivery of UMC's goods to its warehouse on 13 August 1995, 6
September 1995, 8 September 1995, 24 October 1995, 27 October 1995, 9 November 1995,
and 19 December 1995. Lastly, CRM's adjuster Dominador Victorio testified that he inspected
UMC's warehouse and prepared preliminary reports in this connection. CHATcE
On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a
Securities and Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera),
and NBI Investigator Arnold Lazaro (Lazaro). Caguindagan testified that he inspected the burned
warehouse on 5 July 1996, took pictures of it and referred the claim to an independent adjuster.
The SEC representative's testimony was dispensed with, since the parties stipulated on the
existence of certain documents, to wit: (1) UMC's GIS for 1994-1997; (2) UMC's Financial Report
as of 31 December 1996; (3) SEC Certificate that UMC did not file GIS or Financial Reports for
certain years; and (4) UMC's Statement of Inventory as of 31 December 1995 filed with the BIR.
Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMC's claim.
On 19 November 1996, they concluded that arson was committed based from their interview
with barangay officials and the pictures showing that blackened surfaces were present at
different parts of the warehouse. On cross-examination, Lazaro admitted that they did not
conduct a forensic investigation of the warehouse, nor did they file a case for arson.
For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the documents of
UCPB General Insurance, the insurer of Perfect Investment Company, Inc., the warehouse
owner. When asked to bring documents related to the insurance of Perfect Investment Company,
Inc., Batallones brought the papers of Perpetual Investment, Inc.
The Ruling of the Regional Trial Court
On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
ordering defendant to pay plaintiff:
a) the sum of P43,930,230.00 as indemnity with interest thereon at
6% per annum from November 2003 until fully paid;
b) the sum of P100,000.00 for exemplary damages;
c) the sum of P100,000.00 for attorney's fees; and
d) the costs of suit.
Defendant's counterclaim is denied for lack of merit.
SO ORDERED. 11
The RTC found no dispute as to UMC's fire insurance contract with CBIC. Thus, the RTC ruled
for UMC's entitlement to the insurance proceeds, as follows:
Fraud is never presumed but must be proved by clear and convincing
evidence. (see Alonso v. Cebu Country Club, 417 SCRA 115 [2003])
Defendant failed to establish by clear and convincing evidence that the
documents submitted to the SEC and BIR were true. It is common
business practice for corporations to have 2 sets of reports/statements for
tax purposes. The stipulated documents of plaintiff (Exhs. 2-8) may not
have been accurate. TDAHCS
The conflicting findings of defendant's adjuster, CRM Adjustment [with
stress] and that made by Atty. Cabrera & Mr. Lazaro for Central Surety
shall be resolved in favor of the former. Definitely the former's finding is
more credible as it was made soon after the fire while that of the latter
was done 4 months later. Certainly it would be a different situation as the
site was no longer the same after the clearing up operation which is
normal after a fire incident. The Christmas lights and parts could have
been swept away. Hence the finding of the latter appears to be
speculative to benefit the reinsurer and which defendant wants to adopt to
avoid liability.
The CRM Adjustment report found no arson and confirmed substantial
stocks in the burned warehouse (Exhs. QQQ) [underscoring supplied].
This is bolstered by the BFP certification that there was no proof of arson
and the fire was accidental (Exhs. PPP). The certification by a
government agency like BFP is presumed to be a regular performance of
official duty. "Absent convincing evidence to the contrary, the presumption
of regularity in the performance of official functions has to be upheld."
(People vs. Lapira, 255 SCRA 85) The report of UCPB General
Insurance's adjuster also found no arson so that the burned warehouse
owner PIC was indemnified. 12
Hence, CBIC filed an appeal with the Court of Appeals (CA).
The Ruling of the Court of Appeals
On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of
the Decision reads:
WHEREFORE, in view of the foregoing premises, the instant appeal is
GRANTED and the Decision of the Regional Trial Court, of the National
Judicial Capital Region, Branch 3 of the City of Manila dated June 16,
2005 in Civil Case No. 98-87370 is REVERSED and SET ASIDE. The
plaintiff-appellee's claim upon its insurance policy is deemed avoided.
 SO ORDERED. 13

The CA ruled that UMC's claim under the Insurance Policy is void. The CA found that the fire Exhs. "II"-"QQ", Precious Belen 2,720,400.00 January 13, 1996
was intentional in origin, considering the array of evidence submitted by CBIC, particularly the inclusive Trading January 19, 1996
pictures taken and the reports of Cabrera and Lazaro, as opposed to UMC's failure to explain the
January 26, 1996
details of the alleged fire accident. In addition, it found that UMC's claim was overvalued through
fraudulent transactions. The CA ruled: HIETAc February 3, 1996
February 13, 1996
We have meticulously gone over the entirety of the evidence submitted by
the parties and have come up with a conclusion that the claim of the February 20, 1996
plaintiff-appellee was indeed overvalued by transactions which were February 27, 1996
fraudulently concocted so that the full coverage of the insurance policy
will have to be fully awarded to the plaintiff-appellee.
Exhs. "RR"- Wisdom Manpower 361,966.00 April 3, 1996
First, We turn to the backdrop of the plaintiff-appellee's case, thus, [o]n
"EEE", inclusive Services April 12, 1996
September 6, 1995 its stocks-in-trade were insured for Fifteen Million
Pesos and on May 7, 1996 the same was increased to 50 Million Pesos. April 19, 1996
Two months thereafter, a fire gutted the plaintiff-appellee's warehouse. April 26, 1996

Second, We consider the reported purchases of the plaintiff-appellee as May 3, 1996

shown in its financial report dated December 31, 1996 vis--vis the May 10, 1996
testimony of Ms. Ebora thus:
May 17, 1996
1994 P608,986.00 May 24, 1996

1995 P827,670.00 June 7, 1996

June 14, 1996
1996 P20,000,000.00 (more or less) which were purchased for a
June 21, 1996
period of one month.
June 28, 1996
Third, We shall also direct our attention to the alleged true and complete
July 5, 1996
purchases of the plaintiff-appellee as well as the value of all stock-in-trade
it had at the time that the fire occurred. Thus:
Exhs. "GGG"- Costs of Letters 15,159,144.71 May 29, 1995
Exhibit Source Amount (pesos) Dates Covered
"NNN", inclusive of Credit for June 15, 1995
imported raw July 5, 1995
Exhs. "P"-"DD", Fuze Industries 19,550,400.00 January 20, 1996
materials September 4, 1995
inclusive Manufacturer January 31, 1996
October 2, 1995
Phils. February 12, 1996
October 27, 1995
February 20, 1996
January 8, 1996
February 23, 1996
March 19, 1996

Exhs. "EE"-"HH", Tomco Commercial 1,712,000.00 December 19, 1995

Exhs. "GGG-11"- SCCFI statements 384,794.38 June 15, 1995
inclusive Press January 24, 1996
GGG-24, of account June 28, 1995
February 21, 1996
"HHH-12, "HHH- August 1, 1995
November 24, 1995
22", "III-11", September 4, 1995
"III-14", "JJJ-13", September 8, 1995
"KKK-11", "LLL-5" September 11, 1995
October 30, 199[5]
November 10, 1995
December 21, 1995
TOTAL 44,315,024.31
===========
Fourth, We turn to the allegation of fraud by the defendant-appellant by
thoroughly looking through the pieces of evidence that it adduced during
the trial. The latter alleged that fraud is present in the case at bar as
shown by the discrepancy of the alleged purchases from that of the
reported purchases made by plaintiff-appellee. It had also averred that
fraud is present when upon verification of the address of Fuze Industries,
its office is nowhere to be found. Also, the defendant-appellant expressed
grave doubts as to the purchases of the plaintiff-appellee sometime in
1996 when such purchases escalated to a high 19.5 Million Pesos
without any contract to back it up. 14 TAEDcS
On 7 July 2011, UMC filed a Motion for Reconsideration, 15 which the CA denied in its
Resolution dated 8 September 2011. Hence, this petition.
The Issues
UMC seeks a reversal and raises the following issues for resolution:
I.
WHETHER THE COURT OF APPEALS MADE A RULING
INCO[N]SISTENT WITH LAW, APPLICABLE JURISPRUDENCE AND
EVIDENCE AS TO THE EXISTENCE OF ARSON AND FRAUD IN THE
ABSENCE OF "MATERIALLY CONVINCING EVIDENCE."
II.
WHETHER THE COURT OF APPEALS MADE A RULING
INCONSISTENT WITH LAW, APPLICABLE JURISPRUDENCE AND
EVIDENCE WHEN IT FOUND THAT PETITIONER BREACHED ITS
WARRANTY. 16
The Ruling of the Court
At the outset, CBIC assails this petition as defective since what UMC ultimately wants this Court
to review are questions of fact. However, UMC argues that where the findings of the CA are in
conflict with those of the trial court, a review of the facts may be made. On this procedural issue,
we find UMC's claim meritorious.
A petition for review under Rule 45 of the Rules of Court specifically provides that only questions
of law may be raised. The findings of fact of the CA are final and conclusive and this Court will
not review them on appeal, 17 subject to exceptions as when the findings of the appellate court
conflict with the findings of the trial court. 18 Clearly, the present case falls under the exception.
Since UMC properly raised the conflicting findings of the lower courts, it is proper for this Court
to resolve such contradiction.
Having settled the procedural issue, we proceed to the primordial issue which boils down
to whether UMC is entitled to claim from CBIC the full coverage of its fire insurance policy.
UMC contends that because it had already established a prima facie case against CBIC which
failed to prove its defense, UMC is entitled to claim the full coverage under the Insurance Policy.
On the other hand, CBIC contends that because arson and fraud attended the claim, UMC is not
entitled to recover under Condition No. 15 of the Insurance Policy.
Burden of proof is the duty of any party to present evidence to establish his claim or defense by
the amount of evidence required by law, 19 which is preponderance of evidence in civil
cases. 20 The party, whether plaintiff or defendant, who asserts the affirmative of the issue has
the burden of proof to obtain a favorable judgment. 21 Particularly, in insurance cases, once an
insured makes out a prima facie case in its favor, the burden of evidence shifts to the insurer to
controvert the insured's prima facie case. 22 In the present case, UMC established a prima
facie case against CBIC. CBIC does not dispute that UMC's stocks in trade were insured against
fire under the Insurance Policy and that the warehouse, where UMC's stocks in trade were
stored, was gutted by fire on 3 July 1996, within the duration of the fire insurance. However,
since CBIC alleged an excepted risk, then the burden of evidence shifted to CBIC to prove such
exception. DEIHSa
An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the
burden of establishing that the loss comes within the purview of the exception or limitation. 23 If
loss is proved apparently within a contract of insurance, the burden is upon the insurer to
establish that the loss arose from a cause of loss which is excepted or for which it is not liable, or
from a cause which limits its liability. 24 In the present case, CBIC failed to discharge its
primordial burden of establishing that the damage or loss was caused by arson, a limitation in
the policy.
In prosecutions for arson, proof of the crime charged is complete where the evidence
establishes: (1) the corpus delicti, that is, a fire caused by a criminal act; and (2) the identity of
the defendants as the one responsible for the crime. 25 Corpus delicti means the substance of
the crime, the fact that a crime has actually been committed. 26 This is satisfied by proof of the
bare occurrence of the fire and of its having been intentionally caused. 27
In the present case, CBIC's evidence did not prove that the fire was intentionally caused by the
insured. First, the findings of CBIC's witnesses, Cabrera and Lazaro, were based on an
investigation conducted more than four months after the fire. The testimonies of Cabrera and
Lazaro, as to the boxes doused with kerosene as told to them by barangay officials, are hearsay
because the barangay officials were not presented in court. Cabrera and Lazaro even admitted
that they did not conduct a forensic investigation of the warehouse nor did they file a case for
arson. 28 Second, the Sworn Statement of Formal Claim submitted by UMC, through CRM,
states that the cause of the fire was "faulty electrical wiring/accidental in nature." CBIC is bound
by this evidence because in its Answer, it admitted that it designated CRM to evaluate UMC's
loss. Third, the Certification by the Bureau of Fire Protection states that the fire was accidental in
origin. This Certification enjoys the presumption of regularity, which CBIC failed to rebut.
Contrary to UMC's allegation, CBIC's failure to prove arson does not mean that it also failed to
prove fraud. Qua Chee Gan v. Law Union 29 does not apply in the present case. In Qua Chee
Gan, 30 the Court dismissed the allegation of fraud based on the dismissal of the arson case
against the insured, because the evidence was identical in both cases, thus: aITDAE
While the acquittal of the insured in the arson case is not res judicata on
the present civil action, the insurer's evidence, to judge from the decision
in the criminal case, is practically identical in both cases and must lead to
the same result, since the proof to establish the defense of connivance at
the fire in order to defraud the insurer "cannot be materially less
convincing than that required in order to convict the insured of the crime
of arson" (Bachrach vs. British American Assurance Co., 17 Phil. 536). 31
In the present case, arson and fraud are two separate grounds based on two different sets of
evidence, either of which can void the insurance claim of UMC. The absence of one does not
necessarily result in the absence of the other. Thus, on the allegation of fraud, we affirm the
findings of the Court of Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under the policy shall be
forfeited, if the claim be in any respect fraudulent, or if any false declaration be made or used in
support thereof, to wit:
15. If the claim be in any respect fraudulent, or if any false declaration be
made or used in support thereof, or if any fraudulent means or devices
are used by the Insured or anyone acting in his behalf to obtain any
benefit under this Policy; or if the loss or damage be occasioned by the
willful act, or with the connivance of the Insured, all the benefits under this
Policy shall be forfeited. AHCETa
In Uy Hu & Co. v. The Prudential Assurance Co., Ltd., 32 the Court held that where a fire
insurance policy provides that "if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or devices are used
by the Insured or anyone acting on his behalf to obtain any benefit under this Policy," and the
evidence is conclusive that the proof of claim which the insured submitted was false and
fraudulent both as to the kind, quality and amount of the goods and their value destroyed by the
fire, such a proof of claim is a bar against the insured from recovering on the policy even for the
amount of his actual loss.
In the present case, as proof of its loss of stocks in trade amounting to P50,000,000.00, UMC
submitted its Sworn Statement of Formal Claim together with the following documents: (1) letters
of credit and invoices for raw materials, Christmas lights and cartons purchased; (2) charges for
assembling the Christmas lights; and (3) delivery receipts of the raw materials. However, the
charges for assembling the Christmas lights and delivery receipts could not support its insurance
claim. The Insurance Policy provides that CBIC agreed to insure UMC's stocks in trade. UMC
defined stock in trade as tangible personal property kept for sale or traffic. 33 Applying UMC's
definition, only the letters of credit and invoices for raw materials, Christmas lights and cartons
may be considered.
The invoices, however, cannot be taken as genuine. The invoices reveal that the stocks in trade
purchased for 1996 amounts to P20,000,000.00 which were purchased in one month. Thus,
UMC needs to prove purchases amounting to P30,000,000.00 worth of stocks in trade for 1995
and prior years. However, in the Statement of Inventory it submitted to the BIR, which is
considered an entry in official records, 34 UMC stated that it had no stocks in trade as of 31
December 1995. In its defense, UMC alleged that it did not include as stocks in trade the raw
materials to be assembled as Christmas lights, which it had on 31 December 1995. However, as
proof of its loss, UMC submitted invoices for raw materials, knowing that the insurance covers
only stocks in trade.
Equally important, the invoices (Exhibits "P"-"DD") from Fuze Industries Manufacturer Phils.
were suspicious. The purchases, based on the invoices and without any supporting contract,
amounted to P19,550,400.00 worth of Christmas lights from 20 January 1996 to 23 February
1996. The uncontroverted testimony of Cabrera revealed that there was no Fuze Industries
Manufacturer Phils. located at "55 Mahinhin St., Teacher's Village, Quezon City," the business
address appearing in the invoices and the records of the Department of Trade & Industry.
Cabrera testified that: TIDcEH
A: Then we went personally to the address as I stated a while ago
appearing in the record furnished by the United Merchants
Corporation to the adjuster, and the adjuster in turn now, gave
us our basis in conducting investigation, so we went to this
place which according to the records, the address of this
company but there was no office of this company.
Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City
and discover the address indicated by the United Merchants as
the place of business of Fuze Industries Manufacturer, Phils.
was a residential place, what then did you do after determining
that it was a residential place?
A: We went to the owner of the alleged company as appearing in the
Department of Trade & Industry record, and as appearing a
certain Chinese name Mr. Huang, and the address as
appearing there is somewhere in Binondo. We went personally
there together with the NBI Agent and I am with them when the
subpoena was served to them, but a male person approached
us and according to him, there was no Fuze Industries
Manufacturer, Phils., company in that building sir. 35
In Yu Ban Chuan v. Fieldmen's Insurance, Co., Inc., 36 the Court ruled that the submission of
false invoices to the adjusters establishes a clear case of fraud and misrepresentation which
voids the insurer's liability as per condition of the policy. Their falsity is the best evidence of the
fraudulent character of plaintiff's claim. 37 In Verendia v. Court of Appeals, 38 where the insured
presented a fraudulent lease contract to support his claim for insurance benefits, the Court held
that by its false declaration, the insured forfeited all benefits under the policy provision similar to
Condition No. 15 of the Insurance Policy in this case.
Furthermore, UMC's Income Statement indicated that the purchases or costs of sales are
P827,670.00 for 1995 and P1,109,190.00 for 1996 or a total of P1,936,860.00. 39 To corroborate
this fact, Ebora testified that:
Q: Based on your 1995 purchases, how much were the purchases made
in 1995?
A: The purchases made by United Merchants Corporation for the
last year 1995 is P827,670.[00] sir
Q: And how about in 1994? DIETcH
A: In 1994, it's P608,986.00 sir.
Q: These purchases were made for the entire year of 1995 and 1994
respectively, am I correct?
A: Yes sir, for the year 1994 and 1995. 40 (Emphasis supplied)
In its 1996 Financial Report, which UMC admitted as existing, authentic and duly executed
during the 4 December 2002 hearing, it had P1,050,862.71 as total assets and
P167,058.47 as total liabilities. 41
Thus, either amount in UMC's Income Statement or Financial Reports is twenty-five times the
claim UMC seeks to enforce. The RTC itself recognized that UMC padded its claim when it only
allowed P43,930,230.00 as insurance claim. UMC supported its claim of P50,000,000.00 with
the Certification from the Bureau of Fire Protection stating that ". . . a fire broke out at United
Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an
estimated damage of Fifty-Five Million Pesos (P55,000,000.00) to the building and
contents . . . ." However, this Certification only proved that the estimated damage of
P55,000,000.00 is shared by both the building and the stocks in trade.
instruments or documents as to matters that may have some relation to the insurance coverage
voids the policy." 48
On UMC's allegation that it did not breach any warranty, it may be argued that the discrepancies
do not, by themselves, amount to a breach of warranty. However, the Insurance Code provides
that "a policy may declare that a violation of specified provisions thereof shall avoid it." 49 Thus,
in fire insurance policies, which contain provisions such as Condition No. 15 of the Insurance
Policy, a fraudulent discrepancy between the actual loss and that claimed in the proof of loss
voids the insurance policy. Mere filing of such a claim will exonerate the insurer. 50
Considering that all the circumstances point to the inevitable conclusion that UMC padded its
claim and was guilty of fraud, UMC violated Condition No. 15 of the Insurance Policy. Thus,
UMC forfeited whatever benefits it may be entitled under the Insurance Policy, including its
insurance claim.
While it is a cardinal principle of insurance law that a contract of insurance is to be construed
liberally in favor of the insured and strictly against the insurer company, 51 contracts of
insurance, like other contracts, are to be construed according to the sense and meaning of the
terms which the parties themselves have used. 52 If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and popular sense. Courts are not
permitted to make contracts for the parties; the function and duty of the courts is simply to
enforce and carry out the contracts actually made. 53
WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision and the 8
September 2011 Resolution of the Court of Appeals in CA-G.R. CV No. 85777. CTHaSD
SO ORDERED.
||| (United Merchants Corp. v. Country Bankers Insurance Corp., G.R. No. 198588, [July 11,
2012], 690 PHIL 734-755)

It has long been settled that a false and material statement made with an intent to deceive or
defraud voids an insurance policy. 42 In Yu Cua v. South British Insurance Co., 43 the claim was
fourteen times bigger than the real loss; in Go Lu v. Yorkshire Insurance Co., 44 eight times; and
in Tuason v. North China Insurance Co., 45 six times. In the present case, the claim is twenty
five times the actual claim proved.

The most liberal human judgment cannot attribute such difference to mere innocent error in
estimating or counting but to a deliberate intent to demand from insurance companies payment
for indemnity of goods not existing at the time of the fire. 46 This constitutes the so-called
"fraudulent claim" which, by express agreement between the insurers and the insured, is a
ground for the exemption of insurers from civil liability. 47

In its Reply, UMC admitted the discrepancies when it stated that "discrepancies in its statements
were not covered by the warranty such that any discrepancy in the declaration in other

G.R. No. 195872 March 12, 2014
FORTUNE MEDICARE, INC., Petitioner,
vs.
DAVID ROBERT U. AMORIN, Respondent.
DECISION
REYES, J.:
This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, which challenges
the Decision2dated September 27, 2010 and Resolution3 dated February 24, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 87255.
The Facts
David Robert U. Amorin (Amorin) was a cardholder/member of Fortune Medicare, Inc. (Fortune
Care), a corporation engaged in providing health maintenance services to its members. The
terms of Amorin's medical coverage were provided in a Corporate Health Program
Contract4 (Health Care Contract) which was executed on January 6, 2000 by Fortune Care and
the House of Representatives, where Amorin was a permanent employee.
While on vacation in Honolulu, Hawaii, United States of America (U.S.A.) in May 1999, Amorin
underwent an emergency surgery, specifically appendectomy, at the St. Francis Medical Center,
causing him to incur professional and hospitalization expenses of US$7,242.35 and
US$1,777.79, respectively. He attempted to recover from Fortune Care the full amount thereof
upon his return to Manila, but the company merely approved a reimbursement of P12,151.36, an
amount that was based on the average cost of appendectomy, net of medicare deduction, if the
procedure were performed in an accredited hospital in Metro Manila.5 Amorin received under
protest the approved amount, but asked for its adjustment to cover the total amount of
professional fees which he had paid, and eighty percent (80%) of the approved standard
charges based on "American standard", considering that the emergency procedure occurred in
the U.S.A. To support his claim, Amorin cited Section 3, Article V on Benefits and Coverages of
the Health Care Contract, to wit:
A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether as an in-patient or
out-patient, the member shall be entitled to full coverage under the benefits provisions
of the Contract at any FortuneCare accredited hospitals subject only to the pertinent
provision of Article VII (Exclusions/Limitations) hereof. For emergency care attended
by non affiliated physician (MSU), the member shall be reimbursed 80% of the
professional fee which should have been paid, had the member been treated by an
affiliated physician. The availment of emergency care from an unaffiliated physician
shall not invalidate or diminish any claim if it shall be shown to have been reasonably
impossible to obtain such emergency care from an affiliated physician.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization
cost including the professional fee (based on the total approved charges) to a member who
receives emergency care in a non-accredited hospital. The above coverage applies only to
Emergency confinement within Philippine Territory. However, if the emergency confinement
occurs in a foreign territory, Fortune Care will be obligated to reimburse or pay eighty (80%)
percent of the approved standard charges which shall cover the hospitalization costs and
professional fees. x x x6
Still, Fortune Care denied Amorins request, prompting the latter to file a complaint7 for breach of
contract with damages with the Regional Trial Court (RTC) of Makati City.
For its part, Fortune Care argued that the Health Care Contract did not cover hospitalization
costs and professional fees incurred in foreign countries, as the contracts operation was
confined to Philippine territory.8Further, it argued that its liability to Amorin was extinguished
upon the latters acceptance from the company of the amount of P12,151.36.
The RTC Ruling
On May 8, 2006, the RTC of Makati, Branch 66 rendered its Decision9 dismissing Amorins
complaint. Citing Section 3, Article V of the Health Care Contract, the RTC explained:
Taking the contract as a whole, the Court is convinced that the parties intended to use the
Philippine standard as basis. Section 3 of the Corporate Health Care Program Contract provides
that:
xxxx
On the basis of the clause providing for reimbursement equivalent to 80% of the professional fee
which should have been paid, had the member been treated by an affiliated physician, the Court
concludes that the basis for reimbursement shall be Philippine rates. That provision, taken with
Article V of the health program contract, which identifies affiliated hospitals as only those
accredited clinics, hospitals and medical centers located "nationwide" only point to the Philippine
standard as basis for reimbursement.
The clause providing for reimbursement in case of emergency operation in a foreign territory
equivalent to 80% of the approved standard charges which shall cover hospitalization costs and
professional fees, can only be reasonably construed in connection with the preceding clause on
professional fees to give meaning to a somewhat vague clause. A particular clause should not
be studied as a detached and isolated expression, but the whole and every part of the contract
must be considered in fixing the meaning of its parts.10
In the absence of evidence to the contrary, the trial court considered the amount of P12,151.36
already paid by Fortune Care to Amorin as equivalent to 80% of the hospitalization and
professional fees payable to the latter had he been treated in an affiliated hospital.11
Dissatisfied, Amorin appealed the RTC decision to the CA.
The CA Ruling
12
On September 27, 2010, the CA rendered its Decision granting the appeal. Thus, the
dispositive portion of its decision reads:
WHEREFORE, all the foregoing premises considered, the instant appeal is hereby GRANTED.
The May 8, 2006 assailed Decision of the Regional Trial Court (RTC) of Makati City, Branch 66
is hereby REVERSED and SET ASIDE, and a new one entered ordering Fortune Medicare, Inc.
to reimburse [Amorin] 80% of the total amount of the actual hospitalization expenses of
$7,242.35 and professional fee of $1,777.79 paid by him to St. Francis Medical Center pursuant
to Section 3, Article V of the Corporate Health Care Program Contract, or their peso equivalent
at the time the amounts became due, less the [P]12,151.36 already paid by Fortunecare.
SO ORDERED.13
In so ruling, the appellate court pointed out that, first, health care agreements such as the
subject Health Care Contract, being like insurance contracts, must be liberally construed in favor
of the subscriber. In case its provisions are doubtful or reasonably susceptible of two
interpretations, the construction conferring coverage is to be adopted and exclusionary clauses
of doubtful import should be strictly construed against the provider.14Second, the CA explained
that there was nothing under Article V of the Health Care Contract which provided that the
Philippine standard should be used even in the event of an emergency confinement in a foreign
territory.15
Fortune Cares motion for reconsideration was denied in a Resolution 16 dated February 24, 2011.
Hence, the filing of the present petition for review on certiorari.
The Present Petition
Fortune Care cites the following grounds to support its petition:
I. The CA gravely erred in concluding that the phrase "approved standard charges" is
subject to interpretation, and that it did not automatically mean "Philippine Standard";
and
II. The CA gravely erred in denying Fortune Cares motion for reconsideration, which
in effect affirmed its decision that the American Standard Cost shall be applied in the
payment of medical and hospitalization expenses and professional fees incurred by
the respondent.17
The Courts Ruling
The petition is bereft of merit.
The Court finds no cogent reason to disturb the CAs finding that Fortune Cares liability to
Amorin under the subject Health Care Contract should be based on the expenses for hospital
and professional fees which he actually incurred, and should not be limited by the amount that
he would have incurred had his emergency treatment been performed in an accredited hospital
in the Philippines.
We emphasize that for purposes of determining the liability of a health care provider to its
members, jurisprudence holds that a health care agreement is in the nature of non-life
insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical
or any other expense arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract.18
To aid in the interpretation of health care agreements, the Court laid down the following
guidelines in Philamcare Health Systems v. CA19:
When the terms of insurance contract contain limitations on liability, courts should construe them
in such a way as to preclude the insurer from non-compliance with his obligation. Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly against the
party which prepared the contract the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture. This is equally applicable to Health Care Agreements. The phraseology used in
medical or hospital service contracts, such as the one at bar, must be liberally construed in favor
of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be
strictly construed against the provider.20 (Citations omitted and emphasis ours)
Consistent with the foregoing, we reiterated in Blue Cross Health Care, Inc. v. Spouses
Olivares21:
In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is in the nature
of a non-life insurance. It is an established rule in insurance contracts that when their terms
contain limitations on liability, they should be construed strictly against the insurer. These are
contracts of adhesion the terms of which must be interpreted and enforced stringently against
the insurer which prepared the contract. This doctrine is equally applicable to health care
agreements.
xxxx
x x x [L]imitations of liability on the part of the insurer or health care provider must be construed
in such a way as to preclude it from evading its obligations. Accordingly, they should be
scrutinized by the courts with "extreme jealousy" and "care" and with a "jaundiced eye." x x
x.22 (Citations omitted and emphasis supplied)
In the instant case, the extent of Fortune Cares liability to Amorin under the attendant
circumstances was governed by Section 3(B), Article V of the subject Health Care Contract,
considering that the appendectomy which the member had to undergo qualified as an
emergency care, but the treatment was performed at St. Francis Medical Center in Honolulu,
Hawaii, U.S.A., a non-accredited hospital. We restate the pertinent portions of Section 3(B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization
cost including the professional fee (based on the total approved charges) to a member who
receives emergency care in a non-accredited hospital. The above coverage applies only to
Emergency confinement within Philippine Territory. However, if the emergency confinement
occurs in foreign territory, Fortune Care will be obligated to reimburse or pay eighty (80%)
percent of the approved standard charges which shall cover the hospitalization costs and
professional fees. x x x23 (Emphasis supplied)
only qualification was only as to the percentage, or 80% of that payable for treatments
performed in non-accredited hospital.
All told, in the absence of any qualifying word that clearly limited Fortune Care's liability to costs
that are applicable in the Philippines, the amount payable by Fortune Care should not be limited
to the cost of treatment in the Philippines, as to do so would result in the clear disadvantage of
its member. If, as Fortune Care argued, the premium and other charges in the Health Care
Contract were merely computed on assumption and risk under Philippine cost and, that the
American cost standard or any foreign country's cost was never considered, such limitations
should have been distinctly specified and clearly reflected in the extent of coverage which the
company voluntarily assumed. This was what Fortune Care found appropriate when in its new
health care agreement with the House of Representatives, particularly in their 2006 agreement,
the provision on emergency care in non-accredited hospitals was modified to read as follows:

However, if the emergency confinement occurs in a foreign territory, Fortunecare will be

The point of dispute now concerns the proper interpretation of the phrase "approved standard
obligated to reimburse or pay one hundred (100%) percent under approved Philippine Standard
charges", which shall be the base for the allowable 80% benefit. The trial court ruled that the
covered charges for hospitalization costs and professional fees but not to exceed maximum
phrase should be interpreted in light of the provisions of Section 3(A), i.e., to the extent that may
allowable coverage, payable in pesos at prevailing currency exchange rate at the time of
be allowed for treatments performed by accredited physicians in accredited hospitals. As the
availment in said territory where he/she is confined. x x x24
appellate court however held, this must be interpreted in its literal sense, guided by the rule that
any ambiguity shall be strictly construed against Fortune Care, and liberally in favor of Amorin.
Settled is the rule that ambiguities in a contract are interpreted against the party that caused the
ambiguity. "Any ambiguity in a contract whose terms are susceptible of different interpretations
The Court agrees with the CA. As may be gleaned from the Health Care Contract, the parties
must be read against the party who drafted it."25
thereto contemplated the possibility of emergency care in a foreign country. As the contract
recognized Fortune Cares liability for emergency treatments even in foreign territories, it
expressly limited its liability only insofar as the percentage of hospitalization and professional WHEREFORE, the petition is DENIED. The Decision dated September 27, 2010 and Resolution
fees that must be paid or reimbursed was concerned, pegged at a mere 80% of the approved dated February 24, 2011 of the Court of Appeals in CA-G.R. CV No. 87255 are AFFIRMED.
standard charges.
SO ORDERED.
The word "standard" as used in the cited stipulation was vague and ambiguous, as it could be
susceptible of different meanings. Plainly, the term "standard charges" could be read as referring
to the "hospitalization costs and professional fees" which were specifically cited as compensable
even when incurred in a foreign country. Contrary to Fortune Cares argument, from nowhere in
the Health Care Contract could it be reasonably deduced that these "standard charges" referred
to the "Philippine standard", or that cost which would have been incurred if the medical services
were performed in an accredited hospital situated in the Philippines. The RTC ruling that the use
of the "Philippine standard" could be inferred from the provisions of Section 3(A), which covered
emergency care in an accredited hospital, was misplaced. Evidently, the parties to the Health
Care Contract made a clear distinction between emergency care in an accredited hospital, and
that obtained from a non-accredited hospital.1wphi1 The limitation on payment based on
"Philippine standard" for services of accredited physicians was expressly made applicable only
in the case of an emergency care in an accredited hospital.

The proper interpretation of the phrase "standard charges" could instead be correlated with and
reasonably inferred from the other provisions of Section 3(B), considering that Amorins case fell
under the second case, i.e., emergency care in a non-accredited hospital. Rather than a
determination of Philippine or American standards, the first part of the provision speaks of the
full reimbursement of "the total hospitalization cost including the professional fee (based on the
total approved charges) to a member who receives emergency care in a non-accredited
hospital" within the Philippines. Thus, for emergency care in non-accredited hospitals, this cited
clause declared the standard in the determination of the amount to be paid, without any
reference to and regardless of the amounts that would have been payable if the treatment was
done by an affiliated physician or in an affiliated hospital. For treatments in foreign territories, the
 upon posting of a cash bond, a bond secured by real estate, or a bond signed by a duly
authorized bonding company, the amount of which shall be fixed by the NFA Administrator at not
less than thirty-three and one third percent (33 1/3%) of the market value of the maximum
quantity of rice to be received.

Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse

Bond No. 03304 4 for P1,749,825.00 on 5 November 1989 and Warehouse Bond No.
02355 5 for P749,925.00 on 13 December 1989 (1989 Bonds) through its agent, Antonio
Lagman (Lagman). Santos was the bond principal, Lagman was the surety and the Republic of
the Philippines, through the NFA was the obligee. In consideration of these issuances,
corresponding Indemnity Agreements 6 were executed by Santos, as bond principal, together
with Ban Lee Lim Santos (Ban Lee Lim), Rhosemelita Reguine (Reguine) and Lagman, as co-
signors. The latter bound themselves jointly and severally liable to Country Bankers for any
damages, prejudice, losses, costs, payments, advances and expenses of whatever kind and
nature, including attorney's fees and legal costs, which it may sustain as a consequence of the
said bond; to reimburse Country Bankers of whatever amount it may pay or cause to be paid or
become liable to pay thereunder; and to pay interest at the rate of 12% per annum computed
and compounded monthly, as well as to pay attorney's fees of 20% of the amount due it. 7

Santos then secured a loan using his warehouse receipts as collateral. 8 When the loan
matured, Santos defaulted in his payment. The sacks of palay covered by the warehouse
receipts were no longer found in the bonded warehouse. 9 By virtue of the surety bonds,
Country Bankers was compelled to pay P1,166,750.37. 10
[G.R. No. 165487. July 13, 2011.]
Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No.
COUNTRY BANKERS INSURANCE CORPORATION, petitioner, vs. 95-73048 before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that
ANTONIO LAGMAN, respondent. the 1989 Bonds were valid only for 1 year from the date of their issuance, as evidenced by
receipts; that the bonds were never renewed and revived by payment of premiums; that on 5
DECISION November 1990, Country Bankers issued Warehouse Bond No. 03515 (1990 Bond) which was
also valid for one year and that no Indemnity Agreement was executed for the purpose; and that
PEREZ, J p: the 1990 Bond supersedes, cancels, and renders no force and effect the 1989 Bonds. 11

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, The bond principals, Santos and Ban Lee Lim, were not served with summons because they
assailing the Decision 1 and Resolution 2 of the Court of Appeals dated 21 June 2004 and 24 could no longer be found. 12 The case was eventually dismissed against them without
September 2004, respectively. prejudice. 13 The other co-signor, Reguine, was declared in default for failure to file her
answer. 14

These are the undisputed facts.

On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly
and severally liable to pay Country Bankers the amount of P2,400,499.87. 15 The dispositive
Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage
portion of the RTC Decision 16 reads:
in the business of storing not more than 30,000 sacks of palayvalued at P5,250,000.00 in his
warehouse at Barangay Malacampa, Camiling, Tarlac. Under Act No. 3893 or the
General Bonded Warehouse Act, as amended, 3the approval for said license was conditioned WHEREFORE, premises considered, judgment is hereby rendered,
ordering defendants Rhomesita [sic] Reguine and Antonio Lagman, jointly
 and severally liable to pay plaintiff, Country Bankers Assurance
Corporation, the amount of P2,400,499.87, with 12% interest from the
date the complaint was filed until fully satisfied plus 20% of the amount
due plaintiff as and for attorney's fees and to pay the costs.
As the Court did not acquire jurisdiction over the persons of defendants
Nelson Santos and Ban Lee Lim Santos, let the case against them be
DISMISSED. Defendant Antonio Lagman's counterclaim is likewise
DISMISSED, for lack of merit. 17
In holding Lagman and Reguine solidarily liable to Country Bankers, the trial court relied on the
express terms of the Indemnity Agreement that they jointly and severally bound themselves to
indemnify and make good to Country Bankers any liability which the latter may incur on account
of or arising from the execution of the bonds. 18
The trial court rationalized that the bonds remain in force unless cancelled by the Administrator
of the NFA and cannot be unilaterally cancelled by Lagman. The trial court emphasized that for
the failure of Lagman to comply with his obligation under the Indemnity Agreements, he is
likewise liable for damages as a consequence of the breach. ScaCEH
Lagman filed an appeal to the Court of Appeals, docketed as CA G.R. CV No. 61797. He
insisted that the lifetime of the 1989 Bonds, as well as the corresponding Indemnity Agreements
was only 12 months. According to Lagman, the 1990 Bond was not pleaded in the complaint
because it was not covered by an Indemnity Agreement and it superseded the two prior
bonds. 19
On 21 June 2004, the Court of Appeals rendered the assailed Decision reversing and setting
aside the Decision of the RTC and ordering the dismissal of the complaint filed against
Lagman. 20
The appellate court held that the 1990 Bond superseded the 1989 Bonds. The appellate court
observed that the 1990 Bond covers 33.3% of the market value of the palay, thereby manifesting
the intention of the parties to make the latter bond more comprehensive. Lagman was also
exonerated by the appellate court from liability because he was not a signatory to the alleged
Indemnity Agreement of 5 November 1990 covering the 1990 Bond. The appellate court rejected
the argument of Country Bankers that the 1989 bonds were continuing, finding, as reason
therefor, that the receipts issued for the bonds indicate that they were effective for only one-year.
Country Bankers sought reconsideration which was denied in a Resolution dated 24 September
2004. 21
Expectedly, Country Bankers filed the instant petition attributing two (2) errors to the Court of
Appeals, to wit:
A.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
DISREGARDING THE EXPRESS PROVISIONS OF SECTION 177 OF
THE INSURANCE CODE WHEN IT HELD THAT THE SUBJECT
SURETY BONDS WERE SUPERSEDED BY A SUBSEQUENT BOND
NOTWITHSTANDING THE NON-CANCELLATION THEREOF BY THE
BOND OBLIGEE. aEAcHI
B.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
HOLDING THAT RECEIPTS FOR THE PAYMENT OF PREMIUMS
PREVAIL OVER THE EXPRESS PROVISION OF THE SURETY BOND
THAT FIXES THE TERM THEREOF. 22
Country Bankers maintains that by the express terms of the 1989 Bonds, they shall remain in full
force until cancelled by the Administrator of the NFA. As continuing bonds, Country Bankers
avers that Section 177 of the Insurance Code applies, in that the bond may only be cancelled by
the obligee, by the Insurance Commissioner or by a competent court.
Country Bankers questions the existence of a third bond, the 1990 Bond, which allegedly
cancelled the 1989 Bonds on the following grounds: First, Lagman failed to produce the original
of the 1990 Bond and no basis has been laid for the presentation of secondary evidence;
Second, the issuance of the 1990 Bond was not approved and processed by Country Bankers;
Third, the NFA as bond obligee was not in possession of the 1990 Bond. Country Bankers
stresses that the cancellation of the 1989 Bonds requires the participation of the bond
obligee. Ergo, the bonds remain subsisting until cancelled by the bond obligee. Country Bankers
further assert that Lagman also failed to prove that the NFA accepted the 1990 Bond in
replacement of the 1989 Bonds.
Country Bankers notes that the receipts issued for the 1989 Bonds are mere evidence of
premium payments and should not be relied on to determine the period of effectivity of the
bonds. Country Bankers explains that the receipts only represent the transactions between the
bond principal and the surety, and does not involve the NFA as bond obligee. SaCIAE
Country Bankers calls this Court's attention to the incontestability clause contained in the
Indemnity Agreements which prohibits Lagman from questioning his liability therein.
In his Comment, Lagman raises the issue of novation by asserting that the 1989 Bonds were
superseded by the 1990 Bond, which did not include Lagman as party. Therefore, Lagman
argues, Country Bankers has no cause of action against him. Lagman also reiterates that
because of novation, the 1989 bonds are neither perpetual nor continuing.
Lagman anchors his defense on two (2) arguments: 1) the 1989 Bonds have expired and 2) the
1990 Bond novates the 1989 Bonds.
The Court of Appeals held that the 1989 bonds were effective only for one (1) year, as evidenced
by the receipts on the payment of premiums. AEIHCS
We do not agree.
The official receipts in question serve as proof of payment of the premium for one year on each
surety bond. It does not, however, automatically mean that the surety bond is effective for only
one (1) year. In fact, the effectivity of the bond is not wholly dependent on the payment of
premium. Section 177 of the Insurance Code expresses:
Sec. 177. The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the obligor.
No contract of suretyship or bonding shall be valid and binding unless
and until the premium therefor has been paid, except where the obligee
has accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety: Provided, That if the contract of
suretyship or bond is not accepted by, or filed with the obligee, the surety
shall collect only reasonable amount, not exceeding fifty per centum of
the premium due thereon as service fee plus the cost of stamps or other
taxes imposed for the issuance of the contract or
bond: Provided, however, That if the non-acceptance of the bond be due
to the fault or negligence of the surety, no such service fee, stamps or
taxes shall be collected. (Emphasis supplied)
The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of
these bonds, viz.:
NOW, THEREFORE, if the above-bounded Principal shall well and truly
deliver to the depositors PALAY received by him for STORAGE at any
time that demand therefore is made, or shall pay the market value
therefore in case he is unable to return the same, then this obligation
shall be null and void; otherwise it shall remain in full force and effect and
may be enforced in the manner provided by said Act No. 3893 as
amended by Republic Act No. 247 and P.D. No. 4.This bond shall
remain in force until cancelled by the Administrator of National Food
Authority. 23
This provision in the bonds is but in compliance with the second paragraph of Section 177 of the
Insurance Code, which specifies that a continuing bond, as in this case where there is no fixed
expiration date, may be cancelled only by the obligee, which is the NFA, by the Insurance
Commissioner, and by the court. Thus:
In case of a continuing bond, the obligor shall pay the subsequent annual
premium as it falls due until the contract of suretyship is cancelled by the
obligee or by the Commissioner or by a court of competent jurisdiction, as
the case may be. HIEAcC
By law and by the specific contract involved in this case, the effectivity of the bond required for
the obtention of a license to engage in the business of receiving rice for storage is determined
not alone by the payment of premiums but principally by the Administrator of the NFA. From
beginning to end, the Administrator's brief is the enabling or disabling document.
The clear import of these provisions is that the surety bonds in question cannot be unilaterally
cancelled by Lagman. The same conclusion was reached by the trial court and we
quote: DISHEA
As there appears no record of cancellation of the Warehouse Bonds No.
03304 and No. 02355 either by the administrator of the NFA or by the
Insurance Commissioner or by the Court, the Warehouse Bonds are valid
and binding and cannot be unilaterally cancelled by defendant Lagman as
general agent of the plaintiff. 24
While the trial court did not directly rule on the existence and validity of the 1990 Bond, it upheld
the 1989 Bonds as valid and binding, which could not be unilaterally cancelled by Lagman. The
Court of Appeals, on the other hand, acknowledged the 1990 Bond as having cancelled the two
previous bonds by novation. Both courts however failed to discuss their basis for rejecting or
admitting the 1990 Bond, which, as we indicated, is bone to pick in this case.
Lagman's insistence on novation depends on the validity, nay, existence of the allegedly novating
1990 Bond. Country Bankers understandably impugns both. We see the point. Lagman
presented a mere photocopy of the 1990 Bond. We rule as inadmissible such copy.
Under the best evidence rule, the original document must be produced whenever its contents
are the subject of inquiry. 25 The rule is encapsulated in Section 3, Rule 130 of the Rules of
Court, as follow:
 Sec. 3. Original document must be produced; exceptions. When the
subject of inquiry is the contents of a documents, no evidence shall be
admissible other than the original document itself, except in the following
cases:
(a) When the original has been lost or destroyed, or cannot be produced
in court, without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party
against whom the evidence is offered, and the latter fails to produce it
after reasonable notice; HaDEIc
(c) When the original consists of numerous accounts or other documents
which cannot be examined in court without great loss of time and the fact
sought to be established from them is only the general result of the
whole; and
(d) When the original is a public record in the custody of a public officer or
is recorded in a public office. 26
A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the
original is unavailable. 27 Section 5, Rule 130 of the Rules of Court states:
SEC.5 When original document is unavailable. When the original
document has been lost or destroyed, or cannot be produced in court, the
offeror, upon proof of its execution or existence and the cause of its
unavailability without bad faith on his part, may prove its contents by a
copy, or by a recital of its contents in some authentic document, or by the
testimony of witnesses in the order stated. DCaSHI
Before a party is allowed to adduce secondary evidence to prove the contents of the original, the
offeror must prove the following: (1) the existence or due execution of the original; (2) the loss
and destruction of the original or the reason for its non-production in court; and (3) on the part of
the offeror, the absence of bad faith to which the unavailability of the original can be attributed.
The correct order of proof is as follows: existence, execution, loss, and contents. 28
In the case at bar, Lagman mentioned during the direct examination that there are actually four
(4) duplicate originals of the 1990 Bond: the first is kept by the NFA, the second is with the Loan
Officer of the NFA in Tarlac, the third is with Country Bankers and the fourth was in his
possession. 29 A party must first present to the court proof of loss or other satisfactory
explanation for the non-production of the original instrument. 30 When more than one original
copy exists, it must appear that all of them have been lost, destroyed, or cannot be produced in
court before secondary evidence can be given of any one. A photocopy may not be used without
accounting for the other originals. 31
Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman
merely presented a photocopy. He admitted that he kept a copy of the 1990 Bond but he could
no longer produce it because he had already severed his ties with Country Bankers. However,
he did not explain why severance of ties is by itself reason enough for the non-availability of his
copy of the bond considering that, as it appears from the 1989 Bonds, Lagman himself is a
bondsman. Neither did Lagman explain why he failed to secure the original from any of the three
other custodians he mentioned in his testimony. While he apparently was able to find the original
with the NFA Loan Officer, he was merely contented with producing its photocopy. Clearly,
Lagman failed to exert diligent efforts to produce the original.
Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an
Indemnity Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he
raises the defense of "non-existence of an indemnity agreement" which would conveniently
exempt him from liability. The trial court deemed this defense as indicia of bad faith, thus:
To the observation of the Court, defendant Lagman contended that being
a general agent (which requires a much higher qualification than an
ordinary agent), he is expected to have attended seminars and
workshops on general insurance wherein he is supposed to have
acquired sufficient knowledge of the general principles of insurance which
he had fully practised or implemented from experience. It somehow
appears to the Court's assessment of his reneging liability of the bonds in
question, that he is still short of having really understood the principle of
suretyship with reference to the transaction of indemnity in which he is a
signatory. If, as he alleged, that he is well-versed in insurance, the Court
finds no excuse for him to stand firm in denying his liability over the claim
against the bonds with indemnity provision. If he insists in not recognizing
that liability, the more that this Court is convinced that his knowledge that
insurance operates under the principle of good faith is inadequate. He
missed the exception provided by Section 177 of the Insurance Code, as
amended, wherein non-payment of premium would not have the same
essence in his mind that the agreements entered into would not have full
force or effect. It could be glimpsed, therefore, that the mere fact of
cancelling bonds with indemnity agreements and replacing them
(absence of the same) to escape liability clearly manifests bad faith
on his part. 32 (Emphasis supplied.) HTcDEa
Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to
speak of. Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in place of the debtor, or by subrogating
a third person in the rights of the creditor. For novation to take place, the following requisites
must concur: 1) There must be a previous valid obligation; 2) The parties concerned must agree
to a new contract; 3) The old contract must be extinguished; and 4) There must be a valid new
contract. 33
In this case, only the first element of novation exists. Indeed, there is a previous valid
obligation, i.e., the 1989 Bonds. There is however neither a valid new contract nor a clear
agreement between the parties to a new contract since the very existence of the 1990 Bond has
been rendered dubious. Without the new contract, the old contract is not extinguished.
Implied novation necessitates a new obligation with which the old is in total incompatibility such
that the old obligation is completely superseded by the new one. 34 Quite obviously, neither can
there be implied novation. In this case, there is no new obligation.
Bond, its renewals, extensions, alterations, or substitutions, shall be final
and shall not be disputed by the undersigned, who hereby jointly and
severally bind themselves to indemnify [Country Bankers] of any and all
such payments, as stated in the preceding clauses.
In case the COMPANY shall have paid[,] settled or compromised any
liability, loss, costs, damages, attorney's fees, expenses, claims[,]
demands, suits, or judgments as above-stated, arising out of or in
connection with said bond, an itemized statement thereof, signed by an
officer of the COMPANY and other evidence to show said payment,
settlement or compromise, shall be prima facie evidence of said payment,
settlement or compromise, as well as the liability of the undersigned in
any and all suits and claims against the undersigned arising out of said
bond or this bond application. 36

The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by
1989 Bonds which we have considered as continuing contracts. Under both Indemnity virtue of the 1989 Bonds gave rise to Lagman's obligation to reimburse it under the Indemnity
Agreements, Lagman, as co-signor, together with Santos, Ban Lee Lim and Reguine, bound Agreements. Lagman, being a solidary debtor, is liable for the entire obligation. STIcaE
themselves jointly and severally to Country Bankers to indemnify it for any damage or loss
sustained on the account of the execution of the bond, among others. The pertinent identical WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of
stipulations of the Indemnity Agreements state: ADCEcI Appeals in CA-G.R. CV No. 61797 are SET ASIDE and the Decision dated 21 September 1998
of the RTC is hereby REINSTATED.
INDEMNITY: To indemnify and make good to the COMPANY jointly
and severally, any damages, prejudice, loss, costs, payments advances SO ORDERED.
and expenses of whatever kind and nature, including attorney's fees and
legal costs, which the COMPANY may, at any time, sustain or incur, as ||| (Country Bankers Insurance Corp. v. Lagman, G.R. No. 165487, [July 13, 2011], 669 PHIL
well as to reimburse to said COMPANY all sums and amounts of money 205-221)
which the COMPANY or its representatives shall or may pay or cause to
be paid or become liable to pay, on account of or arising from the
execution of the above-mentioned BOND or any extension, renewal,
alteration or substitution thereof made at the instance of the undersigned
or anyone of them. 35

Moreover, the Indemnity Agreements also contained identical Incontestability Clauses which
provide:

INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any

payment or disbursement made by the COMPANY on account of the
above-mentioned Bond, its renewals, extensions, alterations or
substitutions either in the belief that the COMPANY was obligated to
make such payment or in the belief that said payment was necessary or
expedient in order to avoid greater losses or obligations for which the
COMPANY might be liable by virtue of the terms of the above-mentioned